1. FINANCE and Accounts 3.1 SOURCES OF FINANCE Page 161 3.1 SOURCES OF FINANCE Page 161

2. The Need for Speed Finance All businesses need money... There are a number of reasons for this:  To set up a business  For day to day operations  To expand

3. Categories of Finance Capital expenditure Revenue expenditure

4. Capital Expenditure This is the finance spent on buying fixed assets What are fixed assets?

5. Fixed Assets Fixed assets: – are items that have long term value and can be used over again. – help to determine the scale of a business’s operations and – have the purpose of regenerating money for the business – are expensive – can provide collateral* * Collateral is a financial guarantee, a type of security. Typically a borrower offers a lender the ownership of a good that is of equal or greater value than the loan. That good is called the collateral for the loan.

6. Revenue Expenditure As the name suggests, it is finance spent to earn revenues This is the finance spent on the day to day running of a business (expenses) and the payment of direct and indirect costs What are direct costs?

7. Direct Costs Direct costs: – Are costs that arise from production of the good or service such as raw materials, and wages. – These are specific costs associated with the product or service that need to be made in order to earn revenues Indirect costs: – are short term costs that come from joint or shared usage (and are therefore difficult to allocate to a specific cost object or stream of revenues) but nonetheless, they have to be paid in order to earn revenues, – Premises rent, insurance and fuel

8. TASK: Before proceeding… Identify and list at least three examples of capital expenditure and three examples of revenue expenditure. TASK: Before proceeding… Identify and list at least three examples of capital expenditure and three examples of revenue expenditure.

9. CAPITAL EXPENDITURE: -land -buildings -equipment -machinery CAPITAL EXPENDITURE: -land -buildings -equipment -machinery REVENUE EXPENDITURE: -rent -insurance -advertising REVENUE EXPENDITURE: -rent -insurance -advertising

10. SOURCES OF FINANCE INTERNAL SOURCES Internal sources of finance come from within the business INTERNAL SOURCES Internal sources of finance come from within the business EXTERNAL SOURCES External sources of finance come from outside the business EXTERNAL SOURCES External sources of finance come from outside the business

11. INTERNAL FINANCE Personal funds Family/friends Working capital Investing extra cash Selling assets Retained profits

12. EXTERNAL FINANCE Share capital Loan capital Overdrafts Government subsidies Government grants Trade credit SponsorshipsDonations Debt Factoring Leasing Debentures Hire Purchase Business AngelsVenture Capital

13. TASK: Before you proceed… Use your text to help you add detail to your mindmap of internal sources of finance. Then, work in pairs to complete the external sources of finance mindmap. (pgs 162-167) TASK: Before you proceed… Use your text to help you add detail to your mindmap of internal sources of finance. Then, work in pairs to complete the external sources of finance mindmap. (pgs 162-167)

14. EXTERNAL FINANCE Share capital Money raised from selling company shares -preference -ordinary Loan capital Loans obtained from commercial lenders Overdrafts Allows a business to temporarily draw out more than the funds in their bank account Government subsidies Assistance given to business, but with intention of helping society. Government grants Government offers funds to assist businesses. Usually one off payments, either for start up or to stimulate eco activity Trade credit Buy now pay later. Sponsorships One company offers financial support to another in return for promotion of brand or logo Donations Financial gifts to a business Debt Factoring Debtors owe money to a business. Debt factoring allows a business to raise funds based on what they are owed by their debtors. Leasing Leasing is a contract that allows a lessee (customer) to rent goods from a lessor (leasing company). The rent paid each month is a form of finance for the lessor. Debentures Long time loans. Similar to shares: all holders have a certificate. But, debenture holders don’t get voting rights. Holders receive interest payments. Hire Purchase Similar to leasing. Item is paid for in instalments by a business. The item remains property of HP company until all payments have been made. Business Angels Similar to venture capitalists. Business angels are usually private investors that choose to invest in a new business venture that offers large potential growth. They usually take a proactive role in the business. Venture Capital High risk investment (usually in form of loans/shares). Venture capitalists will want to consider return on investment, business plan, people and track record before investing.

15. TASK: Create a table detailing the advantages and disadvantages of three internal sources of finance and three external sources of finance. TASK: Create a table detailing the advantages and disadvantages of three internal sources of finance and three external sources of finance. Next Topic: Financial Time Frames