1. IB Business Management
Unit 3/Section 3.1
Sources of Finance

2. 3.1 SOURCES OF FINANCE On completing this chapter you should be able to
Explain the role of finance for businesses in terms of capital expenditure and revenue expenditure.
Analyse the internal and external sources of finance.
Define long-, medium- and short-term finance.
Discuss the appropriateness, advantages and disadvantages of sources of finance for a given situation.

3. ROLE OF FINANCE
1.1

4. The Need for Finance All businesses need money...
There are a number of reasons for this:
To set up a business:
Start-up capital: Capital needed by an entrepreneur to set up a business.
For day to day operations
Working capital: Capital needed to pay for raw materials, day-to-day running costs and credit offered to customers.
To expand
To pay for Innovation, R&D, Marketing strategies

5. THE BASIC ACCOUNTING/FINANCE EQUATION (BALANCE SHEET EQUATION)
Capital = Assets – Liabilities
( Patrimonio = Activos – Pasivos )
Assets = Property/ Resources
Liabilities = Debts
In a corporation, capital represents the stockholders' equity
For example: A student buys a computer for $1000. To pay for the computer, the student uses $400 in cash and borrows $600 for the remainder. His assets are worth $1000, liabilities are $600, and capital/equity $400.

6. 2016 FORBES GLOBAL 2000 – BIGGEST PUBLIC COMPANIES IN THE WORLD
4 metrics: sales, profits, assets and market value.

7. 2016 FORBES GLOBAL 2000 – BIGGEST PUBLIC COMPANIES IN colombia

8. 2015 el pais – las 500 empresas mas exitosas del valle del cauca

9. Categories of Finance by purpose
Capital expenditure
Revenue expenditure

10. Capital Expenditure
Capital expenditure is the purchase of assets that are expected to last for more than one year and may be used over and over again, such as buildings and machinery.
This is the finance spent on buying fixed assets.

11. Fixed Assets & collateral
Fixes assets
are items that have long term value and can be used over again.
help to determine the scale of a business operations
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.

12. Revenue Expenditure
This is the finance spent on the day to day running of a business (expenses) and the payment of direct and indirect costs.
Revenue expenditure is spending on all costs and assets other than fixed assets and includes wages and salaries, insurance, fuel, and materials bought for stock.

13. Direct & indirect 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 have to be paid in order to earn revenues.
Premises rent, insurance and fuel

14. Identify and list at least three examples of capital expenditure and three examples of revenue expenditure
CAPITAL EXPENDITURE:
land
-buildings
-equipment
-machinery
REVENUE EXPENDITURE:
rent
insurance
advertising

15. SOURCES OF FINANCE
1.1

16. SOURCES OF FINANCE

17. SOURCES OF FINANCE EXTERNAL FINANCE INTERNAL FINANCE Share capital
come from within the business
EXTERNAL FINANCE
come from outside the business
Share capital
Loan capital
Personal funds
(sole traders)
Overdrafts
Sale of assets
Trade credit
Retained profits
Grants
Venture Capital
Subsidies
Business Angels
Leasing
Debt Factoring

18. SOURCES OF FINANCE EXTERNAL FINANCE Subsidies Share capital
Government, NGO or individual assistance given to business, but with intention of helping society. Do not have to be repaid.
Share capital
Money raised from selling company shares
EXTERNAL FINANCE
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.
Loan capital
Loans obtained from commercial lenders
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.
Overdrafts
Allows a business to temporarily draw out more than the funds in their bank account
Trade credit
Buy now pay later.
Venture Capital
High risk investment, high-potential start-up firms or small businesses.
Venture capitalists include specialist organizations and investment banks. Will want to consider return on investment, business plan, people and track record before investing.
Business Angels
Similar to venture capitalists. Business angels are usually private investors/affluent individuals that choose to invest in a new business venture that offers large potential growth. They usually take a proactive role in the business.
Grants
Government or foundations offer funds to assist businesses. Do not have to be paid back. Either for start up or to stimulate economic activity

20. Si el perro es el mejor amigo del hombre, el Ebitda es el gran aliado del inversionista….

21. Short, medium and long-term finance
1.1

22. Short/Medium/Long-term Finance
SOURCES OF FINANCE
Short-term Finance
Money needed for the day-to-day running of a business
Finance that lasts for one year or less
Bank overdrafts
Trade credit
Debt factoring
Medium-term Finance
Money used to purchase assets such as equipment or vehicles
Duration period between one year and five years
Leasing
Medium-term bank loans
Long-term Finance
Money used to purchase long-term fixed assets or other expansion requirements of a business
Duration period between more than five years to around 30 years.
Share capital
Long-term bank loans
Short/Medium/Long-term Finance
Business Angels
Grants
Subsidies
Venture capital

23. If you had to find the finance for:
Which would you choose?
If you had to find the finance for:
A fleet of new cars for sales staff
Short-term finance to pay a large bill one month
Long-term finance for a small, thriving IT firm
A company setting up in a deprived area
A company which wants to expand abroad
Leasing
Bank overdraft
Venture capital
Grant
Selling/share capital

24. Factors influencing the choice of a source of finance
1.1

25. Factors influencing the choice of a source of finance
Purpose or use of funds – Specific requirements
Cost – Interests, Administrative costs
Status and size – Sole traders vs. public limited companies
Amount required – Larger amounts long-term finance
Flexibility – Switch from one source to another
State of the external environment – Interest rates, inflation
Gearing – Relationship between share capital and loan capital. High-geared ( share capital lower than loan capital ) business too risky for financial institutions.

26. KEY TERMS/DEFINITIONS
Business angels
Capital expenditure
Debt factoring
Leasing
Overdrafts
Share capital
Revenue expenditure
Subsidies
Trade credit
Venture capital

27. IN –CLASS REVIEW QUESTIONS ( 30 marks)
Distinguish between capital expenditure and revenue expenditure. AO2 - 2
State three sources of internal finance and five sources of external finance.AO1-2
Explain the differences between share capital and loan capital. AO2 - 3
Discuss the difference between venture capital and business angels.AO3 - 3
Describe the difference between short-, medium- and long-term finance .AO1 – 2
With reference to one organization that you have studied, examine the impact ethics and culture have on raising finance. AO3 – 10
Prepare and complete a table that classifies the following sources of finance into short, medium or long-term.AO4 - 8
Debt factoring
Leasing
Trade credit
Venture capital
Share capital
Overdrafts
Subsidies
Business angels

28. In- class case study oxford pgs. 171-172 ( 20 marks)
Outline the main activities of MTN Uganda in the financial services sector. AO1 - 4
Explain how three different stakeholders have been affected by the introduction of MTN Mobile money. AO2 - 6
Evaluate to what extent have MTN and Fundamo reached their strategic objectives in Uganda. AO3 - 10