1. Topic 3 Accounts & Finance
Sources Of Finance

2. Learning Objectives To understand internal and external finance
To be able to analyse the different sources of long-, medium-, and short-term finance
To understand the role played by the main financial institutions
To evaluate the advantages and disadvantages for each form of finance for a given situation

3. Finance is required for many business activities
Start up capital
Working capital
Expansion
Current assets – current liabilities
Finance is required for many business activities
Special situations
EG. Recession
R&D, Marketing

4. The Accounting Equation
ASSETS = LIABILITIES OWNER EQUITY
BANK LOANS
A PROMISE TO PAY
ALSO HAVE TO PAY INTEREST
SHARES
IN EXCHANGE FOR INVESTING IN A COMPANY THEY RECEIVE OWNERSHIP AND PROFIT

5. What are assets and liabilities?
The resources of the business
The stuff you have to make a difference!
Something that has a potential for future value
E.g. cash, supplies, inventory / stock
Liabilities
Promises to pay in future, or, responsibilities to others
Debts
E.g. a bank loan

6. What is sales revenue vs. profit?
You own a business selling cookies. You are in competition with other cake companies. Your objective is to make a big profit.
Every week you have to make 2 decisions:
How many packets of cookies to make
What price to sell each packet of cookies
Every week you must pay fixed costs of $100 to pay for the kitchen where you make the cookies.
Also, every packet of cookies has variable costs of $20.

7. What is sales revenue vs. profit?
So if you make 3 packets of cookies your costs are: Fixed costs $100 Variable costs $60 Total costs $160 Your customer will order the packets of cookies as follows: Cheapest price – 8 packets of cookies Next cheapest price – 6 packets of cookies Next cheapest price - 4 packets of cookies Highest price - 2 packets of cookies

8. Break-even quantity
To find out whether it is worthwhile to make a product
To estimate the level of profit for a product
Break-even quantity = total fixed costs
contribution per unit
…where contribution = price per unit – variable cost per unit

9. Capital & Revenue Expenditure
Capital expenditure is the purchase of assets that are expected to last for more than one year. Machinery etc.
Revenue expenditure is spending on all costs and assets other than fixed assets. Wages, electricity etc.
Fixed Assets are items of a monetary value which have a long term function such as land

10. Olympic Games 2012
The UK construction industry has been very optimistic since London was announced as the host of the 2012 Olympic Games. News media reported an estimated half a million new recruits to the industry in preparation for the global sporting event
Use examples to distinguish revenue expenditure from capital expenditure
[4 marks]

12. Sources of finance Internal – From within the business
External – Outside the business

13. Internal Finance Personal Funds
Main source of finance for sole traders and partnerships
Family & Friends
Borrowing money from family and friends is another popular source of finance for sole traders and partnerships
Very limited and could lead to fall outs

14. Internal Finance Working Capital Retained Profits
Money that is available for the day to day running of a business
Comes from the sale of goods and services
Vital source of finance as it is used to pay wages, bills etc
Retained Profits
Value of profit that business holds of to use within the business
Also known as internal profits / ploughed-back profits
Often used for purchasing or upgrading fixed assets
Also may be saved in a contingency fund
If retained profits are used the business does not need to rely on much borrowing
Retained profits alone may not be enough and also decreases the dividends

15. Internal Finance Selling Assets
Businesses can sell their dormant assets (unused assets)
They could sell fixed assets to survive
Investing Extra Cash
Putting money into bonds which earns interest

16. External Finance Share Capital
Share capital - a limited company can raise money by selling shares.  Anyone who buys shares becomes a part owner of that company. In return for buying shares, shareholders receive a dividend (i.e. share of the profits) for each share they possess
Ordinary Shares (Equities):
Ordinary shareholders have voting rights
Dividend can vary
Last to be paid back in event of collapse
Share price varies with trade on stock exchange
Preference Shares:
Paid before ordinary shareholders
Fixed rate of return
Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment

17. External Finance
Loan capital - providers of loan capital are known as creditors. These creditors charge interest on any money borrowed and money owing must be paid out of profits before any dividends are paid to shareholders

18. External Finance
Overdrafts- these occur when a bank allows an account holder to overspend on their current account. They are flexible and are widely used to aid short term cash flow problems

19. External Finance
Trade credit - another common source of finance where suppliers supply goods and then allow a period of time before collecting payment
Government assistance - this is selective as it normally only applies in areas where the government is trying to encourage businesses to locate (e.g. areas of high unemployment) Assistance normally takes the form of a government grant (or gift) although other inducements can also be offered
Subsidies

20. External Finance
Leasing - this eliminates the need for large amounts of capital by allowing the business to lease (rent) an asset rather than purchase it
Hire purchase - this involves regular payments for an asset which becomes the purchasers' property once the final payment has been made. Interest payments are high but little security is required

21. External Finance
Debt factoring – When a company sells goods on credit it creates a debtor. The longer the time allowed to pay this debt, the more finance the business has to find to carry on trading. Debt factoring companies buy these claims at a discount and make profit when they collect the money from the original customer
Sometimes called - Non recourse factoring

22. External Finance Venture Capital Business Angels
Pooling of capital in the form of limited companies – Venture Capital Companies
Looking for investment opportunities in fast growing businesses or businesses with highly rated prospects
May also buy out firms in administration who are going concerns
May also provide advice, contacts and experience
Business Angels
Individuals looking for investment opportunities
Generally small sums up to £100,000
Could be an individual or a small group
Generally have some say in the running of the company

23. External Finance Debentures or Long Term Bonds
Putting money away for a long period of time (25 years) and in return interest is paid, businesses can sell these debentures to other companies / individuals