Presentation on theme: "Source of finance All businesses need money to finance business activity. This can be for the initial setting up of the business, for its day-to-day running."— Presentation transcript:
Source of finance All businesses need money to finance business activity. This can be for the initial setting up of the business, for its day-to-day running or for expansion purposes
The need for business finance Capital expenditure: It is the finance spent on purchasing fixed assets. Ex: land, buildings, equipment and machinery. Revenue expenditure: It refers to payments for the daily running of a business, such as wages, raw materials and electricity
Internal sources of Finance Personal Funds: This is the main source of finance for a sole trader and for partners going into business together Family and Friends: It is popular among sole proprietorship and partnerships Working capital: refers to the money that is available for the day to day running of a business. It comes from the sale of goods and services. ( wages, utility)
Internal sources of Finance Retained profits: This is the value of profits that the business keeps hold of (after paying taxes to the government and dividends to its shareholders). Internal profits. It is often used for purchasing fixed asset. Selling assets: This might include selling machinery that has been replaced, such as computer equipment.
External sources of finance External sources of finance comes from outside the business. Share capital: tends to be the main source of finance for a company. Share capital is the money that has been raised from selling shares in the company. Loan capital: These are loans that are obtained from commercial lenders such as banks. Overdrafts: It allows a business to overdraw on its account.
External sources of finance Trade credit: It allows a business to buy now and pay later. Ex: suppliers Government subsidies: The purpose is to reduce cost of production. For example: farmers are often provided subsidies so that food prices can be stabilized. Donations: are financial gifts individuals or organizations to a business Sponsorships: It occurs when an organization gives financial support, in the form of cash, products or services, for another business in return for displaying the sponsor’s company brand or logo
External sources of finance Debt factoring: is a financial service that allows a business to raise funds based on the value owed by the debtors. 80 or 85 % Leasing: It is a form of hiring whereby a contract is drawn between a leasing company (known as a lessor) and the customer ( known as the lessee). The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets.
External sources of finance Debentures: are long-term loans. They are similar to shares in that certificate is issued to all debenture holders, be they members of the public, the government or other business that have purchase debentures Business angels: some private investors are extremely wealthy and choose to invest in business that offer high growth potential.
Short-Term, Medium-Term and Long-term Finance Short term means that something has to be paid to creditors and lenders within the next twelve months Medium term refers to the time period of more than twelve months but less than five years Long term refers to any period after the next five years.