1. IB Business and Management
3.1 Sources of Finance

2. Learning Outcomes Role of Finance for Businesses (AO2)
Capital Expenditure
Revenue Expenditure
Internal Sources of finance (AO2)
Personal funds (for sole traders)
Retained profit
Sale of Assets
External Sources of finance (AO2)
Share capital
Loan capital
Overdrafts
Trade Credit
Grant
Subsidies
Debt Factoring
Leasing
Venture Capital
Business Angels

3. Capital Vs Revenue Expenditure
What is the difference?
Capital Vs Revenue Expenditure

5. What would be the capital expenditures and revenue expenditures here?

6. What does the this mean?
Sources Of Finance

7. Finance
Businesses need money. This money can come from a range of different sources. These are known as ‘Sources of Finance’
What do businesses need money for? Brainstorm some ideas. Can these be grouped into categories?

8. 4 key reasons why businesses need finance….
Start-up
Working Capital
Renewal
Expansion
Would these be revenue/capital expenditure?

9. Task – Brain storming Using the Mini-whiteboards…..
Where do businesses get finance from?
Write down a list of where you think this ‘money’ can come from

10. Internal V External Sources
What is the difference?
Internal V External Sources

11. Internal Vs External Sources
Internal Sources of Finance
External Sources of Finance
Finance from within the business
Usually involve no cost
However…. Are finite and will not always be sufficient
Finance from organisations outside of the business
Usually involve paying interest OR selling part of the business
Can be Short-term, medium term or long-term depending on the pay back period
What organisations might provide external finance for businesses?

12. 2 Types of Finance External Sources Internal Sources Factoring Company
Banks
Factoring Company
External Sources
Government
Internal Sources
Profits
Assets
Business Angels
Creditors
Owners/
shareholders
Venture Capitalists
Charities

13. Personal Funds (sole traders/partnerships)
Sources of Finance
Internal
Retained Profit
Sale of Fixed
Assets
Personal Funds (sole traders/partnerships)
Sale and Leaseback
External
Short Term
Overdraft
Trade Credit
Debt Factoring
Medium Term
Loan Capital
Hire Purchase
Leasing
Long Term
Share Issue
Rights Issue
Venture Capital
Business Angels
Grants and Subsidies
Sell equity
Increase Debt
Lets be questioning…..
What questions do you want to ask about this diagram?

14. Task
Fill in the sources of finance table. The ‘How it works…’ column has already been filled in You need to match up the correct source of finance and then fill in the advantages and disadvantages columns. Feel free to use discussion and internet research to help you.

15. Choosing the right source of finance

16. Making the right choice….
In any given situation, businesses will have to make a choice about which source of finance to use (And so will you in your IB exam!!)
Two things have to be considered….
What sources are available
Which is the best option
What factors are likely to affect the availability of finance in a given situation?
What factors would a firm consider when deciding which is the best option?

17. Factors to consider - Choosing a source of finance
Availability may be affected by:
What the finance is needed for
The ownership type/size of the business
State of the economy
Level of risk involved
Business would then consider:
How and when repayments will have to be made
The level of the repayment
How quickly the finance is needed
The overall cost of borrowing the money
The amount of finance needed
Attitude towards diluting ownership 17

18. Task For each of these scenarios…..
write a list of the options likely to be available
Pick which you think is the BEST option
3. CAN YOU JUSTIFY YOUR ANSWER?
Why is it better then other options?
Why is it still the best option despite the downsides?
Are there any conditions on your recommendation?
Is there any other information you need to know?
Task

19. Sandwich Delivery – Sole Trader
The owner would like to replace his motor bike with a small van so he can transport a greater quantity of sandwiches

20. Clothing Manufacturer – Public Limited Company
A successful clothing manufacturer needs finance to build an additional factory

21. Accountants- Partnership
The firm are finding that their existing computers are difficult to maintain and are too slow. It needs ten new computers and software

22. Plumbers – Partnership
The partners have recently expanded and need money to cover materials and additional running costs until they get paid by their customers

23. Farm – Private Limited Company
The owners have decided to buy the vacant farm next to theirs, they need money to buy the land and also for farm machinery

24. Team Challenge
The worksheet contains 14 different scenarios. For each scenario you should identify the best source of finance . There is a maximum of 5 points for correctly identifying the most appropriate source.
House points for the winning team

25. IB Questions
May 2014 Q1(e) Examine two appropriate sources of finance for AH Ltd to fund the replacement of the old equipment. [6 marks] Nov 2013 Q1(b) Explain two appropriate sources of finance that SF could use to purchase the 20 new scooters. [4 marks] Nov 2012 Q5(e) Discuss two possible medium- to long-term external sources of finance that IM could use to help solve its financial problems. [10 marks]