IB Business and ManagementUnit 3.1Sources of FinanceLesson 1: Capital, Revenue and Sources of Financepp. 335-345

1. Think about it….• “A business that makes nothing

but money is a poor kind of business.” Henry Ford (1863-1947)

• Was he crazy? What does he mean by this?

• …

2. Focus Questions• 1. What is the purpose of finance?• 2. What are the difference between capital and

revenue expenditure?• 3. Explain the different kinds of internal and external

sources of finance available to companies?• 4. What are the differences between Short, Medium

and Long term finance?• 5. What kind of finance can the public sector obtain?• …

3a. The need for business finance• All businesses need money to finance business activity.

– Set up costs– Day-to-day running costs– Cost for expansion– List goes on…

• Business can raise this money by obtaining bank loans or by selling unused assets.

• Your choice of finance will depend on many factors.• …

3b. The need for business finance• What is capital expenditure?

– It is finance (money) spent on purchasing (buying) fixed assets.• Do you remember what a fixed asset is?

– Items of monetary value, which have a long-term function and can be used over and over again.

» Such as buildings, equipment, land. Machinery, etc.– Buying fixed assets tend to be very expensive, so the sources of

finance for capital expenditure comes from medium to long term sources.

• …

4c. The need for business finance• What is revenue expenditure?

– These are the payments (cost) for the daily running of a business.• Such as wages, raw materials, electricity, etc.

– Will also include indirect costs, too.• Such as rent, insurance, advertising, etc.

• Should we control our costs?– Why?– We need to generate enough revenue to make a profit.

• Remember the equation:Revenue – Costs = Profits or Losses (we are hoping for profits )

• …

5. InternalFinance

PersonalFunds

(sole trader or partnership)

Family and

Friends

Working Capital

(money for day to day

operations)

Retained Profits

(internal profits or ploughed-back profits)

Selling Dormant Assets

Investing Extra Cash(gain

interest)

6. ExternalFinance

Share Capital

(selling securities on

the stock market)

Loan Capital

(commercial loan or

business development

loan)

Overdrafts(take out more

money than what is in your

account)

Trade Credit

(buy now, pay later)

Government Grants

Donations

Sponsorships

IB Business and ManagementUnit 3.1Sources of FinanceLesson 2: Debt Factoring and Terms of Financepp. 341-348

1. Focus Questions• 1. What is debt factoring?• 2. What are the advantages and disadvantages of

factoring?• 3. Explain other sources of external financing.• 4. Decide which term of financing to use.• …

2a. Other sources of external financing• Debtors:

– Key word here is debt and the concept of debtors.– Who are they and what do they do…these debtors…

• People or organizations that owe money.– Remember when we talked about credit terms for a company who was

doing business overseas?» That business sold supplies to a customer on 30 days credit.» This mean you the company will not see any payment until after

the 30 days.– There is a concept called good debt and bad debt.

• Good debt makes you money.• Bad debt makes you lose money.

– So, lets take the above example. A customer on 30 days credit.– If more of your customers are given credit you may face bad debt.

– Because if your customers can not pay you, how are you going to pay your suppliers, or operating costs of your company.…

2b. Other sources of external financing• Debt Factoring:

– Is a financial service that allows a business to raise funds based on the value owed by their debtors.

• Confused?– So, if you have customers who bought on credit, you can

borrow based on that amount.• How does it work, this borrowing on debt?

– Most factoring services provide 80-85% of the outstanding payments from debtors within 24 hours.

– Advantages: • Immediate source finance: receive money in 24 hours vs. 30 days

from your customer.• Option of non-recourse factoring for the provision of bad debt.

– Think about it, if your customer does not pay, whose lose is it?» Yours right? But under this provision, the finance provider

will absorb the loss. » So your business does not suffer and losses from bad debt

and reduces the risk of doing business.

2c. Other sources of external financing• Debt Factoring:

– Disadvantages: • High fees charged by financial institutions.• The larger the value of debtors and the riskier the business seems

to be, the higher the charges tend to be.• Not all businesses are eligible to use this service.• …

2d.Other

sources of external financing

Leasing(lease assets)

Hire Purchase(pay for items in

instalments)

Debentures(long term loans to receive interest)

Venture Capital(ROI)

Business Angels

(Remember Dragon’s

Den?)

3a. Terms of Finance• YOU as an effective manager must pay very close attention to the

cash flow situation of your company.– Remember…what is cash flow?

• The money coming into and going out of the company. • Your revenue and expenses. Right. Very good.

• But you are not super-human, and must deal with the ever changing short-medium-and long term cycles of the business environment.

• So you may find yourself strapped for cash and will need to use a form of financing.– Why do we use financing?

• To aid business operations.• If you have serious cash flow problems it could cause

liquidation (you sell off your assets) or bankruptcy.• …

3b.Terms of finance

Short(paid within 12 months)

Medium(paid within 1-5 years)

Long(paid back

after 5 years or more)

See pg. 346 for a

summary of sources of financing

4a. Sources of finance for public sectors organizations

• Some organizations charge for their services.– Postal services sell stamps to generate revenue for example.

• They may also obtain government funding.– Schools and hospitals for example.

• To recap:– Many business fail because of poor financial planning and cost control.

• Remember:– The purpose of financing: why do you need to borrow?– The cost: not only for assets, but opportunity costs as well.– The Amount required: Do you really need a large amount?– Time: consider how long it will take your firm to repay the loan.– Status and size: if you are a small firm, forget about getting large financing.– Financial situation: if you have poor cash flow, banks will not look at you.– External factors: things out of your control, will impact your business. – …

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