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Chapter 22 - Business Finance - Needs and Sources

Businesses need finance for starting up, expanding, and maintaining working capital. They have internal sources like retained profits or external sources like bank loans. Short-term finance includes overdrafts and trade credit while long-term includes loans and share issues. When choosing sources, businesses consider their purpose, amount needed, legal form, control level, and existing risks. Banks will lend and shareholders invest if the business can show viable cash flows, profits, security, and growth plans.

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189 views

Chapter 22 - Business Finance - Needs and Sources

Businesses need finance for starting up, expanding, and maintaining working capital. They have internal sources like retained profits or external sources like bank loans. Short-term finance includes overdrafts and trade credit while long-term includes loans and share issues. When choosing sources, businesses consider their purpose, amount needed, legal form, control level, and existing risks. Banks will lend and shareholders invest if the business can show viable cash flows, profits, security, and growth plans.

Uploaded by

Khoa Dao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 22: BUSINESS FINANCE: NEEDS AND SOURCES

I. What do Finance Department do?


» Recording all financial transactions, such as payments to suppliers and revenue from customers.
» Preparing final accounts.
» Producing accounting information for managers.
» Forecasting cash flows.
» Making important financial decisions, for example, which source of finance to use for different purposes
within the business.
II. The main reasons why businesses need finance (money)
- Starting up a business
- Expansion of an existing business
- Additional working capital
1. Starting up a business
Start-up capital is the finance needed by a new business to pay for essential non-current (fixed) and current
assets before it can begin trading.
2. Expanding an existing business
- Additional non-current (fixed) assets (larger buildings and machinery)
- A takeover
There can be a lot more forms of expansion.
3. Additional working capital
Working capital is the finance needed by a business to pay its day-today costs.

Two type of expenditures


- Capital expenditure is money spent on non-current (fixed) assets which will last for more than one year
- Revenue expenditure is money spent on day-to-day expenses that do not involve the purchase of a
long-term asset, such as wages or rent.

III. Sources of finance


Two ways of division:
- Internal or external sources of finance
- Short-term or long-term sources of finance
1. Internal finance
- Retained profit: This is profit kept in the business after the owners have taken their share of the profits.
- Sale of existing assets: Existing assets that could be sold are those items of value that are no longer
required by the business, for example, redundant buildings or surplus equipment.
- Sale of inveentories to reduce inventory levels
- Owners’ savings: A sole trader or members of a partnership can put more of their savings into their
unincorporated businesses.
2. External finance
- Issues of shares: This source of finance is only possible for limited companies
- Bank loans: a sum of money obtained from a bank which must be repaid and on which interest is payable.
- Selling debentures: These are long-term loan certificates issued by limited companies.
- Factoring of debts: A debtor is a customer who owes a business money for goods bought. Debt factors are
specialist agencies that ‘buy’ the claims on debtors of businesses for immediate cash.
- Grants and subsidies from outside agencies: Government
- Alternative sources of capital
- Micro-finance: Micro-finance is providing financial services – including small loans – to poor people not
served by traditional banks.
- Crowdfunding: funding a project or venture by raising money from a large number of people who each
contribute a relatively small amount, typically via the internet.

IV. Short-term and long-term finance


1. Short-term finance
- Overdrafts: The bank gives the business the right to ‘overdraw’ its bank account (that is, spend more
money than is currently in the account).
- Trade credit: This is when a business delays paying its suppliers, which leaves the business in a better cash
position.
- Factoring of debts
2. Long-term finance
- Bank loans: These are payable over a fixed period of time.
- Hire purchase: This allows a business to buy a non-current (fixed) asset over a long period of time with
monthly payments which include an interest charge.
- Leasing: Leasing an asset allows the business to use the asset without having to purchase it.
- Issue of shares
+ New issues (mua mới)
+ Rights issues (mua thêm dựa trên cái hiện tại)
- Long-term loans or debt finance:
» Loan interest is paid before tax and is an expense.
» Loan interest must be paid every year but dividends do not have to be paid if, for example, the business has
made a loss.
» Loans must be repaid, as they are not permanent capital.
» Loans are often ‘secured’ against particular assets.

V. Sources of finance: How businesses make the choice


- Purpose and time period
- Amount needed
- Legal form and size
- Control
- Risk and gearing - does the business already have loans
VI. Will banks lend and shareholders invest?
- Chances of obtaining loan finance if the following is available:
» A cash flow forecast which shows why the finance is needed and how it will be used.
» An income statement for the last time period – and a forecast one for the next. These should show the
chances of the business making a profit in future.
» Details of existing loans and sources of finance being used.
» Evidence that ‘security’ (or collateral) is available to reduce the bank’s risk if it lends.
» A business plan to explain clearly what the business hopes to achieve in the future and why the finance is
important to these plans.

Shareholders are most likely to buy additional shares when:


» the company’s share price has been increasing
» dividends are high – or profits are rising so dividends might increase in the future
» other companies do not seem such a good investment
» the company has a good reputation and has plans for future growth.

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