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Chapter 29 Business Finance

The document outlines the essential need for finance in business operations, highlighting various situations that require funding such as start-up capital, working capital, and expansion. It distinguishes between short-term and long-term finance needs, discusses the importance of working capital management, and details various sources of finance available for both incorporated and unincorporated businesses. Additionally, it emphasizes the factors influencing the choice of finance, including cost, ownership structure, and the amount required.

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6 views

Chapter 29 Business Finance

The document outlines the essential need for finance in business operations, highlighting various situations that require funding such as start-up capital, working capital, and expansion. It distinguishes between short-term and long-term finance needs, discusses the importance of working capital management, and details various sources of finance available for both incorporated and unincorporated businesses. Additionally, it emphasizes the factors influencing the choice of finance, including cost, ownership structure, and the amount required.

Uploaded by

yeohadwin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 29 Business

finance
• All businesses need finance to operate.
Insufficient finance can lead to failure.
• Key Situations Requiring Finance:
• Start-up Capital: Essential to purchase
The Need equipment and premises when setting up.
• Working Capital: Needed for day-to-day
for expenses and inventory management.
• Expansion: Finance needed for
Business purchasing assets or for R&D.

Finance • Acquisitions: Finance required to buy


other businesses.
• Survival Situations: Finance needed
during downturns (e.g., economic
recession or customer payment delays).
Short-term Finance:

• Ideal for seasonal demand or


Short-term temporary situations (e.g.,
vs Long- retail inventory before
holidays).
term Finance • Repaid within a year.
Needs
Long-term Finance:

• Necessary for expansion


(e.g., buying buildings or
equipment).
• Repaid over many years.
Cash vs Profit
• Cash and profit are not always the same.
• Example 1: Jhumpa’s weekly sales match her
cash inflow and profit.
• Example 2: Shula's cash inflow is lower than
profit due to unpaid supplier costs.
• Example 3: Sanjit records profit on sales, but
cash outflows are negative due to unpaid
customer invoices.
Administration, Bankruptcy, and
Liquidation
Lack of Finance: Common cause of business failure.

Administration: Appointed accountants try to keep


the business running and find a buyer.

Bankruptcy and Liquidation: Legal process to sell


assets to pay debts.
What is Working Capital?

Finance required for everyday expenses (e.g., wages, inventory).

Formula: Working Capital = Current Assets – Current Liabilities.

Importance: Insufficient working capital leads to illiquidity and


potential business failure.

A high level of working capital can have opportunity costs (e.g.,


tying up money in inventories).
Managing Working Capital

Managing Managing
Inventory:
Keep lower inventory levels. Payables:
Delay payments to suppliers.
Use technology to track and order Buy from suppliers offering credit.
stock.
Efficient handling to reduce waste.
Managi
ng • Managing Receivables:
• Only offer credit when

Workin
necessary.
• Reduce the credit
period.
g
Capital
Capital Expenditure vs
Revenue Expenditure
Capital Expenditure:

• Long-term investment (e.g., buildings,


equipment).
• Usually financed by long-term sources
(e.g., loans or share capital).
Revenue Expenditure:

• Ongoing expenses for day-to-day


operations.
• Typically financed with short-term finance.
Sources of Finance

• Business Ownership Impact: The type of ownership


influences the sources of finance available. Sole traders and
partnerships cannot raise capital by selling shares, unlike
limited companies.
Finance for Limited
Companies

•Internal Sources: Companies can raise finance from within


the business. These include:
• Retained Earnings: Profits kept within the business after
tax and dividends. This is a permanent source for future
activities and expansion.
• Sale of Unwanted Assets: Established companies often
sell unused assets to raise cash.
Finance for Limited
Companies

• Sale and Leaseback: A company sells assets but continues


to use them by leasing them back, providing capital with
added fixed costs.
• Working Capital: Reducing working capital (e.g., inventory)
releases cash, but risks reducing liquidity.
Short-term External Sources of Finance

Bank Overdrafts: Flexible finance allowing a business to


overdraw its bank account. Interest rates can be high, and
there is a risk if the bank calls in the overdraft.

Trade Credit: Suppliers allow businesses to delay payment


for goods, acting as a form of short-term finance. However,
discounts for early payment may be lost.

Debt Factoring: Businesses sell receivables to debt


factors to get immediate cash. However, the amount
received is less than the debt value.
Long-term External Sources of Finance

Hire Purchase: A way to acquire an asset over time, with interest and
partial capital repayments. It avoids large initial payments.

Leasing: A contract to use an asset without purchasing it, often


including maintenance. It is less costly than buying but may be more
expensive in the long run.

Bank Loans: Loans for periods over one year, secured by collateral.
Fixed or variable interest rates are offered, with the risk of losing assets
if the loan is not repaid.

Debentures: Long-term bonds issued to raise capital, with fixed


interest payments. Some can be converted into shares. They don’t
require asset security.
Long-term External Sources of
Finance
Business Mortgages: Loans for purchasing property, secured by
the property itself.

Share or Equity Capital: Limited companies raise capital by


issuing shares. This capital doesn’t need to be repaid unless the
company is liquidated.

Private Companies: Can sell shares to existing shareholders to


raise capital.

Public Companies: Can list shares on the Stock Exchange to


raise large sums, though this can result in a loss of control for
original owners.
Long-term External Sources of
Finance

• Government Grants
• Government agencies, including the EU, offer grants under
certain conditions.
• Typically available to small businesses or those expanding
in developing regions.
• Conditions may include location and job creation.
Advantages of
Loans
• No Ownership Dilution: Loans do not
involve issuing shares, so ownership remains
unchanged.
• Repayment: Loans are repaid over time,
avoiding permanent liability increases.
• No Voting Rights: Lenders do not have
voting rights at the AGM.
• Interest Charges: Interest is paid before
taxes, reducing taxable profit.
Advantages of Share
Capital

• No Repayment: Share capital does not require repayment,


unlike loans.
• Potential for Higher Returns: Shareholders benefit from
higher returns if the company’s value increases.
• No Interest Charges: Dividends are paid from profits after
tax, providing flexibility for the business.
Venture Capital

Small companies that are not listed on the Stock Exchange


can gain long-term investment funds from venture
capitalists.

Venture capitalists are specialist organizations or wealthy


individuals willing to invest in business start-ups or small
to medium-sized businesses that have difficulty raising
capital from other sources.

These businesses may be considered risky due to new


technologies or complex research involved, which might
deter other potential investors.
Finance for Unincorporated Businesses

• Unincorporated businesses (sole traders & partnerships)


cannot raise finance through share sales.
• They are unlikely to successfully sell debentures due to their
relatively unknown status.
Sources of Finance for
Unincorporated
Businesses
• Bank overdrafts and loans, including
microfinance
• Crowd funding
• Credit from suppliers (trade payables)
• Loans from family and friends
• Owners' investment
• Taking on partners with capital to invest
Sources of Finance for
Unincorporated
Businesses
Unlimited Liability
• All owners or partners have unlimited liability.
• Lenders often require personal guarantees,
supported by the owners’ personal assets.
• Family and friends may lend finance, but
repayment could strain relationships.
• Insufficient savings may limit the owner’s ability to
invest.
Grants
• Grants are available for small and newly formed
businesses as part of government support
programs.
Sources of Finance for
Unincorporated
Businesses
Microfinance
• Provides small loans to entrepreneurs
in low-income

Drawbacks of Microfinance
• High interest rates due to
administrative costs.
• Failure of businesses funded by
microfinance can lead to
unmanageable debt for recipients.
Sources of Finance for
Unincorporated
Businesses
• Crowd Funding
• A growing source of finance for new start-ups.
• Entrepreneurs pitch business ideas to a wide
audience of small investors via platforms like
Kickstarter and Crowdcube.
• Investors may receive returns or an equity
stake if the business succeeds.
• Public exposure may lead to idea copying.
Factors Affecting
Source of Finance
• Selecting the right source of finance is
crucial for long-term success.
• Too costly, inflexible, or easily withdrawn
finance can harm the business.
Key Factors Influencing Finance
Choice
• Why finance is needed and time period: Long-term finance
for long-term needs; short-term finance for short-term needs.
• Cost: Loans can be costly during high interest rates; equity
finance may involve paying dividends, which aren’t tax-
deductible.
• Amount required: Larger sums may require share issues or
debentures, while smaller sums can be raised through bank
loans or trade credit.
Key Factors Influencing Finance
Choice

• Form of business ownership and control: Limited


companies can issue shares, but this risks losing control.
• Level of existing borrowing: High debt levels increase
borrowing risks.
• Flexibility: Seasonal businesses benefit from flexible
financing options.

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