Chapter 14
Finance is required for many business activities:
- Setting up a business will require start-up capital
- Businesses need to finance their working capital
- Business expansion needs finance to increase the capital assets held by the firm
- Expansion can be achieved by taking over other businesses
- When the management of a business decides to purchase it from the existing owners
in a management buy-out
- Special situations
- Pay for research and development
Capital expenditure: purchase of assets that are expected to last for more than one year.
Revenue expenditure: spending on all costs and assets other than fixed assets.
Internal finance: raised from the business’s assets or profits left in the business.
External finance: raised from sources outside the business.
Internal:
- Retained profit: profit left after all deductions.
- Sales of assets: sale of assets that are no longer fully employed
- Reductions in working capital: cutting back on current assets by selling stocks or
reducing debts
Advantages:
- No direct cost to the business
- If assets are leased back after being sold, there will be leasing charges
- Does not increase liabilities or debts
- No risk of loss of control
- No shares are sold
Disadvantages:
- Might be an opportunity cost
- Not available for all companies
- Depending only on internal sources of finance for expansion can slow down
business growth
- Rapidly expanding companies are often dependent on external sources of finance
External:
- Short-term finance:
● Bank overdrafts: The bank agrees to a business borrowing up to an agreed
limit as and when required.
● Trade credit: delaying payment of bills for goods or services received to
provide a business is, in effect, obtaining finance.
● Debt factoring: selling claims over debtors to a debt factor in exchange for
immediate liquidity.
, - Medium-term finance
● Hire purchase: an asset is sold to a company that agrees to make fixed
repayments over an agreed period.
● Leasing: a contract with a leasing or finance company to acquire assets over
the medium term.
● Medium-term bank loan
- Long-term finance
● Debt finance:
- Long-term loans from banks: loans that do not have to be repaid for at
least one year.
- Debentures: bonds issued by companies to raise debt finance, often
with a fixed interest rate.
● Equity finance: permanent finance raised by companies through the sale of
shares.
● Business angel: individual investors who put in their own money in a variety
of businesses.
Chapter 15
Main types of costs:
- Fixed costs: remain fixed no matter the level of output.
- Variable costs: costs that vary with output.
- Direct costs: costs that can be identified with each unit of production.
- Indirect costs: costs that cannot be identified with a unit of production.
Revenue: the income received from the sale of a product.
Total revenue: total income from the sale of all units of the product.
Revenue stream: the income that an organization gets from a particular activity.
Advantages:
- This should lead to higher total revenue for the business.
- Form of diversification
Disadvantages:
- Each activity needs to be managed and controlled leading to more work
- A large number of activities can result in a business losing focus
- Accounts need to be kept separate so that each activity’s performance can be
measured and monitored
Chapter 16
Main stakeholders how they use business accounts:
Business managers:
- Measure the performance of the business to compare against competitors.
- Provide information for making decisions.
- Control and monitor the operation of each department and division of the business.
- Set targets or budgets for the future and review actual performance.
Finance is required for many business activities:
- Setting up a business will require start-up capital
- Businesses need to finance their working capital
- Business expansion needs finance to increase the capital assets held by the firm
- Expansion can be achieved by taking over other businesses
- When the management of a business decides to purchase it from the existing owners
in a management buy-out
- Special situations
- Pay for research and development
Capital expenditure: purchase of assets that are expected to last for more than one year.
Revenue expenditure: spending on all costs and assets other than fixed assets.
Internal finance: raised from the business’s assets or profits left in the business.
External finance: raised from sources outside the business.
Internal:
- Retained profit: profit left after all deductions.
- Sales of assets: sale of assets that are no longer fully employed
- Reductions in working capital: cutting back on current assets by selling stocks or
reducing debts
Advantages:
- No direct cost to the business
- If assets are leased back after being sold, there will be leasing charges
- Does not increase liabilities or debts
- No risk of loss of control
- No shares are sold
Disadvantages:
- Might be an opportunity cost
- Not available for all companies
- Depending only on internal sources of finance for expansion can slow down
business growth
- Rapidly expanding companies are often dependent on external sources of finance
External:
- Short-term finance:
● Bank overdrafts: The bank agrees to a business borrowing up to an agreed
limit as and when required.
● Trade credit: delaying payment of bills for goods or services received to
provide a business is, in effect, obtaining finance.
● Debt factoring: selling claims over debtors to a debt factor in exchange for
immediate liquidity.
, - Medium-term finance
● Hire purchase: an asset is sold to a company that agrees to make fixed
repayments over an agreed period.
● Leasing: a contract with a leasing or finance company to acquire assets over
the medium term.
● Medium-term bank loan
- Long-term finance
● Debt finance:
- Long-term loans from banks: loans that do not have to be repaid for at
least one year.
- Debentures: bonds issued by companies to raise debt finance, often
with a fixed interest rate.
● Equity finance: permanent finance raised by companies through the sale of
shares.
● Business angel: individual investors who put in their own money in a variety
of businesses.
Chapter 15
Main types of costs:
- Fixed costs: remain fixed no matter the level of output.
- Variable costs: costs that vary with output.
- Direct costs: costs that can be identified with each unit of production.
- Indirect costs: costs that cannot be identified with a unit of production.
Revenue: the income received from the sale of a product.
Total revenue: total income from the sale of all units of the product.
Revenue stream: the income that an organization gets from a particular activity.
Advantages:
- This should lead to higher total revenue for the business.
- Form of diversification
Disadvantages:
- Each activity needs to be managed and controlled leading to more work
- A large number of activities can result in a business losing focus
- Accounts need to be kept separate so that each activity’s performance can be
measured and monitored
Chapter 16
Main stakeholders how they use business accounts:
Business managers:
- Measure the performance of the business to compare against competitors.
- Provide information for making decisions.
- Control and monitor the operation of each department and division of the business.
- Set targets or budgets for the future and review actual performance.
