Business Management 3.1 – SOURCES OF FINANCE
FINANCE
Start-up capital: capital needed by an entrepreneur to set up a business
Working capital: day-to-day finance (bills, expenses, raw materials, stocks, credit to customers).
WC = current assets – current liabilities
For expansion (more capital assets) or takeovers
Overcome economic recession, credits not repaid by customers
Pay for R&D and marketing
Short-term funding Medium-term Long-term
1- year 1-5 years 5+ years
CAPITAL EXPENDITURE – Purchase of assets that last more than one year (machines)
REVENUE EXPENDITURE – Costs and assets (NO fixed costs), such as wages and materials
SOURCES OF FINANCE
Internal Personal Finds Risks of an entrepreneur.
Business assets or (sole trader) Finance limited to owner´s savings.
retained profits No interest payments.
(ploughed-back) Control over business
No direct cost, but Retained profit Profit after taxes, dividends, etc that is ploughed back to the
opportunity cost. No (Ltd/plc) business. Not paid to shareholders, so they are a permanent
liabilities or debts. source of finance
Difficult for expansion Sale of assets Sell things they don´t use or don´t need to own (leased or
(slow) and not for rented)
small or unprofitable Reduction in Cutting back on current assets by selling stocks or reducing
businesses working capital credits. Risks. Less liquidity (ability to pay short-term debts)
short
External Bank For daily expenses.
Sources outside the overdrafts: Flexible (depends on the needs of the business)
business business High interests
borrows a limit Bank can regret at any time and force business to pay
of cash when
required
Trade credit: For increase in inventory held or sales on credit
delay payment Not immediate payment to suppliers or creditors
of bills No interest
No discount for quick payment.
Confidence on business may be lost
Debt Used by small firms, to finance increase in sales on credit. No
factoring: purchase equipment
selling of Liquidity
claims over Do not receive the full amount of the debt
debtors to a
debt factor in
exchange to
immediate
liquidity
1
FINANCE
Start-up capital: capital needed by an entrepreneur to set up a business
Working capital: day-to-day finance (bills, expenses, raw materials, stocks, credit to customers).
WC = current assets – current liabilities
For expansion (more capital assets) or takeovers
Overcome economic recession, credits not repaid by customers
Pay for R&D and marketing
Short-term funding Medium-term Long-term
1- year 1-5 years 5+ years
CAPITAL EXPENDITURE – Purchase of assets that last more than one year (machines)
REVENUE EXPENDITURE – Costs and assets (NO fixed costs), such as wages and materials
SOURCES OF FINANCE
Internal Personal Finds Risks of an entrepreneur.
Business assets or (sole trader) Finance limited to owner´s savings.
retained profits No interest payments.
(ploughed-back) Control over business
No direct cost, but Retained profit Profit after taxes, dividends, etc that is ploughed back to the
opportunity cost. No (Ltd/plc) business. Not paid to shareholders, so they are a permanent
liabilities or debts. source of finance
Difficult for expansion Sale of assets Sell things they don´t use or don´t need to own (leased or
(slow) and not for rented)
small or unprofitable Reduction in Cutting back on current assets by selling stocks or reducing
businesses working capital credits. Risks. Less liquidity (ability to pay short-term debts)
short
External Bank For daily expenses.
Sources outside the overdrafts: Flexible (depends on the needs of the business)
business business High interests
borrows a limit Bank can regret at any time and force business to pay
of cash when
required
Trade credit: For increase in inventory held or sales on credit
delay payment Not immediate payment to suppliers or creditors
of bills No interest
No discount for quick payment.
Confidence on business may be lost
Debt Used by small firms, to finance increase in sales on credit. No
factoring: purchase equipment
selling of Liquidity
claims over Do not receive the full amount of the debt
debtors to a
debt factor in
exchange to
immediate
liquidity
1
