Business finance can be categorised in two main ways.
Source - Internal or External
Duration - Short term or Long term
Internal finance - within the business e.g. your assets etc.
External finance - comes from banks/finance houses
Short term finance - needs to be repaid within a year
Long term finance - might be repaid over 3, 5, 10 years or more
Need to Consider
Firms will need to consider the following when deciding on finance:
- How much to borrow
- Availability of finance
- Purpose of loan e.g. capital or revenue
- Duration finance is needed for
- Rate of interest (if you're safe and they think you'll pay it back = low interest, if there's a high risk that it won't be paid back = higher interest)
- Repayment schedule
- Any security needed?
A business plan is a document that details what your company is going to do to see if a business proposal is viable.
It will contain:
- Business aims
- Sources of finance
- Market research
- Location of premises
- Marketing plans
- Cash flow forecast
Cash Flow Forecast
A financial document showing projected income (revenue) and expenditure (costs) of your business over a set period of time e.g. a financial year.
It allows the firm to plan for times when costs may excees income and short-term finance will be needed.
Profit and Loss accounts
A financial document that lists revenue and costs to show gross and net profit. It is generated to show the past financial year.
It it used to calculate gross profit margins (GPM) and net profit margins (NPM) and allows yearly comparisons to be made.
Firms could reduce expenses to increase their NPM but this could possibly affect sales.
- This shows the assets that a firm owns and the liabilities is owes.
- It also shows where the money comes from to finance the business.
- A firm creates a balance sheet at the end of each financial year.
Gross Profit - amount of money left over after subtracting basic costs.
Net profit - money left over after subtracting expenses from gross profit.
Total revenue - amount of money your business takes in a year (turnover)
Average selling price x quantity
Gross Profit Margin - gross profit / total revenue x 100 (percentage)
Net Profit Margin - net profit / total revenue x 100 (percentage)