Business Finance

Finance

Why is funding needed?

• To cover start up costs
• Expand
• Cash flow forecasts
• Wanting to buy more raw materials to complete a big order

Amount of funding depends on a few things:

• Type of business format
• Size of business
• State of the economy

Sources of finance:

Internal:

• Retained profit
• Owner's capital
• Asset sale

Advantages:

• Interest free
• More likely to receive family investment than from the bank
• No need to wait for funding
• Source of money cannot be withdrawn

Disadvantages:

• Always an opportunity cost
• Limited finance
• Risk losing everything
• Strained personal relationships

External:

• Lottery funding (Long Term)
• Government grant (Long Term)
• Mortgage (Long Term)
• Bank loan (Short term)
• Shares (Long Term)
• Overdraft (Short term)
• Debentures (Long term)

Forming a Company

PLCs and LTDs: Articles of Association and Memorandum of Association

Unlimited Companies: Only have to tell the HMRC and National Insurance Office

Internal Sources of Finance

Retained profits: (+VE: No interest, immediatly available), although there is an opportunity cost.

Credit control: (+VE: Improves cash flow, although it can be expensive, poor customer/business relationships)

Fixed assets: (+VE: Immediate available, although you may be lacking resources, you can rent them back

Destocking

Measuring success in a business:

• Profit
• Share price
• Revenue
• Motivation
• Productivity
• Absenteeism

Gross Profit= Sales revenue-Variable cost. Just for shareholders, ignores fixed costs

Operating/Net Profit= Sales revenue- Total Costs. Gives a true representation of actual profit.

Operating Profit Margin (£)= Operating profit/Sales revenue *100

Return on Capital: Operating Profit/ Capital invested * 100

Break-even

• The point at which a business makes neither a profit nor a loss i.e. where revenue equals total costs
• BEP (output) = Fixed costs/ (Selling price-variable costs)

Advantages:

• …