edexcel business theme 2 and 3

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THEME 2

Internal Finance

Finance is needed for equipment, raw materials, premises, expanding.

CAPITAL EXPENDITURE is spending on items which can be used over and over again, eg company car, cutting machines, new factory.

REVENUE EXPENDITURE refers to payments for goods and services that have either been consumed or will be soon, eg raw materails, wages, fuel, maintainance and repair of machinery.

OWNERS CAPITAL: In most cases, a business cannot start unless the owners provide capital of their own. Part of the risk taken by entrepreneurs when starting a new business. Owners provide capital from their own personal resources, such as personal savings. Sometimes, people made redundant decide to go into business using their redunancy payments. Can be provided through any stage in the business, not just start up.

RETAINED PROFIT: profit after tax, which is invested into the business and not given to the owners. VERY IMPORTANT FOR BUSINESS. Cheapest source of finance, no interest and administration. Causes opportunity cost as if it is used by the business and not given to the owners, for a small business this may mean owners and their families have less money to fund their lifestyle. For limited companies, shareholders get less dividends. For public limited, may lead to conflict if shareholders dividend payments are frozen. Flexible, and doesnt have to be used immediately. Could put into a bank account and earn interest, then use at a later date. HOWEVER IF BUSINESS MAKES NO PROFIT, RETAINED PROFIT IS NOT POSSIBLE FOR A SOURCE OF FINANCE.

SALE OF ASSETS: can sell any unwanted assets to raise capital, eg machinery, obsolete stock, land that are no longer needed. Sometimes a business can be pressured into selling assets if it needs a large source of income to overcome a problem. EXAMPLE: CO OP SOLD ITS FARMS IN 2014 FOR £249MILLION TO HELP REDUCE DEBT. Also can do whats called a SALE AND LEASEBACK, where business sells an asset it still actually needs, such as machinery. The sale is made to a specialist company that leases the asset back to the seller. Increasingly popular. Gnerates cash instantly and upkeep of asset is passed to new owner.

ADVANTAGES OF INTERNAL FINANCE

✓ capital is available immediately - no time delays between identifying the need for finance and obtaining it. In the bank account waiting, or assets can be sold quickly is price is competitive.

✓ it's cheap - there are no interest payments or administration costs, which means the costs will be lower and profit higher.

✓ business will not be subject to credit checks - external finance often requires investigations into the credit history of the borrowers.

✓ there is no need to involve third parties - more control over your own finances.

DISADVANTAGES OF INTERNAL FINANCE

✗ can be limited - a business may not be sufficiently profitable to use retained profit or may not have any unwanted assets to sell, and owners may not have nay personal savings to contribute.

✗ not tax deductible - have…

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