Finance and Accounts

SOURCES OF FINANCE

Businesses need to ascertain and be clear on the exact purpose of their nance - can be classified as capital expenditure or revenue expenditure

Capital Expenditure

This is the money spent to acquire items in a business that will last for more than a year and may be used over and over again. Items known as fixed assets. 

For example: machinery, land, buildings, vehicles and equipment

Needed for the business to generate income over the long term. 

Most fixed assets can be used as collateral (financial security pledged for repayment of a particular source of finance such as bank loans)

Capital expenditures are therefore long.term investments intended to assist businesses to succeed and grow. 

For example: purchasing a van by a business is termed as capital expenditure because the benefits accrued to the business from this will be spread over the long term

Revenue Expenditure

Money spent on the day-to-day running of a business

For example: rent, wages, raw materials, insurance and fuel.

They do not involve the purchase of longer-term, fixed assets. 

Revenue expenditure needs to be covered immediately to keep the business operational and should therefore provide immediate benefits unlike capital expenditure (which has a long-term focus).

High revenue expenditure will make it difficult to build sufficient capital in order to make long-term investments. Or get out of a sudden crisis situation. 

INTERNAL SOURCES OF FINANCE:

FINANCE OBTAINED FROM WITHIN THE BUSINESS AND IS USUALLY FROM ALREADY ESTABLISHED BUSINESSES

Personal Funds

• Key for sole traders as it comes mostly from their own personal savings
  • Maximises control of their business
  • Shows commitment — good signal to investors/financial institutions 
  • Preferred source — cheap + easily available + no interest rates
  • Great risk — risking life’s savings
  • If not large enough - difficult to start/maintain business

Retained Profit

Profit that remains after a business has paid corporation tax to the government and dividends to shareholders - aka ploughed-back profit

• Can be reinvested into bus.
• Cheap - no interest 
• Permanent (no need to be repaid)
• Flexible 
• Owners have control - no interference from banks 

• Start-up businesses will have no retained profit as they are new ventures
• If too low - not sufficient for expansion 
• Owners may overuse - no buffer for emergencies or growth opportunities
• High retained profit may mean that either very little or nothing was paid out to shareholders as dividends 

Sale of Assets

When a business sells off its unwanted or unused assets to raise funds

For example: machinery, redundant buildings, excess land/equipment

• Good way of raising cash from capital that may be tied up in assets that are not being used
• No interest
• May only be an option to established businesses and not new ones that lack excess assets to sell
• Time-consuming to find a buyer - especially for obsolete machinery 
  • Businesses can adopt a sale and lease back option

EXTERNAL SOURCES OF FINANCE

MONEY OBTAINED FROM SOURCES OUTSIDE THE BUSINESS -…