- Created by: emili.licht
- Created on: 09-11-18 05:05
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
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
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
- 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
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)
- 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 -…