UNIT 2- FINANCE

UNIT 2- FINANCE

Working Capital

Working capital is the money that is available for the day-to-day running of the business.

- It is crucial that a business has sufficient working capital at all times

-once enough finance has been raised to start up, a lot of money becomes tied up in fixed assets.

- need capital to pay for wages, buying materials, paying bills e.t.c.

Financial management for start-ups

Fixed costs: need to be paid no matter what e.g. rent and tax

Variable costs: changes in direct proportion to the number of customers or products sold e.g. raw materials

- important to generate enough revenue in order to cover the running costs of the buisness

- new businesses need to buy enough stock, purchase or rent fixed assests and even train new staff.

Financial Management for established businesses

-balancing cash flow and profit: both different things- can appear the business is generating enough profit but runs out of cash.

-Controlling costs:system of budgetory control is needed to avoid managers overspending

- setting up, monitoring and using budgets is an issue in larger companies.

-Financing growth: can have trouble sourcing capital when business needs to expand. 

RAISING FINANCE

Expenditure

Capital expenditure= spending on resources that can be used over and over e.g. company machinery and vehicle 

Revenue Expenditure= spending on goods and services which are consumed or will be consumed shortly e.g. wages, raw materials, fuel

Internal Sources of Finance:

-owners capital- personal savings

- retained profit= profit after tax that may be kept back to finance the business- once all costs have been covered and dividends paid to shareholders any profit left is retained in the business = the safest and most common used source of finance.

- sale of assets- may be assets no longer needed which can be sold off to generate cash. The business can use sale and leaseback agreement- involves selling an asset to a specialist business that leases that asset back to the seller-instant cash is generated.

ADV:

- Capital is available immediately- no time delay, retained profit will be in bank account immediately, assets sold quickly if price is competitive.

- Internal finance is cheap- no interest payments-costs lower- profit higher. Also no admin costs

-not be subject to credit history checks.

DISAD:

-can be limited- may not be sufficiently profitable to use retained profit- may not have any unwanted assets

-can be inflexible- there are wider range of external sources to use

- no inflationary benefits- inflation can reduce the value of debt if external sources are used

External Sources of Finance 

- Family and friends- may provide loans if bank is unwilling- can cause arguments if money is not paid back-sense of guilt 

-Banks- banks see start-up loans as very risky- insist on some collateral security

Collateral: is something of value that is used as security when a loan is offered. In the event of a business being unable to pay the loan back , the asset…