Business Finance Sources of Finance Key Vocabulary: + Short term finance: money borrowed for one year or les. ‘+ Long term finance: money borrowed for more than one year. + Capita: finance provided by the owners toa business. + internal finanes: finance generated by the business from its own means. + Retained profits: profit held by the business without returning tothe owners and which may be usedin the future, + External finance: finance obtained from outside the business The need for finance + Short term needs: when the business begins to trade they may have revenues which could be used to cover the expenditures, however, it may not be enough at times and this is when the business has to borrow money. + Long term needs: in oder forthe business to begin trading or continue trading they may need funds. These ‘may be funded by the ovmer's capita thats invested or by some financial institutions. This money will be kept inthe business for a ong time or permanently + Startup capital: inorder for a business to start they may have a lot of expenditures such as purchase of non- current assets that are one off and so on, ‘+ Expansion: when a business wants to expand then they may need money, One of the reason why most ofthe businesses want to expand is that to meet the large orders. Internal source of finance 1. Personal saving: asa business isto begin there is a need for finance, Some of the finance may be funded by the owners and some by other financial institutions. 2. Retained profits: once businesses have established they may generate a huge amount of profit and a small amount of profit could be kept by the business without returning it to the owners. This amount can be used for future expansions or emergency funding, Tiss the cheapest source of finance ast has no any extra charge such as interests. 3. Selling off assets: when a business develops they may have alot of unwanted non-current assets that may ‘worth a lot, They can sell these assets to fund expansions External sources of finance ‘+ Long term - remain in the business for more than a year or short term - which willlastin the business for less ‘than a year. They are needed by businesses for various reasons such ‘+ Some businesses have seasonal trade and they may need finance at off season to fund all expenditures. ‘+ Airm may be short of money because a customer has delayed the payments.Sources of short-term external sources of finance: sank overdrafts: this means the business is allowed to spend more money than it has nits account. However, there is a limit set by the bank There may be interest charges. The bank has all the rights to call the business and ask for the money immediately at any time and they may do this when they feel the business is. facing aloss 2. Trade payabl bbe paid at a later date usually within 30 to 90 days. The business can delay the payments to their suppliers in business can purchase raw materials from their suppliers on credit. That is the payment can order to fund some important things. 3. Credit cards: they are very flexible and easy source of finance. The accounts should be settled within 56 days {to avoid any interest charges. And ifthe payment is delayed even after 56 days interest charges will be very high. Sources of extern: long-term sources of finance: 1. Loan capital: bank loans can be used to fund short or long-term needs. They loan must be paid in regular Installments with the interest. The main advantage is that businesses will know how much to pay every month 2. Unsecured bank loans: this is when banks lend loans to business with ne any form of security or guarantee. Banks often avoid this and prefer secured bank loans, The interest rates are very high for these loans ‘comparative to secured loans. 3, Mortgages: ths is along term loan in which the business or the borrower must use a land or a property as @ security, Interests are lower for these types of loans. 4, Debentures: ths is along term security yielding a fixed rate of interest issued by a company and secured ‘against assets. They must be repaid ata set date usually when the debenture matures, Public limited. companies usually use this form of loans. 5. Hire purchase: this is when the business borrow the tools that may be required instead of purchasing them. ‘The business may have to make a dawn payment. 6. Share capital: this is a common method of raising finance for limited companies by selling their shares to people, The business can also use aright issue which may give the existing shareholders the right to purchase ‘more shares, However, the shareholders may expect dividend payments and the costs of administration is, much higher 7. Venture capital: they are specialistinvestors who provide money for business purposes, often to new businesses. They may be entitled to a share of profit. They invest in companies that have a higher growth potential, 8. Crowd uni ‘The main advantage of this is that there is no interest payments, The lenders may be a large number of people who together may represent the crowd therefore, a large amount of money may be raised. However, this is where a large number of people investin a business venture using an online platform. if the business fails the crowd will be disappointed.Cash Flow Forecasting Key Vocabulary + Cash flow: fow of money into and out ofa business. ‘+ Insolvent: inability to meet debts, + Cash flow forecast: its a prediction of al receipts and payments over a period of time forthe future, ‘+ Closing cash balance: amount of cash that a business expects to have at the end of each month. ‘+ Cash inflows: Money that is coming into the business. ‘+ Cash outflows: money that is going out of business. Examples: tax, other expenses ‘+ Net cash flow: difference between cash inflow and outflow. ‘The importance of cash Cash is the most easiest to be changed into money. When a business has a very high amount of cash then itis considered to be successful, els its considered to be struggling to survive. Why is cash needed? + To pay suppliers and other costs: as the raw materials are purchased from the supplier, they may be expecting cash in return. Ifthe business fails to pay them adequate amount of cash then this will result in a damage to the healthy relationship with the suppliers and they may refuse to supply. + To prevent business failure: businesses must ensure that they have enough cash to pay their outstanding debts, And ifthey are unable to pay (insolvent) then this will result in the business shutting down. They should continually monitor their cash flow and keep up-to-date records of financial transactions. The between cash and profit difference ‘Sometimes the value of cash and profit may be different at the end of the trading period. Some of the reasons. + As some goods are sold on credit there may be some consumers who have not paid the money at the end of the trade period and therefore, cashis less than the profit. + Sometimes owners put more cash into the business therefore, cash is greater than profit. + Purchase of non-current assets may reduce the cash. Why is cash flow forecast important? + Identifying any cash shortages: business can in advance identity the cash shortages and make arrangements to raise funds. ‘+ Supporting applications for funding: If the cash flow balances are positive then financial institutions are more willing to lend money. ‘+ Help when planning the business: It helpsto clarify the aims and to make improvements to the business. ‘+ Monitoring the cash flow: Business can compare the predictions and the actual ones and find the weakness and try out different steps to increase the cash inflow.Costs Key Vocabulary + Costs: expenses that must while running the business + Fixed cost: the costs that remain constant + Variable cost: the costs that vary with the level of output + Total cost:the total ofthe fixed cost with the variable costs + Total revenue: money generated from the sale of outputs 1. Fixed costs 2. Fixed costs do not vary with the level of output. They don't increase when output increasesneither do they decrease when the output decreases, However, they are to be met even if no outputs produced, bb. They forma straight horizontal line in a graph. Examples: rent, wages, etc. 2. Variable costs {Variable costs are the costs that vary with the level of output. When output increases they increase and the Vice versa, Examples: raw materials, packaging, b,Total variable costs = Variable cost per unit + number of units 3.Total costs 2. This isthe addition ofthe Variable and fixed costs. b.Total cost = Fixed cost + Total Variable costs 4. Average costs 4. This isthe average cost of producing one single unit. b.Average costs = sar quant Segue 5.Total revenue 2. The amount of money the firm receves after selling its outputs b.Total revenues = Price + QuantityBreak-Even Analysis Key Vocabulary '* Break-even point: it is the level of output where the total revenues is equal to the total costs. Neither a profit nor aloss sade. + Break even chart: the graph that shows the total costs and total revenues. ‘+ Margin of safety: amount of output avallable tobe sold above the break-even point where the business makes aprofit. + Break-even point = sang sree tts caper nt What does the Break-even chart show? ‘+ Break-even pointis where the total costs and total revenues intersects, ‘+ Fixed costs are always horizontal inthe graph ‘+ At any level of output below the break-even point the business makes a loss. + At any level of output above the break-even point the business makes a prof + Margin of Safety = Current output - Break even output Effects of changes in price and costs on the break-even chart « Ifthe price is higher, the TR line will be steeper and the Break-even point will shift to the left. + Ifthe price is lower, the TR willbe flatter and the break-even point will shift to the right. « Ifthe FCs higher, then the TC will move upwards with the steepness unchanged and the break- even point \ shiftto the right. + IF FCis lower, TC will move downward with the steepness unchanged and break-even point will shift to the le + IFVCis higher, TC will be steeper and the break-even point will shift to the right. ‘= IFVC is lower, TC willbe flatter and the break-even point will shift to the left. Limitations of Break-even chart ‘© The TC and TR are shown as straight lines. This is because the costs may lower when the suppliers offer discounts on large orders. And therefore, the TC may fall. ‘= Itis assumed that all goods are sold. However, there are unsold stocks at the end of the trading period. ‘= ILis assumed that all goods are sold. However, there are unsold stocks at the end of the trading period. ‘+ The accuracy of the break-even chart depends on the accuracy of the details that is given and the quality of the data that is used to construct the chart.