Introduction about sources of finance Financial Resources What the business have available it could be cash, securities, creditors , loan facilities and possessed. There are number of ways in which a business can raise the finance necessary to purchase assets and fund working capital. The method chosen depends upon: The amount of money required by the business The risk that the business represents to potential lenders The time period over which the loan is required Internal sources of finance Funds generated from an organisations own resources e.g. retained profit, sales of perhaps 4%. Existing capital can be made to stretch further. The business may be able to negotiate to pay its bills later or work at getting cash in earlier from customers. Nothing soothes a difficult cash situation better than profit. It is also the best and most common way to finance investment into firm’s future. Research shows that over 60% of business investment comes from reinvested profit. External sources of finance If the business is unable to generate sufficient funds from internal sources then it may need to look to external sources. There are two sources of external capital: loan capital and share capital. Loan capital: the most usual way is through barrowing from a bank this may be in the form of a bank loan or an overdraft. A loan is usually a set of period of time. It may be short term( one or two years), medium term (three to five years)or long term( more then five years) the loan could be paid back in instalments over time or at the end of the load period. Leasing : is when the business can make use of the resources to use them all the time: Trade credit: suppliers agree to accept cash payment at a given dat in the future failure to pay on time can create problems for future orders. (short term under 1 year) Own savings: most small business are set up with the owners savings they are interset free but will be lost if the fails banks will not provide aloan or overdraft unlesss the owners are sharing the financial risk. Sole trader Sole Traders are individual people that runs their own business. As they are individual business sole Traders can keep all the profits they make, they are also responsible for anything that happens in the business. The lost and profit is both left to them. Sole Traders have unlimited liability, so if the business would go bankrupt then the owner goes bankrupt as well. Sole Trader Types of owner ship Sources of finance Sole trader Friends and family External: they can start of their business by barrowing money from friends and family to start up the business. This is a medium term because the friends and family might run out of money and would no longer able to support it. Personal savings Internal: this could be the savings a person had to start up their business they could use this saving in starting them off. This is a short term because the owner will run out of their personal savings soon there for this is up to 6 months Bank loans: this is a long term because the bank can offer the owner loans it will help the owner to support his/her sole trader business. This is a long term of up to 25 years. franchise A Franchise is not a business ownership but someone who has paid to become part of an established franhise business (such as McDonalds, Subway) .A franchise could set up their own business it doesn’t matter about the type of ownership all they have to make sure of is that they agree on the contract to the Franchisor. The Franchisor provides training, advertising premises and support for the franchise. Types of ownership Sources of finance Franchise Loans: If you get a loan and decide to get a franchise business then you would pay that off by the money that the company gives you and you could decide how much you want to pay if off by, if it 5 years or 10 years. Trade Credit: this is a short term , trade credit means when you buy goods or services on acount e.g. buy something and not making immediate payments. PRIVATE LIMITED COMPANY (ltd) This is a small family business and there must be at least two shareholders but how ever there is no rules on maximum number. The business has limited liability. The shareholders in private limited company cannot sell or transfer their shares without offering them first to the other shareholders for purchase. Types of ownership Sources of finance Private Limited Company (LTD) Shares: If you are going to use the businesses shares then you need to make sure that nothing goes wrong when you will be spending that money otherwise you could lose the entire business if something goes wrong. This is a long term because the investors has to stay with the business for quite a while. Bank loans: this is a long term this willl last for couple of years but have to be paid back. Family and friends: they could always look up to their friends and owner and expect some help from them however they will not always be in credit to help them out. Financial Performance A personal measure of how well a firm can use assets from its primary mode of business and generate revenue. This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. Budget and Cost Budget= A budget is a target for costs or revenue that a firm or department must aim to reach over a given period of time. Budgeting is like sitting a goal it is a technique for turning a firms strategy into reality. Costs = costs are critical elements of the information necessary to manage a business succesffully. Cost are divided into 3 categories: Variable costs, Fixed Costs and semi fixed costs. Why business needs to control costs and manage budgets. There is a lot of requirements to make a certain amount of profit. There are bank requirement, shareholders requirements, and it can even affect relationships with customers. Controlling costs is part of budgeting and the total sales, minus the costs gives you the profit.
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