Sources of Finance

• What is short-term finance?

  Finance intended for repayment within 12 months. Usually intended for revenue expenditure
• What is long-term finance?

  Finance intended for repayment usually after 3 years or more. Usually intended for capital expenditure
• Short-term finance is usually intended for what type of expenditure?

  Revenue expenditure
• Long-term finance is usually intended for what type of expenditure?

  Captial expenditure
• What are trade revievables (debtors)?

  Amounts owed to a business by customers
• What are trade payables (creditors)?

  Amounts owed by a business to suppliers and others
• What are recievables days?

  The average length of time taken by customers to pay amounts owed
• What are payables days?

  The average length of time taken by a business to pay amounts it owes
• How to calculate revievables days?

  Recievable days = (Trade recievables)/(Revenue) x 365
• How to calculate payables (creditors) days?

  Payables days = (Trade payables)/(Cost of sales) x 365
• Does a business usually want a higher payable days or higher recievable days?

  Higher payable days
• In general, a higher payable day figure is better for cash flow
• A higher payable days implies more near-term liquidity which could be used for short-term investment
• What is revenue expenditure?

  Spending on day-to-day costs, for example, paying for raw materials and paying wages
• Should short-term or long-term finance be used for revenue expenditure?

  Short-term finance
• Should short-term or long-term finance be used for capital expenditure?

  Long-term finance
• What is captial expenditure?

  Spending on assets that will be used repeatedly for longer than a year by firms in their main operations
• What are the internal sources of finance?

  • Retained profits
  • Sale of assets including sale and leaseback
• What are the external sources of finance?

  • Debt factoring
  • Overdrafts
  • Share captial
  • Loans
  • Venture captial
  • Crowdfunding
• What does a firm have to consider when choosing their source of finance?

  • The amount of finance required
  • The level of risk involved in the investment
  • The length of time the finance is needed for and will be paid back over
  • The level of borrowing or investment currently held by the firm
  • The legal structure of the business