Business Studies Section-5

• the main reason why businesses need finance?

  starting up a business, expanding a business, and working capital of a business
• start-up capital


  The finance needed by a new business to pay for essential fixed and current assets before it can begin trading.
• Working Capital


  The finance needed by a business to pay it's day to day costs
• capital expenditures


  money spend on a non current assets which will last long more than a year.
• Revenue expenditure


  money spend on day to day expenses which do not involve the purchase of long term asset, ex: wages or rent
• Sources of finance

  internal, external, short term and long term
• Internal finance


  Obtained from within the business itself
• types of internal finance

  retained profit

  sales of existing assets

  sale of inventories to reduce inventory levels

  owner's savings
• External finance


  Obtained from sources outside of and separate from the business
• types of external finance

  Issue of shares

  Bank loans

  Micro-finance

  Debt factors

  Grants and subsidies

  Debentures
• Micro finance


  Providing financial services - including small loans - to poor people not served by traditional banks
• Crowdfunding


  raising money for a project or venture by obtaining many small amounts of money from many people
• types of short term finance

  overdraft

  trade credit

  factoring of debts
• types of long term finance

  bank loans

  leasing

  hire purchase

  issues of shares

  debt finance or long term loans
• how businesses make choice

  purpose and time period

  amount needed

  legal form and size

  control

  risk and gearing
• Will banks lend?

  - Is a cash flow forecast available?

  - Is a business plan available?

  - Is a forecasted income statement available?

  - Why is the loan needed?

  - What is the gearing ratio?

  - Will the loan be secured?
• cash flow


  cash inflows and outflows over a period of time
• Cash inflows


  The sums of money received by a business during a period of time.
• Cash outflows


  The sums of money paid out by a business during a period of time.
• Cash flow cycle


  shows the stages between paying out cash for labour, materials, etc, and receiving cash from the sale of good
• draw a CFC

  cash needed to pay for---- materials, wage, rent, etc.----goods produced---- cash payment received for goods sold---- repeat
• Porfit


  the surplus after total cost have been subtracted from the revenue
• cash flow forcasting

  an estimate of future cash inflow and outflow of a business
• cash flow forecast helps the manager to do what?

  -how much cash is available to the business

  -how much cash the bank might need to lend the business to avoid insolvency

  -whether the business is holding too much of cash.
• uses of cash flow forecast

  - starting up a business

  - running an existing business

  - keeping the bank manager informed

  - managing cash flow
• Net cash flow

  Total inflows - total outflows
• How to overcome short term cash flow problem

  -increasing bank loans

  -delaying payments to the suppliers

  -asking debtors to pay quickly or do a cash sale

  -delay or cancel capital equipment
• Working capital formula


  current assets - current liabilities
• account


  financial records of a firm's transactions
• accountant


  a professionally qualified person who has responsibility for keeping accurate accounts and for producing the final accounts
• final account


  produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business
• Profit formula

  total revenue - total cost
• How to increase profit

  -increasing revenue by more than costs

  -reducing the cost of making the product
• why profit is important to private sector businesses?


  -reward for enterprise

  -reward for risk taking

  -source of finance

  -indicator of success
• Income Statement


  a financial statement that records the income of a business and all costs incurred to earn that income over a period of time.
• revenue


  income to a business over a period of time from the sales of goods or services
• Cost of sales


  The cost of producing or buying in the goods actually sold by the business during a time period.
• Gross Profit


  Sales revenue - cost of sales
• trading account


  shows how the gross profit of a business is calculated
• depreciation


  the fall in the value of a fixed asset over time