Finance

• Working capital

  A company's ability to pay off its debts using liquid assets. If the firm is unable to meet its obligation in time, the company is in danger of insolvency/bankruptcy/foreclosure.
• Liquidity

  Emphasis placed on financial planning in order to register all potential shortages in funds
• Reasons why businesses need finance

  • To finance short-term needs (e.g. new computers)
  • To finance long-term needs (e.g. expansion)
• Short-term finance

  Loans or debt businesses expected to pay back within 1 year
• Long-term finance

  Financing for large projects that will pay back over a longer period (more than ONE year). Riskier - lenders tend to ask for some form of insurance or security.
• Internal sources of finance

  • Retained profit
  • Sale of existing assets
  • Owners' savings
  • Use of working capital
• Retained profit

  • Profit kept in the business after owners have been given their share of the profit. Investment back in the businesses.
• Keeping more profits to be used as capital

  Reduces owner's share of profit and they may resist the decision
• Sale of existing assets

  • Assets that the business doesn't need anymore, e.g., unused buildings or spare equipment.
• Surplus assets

  Will not be available with new businesses
• Owners' savings

  • For a sole trader or partnership who are unincorporated (owners and business is not separate), finance the owner directly invests will be internal finance.
• Owners' savings

  Increases the risk taken by the owners
• Use of working capital

  • Customers receive goods but pay for them later (usually in 30 days)
• Use of working capital

  Risk of not having enough for day to day working capital – cash flow. This might affect being able to take bigger orders. Dependent on size of the business – discount payments lose money. Still must pay the debt back but likely with more interest.
• External sources of finance

  • Short term (less than 1 year)
  • Long term (more than 1 year)
• Short-term external finance

  • Tends to be spent on day-to-day operations
• Long-term external finance


  • Tends to be spent on large projects that will pay back over a longer period (more than ONE year). Riskier - lenders tend to ask for some form of insurance or security.
• Short-term external finance

  • Bank overdrafts
  • Trade credit
  • Debt factoring
• Capital expenditure

  Spending by a business on non-current assets such as machinery and buildings
• Retained profit

  Profit remaining after all expenses, tax and dividends have been paid and which is ploughed back into the business
• Short-term finance

  Loans or debt that a business expects to pay back within one year
• Long-term finance

  Debt or equity used to finance the purchase of non-current assets or finance expansion plans. Long-term debt is borrowing a business does not expect to repay in less than five years.
• Start-up capital

  The capital needed by an entrepreneur when first starting a business.
• Non-current (fixed) assets

  Resources owned by a business which will be used for a period longer than one year, for example buildings and machinery
• Working capital

  The capital needed to finance the day-to-day running expenses and pay short-term debts of a business
• Three factors that influence the choice of finance are: size and legal form, amount required, length of time or existing debts.
• Being more profitable makes it easier to borrow money.
• A mortgage would be used to borrow money for buildings or land.
• An example of finance affecting ownership is a partnership or private limited company converting to public limited.
• Alternative sources of finance

  • Microfinance
  • Crowdfunding
• Microfinance

  • Pros: Allows those in poverty access to funds, helps create jobs, helps overall social well-being.
  • Cons: Critics say that lenders profit from lending to the poor – unethical? Only limited amounts of money on offer due to the high risk of default and not all poor can apply for loans.
• Crowdfunding

  • Kickstarter - for funding inventions and creative works.
  • GoFundMe - may often see people asking for crowdfunding for short-term projects and medical emergencies.
• Unincorporated businesses cannot raise capital through the sale of shares
• Long term finance

  • Mortgages
  • Bank loans
  • Share issue
  • Debentures
  • Leasing
  • Hire purchase
• Equity Financing

  • These are financial sources which come from within a business.
  • They often do not need to be paid back with interest so are cheap
• Retained profit

  • Pros:
  • Doesn't have to be repaid (like a loan)
  • No interest must be paid
  • Cons:
  • A new business will not have retained profit
  • Profits may be too low to finance
  • Keeping more profits to be used as capital will reduce owner’s share of profit and they may resist the decision
• Sale of existing assets

  • Pros:
  • Makes better use of capital tied up in the business
  • Does not become debt for the business unlike a loan
  • Cons:
  • Surplus assets will not be available with new businesses
  • Takes time to sell the asset and the expected amount may not be gained for the asset
• Owners' savings

  • Pros:
  • Will be available to the firm quickly
  • No interest must be paid
  • Cons:
  • Increases the risk taken by the owner
• Use of working capital

  • Pros:
  • Improve their cash balances
  • Reducing inventory levels (reduce number of raw materials or stock kept in storage)
  • Reducing trade receivables (the total amount owing to a company for goods and services sold
  • Delayed payment to suppliers
  • Cons:
  • Risk of not having enough for day to day working capital – cash flow
  • This might affect the ability to take bigger orders 
  • Dependent on size of the business – discount payments lose money
  • Still must pay the debt back but likely with more interest
• Short term (External sources of finance)

  • Used to cover the day to day running expenses of the business
  • Paid back in a short period of time (less than a year), so less risky for lenders