TOPIC 3 - finance

• Revenue expenditure


  Spending on assets that are used up in a relatively short period of time
• Capital expenditure


  Spending on non-current assets that will be used by the business for a long period of time
• Revenue expenditure


  • Spending on fuel, components and raw materials
• Capital expenditure


  • Expenditure to purchase property, vehicles and production equipment
• Revenue expenditure


  • Essential to production but, if not controlled, can have an immediate and damaging effect on a business profits
• Capital expenditure


  • Has no immediate effect on profits, but is essential if a firm is to generate long-term profits
• A business's expenditure can be divided into revenue and capital expenditure
• Reasons businesses need money (capital)

  • Start up or to expand the business
  • Provide a reward for the owners for taking the risk in starting the business
  • To pay taxes to governments and other authorities
• Finance


  Provides a means to measure the performance of a business
• It is common to judge the success of a business by the amount of profits that it makes, though later there are other ways of measuring performance which may provide more accurate judgements
• Capital expenditure


  Investment in an asset (purchase of a product that gets used over and over again)
• Revenue expenditure


  Day to day operation, short term, running cost (labour cost - e.g rent, marketing, admin, electricity)
• Reasons businesses need finance


  • Setting up a business
  • Need to finance our day-to-day activities
  • Expansion
  • Research into new products
  • Special situations such as a fall in sales
• Finance is required for many activities
• Capital


  The money invested into a business and is used to purchase a range of assets including machinery and stocks
• Revenue expenditure


  The purchase of items such as fuel and raw materials that will be used up within a short period of time
• Capital expenditure


  The spending by a business on non-current assets which will be used for more than one year, such as premises, production equipment and vehicles
• Asset


  Anything that has current or future economic value to a business
• Balance sheet


  A financial statement that records the assets (possessions) and liabilities (debts) of a business on a particular day at the end of an accounting period. It is also known as a statement of financial position.
• Internal sources of finance

  • Retained profit
  • Sale of assets
  • Personal funds
• Short-term external finance


  • Bank overdraft
  • Bank loan
  • Creditors (trade credit)
  • Debt factoring
• Medium-term external finance


  • Leasing
  • Bank loan
• Long-term external finance


  • Sell shares
  • Bank loan
  • Grants
  • Venture capital
  • Business angel
• Share capital


  Funds raised by a company from selling shares in its business to shareholders
• Short-term


  1 year
• Medium-term


  1. 5 years
• Long-term


  5+ years
• Loan capital


  Money that is borrowed over a medium or long period of time. Examples include bank loans and mortgages.
• Venture capitalist


  Funds (in the form of a mix of share and loan capital) that are advanced to businesses which are thought to be relatively high-risk
• Business angel


  A person who has a large personal fortune and is willing to use some of this money to support risky ventures (ethical inputs to society)
• Leasing


  Renting and factoring - involves paying for assets (e.g. vehicles) over a period of time without ever owning the asset
• Bank loan


  The amount of money provided to a business for a stated purpose in return for regular repayments of the amount borrowed plus interest charges over a period of time
• Bank overdraft


  Service offered by banks allowing a business to borrow up to an agreed limit for as long as it wishes
• Trade credit/creditor


  Period of time given by suppliers before payment for goods and services due from customers
• Loan capital


  Same thing as a bank loan
• Crowdfunding


  Source of finance that entails collecting relatively small amounts of money from a large number of supporters ('the crowd'). It is common for businesses aiming to raise money through crowdfunding to use the internet to communicate with potential supporters.
• Microfinance providers


  Give financial services to poor and low-income clients
• Internal sources of finance

  • Retained profits
  • Sale of assets
• Short-term external sources of finance

  • Overdrafts
  • Trade credit
• Long-term external sources of finance

  • Loan capital
  • Crowdfunding
  • Microfinance
  • Business angels
  • Share capital
  • Leasing