Business Finance

• Finance function


  The jobs done by a finance department in a business
• Role of the finance function

  • Calculating the average rate of return to measure how well the business is doing
  • Calculating the break-even output needed to avoid a loss
  • Calculating sales revenues and production costs
  • Arranging finance, e.g. from loans or shares
  • Calculating profit or loss using sales revenue and production cost
  • Forecasting cash flow-expected revenues and expenditures (costs) to decide if finance (e.g. an overdraft) is needed
  • Managing payments (wages, bills) and receipts of money (from sales)
• The work of the finance function is important for decision making
• Other departments will also influence decision making
• Reasons businesses need finance

  • Establishing (setting up) a new business
  • Funding expansion
  • Recruitment
  • Marketing
  • Running the business
• Establishing a new business

  Buying items before it can produce or sell anything, e.g. factory, office, shop, furniture, machinery
• Funding expansion


  Paying for a larger factory, shop or office, along with the furniture and machinery for these, buying more materials or stocks
• Recruitment


  Advertising jobs, selecting workers, paying wages and salaries of new staff
• Marketing


  Funding advertising and public relations campaigns
• Running the business


  Paying day-to-day bills and expenses
• Businesses need finance


  Reasons businesses need finance
• Why businesses need finance

  • Establishing (setting up) a new business
  • Funding expansion
  • Recruitment
  • Marketing
  • Running the business
• BP's need for finance

  Expanding its business
• Lidl's need for finance

  Expanding its business
• Advantages and disadvantages of different sources of finance

  • Owners' capital
  • Retained profit
  • Sale of assets
  • Overdraft
  • Trade credit
  • Taking on a new partner
  • Loan
  • Share issue
  • Crowdfunding
• Owners' capital


  Money from savings put into the business by the owner(s)
• Retained profit


  Profit that is not distributed to shareholders as dividends
• Sale of assets


  Items sold by the business
• Overdraft


  An arrangement with a bank that a business can spend more money than it has in its account
• Trade credit


  When the business buys goods to sell and does not need to pay the supplier for a period of time often 30 days
• Taking on a partner


  Adding a new partner who contributes some new capital
• Loan


  A sum of money borrowed for a stated period at an agreed rate of interest
• Share issue


  Money raised from investors by selling new shares
• Crowdfunding


  Money raised through an appeal to the public who are supporters of the business
• Short-, medium- and long-term sources of finance

  • Short-term finance (up to 12 months): Owners' capital, Sale of assets, Trade credit
  • Medium-term finance (1-5 years): Owners' capital, Sale of assets, Retained profit, Bank loan, Crowdfunding
  • Long-term finance (5 years or more): Owners' capital, Sale of assets, Retained profit, Bank loan, Crowdfunding, Taking on a new partner, Share issue
• Internal finance


  Finance raised from within the business. The main internal sources of finance are owners' capital, retained profit and sale of assets.
• External finance


  Finance raised from sources outside the business. The main external sources of finance are overdraft, trade credit, loan, crowd funding and share issues.
• Questions to ask when deciding on a source of finance

  • Do we need external finance or can we finance it ourselves?
  • How long do we need the finance for?
  • Do we want to keep control over the business as owners?
  • Will it help if other people become owners, providing more money and, perhaps, more expertise?
  • Is this source of finance available to our type of business?
• Revenue


  The money received from sales
• Total revenue is the sum of money a business earns from all the sales it makes.
• Cost of sales


  The cost of buying in the goods the business sells, or of producing goods
• Revenue is important for business because it pays for costs, is a measure of success and, along with costs, determines profits.
• Revenue influences business decision making in several ways. For example, if a business wished to increase its revenue, it could opt for one or more of the following: increase the price of the product, reduce the price to increase sales, increase its sales by increasing advertising, producing more, or selling a wider range of products.
• Sometimes a business may not want to make as much revenue as possible: the owner(s) do not want to expand, perhaps to avoid sharing control, or the business may want to sell to a niche market, for example, selling only to very wealthy people, so they can charge a high price to make their product exclusive.
• Variable costs


  Costs that change as output changes, for example, wage and material costs will increase if more products are made or sold
• Total costs


  The addition of total fixed and total variable costs
• Fixed costs


  Costs that stay the same regardless of a change in output, for example, rent for offices, shops, factories or land, interest rates and the uniform business tax which is a tax based on the location of the business
• Costs are necessary for production to take place and, along with revenue, they determine how much profit a business will make.
• A business may want to minimise its costs to help it to increase profits, reduce prices to become more competitive without cutting profits, or save money in order to expand or to update machinery.
• Costs may be reduced by employing new technology instead of workers, finding cheaper supplies of materials or goods to sell, or asking a supplier to reduce its prices or asking workers to take a pay cut.