5.1 BUSINESS FINANCE

• why business activity requires finance?

  1. to purchase capital equipment (start-up capital)
  2. to finance day to day operation (working capital)
  3. to finance expansion that involves higher working capitals
  4. to expand through acquisition
  5. for special situation like a decline in sales and need of cash
  6. to do research and development on new product development
• capital expenditure

  • item bought by business and retained more than 1 year, that is purchase of fixed asset
  • example: purchase of a vehicle, building or machinery
• revenue expenditure

  • expenditure on asset that used up within one year
  • spend on all costs and assets other than fixed asset
  • examples: stocks for resale, wages and salaries, printer cartridges or petrol for the vehicle
• working capital

  • life blood of business
  • finance needed for everyday expenses
  • not enough working capital, company be illiquid thus unable to pay its immediate or short term debts
  • working capital = current asset - current liability
• trade receivable

  • total amount receivable to a business for sale of goods or services provided as part of business operations
  • arise due to credit sales
  • is an asset to the company
• trade payable

  • total amount payable by a business for goods purchased or services availed
  • arise due to credit purchases
  • liability of the company
• liquidity

  ability of a firm to be able to pay its short term debts
• liquidation

  a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors
• is too much working capital good?

  • it’s a disadvantage because you are not using the money to earn more money.
  • too much capital tied up in inventories, accounts receivable and idle cash
• is too little working capital good?

  • it’s a disadvantage too because your may not be able to meet daily demand of payments or expenses, thus creating a bad reputation for your firm
• working capital cycle

  • requirement for any business will depend on the length of its working capital cycle
  • longer time period from buying materials to receive payment from customer , the greater the working capital needs of the business
  • credit received by the business will lengthen the time before stock bought has to be paid for