3.1 Flashcards
Sources of Finance
Where a business gets money from to fund their activities. From internal or external sources, divided into:
Start-up-capital
Working capital
Start-up-capital
Capital needed by an entrepreneur to set up a business.
Working Capital
Capital needed to pay for raw materials, day-to-day costs and credit offered to customers.
Working capital = current assests - current liabilities
Capital Expenditure
The purchase of assets that are expected to last for longer than one year, such as builings and machinery.
Revenue Expenditure
Spending on all costs and assets other than fixed assets and including wages and salaries and materials bought for stock.
Internal Sources of Finance
Funds found inside the business. Raised from business’ own assets or from the retained profit.
Retained profit
Sale of Assets
Depreciation Provision
Owners savings (sole trader)
External Sources of Finance
Found outside the business. Can be short, medium or long term sources. E.g loan from the bank.
Retained Profit
Profit from previous years are put back into the business. Once shareholders have been paid, the remaining profits can be used.
Sale of Assets
A buisness may sell equipment or vehicles to raise finance. Known as divestment.
Depreciation Provision
Funds are set aside, on a yearly basis, for the depreciation of worn out assets. Shown as an expense in the income statement but is a provision for new assets.
External Short Term Sources of Finance
Allows business to continue trading and avoid cash flow problems.
Overdraft
Debt Factoring
Trade Credit
Bank Overdraft
A business can take more money out of the bank than what they have in their account, the overdraft limit. It is short term as interest is added to any amount borrowed. Any cash paid into the account reduced the amount overdrawn.
✅Used to cover small cash deficits
❌If the limit is exceeded charges apply
Trade Credit
Business buys goods from a supplier and pays for them at a later date.
✅Helps business survive when cash flow is poor
❌Relation with supplier is at risk
Debt Factoring
A business can sell invoices (money owed to them) to a factoring company for less than their value to increase cash flow into the business.
✅Business doesn’t need to chase debtors
❌Business doesn’t receive full amount of the original invoice
External Medium Term Sources
Bank Loans
Leasing
Hire Purchase