Why does business activity require finance?
- start up capital
- working capital
How do you calculate working capital?
Current assets- current liabilities
How much working capital is needed in a business?
Sufficient working capital to prevent a business becoming illiquid and unable to pay its debts.
Yet low enough, to not end up with too much opportunity cost because too much money is tied up in your assets and working capital.
What is the working capital cycle?
> cash> materials and stock> production > sell on credit
What are internal source of finance?
Sales of assets
Reductions in working capital
Retained profit
What are reductions in working capital?
This is when companies reduce their current assets so that working capital is reduced and capital is released to use for financing other things.
What are the features of internal finance?
- no direct cost to the business
- doesn’t increase liabilities or debts
- can be slow relying on this for business growth
What are external sources of finance?
Short term
- bank overdrafts
- trade credit
- debt factoring
- bank loan
Long term
- hire purchase and leasing
- medium term loan
Long term finance
- long term loans
- bonds or debentures
- grants
- share issue
What is trade credit?
Y
What is the difference between hire purchase and leasing?
Hire purchase is exactly like leasing except once a final payment is made the hired object becomes yours (the payer now has ownership) whereas this does not apply to leasing.
What are bonds and debentures?
Un
What are the advantages to equity capital?
- it doesn’t have to be repaid so it is permanent
- dividends dont have to be paid every year
- interest on loans must be paid back when demanded by the lender
What details are important to know about grants?
8
What finance is there for unincorporated businesses
- debentures are going to be unlikely since they are most likely not well known
- bank overdrafts
- loans
- credit form supplier
- borrowing form people (family, friends)
- savings and profit
- lenders are often reluctant to lend to small businesses
- grants
What businesses are unincorporated?
—-
What are they features of microfinance?
- interest rates can be quite high
- if the business fails then microfinance encourages taking on large debt that cannot be repaid by people in these conditions
What are the features of crowdfunding?
- publicity that comes with this can be positive
- if successful, investors will get their initial investments plus interest
- if successful, investors will get an equity stake in the business and a share in profits
Rights responsibilities…
1
