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Sources of Finance
Transcript of Sources of Finance
In your exercise books head up our new title "Financing a Business"
Subheading: Why does a business need money?
Come up with 7 reasons why a business needs money.
Money spent on Day-To-Day expenses which DO NOT involve the purchase of a long term asset.
Revenue Expenditure vs Capital Expenditure
Money spent on assets which will last for more than one year.
In your book, write down the example and say if it is Capital or Revenue expenditure.
A new car
A new building
A new coffee machine
Maintenance of the coffee machine
Come up with two of your own examples of:
- Capital expenditure
- Revenue expenditure
Reminder: Assets are items of value which are owned by the business e.g. land, buildings, equipment and vehicles.
Jessie J - Price Tag ft. B.o.B
The Notorious B.I.G. - Mo Money Mo Problems
So what exactly is finance?
Finance in IGCSE Business studies is about the process of getting the money needed to run the business.
We're going to learn about how a business can get enough money to cover small expenses (revenue expenditure) and large expenses (capital expenditure).
A business is may be unlikely to have large amounts of cash sitting around, waiting to be used. Any spare cash is often invested somewhere where it will earn a return (profit).
This is money which is obtained from within the business itself e.g. retained profit or selling stocks to raise cash.
This is money obtained from individuals or institutions outside of the business e.g. bank loans
There are two main ways that a business can obtain finance...
Internal Sources of Finance
Retained Profit – The profit kept by a business after tax and dividends have been paid.
Retained profit does not have to be repaid (like a loan does).
A business may not have enough retained profit to finance expansion.
Sale of excess long-term assets – the sale of assets that are not required by the business.
Makes better use of assets that are not being used.
It may take time to sell the assets and new businesses may not have any assets to sell.
Selling stock/inventory to raise cash
Reduces the cost of storage.
Customers may be disappointed if their desired product is not in stock.
Owners savings – a sole trader or member of a partnership can put more of their savings into a business.
The business doesn’t have to pay any interest.
Owners may not have any more savings to contribute.
External Sources of Finance
Hire Purchase – allows a business to pay off a fixed asset over a long period of time (includes interest).
The business doesn't have to find a large sum of money to buy the asset.
Interest payments may be high (24%+)
May be an ‘interest free’ period.
Leasing – allows a business to use an asset, but the firm never owns it.
Maintenance and repairs of the asset are done by the leasing company.
Total cost of leasing will be higher than simply purchasing the asset.
You're looking to buy this new television. Harvey Norman are selling it for $28,999.00 and you think that's a pretty good deal.
You have two options:
Pay cash now for the TV, or
Get the TV on Hire Purchase (24% interest), 3 months interest free, paid over two years and a $100 start-up fee.
Question 1 - Which option do you choose? Use evidence from the website to explain.
Question 2 - Does the "Total you will pay" change if you pay fortnightly instead of monthly? How much?
Question 3 - Why does it cost more to use hire purchase than it does to buy the television with cash?
Go to - http://bit.ly/12M8T0d
A business is able to spend more money than they have. A very good short term finance option.
Interest rates may be higher than a normal bank loan.
As the Finance Minister, Bill English is responsible for ensuring that New Zealand's government has enough funds. These funds are used in government spending on things such as defence, health care, education and infrastructure.
The business never actually owns the asset.
Bank overdraft - when a bank account goes into a negative balance.
Interest is only paid on the amount overdrawn.
Issue of shares – (only available to limited companies).
May be able to raise large amounts of money.
If too many shares are sold the ownership of the company could change hands.
No interest has to be paid.
Owners may expect dividends.
Read the article on Moa Brewing Co, who have very recently become a Plc and answer the following quick questions:
1. Geoff Ross is the CEO of Moa Beer. What other NZ company has he been CEO and founder of?
2. How much money did the company raise from the sales of shares?
3. What project are Moa raising finance for?
Bank Loans - a loan from a bank can be short term (3 years or less), medium term (up to 10 years) or long term (10+ years).
Large businesses may be offered lower rates of interest as they are seen as low risk.
A bank loan will have to be repaid with interest.
A bank may require some property as security. If the borrower doesn’t pay, the bank will sell the property.
Use www.trademe.co.nz to find a car that you think you would like to buy.
from this list and find the interest rate http://www.interest.co.nz/borrowing/car-loan
Use the Sorted website to calculate the repayments https://www.sorted.org.nz/calculators/debt#tab-car-loan
Buying your first car...
Use TradeMe to find a house that would be suitable to buy as your first house. It can be from any area in New Zealand but beware - the more affluent the area, the more expensive the house!
Use this website to find the floating interest rate
for the bank that you're with
Calculate the repayments https://www.sorted.org.nz/calculators/mortgage-repayment
Buying a house - is it possible?
Debt factoring – where a business ‘sells’ their debts to another firm.
Cash is made available immediately.
The firm does not receive 100% of the value of the debt.
The risk of collecting the debt now belongs to the other firm
Some practical examples...
On the other side of the page are three situations that require your specialist advice. In each situation you are faced with revenue and capital expenses that require finance. You are expected to complete
at least two
of the three tasks. Your answer should be written in essay format.
The three situations are:
The Rugby Team
The Recording Artist
The Ice Cream Cart
Question: Which source of finance should I choose?
The amount of $ required and
The length of time the finance is needed for.
The asset you're looking to get.
You're in the mood for a shopping spree. You head out and find 8 items that you've been wanting to buy for ages.
Find 8 items (link their web addresses) on the Internet that you want to buy ($NZ)
Add the total value of these items together. You've decided to put all of these items on your credit card.
Use the following website to find the interest rate (in the Purchases% column) for one of the following credit cards: (http://www.interest.co.nz/borrowing/credit-cards)
1. Kiwibank MasterCard (Tertiary/Graduate)
2. ASB Visa (Standard)
Using the interest rate, put the details of your credit card purchase into the following website to find the real cost of your purchase. https://www.sorted.org.nz/calculators/debt#tab-credit-card
MAIN POINT: How much extra did it cost you to buy using your credit card? What lesson can we learn from this?