Accounts and Finance Section 3 Unit 3.1 Sources of

Transcript:Accounts and Finance Section 3 Unit 3.1 Sources of:
Accounts and Finance Section 3 Unit 3.1 Sources of Finance Or where can we get money from? Why do we need finance? Setting up a business Need to finance our day-to-day activities Expansion Research into new products Special situations such as a fall in sales Finance is required for many activities Setting up a business will require start-up capital of cash injections from the owner(s) to purchase essential capital equipment and, possibly, premises. Finance is required for many activities Businesses need to finance their working capital – the day-to-day finance needed to pay bills and expenses and to build up stocks Finance is required for many activities Business expansion needs finance to increase the capital assets held by the firm – and, often, expansion will involve higher working capital needs. Finance is required for many activities Expansion can be achieved by taking over other businesses. Finance is then needed to buy out the owners of the other firm. Finance is required for many activities Special situations will often lead to a need for greater finance. A decline in sales, possibly as a result of economic recession, could lead to cash needs to keep the business stable; or a large customer could fail to pay for goods, and finance is quickly needed to pay for essential expenses. Finance is required for many activities Apart from purchasing fixed assets, finance is often used to pay for research and development into new products or to invest in new marketing strategies, such as opening up overseas markets. Finance is required for many activities Note: Some of these situations will need investment in the business for many years. Others will need only short-term funding (for around one year or less). Some finance requirements of the business are for between one and five years (medium term financed). All of the situations will need different types of finance. No one source or type of finance is likely to be suitable in all cases. Key Terms Start-up capital – capital needed by an entrepreneur to set up a business Working capital – the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms: working capital = current assets – current liabilities Working Capital (Balance Sheet) Capital and Revenue Expenditures Capital Expenditure – is the finance spent on purchasing fixed assets that are expected to last for more than one year,