Class: Lower 6
Subject: Business studies
Sources of Finance
* Why do businesses need finance?
* Types of finance
* Internal sources of finance
* External sources of finance
* Factors to be considered when choosing sources of finance
Sources of finance
Finance is the study of how investors allocate their assets over time under conditions of certainty and uncertainty. A key point in finance, which affects decisions, is the time value of money, which states that a unit of currency today is worth more than the same unit of currency tomorrow. Finance aims to price assets based on their risk level, and expected rate of return. Finance can be broken into three different sub categories: public finance, corporate finance and personal finance.
Why Do Businesses Need Finance?
Finance is the money available to spend on business needs. Right from the moment someone thinks of a business idea, there needs to be cash. As the business grows there are inevitably greater calls for more money to finance expansion. The day to day running of the business also needs money. The main reasons a business needs finance are to: * Start a business:
Depending on the type of business, it will need to finance the purchase of assets, materials and employing people. There will also need to be money to cover the running costs. It may be some time before the business generates enough cash from sales to pay for these costs. * Finance expansions to production capacity:
As a business grows, it needs higher capacity and new technology to cut unit costs and keep up with competitors. New technology can be relatively expensive to the business and is seen as a long term investment, because the costs will outweigh the money saved or generated for a considerable period of time. And remember new technology is not just dealing with computer systems, but also new machinery and tools to perform processes quicker, more efficiently and with greater quality. * To develop and market new products:
In fast moving markets, where competitors are constantly updating their products, a business needs to spend money on developing and marketing new products e.g. to do marketing research and test new products in “pilot” markets. These costs are not normally covered by sales of the products for some time (if at all), so money needs to be raised to pay for the research. * To enter new markets:
When a business seeks to expand it may look to sell their products into new markets. These can be new geographical areas to sell to (e.g. export markets) or new types of customers. This costs money in terms of research and marketing e.g. advertising campaigns and setting up retail outlets. * Take-over or acquisition:
When a business buys another business, it will need to find money to pay for the acquisition (acquisitions involve significant investment). This money will be used to pay owners of the business which is being bought. * Moving to new premises:
Finance is needed to pay for simple expenses such as the cost of renting of removal vans, through to relocation packages for employees and the installation of machinery. * To pay for the day to day running of business:
A business has many calls on its cash on a day to day basis, from paying a supplier for raw materials, paying the wages through to buying a new printer cartridge. * Special situations:
For example, a decline in sales, possibly as a result of economic recession, could lead to cash needs to keep the business stable.
Types of finance:
It is pivotal to have access to money, in order to start and run a business. There are many ways to get money, all businesses need money. Where the money comes from is known as 'sources of finance'. Now there are two different types of sources of finance: internal (finance from inside the business) and external (finance from outside the business). New businesses starting up need money to invest in long-term...