Chapter 25 Sources of Finance - short term

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iGCSE Business Studies:

iGCSE Business Studies Chapter 25 – Sources of Finance (Short term)

Slide2:

Read the case study P119 Class discussion

Slide3:

The need for funds Start up capital – funds most needed when first setting up a business Lots of resources are needed before trading can begin A restaurant will need to buy cookers, fridges, utensils, furniture, glassware, cutlery etc Once these one-off costs are met they may not be repeated for many years Other start up costs might include research, legal fees, website design, marketing etc. Working capital – this is money needed to meet the day to day costs like wages, raw materials, utility bills etc Expansion – once a business is established they might want to grow. Expand capacity to meet growing orders Develop new products Branch into overseas markets Diversify (get into new markets with new products) For expansion they will need funds if internal sources of finance such as profit are not adequate Emergency Funding – if the business gets an unexpected bill or runs out of cash Key fact Most entrepreneurs risk their own money when starting a business. But is money is rarely enough and they will need to find it from other sources

Slide5:

Internal and External Finance External finance – sources of finance that come from outside of the business such as sale of shares, bank loans, overdrafts or trade credit Internal sources - Retained profit – After the business has paid all of its cost any money left over can be returned to the shareholders or invested back in the business – retained profit is profit not returned and invested This source of finance is cheaper than a loan because the business doesn’t need to pay interest however the owners might be unhappy that it has not been returned to them Working capital – money used to run the business A business can make its customers pay quicker (60 days instead of 90) – called reducing trade credit Reduce the amount of stock held – money is not used for stock but for cash to spend on the business Delaying payments to suppliers and holding on to cash longer Sale of assets – sell machinery, land or buildings that are no longer required

Slide6:

Short-term sources of finance Short term finance if money borrowed for a short period (one year or less) Often used to boost working capital Some businesses have seasonal trade – a farmer may need to borrow money for a few months until revenue comes in from selling the harvest A textiles manufacturer may need short-term finance to pay for raw materials and wages to meet a large order A firm might be waiting for customers to pay and need a short term loan Short term finance might also be needed for emergency spending such as the repair of a machine breaking down

Slide7:

Main sources of s hort-term finance Bank overdraft – a business can spend more money than it has in its account (it can go overdrawn) An overdraft limit will be set by the bank Interest will be charged on how much is overdrawn Once the overdraft is set up the business can use it when they want without asking the bank so it is simple and flexible They only pay for it when they use it The downside is that the interest charged will be high Also the bank can demand the money it is owed at any time. If the bank thinks the business is struggling it may remove the overdraft and demand the money back immediately

Slide8:

Main sources of s hort-term finance Leasing – a lease is like renting/hiring A farmer might lease a combine harvester for 6 weeks during the harvest period They will pay a daily or weekly rate This can also be short or long term The advantages are A business can use expensive machinery without buying it The business won’t have to pay maintenance or repair costs Hire companies may have the most up to date machinery It is useful when equipment is only needed occasionally This type of finance is easier to obtain because it is just a hire Over a long period of time it might be more expensive than buying Credit cards – used by executives to meet expenses when travelling on company business Also used by small businesses to buy materials Interest rates tend to be very high

Slide9:

Main sources of s hort-term finance Trade credit – buying resources but paying for them later (normally 30-90 days) This means the business holds on to its cash for longer But the cost of the goods is often higher than paying straight away Suppliers often encourage early payment by offering discounts Delaying payments can cause relationship problems with suppliers

Slide10:

Read the case study P122 Write bullet point answers

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