Business Management-Source of finance金融.

1、3.1 Sources of Finance Part 2 What is finance? The ability to access money in order to fund business activities. Many different business activities need finance. Can you name some? Business Activities to Finance What is Capital? Can be Cash, Equipment, Buildings Startup Capital Money needed to start

2、 a business to: buy equipment, rent/buy a building, purchase inventory Working Capital Money needed to operate the day-to-day activities of the business: pay bills, pay employees, buy supplies Business Expansion Move to a larger location, hire more people, equipment upgrades Business Activities to F

3、inance Business Expansion Expansion can occur by purchasing other businesses; may need extra money to do this Special Situations Decline in sales could leave company without enough cash; a customer could fail to pay his bill in time; unexpected repair expenses Research and Development Invest in new

4、markets, create new products Time to Finance Short-Term Financing One year or less Medium-Term Financing One to five years Long-Term Financing Over 5 years Financing Expenditures Capital Expenditures Purchasing fixed assets that will last over one year (things that arent consumed in the day-to-day o

5、peration of the business) Buildings, machinery, or cars (What are ASSETS?) Revenue Expenditures Spending that occurs in order to produce your product or service Wages, inventory, supplies, utilities Financing these two different types of spending will be very different as the length of time for “pay

6、 back” is different. Sources of Financing Internal Money Money raised by the businesss own assets or from the profits left over from the business. Profits Retained by the business Sale of Assets Reductions in Working Capital External Money Sources from outside the business Bank Overdrafts (Credit Li

7、ne) Trade Credit Debt Factoring (Selling Receivables at a discount) Internal Sources of Finance Profits retained by the business Profit that is kept by the business after taxes and dividends are paid New companies or companies that experience a LOSS may not have access to this type of financing. Thi

8、s type of financing is permanent because it is not “paid back” Revenue$100,000 Expenses 30,000 Profit$ 70,000 Taxes 10% - 7,000 Dividends paid - 20,000 Profits Retained $ 43,000 Internal Sources of Finance Sale of Assets Companies can sell assets they no longer need or use to raise cash for financin

9、g. Example: A company owns 2 cars worth $10,000 each Total: $20,000 in Asset Value NOT Cash $20,000 $10,000 CASH $20,000 Liquidate car asset to raise cash. Internal Sources of Finance Lease Option Company sells equipment that has a loan outstanding to a leasing company; then leases the equipment bac

10、k for a cheaper price. Raising cash by reducing cash outlay. Example: A company is buying a car worth $20,000 and bank loan balance $15,000 with a monthly loan payment of $500. Loan Payment $500 Lease Payment $175 $3000 raised cash + $325 cash extra cash per month Sell car to leasing company for $18

11、,000 - $15,000 loan=$3000 raised cash Internal Sources of Finance Reductions in Working Capital Working Capital = Assets -Liabilities Money owed to the business (Asset) = $20,000 Liabilities (loans on cars) = $5,000 Working Capital = $15,000 Debt to Asset Ratio: 1:4 For every $1 in debt, I can pay i

12、t back 4X Collected Money owed (Assets)= $5,000 Cash = $15,000 Spend Cash=$15,000 Total Assets = $5,000 Liabilities = $5,000 Working Capital = $15,000 Debt to Asset Ratio: 1:1 But $20,000 now in cash For every $1 in debt, I can pay it back 1X External Sources of Finance Bank Overdrafts (Credit Line)

13、 Most Flexible types of financing Pre-arranged with a banking/lending institution Expensive with high interest rates Used on a day-to-day basis to cover the cash needs of a business External Sources of Finance Trade Credit Delaying payment of your vendors Early payment discounts cannot be taken Supp

14、liers may not be happy if you take to long to pay your bills What is “Trade” buying from a supplier in your industry. External Sources of Finance Debt Factoring Selling Accounts Receivable at a discount to a collector (What is Accounts Receivable? Money owed to you by your customers.) Money Owed You

15、: Accounts Receivable:$10,000 You Sell to a Debt Collector for immediate cash:$ 7,000 Debt Collector Profits when debts are collected:$ 3,000 This is not BAD Debt Collection. Evaluation of Internal Financing No direct cost to the business Does not increase the debt of the company No risk of loss of

16、control of the company to another party No shares are sold to others New or unprofitable companies have few assets to sell to raise cash Growth will be constrained by limited cash resources More Vocabulary Hire Purchase (A LOAN) Purchasing an asset over a period of time Example: buying a car, equipm

17、ent using a loan Ownership Leasing A contract with a company to pay a fee but not actually acquire ownership of the item. Example: leasing a car, or equipment No Ownership More Vocabulary Debentures (Corporate Bonds) Bonds issued by a company to raise money and they are usually issued with a fixed rate of interest Loan 15% Interest Bank makes 14% Profit Savings Interest Rate to Depositors 1% Interest Bond 10% Interest to People People make 10% Profit vs 1% at the bank Business SAVES 5% on Loan Interest by NOT using the bank More Vocabulary Righ