business studies source of financial business all application type questions
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Sources of finance
These are how businesses get money to finance growth, to overcome working capital / cash flow problems etc.
Choosing the right source of finance
Businesses need to consider a number of factors when deciding what sources of finance to use
External sources of finance are more expensive as you need to pay interest
To use retained profits you need to get agreement from shareholders
The source of finance chosen also depends on the time period and what you need the finance for
The key questions that managers have to answer are:
how much finance is needed
whether it can be obtained internally
whether it should be borrowed temporarily, with a view to paying back, or obtained as permanent (e.g. share) capital
(if borrowed) whether the loan is for the short (up to one year), medium (1–5 years) or long term.
The amount and nature of this finance varies from firm to firm, and is influenced by a firm’s size, its form of ownership, the type of technology currently being used within the firm, the relationship between capital and labour, the length of credit periods (taken and allowed), and the age of the firm’s assets.
Internal sources
From inside the business e.g. directors
No external body to pay Generally
No time limit
Internal Sources - Retained Profit
Cheap and flexible
Technically profit is shareholders so they need convincing its used effectively
Usually okay infrequently
Idea retained profit used to generate future profits and therefore used for purchase of fixed assets
Opportunity cost needs to be assessed
Internal Sources - Control of working capital and cashflow
Working capital measures the amount of money the business has to pay day-to-day expenses
Working capital = current assets – current liabilities
Businesses need to be aware of their working capital and ensure that they have enough cash to survive
Stock and debtor control – arranging appropriate credit terms
Liquidity – need to manage assets to ensure that the business has sufficient liquidity (ease of converting assets to cash)
Stock needs to be valued correctly
Need to ensure are not holding excess stocks or excess cash
These are how businesses get money to finance growth, to overcome working capital / cash flow problems etc.
Choosing the right source of finance
Businesses need to consider a number of factors when deciding what sources of finance to use
External sources of finance are more expensive as you need to pay interest
To use retained profits you need to get agreement from shareholders
The source of finance chosen also depends on the time period and what you need the finance for
The key questions that managers have to answer are:
how much finance is needed
whether it can be obtained internally
whether it should be borrowed temporarily, with a view to paying back, or obtained as permanent (e.g. share) capital
(if borrowed) whether the loan is for the short (up to one year), medium (1–5 years) or long term.
The amount and nature of this finance varies from firm to firm, and is influenced by a firm’s size, its form of ownership, the type of technology currently being used within the firm, the relationship between capital and labour, the length of credit periods (taken and allowed), and the age of the firm’s assets.
Internal sources
From inside the business e.g. directors
No external body to pay Generally
No time limit
Internal Sources - Retained Profit
Cheap and flexible
Technically profit is shareholders so they need convincing its used effectively
Usually okay infrequently
Idea retained profit used to generate future profits and therefore used for purchase of fixed assets
Opportunity cost needs to be assessed
Internal Sources - Control of working capital and cashflow
Working capital measures the amount of money the business has to pay day-to-day expenses
Working capital = current assets – current liabilities
Businesses need to be aware of their working capital and ensure that they have enough cash to survive
Stock and debtor control – arranging appropriate credit terms
Liquidity – need to manage assets to ensure that the business has sufficient liquidity (ease of converting assets to cash)
Stock needs to be valued correctly
Need to ensure are not holding excess stocks or excess cash
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