Business Finance: Fundamentals and Funding Sources
Introduction to Finance
Why Do Businesses Need Money?
- To start up or to expand
- To pay for day-to-day operations
- To provide a reward for owners
- To pay taxes to the government
How Do Businesses Spend Money?
- Capital expenditure: Items that may be used many times for more than a year (property, vehicles, equipment).
- Revenue expenditure: Goods and services needed by a business that will be used up in the short term (employees, wages, materials).
External Sources of Finance
| Source | Pros | Cons |
|---|---|---|
| Share capital: Selling a share of the business | Great for raising large sums | Can be expensive due to hiring experts |
| Bank loan: Money provided by a bank for a stated purpose | Access to large sums; long periods for repayments | Interest rates can be high; payments are regulated |
| Mortgages: Long-term loans for land or buildings | Access to large sums; long-term repayments | Only for real estate; bank uses property as collateral |
| Debentures: Long-term loan certificate with interest at maturity | Access to large sums | Too risky; non-current assets used as collateral |
| Overdraft: Credit extension for insufficient funds | Fast and easy | High interest rates; damages reputation |
| Crowdfunding: Small capital from many people | No interest | May not reach target; time-consuming |
| Trade credit: B2B agreement for delayed payment | No interest; improves cash flow | May damage reputation with suppliers |
| Leasing: Contract to use an asset without ownership | Avoids large upfront costs; easy to return | May cost more in the long run |
| Micro-finance: Services for low-income clients | Less tedious than bank loans; good for small businesses | High interest rates; smaller amounts available |
| Business angels: Wealthy individuals supporting risky ventures | Large initial sums; long-term repayment | Requires equity or return in exchange |
Cash Flow Forecast
- Sales revenue = Sales price of each unit × Quantity of units sold
- Total cash inflow = Sales revenue + Other cash inflows
- Net cash flow = Total cash inflow – Total cash outflow
- Closing balance = Opening balance + Net cash flow
- Opening balance = Closing balance of the previous month
Payback Period
A calculation of the length of time it takes for a capital investment to pay for itself by estimating future cash flow each year and determining the month and year in which the cash flow covers the investment cost.
