Description
PPT ON FINANCE
An Introduction to Business
“Finance”
What Do You Need to Know for Your Exam?
Define different sources of finance ? Advantages and Disadvantages of different sources of finance ? Purpose of different sources of finance
?
Exam Q – Anne wanted to raise £60,000 of start-up capital from a venture capitalist rather than arranging a bank loan. To what extent do you agree with her? KEEP YOUR UNIT SUMMARY SHEET UP TO DATE!
What is Finance?
Definitions
FINANCE – This is money
SOURCES OF FINANCE – This is WHERE we get finance from
Why Do Businesses Need Finance?
For starting up Everyday bill payments
Expansion
Businesses need money for…
Take over bid
Internal Growth
Replace machinery/equipment
Why Do Businesses Need Finance?
?
Starting Up – Buildings, machinery, raw materials and office equipment WORKING CAPITAL – Short term finance required for the day-to-day running of a business Unforeseen Events – Sudden decline in sales, large customer fails to pay on time or pay expenses quickly
?
?
The purpose of finance
“Different sources of finance have different implications for a business, so it is important that the most appropriate method of finance is chosen for the purpose that the business has in mind”
Sources of Finance
Sources of Finance can be either:
Internal
External
Internal Sources of Finance
INTERNAL SOURCES OF FINANCE – Finance which is raised internally, it does not increase the debts of the business.
Examples:
Retained profit Personal savings Sale of unwanted assets Sale and leaseback
External Sources of Finance
EXTERNAL SOURCES OF FINANCE – Finance provided by people or institutions outside the business, creates a debt that will require payment. Examples: Loans Overdraft Shares Debentures
Time Periods for Finance
Finance is generally considered to be either:
SHORT TERM MEDIUM TERM LONG TERM
UP TO 3 YEARS
3 – 10 YEARS
OVER 10 YEARS
Short-term Finance
?
Short-term Finance is needed for the day-to-day running of a business and is usually for a period of up to 3 years In order to understand short-term finance it is necessary to understand the concept of CASH FLOW
?
Cash Flow
CASH FLOW – A business needs sufficient
inflows of cash to finance its day-to-day outgoings.
INFLOWS refers to money received by the business EXAMPLES:
•Sales revenue •Capital •Loans •Grants
OUTFLOWS refers to money paid out by the business EXAMPLES:
•Purchases •Rent & Rates •Wages & Salaries
BUSINESS
Why is Cash Flow Important?
Think of a business as a bath without a plug…
There should always be cash available – so the bath is never empty!
If the bath is ever empty the business is in TROUBLE – it has a CASH FLOW PROBLEM.
If this is not the case the business needs short-term finance to overcome this problem!
Sources of Short-Term Finance
All commercial banks offer various methods of shortterm finance for businesses:
? ?
Overdraft Short-term Loan
EXTERNAL SHORT-TERM FINANCE
Other sources of Short-Term Finance:
?
?
Hire Purchase (External) Trade Credit (Internal)
External Short-term Finance
OVERDRAFT - The bank allows the business to draw more money from their bank account than they actually have in it.
Advantages
Very quick to arrange Only pay interest on amount overdrawn
Disadvantages
Only suitable for smaller amounts Has to be repaid within a short amount of time
A good short term solution to a cash flow problem
Interest or charges are paid
Continued…
SHORT-TERM LOAN – An amount of money is borrowed from the bank, then repaid (with interest) over a set period of time (0 – 3 years).
?
Tends to be used to buy specific pieces of equipment or to purchase a particular consignment of raw materials in order to fulfil a contract
?
Not a safety net in the way an overdraft is
Continued…
Advantages
Easy and quick to set up
Disadvantages
Interest payable
Small or Large amounts of money can be borrowed
If repayments cannot be kept up, the business risks getting a poor credit rating or being made bankrupt
Structured repayment term
Video
As you watch the video think about why banks need to assess an individuals/businesses situation before agreeing to lend money.
VHaU
Factors Influencing a Bank’s Decision to Lend
Type of Product? Purpose of the Finance? Past Trading Record?
Current Financial Position?
Business Proposal?
Financial Projections?
Nature of the Market/Sales forecast?
Banks Use this Information to…
? ?
Determine who qualifies for lending Determine what interest rate they will lend at
INTEREST RATE - cost of borrowing money (reward for savings)
? ?
What credit limit to set Banks also use this information to determine which customers are likely to bring in the most revenue
Security
SECURITY – Something that acts as assurance to a lender that it will get its money back if a business is unable to pay back money it has borrowed. If the business fails to repay the loan, the bank – as holder of the deeds – is legally entitled to sell the factory or office in order to recover any amount outstanding on the loan.
Video
What are the advantages of purchasing household goods from Brighthouse?
3vUE
Other External Short-term Finance
HIRE PURCHASE – Pay for an item in instalments, to a hire company, over a set period of time. The item is being hired until the last payment is made.
Advantages
Large sum of money does not have to be found at once
Disadvantages
High interest is often charged
Spread payment over a period of time
Improved cash flow
Item doesn’t belong to the business until the end of the term
Video
What are the advantages of purchasing a sofa from DFS?
btinl
Internal Short-term Finance
TRADE CREDIT - Items are bought from suppliers on a ‘buy now pay later’ basis.
Advantages Gives the business more cash to use in the immediate future Does not incur interest charges
Disadvantages Can only be used to buy certain goods
Bills usually have to be settled within 30,60 or 90 days
Medium-term Finance
?
Medium-term Finance is normally thought of as being for between 3 – 10 years.
Purpose of obtaining medium term finance: ? Replace expensive equipment ? To expand ? Convert persistent overdraft into formal medium-term loan
Sources of Medium-term Finance
Various different forms of medium-term finance are available to a business: Medium-term Loan ? Hire purchase ? Leasing
?
EXTERNAL MEDIUM-TERM FINANCE
External Medium-term Finance
MEDIUM-TERM LOAN - An amount of money is borrowed from the bank, then repaid (with interest) over a set period of time (3 – 10 years). The rate of interest charged is particularly important! The rate of interest payable on a medium-term loan depends on: ? How much is borrowed ? How long the money is wanted for ? The security that is provided
Continued…
Businesses have the option to choose either a variable rate or a fixed rate loan. VARIABLE RATE – interest varies with whatever decisions the Bank of England make with regard to interest rates.
FIXED RATE – interest is fixed for the duration of the loan.
Continued…
Advantages Disadvantages
Fixed Rate: Fixed Rate: ?Know what repayment costs are ?If the rate falls still have to pay going to be the higher fixed rate ?Financial planning is easier Variable Rate: ?If the rate falls business pays the new lower rate Variable Rate: ?Don’t now what repayment costs are going to be ?Financial planning is more difficult
Continued…
HIRE PURCHASE – Mentioned before can also be medium-term finance. LEASING – Pay instalments over a set period of time to rent an item – business never actually owns the item!
Continued…
Advantages
Large sum of money does not have to be found at once Spread payment over a period of time Improved cash flow
Disadvantages
High interest is often charged Item doesn’t belong to the business
Leasing company is responsible for maintenance of item
Long-term Finance
?
Long-term finance is usually thought of as being for periods in excess of 10 years. This Finance is for securing the resources for long-term growth.
?
Sources of Long-term Finance
For the long-term, a business essentially has the choice of raising finance by borrowing or through the issue of shares. Sources of Long-term Finance: ? Long-term loans (External) ? Issue of shares ? Sale and leaseback (Internal) ? Retained profit
External Long-term Finance
LONG-TERM LOAN - An amount of money is
borrowed from the bank, then repaid (with interest) over a set period of time (10 years +).
? ? ? ?
Used for expensive pieces of machinery Loans for buildings – mortgages Variable Rate or Fixed Rate Fixed Rate – not fixed for whole length of the loan Advantages and Disadvantages as before!
Continued…
ISSUE OF SHARES - A share in the business is sold to an individual or another business - also know as equity finance. This money then used to purchase new assets.
?
Shareholders are entitled to a dividend (share of company profits)
RIGHTS ISSUE – When a company issues more shares.
Continued…
This type of finance is only available to a company:
? ?
Private Company (Ltd) – restrictions on the transfer of shares and value not readily available as they are not traded in a market. Public Company (Plc) – Shares are traded on the stock market.
STOCK MARKET - A market where shares and debentures are bought and sold.
Continued…
Advantages
No need to repay the money invested
Disadvantages
Need to pay the shareholders a share of future profits
Cheaper than a loan
Original owners may lose control of the business
Some businesses can raise Risky for the shareholder large sums of money this the investment may be lost way if the business fails
Internal Long-term Finance
SALE AND LEASEBACK – Asset is sold but then leased back – usually for a long period of time.
Advantages
Large sum of money is created Business can operate as normal after the sale Leasing company is responsible for maintenance of item
Disadvantages
High interest is often charged Item doesn’t belong to the business anymore No guarantee that lease will be renewed
Continued…
RETAINED PROFIT – Profit retained for the purpose of using in the future. Advantages
No need to pay interest on the money
Disadvantages
Could have been invested elsewhere, earning a higher profit
The business may not have enough retained profit to meet its needs Shareholders may become unhappy if this means lower dividend payments
Other Sources of Finance
Other sources of finance include: Government Assistance ? Venture Capital ? Business Angles
?
Continued…
Government Assistants falls into two categories – assistance with obtaining a loan and regional aid.
THE SMALL FIRMS LOAN GUARANTEE SCHEME (SFLG) – Government provided security scheme which began in 2003, to enable small firms with little security to get finance.
Continued…
?
?
?
?
?
Targeted at smaller businesses Not a loan from the government but from a bank Bank will want to see the usual documents Decision to lend lies with the bank! Government provides 75% of the security via the Department for Business, Enterprise and Regulatory Reform
Continued…
REGIONAL DEVELOPMENT ASSISTNACE (RDA) – Government financial assistance available if the business is located, or is prepared to locate, in certain areas of the UK.
?
? ?
Usually areas where traditional industries have been in decline Business must safeguard and create jobs or grow so that it can compete more effectively at home or abroad Available to small and large businesses
Continued…
INCENTIVES: •Tax incentives
•Sale of land or property at discounted rate
•Reduced rent GRANTS:
•Investment in equipment
•Training or retraining •Research and Development
Continued…
VENTURE CAPITAL – Individuals or firms who lend money, known as venture capital. A venture capitalist might agree to provide a certain amount of finance in exchange for a high % of the company’s shares and might adopt a “take it or leave it” approach. BUSINESS ANGELS – Individuals or firms who offer management advice as well.
A Business’s Choice of Finance
The business’s choice of source of finance depends on several factors!
There are too many considerations…I don’t know which sources to choose!!!
Continued…
The type of business – Sole traders and partnerships cannot issue shares ? The amount of control desired – Becoming a partnership or company can weaken control ? Security – A lack of security may mean that banks are unwilling to grant a loan ? Existing levels of debt – If high banks will think twice about lending
?
Continued…
Internal Funds – If the business uses them for finance there will be no interest to pay; but once used the firm has no cushion to fall back on ? Length of time – How long will it take to generate the funds to pay back investment ? Current methods of finance being used – Inappropriate financial management will discourage the bank from lending
?
Recap…
Short-term
?Overdraft
Medium-term Long-term
?Medium-term ?Long-term ?Shares ?Debentures
Loan
EXTERNAL
?Short-term
Loan ?Hire Purchase
?Trade
Loan ?Hire Purchase ?Leasing
?Retained
INTERNAL
Credit
Profit
?Retained
profit ?Sale of Assets ?Sale and Leaseback
Continued…
Type of business Length of Time
Factors influencing the choice of finance
Security
Cash Flow
Control
Existing Debt
Internal Vs External
What Do You Need to Know for Your Exam?
Define different sources of finance ? Advantages and Disadvantages of different sources of finance ? Purpose of different sources of finance
?
Exam Q – Anne wanted to raise £60,000 of start-up capital from a venture capitalist rather than arranging a bank loan. To what extent do you agree with her? KEEP YOUR UNIT SUMMARY SHEET UP TO DATE!
doc_567592635.ppt
PPT ON FINANCE
An Introduction to Business
“Finance”
What Do You Need to Know for Your Exam?
Define different sources of finance ? Advantages and Disadvantages of different sources of finance ? Purpose of different sources of finance
?
Exam Q – Anne wanted to raise £60,000 of start-up capital from a venture capitalist rather than arranging a bank loan. To what extent do you agree with her? KEEP YOUR UNIT SUMMARY SHEET UP TO DATE!
What is Finance?
Definitions
FINANCE – This is money
SOURCES OF FINANCE – This is WHERE we get finance from
Why Do Businesses Need Finance?
For starting up Everyday bill payments
Expansion
Businesses need money for…
Take over bid
Internal Growth
Replace machinery/equipment
Why Do Businesses Need Finance?
?
Starting Up – Buildings, machinery, raw materials and office equipment WORKING CAPITAL – Short term finance required for the day-to-day running of a business Unforeseen Events – Sudden decline in sales, large customer fails to pay on time or pay expenses quickly
?
?
The purpose of finance
“Different sources of finance have different implications for a business, so it is important that the most appropriate method of finance is chosen for the purpose that the business has in mind”
Sources of Finance
Sources of Finance can be either:
Internal
External
Internal Sources of Finance
INTERNAL SOURCES OF FINANCE – Finance which is raised internally, it does not increase the debts of the business.
Examples:
Retained profit Personal savings Sale of unwanted assets Sale and leaseback
External Sources of Finance
EXTERNAL SOURCES OF FINANCE – Finance provided by people or institutions outside the business, creates a debt that will require payment. Examples: Loans Overdraft Shares Debentures
Time Periods for Finance
Finance is generally considered to be either:
SHORT TERM MEDIUM TERM LONG TERM
UP TO 3 YEARS
3 – 10 YEARS
OVER 10 YEARS
Short-term Finance
?
Short-term Finance is needed for the day-to-day running of a business and is usually for a period of up to 3 years In order to understand short-term finance it is necessary to understand the concept of CASH FLOW
?
Cash Flow
CASH FLOW – A business needs sufficient
inflows of cash to finance its day-to-day outgoings.
INFLOWS refers to money received by the business EXAMPLES:
•Sales revenue •Capital •Loans •Grants
OUTFLOWS refers to money paid out by the business EXAMPLES:
•Purchases •Rent & Rates •Wages & Salaries
BUSINESS
Why is Cash Flow Important?
Think of a business as a bath without a plug…
There should always be cash available – so the bath is never empty!
If the bath is ever empty the business is in TROUBLE – it has a CASH FLOW PROBLEM.
If this is not the case the business needs short-term finance to overcome this problem!
Sources of Short-Term Finance
All commercial banks offer various methods of shortterm finance for businesses:
? ?
Overdraft Short-term Loan
EXTERNAL SHORT-TERM FINANCE
Other sources of Short-Term Finance:
?
?
Hire Purchase (External) Trade Credit (Internal)
External Short-term Finance
OVERDRAFT - The bank allows the business to draw more money from their bank account than they actually have in it.
Advantages
Very quick to arrange Only pay interest on amount overdrawn
Disadvantages
Only suitable for smaller amounts Has to be repaid within a short amount of time
A good short term solution to a cash flow problem
Interest or charges are paid
Continued…
SHORT-TERM LOAN – An amount of money is borrowed from the bank, then repaid (with interest) over a set period of time (0 – 3 years).
?
Tends to be used to buy specific pieces of equipment or to purchase a particular consignment of raw materials in order to fulfil a contract
?
Not a safety net in the way an overdraft is
Continued…
Advantages
Easy and quick to set up
Disadvantages
Interest payable
Small or Large amounts of money can be borrowed
If repayments cannot be kept up, the business risks getting a poor credit rating or being made bankrupt
Structured repayment term
Video
As you watch the video think about why banks need to assess an individuals/businesses situation before agreeing to lend money.
Factors Influencing a Bank’s Decision to Lend
Type of Product? Purpose of the Finance? Past Trading Record?
Current Financial Position?
Business Proposal?
Financial Projections?
Nature of the Market/Sales forecast?
Banks Use this Information to…
? ?
Determine who qualifies for lending Determine what interest rate they will lend at
INTEREST RATE - cost of borrowing money (reward for savings)
? ?
What credit limit to set Banks also use this information to determine which customers are likely to bring in the most revenue
Security
SECURITY – Something that acts as assurance to a lender that it will get its money back if a business is unable to pay back money it has borrowed. If the business fails to repay the loan, the bank – as holder of the deeds – is legally entitled to sell the factory or office in order to recover any amount outstanding on the loan.
Video
What are the advantages of purchasing household goods from Brighthouse?
Other External Short-term Finance
HIRE PURCHASE – Pay for an item in instalments, to a hire company, over a set period of time. The item is being hired until the last payment is made.
Advantages
Large sum of money does not have to be found at once
Disadvantages
High interest is often charged
Spread payment over a period of time
Improved cash flow
Item doesn’t belong to the business until the end of the term
Video
What are the advantages of purchasing a sofa from DFS?
Internal Short-term Finance
TRADE CREDIT - Items are bought from suppliers on a ‘buy now pay later’ basis.
Advantages Gives the business more cash to use in the immediate future Does not incur interest charges
Disadvantages Can only be used to buy certain goods
Bills usually have to be settled within 30,60 or 90 days
Medium-term Finance
?
Medium-term Finance is normally thought of as being for between 3 – 10 years.
Purpose of obtaining medium term finance: ? Replace expensive equipment ? To expand ? Convert persistent overdraft into formal medium-term loan
Sources of Medium-term Finance
Various different forms of medium-term finance are available to a business: Medium-term Loan ? Hire purchase ? Leasing
?
EXTERNAL MEDIUM-TERM FINANCE
External Medium-term Finance
MEDIUM-TERM LOAN - An amount of money is borrowed from the bank, then repaid (with interest) over a set period of time (3 – 10 years). The rate of interest charged is particularly important! The rate of interest payable on a medium-term loan depends on: ? How much is borrowed ? How long the money is wanted for ? The security that is provided
Continued…
Businesses have the option to choose either a variable rate or a fixed rate loan. VARIABLE RATE – interest varies with whatever decisions the Bank of England make with regard to interest rates.
FIXED RATE – interest is fixed for the duration of the loan.
Continued…
Advantages Disadvantages
Fixed Rate: Fixed Rate: ?Know what repayment costs are ?If the rate falls still have to pay going to be the higher fixed rate ?Financial planning is easier Variable Rate: ?If the rate falls business pays the new lower rate Variable Rate: ?Don’t now what repayment costs are going to be ?Financial planning is more difficult
Continued…
HIRE PURCHASE – Mentioned before can also be medium-term finance. LEASING – Pay instalments over a set period of time to rent an item – business never actually owns the item!
Continued…
Advantages
Large sum of money does not have to be found at once Spread payment over a period of time Improved cash flow
Disadvantages
High interest is often charged Item doesn’t belong to the business
Leasing company is responsible for maintenance of item
Long-term Finance
?
Long-term finance is usually thought of as being for periods in excess of 10 years. This Finance is for securing the resources for long-term growth.
?
Sources of Long-term Finance
For the long-term, a business essentially has the choice of raising finance by borrowing or through the issue of shares. Sources of Long-term Finance: ? Long-term loans (External) ? Issue of shares ? Sale and leaseback (Internal) ? Retained profit
External Long-term Finance
LONG-TERM LOAN - An amount of money is
borrowed from the bank, then repaid (with interest) over a set period of time (10 years +).
? ? ? ?
Used for expensive pieces of machinery Loans for buildings – mortgages Variable Rate or Fixed Rate Fixed Rate – not fixed for whole length of the loan Advantages and Disadvantages as before!
Continued…
ISSUE OF SHARES - A share in the business is sold to an individual or another business - also know as equity finance. This money then used to purchase new assets.
?
Shareholders are entitled to a dividend (share of company profits)
RIGHTS ISSUE – When a company issues more shares.
Continued…
This type of finance is only available to a company:
? ?
Private Company (Ltd) – restrictions on the transfer of shares and value not readily available as they are not traded in a market. Public Company (Plc) – Shares are traded on the stock market.
STOCK MARKET - A market where shares and debentures are bought and sold.
Continued…
Advantages
No need to repay the money invested
Disadvantages
Need to pay the shareholders a share of future profits
Cheaper than a loan
Original owners may lose control of the business
Some businesses can raise Risky for the shareholder large sums of money this the investment may be lost way if the business fails
Internal Long-term Finance
SALE AND LEASEBACK – Asset is sold but then leased back – usually for a long period of time.
Advantages
Large sum of money is created Business can operate as normal after the sale Leasing company is responsible for maintenance of item
Disadvantages
High interest is often charged Item doesn’t belong to the business anymore No guarantee that lease will be renewed
Continued…
RETAINED PROFIT – Profit retained for the purpose of using in the future. Advantages
No need to pay interest on the money
Disadvantages
Could have been invested elsewhere, earning a higher profit
The business may not have enough retained profit to meet its needs Shareholders may become unhappy if this means lower dividend payments
Other Sources of Finance
Other sources of finance include: Government Assistance ? Venture Capital ? Business Angles
?
Continued…
Government Assistants falls into two categories – assistance with obtaining a loan and regional aid.
THE SMALL FIRMS LOAN GUARANTEE SCHEME (SFLG) – Government provided security scheme which began in 2003, to enable small firms with little security to get finance.
Continued…
?
?
?
?
?
Targeted at smaller businesses Not a loan from the government but from a bank Bank will want to see the usual documents Decision to lend lies with the bank! Government provides 75% of the security via the Department for Business, Enterprise and Regulatory Reform
Continued…
REGIONAL DEVELOPMENT ASSISTNACE (RDA) – Government financial assistance available if the business is located, or is prepared to locate, in certain areas of the UK.
?
? ?
Usually areas where traditional industries have been in decline Business must safeguard and create jobs or grow so that it can compete more effectively at home or abroad Available to small and large businesses
Continued…
INCENTIVES: •Tax incentives
•Sale of land or property at discounted rate
•Reduced rent GRANTS:
•Investment in equipment
•Training or retraining •Research and Development
Continued…
VENTURE CAPITAL – Individuals or firms who lend money, known as venture capital. A venture capitalist might agree to provide a certain amount of finance in exchange for a high % of the company’s shares and might adopt a “take it or leave it” approach. BUSINESS ANGELS – Individuals or firms who offer management advice as well.
A Business’s Choice of Finance
The business’s choice of source of finance depends on several factors!
There are too many considerations…I don’t know which sources to choose!!!
Continued…
The type of business – Sole traders and partnerships cannot issue shares ? The amount of control desired – Becoming a partnership or company can weaken control ? Security – A lack of security may mean that banks are unwilling to grant a loan ? Existing levels of debt – If high banks will think twice about lending
?
Continued…
Internal Funds – If the business uses them for finance there will be no interest to pay; but once used the firm has no cushion to fall back on ? Length of time – How long will it take to generate the funds to pay back investment ? Current methods of finance being used – Inappropriate financial management will discourage the bank from lending
?
Recap…
Short-term
?Overdraft
Medium-term Long-term
?Medium-term ?Long-term ?Shares ?Debentures
Loan
EXTERNAL
?Short-term
Loan ?Hire Purchase
?Trade
Loan ?Hire Purchase ?Leasing
?Retained
INTERNAL
Credit
Profit
?Retained
profit ?Sale of Assets ?Sale and Leaseback
Continued…
Type of business Length of Time
Factors influencing the choice of finance
Security
Cash Flow
Control
Existing Debt
Internal Vs External
What Do You Need to Know for Your Exam?
Define different sources of finance ? Advantages and Disadvantages of different sources of finance ? Purpose of different sources of finance
?
Exam Q – Anne wanted to raise £60,000 of start-up capital from a venture capitalist rather than arranging a bank loan. To what extent do you agree with her? KEEP YOUR UNIT SUMMARY SHEET UP TO DATE!
doc_567592635.ppt