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Chapter 29

This document discusses why businesses need finance and the different types of finance available. It explains that businesses need start-up capital to launch, working capital to pay daily expenses and inventory, and financing to develop new products, acquire other companies, or cover special situations. The document outlines short-term and long-term financing options from both internal sources like retained profits and external sources like bank loans, debentures, share capital, and more. It emphasizes the importance for businesses to understand the difference between cash and profit to avoid liquidity issues.

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20 views4 pages

Chapter 29

This document discusses why businesses need finance and the different types of finance available. It explains that businesses need start-up capital to launch, working capital to pay daily expenses and inventory, and financing to develop new products, acquire other companies, or cover special situations. The document outlines short-term and long-term financing options from both internal sources like retained profits and external sources like bank loans, debentures, share capital, and more. It emphasizes the importance for businesses to understand the difference between cash and profit to avoid liquidity issues.

Uploaded by

belenorcann
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Why businesses need finance?

1- Starting up a business will require money (Start-up capital)


2- Day-to-day finance to pay bills & expenses
To build up inventories (Working capital)
3- Developing new products
4- To buy out other firms for growth
5- Special situations when it’s is needed to pay essential expenses

Start-up capital: the capital needed by an entrepreneur to set up a business


Working capital: the capital needed to pay for raw materials, day-to-day running costs
and credit offered to customers
(current assets-current liabilities)
Current assets: assets that either cash or likely to be turned into cash within one year
Current liabilities: debts that usually have to be paid within one year

Managers need to decide which type of finance is suitable in each situation. Many
businesses prefer short-term finance over long-term finance.
Short-term finance is helpful to businesses that experience seasonal demand
especially in the holiday season as known as their busiest month.
Long-term finance is helpful to businesses when a business is expanding and need
more buildings and equipment.

Short-term finance: money required for short periods of time of up to one year
Long-term finance: money required for more than one year

It is very important for owners and managers to understand the difference between cash and
profit or else the business can result in failure.
It is vital for a business to have cash in short term to pay wages and rent. Profit can wait to
be earned in long term.

Profit: the value of goods sold (revenue) less costs


(revenue-costs)
Liquidity: the ability of a business to pay its short-term debts

If a business made profit out of a sale but doesn’t have cash, it shows that the
business may have a low level of liquidity.

If a business fails due to lack of finance:


Administration: when administrators manage a business that is unable to pay its
debts with the intention of selling it as a going concern
( trying to keep the business operational and to find a buyer for it )

Bankruptcy: the legal procedure for liquidating a business which cannot fully pay its
debts out of its current assets

Liquidation: when a business ceases trading and its assets are sold for cash to pay
suppliers and other creditors

Without sufficient working capital, a business will be unable to pay its short-term debts. So,
either the business can raise their finance quickly via bank loan or it will be forced into
administration or liquidation by its creditors.

Capital Expenditure (sermaye giderleri): the purchase of non-current assets that are
expected to last for more than one year
+ buildings
+ machinery
+ dondurma makinesi
Revenue Expenditure: spending on all costs and assets other than non-current assets
+ wages
+ salaries
+ inventory of materials
+külah

FINANCE FOR LIMITED COMPANIES


Companies are able to raise finance by:
1- Internal Sources: raising finance from the business’s own assets or form profits
left in the business( retained earnings )
2- External Sources: raising finance from sources outside the business
INTERNAL FINANCE EXTERNAL FINANCE
Long Term Short Term
1- Retained profit
2- Sale of unwanted assets 1- Hire purchase 1- Bank overdraft
3- Reductions in working capital 2- Leasing 2- Trade credit
4- Sale and leaseback of non- 3- Share capital 3- Debt factoring
current assets 4- Debentures
5- Bank loans
6- Business mortgage
7- Government grant
8- Venture capital

Internal Sources of Finance


Retained Profit: profit after tax retained in a company rather than paid out to shareholders as
dividends
Non-current Assets: assets kept and used by the business for more than one year
***Finance from internal sources has no direct cost or risks to the business.
1-However if assets are leased back once sold, there will be leasing charges.
2-However depending solely on internal sources of finance for expansion can slow down
business growth.
Thus, rapidly expanding companies are often dependent on external sources of finance.
External Sources of Finance
Short Term
Bank Overdraft: a credit that a bank agrees can be borrowed by a business up to an agreed
limit as and when required
Business may need to increase the overdraft for short periods of time if customers do not
pay as quickly or if a large delivery of supplies has to be paid for but this form of finance
often carries high interest charges and if a bank becomes concerned about the stability, it can
call in the overdraft and force the firm to pay it back. In extreme cases this can lead to
business failure.
In trade credit, delaying payment to suppliers(which becomes trade payables or trade
creditors) so the business is obtaining finance. However discounts are often lost.

Long Term
Hire Purchase: a company purchases an asset and agrees to pay fixed payment over an
agreed time period. The asset belongs to the purchasing company once the final payment
has been made.
A hire purchase is like a loan expect the seller sells and gives you the item you want to but
instead of lending you the money. However, the interest rate can be higher than bank loan.
Leasing: obtaining the use of an asset and paying a leasing charge over a fixed period,
avoiding the need to raise long-term capital to buy the asset. The asset is owned by the
leasing company.
With a contract with the leasing company, business can buy an asset but does not necessarily
purchase it. The business can avoid the cash requirements of the asset since the leasing
company is responsible repairing and updating the asset. Leasing can be a high-cost option
but the business doesn’t have to maintain or sell or improve the asset. Leasing does improve
the short-term cash position of a company.
Bank (long-term loans): loans that do not have to be repaid for at least one year
Debentures: long-term bonds issued by companies to raise debt finance, often with a fixed
rate of interest
A trusted business can sell debentures to investors while agreeing to pay a fixed rate of
interest which can be up to 25 years. No collateral security will be required over any non-
current assets.
Collateral Security: an asset which a business pledges to a lender and which must be sold off
to pay a debt if the loan is not repaid
Business Mortgages: long-term loans to companies purchasing a property for business
premises, with the property acting as collateral security on the loan
Business mortgages are when a bank may offer loans to a business specifically for the
purpose of buying premises(ipotekle borc verme) The interest rate can be fixed or variable.
The loan is secured since the lender can sell the property if the business fails.
Share Capital: permanent finance raised by companies through the sale of shares

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