CAPEX vs REVEX

• Finance is essential for business survival and growth, providing capital for activities and enabling performance measurement.
• Businesses obtain finance from internal sources (within the business) and external sources.
• The business expenditures are categorized into capital expenditure (long-term assets) and revenue expenditure (short-term costs).
• Short-term finance is what businesses need for day-to-day operations and long-term finance for investments.
• Cost, availability and the business's risk are considered when choosing the best finance source.

Personal Funds

• Owner's savings or resources invested in the business.
• Offers control but poses a personal risk.

Sale of Assets

• Selling non-essential assets to generate immediate cash.
• Can be a significant source but may reduce operational capacity.
• Businesses require capital to start up, expand, cover day-to-day expenses, reward owners for risk-taking, and pay taxes.
• Profitability, is a key indicator of business success and risk of failure is measured by the amount of profits.

Internal Sources of Finance

• These include owners' investments, retained profits, sale of assets, sale and leaseback, and working capital.
• Retained Profit is profits reinvested back into the business.
• It is a crucial long-term funding source but impacts dividend payouts to shareholders.

Share Capital

• Funds raised by selling shares in a limited company.
• Provides capital but dilutes ownership.

Loan Capital

• Borrowing money from financial institutions.
• Offers flexibility but incurs interest payments.
• Overdrafts are a short-term borrowing facility allowing withdrawals exceeding available funds are convenient but costly.
• Interest is charged on amount overdrawn.
• Trade Credit has deferred payments from suppliers which offers flexible short-term finance but may impact credit ratings.
• Crowdfunding is raising small amounts of money from a large number of individuals that can be effective for startups but requires marketing effort.
• Leasing is acquiring the use of assets without outright purchase, reduces capital outlay but incurs ongoing lease payments.
• Microfinance is financial services for low-income individuals or groups that helps underserved populations but may have high-interest rates.
• Business Angels are wealthy individuals investing in startups that provides capital and expertise but may demand significant equity.
• Venture Capital gives Investment in high-risk, high-growth businesses that offers significant funding but may involve loss of control.
• Subsidies are government grants to reduce costs and encourage growth can provide valuable support but may have conditions attached
• External Sources of Finance: These include bank loans, overdrafts, trade credit, share capital, crowdfunding, leasing, microfinance, and venture capital.

Finance Considerations

• The purpose of the investment must align with its intended use (short-term or long-term).
• The total cost of finance (including interest and fees) should be considered.
• Finances should align with your businesses risk profile
• The choice of finance should offer sufficient flexibility to meet changing needs.
• The legal structure impacts the available finance options and level of control.
• The level of existing influences the availability and cost of further borrowing.
• The most suitable source of finance depends on various factors including purpose, cost, and risk tolerance.
• Businesses must adapt their financing strategies to reflect changes in the market and their objectives.
• Businesses generate revenue from various sources including sales, rent, dividends, and interest.

Cost Classification

• Costs are categorized as fixed, variable, direct, and indirect, influencing profitability analysis and decision-making.
• Fixed Costs are expenses that remain constant regardless of production volume.
• Variable Costs are expenses that change proportionally with production volume.
• Direct Costs are expenses directly attributable to a specific product or service.
• Indirect Costs are expenses not directly traceable to a specific product or service (overheads).
• Absorption Costing is an accounting method where all costs are absorbed into production.

Personal Funds details

• They maximizes control with risk for owners, but are difficult to start for high costs

Stock exchange details

• Stock exchange is a share market where stocks of public limited companies are traded

Key Terms

• Assets are resources of value that a business owns
• Liquidation is selling all the firm's assets to cover the debt
• Share Capital is original capital invested into a business
• Share Capital dilutes ownership
• If too much is spent, long-term capital can't be built up.
• If too much is spent, there might not be enough funds to be liquid
• balancing act of CAPEX VS. REVEX
• Inflation is an increase in general price level in an economy over a given period
• Profit is a positive difference between sales revenue and total costs

Capital Expenditure

• Investments in non-current assets used for more than one year.
• Capital Expenditure is essential for business expansion and start-up.
• Shown on the balance sheet.

Revenue Expenditure

• Spending on goods and services used up in the short-term.
• Crucial for daily operations.
• Shown on the profit and loss.

Gold Rule

• Always match the type of finance to type of assets being financed

Purpose of Accounts

• Financial statements provide information for internal and external stakeholders.
• The financial statements show how efficient the business are
• Accounts are used by managers to set targets and decision making
• Accounts involves sending signals about jobs

Statements

• Profit and Loss Account: is a statement that Shows the financial performance of a business over a period.
• Balance Sheet is a statement that is a snapshot of a business's financial position at a specific point in time.
• Cash Flow Statement is a statement that shows the movement of cash in and out of a business over a period.

Liquidity Ratios

• Liquidity Ratios measure a business's ability to meet its short-term debts.
• Gearing Ratio measures the proportion of a firm's capital that is financed by debt.
• Current Ratio is current assets divided by current liabilities.
• Acid Test Ratio is (Current assets - Stock) divided by current liabilities.
• Descriptive Statistics are methods for summarizing large datasets in a meaningful way.
• Financial Statements includes the profit and loss account, balance sheet, and cash flow statement.
• Insolvency is the inability to pay debts; bankruptcy is a legal process to resolve insolvency.
• Cash Flow Forecasts: Predicting future cash inflows and outflows.

Strategies for Dealing with Cash Flow Problems:

• Businesses can negotiate with suppliers on or offer discounts and can improve their cash flow for early payments with incentives.
• Businesses can decrease specific expenses or diversify its product offering
• Businesses can look for additional finance sources of debt factoring and selling assets
• Limitations of Ratio Analysis: Ratios are useful tools but have limitations; they should be interpreted cautiously and in context.
• Investment Appraisal: Methods for evaluating the viability of investment projects.
• The time it takes for an investment to recoup its initial cost is called the payback period.
• Average Rate of Return (ARR): The average annual profit as a percentage of investment.
• Net Present Value (NPV): The difference between the present value of cash inflows and outflows.
• Intangible Assets: Patents provide investors with the exclusive rights to manufacture, use, sell, or control the product or process they invented.
• Goodwill - the value of positive or favorable attributes that relate to a business.
• Copyright level
• Trademark recognizable symbol/word
• Profitability doesn't always equal positive cash flow.
• Working Capital: The funds needed for day-to-day operations.
• Cash Flow: The movement of cash into and out of a business.
• Working Capital Management: Efficient management of current assets and liabilities.
• Working Capital Cycle: The time it takes to convert inputs into cash from sales.
• Relationship between Investment, Profit, and Cash Flow: Investment leads to profits, which then generate cash flow.
• Discounting: Determining the present value of future cash flows.
• The trading account shows the difference between sales revenue and the costs of sales that establishes gross profit.
• Appropriation account shows firm's profit for the period.
• Depreciation: allocation of cost of a physical assets over its useful life.
• Straight-line method and units of production method can calculate depreciation.

Ratios

• Stock Turnover Ratio: Measures how quickly a firm sells its stock.
• Debtor Days: Measures the average time it takes to collect receivables.
• Creditor Days: Measures the average time it takes to pay suppliers.
• Efficiency Ratios: Assess how effectively a firm is using its resources.

Insolvency

• Insolvency and Bankruptcy: Insolvency is the inability to pay debts; bankruptcy is a legal process to resolve insolvency.