Finance Basics: Capital Types

Start-up Capital and Working Capital

• Start-up capital is the finance needed for initial business assets (fixed and current).
• Working capital is the funds for day-to-day business operations.

Capital Expenditure and Revenue Expenditure

• Capital expenditure is spending on assets lasting over a year.
• Revenue expenditure is spending on day-to-day expenses (excluding asset purchases).

Internal Finance Sources

Retained Profit

• Advantages: No repayment needed, no interest.
• Disadvantages: No profit for new ventures, low profit margins may prevent expansion for small firms.

Sale of Existing Assets

• Advantages: Improves capital use, no debt increase.
• Disadvantages: Time consuming, unavailable for new businesses.

Owner's Savings

• Advantages: Quick access, no interest.
• Disadvantages: Limited savings, increased risk for owners.

External Finance Sources

Issue of Shares

• Advantages: Permanent capital, no interest.
• Disadvantages: Dividends paid after tax, shareholder expectations.

Bank Loans

• Advantages: Quick access, varying repayment terms.
• Disadvantages: Repayment and interest required, often require security/collateral.

Microfinance

• Small loans to underserved populations by non-traditional lenders.

Crowdfunding

• Funding ventures by gathering small contributions from many people.
• Advantages: No initial fees from platforms, tests public reaction.
• Disadvantages: Platform rejection possibility, potential repayment if target isn't hit.

Factors Affecting Finance Choice

• Purpose: What is the money for?
• Time Period: How long is it needed?
• Amount Needed: How much is required?
• Legal Form and Size: Limited companies can issue certain types of securities.
• Control: Share issuances can lead to loss of control for owners.

Cash Flow Management

• Cash Flow: Inflows and outflows over time.
• Cash Inflows: Money received by the business.
• Cash Outflows: Money paid out by the business.
• Cash Flow Forecast: Estimate of future cash flow.

Overcoming Short-Term Cash Flow Problems

• Increasing Bank Loans
• Delaying Payments to Suppliers
• Encouraging Quick Debtor Payments

Profit: Significance and Importance

• Profit: Reward for enterprise and risk-taking, a source of finance, an indicator of success.
• Working Capital: Liquid assets ready for debt repayment.

Financial Statements

• Income Statement: Records income and costs over a period.
• Statement of Financial Position: Value of assets and liabilities at a specific time.

Formulas

• Total Cost: Average cost per unit multiplied by output.
• Revenue: Quantity sold multiplied by price.
• Working Capital: Current assets minus current liabilities.
• Profit: Revenue minus total cost.
• Total Costs: Fixed costs plus variable costs.
• Margin of Safety: Maximum output minus break-even output.
• Gross Profit: Revenue minus cost of sales.
• Gross Profit Margin: Gross profit divided by revenue, multiplied by 100.
• Net Profit: Gross Profit minus all other costs.
• Net Profit Margin: Net profit divided by revenue, multiplied by 100.
• Current Ratio: Current assets divided by current liabilities.
• Acid Test Ratio: (Current Assets - Inventory) / Current Liabilities

Accounts and Accountants

• Accounts: Financial records of a firm's transactions.
• Accountants: Professionals responsible for accurate accounts and final accounts.
• Final Accounts: Summarize profit/loss and worth at the end of a financial year.

Revenue, Cost of Sales, Gross Profit, Net Profit, Trading Account

• Revenue: Income generated from sales.
• Cost of Sales: Cost of produced or bought goods sold.
• Gross Profit: Revenue exceeding cost of sales.
• Trading Account: Calculation of gross profit.
• Net Profit: Profit after all expenses.

Depreciation, Retained Profit, Assets, Liabilities

• Depreciation: Reduction in asset value over time.
• Retained Profit: Reinvested profit after all payments.
• Assets: Items of value owned by the business.
• Liabilities: Debts owed by the business.
• Non-Current Assets: Assets held for more than a year.
• Current Liabilities: Short-term debts.
• Non-Current Liabilities: Long-term debts.
• Capital Employed: Shareholders' equity + non-current liabilities (long-term financial investment).

Liquidity and Profitability

• Liquidity: Ability to pay short-term debts.
• Profitability: Profit relative to sales or capital.
• Illiquid Assets: Assets difficult to convert to cash.

Business Location Decisions

• Manufacturing Firms: Factors affecting location decisions include the market location of perishable goods or the need to be close to raw materials.
• Service-Sector Firms: Factors affecting location decisions include customer accessibility and convenience and favorable climate.
• Retailing Firms: Factors include shopping traffic patterns, proximity to other shops, and competition.
• International Expansion: Motivation for moving beyond national borders includes new markets, cheaper costs, and raw materials.
• Legal Controls: Governments influence business location to support underdevelopment and high unemployment.