Finance Unit 3: Expenditures and Funding Sources

Unit 3: Finance

• Capital Expenditure: Money spent on fixed assets (land, buildings, equipment, vehicles) over a year.

• Revenue Expenditure: Money spent on day-to-day business operations (wages, raw materials, electricity).

• Internal Sources of Finance:

  • Personal Funds: Money from savings, friends, or family.

• Advantages: Easy to acquire, owner knows how much available.

• Disadvantages: Limited supply, risky if not enough saved.

  • Retained Profits: Profits kept within a company after expenses and dividends.

• Advantages: Permanent source of finance, low cost since it doesn't need to be repaid.

• Disadvantages: Insufficient in startups, limits growth if profits are too low.

  • Sales of Assets: Selling unwanted or unused assets.

• Advantages: Provides quick cash, no borrowing costs.

• Disadvantages: Time-consuming to find buyers, may lack assets for new businesses.

• External Sources of Finance:

  • Share Capital: Money raised from selling company shares.

• Advantages: No interest payments, permanent capital.

• Disadvantages: Dividends expected, potential loss of control.

  • Loan Capital: Loans from financial institutions (banks) with interest.

• Advantages: Easily accessible, quick process, specific purpose.

• Disadvantages: Repayment required, even with losses, assets can be seized.

  • Overdrafts: When a bank allows a company to withdraw more money than in their account.

• Advantages: Flexible funding for unexpected expenses, allows spending over available funds.

• Disadvantages: High interest rates, short notice to repay, losses can be seized for failure to repay.

  • Trade Credit: Agreement allowing businesses to delay payment for goods/services.

• Advantages: Delays payment to suppliers, interest-free periods, good cash flow.

• Disadvantages: Poor relationships if late payments, potential loss of discounts.

  • Crowdfunding: Raising small amounts of money from many people.

• Advantages: Access to many investors, useful marketing.

• Disadvantages: Intense competition, complex requirements, business need to prove.

  • Leasing: Using an asset without owning it.

• Advantages: Doesn't require upfront capital, useful for short-term needs.

• Disadvantages: Leasing costs can exceed buying, doesn't act as collateral.

  • Microfinance: Banking services for low-income individuals.

• Advantages: Access to finance otherwise unavailable.

• Disadvantages: Limited amounts available, difficult to prove repayment capability.

  • Business Angels: Private investors funding high-risk ventures for ownership.

• Advantages: No repayment, gain from success.

• Disadvantages: Can lose control of the project, possible buyout needed.