12 GED Business Studies Business Finance Notes PDF

Business Studies Business Finance Grade 12 GED Q1 Why do businesses need finance? Or Discuss the various business activities and situations that require financial support or Analyze the importance of finance for...

Business Studies Business Finance Grade 12 GED Q1 Why do businesses need finance? Or Discuss the various business activities and situations that require financial support or Analyze the importance of finance for business Businesses need finance for various reasons to ensure smooth operations, expansion and growth. Start-up Costs: Finance is essential for covering initial costs such as purchasing equipment, leasing space, and marketing. Example: A restaurant business may need finance to buy kitchen equipment, furniture, and pay rent before opening to customers. Operational Expenses: Businesses need finance to cover day-to-day expenses like wages, utilities, raw materials, and inventory management. Example: A retail store needs finance to purchase inventory upfront before sales revenue comes in. Growth and Expansion: Businesses often require finance to expand their operations, enter new markets, or increase production capacity. Example: A tech company may secure finance to open a new office, hire more employees, or develop new products to increase its market presence. Q2 Distinguish between short and long-term need for finance Short-term Need for Finance: This refers to the financial requirements for a shorter duration, usually less than a year. The purpose is usually to meet immediate operational expenses or manage cash flow. Duration: Up to one year Purpose: ○ Working capital (e.g., paying wages, buying raw materials) ○ Covering temporary cash shortfalls ○ Meeting immediate expenses (e.g., utility bills, rent) Ms Marilyn 1  Sources of Short-term Finance: ○ Trade credit ○ Bank overdrafts ○ Debt Factoring Examples: ○ A retailer needing funds to buy additional stock for the holiday season ○ A business covering a cash flow gap due to delayed payments from customer Long-term Need for Finance: This refers to the financing required for a longer period, usually more than a year. It is usually meant for capital expenditures that will benefit the business or individual over an extended period. Duration: More than one year (up to several years or decades) Purpose: ○ Purchase of fixed assets (e.g., land, buildings, machinery) ○ Business expansion ○ Long-term projects (e.g., infrastructure development) ○ Acquisitions and mergers ○ Debt restructuring Sources of Long-term Finance: ○ Equity capital (shares) ○ Long-term loans (bank loans, bonds) ○ Venture capital or private equity Examples: ○ A company building a new factory ○ An individual taking out a mortgage to buy a house Q3 Define start-up capital and working capital Start-up capital refers to the initial funds required to start a business. It covers the costs involved in establishing a business, including setting up operations, purchasing equipment, legal fees, and other expenses necessary to launch the business. Ms Marilyn 2  Purpose: ○ Cover the costs of establishing the business ○ Purchase equipment, inventory, and assets ○ Lease premises or office space Examples: A tech company raising funds to develop software and rent office space Working capital refers to the funds available to run the day-to-day operations of a business. It is the difference between a company’s current assets (e.g., cash, accounts receivable, and inventory) and its current liabilities (e.g., accounts payable, short-term debts). Formula: Working Capital=Current Assets−Current Liabilities Purpose: ○ To finance day-to-day operations ○ To cover short-term expenses such as salaries, rent, utilities, and inventory purchases ○ To manage cash flow and meet operational needs Examples: ○ A manufacturer purchasing raw materials for production ○ A business paying its suppliers and utility bills while waiting for payments from customers. Q4 Explain the significance (importance) of start-up capital in the initial phase of a business. Start-up capital is the money needed to launch a business, covering essential costs such as purchasing equipment, securing premises, hiring employees, and marketing. Its significance in the initial phase includes: 1. Operational Setup: Start-up capital funds initial expenses like acquiring raw materials, renting space, and buying technology needed to begin operations. 2. Cash Flow: It provides a buffer (safety net) to handle early financial challenges, ensuring that the business can meet its obligations before generating sufficient revenue. 3. Marketing and Branding: Early investment in advertising and branding is important for attracting customers, and start-up capital ensures resources are available for these efforts. Ms Marilyn 3 Q5 Describe the role (function) of working capital in daily business operations. Ensuring Liquidity: Working capital provides the necessary cash flow to cover day-to-day operational expenses, such as paying suppliers, utilities, and wages. It ensures the business can function smoothly without cash shortages. Maintaining Inventory: Adequate working capital allows businesses to maintain sufficient inventory levels to meet customer demand, avoiding stock outs or production delays. Managing Debts: It helps in meeting short-term financial obligations, such as repaying loans or paying off creditors on time, avoiding penalties or interest charges. Maintains Business Reputation: Consistently meeting financial obligations, such as paying suppliers on time, enhances a company's reputation. A good reputation can lead to favorable credit terms, partnerships, and customer trust. Supports Growth: Working capital provides the necessary funds for a company to invest in growth opportunities, such as expanding operations, entering new markets, or launching new product lines. Q6 Evaluate the importance of working capital (running costs of the business) Without sufficient working capital, a company may struggle to meet its financial payments, jeopardizing its reputation and survival. Conversely, having a healthy working capital position offers several strategic advantages: It provides flexibility to seize opportunities and navigate challenges. It reduces reliance on external financing, minimizing interest costs and potential debt-related risks. It enhances the ability to manage cash flow effectively, optimizing the allocation of resources. It fosters a sense of financial stability, instilling confidence in stakeholders, including investors, suppliers, and employees. In conclusion, working capital is an important financial measure that affects how well a business runs, stays stable, and grows. Companies need to manage their working capital carefully to make sure they have enough money to keep the business going and succeed, even when the economy is good or bad. Ms Marilyn 4 Q7 Analyze the ways of managing working capital including managing trade receivables, managing trade payables, and managing inventory. 1. Managing Trade Receivables (Money Owed by Customers): Trade receivables are amounts customers owe a business after purchasing on credit. Efficient management helps improve cash flow. Credit Policies: Businesses can establish clear credit terms, such as offering shorter payment deadlines or early payment discounts, to encourage customers to pay quickly. Customer Credit Checks: Assessing the creditworthiness of customers before offering credit helps reduce the risk of bad debts. Example: A business may offer a 2% discount for customers who pay within 10 days, encouraging faster payments. 2. Managing Trade Payables (Money Owed to Suppliers): Trade payables are the amounts a business owes to its suppliers. Managing these effectively can improve cash flow while maintaining good supplier relationships. Negotiate Better Terms: Businesses can negotiate longer payment terms with suppliers to delay cash outflow without harming relationships. Take Advantage of Discounts: Some suppliers offer early payment discounts. If the business has sufficient cash, it can benefit from these discounts to save money. Example: A business might negotiate with suppliers to pay in installments over several months instead of one lump sum. This spreads out the payment, allowing the company to manage its cash flow better while still maintaining a good relationship with the supplier. Managing Inventory (Stock of Goods): Proper inventory management ensures that businesses have enough stock to meet customer demand without tying up too much cash in excess inventory. Just-in-Time (JIT) Inventory: This approach reduces the amount of inventory on hand by ordering stock only when needed, minimizing storage costs. Monitor Inventory Levels: Regularly reviewing and adjusting inventory levels based on demand can prevent overstocking or stockouts, which can lead to missed sales opportunities. Ms Marilyn 5  Example: A retailer might use sales data to predict demand more accurately, avoiding overstocking and ensuring popular items are always available. Q8 Define capital expenditure and revenue Expenditure. Explain the differences between revenue expenditure and capital expenditure. Capital Expenditure (CapEx): Capital expenditure refers to the money a business spends on acquiring or upgrading long-term assets, such as equipment, buildings, or machinery, that will benefit the business for many years. These assets are expected to generate income or improve efficiency over time. Example: Purchasing new machinery, constructing a new office building, or upgrading a company's IT infrastructure. Revenue Expenditure: Revenue expenditure is the money a business spends on day-to-day operations and maintaining existing assets. These expenses are short-term and are incurred to keep the business running. They do not create new long-term assets but help generate revenue within the current financial period. Example: Paying salaries, purchasing raw materials, utility bills, and repair costs for existing machinery. Example of Difference: Capital Expenditure: A company spends $100,000 on a new machine that will be used for 10 years. This is a capital expenditure because the machine is a long-term asset that will provide value over multiple years. Revenue Expenditure: The same company spends $5,000 annually on maintaining the machine. This is revenue expenditure, as it is a recurring expense to keep the machine in working condition during the year. Ms Marilyn 6