IB Business and Management<br />Unit 3.1<br />Sources of Finance<br />Lesson 1: Capital, Revenue and Sources of Finance<br...
1. Think about it….<br />“A business that makes nothing but money is a poor kind of business.” Henry Ford (1863-1947)<br /...
2. Focus Questions<br />1. What is the purpose of finance?<br />2. What are the difference between capital and revenue exp...
3a. The need for business finance<br />All businesses need money to finance business activity.<br />Set up costs<br />Day-...
3b. The need for business finance<br />What is capital expenditure?<br />It is finance (money) spent on purchasing (buying...
4c. The need for business finance<br />What is revenue expenditure?<br />These are the payments (cost) for the daily runni...
IB Business and Management<br />Unit 3.1<br />Sources of Finance<br />Lesson 2: Debt Factoring and <br />Terms of Finance<...
1. Focus Questions<br />1. What is debt factoring?<br />2. What are the advantages and disadvantages of factoring?<br />3....
2a. Other sources of external financing<br />Debtors:<br />Key word here is debt and the concept of debtors.<br />Who are ...
2b. Other sources of external financing<br />Debt Factoring:<br />Is a financial service that allows a business to raise f...
2c. Other sources of external financing<br />Debt Factoring:<br />Disadvantages: <br />High fees charged by financial inst...
3a. Terms of Finance<br />YOU as an effective manager must pay very close attention to the cash flow situation of your com...
4a. Sources of finance for public sectors organizations<br />Some organizations charge for their services.<br />Postal ser...
End<br />
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Bm Unit 3.1 Sources of Finance

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IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007

Published in: Business, Economy & Finance

Bm Unit 3.1 Sources of Finance

  1. 1. IB Business and Management<br />Unit 3.1<br />Sources of Finance<br />Lesson 1: Capital, Revenue and Sources of Finance<br />pp. 335-345<br />
  2. 2. 1. Think about it….<br />“A business that makes nothing but money is a poor kind of business.” Henry Ford (1863-1947)<br />Was he crazy? What does he mean by this?<br />…<br />
  3. 3. 2. Focus Questions<br />1. What is the purpose of finance?<br />2. What are the difference between capital and revenue expenditure?<br />3. Explain the different kinds of internal and external sources of finance available to companies?<br />4. What are the differences between Short, Medium and Long term finance?<br />5. What kind of finance can the public sector obtain?<br />… <br />
  4. 4. 3a. The need for business finance<br />All businesses need money to finance business activity.<br />Set up costs<br />Day-to-day running costs<br />Cost for expansion<br />List goes on…<br />Business can raise this money by obtaining bank loans or by selling unused assets.<br />Your choice of finance will depend on many factors.<br />…<br />
  5. 5. 3b. The need for business finance<br />What is capital expenditure?<br />It is finance (money) spent on purchasing (buying) fixed assets.<br />Do you remember what a fixed asset is?<br />Items of monetary value, which have a long-term function and can be used over and over again.<br />Such as buildings, equipment, land. Machinery, etc.<br />Buying fixed assets tend to be very expensive, so the sources of finance for capital expenditure comes from medium to long term sources.<br />…<br />
  6. 6. 4c. The need for business finance<br />What is revenue expenditure?<br />These are the payments (cost) for the daily running of a business.<br />Such as wages, raw materials, electricity, etc.<br />Will also include indirect costs, too.<br />Such as rent, insurance, advertising, etc.<br />Should we control our costs?<br />Why?<br />We need to generate enough revenue to make a profit.<br />Remember the equation:<br />Revenue – Costs = Profits or Losses (we are hoping for profits  )<br />…<br />
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  9. 9. IB Business and Management<br />Unit 3.1<br />Sources of Finance<br />Lesson 2: Debt Factoring and <br />Terms of Finance<br />pp. 341-348<br />
  10. 10. 1. Focus Questions<br />1. What is debt factoring?<br />2. What are the advantages and disadvantages of factoring?<br />3. Explain other sources of external financing.<br />4. Decide which term of financing to use.<br />… <br />
  11. 11. 2a. Other sources of external financing<br />Debtors:<br />Key word here is debt and the concept of debtors.<br />Who are they and what do they do…these debtors…<br />People or organizations that owe money.<br />Remember when we talked about credit terms for a company who was doing business overseas?<br />That business sold supplies to a customer on 30 days credit.<br />This mean you the company will not see any payment until after the 30 days.<br />There is a concept called good debt and bad debt. <br />Good debt makes you money.<br />Bad debt makes you lose money.<br />So, lets take the above example. A customer on 30 days credit.<br />If more of your customers are given credit you may face bad debt.<br />Because if your customers can not pay you, how are you going to pay your suppliers, or operating costs of your company.… <br />
  12. 12. 2b. Other sources of external financing<br />Debt Factoring:<br />Is a financial service that allows a business to raise funds based on the value owed by their debtors.<br />Confused?<br />So, if you have customers who bought on credit, you can borrow based on that amount.<br />How does it work, this borrowing on debt?<br />Most factoring services provide 80-85% of the outstanding payments from debtors within 24 hours.<br />Advantages: <br />Immediate source finance: receive money in 24 hours vs. 30 days from your customer.<br />Option of non-recourse factoring for the provision of bad debt.<br />Think about it, if your customer does not pay, whose lose is it?<br />Yours right? But under this provision, the finance provider will absorb the loss. <br />So your business does not suffer and losses from bad debt and reduces the risk of doing business.<br />
  13. 13. 2c. Other sources of external financing<br />Debt Factoring:<br />Disadvantages: <br />High fees charged by financial institutions.<br />The larger the value of debtors and the riskier the business seems to be, the higher the charges tend to be.<br />Not all businesses are eligible to use this service.<br />…<br />
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  15. 15. 3a. Terms of Finance<br />YOU as an effective manager must pay very close attention to the cash flow situation of your company.<br />Remember…what is cash flow?<br />The money coming into and going out of the company. <br />Your revenue and expenses. Right. Very good.<br />But you are not super-human, and must deal with the ever changing short-medium-and long term cycles of the business environment.<br />So you may find yourself strapped for cash and will need to use a form of financing.<br />Why do we use financing?<br />To aid business operations.<br />If you have serious cash flow problems it could cause liquidation (you sell off your assets) or bankruptcy.<br />…<br />
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  17. 17. 4a. Sources of finance for public sectors organizations<br />Some organizations charge for their services.<br />Postal services sell stamps to generate revenue for example.<br />They may also obtain government funding.<br />Schools and hospitals for example.<br />To recap:<br />Many business fail because of poor financial planning and cost control.<br />Remember:<br />The purpose of financing: why do you need to borrow?<br />The cost: not only for assets, but opportunity costs as well.<br />The Amount required: Do you really need a large amount?<br />Time: consider how long it will take your firm to repay the loan.<br />Status and size: if you are a small firm, forget about getting large financing.<br />Financial situation: if you have poor cash flow, banks will not look at you.<br />External factors: things out of your control, will impact your business. <br />…<br />
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