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

1. IB Business and Management Unit 3.1 Sources of Finance Lesson 1: Capital, Revenue and Sources of Finance pp. 335-345

2. 1. Think about it…. “A business that makes nothing but money is a poor kind of business.” Henry Ford (1863-1947) Was he crazy? What does he mean by this? …

3. 2. Focus Questions 1. What is the purpose of finance? 2. What are the difference between capital and revenue expenditure? 3. Explain the different kinds of internal and external sources of finance available to companies? 4. What are the differences between Short, Medium and Long term finance? 5. What kind of finance can the public sector obtain? …

4. 3a. The need for business finance All businesses need money to finance business activity. Set up costs Day-to-day running costs Cost for expansion List goes on… Business can raise this money by obtaining bank loans or by selling unused assets. Your choice of finance will depend on many factors. …

5. 3b. The need for business finance What is capital expenditure? It is finance (money) spent on purchasing (buying) fixed assets. Do you remember what a fixed asset is? Items of monetary value, which have a long-term function and can be used over and over again. Such as buildings, equipment, land. Machinery, etc. Buying fixed assets tend to be very expensive, so the sources of finance for capital expenditure comes from medium to long term sources. …

6. 4c. The need for business finance What is revenue expenditure? These are the payments (cost) for the daily running of a business. Such as wages, raw materials, electricity, etc. Will also include indirect costs, too. Such as rent, insurance, advertising, etc. Should we control our costs? Why? We need to generate enough revenue to make a profit. Remember the equation: Revenue – Costs = Profits or Losses (we are hoping for profits  ) …

9. IB Business and Management Unit 3.1 Sources of Finance Lesson 2: Debt Factoring and Terms of Finance pp. 341-348

10. 1. Focus Questions 1. What is debt factoring? 2. What are the advantages and disadvantages of factoring? 3. Explain other sources of external financing. 4. Decide which term of financing to use. …

11. 2a. Other sources of external financing Debtors: Key word here is debt and the concept of debtors. Who are they and what do they do…these debtors… People or organizations that owe money. Remember when we talked about credit terms for a company who was doing business overseas? That business sold supplies to a customer on 30 days credit. This mean you the company will not see any payment until after the 30 days. There is a concept called good debt and bad debt. Good debt makes you money. Bad debt makes you lose money. So, lets take the above example. A customer on 30 days credit. If more of your customers are given credit you may face bad debt. Because if your customers can not pay you, how are you going to pay your suppliers, or operating costs of your company.…

12. 2b. Other sources of external financing Debt Factoring: Is a financial service that allows a business to raise funds based on the value owed by their debtors. Confused? So, if you have customers who bought on credit, you can borrow based on that amount. How does it work, this borrowing on debt? Most factoring services provide 80-85% of the outstanding payments from debtors within 24 hours. Advantages: Immediate source finance: receive money in 24 hours vs. 30 days from your customer. Option of non-recourse factoring for the provision of bad debt. Think about it, if your customer does not pay, whose lose is it? Yours right? But under this provision, the finance provider will absorb the loss. So your business does not suffer and losses from bad debt and reduces the risk of doing business.

13. 2c. Other sources of external financing Debt Factoring: Disadvantages: High fees charged by financial institutions. The larger the value of debtors and the riskier the business seems to be, the higher the charges tend to be. Not all businesses are eligible to use this service. …

15. 3a. Terms of Finance YOU as an effective manager must pay very close attention to the cash flow situation of your company. Remember…what is cash flow? The money coming into and going out of the company. Your revenue and expenses. Right. Very good. But you are not super-human, and must deal with the ever changing short-medium-and long term cycles of the business environment. So you may find yourself strapped for cash and will need to use a form of financing. Why do we use financing? To aid business operations. If you have serious cash flow problems it could cause liquidation (you sell off your assets) or bankruptcy. …

17. 4a. Sources of finance for public sectors organizations Some organizations charge for their services. Postal services sell stamps to generate revenue for example. They may also obtain government funding. Schools and hospitals for example. To recap: Many business fail because of poor financial planning and cost control. Remember: The purpose of financing: why do you need to borrow? The cost: not only for assets, but opportunity costs as well. The Amount required: Do you really need a large amount? Time: consider how long it will take your firm to repay the loan. Status and size: if you are a small firm, forget about getting large financing. Financial situation: if you have poor cash flow, banks will not look at you. External factors: things out of your control, will impact your business. …

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