Research on the Sources of Finance for a Business

Research on the Sources of Finance for a Business

Firms sometimes need to raise finance for Working Capital and Capital

Expenditure. Explain what each is and give examples.

· Working Capital (or Revenue Expenditure)

The working capital is made up of the current assets net of the

current liabilities.

It is vital to a business to have sufficient working capital to meet

all its requirements. Many businesses have gone under, not because

they were unprofitable, but because they suffered from shortages of

working capital.

· Capital Expenditure

Used for buying fixed assets where large sums of money are involved

but they are not purchased often e.g. new premises.

List and explain factors that determine how much and what type of

finance a business might need.

· Size of the Business.

· Type of the Business.

· Where the business is in terms of its development.

· Whether it is a profitable business.

Define the following terms in your own words

· Internal Finance

Internal Finance can be profit that has been retained, squeezed out of

working capital, or can be cash from sale of assets. This is money

that was already within the business.

· External Finance

External Finance for day-to-day working capital is trade credit, bank

overdrafts, and debt factoring. This is money from outside the firms

own resources.

Internal Finance

Make notes (with examples) on the following three (3) types of

Internal Finance.

· Retained Profit

Once the business starts to generate sales it will hopefully make some

profit. This provides a return on the investment on the business.

However it is also a source of finance. Research shows that over 60%

of business investment comes from reinvested, retained profit.

· Squeezing Working Capital

By cutting stocks, chasing up debtors or delaying payments to

creditors, cash can be generated from a firm’s working capital.

However, when cash is taken from working capital for a purpose such as