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Sources of finance 3.1 (Internal sources (Evaluation (There are not direct…
Sources of finance 3.1
Capital expenditure: The purchase of assets that are expected to last more than 1 year - infrastructure, machinery...
Revenue expenditure: Spending on all costs and assets other than fixed assets including wages, salaries and material bought for stock.
External sources
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Short-term
Trade credit: Used to buy raw materials from suppliers on credit terms. Goods are delivered and payment is made later (e.e. 1 month). It helps managed the short-term cash flow.
Debt factoring: The selling of the business debtor invoices to a finance company to release cash owed earlier than when debtors are due to pay. Full amount is not paid as the finance company keeps a % of the total. This is only used when companies are really short of cash and need it to pay bills. The factor collects the debt from customers which reduces the possibility of a bad debt but may cause a loss of loyal customers which will look for another supplier.
Overdrafts: The bank agrees to a business borrowing up to an agreed limit as and when required. It is the most flexible source of finance and effective as short-term finance. however, there is interest charged on the amount borrowed.
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Internal sources
Personal funds: Owners' savings. The finance of the firm is limited to the amount the owner has saved. However, there is no interest payments and the owner has full control.
Retained assets: All the profit remaining after the shareholder dividends are paid and corporate tax. This is significant for future expansion and investments in the firm.
Sale of assets: When assets are no longer fully employed, they can be sold for extra cash. This can also be sold and then leased back. There will be short-term cash but it more expensive to rent and lease
Evaluation
There are not direct costs to the business from this form of capital, there may be an opportunity cost and lease costs.
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Only depending on internal sources of finance will limit business growth, the pace will be limited by annual profits. Firms depending on external finance grow rapidly.
Managing working capital: For instance, selling unused assets by reducing working capital. There are risks in doing this due to the short-term debts not being able to be repaid = the LIQUIDITY of the business.
Start-up capital: Required to start the business. Cash injections from owners to purchase capital equipment or premises.
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