Please enable JavaScript.
Coggle requires JavaScript to display documents.
Finance - Coggle Diagram
Finance
What does the finance department do?
recording all financial transactions
prepare final accounts
produce accounting information
forecast cash flows
make important financial decisions
How to make the choice
purpose and time period
use is long term = finance long term (ex: purchase of non-current asset)
use is short term = finance short term (ex: additional inventory to cover a busy period)
amount needed
company Ould not arrange new share issue if only $5000 needed for a short time
legal form and size
public companies have greater choice
issuing share or debenture isn't an option for sole traders
sole traders may have to depend on owner's saving
sole trader may have to pay higher interest rates
control
owners have to decide is expanding or keeping control of the business more important
risk and gearing
proportion raised from long term loans
above 50% = highly geared (risky)
risky because interest
Sources of finance
Internal finance
retained profit
advantage
retained profit doesn't have to be repaid
no interest to pay
disadvantage
new business might not have retained profit
small firm's profit too small for expanse expenses
keeping profit reduce owner's payment
Sale of existing assets
advantage
better use of capital
doesn't increase debt
disadvantage
takes time to sell assets
non available to new business
sale of inventory
advantage
less opportunity and storage cost
disadvantage
not enough goods maybe kept as inventory
customers getting disappointed
Owner's saving
advantage
available quickly
no interest
disadvantage
savings too low
increase owner's risk (unlimited liability)
External finance
issue of shares
advantages
no interest
doesn't have to be repaid
permanent source of capital
disadvantages
dividends paid after tax
dividends expected by shareholders
ownership could change hands
bank loans
advantages
quick to arrange
varying lengths of time
large companies offered lower interest
disadvantages
has to be repaid with interest
security or collateral usually required
selling debentures
advantages
raise long term finance
disadvantages
must be repaid with interest
factoring of debt
advantages
collecting debt risk becomes factor's
immediate cash
disadvantages
business doesn't receive 100% of debt
grants and subsidies from outside agencies
advantages
do not have to be repaid
disadvantages
certain requirements given
mirror finance
banks don't lend to poor people
size of loans isn't profitable
poorer people don't have assets
poot entrepreneurs or special institution provide loans to these poor people
crowdfunding
advantages
allow public reaction
fast way raise big sums
no initial fee required
can be used when other sources unavailable
disadvantages
proposal may get rejected
total amount not raised, promised finance has to be repaid
media interest and publicity needed to increase chance of success
competitors might steal the idea
encouraging people to invest small amounts
Short term and long term finance
short term finance
overdrafts
advantages
pay wages and suppliers
flexible
right to overdraw
interest payed only on overdrawn amount
cheaper then short term loans
disadvantages
interest rates are variable
bank can ask for payment on a short notice
trade credit
advantages
almost interest free
disadvantages
supplier may refuse discounts or supplies if payment not made on time
factoring of debt
advantage
risk is now factor's
immediate cash
disadvantage
business doesn't get 100% of debt
long term finance
bank loans
payable over a fixed amount of time
hire purchase
advantages
large sum not needed to buy asset
disadvantages
cash deposit payed at start
interest quite high
leasing
advantages
no large cash needed to purchase asset
maintenance carried by leasing company
disadvantages
total leasing cost higher then purchasing asset
issue of share
advantages
can raise large capital sums
no restriction on buying, selling or transfer
separate legal identity to owners
public limited company usually have high status (attract)
limited liability
disadvantages
complicated, time consuming legal formalities
publication of accounts
expensive
losing control of business
long term loan or debt finance
difference from share capital
loan interest payed every year
loans must be repaid
interest payed before tax (expensive)
loans secured against particular assets
debentures
advantage
long term financing
disadvantage
must be repaid with interest
will banks let shareholders invest
plus chance
details of existing loans
collateral
income statement
clear explanation of future goal and why finance is needed
cash flow forecast
shareholders likely to invest when
dividents are high
other companies aren't a good investment
share price increasing
good reputation and plans for future growth
The main reason why businesses need finance
Why finance is needed
starting up a business
non-current assets
ex: business, land, equipment
start up capital needed
expansion of existing business
makes more profit
needs more non-current
methods
takeover
create new product
additional working capital
Working capital - life blood needed to run day to day costs
capital expenditure
non-current assets
lasts more than a year
assets needed at start/expanding
revenue expenditure
day to day expenses
ex: wages or rent