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IGCSE Business Studies - Coggle Diagram
IGCSE Business Studies
Financial Information and Decisions
Why do businesses need finance?
Classification
Capital Expenditure
Money spent on long-term assets that will benefit the business for longer than a year.
Land, Premises, Machinery
Revenue Expenditure
Money spent on paying short-term expenses that allows the business to function on a day-to-day basis
Wages, Inventory, Advertisement
Examples
At Start Up
Land. Premises, Advertisement and Equipment
For Day-to-day Management
Inventory and Wages
For Expansion
Land, Premises, etc for branches in a different location
Research
To create and test new products
For Takeovers
Funds required to buy out a business
For new premises/technology
To buy new technology and to expand premises as the business grows
Sources of Finance
Classification
Equity // Debt
Debt: The act of borrowing finance from an external source, before paying them back the said amount, plus interest.
Advantages
Owner doesn't have to share profits
If fixed interest rate, business is able to predict the amount and prepare to repay it
Owners have complete control over business
Easy for most firms to get access
Disadvantages
Debts must be repaid
If variable interest rate, business isn't able to predict the amount and won't be able to prepare to repay it
In period of financial difficulty, interest rate is likely to be high, making it difficult to repay
Security, in the form of the asset is required to gain the funds
Equity: Term used to describe funds gathered from selling shares of a business. Also includes the personal funds the owner puts into the business, known as private equity..
Advantages
Experiences benefits from shared profits and shared risks
No monthly repayments
Repayments only start when the business are making profit
Disadvantages
Owners lose control over the business
Owners will have to share profits
Only limited companies have access
Legally complicated and difficult to set up and maintain
Gearing: Ratio of Debt:Equity
Internal // External
Internal
Owner's Funds: Personal funds put in business by owner
Advantages
Interest free
Disadvantages
Great financial risk for owner
Owner must use personal items that can be lost
Retained Profit: The profit that is reinvested into the business for it's growth
Advantages
Interest free
Disadvantages
Not always available, as business needs to be in profit
Lower return on money invested into business
Working Capital: The capital that the business utilises to run day-to-day operations.
Advantages
Invokes efficient management of cash which is good practice
Disadvantages
Money is not always available, as business needs a set amount to maintain the daily operations
Business needs to ensure that there is sufficient inventory to meet demand
Sale of Asset: Sells asset owned by business
Advantages
Allows business to gain access to large amount of funds
Disadvantages
Business loses access to asset
Funds only available when asset is sold, which may take time
External
Short-Term
Debt Factoring
Disadvantages
Amount taken is relative to how risky it is to retrieve the money
Amount of debt garnered is likely not 100%
Advantages
Gives business quick access to funds
Businesses won't need to worry about retreiving the debt
Overdrafts: Where bank allow firm to draw more out it's account than it has put in for short period of time
Advantages
Cheaper than bank loans
Flexible way for businesses to borrow money for short periods of time
Disadvantages
High interest rates and cost, making it unusable for the long term
Trade Credit: Paying amount over a period of time, instead of all on the spot
Advantages
Interest free
Securing payments early may result in discounts
Disadvantages
Start-ups may not be given access unless proven to be able to pay
Needs proper management to prevent overtrading and cash flow crisis
Long-Term
Leasing: Act of hiring asset instead of buying
Advantages
Lower initial purchase as it is a service that is paid regularly
Lower impact on cash flow as no large payment is made at once
Business doesn't have to worry about maintenance of asset
Assets are replaced regularly to keep up with technology
Disadvantages
Total Cost is typically higher than if the firm were to buy it
Hire Purchase: Similar to leasing, but gives business ownership of the asset after borrowing period ends
Advantages
Lower initial purchase
Lower impact on cash flow
Assets are replaced regularly until borrowing period ends
Businesses own the asset at the end
Disadvantages
Businesses need to maintain the asset after borrowing period ends
Total cost is likely higher than simply buying the asset
Bank Loans: Borrowing money from the bank and repaying it over a regular period
Advantages
Easy to arrange
Can be arranged for different time-frames and at different amounts
Disadvantages
Likely to be expensive if interest rate is high
Security, in the form of asset, is needed
If debt is unable to be repaid, asset is taken
Sale and Leaseback: Act of selling an asset before leasing it from new owner
Advantages
Instantly gains a large amount of capital
Retains use over asset
Disadvantages
Cost of leasing likely to be high
Leasing arrangemtn usually doesn't include maintanence
Debentures: Long term loan to a limited company
Advantages
Lower interest rate than bank
Available for extremely long term finance
Disadvantages
Only available to large limited companies
Grants: Funds given by governmnet to business
Advantages
Cheap or free
No need to repay
Disadvantages
Only available to specific type of firms or to specific areas of country
Other Sources
Share Issue: Selling shares to external shareholders
Change in business status: Sole trader -> Partership -> Limited
Franchising: Gain of initial fee and share of profits for giving access to brand name to fracnhiseees
Micro-financing: Gives low income people small portion of money to start up business
Joint Ventures: Two existing businesses create a new business to reduce cost required by each business