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Business Finance - Coggle Diagram
Business Finance
Sources of Finance
Retained Profits
The overall net income that a business holds within its accounts.
Benefit
Provide funding for the growth of the business
Drawback
The business could miss out in investment opportunities
Venture Capitalists
A form of private equity and a type of financing that investors provide to start up companies and small businesses that could have long-term growth potential
Benefit
Don’t have to repay the invested sum even if the company falls
Drawback
Venture capitalists usually take a long time to make a decision
Mortgages
A long term loan that is used to buy a property
Benefit
allows you to be able to buy property when you need it immediately
Drawback
Could get you into debt easily
Bank loans
Money being transferred from one party to another with an agreement to pay it back within a specified time period.
Benefit
Low Interest Rates
Flexibility
Drawback
There are a lot of eligibility requirements
Fees and penalties can be high
Donations
a gift given by another person or group for charity, aid or to benefit a cause. Usually taking multiple forms, including money, services, or goods such as clothing, toys, food, or vehicles.
Benefit
It’s a bit of tax relief
It creates stronger relationships with customers
Drawback
Not guaranteed the source may not be enough
Leasing
allows your business to use an asset in exchange for rental payments which could possibly include an advanced rental.
Benefit
The biggest advantage of leasing is the low initial investment.
Drawback
You don't build equity in the vehicle as you make lease payments.
Hire Purchase
when someone pays for something in installments while using it then owns it after they make the final payment.
Benefit
It allows businesses to spread cost of equipment's
It usually has a fixed interest rate
Drawback: You don’t own the product until the final installment is paid
Government Grants
a financial award given by a federal state or local government authority for a beneficial project
Benefit
grants are never expected to be repaid
Drawback
can't rely on them for large periods of time.
Trade Credit
a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date.
Benefit
Easy to obtain. Low or no interest.
Drawback
Need for credit management
Risk of late payment fees
Debt factoring
when a business sells its accounts receivables to a third party at a discount
Benefit
Increases cash flow
Drawback
You lose money in the long run
Crowdfunding
Allows the business to collect money from a large number of people via online platforms
Benefit
can help raise quick money
Drawback
may not raise enough money and can come short
Bank overdraft
a line of credit on your business bank account that gives you more short-term cash flow than your business can fund from its own capital
Benefit
Flexible borrowing
Drawback
could be charged if you exceed the limit without your authorization
Purpose of accounting
Accounting
Accounting involves the recording of financial transactions, planned or actual, and the use of these figures to produce financial information.
Recording transactions
The business records need to be accurate and up to date so the business can run smoothly
The business owner or bookkeeper must record all of the money coming into the business and all of the money going out
If the transactions aren't kept up to date then they could fall behind on payments or get into trouble with HMRC
Management of the business
A manager is responsible for the planning, monitoring and controlling of the resources for which they are responsible.
Management involves: Coordination of staff, Materials, Money, Stock
Compliance
Financial reporting is governed by laws and regulations This is to ensure that any financial records give a fair and accurate picture of the business
It helps protect against fraud
Control
Accounting will control the flow of money into and out of the business by maintaining accurate records and monitoring performance. This should mean that any unusual activity is spotted, helping to prevent fraud.
It will also, therefore, track the amount of money the business is owed, trade receivables, from the sale of goods. And the amount the business owes, trade payables.
Measuring Performance
Gross Profit
this is the amount of profit left after the cost of producing the good or service is
deducted from the amount of sales revenue
Net Profit
this is the smaller amount of profit made after all other expenses are
deducted from the gross profit
.
Value owed to the business
this is the
money owed to the business
from sales that have not yet been paid for.
Value owed by the business
this is the
amount of money the business owes
to others for goods or services purchased but not yet paid for.
Reasons for Sourcing Finance
Short Term
Buying stock
Paying a supplier
Small orders for the office (Stationary)
Medium Term
Buying new machinery
Upgrading software
Investing in a website/ app
Long Term
Business growth
Taking on more staff
Opening more stores
Holding more stock
Expanding production