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Summary Business finance and sources
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Typed out summary of section 5 financial information of business IGCSE
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Business igsce business (0450)Section 5 Financial Information and decisions
Business Finance: Needs and sources
What do finance departments do?
Þ Finance department for fulfill an important role in the
business.
Þ Recording all financial transactions.
Þ Preparing final account.
Þ Producing accounting information.
Þ Forecasting cashflows
Þ making important financial decisions.
The business needs finance because finance is money. The
business needs the money to purchase the goods and services
they require.
Finance, otherwise known as capital, is needed for starting up
the business, expansion of an existing business or additional
working capital.
Starting up a business
When an entrepreneur is thinking of starting up a business,
they need to consider. All the buildings, land equipment, labor,
all things involved with business costs, etc.
Noncurrent or fixed assets- things like equipment or buildings.
To start the business, you need capital this is called startup
capital.
Expansion of an existing business
Owners of successful businesses may want to. Expand the
already existing business. They may do this by a takeover. Or
developing new products to reach new markets.
Additional working capital.
, Working capital is needed for the day-to-day running of a
business. The business may need finance to pay for either
capital expenditure or revenue expenditure.
Capital expenditure is money spent on non-current assets.
These assets are needed at the start of the business.
Revenue expenditure is money spent on day-to-day expenses.
Sources of finance.
Internal or external sources of finance.
Short term or long-term sources of finance.
Internal finance
The most common are:
Retained profits.
Þ This is kept in the business after the owners have taken
their share of the profits.
Þ Advantages
Þ Does not have to be repaid.
Þ No interest to pay as capital is raised within the business.
Þ Disadvantages
Þ A new business will not have retained profits.
Þ A small business might not have enough profits to finance
expansion.
Þ Keeping profits in the business reducers owners profits.
Sale of existing assets.
Þ Assets that can be sold. They have value and they are no
longer needed by the business.
Þ Advantages
Þ Makes better use of capital tied up in the business.
Þ Does not increase debts of the business.
Þ Disadvantage.
Þ May take some time to sell assets.
Þ The source of finance is not available for new businesses
as they have no surplus of assets.
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