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IB Business Management Topic 3 - Study Guide/Revision Notes for FINANCE AND ACCOUNTS $10.49   Add to cart

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IB Business Management Topic 3 - Study Guide/Revision Notes for FINANCE AND ACCOUNTS

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A complete study guide and revision notes for the IB Diploma Business Management program. I achieved a 43 predicted in the IB program and scored a 7 overall for my HL final business management grade by using these notes to study. These notes include all aspects listed in the IB syllabus as well...

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  • June 27, 2020
  • 40
  • 2019/2020
  • Study guide

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TOPIC 3.1

Capital expenditure
- Refers to the spending on a firm’s capital assets & the long term-investment a business has in
these assets
- Capital assets = an asset that the business owns which will stay in the business for a long period
of time
- Investing in capital expenditure allows a firm to progress in the future

Examples
➔ Purchases of land, buildings and machines

Revenue expenditure
- Refers to the spending on a firm’s general operational costs (operational costs include both
variable and fixed costs)
- It is funded using short term or long term sources of finance
- It is the cost a firm has to pay on a daily/weekly/monthly basis in order to stay in business
- If a firm cannot pay revenue expenditure, it will go out and business rapidly (insolvency), where
employees will refuse to work & utility companies may shut off supplies

Examples
➔ Paying wages & salaries to workers, suppliers, utility bills, tax bills & repayments of debts
(mortgages & loans)

Forms of Revenue Expenditure



Rev. Expenditure Examples

Premises Costs (building costs) Renovations/repairs Heating Lighting

Staff Costs (maintenance & Travelling overseas to
retaining of workers) recruit new staff members

Administrative Costs Visas for new staff Rental contracts for Health insurance/medicals
(‘paperwork’ that goes with staff for staff
running a business)

Selling & Distribution Costs Marketing Websites
(efforts to attract customers to
product)

Finance Costs (external sources Interest of loans Mortgages/rent Leasing of cars to employees
of debt finances/banks)

Stock Purchases (inventory) Warehouses to store Cost of

, materials storage/warehousing



Financial Management Planning/Strategies
➔ The planning & monitoring of a business's financial resources in order to allow it to achieve its
long term financial goals

Strategic Planning (capital & revenue expenditure)
Occurs from 3-5 years but can take up to 10 years
E.g: become a market leader in the aviation industry (needs assets & marketing)

Tactical Planning (capital & revenue expenditure)
Occurs between 1-2 years
E.g: increase the size of the fleet (increasing assets)

Operational Planning (revenue expenditure)
Occurs day to day basis
E.g: Undertake a research of new planes & train the staff

Financial Objectives
1. Profitability
2. Growth
3. Efficiency (most output generated from least amount of input)
4. Liquidity (cash availability)
5. Solvency (assets are greater than liabilities)

Acronym: P LEGS




Internal Sources of Finance

,Personal Funds/Owner’s Equity
- Money invested by the owner(s) of a business
- Equity finance
- It may be short/medium or long term loan
- May cause loss on any potential interest on savings &
savings in general
- Very risky investment - owners at risk for losing own
funds if company goes bankrupt

Used by:
- Sole traders or partnerships/companies with little
experience when personal funds are only available finances
- To start up a business
- Owners of larger companies in times of a crisis

Retained Profit
- Essentially the company’s savings & the money it has leftover after paying all expenses, costs,
dividends and taxes at the end of each trading year
- Equity finance & primary source of finance
- Retained profits do not have to be repaid - not stuck in debt
- May take many years before funds are in place - potential lost sales while waiting for retained
profits to be of sufficient size & loss of dividends

Used by:
- When a business wants to invest a new capital project (new building) - may choose to save up
retained profits to pay for project
- Primary source of finance for most companies


Sale of assets
- When a corporation is in need of some cash, it may choose to sell one of its fixed assets.
- Raises massive amounts of money which can be reinvested into new projects
- Loan length depends on asset size
- It is unlikely that money raised from sales of assets will be sufficient enough alone, therefore
additional finance sources are needed

Used by:
- When a company changes objectives & needs funds to invest in a new strategy
- When a company wants to update technology




External Sources of Finance

, Equity Finance
- When investors offer equity finance, in return they demand ownership of a part of the company


Advantages Disadvantages

Does not have to be repaid unless owner leaves business Lower profits and lower returns for owner of business
(no interest - cheaper than other payment sources)

Investors who contribute equity have control over finance Expectation that an owner has to return the investments
in a business to shareholders (dividends)

Less risk for business & owner Loss of control/ownership of business

Low ‘gearing’ (uses resources of owner and no external
sources of finance)


Share Capital
- Money/capital raised through the issue of shares, by selling shares to new investors on the stock
market
- Equity finance
- It is a long term loan
- Suitable for companies & corporations, to raise vast amounts of money




Business Angels

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