Summary IB Business management HL Revision notes. Chapter 3: Sources of finance
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Module
Business economics
Institution
Bachillerato
Book
Business and Management
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3.1 Sources of finance
1 Role of finance farbusiness capital and revenue expenditure
The purpose of finance can be categorized as capital and revenue expenditure
Capitalexpenditure finance spent on fixed assets that will assist in Theproduction ofother
goods forlongtermHighcost
Revenue expenditure payments
of finance spentin Thedaily running of The business
eg wages rent raw materials
2 Internal sources
of finance
ThesecomewithinThebusiness resources
s 1 PERSONAL FOUNDS Own doesnotapplyforacompany
moneybusiness
SAL2 RETAINEDPROFIT Thatitcan reinvest It no interest charges
Profitskept
by
s 3 SALEOFASSETS Selling unused fixedassets oldmachineryand equipment
3 External sourcesof finance
Thesecome outside thebusiness
from
1 SHARECAPITAL Mainsource farlimited liability companies Companysellshares to obtainshare
capital Initialpublicoffering Shareissue issuemoreshares tHugeamountoffinas
Mk 2 LOAN CAPITAL Mediumtolongterm finance obtained from commercial lendersFixed variab
interest
MortgageSecuredloanforpurchase borrowerfailstorepay Then
of
property
lenderloan repossess property If
Debentures longtermloans issued
bya business Debentureholders receive interests
payments before shareholders be
arepaid dividendsInterest can fixed
or variable Novoting rights debenture holders
for
Longterm financewithout losing control
Business developmentloan Meet the needs any the borrowerHighlyflexible loans
S 3 OVERDRAFTS Allows a business totemporarily takemore
of Than
money ithas in it'saccount
Farminor cashflow problemsShortterm
High interest dailybasis
Repayable andemandfromThe lender Major disadvantage
S 4 TRADECREDITS Allows businesses tobuynow andpaylaterCreditors are those who offerthe
credit and debtors are borrowers
Shortterm Creditcards aresimilar except The creditor is a financial
institution instead
ofanother business
Mi5 GRANTS Refers to government financialgifts Thatareone off paymentsUsuallyfor
startups ortohelp simulate economic activity HARDTOOBTAIN
6 SUBSIDIES Provided bygovernments to reduce costs of a business toensure its
survival or lower The prices Encourage certain production like Health
Services
, 7 DebtFactoring RecoupingThe mamey owed by debtors Through a financial service
80 85 ofThe mamey Serviceproviders chases thedebtors loyalty
High fees is charged The service providers
by
8 LEASING A form ofhiring where Thelessee paysrental income tohire assets from1h
mi lessorForbusinesses whocannot
buyThe asset
Saleand Lease book Selling a fixed asset and immediately leasing itback
Ownership is transferred though asset doesn't physically lea
business
Hirepurchase Payment in installments tobuy The asset legally It is leased
by The lessee Thewhole time Difference from leasing
That herThe lessee eventually owns the asset
is
9 VENTURE CAPITAL High risk capital inform ofloans or sharesMustshowcaminan
business
plans toventure capitalistsTheyalso provide strategic advice
Sharktank
10 BusinessAngels Wealthy individuals whoinvest in highrisk high return ventures
Mi They invest in small businesses
venture capitalists
That don't attract attention
of
4 Shortmedium and longterm finance
ShorttermWithin the current fiscal year
MediumtermWithin One to five years
Longterm Overfiveyears
ButThe range varies from business to business
short Medium Long
Internal sources
1 PersonalFunds
2 RetainedProfits
3 Saleof Assets
Externalsources
IBusiness Angels
2 Debentures
3 DebtfactoringDebtors
4 Government grantsand v u v
subsidies
5 Leasing v u v
6 LoanCapital r r
7 Overdrafts
8 Sharecapital
9 TradeCreditloeditors
10 Venture capital
5 Appropietness advantages and disadvantages
ofsources of finance
, 3.2 COSTS AND REVENUES
COST ReferstoThe expenditure in productionPrice isthe amount paid byThe customer
whenproduct is sold
1 Typesofcost FixedVariable semivariable directindirect overhead
Fixedcosts costs Thatare independent output andpayable regardless
ofbut ofThe level
of production Theycan change independently at
from put
Eg interestpayments onbanks management salaries rent
costsa r
Tro
sooo ir TFC AFC O
units
outputs
Variablecosto cost of production that are proportional to output ar sales
costsa EgRawMaterials
TC TVC t TFC
aoutput
Ivnits
TVCwww.cosrs
AVEXunir O
semivariable costs These areboth fixedand variable atdifferent extents they
change when production exceeds a limitar level
Eg Telephone billquota Fixedandthen variable
salesmen r Fixed and Thenvariable Comission
Directcosts costs specifically related to an individual project orThe atput of a
particular project Canbe fixed ar variable
Fixed Salaryof project manager
Variable Cost of raw materials
Indirectcosts Overheads CostsThat cannotbe traced to The production ar sale of
any single product egrent advertising Thebrand
2 Total revenue andrevenue streams using examples
Revenue Moneyflowing into abusiness usually from sales
of goods and services
Sales revenue PRICE QUANTITY SOLD
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