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All the information for topic 3 IB Business Management HL
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All the information for topic 3 IB Business Management HL
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Rocío Fernández Martín 1º F (IBDP)Busines management
unit 3: Finances
3.1 Introduction to finance
Most businesses need money to get started and to continue operations. Over time, businesses
will need money to continue operating. Occasionally, they may need to spend a large amount
of money. For example, they could decide to expand their business to another location and set
up another shop. At this point, they may need more money than they have available. If this is
the case, they might seek additional funding from a Key terms
bank or another external source. • Finance: Refers to the various
available money that an organization
has to fund its business activities.
Finance is the process of acquiring and managing
• Capital expenditure (purchase of
money for a business. Accounting is the process of
equipment): Refers to business
recording money flows and assets (something that a spending money on fixed assets or
company owns, usually long-term) for a business. capital equipment of a business.
Finance is necessary for all businesses, from starting • Revenue expenditure: Refers to
business spending money on its
up a new business to day-to-day operations and for
everyday and regular operations.
growth. All business organizations need funding or • Assets (property, resources): fixed
finance for the various activities they undertake. assets / current assets
Þ A capital-intensive company is one that needs • Liabilities (debts): long-term liabilities /
a lot of money to work properly, which is current liabilities
• Revenues (income = sales and other
usually invested in machinery
types of income)
The purpose, or role, of finance, can be characterized • Payments
as either capital or revenue expenditure, both of which • Costs
are equally important for businesses. • Profits
,Rocío Fernández Martín 1º F (IBDP)
Capital expenditure (capex)
Capital expenditure in the long-term investment to generate revenues. Refers to the money
spent in buying fixed assets that last more than a year (long-term assets). Fixed assets are
used over and over to generate income for the business in the long term. Usually, fixed assets
have a high price and are bought with loans. Examples of fixed Revenues = income
assets include purchases of land, buildings, and machines. Sales = Q x price
Capital expenditure is the long-term investment in these assets. Profit = income – cost
Without capital expenditure, a company cannot grow. Revenues ≠ profit
Cost ≠ price
Revenue expenditure
Revenue expenditure refers to the money spent in a day-to-day basis, spending on a
company’s general operational costs. It is best thought of as the day-to-day running costs of
a company. Examples of revenue expenditure include:
• utility bills, such as gas, electricity and
water
• paying wages and salaries to workers
• paying suppliers
• settling tax bills with the government
• repayments of debts, such as
mortgages and loans
If a business cannot pay for its revenue expenditures, it will go out of business rapidly. This is
referred to as insolvency. Revenue expenditure is funded using short-term or medium-term
sources of finance.
3.2 sources of finance
Finances are needed to start a business, because you need to invest more money at the
beginning, also for day-to-day activities and growth. But all funding sources come with
consequences that can include risk, issues around ownership and control, and potential
conflicts with the purpose and values of the business.
The sources of finances can be, like growth, both internal (personal funds, retained profits,
sales of assets) and external (loans, shares, trade credit, leasing, crowdfunding…).
,Rocío Fernández Martín 1º F (IBDP)
Sources of finances by time
Sources needed for the day-to-day stuff are
short-term, long-term if it is for more than
one year. The short/long term is
the goal, but you can pay a long-
term goal in a short-term period of time
(f. ex. if you pay the price of something all in the same day).
Short-term
Are those repaid within less than one year. Some external sources of short-term finance tend
to be expensive, so should not be used to finance capital expenditure. It is also often used to
solve cash flow, and working capital problems and to pay revenue expenditures. Short-term
sources of finance are funds that do not last longer than one year from the balance sheet
date. Examples of short-term finance include:
• Personal savings (internal)
• Sale of assets (internal)
• Overdrafts (external)
• Trade credit (external)
Medium-term
Are those that last longer than one year but less than five years. The most commonly used is
a bank loan. This would normally be used to finance capital expenditure or to purchase a fixed
asset. Leasing and subsidies can also be medium-term sources of finance if they are used for
an extended period of time.
Long-term
Are those that will be used for more than five years. All forms of equity finance are included
in this category. Equity finance is essentially never-ending. Mortgages are also long-term
sources of finance. Examples of long-term sources of finance include:
• Share capital
• Loan capital Equity finance is where
the provider receives
• Leasing
part ownership of the
• Business angels
business in exchange of
• Microfinance providers (could be both)
finance
, Rocío Fernández Martín 1º F (IBDP)
• Crowdfunding
Internal sources of finance
Is money that is raised from the business or owner’s existing assets. Internal sources of
finance involve using money the business or owner has previously earned. These sources do
not have to be repaid, so there is less risk or cost associated with using them when compared
to external sources. There are three main internal sources of finance: personal funds, retained
profit, and sale of assets.
Personal funds
Personal funds are an internal source of finance that comes from the savings (personal funds)
of the business owner that are used to finance their start-up.
This investment comes with a risk for the owner: if the business goes bankrupt, the money will
be lost. In a partnership, it is likely that the partner who invests the greatest amount of personal
funds will receive the most profits and greatest control over the business.
For sole traders and companies with little experience, personal funds may be the only source
of finance available to them. However, even the owners of larger established companies may
be forced to invest their own funds in times of crisis, like recession and periods of falling sales.
Pros Cons
• No need to be repaid. • Sole traders assumed high personal risks
• No interest charges incurred either, in investing their or their family’s
unlike with external finance. savings, in the business.
• The sole trader has much more control • Personal funds are rarely sufficient for
over the business finances most small businesses
• The fact of investing their personal
funds shows a greater commitment to
the business (future investors will
perceive it as very positive).
Retained profits
Companies usually distribute a portion of their profits to shareholders at regular intervals,
known as dividends (financial reward for the owners).
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