IGCSE Business studies 0450 - 5.1 - Business Finance

Summary

This video provides an in-depth exploration of business finance, focusing on the different needs and sources of funding for businesses. It covers internal finance options like retained profits, asset sales, and owner savings, as well as external options such as bank loans, shares, debentures, and crowdfunding. The video also discusses short-term and long-term finance solutions, including overdrafts, hire purchase, and leasing. Factors like purpose, time period, amount, and risk are explored to help businesses make informed decisions about financing. It concludes with advice on how to secure financing from banks and shareholders.

Takeaways

• 😀 Finance is essential for setting up, expanding, and running a business, with startup capital for initial expenses and working capital for daily operations.
• 💡 Retained profits, sale of assets, and owner's savings are internal sources of finance that businesses can use, with the advantage of no repayment or interest.
• 📉 New businesses often lack retained profit, and the sale of assets might take time and may not yield the expected amount.
• 💰 External finance options include issuing shares (for limited companies), bank loans, debentures, and crowdfunding, which provide businesses with more funding but may involve repayment or loss of control.
• 💳 Bank loans are quick to arrange but come with interest costs and may require collateral, while debentures involve long-term repayment with interest.
• 📊 Crowdfunding and microfinance provide small businesses with accessible finance through donations or small loans from individuals or specialized institutions.
• 📅 Short-term finance options like overdrafts and trade credits help businesses manage their daily expenses, offering flexibility but with varying costs and risks.
• 🏢 Long-term finance options include loans, hire purchase, leasing, and sale-and-leaseback arrangements, which allow businesses to spread payments over time but may involve higher total costs.
• 📈 The choice of finance depends on the business’s needs, including the purpose, time period, amount needed, legal form, and risk appetite.
• 📉 A high level of borrowing (gearing) increases financial risk, so businesses must be cautious when taking on new loans or issuing debentures.
• 🏦 Banks and shareholders are more likely to lend or invest if a business provides strong evidence of its financial health, including forecasts, income statements, collateral, and a clear business plan.

Q & A

What is finance in the context of business studies?

Finance is the money required by a business to set up, operate, expand, and manage its day-to-day activities.

What is the difference between startup capital and working capital?

Startup capital is the initial money used to buy fixed and current assets before trading begins, whereas working capital is the money needed for the daily running expenses of a business.

What are capital expenditure and revenue expenditure?

Capital expenditure is money spent on long-term assets like buildings, machinery, or vehicles that last more than a year. Revenue expenditure is spent on day-to-day operations such as wages and rent and does not involve long-term assets.

What are internal sources of finance, and can you give examples?

Internal finance comes from within the business itself. Examples include retained profit, sale of existing assets, sale of inventories, and owner’s personal savings.

What are the main advantages and disadvantages of using retained profits as a source of finance?

Advantages: does not need to be repaid and no interest is charged. Disadvantages: new businesses may not have retained profits, profits may be too low, and using more profit reduces the owner's share.

What is the difference between short-term and long-term finance?

Short-term finance is used for daily operations and working capital needs, usually less than a year. Long-term finance is available for more than a year and is used for major investments or expansion, like loans, share issues, or leasing.

What factors affect a business's choice of finance source?

Factors include the purpose of finance, time period, amount needed, legal form and size of the business, desire for control, and the risk or gearing involved.

How do banks and shareholders assess whether to provide finance to a business?

Banks look at cash flow forecasts, past and forecasted income statements, existing loans, and available collateral. Shareholders consider share price trends, profits, dividends, company reputation, and future growth plans.

What is the difference between a bank loan and a debenture?

A bank loan is borrowed money that must be repaid with interest over a specified period, often requiring collateral. A debenture is a long-term loan certificate issued by a company, repaid after a set period with interest, and can be used to raise very long-term finance.

How do overdrafts and trade credit help businesses with short-term finance?

Overdrafts allow businesses to spend more than their account balance and pay interest only on the overdrawn amount. Trade credit lets businesses delay payments to suppliers, improving cash flow without paying interest, though delayed payments may affect future supply relationships.

What is the concept of leasing and sale and leaseback?

Leasing allows a business to use an asset by paying monthly fees without purchasing it. Sale and leaseback involves selling an asset to get cash and then leasing it back from the leasing company, freeing up capital while continuing to use the asset.

What is crowdfunding and how does it serve as a source of finance?

Crowdfunding raises small amounts of money from a large number of people, often via platforms like Kickstarter. The funds are voluntary and do not need to be repaid or pay dividends, providing an alternative source of finance.