5.1 Business finance needs and sources IGCSE business studies

Summary

This video covers key business finance concepts, including the need for finance in business operations, both short-term and long-term financing, and various sources of capital. It explains internal financing methods like retained profits and asset sales, as well as external options such as bank loans, government grants, and crowdfunding. The video also touches on factors influencing financial choices, such as purpose, time, and cost. The speaker emphasizes the importance of understanding these concepts for IGCSE exams, providing practical examples and tips for students to succeed.

Takeaways

• 😀 Businesses need finance for various reasons, including starting up, expanding, and running day-to-day operations.
• 😀 Short-term finance is typically for less than one year and is used for immediate expenses like wages and materials.
• 😀 Long-term finance is available for more than one year and is often used for capital expenditures, such as purchasing equipment or property.
• 😀 Working capital refers to the funds required to cover a business's daily expenses, which is crucial for smooth operations.
• 😀 Revenue expenditure includes costs for regular operational needs, such as rent, utilities, and salaries.
• 😀 Internal sources of finance include retained earnings, selling assets, and utilizing working capital more effectively.
• 😀 Retained profit is the money a business saves from its earnings and uses for reinvestment or to pay off debts.
• 😀 External sources of finance involve borrowing money from outside parties, such as through selling shares, taking bank loans, or receiving government grants.
• 😀 Debt factoring allows businesses to sell their unpaid invoices to receive money faster, though it may involve a fee and customer relations risks.
• 😀 Alternative sources of finance include microfinance, which offers small loans to businesses without access to traditional capital, and crowdfunding, which gathers funds from many individuals online.
• 😀 When making financial choices, businesses consider factors like purpose, time, amount, and the cheapest available option to meet their financial needs.

Q & A

Why do businesses need finance?

Businesses need finance to start up, expand, and run day-to-day operations. This includes buying land, equipment, advertising, expanding premises, and covering day-to-day expenses such as employee wages and raw materials, often referred to as working capital.

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

Long-term finance refers to funds needed for more than one year, such as for capital expenditures (e.g., buying land, buildings, machinery). Short-term finance is needed for less than one year, often to cover day-to-day operational expenses or working capital.

What is capital expenditure?

Capital expenditure (CapEx) is money spent by a company to acquire, upgrade, or maintain fixed assets like buildings, vehicles, and machinery to increase the company’s capacity or efficiency over a longer term.

What is working capital?

Working capital is the money required to cover a company’s day-to-day operational costs, including expenses such as employee wages, raw materials, and other short-term financial needs.

What is retained profit?

Retained profit is the portion of a company's profit that is not paid out as dividends to shareholders but is reinvested in the business or kept as reserves for future use, such as paying off debt or acquiring capital assets.

What are the internal sources of finance?

Internal sources of finance include money generated within the business, such as owner investments, retained profits, selling assets, utilizing working capital, and better debt collection practices.

What are the advantages of using internal finance?

The main advantage of using internal finance is that it avoids borrowing money and incurring interest payments. Additionally, it gives the business greater control and independence since no external parties are involved.

What is the risk of selling assets to generate finance?

The risk of selling assets is that it may take time to sell them at a reasonable price, potentially resulting in a loss if they are sold quickly at a low rate. Also, once assets are sold, the business may not have them available for future needs.

What are the external sources of finance?

External sources of finance come from outside the business and may include selling shares, taking out bank loans, receiving government grants, and engaging in debt factoring.

What is debt factoring and what are its pros and cons?

Debt factoring is the process of selling unpaid invoices to a third-party company in exchange for immediate cash. The advantage is improved cash flow, while the disadvantage is that the business only receives a portion of the owed amount, and the customer relations may be negatively affected.