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        • 2.1 The functions and evolution of human resource management
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      • Unit 3: Finance and Accounts >
        • 3.1 Sources of Finance
        • 3.2 Costs and Revenues
        • 3.3 Break-even analysis
        • 3.4 Final accounts
        • 3.5 Profitability and liquidity ratio analysis
        • 3.7 cash flow
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3.1 sources of finance 

For this chapter, you should be able to...

1. explain the PURPOSE OF FINANCE FOR BUSINESS in terms of capital expenditure and revenue expenditure
2. comment on INTERNAL SOURCE OF BUSINESS
3. comment on EXTERNAL SOURCE OF BUSINESS
4. define SHORT-, MEDIUM-, AND LONG-TERM FINANCE

​


1. purpose of finance for business

All forms of business need funding for the business activities, so they always need to ascertain on the purpose of their finance.
The purpose of finance = either capital expenditure or revenue expenditure
  • Capital expenditure
​         ​= Firms' investments in new equipment, items that will last for more than a year
         = Also known as money spect to acquire fixed assets
            e.g. machinery, vehicles, office buildings, and land
  • Revenue expenditure
         = Payments for goods and services which have already been consumed or will be in the near future
         = Also known as money spent on the day-to-day running of a business
            e.g. wages, raw materials, insurance, and fuel

TIP! : Try not to use "Money" in your exam!
          "Money" is a vague term and can refer to different concepts like profit, investment, payment, and more. Use these terms
          instead of "money" to make your answers more specific and knowledgeable.

2. Internal sources of finance

Internal finance = obtained within the business (usually earned through business activities)

Types of Internal finance:
  • Personal Funds
​         = Key source of finance for sole traders 
         +) cheap and easily available, no interest will be paid
         - ) have a great risk as it is investing own personal life savings
  • Retained Profit​
         = Profit that remains after a business has paid tax and dividends
         +) cheap because it does not charge interest, flexible and permanent source of finance
         - ) high retained profit = very little was paid out to shareholders as dividends
  • Sales of Assets
​         = When a business sells its unwanted or unused assets to raise finance
         +) can tie up assets that are not being use without any interest or borrowing costs
         - ) may lack excess assets to sell, may be time-consuming to find a buyer
​

3. External sources of finance

External finance = obtained from sources outside the business

Types of External finance: 
  • Share Capital 
         = Raised from the sale of shares of a limited company (LTD, PLC). Also known as equity capital
         ​+) permanent source of capital, no interest payments
         - ) have to pay dividends to shareholders when the business makes a profit

  • Loan Capital
         ​= Sourced from financial in financial institutions such as banks. Also known as debt capital
         +) accessible, can be arranged quickly
         - ) have to be redeemed, high interest may be a burden

  • Overdrafts
         ​= When a lending institution allows a firm to withdraw more money than it currently has in its account
         +) provides opportunity to spend more than a business has in its account, flexible form of finance
         - ) banks can ask for paying back at very short notice, banks may charge high interest rates

  • Trade Credits
         ​= An agreement between businesses that allows the buyer of goods or services to pay the seller at a later date
         +) delaying payments to suppliers -> businesses have a better cash-flow position, an interest-free means of raining funds
         - ) delaying payments can lead to having poor relations -> suppliers may refuse to engage in future transactions

  • Grants
         ​= Funds usually provided by a government, foundation or other agency that do not need to be repaid
         +) no need to pay back
         - ) competition for grants is fierce, most grants are short-term

  • Subsidies
         ​= Financial assistance granted by a government or NGO to support business enterprises that are in the public interest
         +) helps businesses to increase their demand for goods by charging lower prices for their products
         - ) subsidies are often marred by political interference in the subsidization process

  • Debt Factoring
         ​= When a business sells its invoice to a third party known as debt factor
         +) business gets immediate cash , risk of collecting the debt is passed onto the factor
         - ) business loses % of its profits because it does not receive the full debt repayment
  • Leasing
         ​= A source of finance that allows a firm to use an asset without having to purchase by cash
         +) no large sums of money allocated for purchasing the asset, useful when equipment is used occasionally
         - ) interest rates are higher, not able to secure any loans with another institution on assets that are leased

  • Venture Capital
         ​= Financial capital provided by investors to high-risk, high-potential start-up firms or small businesses
         +) venture capitalists provide funding to businesses that other institutions might regard as too high a risk
         - ) venture capitalists may set very high profit targets for the start-up businesses they invest in

  • Business Angels
         ​= Provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses
         +)  more favorable than other institutions -> because they invest in the person rather than how viable a business venture is. 
         - ) may assume a good degree of control in the business they invest in = diluting the ownership of the business
​

4. Short-, medium-, and long-term finance

  • Short-term finance
         = needed for day-to-day running of a business
         = finance that lasts for one year or less (external short-term finance is expected to be paid within 12 months)
         e.g. bank overdrafts, trade credit, and debt factoring
  • Medium-term finance
         = needed for purchasing assets that have lifespans for specific period of time (equipment, vehicles)
         = finance that lasts for 1 ~5 years
         e.g. leasing, medium-term bank loans, and grants
  • Long-term finance
         = needed for purchasing long-term fixed assets or other expansion requirements
         = finance that lasts for more than 5 years
         e.g. long-term bank loans and share capitals
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  • Home
  • IB STUDY MATERIALS
    • Psychology SL/HL >
      • Tips & Guide
      • Biological Approach >
        • Brain and Behaviour
        • Hormones and Pheromones
        • Genetics and Evolution
        • HL Animal Research
      • Sociocultural Approach >
        • Individual and the group
        • Cultural Origins
        • Cultural Influences
        • HL Globalization
      • Cognitive Approach >
        • Cognitive Processing
        • Reliability of Cognitive Processes
        • Emotion and Cognition
        • HL Digital World
      • B. Human Relationships >
        • Personal Relationships
        • Group Dynamics
      • D. Developmental >
        • Developing as a Learner
        • Developing an Identity
      • Studies >
        • Biological Approach
        • Sociocultural Approach
        • Cognitive Approach
        • B. Human Relationships
        • D. Developmental
    • Chemistry SL/HL >
      • Tips & Guide
      • All Vocab Definitions
      • ALL EQUATIONS
      • Unit 1,2 & 12
      • Unit 3 &13
      • Unit 4 &14
      • Unit 5,6,7 & 15,16,17
      • Unit 8 & 18
      • Unit 9 & 19
      • Unit 10 & 20
      • Unit 11 & 21
      • Option D: Medicinal Chemistry >
        • D.1 PHARMACEUTICAL PRODUCTS AND DRUG ACTION
        • D.2 Aspirin and penicillin
        • D.3 Opiates
        • D.4 pH Regulation of the Stomach
        • D.5 Antiviral Medications
        • D.6 Environmental impact of some medications
        • D.7 Taxol- A Chiral Auxiliary Case Study
        • D.8 Nuclear Medicine
        • D.9 Drug Detection and Analysis
    • Biology SL >
      • Tips & Guides
      • TOPIC 1: CELL BIOLOGY >
        • 1.1 Introduction to cells
        • 1.2 Ultrastructure of Cells
        • 1.3 Membrane Structure
        • 1.4 Membrane Transport
        • 1.5 Origin of Cells
        • 1.6 Cell Division
      • TOPIC 2: MOLECULAR BIOLOGY >
        • 2.1 Molecules to metabolism
        • 2.2 Water
        • 2.3 Carbohydrates and Lipids
        • 2.4 Proteins
        • 2.5 Enzymes
        • 2.6 Structure of DNA and RNA
        • 2.7 DNA Replications, Transcription and Translation
        • 2.8 Cell Respiration
        • 2.9 Photosynthesis
      • Topic 3: Genetics >
        • 3.1 Genes
        • 3.2 Chromosomes
        • 3.3 Meiosis
        • 3.4 Inheritance
        • 3.5 Genetic Modification and Biotechnology
      • Topic 4: Ecology >
        • 4.1: Species, Communities and Ecosystems
        • 4.2 Energy Flow
        • 4.3 Carbon Cycling
        • 4.4 Climate Change
      • Topic 5: Evolution and Biodiversity >
        • 5.1 Evidence for evolution
        • 5.2 Natural Selection
        • 5.3 Classification and Biodiversity
        • 5.4 Cladistics
      • Topic 6: Human Physiology >
        • 6.1 Digestive System
        • 6.2 The blood system
        • 6.3 Defense against infectious disease
        • 6.4 Gas Exchange
        • 6.5 Neurons and Synapses
        • 6.6 Hormones, Homeostasis and Reproduction
    • Physics SL >
      • Must-have Resources
      • Full Study Resources
      • Other Resources
      • Tips & Guide
      • IA, Lab Report
      • Topic 1: Measurements & Uncertainties
      • TOPIC 2: MECHANICS
      • TOPIC ​3: THERMAL PHYSICS
      • Topic 4: Waves
      • Topic 5: Electricity & Magnetism
      • Topic 6: Circular Motion & Gravitation
      • Topic 7: Atomic, Nuclear, & Particle Physics
      • Topic 8: Energy Production
      • Option D: Astrophysics
    • Geography SL/HL >
      • Tips & guide
      • Unit 1: Changing population
      • Unit 2: Global climate—vulnerability and resilience
      • Unit 3: Global resource consumption and security
      • Unit 4: Power, Places and Networks
      • Unit 5: Human Development and Diversity
      • Unit 6: Global Risks and Resillience
      • Option A: Freshwater
      • Option B: Ocean and Coastal Margins
      • Option C: Extreme Environments
      • Option E: Leisure, tourism and sport
    • Business SL/HL(pending) >
      • Tips & guides
      • Unit 1: Business Organization and Movement >
        • 1.1 Nature of Business
        • 1.2 Types of Organizations
        • 1.3 Organizational objectives
        • 1.4 Stakeholders
        • 1.5 External Environment
        • 1.6 Growth and evolution
      • Unit 2: Human Resource Management >
        • 2.1 The functions and evolution of human resource management
        • 2.2 Organizational structure
        • 2.3 Leadership and management
        • 2.4 Motivation
      • Unit 3: Finance and Accounts >
        • 3.1 Sources of Finance
        • 3.2 Costs and Revenues
        • 3.3 Break-even analysis
        • 3.4 Final accounts
        • 3.5 Profitability and liquidity ratio analysis
        • 3.7 cash flow
      • Unit 4: Marketing >
        • 4.1 The role of marketing
        • 4.2 Marketing Planning
        • 4.4 Market Research
        • 4.5 The four ps
        • 4.8 E-commerce
      • Unit 5: Operations Management >
        • 5.1 The role of operations Management
        • 5.2 Production methods
        • 5.4 Locations
    • Economics SL/HL (pending) >
      • Tips & guides
      • MICROECONOMICS >
        • 1.1 Competitive Markets: Demand and Supply
      • macroeconomics
    • Chinese B SL >
      • Oral Example
    • Extended Essay (EE) >
      • General Tips
      • Physics EE
    • Internal Assessment (IA) >
      • General Tips
    • Theory of Knowledge >
      • Essay Example
      • Presentation Example
    • Other notes >
      • Topic 1: Measurements and Uncertainties
      • Topic 2: Mechanics
      • Topic 3: Thermal Physics
      • Topic 4: Waves
      • Topic 5: Electricity and Magnetism
      • Topic 6: Circular Motion and Gravitation
      • Topic 7: Atomic, Nuclear and Particle Physics
      • Topic 8: Energy Production
      • Option D: Astrophysics
    • Other Citations
  • UNI application
    • United States
    • United Kingdom >
      • Academic Schools
      • Art & Design Schools
    • China
    • Japan
    • Hong Kong
    • Canada (pending)
    • Australia (pending)
  • our warm advice
    • academic advice!
    • Toxic Productivity
    • Finding Your Balance
    • Giving Up
    • YOLO?
    • Are grades important
    • Danger of Quotes
    • How to Destress
  • About us