Share Issues and Bank Loans as Financing Options

This page delves into share issues and bank loans as sources of finance for businesses.

Share issues allow limited companies to sell shares for extra capital. Public Limited Companies $PLCs$ can sell shares on the stock market.

Definition: A share represents a unit of ownership in a company.

Advantages of share capital include:

• Shareholders benefit from limited liability
• Raised finance doesn't require repayment like loans
• Large amounts of capital can be retained

Disadvantages of issuing shares include:

• Share prices can fluctuate daily on the stock market
• The process can be expensive
• There's a limit to the number of shares that can be issued

Bank loans are another financing option, typically offered for 5-10 years. Commercial mortgages, a type of secured loan, are used to buy business premises like offices or factories.

Example: A retail business might use a commercial mortgage to purchase a new store location.

Debt Factoring and Debentures

This page explores debt factoring and debentures as financing methods for businesses.

Debt factoring involves businesses selling unpaid invoices to a factoring company, which then collects from customers.

Highlight: Debt factoring can improve cash flow by providing immediate payment for outstanding invoices.

Advantages of debt factoring include:

• Debts are often collected at a lower cost than a bank loan
• It saves time and money as debt collection becomes the factor's responsibility
• Cash flow improves due to immediate payments for sold debts

Disadvantages of debt factoring include:

• Factoring companies typically only want large debts, making it unsuitable for all businesses
• Debts are sold at a reduced amount

Example: A manufacturing company might use debt factoring to quickly convert its accounts receivable into cash, improving its working capital.

Debentures are loans borrowed through the stock market. They offer advantages like long-term repayment but have disadvantages such as annual interest payments regardless of profit.

Government Grants and Venture Capital

This section discusses government grants and venture capital as sources of business finance.

Government grants are offered to encourage entrepreneurship and start new businesses. They provide financial assistance and expert knowledge.

Highlight: Government grants can be particularly beneficial for those with poor credit ratings who might struggle to secure traditional financing.

Venture capital involves large loans from individuals or organizations willing to take risks on businesses that banks might consider too risky.

Advantages of venture capital:

• Provides finance to organizations that might otherwise struggle to obtain funding
• Allows for large amounts of capital to be obtained

Example: A tech startup might secure venture capital funding to develop and launch a new innovative product.

Venture capitalists usually part-own the business in return for taking the risk, which can be both an advantage and a disadvantage depending on the business's perspective.

Crowdfunding and Cash Flow Management

This page covers crowdfunding as a financing option and introduces cash flow management concepts.

Crowdfunding involves raising small amounts of money from a large number of people, typically through a website.

Advantages of crowdfunding:

• Allows finance to be raised when banks consider it too risky
• Some funds may be donated, requiring no repayment

Disadvantages of crowdfunding:

• Low success rate, with only a small percentage of ventures succeeding
• Privacy concerns, as ideas can be copied by the public

The page also introduces cash budgeting, highlighting its benefits:

• Allows for future planning
• Identifies need for additional finance
• Helps control expenses
• Aids in evaluating department performance
• Supports decision-making processes

Definition: A cash budget is a financial planning tool that estimates a company's cash inflows and outflows over a specific period.

Cash Flow Improvement and Income Statements

This section focuses on methods to improve cash flow and introduces income statements.

Methods to improve cash flow include:

• Increasing advertising to boost sales
• Offering discounts to incentivize quicker customer payments
• Selling unused fixed assets
• Implementing Just-In-Time $JIT$ stock management to reduce costs and waste

Vocabulary: Just-In-Time $JIT$ is an inventory strategy that aligns raw-material orders from suppliers directly with production schedules.

The page then introduces income statements, also known as profit and loss accounts. These financial documents summarize an organization's income and expenses over a specific period.

Key components of an income statement include:

• Trading account section showing gross profit
• Profit and loss account section showing profit for the year

Definition: Gross profit is the difference between sales and the cost of goods sold.

Understanding Profit and Loss in Financial Statements

This final page delves deeper into the components of profit and loss in financial statements.

Key concepts covered include:

Gross Profit: This represents the money made from buying and selling goods before accounting for other expenses.

Formula: Gross Profit = Sales - Cost of Sales

Profit/Loss for the Year: This is the final profit or loss figure after subtracting all expenses from the gross profit.

Formula: Profit for Year = Gross Profit - Expenses

Expenses: These are the various costs a business must pay that are not directly related to the production of goods or services.

Example: Expenses might include utility bills, rent, or administrative costs.

The page emphasizes that the profit or loss recorded should accurately reflect the company's trading performance for the given period.

Highlight: Understanding these financial concepts is crucial for effective business management and decision-making.

Expenses and Financial Analysis

This final page discusses business expenses and their impact on financial statements.

Expenses are the costs that an organization has to pay, such as utility bills $e.g., gas$ or rent. These expenses are subtracted from the gross profit to determine the final profit or loss for the year.

Understanding and managing these expenses is crucial for maintaining profitability and making informed business decisions.

Vocabulary: Expenses - The costs incurred by a business in the process of generating revenue.

Highlight: Careful management and analysis of expenses are essential for maintaining a healthy profit margin and ensuring long-term business success.

Page 8: Blank

Sources of Finance: Retained Profits and Asset Sales

This page introduces two important sources of business finance: retained profits and sale of assets.

Retained profits refer to the portion of a company's earnings saved for reinvestment. This method offers several advantages:

Highlight: Retained profits don't require repayments or interest, and they don't dilute control by bringing in additional investors.

However, there are also disadvantages to consider:

Example: Shareholders might be upset due to lower dividend payouts from profits.

The sale of assets involves selling items the business no longer needs, such as equipment or vehicles. This method has its own set of pros and cons:

Advantages of using retained profit for expansion include no need for repayment and improved cash flow. A potential drawback is that assets may be sold below their actual worth.

Vocabulary: Cash flow refers to the movement of money in and out of a business.