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FINANCE
CHAPTER 15
CHAPTER OVERVIEW
Capital
The money invested into a business either by its owners or by organizations such as banks
Usually used to purchase assets
Share capital
The money invested into a company by shareholders when they buy shares
Loan Capital
Money invested by a business as a result of borrowing
Asset
Any item owned by a business that can generate income for the enterprise
Non-current assets
Assets that a business expects to hold for one year or more
Property, vehicles, equipment, investment in other firms, etc.
WHY BUSINESSES NEED
CAPITAL
Capital is the money invested into a business either by its owners or
by organizations such as banks
Usually used to purchase assets
There are two major circumstances in which a business needs to raise
capital:
1. When it is first started
Referred to as start up capital
Likely to be small as an entrepreneur starting a new business is unlikely
to have access to large amounts of finance
Banks and investors may be unwilling to invest in an untried enterprise
Typically used to purchase assets needed to begin trading
WHY BUSINESSES NEED
CAPITAL
Many new businesses will use capital to purchase non-current assets
Most will finance market research, promotion, establishing brand identity
Needs for capital differ depending on the business
A manufacturing business
Buy a lease for a factory for an agreed upon period of time
Will also need to buy machinery and vehicles
Start-ups supplying services
Purchase leases on shops or offices
Non-current assets
Assets that a business expects to hold for one year or more
Property, vehicles, equipment, investment in other firms, etc.
CASE STUDY: CREATING A
STORM OF INTEREST
1. Explain how an entrepreneur starting a new business as a company
might raise the capital needed to start the business.
Might create a private company allowing the firm to sell shares
May have friends or family invest
2. Discuss the reasons why Key is Ng was able to start the Storm
Creative Events Agency with so little start-up capital.
It provides a service and will not need to purchase lots of non-current
assets
May only require a small staff and would not need to invest in much
training
WHY BUSINESSES NEED
CAPITAL
2. When it expands
Increase sales of existing products
Enter new markets
Develop new products
Take over another business
SOURCES OF FINANCE FOR
START-UPS AND EXPANSION
Start-up capital Capital for expansion
Possible sources of finance include: Possible sources of finance include:
owners finance: savings, sale of shares (possibly using a
redundancy pay, etc. Stock Exchange)
money borrowed from friends sale of non-current assets that are
and family not used
bank loans loan capital banks may be willing
funds invested by outsiders, for to lend for expansion
example, venture capitalists. profits retained in the business
from previous trading periods.
USES AND SOURCES OF
FINANCE
Loan capital
Raised from financial organizations such as banks
If a firm is expanding they are more likely to get a loan as they will have a track
record of successful trading and an established customer base
The business will also have assets to use as collateral
Share capital
Funds raised in exchange for an ownership interest in the company in the form
of shares
Easier for large firms trading on the Stock Exchange
USES AND SOURCES OF
FINANCE
Retained profits
Can only be used if a company is established and profitable
Not available for start-up businesses
Venture capital
Investments from wealthy individuals or organizations
Normally offered as a mix of loan and share capital
Unlikely to provide large sums of finance
Typically used by start-ups
WORKING
CAPITAL
15.2
WORKING CAPITAL
A general rule states that if a business has borrowed more than half
the total capital raised, further loans are too risky for banks
CHOOSING AN
APPROPRIATE
SOURCE OF
FINANCE
15.6
CHOOSING AN APPROPRIATE
SOURCE OF FINANCE
When making judgements on the most appropriate source, managers
will have to consider a range of factors:
The businesss financial situation
Is the business profitable? If so it can used retained profits as a source of
finance
Can be used to provide evidence to banks and other creditors that it
can repay loans