SotE Chapter 9: FINANCE FOR THE CHOSEN IDEA (part 1)

Introduction

All business need money to start up, run and operate, this money which is also called finance needs to be sourced somewhere. The new firm is going to need a lot of finance to grow and to form a firm establishment in the market. This is going to require a lot of finance. This finance is going to be acquired from various sources, in various ways. There are two major types of sourcing finance, internally or externally.

External sources of finance would include short term finance and long term finance:

Short term finance

Short term finance is capital that’s raised, used, and paid back quickly. Examples of short term finance would include:

·         Credit cards

·         Bank overdrafts

·         Bank loans  ( these could also middle term finance depending on the loan taken out)

·         HP ( hire purchase)

·         Personal savings

·         Leasing

·         Trade credit factoring

·         Factoring

Long term finance

This is the capital that’s paid back over a long period of time which is usually classified as being over a year.  Examples of long term finance would include:

• Share ( for companies only)
• Mortgages
• Venture capitalists
• Hire purchase and leasing
• Bank loan
• Government grants

Internal finances

This is the money that the firm attains from within the firm its self:

·         Retained profit or retained earnings- In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation makes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.

Sourced: (http://en.wikipedia.org/wiki/Retained_Profit last modified on 29 February 2008) this is the profit that is left after all expenses have been paid including; the cost of sales, overhead expenses, tax, dividends or owners drawings. This can be used as a source of finance for the following year.

• Working capital- The fund available for carrying on the activities of a business after an allowance is made for bills that have to be paid within the year. This technically, means current assets and current liabilities. The term is commonly used a synonymous with net working capital. The term often also is used to refer to all short-term funding needs for operations (excluding debt service and fixed assets). A company's investment in current assets that are used to maintain normal business operations. Net working capital, which is the excess of current assets over current liabilities, is also interchangeable with working capital. Both reflect the resources in circulation to meet operating needs and obligations as they come due. Sourced: (http://www.whynotloans.com/loans-glossary.html ) If a firm has more current assets than current liabilities it can use this surplus cash to finance day to day activities.

• Owners personal cash injection-this is the imputation of personal money into the firm, usually this amount of money is not a lot and is usually done by sole trades through their own personal save to help boost the current financial situation of the firm or included as start up capital for small firms.

• Asset sales- this is the money generated from selling assets weather fixed assets of or current assets. This form of acquiring money is usually a last resort for firms. This method acquiring finance is also known as liquidation, this is because the assets would be converted from being a solid commodity to being liquid cash or money in the bank which is liquid as well. This could also be defined as a form of acquisition whereby a selling entity agrees to sell all or certain assets and liabilities of a company to a purchaser. The corporate entity is not transferred.

Sourced: (www.ibgbusiness.com/glossary_of_terms.htm ) a firm may be able to sell a fixed asset in order to bring cash in. especially if the asset is no longer needed. If the firm still needs the asset they may use sale and leaseback.

·      Shared capital- Share capital, issued capital (UK English) or capital stock refers to the portion of a company's equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. For example, a company can set aside share capital to exchange for computer servers instead of directly purchasing the servers from existing equity. In simple terms share capital is the finance attained from selling a part of ownership of a public limited company. The more shared bought the more of the company the buyer owns (or the more equity). Share capital can be recognised as both an internal source of finance and external source of finance.

Sourced:  (http://en.wikipedia.org/wiki/Share_capital )

All these sources of finance are known to be short term finances because these finances are attained in the firm as the firm is running.