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4.2 Sources of Finance ( where can companies get money ?). Objectives. Why do companies need money ? What are the sources of finance ? The importance of working capital. Why do companies need money ?. Lets assume that the school is going to build a swimming pool.

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objectives
Objectives
  • Why do companiesneedmoney?
  • What are thesources of finance?
  • Theimportance of working capital.
why do companies need money
Why do companiesneedmoney?
  • Letsassumethattheschoolisgoingtobuild a swimming pool.
  • Make a list of allthethingsthatwillhavetobepaidfor.
  • Page 476. Writedownthedefinitions of capital expenditure and revenueexpenditure.
  • Classifyyourexpenditures as either ‘revenue’ or ‘capital’.
where can the school get the money from
Where can theschoolgetthemoneyfrom?
  • Make a list of allthemethodsbywhichtheschool can getmoneytopayforthe new swimming pool.
what is working capital and why is it important
Whatisworking capital and whyisitimportant?
  • Cash isvitallyimportanttobusinesses. Without cash; employeescannotbepaid and stock cannotbepurchased. Therefore, businessescannotoperate.
  • Working Capital is cash and thingsthat can easilybeconvertedinto cash: inventory and accountsreceiveable (moneyowedbycustomers). Italsoincludesthingswhere cash isowed: accountspayable (moneyowedtosuppliers) and overdrafts.
working capital cycle
Working Capital Cycle

Cash isconvertedintoinventorythenaccountsreceiveable and finally back to cash.

At anyone time thecompany has significantamounts of cash invested in theworking capital cycle.

Byspeeding up thecyclethecompany can reduce theamount of cash invested in it.

working capital example
Working Capital Example
  • You are a wholesaler.
  • Youpurchaseinventoryusing cash. Ittakes 10 daystoarrive.
  • Youputit in yourwarehouse, whereittakesonaverage 20 daystosell.
  • Youofferyourcustomers 30 dayscredit.
    • Howlongisyourworking capital cycle?
    • Youbuy and sell 10 units of inventory per day. Eachunit of inventorycosts $100 topurchase. Howmuchmoney do youhaveinvested in theworking capital cycle?
    • Whathappenstothelength of theworking capital cycle and theamount of moneyinvested in itifwe reduce credittermsto 20 days?
slide11

Accountsreceivable = debtors. Peopleorcompaniesthatyouhavesoldtooncredit and theywillpayyou in 30 days.

  • Accountspayable = creditors. Companiesthathavesuppliedgoodstoyouoncredit and youwillpaythem in 30 days.
working capital
Working Capital
  • Whatelements of working capital willthefollowingbusinesseshave?
    • Pizza restaurant
    • Tottus
    • Barber
    • Bookshop
how much working capital
How much working capital?
  • Supermarket:
    • Cash= 20,000, Inventory = 50,000, Accounts Payable 65,000
  • Restaurant:
    • Cash= 2,000, Food = 5,000, Money owed to suppliers = 3,000
  • Cinema:
    • Cash= 4,000, Popcorn etc= 2,000, Accounts Payable =3,000, Money owed by customer = 2,000
how much working capital1
How much working capital?
  • Wholesaler:
    • Cash=1,000, Inventory= 20,000, Accounts Payable = 15,000, Accounts Receivable = 30,000
    • Thewholesaler has beengrantedanincrease, fromitssupplier, in thetradecredititreceivesfrom 30 to 60 days.
    • What has happenedtotheamount of moneyinvested in working capital?
  • Activity 26.2 Page 478.
internal sources of finance
Internalsources of finance
  • Page 478 make notes on:
    • Profitsretained
    • Sale of assets
  • Page 480 Activity 26.3
slide18

Short-term = 1 weekto 2 years

  • Medium-term = 2 to 5 years
  • Long-term = 5 to 30 years
external short term sources of finance overdraft
External short-termsources of finance - Overdraft
  • Thisisnot a loan!!!!
  • Most of youwillhave a bankaccount and willreceiveinterestonthemoneythatyouhave in thebank. (Theinterestrateyoureceivewillbelow).
  • Anoverdraftallowsyoutohave a negativebank balance forwhichyoupayinteresttothebank. (Theinterestrateyoupaywillbeveryhigh).
external short term sources of finance others
External short-termsources of finance - Others
  • Creditcard
    • you can pay off thecreditcard 30 daysafterpurchasingthegoodorservice.
    • Interestrates can behighisdebtnotpaid off.
  • Tradecredit
    • Othercompaniesmayagreeforyoutopay 30 daysor more afteryoureceivethegood.
    • No interest. Supplierswill stop supplyingifdebtnotpaidon time.
  • Factoring
    • Sellyouraccountsreceiveableto a ‘factoringcompany’. Yourdebtors (peoplethatoweyoumoneynowowethefactoringcompany).
external medium term sources of finance
Externalmedium-termsources of finance
  • Leasing – rent
  • Hirepurchase – whereyourenttheitembutalsopay extra eachmonthtoeventuallybuyit.
  • Medium-termbank loan – repayable in lessthan 5 years – thebankwillchargeinterestonthe loan
long term finance
Long-termfinance
  • DEBT or EQUITY
  • Thisisprobablythemostimportantdecisionwhenconsideringthefinancing of a company, as thecompanywillhavetolivewiththisforyearsordecadesto come.
  • DEBT = borrowingmoney
  • EQUITY = selling a part of thecompany
debt finance
DebtFinance
  • Loans – fromthebankforwhich a mediumrate (10%) of interest has tobepaid.
  • Mortgages – these are a type of loan that are ‘secured’ onproperty, ie. Ifyou do notpaytheinterestthebank can takeyourhouse. Thesehave a lowrate of interest (5%) as thereislittleriskinvolved.
  • Bonds (sometimescalleddebenture) – thecompany can sellIOUstoprivateindividuals and promisetopaytheminterest (10%). A bit like a loan.
equity finance
Equityfinance
  • Sale of shares – can beprivatelyoronthe stock exchange (evensmallcompanies can get a listingontheAlternativeInvestmentMarket (AIM)).
    • There are costsinvolved in sellingthroughthe stock exchange.
    • Youmay lose control of thecompany.
    • Thecompanymustmake more profitstokeeptheexisting and new shareholdershappy.
  • Takeon a new partner.
  • Venture capital – Dragon’s Den
equity finance1
Equityfinance
  • Why do shareholdersbuy shares?
  • Theyreceivedividends and gain as the share pricerises.
  • Theyactuallywant a returnfromtheirinvestment. Whatpercentage?
debt or equity
DEBT or EQUITY
  • Page 482
    • Make notes onDebtorequity capital – anevaluation.
  • Page 481 activity 26.4
  • Page 483 activity 26.5