Explain factors that determine how much and what type of finance a business
Research on the Sources of Finance for a Business
Firms sometimes need to raise finance for Working Capital and Capital
Expenditure. Explain what each is and give examples.
· Working Capital (or Revenue Expenditure)
The working capital is made up of the current assets net of the
It is vital to a business to have sufficient working capital to meet
all its requirements. Many businesses have gone under, not because
they were unprofitable, but because they suffered from shortages of
· Capital Expenditure
Used for buying fixed assets where large sums of money are involved
but they are not purchased often e.g. new premises.
List and explain factors that determine how much and what type of
finance a business might need.
· Size of the Business.
· Type of the Business.
· Where the business is in terms of its development.
· Whether it is a profitable business.
Define the following terms in your own words
· Internal Finance
Internal Finance can be profit that has been retained, squeezed out of
working capital, or can be cash from sale of assets. This is money
that was already within the business.
· External Finance
External Finance for day-to-day working capital is trade credit, bank
overdrafts, and debt factoring. This is money from outside the firms
Make notes (with examples) on the following three (3) types of
· Retained Profit
Once the business starts to generate sales it will hopefully make some
profit. This provides a return on the investment on the business.
However it is also a source of finance. Research shows that over 60%
of business investment comes from reinvested, retained profit.
· Squeezing Working Capital
By cutting stocks, chasing up debtors or delaying payments to
creditors, cash can be generated from a firm’s working capital.
However, when cash is taken from working capital for a purpose such as
buying fixed assets, the liquidity position worsens.
· Sale of Assets
An established business has assets. These can be sold to raise cash.
The business loses the asset but has the use of the cash. It makes
good business sense for businesses to dispose of redundant assets.
They can finance development without extra borrowing. If the asset is
needed, it may be possible to sell it, but immediately lease it back.
In this way, the business has use of the cash and the asset. This is
known as the sale and leaseback. …