3.1 Sources of Finance
Role of fnance for a business
Capital expenditure
Revenue expenditure
What fiaice is ieeded fnor:
Settiig up a a bup siiess requp ires startsup a caaitao ofn cash iijececoois fnro the owiers to
aup rchase esseioao caaitao equp ia eit aid, aossiboy, are ises.
Need to fiaice their workiig caaitao: the daystosday fiaice ieeded to aay bioos aid
exaeises aid to bup iod up a stocks
Bup siiess exaaisioi ieeds fiaice to iicrease the caaitao assets heod by the fr or to bup y
oup t the owiers ofn the other fr
Fiiaice is ofei up sed to aay fnor research aid deveooa eit iito iew arodup cts or to iivest
iito iew arkeoig strategies
Reveiup e exaeiditup re: the saeidiig oi the costs that aooows a bup siiess to ake a reveiup e.
Used to aay e aooyees, bup y raw ateriaos.
Caaitao exaeiditup re: whei a bup siiess bup ys aid aiitaiis fxed assets, assets that they
exaect to oast ore thai oie year. Used oi bup iodiigs, achiiery etc.
Caaitao exaeiditup re is oi fxed assets that youp ieed fnup ida eitaooy to rup i the bup siiess. Oice
youp have the , youp doi’t ieed the every day. Reveiup e exaeiditup re is exaeiditup re oi day to
day thiigs that geierate reveiup e (e.g. staf, raw ateriaos, eoectricity).
Caa ex. saoit iito two categories: aiiteiaice vs iivest eit. Maiiteiaice: keeaiig it
rup iiiig. Iivest eit: deveooaiig the bup siiess e.g. bup yiig a iew fnactory.
The following internal sources of fnance
Personal funds (for sole traders)
First soup rce ofn fiaice
Used esaeciaooy fnor staroig up a iew bup siiesses
Ifn the sooe trader fiaices the bup siiess fnro his/her owi resoup rces, it adds to the bup siiess
risk fnor the eitreareieup r
The fiaices ofn the fr are iiioaooy oi ited to the a oup it the owier has ii the fnor ofn
saviigs
Baiks oike aersoiao fiaice as it shows co it eit aid that youp trup st ii the idea
Cheaa soack ofn iiterest aay eitss aid easy
Retained proft
Proft oef over afer tax aid aayiig divideids to sharehooders is keat ii the bup siiess aid
beco es a soup rce ofn fiaice fnor fnup tup re bup siiess acovioes
A iewoy fnor ed co aaiy or oie tradiig at a ooss wioo iot have access to this soup rce
Bup siiesses that up se retaiied aroft are growiig bup siiesses. Oice they have growi, they wioo
aay oup t their arofts as divideids.
Good becaup se: io aer issioi ieeded, easy aid cheaa as io iiterest is owed.
Bad becaup se: sharehooders fneeo they are iot gettiig cash oup t ofn the bup siiess, so their
iivest eit is sooo at risk.
Sale of assets
Role of fnance for a business
Capital expenditure
Revenue expenditure
What fiaice is ieeded fnor:
Settiig up a a bup siiess requp ires startsup a caaitao ofn cash iijececoois fnro the owiers to
aup rchase esseioao caaitao equp ia eit aid, aossiboy, are ises.
Need to fiaice their workiig caaitao: the daystosday fiaice ieeded to aay bioos aid
exaeises aid to bup iod up a stocks
Bup siiess exaaisioi ieeds fiaice to iicrease the caaitao assets heod by the fr or to bup y
oup t the owiers ofn the other fr
Fiiaice is ofei up sed to aay fnor research aid deveooa eit iito iew arodup cts or to iivest
iito iew arkeoig strategies
Reveiup e exaeiditup re: the saeidiig oi the costs that aooows a bup siiess to ake a reveiup e.
Used to aay e aooyees, bup y raw ateriaos.
Caaitao exaeiditup re: whei a bup siiess bup ys aid aiitaiis fxed assets, assets that they
exaect to oast ore thai oie year. Used oi bup iodiigs, achiiery etc.
Caaitao exaeiditup re is oi fxed assets that youp ieed fnup ida eitaooy to rup i the bup siiess. Oice
youp have the , youp doi’t ieed the every day. Reveiup e exaeiditup re is exaeiditup re oi day to
day thiigs that geierate reveiup e (e.g. staf, raw ateriaos, eoectricity).
Caa ex. saoit iito two categories: aiiteiaice vs iivest eit. Maiiteiaice: keeaiig it
rup iiiig. Iivest eit: deveooaiig the bup siiess e.g. bup yiig a iew fnactory.
The following internal sources of fnance
Personal funds (for sole traders)
First soup rce ofn fiaice
Used esaeciaooy fnor staroig up a iew bup siiesses
Ifn the sooe trader fiaices the bup siiess fnro his/her owi resoup rces, it adds to the bup siiess
risk fnor the eitreareieup r
The fiaices ofn the fr are iiioaooy oi ited to the a oup it the owier has ii the fnor ofn
saviigs
Baiks oike aersoiao fiaice as it shows co it eit aid that youp trup st ii the idea
Cheaa soack ofn iiterest aay eitss aid easy
Retained proft
Proft oef over afer tax aid aayiig divideids to sharehooders is keat ii the bup siiess aid
beco es a soup rce ofn fiaice fnor fnup tup re bup siiess acovioes
A iewoy fnor ed co aaiy or oie tradiig at a ooss wioo iot have access to this soup rce
Bup siiesses that up se retaiied aroft are growiig bup siiesses. Oice they have growi, they wioo
aay oup t their arofts as divideids.
Good becaup se: io aer issioi ieeded, easy aid cheaa as io iiterest is owed.
Bad becaup se: sharehooders fneeo they are iot gettiig cash oup t ofn the bup siiess, so their
iivest eit is sooo at risk.
Sale of assets
