Chapter 19: Business Finance: Needs and Sources.
Why Businesses need finance.
a) Start-up capital.
Start-up capital refers to that finance needed to set up the business.
b) Working capital.
Working capital refers to that finance needed to pay day-to-day expenses of a
business such as wages, supplies raw materials, fuel expenses et al.
c) Purchase of fixed assets/non-current assets.
Businesses need finance to purchase buildings, machines to replace ones that are no
longer working efficiently or are obsolete.
d) Capital expenditure.
Capital expenditure refers to that finance needed by the business to invest in latest
technology.
e) Expansion of businesses.
Businesses need finance to finance its growth objective.
f) Research and development.
Businesses need finance to research into new products and/or new markets.
Main sources of finance.
The sources of finance will be appropriate for limited companies, but they may not be
suitable for sole traders and partnerships.
Reasons.
Cannot raise capital through the sale of shares.
Only needed to finance small capital expenditure projects.
Often considered by lenders to be too high-risk for large scale borrowing.
Classification of the main sources of finance.
a) Internal sources of finance.
b) External sources of finance.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 1
, a) Internal sources of finance.
Internal sources of finance refer to capital which can be raised from within the
business.
They include:
Retained profits.
Sale of fixed assets/non-current assets.
Owners’ savings.
Some of the business working capital.
Retained profits.
Retained profits refer to profits remaining after all expenses, tax and dividends have
been paid and which is ploughed back into the business.
The distribution of after-tax profit between dividends and retained profit is shown in
the appropriation account of a company’s income statement.
Extract from company Y’s income statement.
Company Y had $13.6 m profit after paying tax. This amount belongs to the
shareholders as they are the owners of company Y.
However, instead of distributing all of the profit to the shareholders as dividends, the
company decided only to pay dividends of $7.8. The balance $5.8, is kept as retained
profit.
This amount becomes a source of internal finance for the company which management
can use to fund capital expenditure projects.
The amount available from retained profits is likely to be higher for a multinational
company than it is for a sole trader.
Benefits of retained profits.
There is no cost to the business.
Profits have been earned through trading activities.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 2
Why Businesses need finance.
a) Start-up capital.
Start-up capital refers to that finance needed to set up the business.
b) Working capital.
Working capital refers to that finance needed to pay day-to-day expenses of a
business such as wages, supplies raw materials, fuel expenses et al.
c) Purchase of fixed assets/non-current assets.
Businesses need finance to purchase buildings, machines to replace ones that are no
longer working efficiently or are obsolete.
d) Capital expenditure.
Capital expenditure refers to that finance needed by the business to invest in latest
technology.
e) Expansion of businesses.
Businesses need finance to finance its growth objective.
f) Research and development.
Businesses need finance to research into new products and/or new markets.
Main sources of finance.
The sources of finance will be appropriate for limited companies, but they may not be
suitable for sole traders and partnerships.
Reasons.
Cannot raise capital through the sale of shares.
Only needed to finance small capital expenditure projects.
Often considered by lenders to be too high-risk for large scale borrowing.
Classification of the main sources of finance.
a) Internal sources of finance.
b) External sources of finance.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 1
, a) Internal sources of finance.
Internal sources of finance refer to capital which can be raised from within the
business.
They include:
Retained profits.
Sale of fixed assets/non-current assets.
Owners’ savings.
Some of the business working capital.
Retained profits.
Retained profits refer to profits remaining after all expenses, tax and dividends have
been paid and which is ploughed back into the business.
The distribution of after-tax profit between dividends and retained profit is shown in
the appropriation account of a company’s income statement.
Extract from company Y’s income statement.
Company Y had $13.6 m profit after paying tax. This amount belongs to the
shareholders as they are the owners of company Y.
However, instead of distributing all of the profit to the shareholders as dividends, the
company decided only to pay dividends of $7.8. The balance $5.8, is kept as retained
profit.
This amount becomes a source of internal finance for the company which management
can use to fund capital expenditure projects.
The amount available from retained profits is likely to be higher for a multinational
company than it is for a sole trader.
Benefits of retained profits.
There is no cost to the business.
Profits have been earned through trading activities.
CAMBRIDGE IGCSE BUSINESS STUDIES NOTES Page 2
