Business finance — needs and sources
Introduced| English | Meaning |
|---|---|
| finance/ˈfaɪnæns/ | Money available or obtained to fund a business's activities and investment. |
| start-up capital/stɑːt ʌp ˈkæpɪtl/ | The funds needed to establish a business and begin its operations. |
| working capital/ˈwɜːkɪŋ ˈkæpɪtl/ | working capital |
| overdrafts/ˈəʊvədræfts/ | Amounts by which withdrawals or payments exceed the available balance in a bank account, leaving money owed to the bank. |
| retained profit/rɪˈteɪnd ˈprɒfɪt/ | Profit kept in a business after distributions to its owners. |
| share issues/ʃeə ˈɪʃuːz/ | The creation and sale or allocation of new shares by a company. |
| trade credit/treɪd ˈkredɪt/ | An arrangement allowing a business to receive goods or services from a supplier and pay at an agreed later date. |
| grants/ɡrænts/ | Funds provided for a specified purpose that generally do not have to be repaid if the relevant conditions are met. |
Money to start and grow
- You can't open a shop, buy stock or pay staff without money — finance 资金.
- Knowing why a business needs finance and where to get it is essential.
Sources of finance lab
Choose the best type of finance by time, risk and ownership.
Capital needed to finance day-to-day business operations is called:
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Working capital finances day-to-day operations and equals current assets minus current liabilities. It includes stock and receivables, so it is not the same as cash available today.
Why businesses need finance
- Start-up capital 启动资金: premises, equipment, first stock.
- Working capital 营运资金: day-to-day cash for wages and suppliers.
- Growth: expansion, new products or machinery.
Banks are a key external source of business finance, through loans and overdrafts 透支
Which is an internal source of finance?
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Retained profit comes from within the business.
A bank loan is an ______ source of finance.
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External finance comes from outside the business.
Internal and external sources
- Internal: retained profit 留存利润, selling assets, owner's savings. No interest.
- External: bank loans, overdrafts, share issues 发行股票, trade credit 贸易信贷, grants 补助金.
Sources of finance split into internal (from within the business) and external (from outside)
A stock exchange: public limited companies raise finance by selling shares
Which is a short-term source of finance?
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Overdrafts and trade credit are short-term.
A long-term asset such as a factory is best funded with a bank overdraft.
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False. An overdraft is short-term finance. A long-term asset should be funded with long-term finance, such as a loan or share capital.
Short-term vs long-term
- Short-term (overdraft, trade credit): for day-to-day cash needs.
- Long-term (loans, shares): for big, lasting investments.
Match the source to the need. Funding a long-term machine with a short-term overdraft is risky; using a 10-year loan for this week's wages is wasteful. The term of finance should fit its purpose.
Finance is needed to start up, to run day-to-day, and to grow
You've got it
- finance is needed for start-up, working capital and growth
- sources are internal (retained profit) or external (loans, shares)
- match short-term sources to short-term needs, long-term to long-term
Write from an 8-year machine
- A machine will be used for 8 years.
- Fund it with a long-term source. A one-month overdraft does not match that life.
A business wants to buy a machine it will use for 8 years. Why is a long-term loan or retained profit a better match than a one-month overdraft?
The life of the finance should match the life of the need. Short-term cash is for day-to-day costs.
How should the 8-year machine be financed?
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An asset used for 8 years needs a long-term source. An overdraft is meant for a short cash gap.