3.

1 Intro to Finance:
Capital Expenditure: money that is spent on fixed assets (none-Current assets)
-High in cost
-Can have high return on investment
Reasons to do capital expenditure:
-Extra production capacity
-Improve Efficiency
-replacing worn out/outdated equipment and machinery
-comply with regulations
Revenue Expenditure: Money that is spent on daily operations of business. Ex.
Wages, materials, rent
Collateral: the financial guarantee secured by an external loan capital to finance
an investment
None-Current Assets (Fixed assets): assets that will not be sold within a year
period. Ex. Land, Machinery, equipment
3.2 Sources of Finance:
Sources of Finance: General term refers to where a business obtains their funds
Internal: Money or funds that come within the business
1. Personal Funds (Owners Capital): Usually for startups, it is an
entrepreneur’s own savings
2. Retained Profit: all profit that is retained after paying taxes and
dividends, usually used for capital expenditures, or as emergency
funds
3. Sale of assets: selling a business’s existing and unused assets
(dormant)
External: Money or funds that come from outside the business
1. Share Capital: Money raised from selling shares of a limited
liability company, could be from IPO, or later bought shares. Main
source of finance for LLC.
2. Loan Capital: medium-Long term sources of finance obtained from
lenders or banks, with interest usually, fixed or variable.
-Mortgages: Loans secured with purchase of property, if loan
isn’t paid, the lender takes the property
-Business development loans: highly flexible loans meant to
meet specific needs of a borrower to develop aspects of their
business.
-Debentures: long term loans issued by the business, and are
paid prior to giving shareholders dividends, and are paid even
if at a loss.
3. Overdrafts: A financial service that allows a business to withdraw
more money from the bank than they actually possess in their
account, usually for minor cashflow problems, flexible, short term,
very high interest, charged on a daily base
4. Trade credit: A financing process where a customer buys now and
pay later, receiving payment after the purchase has been made.
Credit cards have a similar idea
5. Crowdfunding: funding that comes from raising a smaller amount
of finance from a large group of people, usually to finance a
project or venture.
6. Leasing: a contract agreed on by both parties where one party
pays rent to legally temporarily own the other’s assets.
-Sale-and-leaseback: selling a fixed asset then leasing it from
the person you sold it to, and the asset doesn’t physically leave
the business
7. Microfinance: enterprises that provide disadvantaged members of
society small amounts of finance to eradicate poverty

8. Business Angels: wealthy individuals that choose to invest their

money in another’s business, expecting a return on investment,
high risk high reward, usually gain some sort of control of the
company.
Before investing, investors look at:
-Return on investment: demanding a positive return on their
investment, so the business must have high potential
-Business plan: purposes and goals of the business venture.
-People: the skills and potential of those involved
-Track record: the track record of the business’s performance.
Short- and long-term finance:
Short term finance: finance that is only available for a period less than a 12 month
accounting period, for day to day operations
long term finance: finance that is available for a period longer than a 12 month
accounting period, for long term operations such as buying fixed assets.

SPACED: used to assess what type of financing required:

S (Size and status of firm): A large business can raise a large amount of finance
from a lot of different sources, a sole trader cannot. Cheaper sources of finance
due to size
P (purpose of finance): whether its needed for day to day or long term purposes
A (amount required): Whether a lot or a little money is required
C (Cost of finance): considering any additional costs it may cause, such as
administrative costs or maintenance fees.
E (External factors): customer confidence, stock market volatility, interest rates
D (Duration): Period of time the finance is needed
3.3 Cost and Revenues:
Price: the sum paid by the customer for a good or service
Cost: Expenditure incurred by the business; not actual amount paid
1. Set up Cost: items of expenditure needed to start a business
2. Running costs: costs of ongoing operation of the business

3. Fixed Costs: Costs of production that you pay regardless of the amount
produced or sold
4. Variable Costs: Costs of production that change in proportion to the level
of output or sales
5. TC= FC + VC (Not in DB)
 6. Direct costs: Costs that are directly related to the output of a particular
product
7. Indirect costs (overheads): costs that cannot be clearly traced to the
production of any single product
Revenue: money coming into a business, usually from the sale of goods or services
Sales Revenue (total revenue): Price * Quantity sold
COGS: the direct cost of producing goods sold by a business
Profit: Positive difference between revenue and COGS
Loss: negative difference between revenue and COGS
Revenue Stream: All money coming into the business from its various activities
1. Advertising Revenue: Money made from providing a platform for others
to advertise
2. Transaction fees: extra fees added on when transactions are made
3. Franchising costs and loyalties
4. Sponsorships
5. Subscription fees
6. Merchandise
7. Interest earnings
8. Dividends
9. Donations
10.Subventions: subsidies offered by the government
3.4 Cost and Revenues:
1-Profit and loss account: reports the revenues and expenses of a business in a
given accounting period
2-Balance sheet: reports the value of assets and liabilities of a business at a
particular point in time
These are meant for any stakeholder, such as:
1. Shareholders
2. Employees
3. Managers
4. Competitors
5. Government
6. Financiers
7. Suppliers
8. Potential investors

Profit and Loss Account

Costs: Outflow of money
P&L is divided into 3 sections:
1. Trading account:
a. Sales Revenue
b. Gross Profit = Sales revenue – COGS
c. COGS = opening stock + purchases – closing stock
2. P&L account:
a. Expenses: indirect costs/overheads or fixed costs
b. Net Profit = GP – Expenses
c. Interest
d. Taxes
3. Appropriation account
a. Dividends: the amount of net profit after tax and interest distributed
to shareholders, the amount is decided by the board of a business
b. Retained profit: how much profit is retained after interest and tax
Note: interest before tax
Limitations:
1. Doesn’t show guaranteed future performance
2. No standardized form
3. Window dressing

Balance Sheet
Balance Sheet is divided into 3 sections:
1. Assets (items with monetary value owned by a business):
a. Nonrecurrent assets
b. Current assets: cash or liquid asset likely to be turned into cash within
12 months
c. Total assets: NC + CA
2. Liabilities (legal obligation to repay its lenders at a later date):
a. Noncurrent liabilities (long term liability): debts that are due after 12
months
b. Current liabilities: debts that are due within 12 months
c. Total Liabilities: CL + NCL
Net Assets: TA - TL
3. Equity (value of the business that belongs to its owners)
a. Share capital: amount of money raised through sale of shares
b. Retained earnings: total amount of accrued profit after interest, tax,
and dividends
c. Total equity = Share capital + retained profit
Limitations:
1. Values can change at any moment
2. Figures are only estimates, market values aren’t always book values
3. No universal format
4. Not all assets are included, namely none tangible assets
Intangible assets