Notes for BUSINESS & ENTREPRENEURSHIP EDUCATION

Grade 8

UNIT 4: Finding Funds

WHAT ARE FUNDS?

 Funds mean capital, money or finance.
 Funds are very important for businesses.

IMPORTANCE OF FUNDS
 Funds are money needed to:
1. Set up the business and to
2. Pay for their expenses

USES OF FUNDS
 Entrepreneurs need money to implement their business idea.
 Funds are needed to set up the business. This is known as start-up capital.

 Moreover, funds are needed for the day-to-day running of the enterprise.

 Businesses have a number of expenses.

EXAMPLES OF EXPENSES
 For example:
1. purchase of equipment
2. Raw materials or supplies
3. Rent of building
4. Advertising

USES OF FUNDS
 As businesses grow, more expenses will arise and therefore more funds will be needed.

TYPES OF EXPENDITURE
 Funds are used for both:

1. CAPITAL EXPENDITURE and 2. REVENUE EXPENDITURE

CAPITAL EXPENDITURE
 Capital expenditure is money spent on items which last for a long period of time in a
business.

Examples of capital expenditure are:

 Office building
 Equipment
 Furniture and fittings
 Motor vehicles

REVENUE EXPENDITURE
 Revenue expenditure is money spent on the day-to-day expenses of an enterprise.
 These expenses are happen on a regular basis.

Examples of revenue expenditure are:

1. Utility bills
2. Rent
3. Purchase of stocks
4. Repair and Maintenance

GROWTH OF A BUSINESS
 When an enterprise performs well, it may tend to grow or expand its business activities.
 When businesses grow/expand, they usually gain more profits but they also require more
finance.

WAYS OF BUSINESS GROWTH

 A business can grow in different ways:
1. More production
2. Expansion of office or business plant
3. Open new outlets

SOURCES OF FINANCE

 Finance is needed by entrepreneurs for different reasons.

 Sometimes a small amount is required and at other times a larger sum of money is
needed.

 The amount needed depends on the purpose for which the money is needed.

 There are different sources of finance.

  Finance can come from inside or outside of the business.

Common sources of finance

 As stated before, finance can come from within the enterprise which is known as internal
sources of finance or from outside the business which is known as external sources of
finance.

 Examples of Internal sources of finance are: Savings , Profits and Sale of idle assets

 Examples of External sources of finance are: Loans from banks and Borrowings from
friends and relatives

INTERNAL SOURCES OF FINANCE

 INTERNAL SOURCES of finance is money obtained from within the business, that is
inside of the business.

EXAMPLES OF INTERNAL SOURCES OF FINANCE

1. SAVINGS - Savings is money kept aside for future use. It is often seen that
entrepreneurs invest their personal cash to start up their business.

Advantages of using Savings as a source of finance are:

1. It is a cheap form of finance
2. It is readily available and
3. It does not need to be repaid

2. PROFITS
All entrepreneurs want to make profit.
They can use part of the profit made to reinvest in the enterprise instead of borrowing
from banks or from friends.

3. SALE OF IDLE ASSETS

An entrepreneur can also sell furniture, vehicles or equipments he no longer needs to
obtain additional finance.
He can use this money to expand his enterprise or for other purposes.
EXTERNAL SOURCES OF FINANCE

 EXTERNAL SOURCES of finance are money obtained from outside the business.

EXAMPLES OF EXTERNAL SOURCES OF FINANCE

1. LOANS FROM BANKS

 A bank loan is money lent by bank for a given period of time against payment of
interest.

 It is usually approved under certain repayment conditions.

 Bank loan has to be repaid with interest.

 Interest is the additional sum of money paid on the amount borrowed.

 Loans can be granted for short term or long term.

SHORT-TERM LOANS are loans which have to be repaid in less than one year.

LONG-TERM LOANS are loans granted for more than 3 years. (Next slide)

 SECURITY - Very often, borrowers have to provide security as a guarantee that the loan
will be repaid within the agreed time period.

 The security is usually in terms of personal belongings like for example bungalows
or a piece of land.

INFORMATION NEEDED BY BANKS BEFORE GRANTING LOANS

 Before granting a loan, the bank usually requires certain information about the enterprise.
These information are:

1. Purpose
2. Amount
3. Repayment period
4. Security

CALCULATING LOAN INTEREST

 The formula to calculate yearly interest on loan is :
 Yearly interest payment = Rate of interest per year X Funds borrowed

 The formula to calculate monthly interest on loan is :

Monthly interest payment = Total interest paid divide by Number of months

For example:

If John, an entrepreneur decides to take a bank loan of Rs 500,000 with a 6% interest rate.
He will have to pay :

Annual interest = 6/100 X 500,000 = Rs 30,000

Monthly interest = 30,000/12 = Rs 2,500

2. BORROWING FROM RELATIVES OR FRIENDS

 An entrepreneur may decide to borrow money from friends and relatives instead of taking
a bank loan.

 Borrowing from friends and relatives is usually short-term and usually does not involve
paying interest.

CHOOSING SOURCES OF FUNDS

 An entrepreneur has to choose carefully the source of funds as it can affect the business
positively or negatively.

INTERNAL SOURCES OF FINANCE

 OWNER’S SAVINGS

Advantages:

1. Money is easily and readily available

2. No interest has to be paid
Disadvantages:

1. Amount available may not be sufficient

2. Stress if the owner does not have sufficient amount of money

 PROFITS OF THE BUSINESS

Advantages:

1. Money is easily and readily available

2. No interest has to be paid

Disadvantages:

1. Owners will have less profit

 SALE OF IDLE ASSETS – Assets are the machines, equipments or furniture of a

business. Assets are the possessions of a business

Advantages:

1. Income is earned from unused assets

2. Money is easily and readily available

Disadvantages:

1. Assets will have to be replaced

2. Larger amount of money will be required to replace new assets

 BORROWING FROM FRIENDS & RELATIVES

Advantages:

1. It is easy as funds are available without formal procedures

2. Repayment can be easily adjusted
3. No or very low charges of interest

Disadvantages:
1. Some friends/relatives may not be willing to lend money
2. The entrepreneur may not get the amount required
3. Borrower may be uncomfortable if the amount borrowed is not returned on time
  LOANS FROM BANKS
Advantages:

1. Full amount of funds required can be obtained

2. Helps in reducing the tax amount
3. No interference in the running of the enterprise

Disadvantages:
1. Banks may require lengthy formalities before approval of loan
2. Interest has to be paid
3. Risk of losing personal belongings if loan is not repaid