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Introduction to Business Finance.

Extracts from this document...

Introduction

Introduction to Business Finance Introduction * Finance is anything that allows the business to operate. * This includes a number of factors: * All business activity will generate the need for finance. * Different activities will require different types of finance. * It is important for the business to keep track of the money flowing into the business and the money flowing out of it. * A business must ensure it uses effective management and planning of its finances. * New technology has allowed businesses to do this with increased ease and efficiency. Types of Finance * A business must ensure that it can effectively raise the capital or finance it requires for its daily operations. * It will also require finance to start the business, in order to purchase things such as machinery, the land or premises. * There are many sources and types of finance available to a business. * The business must ensure it chooses the most appropriate type for every purchase it makes. * The types of finance can be placed into two groups - those that will be repaid and those that will not. * Each repayable type of finance will have different costs and different repayment times. Importance of Finance Types of Financial Documents Introduction * Businesses must be aware of a variety of financial documents. * These documents will allow a business to operate efficiently. * The documents can ensure that a check is made on the activities a business is undertaking. * Financial documents refer directly to the transactions that are made when a business is buying or selling a good or service. * It is also important that the business completes the documents in an appropriate order. * The correct sequence will improve the effectiveness of the firms financial planning. Types of Financial Documents Financial Documents Document Purpose Sequence Purchase Order Used when a business wishes to buy a good. It lets the business supplier know the requirements of the company making the order. ...read more.

Middle

* The card will have a maximum limit over which the holder cannot spend. * This allows the holder to make purchases without actually having the physical cash. * The receiver of the payment will have that money debited to their business account. * There is an extra cost with credit cards. * The cardholder will be expected to pay interest on the money they borrow through their card. * A store card works on a similar basis but a particular shop or group of shops issues it. * The holder can use that card to make purchases in the shops that are participating in that credit scheme. Direct Debit and Standing Orders * This is a system that a business or customer can arrange with a bank or building society. * The system allows for payments to be made directly from the persons account. * The account holder will need to arrange the facility by completing a number of forms that authorise the movement of money from their account. * A direct debit is when a variable amount will be taken from the account on a regular basis. * An example of this could be payment of a phone bill. * A standing order is when a specified amount is taken from a persons account on a regular basis. * An example of this could be the businesses rent. Advantages Method of Payment Advantages Cash This is still the most common way of paying for goods and services Easy to use and understand Can be used by all ages without identification Cheque book A written instruction by an account holder to their bank to pay a named person a sum of money Can be sent through the post Can be used by individuals without the need for specialist machinery Cash point card Allows people to withdraw money from a machine in the wall of a bank Access to thousands of machines Can withdraw cash out of banking hours Credit card This allows people ...read more.

Conclusion

* This means other people can purchase the shares and become part owners of the business. * The other method is to change the legal entity of the business. * This means that the business actually goes through the process to have a different type of ownership INITIAL OWNERSHIP NEW OWNERSHIP Sole Trader Partnership Partnership Private Limited Company Private Limited Company Public Limited Company * Some business may also decide to look at the option of becoming a Franchise. * This allows the business to expand and become better known. * It also means that for every franchisee the business will receive money. Selling Assets * In some situations a business may consider selling certain parts of its property in order to gain finance. * The business may sell its assets to specialised companies or to other businesses that require similar assets. * These assets include machinery, equipment, ICT and transportation. * This is usually a method that businesses will only use in times of cash flow problems. * Some businesses will use Sale and Leaseback. * This is where the assets are sold to a specialist firm for a cash sum, and then the business will lease the asset for a monthly fee. Advantages and Disadvantages Source of Finance Advantages Disadvantages Overdrafts Easy and quick to set up. Only pay interest on amount used not whole amount Repayable Interest Charged Owners Funds Does not need repaying No loss of control Owner must raise money No interest repayments Loans Receive large sums of finance Repayable Interest charged Profits Not repayable Easy and quick access to finance Owners and shareholders receive less money Grants Not repayable Helps small businesses Helps with start-up and in troubled times Not available to all businesses Businesses must meet certain criteria Hiring and Leasing No need for large sums of cash Update equipment May be interest charged Never actually own asset Shares and Legal Entity Receive finance Not repayable Loss of control of the business Must share the profits Selling Assets Quick and easy Receive sums of money Loss of asset May have to pay leasing or hiring charge. ...read more.

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