Business_Finanace

Finance Finance refers to the funds required to carry out the activities of a business. It is a crucial issue when an entrepreneur is identifying a business opportunity, especially due to the fact that finance is often difficult to obtain. Sources of finance: Finance is available from a variety of sources, but there are two main types of sources available to a business, those being debt and share holders’ equity. To put it simply, the business can either add their own funds (capital or equity), which is an internal source of funds; the business can also obtain loans (debt) from external sources. - Debt Finance: This is finance obtain through loans. The main advantage with debt financing is that the owner doesn’t have to sell any ownership in the business; debt finance also has certain taxation advantages. Due to this, debt financing is the most popular source of finance used by people when starting a business. One the type of finance has been selected, the next step is choosing the appropriate term or length of time. There are three main terms for debt financing; those being short term (less then one year, for example bank overdraft), medium term (between one and five years, for example term loans) and long term (greater than five years, for example mortgage). - Equity finance (equity capital): This is the funds contributed by the business owner/s to start then expand their business. If the SME is a company, then this contribution is called shareholders equity. This form of finance has an advantage over others for it doesn’t have to be repaid unless the owners leave the business; it is also cheaper, for there are no interest payments, plus any owner who contributes the equity to a business retains control over how the finance is used. Disadvantages of this form of finance are that the owner may expect a good return on his investment, but the small amount of finance may only generate low profits and low returns. There are three ways to gain equity finance, those being; taking on a partner, or another partner, seeking funds from an investor (future shareholder) or selling off any unproductive asset. * In relation to my business, we will need to source finance from a number of debts, consisting of short, medium and long term financing, in order to pay the costs involved with establishing and operating the business. The establishment costs that were involved when beginning my business included purchasing our building, equipment (cash registers, computers etc), fixtures and fittings, legal fees, furnishing, connections costs (phone, electricity) and our company car; to pay for the initial deposit on the buildings rent ($8500), fixtures, fittings furnishing ($125 000) and legal fees ($10 000), I took out a bank loan (medium term), and the connection costs ($850) and equipment ($3000) and vehicle ($5 500) I payed using my own money (equity). For the operating costs, this includes wages, rent, electricity, stationary, advertising and insurance, I generally use retained profit or equity, but I also have an overdraft facility, from which I can draw funds from during cash shortages. Any money left over (retained profits) and my own money (equity) I will use to employ strategies and to grow, fund and develop my business. Cost of finance: The cost of finance will depend on the following; the types of finance, the source of finance and the term. The type of finance used by a business will influence the cost of capital; for example debt financing requires the use of money form an external source (like bank, finance company ect), and involves interest (cost of borrowing) which is charged by the institution. If equity finance is a businesses way of raising capital, no interest is charged, for the money has been invested by the entrepreneur and/or partners and shareholders involved have invested the money. The cost involved in using this capital is the return paid at the end of the financial year if the business makes a profit, if the business is a company this I known as a dividend. If a company doesn’t return a dividend, it doesn’t pay a dividend. The cost of equity can also be measured in terms of liability. If the business is a sole trader or partnership, the liability is unlimited, meaning creditors will sells all business and personal assets to recover the debt. The liability of a company is limited to just the assets of the company and all the funds injected by shareholders. Financial requirements: - Establishment and operating costs: A crucial question the owner must ask and answer when starting a business is how much money will I need to establish and operate the business' To answer this question the business must first begin determining and listing the main expenses in setting up the business (establishment costs). This may include legal fees, furniture, electricity, phone etc. The nest step the business owner must take is estimating the running cots for a full year’s operation (operating costs). These costs may include wage, advertising, insurance interest etc; these costs must be paid for the business to continue its operations. * As mentioned before, the establishment costs method surf co will face are: - Building deposit - Purchasing equipment (cash registers, computers etc) - Fixtures, furnishing and fittings (shelves, counter, lights etc) - Legal fees - Connection costs (phone, electricity, internet etc) - Vehicle (company car) The operating costs method surf co will face are: - Wages - Rent - Electricity - Stationary - Advertising - Insurance