Sources of Finance

Owners Funds


  • No need to pay interest on the money


  • Could have been invested elsewhere, earning a higher profit
  • Owner may not have enough funds to meet the needs of the business

Retained Profits


  • No need to pay interest on the money


  • Could have been invested elsewhere, earning a higher profit
  • Shareholders may become unhappy if this means lower dividend payments
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Sources of Finance 2

Selling Assets


  • The business is using money it already has- so no loans or charges paid


  • The business has to have something worth selling for this to be a option
  • The business may sell something that they later need



  • Very quick to arrange
  • A good short term solution to a cash flow problem


  • Interests and charges are paid
  • Only suitable for small amounts of money
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Trade Credit


  • Gives the business more cash to use in the immediate future


  • Can only be used to buy certain goods
  • Bills usually have to be settled within 30,60,90 days

Debt Factoring


  • Allows the business to get money for debts that otherwise never be payed
  • Saves business time chasing customers


  • Time consuming to organise
  • Business receives less money than it was originally owed- may affect profability
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  • Cost of the asset is spread over its life
  • No need to find a lump-sum of money to purchase it


  • May be more expensive than buying the asset- the owner will want to profit from it 
  • the business does not own the asset so it does not appear on the balance sheet

Bank Loan


  • Easy and quick to set up
  • Large amounts of money can be borrowed 
  • Structured repayment term
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  • Interest payable
  • If repayments cannot be kept up, the business risks getting a poor credit rating or becoming bankrupt

Issuing Shares


  • No need to repay the money invested 
  • Cheaper than a loan
  • Some businesses can raise large sums of money this way


  • Need to pay the shareholders a share of future profits
  • Ownership also means some influence over how the business is run
  • Risky for the shareholder- investment may be lost if the business fails
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  • Only method available to buy property
  • Structured repayments over a long term 


  • Large sums of interest charged 
  • Can take a long time to repay debt

Goverment Grants


  • No need to repay the grant


  • Limited funds are available
  • May be restrictions on what the money can be used for
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Hire Purchases


  • Flexible method- can hand back the item if no longer required 


  • High interest often charged
  • Item doesn't belong to the business until the end of the term

Venture Capital


  • Can raise money from them even when banks have refused to lend to the business


  • Risky for the venture capitalist
  • The VC may want to have some control over how the business operates
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Break Even= Fixed Costs / Contribution per Unit

Sales Revenue= Number of sales x Price of product/ service

Total costs= Fixed costs + Variable costs

Profit= Total Revenue - Total Costs

Unit Contribution= Selling Price - Variable Costs

Market Share= Sales of firm / Total market sales x 100

Total size of market= Firm sales / Firms marketshare x 100

Firms sales= Total size of market / 100 x market share

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Calculating Costs, Revenues and Profit

Fixed Costs= The same at all levels of output in the short run

Stepped Fixed Costs= This can occur over long periods of time following

Variable Costs= Costs of production that increases directly as output rises

Semi- Variable= Costs that consists of a fixed cost + Variable cost

Total costs= All the costs added together

Total revenue= Amount of money received from selling of a product

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Break- Even

.... determines the point at which a business neither makes a profit or a loss

Margin of safety= The difference between your break-even outut and your actual output

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Budgets and decision making

Budget= A target for costs or revenue that a firm or department must aim to achieve over a given period of time.

Why is it important for a business to

  • Prioritise funds
  • Business can have a good idea of what to expect
  • Performance of workers can be assessed 

Types of budgets

  • Income budget- sets a minimum target for the desired revenue level to be achieved 
  • Expenditure budget- sets a maximum target for costs
  • Profit budget- a function of the income and expenditure
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Identifying business oppurtunities

Small budget research

  • Geographical mapping
  • Mapping particular businesses 
  • Check on prices, deals, discounts
  • Arrange to spend time in particular bussinesses 
  • Carry out market mapping

Market mapping

  • Identify key features that characterise consumers within the market
  • Check brands out there and put them on a market map

Market niche- Gap in the market

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Advantages of running a franchise

  • Easier to receive bank funding compared to independent businesses
  • rates of interest charged less compared to indeendent businesses

Advantages for the franchisee

  • Business is based on a proven idea
  • Franchisee is using recognised brand name and trademarks
  • Franchisor wil give support
  • Franchisee given exclusive rights in their territory
  • Financing business will be easier
  • Relationships with suppliers already established

Disadvantages for franchisee

  • Costs may be higher than expected
  • Franchise agreement includes restrictions
  • Franchise may go out of business 
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Franchises 2

  • Other franchises could give the brand as a whole a bad reputation
  • Franchisee may find it difficult to sell their franchise

Advantages for the franchisor

  • Franchising creates another source of income 
  • Franchisor can have smaller central organisation 
  • Franchising means spreading of risks
  • Business maintains more cost effective labour force

Disadvantages for franchisor

  • Considerable capital allocation needed to build a franchise infrastructure 
  • At beginning of franchise programme is a broader risk that company ruined by misfits
  • Franchisor has to disclose confidential information to franchisee's

Royalties- The amount of interest payed by the franchisee to the franchisor

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Inputs to Outputs

Primary- Growing, fishing, farming, mining, extracting

Secondary- turning raw materials into finished products

Tertiary- service sector


Primary- Growing Apples 

Secondary- Turn apples into cider

Tertiary- Selling in pubs

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Business Plan


  • Forces entrepreneur to think carefully about every aspect of the early start-up
  • It may make the entrepreneur realise that they lack the skills needed for part of plan
  • It may help achieve attractive terms for the investors
  • If anything happens to the entrepreneur the business will be able to keep on going

Disadvantages of a business plan

  • Making a forecast doesn't make it happen 
  • The plan may be too rigid, needs to be flexible to cope with unexpected events
  • Low costs/ Low expectations are better to start with as costs may be too high if sales wrongly forecated
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Sampling Methods

Random Sampling- All individuals have an equal chance of being selected

Quata Sampling- Used when you need a certain number of respondants from each sub-category of an overall population

Stratified sampling- used when a sample is relatively small and random sampling may give unrepresentable results

Cluster sampling- A random selection from a sampling frame may be picked

Conveinence sampling- Subjects are selected purely on the bases of conveinance

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Factors affecting location

Quantative factors- Financial

Qualitative factors- Non- Financial

Quantative factors

  • Fixed costs- land, rent, utilities, salaries
  • Variable costs- Transport, raw materials, wages
  • Revenue- nearness to customers

Qualitative factors

  • Working environment
  • Ease of access
  • Quality of infrastructure
  • Quality of labour
  • Planning laws and restrictions
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