Summary of Core Business and Management Principles

## Introduction Business finance is the study of how businesses obtain, use and manage money. It explains why firms need capital, where that capital can come from, and how to choose the best form of finance for different needs. This guide breaks down core ideas into simple parts, shows examples, and includes short calculations you will meet in class. > **Definition:** Business finance is the planning, raising and managing of funds to run and grow a business. ## Why businesses need capital Businesses need capital for different purposes. Broadly these fall into three groups: ### 1. Start-up needs - Buying or hiring fixed assets (premises, equipment) - Buying materials and initial stock - Paying fees and licences ### 2. Expansion needs - Research and development of new products - Replacing old equipment with new technology - Setting up overseas operations or acquiring another company ### 3. Survival and day-to-day needs - Covering losses - Paying short-term running costs like wages, electricity, phone bills > **Definition:** Capital expenditure is money spent to acquire long-lived assets (non-current assets) such as premises, vehicles and equipment. > **Definition:** Revenue expenditure is money spent on running costs, for example wages, rent, utilities and other overheads. Fun fact: Many successful firms used a mix of a founder's savings and small bank loans at the start, then later issued shares or took larger bank loans to expand. ## Forms of capital (short categories) | Type | What it is | Typical use | |---|---:|---| | Venture capital | External investors provide funds in exchange for equity | Start-ups or high-growth firms | | Fixed capital | Money tied up in long-lived assets | Buying machinery, buildings | | Working capital | Short-term funds for daily operations | Wages, supplies, utilities | ## Internal sources of finance Internal sources are funds generated or freed up inside the business. 1. Retained profit - Definition: Profits kept in the business instead of being paid out as dividends. - Pros: No repayment, no interest, supports reinvestment. - Cons: New/small businesses may not have profits; reduces dividends for owners. 2. Owner's personal savings - Pros: Quick access, no interest or repayment required. - Cons: Limited amounts, increases owner’s personal financial risk. 3. Selling off assets - Sell surplus equipment or unsold stock. - Pros: Cheap and quick, frees storage space. - Cons: Not always possible for very small firms; may remove resources needed for production. 4. Sale and leaseback - Sell a non-current asset (e.g., building) then lease it back. - Pros: Raises cash while keeping use of the asset. - Cons: Creates ongoing lease payments; may be costly long-term. 5. Hire purchase and leasing - Spread payments over time while using the asset. - Pros: Spread cost, leasing company may handle maintenance. - Cons: Deposit often required for hire purchase; leasing total cost can exceed purchase price. ## External sources of finance External sources come from outside the business and include debt and equity. > **Definition:** Debt finance is borrowed money that must be repaid with interest. > **Definition:** Equity finance is money invested in the business by shareholders and does not have to be repaid. ### Banks and financial institutions - Commercial banks, savings & loan associations, credit unions, investment banks - Types of bank finance: - Overdraft (short-term): Quick but can be withdrawn; interest/charges often high. - Credit card (short-term): Short interest-free period; high rates if not repaid. - Commercial loan (long-term): Fixed repayment schedule; collateral often required. - Mortgage (long-term): For property purchases; property used as security. ### Trade credit - Suppliers allow "buy now, pay later." - Pros: No interest, helps cash flow. - Cons: Losing early-payment discounts or future supplies if payments are late. ### Venture capital and business angels - Venture cap