Introduction to BusinessChapter 6: Sources of Finances

Introduction

• Lack of knowledge in Financial Matters will leads to cash-flow problem and the inability of the business to pay its creditors.

Function of Finance

• Funds are needed because: – Cash requirement for the daily operation – Raw materials and goods in stock costs money to be kept – No money will be available until the goods is sold and the

debt is being collected– The need to service bank loans – The need to pay dividend to shareholders– The need to finance the purchase of machinery and

equipment – Transport and packaging of goods

The need of fund (4 main categories)

• Account Payable– An accounting entry that represents an entity's obligation to pay off a

short-term debt to its creditors. – refers to a business department or division that is responsible for

making payments owed by the company to suppliers and other creditors.

• Account Receivable – Money owed by customers (individuals or corporations) to another

entity in exchange for goods or services that have been delivered or used, but not yet paid for

The need of fund (4 main categories)

• Inventories – The raw materials, work-in-process goods and completely finished

goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.

• Capital expenditure – Funds used by a company to acquire or upgrade physical assets such

as property, industrial buildings or equipment.

Short-Term Finance

• Trade Credit – is the credit extended to you by suppliers who let

you buy now and pay later.

• Bank Overdraft – A bank overdraft is when someone is able to

spend more than what is actually in their bank account.

Short Term Finances

• Bank Loans– A sum of money lent at interest.

• Debt Factoring – The sale of a business' invoices to a third party.

• Sale of Assets– whether the seller gives the buyer control over

the assets transferred, and also any residual interest, without recourse to the seller.

Medium and Long Term Finance

• Debt Financing– Medium and long term bank loan – Corporate Bond Issue

• Equity Financing– The act of raising money for company activities by

selling common or preferred stock to individual or institutional investors.