1/09 Warm-up (Part 1)

1. 1/09 Warm-up (Part 1) • List and describe the 4 major functions of business.

2. Three Major Business Functions

3. 1/09 Warm-up (Part 2) • Define Business Financing. • Describe the purpose of business financing. • List the sources of financing for a business.

4. Unit Overview • 3.1 = Sources of Finance • 3.2 = Investment Appraisal • 3.3 = Working Capital • 3.5 = Final Accounts • 3.6 = Ratio Analysis

5. Sources of Finance • Evaluate the advantages and disadvantages of each form of finance • Evaluate the appropriateness of a source of finance for a given situation.

6. Business Financing • What long-term investments should be taken on? • Lines of business? • Buildings, machinery, equipment requirements? • Where should we get the long-term financing to pay for the chosen investments? • Borrow? • Bring in other investors? • How to manage everyday financial activities? • Collecting payments from customers? • When & how to pay suppliers & other expenses?

7. purpose of financing

8. Purpose of Business Financing Revenue Expenditure Capital Expenditure • Pay for fixed assets • long-term function • used repeatedly • define the scale of the business (production capability) • usually expensive • decline in value over time (depreciation) • Pay Expenses • Direct costs • Wages, raw materials, stock (inventory) • Indirect (overhead) costs • Rent, Advertising, Insurance, Electricity • Interest, Taxes

9. sources of financing Internal vs. External

10. 1/10 Warm-up • Explain the difference between a capital expenditure and a revenue expense. • Using Starbucks as an example, give specific examples of capital expenditures and revenue expenditures.

11. Internal Sources of Financing BUSINESS Personal Funds Cash Investment Returns Family & Friends Liquidate Fixed Assets Retained Profits Working Capital (Revenue)

12. 1/13 Warm-up (Microsoft Case Study) • Identify the type of financing being used by Microsoft. • Identify alternative sources of finance available to Microsoft. • Discuss the advantages and disadvantages of Microsoft’s decision to use this source of finance over the alternatives you identified. • Questions you have.

13. 1/17 Warm-up (Microsoft Case Study) • Discuss the factors that Microsoft considered when the decided to sell bonds as a source of finance.

14. 1/23 Warm-up • Work with a partner and visit the website of the Small Business Administration (SBA) http://www.sba.gov/about-sba-services/what-we-do • Summarize how the SBA assists small businesses though its 4 program • Explain the role of the SBA as a financing source for small businesses. • Explain why a small business would need assistance from the SBA to obtain financing.

15. 1/23 Warm-up • Compare and Contrast Business Angels and Venture Capital in terms of sources of finance for a business. • How are they similar? • How are they different?

16. Stages of a Company’s Growth & Need for Financing

17. Business Angels & Venture Capital Business Angels Venture Capital Provide committed capital in return for an ownership stake Larger sums ($1 to $2 million) Fund later stages (start-up & expansion) Look for exceptional growth potential (high risk) • Private investors who invest directly in private limited companies in return for an ownership stake • Smaller amounts of money, • Fund earliest stages (seed & start-up) • Hands-on role with company • Usually found through personal connections

18. Structure of Venture Capital

19. Match Source of Finance to Its Purpose • Capital Expenditures • Long-term investments • Right mix of borrowing & equity to support business operations • Revenue Expenditures (Working Capital Management) • Short-term investments & obligations (cash, stock, trade credit, etc.) • Day-to-day operations.

20. Sources of Finance Working Capital Retained Profits Sell Assets Cash in Bank Short Term Long Term Business Angels Over- drafts Debentures Leasing & Hire Purchase Shares Venture Capital Debt Factoring Government Subsidies & Grants Trade Credit Loans 5+ Years 1 Year

21. Ownership Borrowing Venture Capital Business Angels Banks Overdraft Loans Share Capital Sell Assets Debentures Government Preferred Ordinary Debt Factoring Grants Credit Trade Credit Subsidies BUSINESS Personal Funds Cash Investment Returns Family & Friends Sell Fixed Assets Working Capital (Revenue) Retained Profits Leasing & Hire Purchase Loans

22. Factors Impacting Choice of Financing • Purpose – revenue vs. capital expenditures • Time Short vs. long-term use. • Status & Size of Business • Growth Stage • Sole Trader/Partnership vs. Limited Company • Business Risk  Increased Cost • Amount of Financing – large vs. small amounts • External Factors – economic & market conditions beyond control of business

23. Sources of Financing Exercise • For each scenario identify the following; • Purpose • Revenue or Capital Expenditure? • Time • Funding for Short-, Medium-, Long-term? • Type & Size of Business • Sole trader, partnership or Limited Company? • Small or large? • Amount of Financing Needed • Recommend & justify financing source.

24. Goods & Services Expand Business Company $$ Revenue/Sales Profit Expenses Advise ? $$ SECONDARY MARKET Stocks Exchanges Investment Bankers OTC (Nasdaq) PRIMARY MARKET Video

25. Goods & Services Expand Business Company $$ Revenue/Sales Profit Expenses Advise ? $$ SECONDARY MARKET Bonds Investment Bankers OTC Market PRIMARY MARKET Video