I ALSO PUT IT IN MY NOTEBOOK

Unit 19

1.Define

a) Start up capital: The capital needed by an entrepreneur when first starting a business

b) Working capital: Capital needed to finance the day to day running expenses and pay
the short term debts of a business

c) Non-current fixed assets: The capital needed to start a business which will be used
for a period longer than one year, for example buildings and machinery

d) Capital expenditure: Spending by a business or non-current assets

2. Contrast “short term finance” and “long term finance”

Long term finance is the debt or equity used to finance the purchase of non current assets or
finance expansion commands, meanwhile, short term finance are lows or debts that a
business expects to pay back within one year.

3. What are internal sources of finance? List down and explain each one.

The internal sources of finance refer to money that comes from within a business. Some
example are:
- Owner savings: Refers to the personal funds that the business owner invests into
the business.
- Some of the business working capital: businesses may be able to use some of the
capital to raise funds. This sources of finance may come from: cash balances,
reducing inventory levels and reducing trade receivables (debtors)
- Retained profits: profit remaining after all expenses, tax and dividends have been
paid and which is ploughed back into the business.
- Sale of non current assets, such as equipment of machinery: Selling off assets
that are not essential to the operations of the business. These assets can include
machinery, equipment, buildings.

4. What are external sources of finance? List down and explain each one.

The external sources of finance are raised from outside the business. This topic is usually
divided into short-term and long-term sources.

Short term finance (less than a year):

● Overdraft: agreements with the bank which allows a business to spend more money
than it has in its account up to an agreed limit, the loan has to be repaid within a year.
● Trade credit: source of finance as the supplier is really lending the money for the cost
of the goods for the length of the agreed credit.
 ● Debt factoring: selling trade receivables( amount owed to a business by its
customers who bought goods on credit) to improve business liquidity.

Long term finance (more than 1 year):

● Bank loan: Provision of finance by a bank which the business will repay with
interprets over an agreed period of time.
● Higher purchase: The purchase of an asset by paying a fixed repayment amount per
time period over an agreed period of time. The asset is owned by the purchasing
company on completion of the final repayment.
● Leasing: To obtain the use of a non current asset by paying a fixed amount per time
period for a fixed period of time. Ownership remains with the leasing company.
● Mortgage: Long term loan used for the purchase of land or buildings.
● Debenture: A bond issued by a company to raise long term finance usually at a fixed
rate of interest.
● Share issue: A source of permanent capital available to limited liability companies.

5. Which factors influence the choice of finance? Detail each one

- Size and legal form of business: The business's structure and scale determine
financing options, with larger firms accessing capital markets and smaller entities
relying on personal savings or small loans. Legal form impacts liability, taxes, and
regulatory considerations, influencing finance attractiveness.
- Amount required: If a large capital amount is required then share issues and
debentures are more appropriate. A smaller amount might be financed through bank
loans or leasing and hire purchase.
- Length of time: The business needs to plan carefully to decide how long it will need
the finance for. if it is a very long-term finance then it may want to consider
debentures or share issues. ìn the short-term, an overdraft may be the most flexible
solution. The longer the period of time finance is borrowed over , the more closely it
will be because of interest payments
- Existing borrowing: If a business already has existing borrowing then it might find it
more difficult to borrow further amounts from banks and other lenders. This is
because it would be seen as a greater risk.

Unit 20

6. Define:

a) Cash flow forecast: an estimate of the future cash inflows and outflows of a business

b) Net cash flow: cash inflow minus cash outflow.

c) Liquidity: the ability of a business to pay its short-term debts

d) Credit sales: Goods sold to customers who will pay for these at and agreed date in
the future
Tasks - UNIT 19

Case Study: Start-up capital

a) Define start up capital: The capital needed by an entrepreneur when first starting a
business

b) Identify two day-to-day expenses of Milena's business

- Purchasing fresh fruits everyday, in order to make her juices.
- Employee wages.

c) Using an example from Milena’s business, define ‘capital expenditure’: In Milena's

case, an example would be the purchase of the two large refrigerators.

d) Why does Milena need more finance for her business? Milena needs more finance
because she is planning to expand her business to the next town, this requires
capital for buying a new place, hiring new staff and marketing services.

Case Study: Cemex

a) Explain 2 reasons why Cemex needed to raise finance from the sale of assets

Reduce Long-Term Debt: they needed immediate cash to lower their long-term debt,
reducing interest payments and financial risks

Improve Return of Capital Employed: Selling non-core assets allowed Cemex to focus on
more profitable operations, enhancing overall efficiency and returns.

b) Do you think selling assets was the best source of finance for Cemex to use to pay
off its debts? Justify your answer.

Yes, it was a reasonable decision because the instant cash inflow provided the necessary
liquidity to meet financial obligations on time. Avoided further debt buildup and interest
payments. Focus on core activities made it possible for Cemex to increase profitability and
simplify operations.

Case Study: Marie - Claire

a) Why might Marie Claire be described as an entrepreneur?

Marie-Claire shows entrepreneurial traits by starting and growing her own business, taking
risks, and innovating with limited resources.
 b) Why might Marie Claire have found it difficult to raise the finance she needed for her
business from banks and other lenders?

Her low credit history, lack of collateral , and the strict lending requirements of traditional
banks probably caused her problems.

c) Do you think Marie-Claire has a successful business? Justify your answer.

Yes, judging by the fast loan payback, profitability, and expansion plans to help the
community even more, her company is successful

Tasks - UNIT 20

Case study: Metrorail

a) Define ‘cash flow’

Net amount of cash being transferred into and out of a business or personal account, over a
specified period. It reflects the liquidity and financial health by showing how well income
covers expenses.

b) How has the cash-flow problem at Metrorail affected Sinqobile?

The cash-flow problem at Metrorail has affected Sinqobile by delaying payments owed to the
company for services rendered, leading to financial strain and difficulties in meeting its own
obligations.

c) Why might the cash-flow problem be worse for Sinqobile than it is for Metrorail?

Sinqobile's cash-flow problem might be worse than Metrorail's due to its dependency on
timely payments from Metrorail for its operational expenses, potentially impacting its ability to
pay employees and suppliers promptly.

d) How might Sinqobile overcome its cash flow problem?

Sinqobile could overcome its cash-flow problem by diversifying its client base, renegotiating
payment terms with Metrorail, implementing stricter credit control measures, and exploring
alternative financing options such as securing a line of credit or seeking short-term loans.

Case study: Shonaquip

a) Why is Shona McDonald a good example of an entrepreneur?

Shona McDonald embodies entrepreneurship through her visionary leadership, calculated

risks, and the successful establishment of Shonaquip, a manufacturer aiding disabled
children, showcasing resilience and innovation.
 b) Identify two reasons why Shona needed cash for her business in the ‘early days’.

Shona needed cash in the early stages for startup costs like equipment and R&D to develop
specialized wheelchairs, crucial for initiating and refining her business model.

c) Why is working capital important to Shonaquip?

Working capital is vital for Shonaquip, ensuring smooth operations, covering day-to-day
expenses, and managing seasonal demand fluctuations, enabling effective business
continuity.

d) What factors will determine the length of Shonaquip’s working capital cycle?

The length of Shonaquip's working capital cycle hinges on factors like inventory turnover,
accounts receivable collection period, accounts payable payment period, and seasonal
variations in demand, influencing cash flow dynamics and operational efficiency.