Management of Business

Grade 12
Module 3: Business Finance and Accounting

The Need for Capital

All businesses need capital/funds. There are four main types of capital:

1. Start-up capital – The start-up capital for a small business is likely to come from the
owner’s own funds and any borrowing he or she can secure. For a public or private
company, the financial capital is provided by shareholders.

2. Venture Capital – A venture capitalist is usually a wealthy individual or group of

individuals who tries to spot new investment opportunities. The venture capitalist provides
some of the funds for the enterprise in return for a share of the returns.

3. Working capital – This is the capital required to purchase stock and to cover the daily
expenses of operating the business.

4. Investment Capital – Once a business is established, the owner may want to grow in size.
Capital for expansion may be paid out of the company’s profit or by borrowing.

Sources of Finance

A major decision for any business is how it should be financed. The business needs to decide
what proportion of the finance should come from the owner’s equity and what proportion should
come from debt (lenders outside the business). There are various sources from which finance
may be obtained. These include:

1. Equity – Equity refers to the capital provided by the owner. The forms of equity include:

A. Capital – Ordinary share capital is often called equity capital. This is finance
invested by the shareholders in a company. Equity is provided by the risk takers or
the owners of the business.

B. Shares – Ordinary shareholders are also entitled to a share of the business’s profit
after all other investors have been paid. They receive this in the form of a dividend
payment. They can expect a high return when the company makes good profits, but
in years when the company makes low profits, they may only receive a low dividend
and in some years they may receive nothing at all.

2. Debt – Debt finance is provided by creditors (lenders). Debentures/bonds is a form of debt.

A. Debentures/bonds – A debenture is a loan made to a company under terms set out in

a certifying document. Typically, the loan involves a fixed rate of interest and is
repaid (redeemed) by the company on a predetermined date.
Criteria for seeking Finance

There are a number of factors that a business needs to consider when seeking finance. These
include:

❖ The purpose of raising finance

❖ Does the business want to raise the funds from its own resources (equity) or externally
(debt)?

❖ Under what terms is the business prepared to repay the loan?

❖ How much interest needs to be paid on different forms of borrowing both now and in the
future?

Sources of Short Term Finance

1. Trade Creditors

2. Family/Friends

3. Commercial Banks

4. Overdraft

5. Credit Cards

6. Leasing and hire purchase

7. Short term loans

Sources of Long term Finance

1. Profit retention

2. Family/Friends

3. Long term loans

4. Government Grants

5. Venture Capital

6. Shares (equity)

7. Mortgages – loans secured against a property or land

8. Commercial Banks

9. Development Banks

10. Small Business Associations – for example the Small Business Association of Jamaica

11. Development Funds

 Money market VS Capital market

The Capital Market is made up of financial institutions that provide long term finance
for businesses and the government. Institutions in the capital market include those trading shares
on the stock exchange, investment banks, and private equity firms.

The Money Market is made up of organizations that provide short-term finance for
businesses and the government. The money market deals in transactions and short term debt that
become due for payment in less than one year. Institutions in the money market include
commercial banks and credit unions.

Regional and International Financial Institutions

1. Caribbean Development Bank (CDB) – The CDB has its head office in Barbados. It provides
capital for a range of development projects in the Caribbean, mainly to government but also to
community groups for projects involving the development of industry and agriculture, and
setting up small enterprises, typically in poorer communities.

2. World Bank – The World Bank is an international organization that provides funds to national
governments and development agencies, often for major development projects such as building
schools and hospitals. It works with national government, aid agencies and environmental
groups to establish development priorities, which are then funded or part-funded by the World
Bank. Before the World Bank lends money to borrowers it will first need to carry out feasibility
studies and economic appraisal in order to check that the investment will yield an appropriate
return.

3. International Monetary Fund (IMF) – Whereas the World Bank and the CDB are mainly
concerned with providing long-term capital investment, The International Monetary Fund (IMF)
may provide shorter-term support. The IMF provides loans to countries with balance of
payments and other problems to help them to restructure their economies. Most, if not all
Caribbean countries have borrowed from the IMF in recent times, for eg, to help resolve
financial difficulties after a severe hurricane. The IMF works with Caribbean countries to create
economic stability and reduce poverty. The World Bank and the IMF also provide technical and
managerial advice to governments to support development programmes.

4. International Development Bank (IDB) – is a generic term for a financial institution that seeks
to support economic growth and social development in a particular region or country. The IDB
in the Caribbean is the Caribbean Development Bank.

The Stock Exchange

The stock exchange is a place in which shares in public companies are traded. A stock exchange
is an institution that facilitates the raising of funds/capital for businesses. The shareholders in the
companies are rewarded by means of dividends.

The Functions of the Stock Exchange

The main function of the stock exchange is to help public companies raise capital. The capital
can then be used to purchase physical plant, such as buildings and machinery.