UNIT 3: FINANCE

ROLE OF FINANCE IN A BUSINESS

Why do we need finance?

- Setting up a business (Start-up capital)

- Need to finance our day-to-day activities
- Expansion
- Research into new products
- Special situations (fall in sales, a demand…)

Start-up capital: amount of money needed by an entrepreneur to set up a business

Working capital: the capital needed to pay for raw materials, day-to-day activities, costs, and
credit offered to customers.

CAPITAL vs REVENUE EXPENDITURES

Capital expenditure  money spent on fixed assets that are expected to last for more than
one year.

Example: furniture, land, building…

Revenue expenditure  money spent on other things that are not fixed assets.

Example: wages, rent, raw materials…

SOURCES OF FINANCE
Companies are able to raise finance from a wide range of sources. It is useful to classify these
into internal and external sources.

Internal sources of finance

PERSONAL FUNDS
This is a key source of finance for sole traders, and it comes mostly from their own personal
savings. By investing with their personal savings, sole traders maximize their control over the
business. In addition, this investment shows commitment to the business and is a good signal
to other investors or financial institutions that the business might need to approach for
additional sources of finance.

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Characteristics:

- It is cheap
- It is easily available
- No interests will need to be paid
- It poses a great risk to the owner

RETAINED PROFITS
This is the profit that remains after a business has paid tax to
the government (corporation tax) and dividends to
shareholders. It is also known as ploughed-back profit and may
be reinvested into the business, becoming an important source
of finance for the organization.

Advantages:

- It is cheap because it does not incur interest charges.

- It is a permanent source of finance as it does not have to be repaid.
- It is flexible as it can be used in a way the business deems fit.
- Owners have control over their retained profits

Disadvantages:

- Start-up businesses will not have any retained profit as they are new ventures.
- If retained profits are low, it may be insufficient for expansion
- In some cases, owners may overuse the retained profit and leave no buffer for
emergencies or for future growth opportunities.
- A high retained profit may mean that either very little or nothing was paid out to
shareholders as dividends.

SALE OF ASSETS
Advantage  that it is a good way of raising cash from
capital that may be tied up in assets that are not being
used. No interest or borrowing costs are incurred.

Disadvantage  it may only be an option available to established businesses and not new
ones that may lack any excess assets to sell. In addition, it may be time-consuming to find a
buyer to sell the assets to, especially in the case of obsolete machinery.

(In some cases, businesses may adopt a sale and lease back option, which involves selling an
asset that the business still needs to use. In this case the business will sell the asset to a
specialist firm that then leases the asset back to the business)

External sources of finance

SHARE CAPITAL
Advantages:

- It is a permanent source of capital as it will not need to

be redeemed (repaid by the business).

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 - There are no interest payments, and this relieves the business from additional
expenses

Disadvantages:

- Shareholders will expect to be paid dividends when the business makes a profit.

DEBENTURES / LONG-TERM BONDS

Bonds issued by companies to raise debt finance, often with a fixed rate of interests (even
when the business has losses).

- It differentiates with the shares because shareholders only receive a dividend if the
business makes a profit, and the debentures are paid even with a loss.

GRANTS
In order to receive a grant, businesses will be expected to write a
proposal showing how they plan to use the money. In most cases
grant makers (providers of the grant) are very selective on who
receives the grant.

LOAN CAPITAL
The interest rates may be either fixed or variable:

- A fixed interest rate is one that does not fluctuate and

remains fixed for the entire term of the loan repayment.
- A variable interest rate changes periodically based on
the prevailing market conditions.

Advantages:

- It is accessible and can be arranged quickly for a firm’s specific purpose

- Its repayment is spread out over a predetermined period of time, reducing the burden
to the business of having to pay it in a lump sum
- Large organizations can negotiate for lower interest charges depending on the amount
they wish to borrow
- The owners still have full control of the business if no shares are issued to dilute their
ownership.

Disadvantages:

- The capital will have to be redeemed even though the business is making losses and
in some cases collateral (como un tipo de seguro que respalde que eres capaz de
pagar la deuda) will be required before any funds are lent out
- Failure to pay the loan may lead to the seizure of a firm’s assets
- If variable interest rates increase, a firm that took this option may be faced with a high
debt repayment burden.

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OVERDRAFTS
Advantages:

- It provides an opportunity for firms to spend more than

they have in their account (even in situations where there
is no money in the account), which greatly helps in settling
short-term debts such as paying suppliers or the wages of
staff
- It is a flexible form of finance as its demand will depend on the needs of the business
at a particular point in time
- Charging interest only on the amount overdrawn may make it even cheaper than loan
capital.

Disadvantages:

- Banks can ask for the overdraft to be paid back at very short notice
- The bank may at times charge high interest rates

 Definition:

TRADE CREDIT
The credit period offered by most creditors (trade credit
providers) usually lasts from 30 to 90 days; jewelry
businesses are known to extend it to at least 180 days.

Advantages:

- By delaying payments to suppliers, businesses are left in a better cash-flow position

than if they paid cash immediately
- It is also an interest-free means of raising funds for the length of the credit period

Disadvantages:

- Debtors (trade credit receivers) lose out on the possibility of getting discounts had
they purchased by paying cash
- Delaying payment to creditors after the agreed period may lead to the development of
poor relations and suppliers may even refuse to engage in future transactions with the
debtors.

*Liquidity: this is how easy is to convert something into cash.

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SUBSIDIES
In situations where the market price goes below the cost of
production, this is known as subvention.

Advantages:

- It helps businesses to increase their demand for goods by

charging lower prices for their products
- Subsidies do not need to be repaid

Disadvantages:

- They are often marred by political interference in the subsidization process (especially
government subsidies)

DEBT FACTORING
The debt factor may immediately pay the business between 80
90 per cent of the money owed on the invoices and then
proceed to collect the full amount from these debtors. The
remaining 10–20 per cent of sales revenue counts as part of the
debt factor’s profit.

Example: Tienes un recibo que te van a pagar dentro de 1 mes

de 200€ pero no quieres esperar tanto tiempo para recibir tu
dinero, entonces hay una persona que sí que quiere esperar y te paga 170€ (menos de lo que
deberías recibir) a cambio de que recibas ya el dinero.

Advantages:

- A business gets immediate cash that it can use to fund other activities or projects
- The risk, or responsibility of collecting the debt is passed on to the factor

Disadvantages:

- A business loses a percentage of its profits because it does not receive the full debt
repayment and debt factors are known to charge high administrative and service fees
to do their job.
- A business may risk losing a loyal customer if the debt factors use harsh means of
collecting debt such as threatening to take the customer to court for failing to pay the
debt.

LEASING
Periodic or monthly leasing payments are made by agreement
between the lessor and lessee. In some cases, businesses may
get into a finance lease agreement where, at the end of the
leasing period, which usually lasts for more than three years, it
is given the option of purchasing the asset.

Example: car rent

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Advantages:

- A firm does not need to have a high initial capital outlay to purchase the asset.
- The lessor takes on the responsibility of repair and maintenance of the asset.
- Leasing is useful when particular assets are required only for short periods of time or
occasionally.

Disadvantages:

- In the long haul, though, leasing can turn out to be more expensive than the outright
purchase of an asset due to the accumulated total costs of the leasing charges
- A leased asset cannot act as collateral for a business seeking a loan as an additional
source of finance.

VENTURE CAPITAL
Venture capitalists usually fund start-ups that find it difficult
to access money from other financial institutions or capital
markets. Venture capitalists include specialist organizations
and investment banks. They own a stake in the businesses
they invest in with the expectation of benefiting from future
profits.

Advantages:
- They provide funding to businesses that other institutions might regard as too high a
risk.
- They are involved in the firm’s decision making by providing the required guidance
where it is needed (to protect their investment).

Disadvantages:

- They may set very high profit targets for the startup businesses they invest in and if
these are not attained, they usually increase their equity stake in these firms, often by
a large percentage.

BUSINESS ANGELS
They invest in high-risk businesses that show good potential for
high returns or future growth. They may provide a one-time
initial capital injection or continually support the businesses
through their lifetime.

Advantages:
- They give more favorable financial terms than other institutions or lenders of small or
start-up businesses (they are known to invest in the person rather than how viable a
business venture is)
- They focus on helping a business succeed by using their extensive business experience
coupled with good financial capital.

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Disadvantages:

- Angel investors may assume a good degree of control or ownership in the businesses
they invest in, therefore diluting the ownership of the entrepreneur.

Short/Medium/Long-term finance
SHORT-TERM
This is money needed for the day-to-day running of a business and therefore provides its
needed working capital. External short-term sources of finance are usually expected to be paid
with 12 months of a trading or financial year.

- Duration  1 year or less

Examples: bank overdrafts, trade credit & debt factoring.

MEDIUM-TERM
This is money mostly used to purchase assets such as equipment or vehicles that have useful
lifespans for a specific period of time.

- Duration  1 to 5 years approx.

Examples: leasing, medium-term bank loans & grants.

LONG-TERM
This is funding obtained for the purpose of purchasing long-term fixed assets or other
expansion requirements of a business.

- Duration  around 30 years

Examples: long-term bank loans & share capital.

Factors influencing the choice of a source of finance

- Purpose or use of funds
- Costs
- Status and size
- Amount required
- Flexibility
- Gearing
- State of the external environment

3.2. COSTS AND REVENUES

Costs and revenues are very important factors that determine the success of any business.
Businesses therefore need accurate and reliable information about them for effective decision
making.

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Cost: refers to the total expenditure incurred by a business in order to run its operations.

Revenue: is a measure of the money generated from the sale of goods and services.

Profit: is calculated by finding out the difference between revenues and costs. A high positive
difference is a good indicator of business success

TYPES OF COST
FIXED COSTS
They are expenses that have to be paid regardless of any business
activity the firm engages in. They are mostly time related and are
usually paid per month, per quarter, bi-annually, or per year. They
remain fixed in the short run.

Short run: is defined as a period of time when at least one factor of production does not
change.

VARIABLE COSTS
They are expenses that change in proportion to business activity.
Variable costs are volume related as they are paid per quantity
produced.

SEMI-VARIABLE COSTS
Semi-variable costs remain fixed for a given level of production
or consumption, after which they become variable when the set
level is exceeded.

Example: labor costs

DIRECT COSTS
They are expenses that can directly be traced to a particular
product, department, or process.

Example: cost of flour used for making bread, cost of chicken

used in a fast-food restaurant.

INDIRECT COSTS
They are expenses that are not directly traceable to a given
cost center such as product, activity, or department

Example: insurance, rent, legal fees…

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Revenue and total revenue
Total revenue: this is the total amount of money a firm receives from its
sales, found by multiplying the price per unit by the number of units sold.

Total revenue = price per unit × quantity sold

TR = P × Q

⚠ Do not confuse with profit ⚠

Revenue streams: all the different ways in which a business or person makes money and has
revenue.

 Revenue streams
o Sale of fixed assets
o Rental income
o Dividends
o Interest on deposits

3.3. BREAK-EVEN ANALYSIS

contribution per unit =selling price−VC per unit

total contribution=TR−total VC

When your total cost (TC) and total revenue (TR) are exactly the same, that’s what we call
BREAK-EVEN.

Break-even: this is the amount of output a business needs to sell in order to cover their costs.

TC >TR → loss
TC =TR →break −even
TC<TR → profit

¿ cost FC
Break-even formula  BE= =
contribution per unit selling price−variable costs(VC )

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Break- even chart (the table method)

(Remember to name the graph and put names on the axes and its units)

The answer of the break-even is the number of units sold where the lines meet

Margin of safety
A measure of the difference between the break-even level of output and the actual (current)
level of output is known as the margin of safety.

- It is the output amount that exceeds the break-even quantity.

margin of safety=current output −breakeven output

(The greater the difference between the break-even quantity and the sales number, the grater
the margin of safety)

- Profit  when sales are over the break-even quantity

- Loss  when sales are under the break-even quantity

Target profit
Target profit output
What is it?  It is the level of output that is needed to earn a specified amount of profit.

The break-even chart can be used to

determine the level of output that is needed
to earn a given level of profit.

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Output found this way is known as target profit output and the expected profit is known as
target profit.

¿ costs+target profit
target profit output=
contribution per unit
Break-even revenue
¿ costs
break−even revenue= × price per unit
contribution per unit

EFFECTS OF CHANGES IN PRICES OR COSTS

The break-even chart can be used as a helpful decision-making tool as it can show the impact
on break-even quantity, profit, and margin of safety as a result of any changes in price or cost.
The new position after the changes can then be compared with the previous position to
provide future direction in the business.

Changes in price
(If the sales remain)

- Increase of the total revenue

- The break-even will be reached at a
lower level of output
- Higher profit at every output level
- Higher margin of safety

Changes in costs
a) Increase in fixed costs

 This will lead to parallel increase of

the total costs
 Higher total costs will require to
sell more outputs to reach the
break-even
 Decreases the profits and margin
of safety (in the revenue remains
the same)

b) Increase in variable costs

 Increase the gradient (pendiente) of

the total costs line

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  Rise in the break-even quantity
 Decreases the margin of safety

Benefits & limitations of break-even analysis

BENEFITS
- By using the charts, the management of a business is able to determine the profit or
loss, margin of safety, break-even quantity, and break-even revenue or cost.
- Break-even charts provide an easy and visual means of analysing a firm’s financial
position at various levels of output.
- Changes in prices and costs and their impact on profit or loss, breakeven point, and
margin of safety can be compared by using the charts

LIMITATIONS
- Break-even analysis assumes that all the output produced by firms is sold with no
possibility of stocks being built up or held.
- It assumes that all revenue and cost lines are linear, i.e., represented by straight lines.
This is not always the case. Offering price reductions or discounts will influence the
slope of the revenue line. The slope of the variable cost line will also change if a firm
pays overtime wages in an effort to increase output.
- Fixed costs may change at different levels of activity. It would be preferable to
represent these fixed costs as a “stepped” line.
- Apart from showing fixed and variable costs, semi-variable costs are not represented
on the break-even chart. If these are included, it makes the process more complex.

4.3. FINAL ACCOUNTS

Purpose of accounts to different stakeholders
Final accounts are financial statements compiled by businesses at the end of a particular
accounting period such as at the end of a fiscal or trading year. These records of accounts
including transactions, revenues, and expenses help to inform internal and external
stakeholders about the financial position and performance of an organization.

SHAREHOLDERS
Shareholders will be interested in knowing how valuable the business is becoming throughout
its financial year. They will be keen to establish how profitable the business is in order to
assess the safety of their investment.

- Check how effective the business is to make sure they have a good ROI (Return on
Investment)

MANAGERS
Knowing the financial records will greatly assist managers in strategic planning for more
effective decision making in the businesses.

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Managers will:

- Set targets
- Set budgets
- Control expenditure patterns in different departments

EMPLOYEES
A profitable business could signal to employees that their jobs will be secure. This may also
indicate that they could get pay rises.

However, an increase in the profitability of a business does not necessarily mean higher
salaries for their employees.

CUSTOMERS
Customers will be interested in knowing whether there will be a constant supply of a firm’s
products in the future. This will determine how dependent they should be on the business and
how secure it is.

SUPPLIERS
Suppliers can use final accounts to negotiate better cash or credit terms with firms. They can
either extend the trade credit period or demand immediate cash payments.

- For suppliers it will be a key concern the ability to pay off its debts and the security of a
business.

THE GOVERNMENT
The government and tax authorities will check on whether the business is abiding by the law
regarding accounting regulations. They will be interested in the profitability of the business to
see how much tax it pays.

- A decrease in profitability of a business will probably cause an increase of

unemployment what will affect the county’s economy, so governments are interested
that their country’s businesses business run well.

COMPETITORS
Businesses will want to compare their financial statements with those of other firms to see
how well they are performing financially.

If the rival business is performing better than them, they would like to see on what they should
improve in order to be as profitable as the other business.

FINANCIERS
These include banks that will check on the creditworthiness of the business to establish how
much money they can lend it. This will also depend on the gearing of the business because a
high-geared business will have problems soliciting funding from financial institutions.

They will look to receive back their money with some interests.

THE LOCAL COMMUNITY

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Residents living around a particular business will want to know its profitability and expansion
potential. This is because it may create job opportunities for them and lead to growth in the
community.

They will also be concerned about if the business will be environmentally friendly, so it doesn’t
pollute its area.

Principles and ethics of accounting practice

- Integrity  accountants need to be open and honest in all aspects of their
professional conduct.
- Objectivity  the reporting of final accounts should not contain bias or undue
influence of other parties.
- Confidentiality  accountants must respect the confidentiality of financial data and
information acquired as a result of their profession. They must not disclose this to any
third parties.
- Professional behavior  accountants must avoid any action that could bring their
profession into disrepute.
- Professional competence and due care  this means accountants have a professional
duty to continue their professional knowledge and act diligently. They should stay up
to date in all aspects.

Profit and Loss accounts

Profit and loss accounts are also known as the income statement, shows the records of
income and expenditure flows of a business over a given time period.

- Sales revenue  refers to the money a business earns from selling its goods and
services.
- Cost of sales / Cost of goods sold (COGS)  this is the direct cost of purchasing the
goods that were sold during the financial year.
- Dividends  a sum of money paid to shareholders decided by the board of directors
of a company.
- Retained profit  the amount of earnings left after dividends and other deductions
have been made.
- Overheads / expenses  are the indirect or fixed costs of production.

Income statement

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Trading account
The trading account shows the difference between the sales revenue and the cost to the
business of those sales.

It shows the gross profit of the business.

Profit & loss account

This is the second part of the income statement that shows the net profit before interest and
tax, net profit before tax, and net profit after interest.

Appropriation account

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This is the final part of the profit and loss account that shows how the company’s net profit
after interest and tax is distributed.

2 forms of distributing it:

- Dividends (shareholders)
- Retained profit

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BALANCE SHEET
It is a snapshot of the financial position of a firm and is used to calculate a firm’s net worth. It
gives the firm an idea of what it owns and owes, including how much shareholders have
invested in it.

The basic requirement of a balance sheet is that what a business owns (total assets) must
equal what it owes (total liabilities) plus how the assets are financed (equity).

(mirar ficha en la carpeta)

ASSETS
These are resources of value a business owns or are owed to it. They include fixed assets and
current assets.

- Fixed assets are long-term assets that last in a business for more than 12 months.
(Some of these usually depreciate)
- Current assets are short-term assets that last in a business for less than a year.

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 a. Debtors are individuals or other firms that have bought goods on credit and
owe the business money.

LIABILITIES
These are a firm’s legal debts or what it owes to other firms, institutions, or individuals. They
arise during the course of business operation and are usually a source of funding for the firm.

- Long-term liabilities are long-term debts or borrowings payable after 12 months by

the business.
- Current liabilities are short-term debts that are payable by the business within 12
months.

When we know what the liabilities of a business are, we can calculate its working capital and
establish its net assets.

The amount of working capital a business has is important because it indicates whether the
business can pay off its day-to-day bills or running costs.

EQUITY
The equity is basically where does the money come from.

It shows how the net assets are financed using shareholders’ capital and retained profit.

It has to be the same as the net assets in order to have a correct balance sheet.

Share capital
Refers to the original capital invested into the business through shares bought by
shareholders. It is a permanent source of capital and does not include the daily buying and
selling of shares in a stock exchange market or the current market value of shares.

Retained profit
This is money owed to the owners, but which has been reinvested so as to purchase necessary
assets in the business.

It is also known as reserves as it includes profit that the business has made in previous years.

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INTANGIBLE ASSETS
These are fixed assets that lack physical substance or are non-physical in nature.

However, even though they do not have a physical value they can prove to be very valuable to
a firm’s long-term success or failure.

PATENTS
These provide inventors with the exclusive rights to manufacture, use, sell, or control their
invention of a product.

The inventors are provided with legal protection that prevents others from copying their ideas.
Anyone wishing to use the patent holder’s ideas must apply and pay a fee to be granted
permission to use it.

GOODWILL
This refers to the value of positive or favorable attributes that relate to a business

- Good customer base and relations

- Strong brand name
- High-skilled employees
- Desirable location

It helps to attract and retain workers and establish new investors. The value of goodwill is only
realized when the business is actually sold.

COPYRIGHT LAWS
These are laws that provide a creator with the exclusive right to protect the production and
sale of their artistic or literary work.

TRADEMARKS
The legal protection for a recognizable symbol, word, phrase, or design that is officially
registered and that identifies a product or business.

3.5. PROFITABILITY AND LIQUIDITY RATIO ANALYSIS

Ratio analysis  This is a financial analysis tool used in the interpretation and assessment of a
firm’s financial statements. It helps in evaluating a firm’s financial performance by determining
certain trends and exposing its various strengths and weaknesses. It aids in decision making by
making meaningful historical and inter-firm comparisons.

Profitability ratios
These ratios assess the performance of a firm in terms of its profit-generating ability.

GROSS PROFIT MARGIN (GPM)

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Possible strategies to improve GPM:

- Increase prices of your products (it can only be made in low competitive markets)
- Source cheaper suppliers of materials
- Adopting aggressive promotional activities in order to sell more units
- Reduce direct labour costs by improving efficiency and productivity

NET PROFIT MARGIN (NPM)

Strategies to improve NPM:

- Lowering expenses
- Carefully check on the indirect costs to see where unnecessary expenses may be
avoided (such as paying holidays to managers)
- A firm could negotiate with key stakeholders with the aim to cut costs

⚠ It is important to note that measures to increase revenues and cut costs should be used
collectively in an effort to raise both GPM and NPM ⚠

Efficiency ratios
RETURN ON CAPITAL EMPLOYED (ROCE)

It assesses the returns a firm is making from its capital employed.

Liquidity ratios
CURRENT RATIO

A ratio that compares a firm’s current assets to its current liabilities.

ACID TEST RATIO

A stringent ratio that subtracts stock from the current assets and compares this to the firm’s
current liabilities.

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3.7. CASH FLOW
The difference between profit and cash flow
Cash is money that gets into the business through either the sale of its goods or services,
borrowing from financial institutions, or investment by shareholders.

- It is the most liquid asset

- It is essential to the smooth running of any business

DIFFERENCE

- Cash inflows: these are the monies received by a business in a period of time
- Cash outflows: these are the monies paid out by a business over a period of time

Two possibilities can arise in differentiating between profit and cash flow:

a) A business can be profitable but have little or no cash. This is called INSOLVENCY and it
may be brought about by:
- poor collection of funds, possibly by allowing
customers a very long credit period
- paying suppliers too early and leaving little or
no cash for operations
- purchasing capital equipment or many non-
current assets at the same time
- overtrading – purchasing too much stock with cash that is eventually tied up in
the business
- servicing loans with cash
b) a business can have a positive cash flow but be unprofitable. It can achieve a positive
cash flow in the following ways:
- sourced from bank loans
- gained from the sale of a firm’s fixed assets
- obtained from shareholders’ funds

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The working capital cycles
Working capital is the money needed to pay for the day-to-day
running costs of a business.

It is also known as NET CURRENT ASSETS.

working capital cycle

When a business faces insolvency, it is known to be an illiquid

business, which means that they are not able to pay their
short-term debts, and they could eventually be liquidated.

Cash-flows forecasts
These are future predictions of a firm’s cash inflows and outflows over a given period of
time. This is in the form of a financial document that shows expected month-by-month
receipts and payments of a business that have not yet occurred.

Constructing cash-flow forecasts

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Benefits of cash-flow forecasts:

- A cash-flow forecast is a useful planning document for anyone wishing to start a business.
This is because it provides estimated projections for future performance.
- Cash-flow forecasts provide a good support base for businesses intending to apply for
funding from financial institutions. This is because they enable the banks to check on the
solvency and creditworthiness of the business.
- Predicting cash flow can help managers identify in advance periods where the business
may need cash and therefore plan accordingly to source it.
- It can assist in monitoring and managing cash flow. By making comparisons between the
estimated cash flow figures and its actual figures, a business should be able to assess
where the problem lies and seek the respective solutions to solve it.

Limitations of cash-flow forecasting:

- Unexpected changes in the economy

- Poor market research
- Difficulty in predicting competitors’ behavior
- Unforeseen machine or equipment failure
- Demotivated employees

Relation between investment, profit, and cash-flow

Investment is the act of spending money on purchasing an asset with the expectation of future
earnings.

Strategies to deal with cash-flow problems

REDUCING CASH OUTFLOWS
The following methods aim to decrease the amount of cash leaving a business:

- Negotiate with suppliers or creditors so as to delay payments. This helps to have working
capital to pay for short-term debts, but it can cause some problems for future relationships
with suppliers and creditors, till the point they refuse working with the business.
- Purchases of fixed assets can be delayed. Fixed assets may take up a lot of money for the
business sand delaying the payment helps them to have more available cash.
- A business may decrease specific expenses such as advertising costs that will not affect
production capacity. If not well checked, this may reduce future demand.
- Source cheaper suppliers. This will help to reduce costs on materials, but it can be seen as
a decrease in quality.

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IMPROVING CASH INFLOWS
- Insist that customers pay in cash only for goods purchased. This avoids problems of
delayed payments from debtors, but they will probably lose customers who want to pay
on credit.
- Offering discounts or incentives can encourage debtors to pay early. This will make the
business to get the cash quicker, but less amount.
- Diversify products offering. This will potentially increase sales, but it will signify more costs
that don’t guarantee to have sales.

LOOKING FOR ADDITIONAL SOURCES OF FINANCE

- Sale of assets
- Arranging a bank overdraft
- Sale and leaseback
- Debt factoring
- Grants and subsidies

The working capital cycle is the period of time between the actual cash paid for costs of
production and the actual cash received from customers.

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