FINACIAL FUNCTION

PURPSOSE
• The fi nancial function is concerned with raising suffi cient capital to fi nance
the
• business’ assets, resources and services to function properly. The fi nancial
manger
• has to make sure that the business can generate enough income to cover the
• cost (interest rate) of raising capital. The fi nancial manager also needs to
prepare
• fi nancial statements to present to the bank or investors to convince them
that the
• business is fi nancially healthy.
 TYPES OF FINANCE
• Short-term financing
• For a business to function on a daily basis, it requires short-term fi nancing.
• Examples of short-term finacing are:
• • Trade Credit – when a supplier does not request an immediate payment when
• it delivers goods or services to the business, but gives the business 30, 60 or 90
• days to pay.
• • Accruals – expenses which the business pays only after delivery of services,
• such as wages, salaries, water and electricity.
• • Bank overdraft – when the business arranges with the bank to draw out more
• money than what it actually has in its bank account.
• • Invoice discounting – a business hands the accounts of its good debtors to a
• fi nance company in return for cash. Customers are not aware of this arrangement.
• • Factoring – the fi nancing company, usually a bank such as Standard Bank, will do the
• administration and collection of debts. Customers are aware of this arrangement
 LONG TERM FINANCING
•Long-term financing is needed for bigger loans or greater risk, for example when
•there is no security that the business will remain sustainable or too much of the
•owner’s own capital is required. Examples of long-term fi nancing are:
•• Ordinary shares – the business issues shares to the public in exchange for money.
•• Preferential shares – shares are issued to the public with the proposition that
•the shareholders will be paid dividends before the ordinary shareholders.
•• Debentures – the business borrows money from the public or investors by
•issuing a certifi cate, called debentures, to them. They are entitled to a refund of
•their money as well as interest after a specific d period of time has passed.
•• Bonds – the business borrows large sums of money and gives fi xed property
•such as the office ce block or business premises as security.
•• Leasing – instead of buying offi ce equipment or vehicles for the business, the
•business leases the equipment or vehicles for an agreed period of time for which
•an amount called ‘lease’ is paid. The full amount is tax deductible.
 BUDGETING

• Budgeting is one of the most important mechanisms for financial control, in the
• public sector, private sector and even private life. Budgeting is a financial plan
• according to which resources for specific activities are issued. For example, a
• manager prepares a budget for revenues which come from sales and expenses for
• operating the business. The expense budget is made up of the total sum of money
• which the different business departments requested to cover their expected costs
SOURCE OF FINANCE
• Business Partners – offers a full service to entrepreneurs including mentorship,
• business support and consultation. Business Partners will not fi nance
• entrepreneurs with high-risk proposals.
• • Khula Enterprise Finance – operates through a network of channels such as
• commercial banks and Business Partners.
• • National Empowerment Fund – assists different sectors of the BEE market.
• • National Youth Fund – focuses on young people and offers them access to
• finance.
• • SA Micro-Finance Apex Fund – a micro-credit outlet which facilitates access to
• fi nance for micro, small and survivalist businesses
TYPES OF CAPITAL
 CLASSROOM ACTIVITY
• 1. Give four clear reasons why organisations have to budget annually
or per
• semester.
• 2. List two or more institutions which are known for not having
budgeted
• properly.
• 3. What are the results of poor budgeting
 HOMEWORK
• Explain the differences between the following:
• a) Own and borrowed capital
• b) Fixed and working capital.
• You have inherited R5 000 and decide to invest the money.
• a) Identify a low, medium and high risk investment available to
• you.
• b) Explain why each of these investments referred to in 2 a) has a
• different level of risk.
• c) Which form of investment will you choose? Give a reason for
• your answer
 MOODLE QUIZ
• 1)Budgeting is the most important mechanism for financial control.
• 2)trade credit is when a supplier does not request an immediate
payment.
• 3) the financial manager needs to prepare financial statements
• 4)national empowerment funds assist primary sector
• 5)ordinary shares the business issues shares to the private sector.