Role of Finance for Businesses (DP IB Business Management)

Revision Note

Flashcards

The Importance of Finance

  • When starting a new business entrepreneurs need finance to cover initial setup costs

    • This may include acquiring equipment, renting or purchasing premises, conducting market research, hiring staff and developing a marketing strategy

  • Businesses often require finance to fuel their expansion and growth plans

    • This could involve opening new locations, entering new markets, launching new products or services, and increasing production capacity 

Diagram: why businesses need finance

Businesses need finance to start up, keep running, provide working capital, fund expansion, invest in research, manage customer service and to spend on marketing
Reasons why businesses need finance

Capital expenditure

  • Businesses require finance for capital expenditure such as purchasing machinery, technology, vehicles, and infrastructure

    • These investments enable businesses to enhance productivity, expand operations and improve efficiency

Working capital

  • Working Capital is necessary to manage the day-to-day operations of a business

  • It helps cover expenses such as purchasing inventory, paying suppliers, meeting payroll obligations and funding overhead costs like rent and utilities

  • Sufficient working capital ensures that a business can operate smoothly without facing cash flow issues

Research & development

  • Businesses require finance for research and development (R&D)

    • Money is needed to invest in technical research and product development

    • This investment helps them stay ahead of the competition and create new revenue streams

Marketing

  • Effective marketing and advertising require finance to develop and execute marketing campaigns, create advertising materials, conduct market research and build brand awareness

    • Investing in marketing helps attract customers, increase sales, and generate revenue

Risk management

  • Businesses need finance to manage risks and protect against unforeseen events

    • This includes paying for insurance coverage, contingency funds and implementing risk management strategies 

Debt servicing

  • Many businesses need to service debts, such as loans or credit facilities

    • These debts, including interest, must be repaid over the agreed-upon period

Business performance

  • Finance provides a metric to measure business performance

  • Business success is often judged by the level of profits it makes and the stability of a business can be determined by the level of working capital or liquid assets available

Capital Expenditure

  • Capital expenditure is business spending on non-current assets

    • These are assets which will be used many times and for more than one year

  • Common examples of non current assets for which capital expenditure is required include

Diagram: capital expenditure

Capital expenditure on current assets includes purchases of land, machinery, IT equipment, vehicles, fixtures and furniture
Examples of current assets for which capital expenditure is required

Revenue Expenditure

  • Revenue expenditure is spending on goods and services that a business uses in the short-term as part of its normal trading activities

  • Common examples of current assets for which revenue expenditure is required include

Diagram: revenue expenditure

Examples of revenue expenditure include insurance, fuel, wages and salaries, utilities, distribution costs
Examples of day to day costs for which revenue expenditure is required

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