2.1 Finance
Every business requires finance to kick-start operations, fuel growth, and manage daily activities. The money may be needed to acquire essential assets like machinery, buildings, or for recurring expenses such as salaries and utilities.
Internal Sources of Finance
When money comes from within the business itself, it's known as internal finance. Here's how it works:
- Owner’s Capital (Personal Savings):
- In the beginning, you might use your own savings to start the business.
- You might also have a lump sum from other sources like a redundancy payment, which can be invested into the business.
- As the business grows, you might put in more money to tackle specific needs like a short-term cash problem.
- Retained Profit:
- If your business earns more money than it spends, that surplus is called profit.
- You can keep this profit in the business to use later, which is a cost-effective way since it doesn’t involve borrowing and the extra charges that come with it.
- Sale of Assets:
- If the business owns assets that are no longer needed, like outdated machinery or extra land, these can be sold to raise money.
- There's also a method called 'sale and leaseback', where a business sells an asset (usually a building), gets the money, and then rents it back to continue using it.
- Effective Working Capital Management:
- By negotiating better payment terms with suppliers or getting customers to pay sooner, a business can improve its cash flow and have more money for other needs.
Pros and Cons of Internal Finance
Advantages:
- It’s usually free from extra charges like interest.
- It can be arranged swiftly with minimal paperwork.
- It's a more accessible option especially if the business might not pass credit checks required for bank loans.
Disadvantages:
- There’s an opportunity cost; once the money is used, it’s not available for other purposes.
- It may not provide enough funds to meet all the needs of the business.
- It’s not as tax-efficient as some external finance methods since loan repayments can sometimes be offset against tax.
2.2 Sales Forecasts
Sales forecasts are crucial for businesses to predict their future revenues based on past sales data. They help in making informed decisions regarding resource allocation, financial planning, and strategic actions. A sales forecast might consider several aspects like the volume and value of sales, market size, impact of promotional activities, and cyclical factors like seasonal demands.