Financial accounts: control profit and loss statements, and balance sheets.
- Important for financial control and planning
- Also a legal requirement for many firms (i.e. for taxes)
Why would stakeholders be interesting in final accounts?
Shareholders: see where money is going, see how well their investment is performing
Profit and loss account: taxes and interest in not included in expenses, since different places have different taxes and interest rates. Keeping them two separate sections is helpful for comparing profit/loss sheets for MNCs
Financial accounts – Balance sheets
Assets: business possessions that have monetary value. Owned by business
Liabilities: stuff the business owes to other people
Balance sheet has two things: sources of finances and uses of finance.
Non current assets: not going to be sold in the next 12 months (i.e. buildings, machinery, equipment, vehicles). Most of the values of these items fall over time (this is known as depreciation)
Illiquid assets: cannot be sold quickly without losing a lot of money
Current assets: you want to turn into money quickly, within the next 12 months. Can include
- Cash, debtors (people who will pay debt to you), stocks, raw materials, work-in-progress (partially completed goods), finished goods
Advantages and Disadvantages of Share Capital
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No debt or interest payments
Any public limited liability company can make further finance by selling more shares
Disadvantages
Shareholders need to be paid dividends once the company earns a profit (booooo)
Dilution of company ownership (when you sell shares, you’re selling a part of your ownership)
Only an option for public limited companies à what’s public limited company again?
Advantages and Disadvantages of Loan capitals
- Loan is more accessible (smaller incremental payments rather than one big one)
- You don’t dilute company ownership
Disadvantage:
- Interest!
- Collateral!
- Liquidity problems (rate of interest increases, and they can’t make the debt payments)
A & D: Overdrafts
- Withdraw more money than what’s inside your bank account. Good for short term or emergency financial situations
- Easy to obtain: useful for small businesses
- Great flexibility for businesses
Disadvantages:
- High interest rates
- Only suitable for small capital
- Banks can ask to it to be paid quickly
- High cost, short term loan
Trade credit: credit cards. Buy now, pay later
Crowdfunding A & D
- Small risk for investors, since they usually invest small amounts
- Don’t have to deal with bank! (which is slow)
- Raise capital quickly
- Investors don’t take control of the company (unlike business angels)
- Less costly than being listed on the public stock exchange usually
Disadvantages
- Requires companies to be more transparent to the public, which can be costly
- Theft of business ideas (lack of knowledge and finance to defend these rights)
- Crowdfunding scams
Advantages and Disadvantages of Leases
Use assets without purchasing them (like rent)
- Lessor doesn’t have to pay for expensive equipment
- Lessor takes responsibility for equipment, so less cost for lessee
- Helpful if you only need the capital for a short amount of time (i.e. see if it helps production before purchasing it)
Disadvantages:
- Can be more expensive to lease long term.
- You never own the asset
Advantages and Disadvantages of Microfinance providers: for-profit social enterprises that give money to low income or unemployed (so people who wouldn’t be able to secure loans)
- Can help people get out of poverty.
- Help underprivileged people or communities.
- Help empower small businesses.
- Can benefit the community (improved healthcare, education, and employment opportunities)
Disadvantages:
- Some argue it’s unethical (microfinance providers take profit from low income people)
- Small scale, so low impact
- Microfinance loans still have interest, so it can become expensive for small business owners
- Increases debts of entrepreneurs
- Low profitability, so not popular.
Advantages and Disadvantages of Business Angels
- Yay money. Useful for small business
- Expertise and experience of business angels can help small businesses.
Disadvantages
- Business angles can dilute a firms ownership