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2.7 - Examples of Finance in Business

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Interactive Audio Lesson

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Capital Requirements

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0:00
Teacher
Teacher

Today, we'll discuss how businesses use different types of finance. Can anyone tell me what capital requirements are?

Student 1
Student 1

Isn't it the money businesses need for operations?

Teacher
Teacher

Exactly! Businesses need capital for various reasons, like buying new machinery. Student_2, can you think of a time a business might need to use borrowed capital?

Student 2
Student 2

When they take out a loan to buy equipment?

Teacher
Teacher

Correct! That’s a great example. They use loans to invest in essential assets. Remember, we can use the acronym 'LOAN' — L for long-term growth, O for operational needs, A for asset purchase, and N for normalizing cash flow.

Student 3
Student 3

What about using personal savings?

Teacher
Teacher

Great point, Student_3! That reflects owned capital where entrepreneurs invest their savings to start businesses. Let's summarize today's key points: businesses use different funds for different needs; loans help buy assets, and personal savings aid startups.

Entrepreneurial Finance

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Teacher
Teacher

When thinking about businesses starting up, what financial options are common?

Student 4
Student 4

Investing personal money?

Teacher
Teacher

Exactly, Student_4! An entrepreneur may use their savings to start a business. This showcases owned capital well. It’s important to consider the risks involved, right?

Student 1
Student 1

Yes, they might lose their savings.

Teacher
Teacher

Absolutely! Understanding personal investment risks is crucial. What could be another example of finance in business operations?

Student 2
Student 2

Issuing shares to raise funds?

Teacher
Teacher

Yes! Companies often issue shares to gather funding for expansion. Remember the acronym 'GROWTH' — G for gathering funds, R for reducing risks, O for ownership sharing, W for wealth creation, T for transitioning business, and H for helping in decisions.

Student 3
Student 3

That makes it easier to remember!

Teacher
Teacher

Let's summarize: personal investment and issuing shares are common financial strategies to aid business growth.

Short-Term Finance

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0:00
Teacher
Teacher

Now, let's discuss the significance of short-term finance. Can anyone provide an example of when a business might use it?

Student 3
Student 3

To buy raw materials?

Teacher
Teacher

Correct! During peak seasons, businesses often use short-term finance to purchase raw materials. This ensures they can meet demand. Remember, the acronym 'PEAK' — P for purchasing, E for expenses, A for availability, and K for keeping afloat — can help you remember.

Student 1
Student 1

That helps! What’s the difference when they use long-term finance?

Teacher
Teacher

Good question, Student_1! Long-term finance is usually for significant investments over five years. Think of setting up factories. What could be some benefits of using short-term finance?

Student 2
Student 2

It helps manage cash flow?

Teacher
Teacher

Exactly! Managing cash flow efficiently is essential for business sustainability. Let’s summarize: short-term finance supports immediate needs, while long-term finance is used for bigger investment decisions.

Introduction & Overview

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Quick Overview

This section illustrates various real-world examples of how finance is utilized in business operations.

Standard

The section provides practical examples including business loans for machinery, personal investments by entrepreneurs, share issuance for expansion, and the application of short-term finance for raw materials during busy periods.

Detailed

In this section, we explore various examples that demonstrate the application of finance in business. Finance is a crucial aspect that allows businesses to fund their operations, invest in growth, and manage daily expenditures. The section outlines specific scenarios like when a business takes a loan from a bank to purchase new machinery, which exemplifies the use of borrowed capital. Additionally, it discusses cases like an entrepreneur using personal savings to launch a shop, representing owned capital. Moreover, the issuance of shares to generate funds for expansion highlights how companies engage with financial markets. Finally, employing short-term finance to acquire raw materials during peak seasons illustrates the dynamic nature of financial needs in business operations.

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Audio Book

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Loan for Machinery

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A business taking a loan from a bank to purchase new machinery.

Detailed Explanation

In this example, a business opts to borrow money from a bank to acquire new machinery. This is considered a practical use of finance because the machinery may help increase production efficiency or capacity. By taking a loan, the business can obtain the machinery immediately rather than waiting to save up enough cash, which can be crucial for maintaining competitive advantage.

Examples & Analogies

Imagine a bakery that wants to produce more bread to meet increasing customer demand. Instead of waiting months to save enough money to buy a new oven, the bakery takes out a loan from the bank, allowing them to buy the oven right away. This helps the bakery quickly increase its production and revenue.

Entrepreneur’s Personal Investment

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An entrepreneur investing personal savings to start a shop.

Detailed Explanation

This scenario illustrates how entrepreneurs often invest their own funds into their businesses. Using personal savings to start a shop signifies confidence in the business idea and a willingness to take financial risks. It also highlights the self-funding aspect of finance, where personal capital serves as an initial source of funding.

Examples & Analogies

Consider a coffee enthusiast who dreams of opening a small café. They decide to use their personal savings, perhaps from years of working in different jobs, to purchase a coffee machine and some initial supplies. This personal investment shows their dedication and commitment to bringing their idea to life.

Issuing Shares for Expansion

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A company issuing shares to raise money for expansion.

Detailed Explanation

When a company issues shares, it sells portions of ownership to public investors to raise capital. This money can then be used for various expansion projects, such as entering new markets, developing new products, or upgrading facilities. It's a strategic financial decision to increase business scale without increasing debt burdens.

Examples & Analogies

Think of a technology startup that has a revolutionary app but lacks the funds to grow. They decide to go public and issue shares, allowing investors to buy a stake in the company. With the funds raised, they can hire more staff, enhance the app, and market it widely, ultimately reaching more customers.

Short-Term Finance for Raw Materials

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Using short-term finance to buy raw materials during peak seasons.

Detailed Explanation

Short-term finance is often required to cover immediate expenses, such as purchasing raw materials during periods of increased demand. Businesses may need to borrow funds temporarily to ensure they can obtain the necessary supplies to meet customer needs without cash-flow disruptions. This resource flexibility is vital for maintaining operational efficiency.

Examples & Analogies

Imagine a toy manufacturing company that experiences a spike in orders just before the holiday season. To quickly procure materials and meet the demand, the company takes out a short-term loan. This allows them to purchase the necessary raw materials so they can produce and deliver toys on time, ensuring they do not miss the holiday sales rush.

Definitions & Key Concepts

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Key Concepts

  • Owned Capital: Money invested by owners.

  • Borrowed Capital: Funds provided by external sources.

  • Short-term Finance: Funds for immediate needs.

  • Long-term Finance: Funds for substantial investments.

Examples & Real-Life Applications

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Examples

  • A business taking a loan from a bank to purchase new machinery.

  • An entrepreneur investing personal savings to start a shop.

  • A company issuing shares to raise money for expansion.

  • Using short-term finance to buy raw materials during peak seasons.

Memory Aids

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🎵 Rhymes Time

  • Money flows in from owned and borrowed, Helps businesses stand tall, they won't be harrowed.

📖 Fascinating Stories

  • Imagine a baker who needs an oven. She uses her savings to start the bakery and takes a loan to buy high-quality equipment for growth.

🧠 Other Memory Gems

  • For capital use 'BOS' — B for Borrowed, O for Owned, S for Short-term!

🎯 Super Acronyms

CAPITAL

  • C: for Cash
  • A: for Assets
  • P: for Personal savings
  • I: for Investments
  • T: for Loans
  • A: for Accounts
  • L: for Long-term.

Flash Cards

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Glossary of Terms

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  • Term: Owned Capital

    Definition:

    Money invested by the owner(s) of the business, including personal savings and retained earnings.

  • Term: Borrowed Capital

    Definition:

    Money borrowed from external sources with a promise of repayment, like bank loans.

  • Term: ShortTerm Finance

    Definition:

    Funds required for a period less than one year, used to cover day-to-day expenses.

  • Term: LongTerm Finance

    Definition:

    Funds needed for more than five years, typically for substantial investments.

  • Term: Equity Financing

    Definition:

    Raising money for a business by selling shares.