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Interactive Audio Lesson
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Introduction to Business Finance
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Today, we're discussing business finance. What do you think are the main categories of business finance based on ownership?
I think it might be owned capital and borrowed capital!
That's correct! Owned capital is when the funds come from owners, while borrowed capital is sourced externally. Does anyone know examples of each?
Owned capital could be savings put into the business, like retained earnings. Borrowed capital might include loans from banks.
Excellent points! Remember, we can use the mnemonic O-B-E for these categories: Owned = Owners, Borrowed = Bank, External.
Got it! O-B-E helps remember the categories of business finance!
Great! Let's summarize. Owned capital comes from owners, such as equity and retained earnings, while borrowed capital includes loans and debentures.
Deep Dive into Owned Capital
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Let's explore owned capital more deeply. What types do you think businesses use?
Thereβs equity capital from shares, right?
Yes, correct! Equity capital is one. And what about other forms?
Retained earnings also count as owned capital since they come from profits.
Exactly! So to remember these, think of E for Equity and R for Retained Earnings. E-R is our mnemonic!
Thatβs helpful! So E-R helps recall owned capital types!
Right! In summary, owned capital includes funds from owners, equity capital, and retained earnings.
Understanding Borrowed Capital
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Moving on to borrowed capital, can anyone list the types?
Like loans and debentures?
Yes! Loans are one way, and debentures are another. What do we need to remember about these?
They have to be paid back, right? Plus interest!
Correct! Remember the phrase 'B-P' for Borrowed, Payback. Borrowed funds are not free; they come with repayment obligations.
B-P is a good mnemonic to keep in mind!
Excellent! To summarize, borrowed capital includes loans and debentures, which must be repaid with interest.
Introduction & Overview
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Quick Overview
Standard
In this section, we learn about the different types of business finance based on ownership. Businesses can finance themselves through owned capital or borrowed capital. Examples and distinctions between these categories highlight the importance of understanding financing options available to businesses of varying sizes.
Detailed
Based on Ownership
In this section, we delve into the sources of business finance categorized by ownership. Understanding these distinctions is crucial for businesses as it influences their financial strategies. Business finance can broadly be categorized into:
A. Owned Capital
Owned capital refers to the funds that are provided by the owners or shareholders of the business. This type of capital includes:
- Equity Capital: Funds raised through selling shares to investors.
- Retained Earnings: Profits that are reinvested in the business rather than distributed as dividends.
B. Borrowed Capital
Borrowed capital involves funds that are sourced externally and need to be repaid, usually with interest. This includes:
- Loans: Funds borrowed from financial institutions.
- Debentures: Long-term securities yielding a fixed interest rate, issued by a company and secured against its assets.
- Public Deposits: Funds collected through offering deposits to the public, which need to be repaid after a certain period.
Recognizing the distinction between owned and borrowed capital is essential as choosing the right source affects control, cost, and risk associated with financing decisions.
Audio Book
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Types of Capital Based on Ownership
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B. Based on Ownership
Type Description Examples
Owned Capital Funds from owners/shareholders Equity capital, retained earnings
Borrowed Capital Funds borrowed and repayable with interest Loans, debentures, public deposits
Detailed Explanation
In this section, we explore two main types of capital based on ownership: owned capital and borrowed capital. Owned capital refers to the funds that come directly from the owners or shareholders of the business. This can include equity capital, which is money invested by the owners in exchange for ownership in the business, and retained earnings, which are profits that the business has reinvested instead of distributing as dividends.
Borrowed capital, on the other hand, refers to the funds that a business obtains from external sources, which must be repaid with interest. This includes loans from banks, debentures (which are a type of debt security), and public deposits (funds collected from the public). In summary, owned capital is money that belongs to the owners, while borrowed capital is money that needs to be repaid.
Examples & Analogies
Imagine you start a lemonade stand. The money from your piggy bank that you use to buy lemons and sugar is your owned capital. If you decide to borrow $20 from a friend to buy more supplies, that $20 represents your borrowed capital. Just like youβll have to pay back your friend, businesses have to repay the funds they borrow with interest.
Owned Capital Explained
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Owned Capital
β’ Funds from owners/shareholders
β’ Examples: Equity capital, retained earnings
Detailed Explanation
Owned capital consists of funds that are directly contributed by the owners or shareholders of a business. Owners invest their own money in the business, which they do in exchange for a share of the company's ownership. Equity capital is the most common form of owned capital, representing the money raised by issuing shares of stock. Retained earnings are another important aspect of owned capital; they come from the profits generated by the business that are reinvested into it rather than being paid out to shareholders as dividends. This reinvestment is critical for growth and helps to fund future expansion without incurring debt.
Examples & Analogies
Consider a chef who starts a restaurant. The chef uses her savings to buy kitchen equipment, which serves as her owned capital. If her restaurant earns profits, she can choose to keep those profits in the business to buy new cooking tools or to expand the menu. These profits, kept for growth, are her retained earnings, another form of owned capital.
Borrowed Capital Explained
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Borrowed Capital
β’ Funds borrowed and repayable with interest
β’ Examples: Loans, debentures, public deposits
Detailed Explanation
Borrowed capital refers to funds that a business acquires through loans or other financing arrangements that require repayment. This source of capital can include loans from banks, where the business agrees to pay back the principal along with interest over a specified period. Debentures are another form of borrowed capital; they are a type of debt instrument where the business promises to pay back the money borrowed at a future date with interest. Public deposits involve obtaining funds directly from the public, which the business also needs to repay with interest. Borrowed capital allows businesses to leverage funds for expansion and operation without diluting ownership.
Examples & Analogies
Think about a university that needs funds to build a new library. It might take out a bank loan, committing to repay that loan with interest over several years. Similarly, businesses can borrow money to invest in new projects. Just like the university must plan to pay back its loan, businesses must manage their cash flow to ensure they can meet their repayment obligations.
Definitions & Key Concepts
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Key Concepts
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Owned Capital: Funds from owners and shareholders.
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Borrowed Capital: Funds sourced from external sources that need to be repaid.
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Equity Capital: Money raised through shares.
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Retained Earnings: Profits reinvested in the business.
Examples & Real-Life Applications
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Examples
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A small business owner using personal savings as owned capital.
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A company raising funds through issuing shares to shareholders for equity capital.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
π΅ Rhymes Time
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Money from owners' hands, owned capital stands.
π Fascinating Stories
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Imagine a new bakery where Jenna uses her saved money to buy ovens (owned capital), but later takes a bank loan to expand (borrowed capital).
π§ Other Memory Gems
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O-B-E for Owned, Borrowed, Expanding capital.
π― Super Acronyms
O-B for Owned-Borrowed funds.
Flash Cards
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Glossary of Terms
Review the Definitions for terms.
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Term: Owned Capital
Definition:
Funds provided by the owners or shareholders of a business.
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Term: Borrowed Capital
Definition:
Funds sourced externally that need to be repaid with interest.
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Term: Equity Capital
Definition:
Money raised by a business through issuance of shares.
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Term: Retained Earnings
Definition:
Profits reinvested into the business rather than paid out as dividends.
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Term: Debentures
Definition:
Long-term securities yielding fixed interest, issued by a company.