short-term and long-term finance needs of a business

1 Understanding Business Activity

1.1 Purpose of Business

• Provide goods and services that satisfy wants and needs.
• Generate profit for owners and create employment.
• Contribute to economic growth and community development.

1.2 Key Economic Concepts

• Needs vs. Wants – Needs are essential for survival; wants are desires beyond the basic need.
• Scarcity – Resources are limited, so choices must be made.
• Opportunity Cost – The value of the best alternative foregone when a choice is made.

1.3 Classification of Business Activity

Sector	Primary Activity	Examples
Primary	Extraction of natural resources	Farming, mining, fishing
Secondary	Manufacturing & construction	Car production, building houses
Tertiary	Service provision	Retail, banking, tourism

1.4 Types of Organisations

Form	Key Features	Typical Use
Sole Trader	Owned & run by one person; unlimited liability	Small retail or service firms
Partnership	Two or more owners; shared profit & liability	Professional practices (lawyers, accountants)
Private Limited Company (Ltd)	Separate legal entity; limited liability; shares not publicly traded	Medium‑size enterprises
Public Limited Company (PLC)	Shares traded on a stock exchange; limited liability	Large corporations
Franchise	Right to use a proven brand & business model	Fast‑food chains, retail outlets
Joint Venture	Two or more businesses pool resources for a specific project	Co‑development of new technology
Co‑operative	Owned & democratically controlled by members	Retail co‑ops, agricultural co‑ops

1.5 Business Objectives

• Survival – Stay in operation (especially for start‑ups).
• Profit maximisation – Earn the greatest possible profit.
• Growth – Increase market share, sales, or assets.
• Market share – Capture a larger proportion of the market.
• Social/ethical objectives – Corporate social responsibility, environmental sustainability.

1.6 Stakeholders and Their Conflicting Objectives

Stakeholder	Primary Interest	Possible Conflict
Owners/Shareholders	Profit & return on investment	May clash with employee wage demands
Employees	Job security, wages, good conditions	Higher wages increase costs for owners
Customers	Low price, high quality, good service	Low price can reduce profit margins
Suppliers	Timely payment, long‑term contracts	Cash‑flow pressure may delay payments
Government	Tax revenue, compliance with law	Regulations can raise operating costs
Community/Environment	Employment, minimal pollution	Expansion may increase environmental impact

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2 People in Business

2.1 Motivation Theories & Reward Methods

• Maslow’s Hierarchy of Needs – Physiological → Safety → Social → Esteem → Self‑actualisation.
• Herzberg’s Two‑Factor Theory – Hygiene factors (salary, conditions) prevent dissatisfaction; motivators (recognition, achievement) create satisfaction.
• Taylor’s Scientific Management – Financial incentives for increased output (piece‑rate, bonus).
• Reward Methods – Salary, commission, profit‑share, bonuses, non‑monetary (recognition, training).

2.2 Organisational Structure & Management

• Organisational Chart – Shows hierarchy, reporting lines.
• Span of Control – Number of sub‑ordinates a manager can effectively supervise (narrow vs. wide).
• Delegation – Assigning authority and responsibility; improves efficiency and staff development.
• Leadership Styles
  • Autocratic – Decisions made by manager alone.
  • Democratic – Participation from staff.
  • Laissez‑faire – Minimal direction; staff autonomy.

2.3 Communication

• Formal (reports, memos, meetings) vs. informal (grapevine).
• Barriers – language, cultural differences, noise, hierarchy.
• Effective communication improves morale, reduces errors.

2.4 Employment Law & Trade Unions

• Key legislation – Minimum Wage Act, Working Time Regulations, Equality Act, Health & Safety at Work Act.
• Contracts of employment – written terms, notice periods.
• Unfair dismissal – reason must be fair and reasonable.
• Trade unions – collective bargaining, industrial action.

2.5 Recruitment & Selection

1. Identify vacancy and job specification.
2. Advertise (online, newspapers, recruitment agencies).
3. Shortlist candidates.
4. Interview (structured, competency‑based).
5. Test & assess (psychometric, practical).
6. Offer contract and induction.

2.6 Training & Development

Method	Purpose	Example
Induction	Introduce new staff to policies & culture	One‑day welcome programme
On‑the‑job	Skill acquisition while working	Apprenticeship
Off‑the‑job	Broader development	Management course at a college
E‑learning	Flexible, self‑paced learning	Online compliance modules

2.7 Redundancy, Dismissal & Downsizing

• Redundancy – Position no longer needed; statutory redundancy pay may apply.
• Dismissal for misconduct – Must follow fair procedure.
• Downsizing – Reducing workforce to cut costs; may involve voluntary severance schemes.

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3 Marketing

3.1 Role of Marketing

• Identifies and satisfies customer needs profitably.
• Creates market awareness, builds brand loyalty.
• Provides information for product development and pricing.

3.2 Market Changes & Segmentation

• Technological advances, demographic shifts, changes in consumer attitudes.
• Segmentation criteria – Demographic, geographic, psychographic, behavioural.
• Targeting selects the most attractive segment(s).

3.3 Market Research

Type	Method	Advantages	Limitations
Primary	Surveys, interviews, focus groups, observation	Specific to the problem, up‑to‑date	Costly, time‑consuming
Secondary	Published reports, internet, government statistics	Cheap, readily available	May be outdated or not directly relevant

3.4 The 4 Ps of Marketing

Element	Key Decisions	Example
Product	Features, quality, branding, packaging, life‑cycle	Introducing a low‑fat variant of a snack
Price	Pricing strategy, discounts, credit terms	Penetration pricing to enter a new market
Place (Distribution)	Channels, logistics, retail locations, e‑commerce	Using a third‑party online marketplace
Promotion	Advertising, sales promotion, public relations, personal selling	Social‑media campaign with influencer endorsements

3.5 Pricing Strategies

• Cost‑plus pricing – add a markup to unit cost.
• Competitive (market) pricing – set price based on rivals.
• Penetration pricing – low initial price to gain market share.
• Skimming – high initial price for innovative products.
• Psychological pricing – e.g., £9.99 instead of £10.

3.6 Distribution Channels

• Direct (manufacturer → consumer) – e‑commerce website.
• Indirect – wholesaler → retailer → consumer.
• Hybrid – combination of direct online sales and retail outlets.

3.7 Promotion Mix

• Advertising – paid, non‑personal (TV, online banners).
• Sales Promotion – coupons, discounts, contests.
• Public Relations – press releases, sponsorships.
• Personal Selling – face‑to‑face or telephone sales.
• Direct Marketing – email, SMS, catalogues.

3.8 E‑Commerce & Digital Marketing

• Websites, mobile apps, social media platforms.
• Benefits: wider reach, lower transaction costs, data collection.
• Risks: cyber‑security, intense competition, need for digital skills.

3.9 Legal & Ethical Issues in Marketing

• Misleading advertising – must be truthful.
• Product safety – compliance with standards (e.g., CE mark).
• Data protection – GDPR requirements for customer information.
• Ethical concerns – targeting vulnerable groups, environmental claims.

3.10 Entering Foreign Markets

Entry Mode	Control	Risk	Typical Use
Exporting	Low	Moderate (exchange‑rate risk)	Testing a new market
Licensing	Low	Medium (IP protection)	Software, brand use
Franchising	Medium	Medium	Fast‑food, retail chains
Joint Venture	High	High (partner conflict)	Resource‑intensive sectors
Wholly‑Owned Subsidiary	Very high	High (investment)	Strategic control required

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4 Operations Management

4.1 Production & Productivity

• Production – conversion of inputs (labour, materials, capital) into outputs (goods/services).
• Productivity = Output ÷ Input.
  Ways to improve:
  • Invest in better technology.
  • Training and skill development.
  • Process re‑organisation (e.g., assembly line).

4.2 Types of Production Methods

• Job Production – one‑off custom items (e.g., bespoke furniture).
• Batch Production – limited run of similar items (e.g., bakery producing loaves in batches).
• Flow (Mass) Production – continuous high‑volume output (e.g., car assembly line).

4.3 Inventory Management

• Purpose: meet demand, protect against supply disruptions, take advantage of bulk buying.
• Just‑In‑Time (JIT) – minimise stock, receive goods only when needed.
• Economic Order Quantity (EOQ) – formula to determine optimal order size.

4.4 Economies of Scale

• Cost per unit falls as output rises because fixed costs are spread over more units.
• Types: internal (technical, managerial, financial) and external (industry‑wide).
  Example: A large retailer negotiates lower supplier prices.

4.5 Break‑Even Analysis

Break‑Even Point (BEP) = Fixed Costs ÷ (Selling Price per unit – Variable Cost per unit).

• Shows the sales volume needed to cover all costs.
• Key concepts: contribution margin, margin of safety, limitations (assumes constant prices & costs).

4.6 Quality Management

• Quality Control (QC) – checking output against standards (inspection, testing).
• Quality Assurance (QA) – systematic processes to prevent defects (ISO 9001, Total Quality Management).
• Cost of quality: prevention, appraisal, internal failure, external failure.

4.7 Location Decisions

Factor	Considerations
Market access	Proximity to customers, transport links.
Labor availability	Skill level, wage rates.
Cost	Rent, utilities, taxes.
Infrastructure	Roads, ports, internet.
Government incentives	Grants, tax relief.

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5 Finance – Short‑Term & Long‑Term Needs of a Business

5.1 Why Finance Is Required

• Start‑up capital – purchase of assets, licences.
• Working capital – day‑to‑day cash flow for stock, wages, overheads.
• Growth & development – new products, market expansion, modernisation.
• Contingency – emergencies, unexpected price rises, legal claims.

5.2 Short‑Term Finance Needs (≤ 12 months)

• Buying raw materials & finished stock.
• Paying wages, overtime and temporary staff.
• Meeting utility bills, rent, insurance and other overheads.
• Covering tax liabilities and statutory payments.
• Financing seasonal demand fluctuations (e.g., Christmas retail).
• Bridging temporary cash‑flow gaps between receivables and payables.

5.3 Long‑Term Finance Needs (> 12 months)

• Acquisition of land, buildings, plant and machinery.
• Research & development for new products or processes.
• Opening new branches, entering new markets, diversifying product lines.
• Refinancing existing debt to obtain better terms or free up cash.
• Building a financial buffer to support sustained growth.

5.4 Sources of Finance – Internal vs. External

Source Type	Internal (ST / LT)	External (ST / LT)
Equity / Capital	Owner’s capital (LT)	Share issue (LT)
Retained Profits	Retained earnings (LT)	—
Borrowing	—	Bank overdraft (ST), Trade credit (ST), Factoring (ST), Bank term loan (LT), Lease finance (LT), Debentures (LT)
Other	Personal savings (LT), Family & friends (ST/LT)	Venture capital, Crowd‑funding (ST/LT)

5.5 Short‑Term Finance Sources (Key Features)

• Trade Credit – Supplier allows delayed payment (usually 30‑90 days). No interest if paid on time.
• Bank Overdraft – Facility attached to current account; interest charged only on amount used.
• Factoring – Sale of receivables to a factor at a discount; quick cash.
• Short‑Term Bank Loan – Fixed amount for up to 12 months; higher interest than overdraft.

5.6 Long‑Term Finance Sources (Key Features)

• Bank Term Loan – Repayable over 2‑20 years; secured or unsecured.
• Lease Finance – Hire‑purchase or operating lease; spreads cost of high‑value assets.
• Debentures – Long‑term bonds; interest is tax‑deductible; may be secured or unsecured.
• Equity – Share Issue – Issue of new ordinary shares; permanent capital, no repayment.
• Retained Profits – Re‑invested earnings; no external control or interest.
• Venture Capital – Equity investment in high‑growth firms; provides expertise as well as finance.
• Crowd‑funding – Small amounts raised from many individuals, often via online platforms.

5.7 Advantages & Limitations of Each Source

Source	Advantages	Limitations
Trade Credit (ST)	No interest if paid promptly; easy to arrange with existing suppliers.	Limited amount; may strain supplier relationship; no legal protection if supplier withdraws credit.
Bank Overdraft (ST)	Highly flexible; interest only on amount drawn.	Requires collateral; higher interest rates; bank may withdraw facility.
Factoring (ST)	Immediate cash from receivables; off‑balance‑sheet financing.	Factoring fees reduce profit; customers may be contacted by factor.
Bank Term Loan (LT)	Fixed repayments aid budgeting; usually lower rates than short‑term facilities.	Requires security; long‑term interest cost; covenants may restrict other borrowing.
Lease Finance (LT)	Spreads cost of expensive assets; may include maintenance.	Total cost often higher than outright purchase; asset ownership remains with lessor.
Debentures (LT)	Can raise large sums; interest tax‑deductible; does not dilute ownership.	Interest payable regardless of profit; secured debentures need collateral.
Share Issue (LT)	Provides permanent capital; no mandatory repayments; spreads risk.	Dilutes existing shareholders’ control; dividends expected; share price volatility.
Retained Profits (LT)	No interest or external control; strengthens balance‑sheet.	Limited by profitability; may reduce dividends, affecting shareholder satisfaction.
Venture Capital (LT)	Large funding plus expertise and networks.	Significant ownership dilution; high expectations for rapid growth.
Crowd‑funding (ST/LT)	Access to many small investors; marketing boost.	Often limited to specific projects; platform fees; regulatory constraints.

5.8 Factors Influencing the Choice of Finance (The “4 Cs” + Availability)

1. Cost – Interest rate, fees, hidden charges.
2. Control – Impact on ownership, decision‑making, and autonomy.
3. Creditworthiness / Security – Assets required as collateral; impact on credit rating.
4. Cash‑flow Impact – Repayment schedule vs. expected inflows.
5. Time‑horizon – Match short‑term needs with short‑term sources and long‑term needs with long‑term sources.
6. Availability – Ease of obtaining finance (supplier willingness, bank lending criteria, market conditions).

5.9 Comparison of Short‑Term and Long‑Term Finance

Aspect	Short‑Term Finance	Long‑Term Finance
Typical Time Horizon	Up to 12 months	More than 12 months (often 5‑20 years)
Common Sources	Trade credit, overdraft, factoring, short‑term loan	Bank term loan, lease, debentures, share issue, retained profits, venture capital
Primary Purpose	Working capital & day‑to‑day expenses	Capital investment, expansion, long‑term projects
Repayment Frequency	Often monthly or on demand	Annual or semi‑annual instalments (fixed) or equity – no repayment
Key Risks	Liquidity risk if cash flow is poor	Interest‑rate risk and long‑term commitment; possible dilution of control

5.10 Matching Finance to Need (Decision Flowchart – Text Version)

1. Identify the nature of the need:
   • Working‑capital (short‑term) or capital investment (long‑term)?
2. Determine the amount required and the time‑frame.
3. Assess internal resources:
   • Is there sufficient retained profit or owner’s capital?
4. If internal funds are insufficient, evaluate external options using the 4 Cs + Availability.
5. Select the source that best balances cost, control, security, cash‑flow impact and availability.

5.11 Key Points to Remember

• Short‑term finance keeps the business running day‑to‑day; long‑term finance enables growth and strategic development.
• Internal sources (owner’s capital, retained profits) do not create repayment obligations, whereas external sources do.
• Choosing the right source depends on cost, control, security, cash‑flow impact, time‑horizon and ease of access.
• Effective financial planning requires a mix of both short‑term and long‑term finance to maintain liquidity while achieving strategic objectives.