🏢 Types of Business Organisations
Businesses come in different shapes and sizes, from sole traders working alone to massive public companies with thousands of shareholders. Each type has different ways of raising money and using profits.
Types of Organisations » Sources of Finance and Use of Profits
What you'll learn this session
Study time: 30 minutes
- Understand different types of business organisations and their characteristics
- Explore various sources of finance available to businesses
- Learn how businesses use their profits effectively
- Analyse real-world examples of financing decisions
- Compare advantages and disadvantages of different funding options
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Unlock This CourseIntroduction to Business Organisations and Finance
Every business needs money to start up, grow and operate day-to-day. Whether you're opening a corner shop or launching the next big tech company, understanding where money comes from and how it's used is crucial for success. Different types of businesses have access to different sources of finance and how they use their profits can determine their future growth.
Key Definitions:
- Finance: Money needed to start, run, or expand a business.
- Capital: Money invested in a business to generate income.
- Profit: Money left over after all business expenses have been paid.
- Cash flow: Money moving in and out of a business over time.
Types of Business Organisations
Understanding the different types of business organisations helps us see why they need different sources of finance and use profits in various ways.
Sole Traders
A sole trader is someone who runs their own business. They're the boss, make all decisions and keep all profits. However, they're also responsible for all debts and losses. Think of your local plumber, hairdresser, or corner shop owner.
👍 Advantages
Easy to set up, complete control, keep all profits, make quick decisions
👎 Disadvantages
Unlimited liability, limited finance options, work long hours, business dies with owner
💰 Finance Sources
Personal savings, bank loans, family loans, government grants
Partnerships
When two or more people join together to run a business, they form a partnership. Partners share profits, losses and decision-making. Law firms, dental practices and accounting firms often operate as partnerships.
👍 Advantages
Shared workload, more capital available, shared expertise, shared decision-making
👎 Disadvantages
Unlimited liability, shared profits, potential disagreements, joint responsibility for debts
💰 Finance Sources
Partners' savings, bank loans, retained profits, new partner investment
Private Limited Companies (Ltd)
These companies are owned by shareholders but shares cannot be sold to the general public. Many family businesses and small to medium enterprises choose this structure. Examples include many local restaurants, small tech companies and family-run manufacturers.
👍 Advantages
Limited liability, separate legal identity, can raise capital through shares, continuity
👎 Disadvantages
More paperwork, public disclosure of accounts, corporation tax, cannot sell shares publicly
💰 Finance Sources
Share capital, retained profits, bank loans, debentures, venture capital
Public Limited Companies (PLC)
These are large companies that can sell shares to the general public on the stock exchange. Think of companies like Tesco, British Airways, or Rolls-Royce. They have many shareholders and are run by professional managers.
👍 Advantages
Raise large amounts of capital, limited liability, professional management, economies of scale
👎 Disadvantages
Complex regulations, public scrutiny, risk of takeover, divorce of ownership and control
💰 Finance Sources
Share issues, retained profits, debentures, bank loans, government grants
Case Study Focus: Greggs PLC
Greggs started as a small bakery in Newcastle in 1939. It grew from a family business to a partnership, then became a private limited company and finally went public in 1984. Today, it's one of the UK's largest bakery chains with over 2,000 shops. This shows how businesses can evolve and access different sources of finance as they grow.
Sources of Finance
Businesses need money for different reasons - starting up, expanding, buying equipment, or managing cash flow problems. The source of finance they choose depends on how much they need, how long they need it for and what type of business they are.
Internal Sources of Finance
These come from within the business itself. They're often the cheapest option because you don't pay interest to outsiders.
💲 Retained Profits
Money the business has earned but not paid out to owners. It's like the business's savings account. Advantages: No interest, no loss of control. Disadvantages: May not be enough, reduces dividends to shareholders.
💳 Sale of Assets
Selling things the business owns but doesn't need. For example, selling old equipment or unused buildings. Advantages: Quick cash, no debt. Disadvantages: Lose the asset, may need it later.
External Sources of Finance
These come from outside the business. There are many options, each with different advantages and disadvantages.
Short-term Finance (less than 1 year)
🏦 Bank Overdraft
Allows you to spend more than you have in your account. Good for: Cash flow problems, unexpected expenses. Drawback: High interest rates.
💳 Trade Credit
Buying goods now but paying later (usually 30-90 days). Good for: Managing cash flow, building supplier relationships. Drawback: May miss early payment discounts.
💰 Factoring
Selling your unpaid invoices to a factoring company for immediate cash. Good for: Immediate cash, no bad debts. Drawback: Expensive, lose customer contact.
Long-term Finance (more than 1 year)
🏦 Bank Loans
Borrowing a fixed amount for a set period. Good for: Buying equipment, expansion. Advantages: Keep control, fixed payments. Disadvantages: Interest payments, security required.
📈 Share Capital
Selling parts of the business to investors. Good for: Large amounts, no repayment required. Advantages: No interest, share expertise. Disadvantages: Lose control, share profits.
💳 Debentures
Long-term loans with fixed interest rates. Good for: Large companies, major investments. Advantages: Fixed interest, long-term. Disadvantages: Must pay interest, security required.
Case Study Focus: Innocent Drinks
In 1999, three friends started Innocent Drinks with £500 from selling smoothies at a music festival. They used personal savings initially, then got a £250,000 bank loan. As they grew, they sold shares to angel investors, then later to Coca-Cola. This shows how businesses often use multiple sources of finance as they develop.
Use of Profits
When a business makes a profit, owners must decide what to do with it. This decision affects the business's future growth and the rewards for owners.
Retained Profits
Keeping profits in the business for future use. This is like the business saving money for a rainy day or future opportunities.
📈 Benefits of Retaining Profits
Funds for expansion, no interest payments, maintains control, builds reserves for difficult times, shows financial strength to lenders.
Distributed Profits
Paying profits out to the business owners. The method depends on the type of business organisation.
👤 Sole Traders
Keep all profits as personal income. They can withdraw money whenever they want since they own the entire business.
👥 Partnerships
Share profits according to partnership agreement. Usually based on capital invested or work contributed.
📈 Companies
Pay dividends to shareholders. Directors decide how much to pay, balancing shareholder rewards with business needs.
Investment in Growth
Using profits to expand the business. This could mean opening new locations, buying better equipment, or developing new products.
🚀 Growth Strategies
Research and development, new equipment, staff training, marketing campaigns, new premises, technology upgrades. These investments can lead to higher future profits.
Case Study Focus: Amazon's Profit Strategy
For many years, Amazon made little profit because it reinvested everything back into the business. While shareholders received no dividends, the company grew rapidly and became one of the world's most valuable companies. This shows how retaining profits can create long-term value, even if it means short-term sacrifice.
Choosing the Right Finance
Selecting the best source of finance depends on several factors. Smart business owners consider all options before making decisions.
Factors to Consider
💰 Amount Needed
Small amounts: Personal savings, overdraft. Large amounts: Loans, share capital, debentures.
⏰ Time Period
Short-term: Overdraft, trade credit. Long-term: Loans, share capital, retained profits.
💳 Cost
Cheapest: Retained profits, trade credit. Most expensive: Overdrafts, factoring. Consider interest rates and fees.
⚙ Control vs Growth
Business owners must balance keeping control with accessing finance for growth. Selling shares brings money but reduces control. Loans maintain control but create debt obligations.