selecting financial strategies

Selecting Financial Strategies

A2 Business Studies

Aims and Objectives

Aim: • Understand firm’s financial strategies

Objectives:• Define financial strategies• Describe sources of finance• Analyse financial strategies

Starter

• In groups decide upon a definition of a financial strategy…

Definition:• The long term financial plan to achieve the financial

objectives.

Sources of Finance To Fund Strategic Development

Retained Profits

Equity Share Capital

Debt (Loans)

Equity Share Capital

Definition• Raising of capital through sales of shares

• Firm decides a max amount of capital it is likely to need in future from sales of shares.

• Then decides the percentage of this needed in the short to medium term.

• Shares are then issued to raise this amount of capital.• Known as issued share capital.

Equity Share Capital Example

• Firm issues 400,000 shares at £1 each• Share capital = £400,000

• If shares are sold for more than their face value this is known as the share premium

• Firm issues 400,000 shares at £1 each• Sell for £1.50 each• Share capital = £400,000• Premium = £200,000

Rights Issue

• Existing shareholders are offered right to buy a number of new shares.

• Number depends on how may shares already held by the shareholder.

• Offered at a price below market value.

Debt (Loans)

• Banks or financial institutions

• Not that risky to lender as secured against assets

• Riskier for firm as interest payments may affect performance

• Firm relying on debt capital is highly geared

Advantages & Disadvantages

• In groups brainstorm the advantages and disadvantages of share capital and debt as sources of finance.

Share Capital

A

B

C

D Debt

A

B

C

D

Financial Strategies

Implementing Profit Centres

Profit Centres• Identifiable parts of the business for which costs, revenues

and profits can be attributed.

• Subsection of firms get responsibility for the above.• May be identified by product, department or location.

Implementing Profit Centres

Discuss the benefits of using profit centres...

Helps:• Achieve financial objectives• Monitor performance• Delegate responsibility• Motivate managers

• Only appropriate if the subsection can manage it’s costs and revenues!

Cost Minimisation

• Allows a business to compete on price

• Business with high market share can push down their costs from suppliers and therefore sell at low prices.

• J.I.T.

• Could put pressure on production functions

Allocating Capital Expenditure

Definition:• Purchase of long term assets. I.e. machinery

• Usually a ‘sign off chain’ involved• Important to maintain/increase shareholder wealth• Important money spent wisely and benefits are closely

monitored over time.

Question (6 Marks)

• If Primark was to set an objective of 20% growth over the next five years, would you recommend a strategy of cost minimisation or capital expenditure? (6 Marks)