pob finance lecture 1
TRANSCRIPT
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Principles of Business Introduction to Finance – lecture 1
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Overview
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• The importance of cash • Sources of finance for organisations
• Debt versus equity
• Profit versus cash
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Learning outcomes
By the end of this session you should be able to:
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• Explain the importance of cash to a business• Compare and contrast debt and equity• Evaluate financing options for different types of
organisation• Understand the difference between cash and profit
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Superficially, how do businesses operate?
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Company
Customers
Employees and contractors
Suppliers
Tax authorities
Raw materials/services
Wage
Trade on credit Payment
Product/service
Tax
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• Revenue = The gross inflow of economic benefit from the ordinary course of trading.
• Expense = cost incurred in acquiring a product or service
Cash versus Profit
Profit = Revenue - Expenses
Cash = Money or legal tender
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The importance of cash
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• What would you do if you did not get paid for work you had done?
• What can the tax authorities do if they do not receive payment on time?
• What can suppliers do if they do not get paid on time?
Cash is crucial for a business, not profit!
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The working capital cycle
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Company
Customers
SuppliersRaw materials/services
Trade on credit Payment
Product/service
Payable days Inventory days Receivable days
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Sources of funding
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Characteristics of debt-based funding:
• Legal obligation to repay amounts borrowed• Interest or equivalent charged on funds borrowed • Usually a maturity date
Characteristics of equity-based funding:
• No legal obligation to repay amounts invested (therefore no maturity date)
• Usually funds are exchanged for shares• Investor rewarded through capital growth and/or dividends
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Sources of funding
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Debt-based funding:
• Loans/debentures/bonds• Leasing• Overdrafts• Redeemable preference shares
Equity-based funding:
• Shares • Irredeemable preference shares
Other/hybrids:
• Crowdsourcing • Convertible shares• Factoring• Angels
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Sources of funding
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Preference shares
Ordinary shares
Bank overdrafts
Debt factoring
Total finance
Long-term
Short-term
Finance leases
Hire purchase agreements
Invoice discounting
Securitisation of assets
Borrowings
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Sources of funding: Shares
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Company
Shareholders
Investsfunds
Issues new shares (certificates)
Trade existing shares already in issue if company is Plc
Stock markets
Value of shares can go up or down over time
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How expensive are sources of funding?
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Risk versus return
• Why is equity is more expensive than debt• Why is the average small business loan rate
5.3%? • Why are bonds cheaper than debentures?
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1. Chapter 1 of the core text book2. Research the characteristics of various sources of finance
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Pre-seminar work