Unit 2: Managing Financial Resources and Decisions

Session 2

Learning Outcome

Explore the sources of finance available to a

business

Topics

Review of Last sessionTest of baseline knowledgeSources of Finance Available

Review of Last Session

Test of Baseline Knowledge

• Types of Fund Sources• Terms of Fund Sources• Name some Long Term Sources of Funds• Name some Short Term Sources of Funds

Criteria 1.1Identify the sources of finance

available to a business• long term:

– share capital, – retained earnings, – loans, – third-party investment,

• short/medium term:– hire purchase – leasing, – working capital stock control, – cash management, – debtor factoring

Internal Sources of Finance and Growth

• ‘Organic growth’ – growth generated through the development and expansion of the business itself. Can be achieved through:

• Generating increasing sales – increasing revenue to impact on overall profit levels

• Use of retained profit – used to reinvest in the business

• Sale of assets – can be a double edged sword – reduces capacity?

Selling more goods and services to consumers is one way to grow the business.

Title: Home Depot quarterly profit rises 53%. Copyright: Getty Images, available from Education Image Gallery

External Sources of Finance

• Long Term – may be paid back after many years or not at all!

• Short Term – used to cover fluctuations in cash flow

• ‘Inorganic Growth’ – growth generated by acquisition

The existence of capital markets enable firms to raise long term loans and share capital.

Title: Dow up on Wall Street. Copyright: Getty Images, available from Education Image Gallery

Long term (Loans)• Represent creditors to the company • Not owners

– Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan

– Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance

– Government– may offer loans in certain circumstances• Grants

Long term (Shares)• Shares (Shareholders are part owners of a company)

– New Share Issues – arranged by investment banks.– Ordinary Shares (Equities):

• Ordinary shareholders have voting rights• Dividend can vary• Last to be paid back in event of collapse• Share price varies with trade on stock exchange

– Preference Shares (Equities or Liabilities)• Paid before ordinary shareholders• Fixed rate of return• Cumulative preference shareholders – have right to dividend carried over

to next year in event of non-payment– Rights Issue

• existing shareholders given right to buy new shares at discounted rate– Bonus or Scrip Issue

• change to the share structure – increases number of shares and reduces value but market capitalisation stays the same

Short Term• Bank loans

– necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most

• Overdraft facilities / cash management– the right to be able to withdraw funds you do not currently

have– Provides flexibility for a firm– Interest only paid on the amount overdrawn– Overdraft limit – the maximum amount allowed to be

drawn - the firm does not have to use all of this limit• Factoring

– the sale of debt to a specialist firm who secures payment and charges a commission for the service.

• Trade credit

– Careful management of trade credit can help ease cash flow – usually between 28 and 90 days to pay

• Leasing

– provides the opportunity to secure the use of capital without ownership – effectively a hire agreement

• Hire/lease purchase

- customer hires their business equipment from the financier for a fixed monthly repayment over a set period of time. 

• Working capital stock control

- A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

Short Term

'Inorganic Growth'• Acquisitions• The necessity of

financing external inorganic growth– Merger:

• firms agree to join together – both may retain some form of identity

– Takeover:• One firm secures

control of the other, the firm taken over may lose its identity

Business Angels

Business Angels

• Individuals looking for investment opportunities

• Generally small sums up to £100,000• Could be an individual or a small group• Generally have some say in the running of

the company

Venture Capital

Venture Capital• Pooling of capital in the form of limited

companies – Venture Capital Companies• Looking for investment opportunities in fast

growing businesses or businesses with highly rated prospects

• May also buy out firms in administration who are going concerns

• May also provide advice, contacts and experience

• In the UK, venture capitalists have invested £50 billion since 1983

Short Quiz

• Dave Coakely is thinking of setting up his own business - a doughnut Shop. He needs to know more information about where he can get funds from the start his business.

• Produce a brief information pack (use PowerPoint/ word/ or publisher) to explain where and how he can obtain different source of finance. Give some example of business rate charged by banks.

• See you next meeting