Unit 2: Managing Financial Resources and Decisions

Session 2

Learning Outcome

Explore the sources of finance available to a business

Topics
 Review of Last session  Test of baseline knowledge  Sources 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 1.1 Identify the sources of finance available to a business

long term:
share capital, retained earnings, loans, third-party investment, hire purchase leasing, working capital stock control, cash management, debtor factoring

short/medium term:

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

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

capacity?

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.

Short Term
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.

'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