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MODULE 1
AS Marketing and Accounting and Finance
COMPANY ACCOUNTSCOMPANY ACCOUNTS
Sources of Finance
The difference between Methods & Sources
Name given for how finance is raised eg loan.Name given for how finance is raised eg loan.
MethodMethod
SourceSource
From where finance is obtained eg bank.From where finance is obtained eg bank.
Difference between Internal & External Sources
Those generated from within the business.Those generated from within the business.
InternalInternal
ExternalExternal
Those sourced from outside of the business.Those sourced from outside of the business.
Short, Medium and Long-term Methods
Up to 1 yr; fund working capitalUp to 1 yr; fund working capitalShort-termShort-term
MediumMedium1 to 5 yrs; purchase assets with medium term life1 to 5 yrs; purchase assets with medium term life
LongLong5 yrs plus; purchase of long-life assets5 yrs plus; purchase of long-life assets
Internal Sources
Trading Profit
Long term method - generated year after year.
Key to survival - fund working capital / fixed asset finance.
Long term method - generated year after year.
Key to survival - fund working capital / fixed asset finance.
Internal Sources
Trading Profit
No interest to pay (unlike loans).
Control not diluted (unlike shares).
No interest to pay (unlike loans).
Control not diluted (unlike shares).
Advantages Advantages over other long-term methods:over other long-term methods:
Internal Sources
Trading Profit
may not popular with shareholders.
sole reliance on profits - expansion slow and limited.
may not popular with shareholders.
sole reliance on profits - expansion slow and limited.
Problems Problems For long-term investment:For long-term investment:
Internal Sources
Working Capital
Offer discounts to encourage prompt payment.
Tighter credit control procedures.
Offer discounts to encourage prompt payment.
Tighter credit control procedures.
Reduction of Trade CreditReduction of Trade Credit
Internal Sources
Working Capital
Frees up cash, reduces costs.
Frees up cash, reduces costs.
Reduction of StockReduction of Stock
Internal Sources
Asset Sales
+ No interest charges or dilution of control, but..
- May restrict future flexibility.
+ No interest charges or dilution of control, but..
- May restrict future flexibility.
Fixed assets sold off to provide ‘one-off’ source of finance.Fixed assets sold off to provide ‘one-off’ source of finance.
External Sources
Ordinary Share Capital
a) family & friends (ltd)
b) general public (PLC)
a) family & friends (ltd)
b) general public (PLC)
Raising long-term funds by settling shares to:Raising long-term funds by settling shares to:
External Sources
Ordinary Share Capital
Shareholders receive variable dividend and voting rights.Shareholders receive variable dividend and voting rights.
Only usually considered when large sums required, eg starting up, expansion.
Only usually considered when large sums required, eg starting up, expansion.
Advantages Advantages DisadvantagesDisadvantages
No commitments to meeting fixed interest payments.
No commitments to meeting fixed interest payments.
External Sources
Ordinary Share Capital
Process of share issue - expensive.
Dilutes ownership and control.
Process of share issue - expensive.
Dilutes ownership and control.
External Sources
Ordinary Share Capital
DisadvantagesDisadvantages
External Sources
Bank Loans
Common method for all types of business.Common method for all types of business.
Used to purchase fixed assets / fund expansion.Used to purchase fixed assets / fund expansion.
Interest - fixed or variable.Interest - fixed or variable.
External Sources
Bank Loans
Bank / building society loan - interested in:Bank / building society loan - interested in:
a) ability to meet interest payments (liquidity).
b) security in case of failure to pay.
a) ability to meet interest payments (liquidity).
b) security in case of failure to pay.
External Sources
Bank Loans
The amount advanced will depend on security offered.The amount advanced will depend on security offered.
The greater the perceived risk, the higher the security.The greater the perceived risk, the higher the security.
Possible but rare.Possible but rare.
External Sources
Bank Loans
Lenders need convincing of high chance of success.Lenders need convincing of high chance of success.
Interest charged - considerably higher.Interest charged - considerably higher.
Unsecured Loans Unsecured Loans
Advantages Advantages DisadvantagesDisadvantages
Straightforward to arrange. No danger of recall (unlike o/draft). Can be linked to pension plans -
tax relief).
Straightforward to arrange. No danger of recall (unlike o/draft). Can be linked to pension plans -
tax relief).
External Sources
Bank Loans
Variable rate interest - advantage if interest rates fall.
Fixed rate - allows more accurate predictions re: cash flow.
Variable rate interest - advantage if interest rates fall.
Fixed rate - allows more accurate predictions re: cash flow.
External Sources
Bank Loans
Advantages Advantages
Committed to regular interest payments - increases costs / affects cash flow.
Committed to regular interest payments - increases costs / affects cash flow.
External Sources
Bank Loans
DisadvantagesDisadvantages
Less flexible / more expensive than overdrafts.
Variable rate - if rates rise.
Less flexible / more expensive than overdrafts.
Variable rate - if rates rise.
External Sources
Bank Loans
DisadvantagesDisadvantages
Loans used to purchase land / buildings - usually secured.Loans used to purchase land / buildings - usually secured.
External Sources
Mortgages
Advance - 75 to 85% of value of property - 5 to 20 years.Advance - 75 to 85% of value of property - 5 to 20 years.
External Sources
Mortgages
Repayments - usually monthly, fixed or variable rates.Repayments - usually monthly, fixed or variable rates.
Suitable when large sums of money required.Suitable when large sums of money required.
Advantages Advantages DisadvantagesDisadvantages
As for loans, plus other initial costs:
As for loans, plus other initial costs:
External Sources
Mortgages
Professional valuation of property required - paid for by the business.
Arrangement fee payable on amount borrowed.
Professional valuation of property required - paid for by the business.
Arrangement fee payable on amount borrowed.
External Sources
Mortgages
DisadvantagesDisadvantages
External Sources
Overdrafts
Arrangements between firm and bank / building society to withdraw more money from account than is deposited.
Arrangements between firm and bank / building society to withdraw more money from account than is deposited.
External Sources
Overdrafts
Interest is charged on amount overdrawn.Interest is charged on amount overdrawn.
The second most common method of finance.The second most common method of finance.
External Sources
Overdrafts
Use - Use -
Short-term - working capital finance, eg seasonal peaks in demand - bridging facilities.
Short-term - working capital finance, eg seasonal peaks in demand - bridging facilities.
Advantages Advantages DisadvantagesDisadvantages
Simple, quick to arrange, flexible and convenient.
Relatively cheap but… expensive if used regularly for large amounts.
Simple, quick to arrange, flexible and convenient.
Relatively cheap but… expensive if used regularly for large amounts.
External Sources
Overdrafts
Repayable on demand / can be recalled at any time.
Repayable on demand / can be recalled at any time.
External Sources
Overdrafts
DisadvantagesDisadvantages
External Sources
Debentures
Members of public invited to lend money to business for a fixed period, usually long-term at fixed rate of interest.
Members of public invited to lend money to business for a fixed period, usually long-term at fixed rate of interest.
Type of loan divided into smaller units, bought and sold on Stock Exchange.Type of loan divided into smaller units, bought and sold on Stock Exchange.
External Sources
Debentures
New / young companies – difficult to secure confidence. New / young companies – difficult to secure confidence.
Companies involved – usually well established, good profit record, sound liquidity.
Companies involved – usually well established, good profit record, sound liquidity.
Advantages Advantages DisadvantagesDisadvantages
No dilution of control. No dilution of control.
External Sources
Debentures
Priority over shareholders.
Interest paid even if firm is not making a profit.
Priority over shareholders.
Interest paid even if firm is not making a profit.
External Sources
DisadvantagesDisadvantages
Debentures
External Sources
Venture Capital
Expect 15-40% shareholding, over period of 3-7 years, appoint non-executive director, provide general financial & managerial advice.
Expect 15-40% shareholding, over period of 3-7 years, appoint non-executive director, provide general financial & managerial advice.
Capital supplied by merchant banks, specialised commercial banks, venture capital companies.
Capital supplied by merchant banks, specialised commercial banks, venture capital companies.
External Sources
Venture Capital
Loans for £50,000 plus - £250,000 plus – admin costs not worthwhile on smaller projects.
Loans for £50,000 plus - £250,000 plus – admin costs not worthwhile on smaller projects.
Often obtained by small / medium sized businesses – those too small to be quoted on the Stock Exchange.
Often obtained by small / medium sized businesses – those too small to be quoted on the Stock Exchange.
External Sources
Venture Capital
Firms who succeed in securing such finance usually:
• inspire confidence• operate in growth sector• have distinctive competitive advantage• capable of high growth.
Firms who succeed in securing such finance usually:
• inspire confidence• operate in growth sector• have distinctive competitive advantage• capable of high growth.
Advantages Advantages DisadvantagesDisadvantages
Companies offer valuable management support, but...
Companies offer valuable management support, but...
External Sources
Venture Capital
Negotiation fee.
Dilution of control.
Often want quick return on investment.
Negotiation fee.
Dilution of control.
Often want quick return on investment.
External Sources
DisadvantagesDisadvantages
Venture Capital
External Sources
Government Assistance
Assistance from European Union & UK governmentAssistance from European Union & UK government
• relatively cheap way of raising finance• mostly medium to long-term• relatively cheap way of raising finance• mostly medium to long-term
External Sources
Government Assistance
Applying for grants:Applying for grants:
Preparing accounts / cash flow information.Preparing accounts / cash flow information.
Costly Costly
External Sources
Government Assistance
Applying for grants:Applying for grants:
Conditions Conditions
Eg no. and type of employees, how money can be spent.
Eg no. and type of employees, how money can be spent.
External Sources
Government Assistance
Non-financial costs Non-financial costs
Unwanted publicityUnwanted publicity
Applying for grants:Applying for grants:
External Sources
Factors Influencing Methods & Sources of Finance
The purpose
Objectives
Legal Structure
The purpose
Objectives
Legal Structure
External Sources
Factors Influencing Methods & Sources of Finance
Financial Position
Age
Size
Financial Position
Age
Size
External Sources
Factors Influencing Methods & Sources of Finance
Reputation
Government Policy
Interest Rates
Reputation
Government Policy
Interest Rates
- END-
AS Marketing and Accounting and Finance
COMPANY ACCOUNTSCOMPANY ACCOUNTS
Sources of Finance