Presentation Transcript

1. Business Financing

2. You will learn ... Why businesses need finance The different sources available How managers choose between the different sources

3. Why do businesses need finance?

4. Why Do Businesses Need Finance? To start up the business To expand the business To deal with difficulties facing the business Capital Expenditure Revenue Expenditure
5. Types of Expenditure Capital Expenditure Revenue Expenditure Money spent on Fixed Assets more than one year Money spent on day-to-day expenses
6. Types of Expenditure      

7. Sources of business finance

8. Internal Sources of Finance Retained Profits Sale of Surplus Assets Internal Sources of Finance Owners Savings Selling Stocks
9. Internal Sources of Finance Retained profit (ploughed back profit) Profit kept in the business after the owners have taken their share of the profits. Advantage No repayment Disadvantage New Businesses Profits too low to expand More profit kept, less goes to owners
10. Internal Sources of Finance Sale of Business Assets Could be those that are no longer used or outdated. Advantage Better use of capital Disadvantage Time Consuming Not available to small business
11. Internal Sources of Finance Running Down Stocks Used to raise cash Advantages Reduced Opportunity Cost Save on Storage Costs Disadvantage Stock Shortages Disappointed Customers
12. Internal Sources of Finance Owner’s Money Put more of their savings into the business Advantages Available Quickly No Interest Payments Disadvantage Low Savings Increased Risk
13. External Sources of Finance Issue of Shares Bank Loan Debentures External Sources of Finance Grants & Subsidies Debt Factoring
14. External Sources of Finance Issue of shares PLC’s only Money obtained from individuals or institutions outside the business Advantages Permanent Source of Capital No Interest Payments Disadvantages Dividends Ownership Rights
15. External Sources of Finance Bank Loan Advantages Quick to organize Varied lengths of time Low Interest Rates  Large Companies Borrow Large Sums Disadvantages Repaid with Interest Security or Collateral
16. External Sources of Finance Debenture L-T Certificates issued by limited companies Advantages Raise very L-T finance Disadvantage Creditworthiness & reputation essential Repaid Interest
17. External Sources of Finance Factoring Debts Debt factors are specialist agencies that “buy” debts of firms for immediate cash They may offer 90% of the existing debt. The debtor will then pay the factor and the 10% represents as the factor’s profit
18. External Sources of Finance Factoring Debts Goods delivered & invoiced for $100 MFC gives $75 immediately client customer Copy of invoice to MFC MFC follows up payment with customer Sends payment to MFC MFC
19. External Sources of Finance Factoring Debts Advantages Immediate Cash Available Risk of Collecting Debt  Factor Disadvantages Firm does not receive 100%value of debt
20. External Sources of Finance Grants & Subsidies by Outside Agencies E.g. Government Advantages Repaying usually not required Disadvantages “Strings Attached” E.g. relocation

21. Periods of Finance

22. Periods of Finance Trade Creditors Overdrafts Debt Factoring Short-Term Period of Finance is required for Medium-Term Long-Term Hire Purchase Sale of Shares Debentures Leasing Loans Loans New Issue Rights Issue
23. Periods of Finance Short-Term (S-T) < 3 years Medium-Term (M-T) 3 yrs to 10yrs Long-Term (L-T) > 10 years
24. S-T Finance - Overdrafts
25. S-T Finance Overdraft Arranged by bank Advantages Spend more money than available in bank account Can be used for wages, paying suppliers etc Flexible form of borrowing Disadvantages Interest rates variable Short time to repay
26. S-T Finance Trade Credit Businesses delay paying its suppliers Leaves business in better cash position Customer buys supplies from manufacturer customer Time period to pay for supplies bought manufacturer
27. S-T Finance Trade Credit Advantages Almost Interest Free Length of Time to Pay Debt Disadvantages Possible Refusal of Discounts Refuse Goods  Payment Slow
28. S-T Finance Debt Factoring Goods delivered & invoiced for $100 MFC gives $75 immediately client customer Copy of invoice to MFC MFC follows up payment with customer MFC pays balance Sends payment to MFC MFC
29. Medium-Term Finance Hire Purchase Own the Equipment Payments Payments Return Equipment Option to Buy Leasing
30. Medium-Term Finance Hire Purchase Purchase fixed asset over longer period of time Advantages No “up-front” Large Sum of Money Needed for Asset Disadvantages Cash Deposit Needed at Beginning Interest Rates High
31. Medium-Term Finance Leasing Allows firm to use the asset without purchasing it Can be purchased at end of leasing period Advantages No “up-front” Large Sum of Money Needed for Asset Maintenance done by Leasing Company Disadvantages Total Cost Higher
32. Long-Term Finance Issue of Shares - Equities Finance Only available to limited companies Public Limited Companies
33. Long-Term Finance Issue of Shares - Equities Finance Only available to limited companies Public Limited Companies New Issues Very Large Sums Expensive to Organize & Advertise Rights Issues Raise Additional Capital Existing Shareholders
34. Long-Term Finance Issue of Shares - Equities Finance Advantages Permanent Capital No Repayments No Interest Disadvantages Dividends Paid After Tax Balance of Ownership
35. Medium-Term Finance Bank Loan Advantages Disadvantages
36. Long-Term Finance Interest paid every year, dividends do not Interest paid before tax L-T Loans Debt Finance Must be repaid Not Permanent Capital Secured against Collateral
37. Long-Term Finance Debentures (Same as External Finance) Advantages Long-term loan certificates Often no collateral needed Disadvantages Creditworthiness & reputation essential Repaid with Interest
38. Exercise      
39. Exercise Planned take-over of another business Temporary increase in stocks over summer Purchase of new car for the CEO R & D of new product Launch in market in 4 yrs Cost of Factory – Less land than at present

40. Choosing the right Source of Finance

41. Purpose Time Period Amount Needed Status Choosing the right Source of Finance Gearing Size Control Risk
42. Risk is the danger that failure or loss will occur. Risk Choosing the right Source of Finance Gearing is a measure of risk. The proportion of total capital raised from L-T loans. Gearing

43. Will banks lend and shareholders invest?

44. Stability of finance records and information Cash-Flow Forecast Future Business Plans Gearing Profit & Loss Reason for the loan Will banks lend you the money?
45. Will shareholder’s invest? Financial Information Share price variation Future Business Plans Gearing Profit & Loss Dividend Rate

46. Will the shareholders invest?

47. Will shareholders invest? Compare Dividend Rates Compare Future Company Prospects Share Price Variation Gearing ratio
48. Business Plans Business Objectives Important Details Operations Finances Business Plans force owners to think ahead and plan carefully for first the few years
49. Business Plans Considerations Can we break-even or make a profit? Where will the firm be located? What machinery will the firm need? How many staff does the firm need? What to make? products What consumers are we aiming at? What will be the main costs? How many products to make?
50. Pizza Place Ltd Business Plan
51. Pizza Place Ltd Business Plan
52. QUICK QUIZ! What can you use an overdraft for? How long is a source of finance needed to be considered medium term? Name one thing the bank manager needs to get from you before granting a large loan? What is the difference between rights issue and new issues of share?
53. MORE
54. Which of these are short, medium, or long term sources of finance? Overdraft 5 year loan Issue of shares Debenture Trade credit Hire purchase
55. Which of these are internal or external sources of finance? Bank loan Retained profit Owner’s saving Governmental grants Sale of unused asset