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AS Marketing and Accounting and Finance. MODULE 1. COMPANY ACCOUNTS. Sources of Finance. The difference between Methods & Sources. Method. Name given for how finance is raised eg loan. Source. From where finance is obtained eg bank. Difference between Internal & External Sources.

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MODULE 1

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  1. AS Marketing and Accounting and Finance MODULE 1 COMPANY ACCOUNTS Sources of Finance

  2. The difference between Methods & Sources Method Name given for how finance is raised eg loan. Source From where finance is obtained eg bank.

  3. Difference between Internal & External Sources Internal Those generated from within the business. External Those sourced from outside of the business.

  4. Short, Medium and Long-term Methods Short-term Up to 1 yr; fund working capital Medium 1 to 5 yrs; purchase assets with medium term life Long 5 yrs plus; purchase of long-life assets

  5. Internal Sources Trading Profit • Long term method - generated year after year. • Key to survival - fund working capital / fixed asset finance.

  6. Internal Sources Trading Profit Advantages over other long-term methods: • No interest to pay (unlike loans). • Control not diluted (unlike shares).

  7. Internal Sources Trading Profit Problems For long-term investment: • may not popular with shareholders. • sole reliance on profits - expansion slow and limited.

  8. Internal Sources Working Capital Reduction of Trade Credit • Offer discounts to encourage prompt payment. • Tighter credit control procedures.

  9. Internal Sources Working Capital Reduction of Stock • Frees up cash, reduces costs.

  10. Internal Sources Asset Sales Fixed assets sold off to provide ‘one-off’ source of finance. + No interest charges or dilution of control, but.. - May restrict future flexibility.

  11. External Sources Ordinary Share Capital Raising long-term funds by settling shares to: a) family & friends (ltd) b) general public (PLC)

  12. External Sources Ordinary Share Capital Shareholders receive variable dividend and voting rights. Only usually considered when large sums required, eg starting up, expansion.

  13. External Sources Ordinary Share Capital Advantages Disadvantages • No commitments to meeting fixed interest payments.

  14. External Sources Ordinary Share Capital Disadvantages • Process of share issue - expensive. • Dilutes ownership and control.

  15. External Sources Bank Loans Common method for all types of business. Used to purchase fixed assets / fund expansion. Interest - fixed or variable.

  16. External Sources Bank Loans Bank / building society loan - interested in: a) ability to meet interest payments (liquidity). b) security in case of failure to pay.

  17. External Sources Bank Loans The amount advanced will depend on security offered. The greater the perceived risk, the higher the security.

  18. External Sources Bank Loans Unsecured Loans Possible but rare. Lenders need convincing of high chance of success. Interest charged - considerably higher.

  19. External Sources Bank Loans Advantages Disadvantages • Straightforward to arrange. • No danger of recall (unlike o/draft). • Can be linked to pension plans - tax relief).

  20. External Sources Bank Loans Advantages • Variable rate interest - advantage if interest rates fall. • Fixed rate - allows more accurate predictions re: cash flow.

  21. External Sources Bank Loans Disadvantages • Committed to regular interest payments - increases costs / affects cash flow.

  22. External Sources Bank Loans Disadvantages • Less flexible / more expensive than overdrafts. • Variable rate - if rates rise.

  23. External Sources Mortgages Loans used to purchase land / buildings - usually secured. Advance - 75 to 85% of value of property - 5 to 20 years.

  24. External Sources Mortgages Repayments - usually monthly, fixed or variable rates. Suitable when large sums of money required.

  25. External Sources Mortgages Advantages Disadvantages • As for loans, plus other initial costs:

  26. External Sources Mortgages Disadvantages • Professional valuation of property required - paid for by the business. • Arrangement fee payable on amount borrowed.

  27. External Sources Overdrafts Arrangements between firm and bank / building society to withdraw more money from account than is deposited.

  28. External Sources Overdrafts Interest is charged on amount overdrawn. The second most common method of finance.

  29. External Sources Overdrafts Use - Short-term - working capital finance, eg seasonal peaks in demand - bridging facilities.

  30. External Sources Overdrafts Advantages Disadvantages • Simple, quick to arrange, flexible and convenient. • Relatively cheap but… expensive if used regularly for large amounts.

  31. External Sources Overdrafts Disadvantages • Repayable on demand / can be recalled at any time.

  32. External Sources Debentures Type of loan divided into smaller units, bought and sold on Stock Exchange. • Members of public invited to lend money to business for a fixed period, usually long-term at fixed rate of interest.

  33. External Sources Debentures • Companies involved – usually well established, good profit record, sound liquidity. • New / young companies – difficult to secure confidence.

  34. External Sources Debentures Advantages Disadvantages • No dilution of control.

  35. External Sources Debentures Disadvantages • Priority over shareholders. • Interest paid even if firm is not making a profit.

  36. External Sources Venture Capital • Capital supplied by merchant banks, specialised commercial banks, venture capital companies. • Expect 15-40% shareholding, over period of 3-7 years, appoint non-executive director, provide general financial & managerial advice.

  37. External Sources Venture Capital Often obtained by small / medium sized businesses – those too small to be quoted on the Stock Exchange. • Loans for £50,000 plus - £250,000 plus – admin costs not worthwhile on smaller projects.

  38. 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.

  39. External Sources Venture Capital Advantages Disadvantages • Companies offer valuable management support, but...

  40. External Sources Venture Capital Disadvantages • Negotiation fee. • Dilution of control. • Often want quick return on investment.

  41. External Sources Government Assistance Assistance from European Union & UK government • relatively cheap way of raising finance • mostly medium to long-term

  42. External Sources Government Assistance Applying for grants: • Costly Preparing accounts / cash flow information.

  43. External Sources Government Assistance Applying for grants: • Conditions Eg no. and type of employees, how money can be spent.

  44. External Sources Government Assistance Applying for grants: • Non-financial costs Unwanted publicity

  45. External Sources Factors Influencing Methods & Sources of Finance • The purpose • Objectives • Legal Structure

  46. External Sources Factors Influencing Methods & Sources of Finance • Financial Position • Age • Size

  47. External Sources Factors Influencing Methods & Sources of Finance • Reputation • Government Policy • Interest Rates

  48. AS Marketing and Accounting and Finance - END- COMPANY ACCOUNTS Sources of Finance

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