module 1 as marketing and accounting and finance company accounts sources of finance

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


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


Process of share issue - expensive.

Dilutes ownership and control.

Process of share issue - expensive.

Dilutes ownership and control.

External Sources


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


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


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


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.


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


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.


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


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.


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


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.


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


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


Applying for grants:Applying for grants:

Preparing accounts / cash flow information.Preparing accounts / cash flow information.

Costly Costly

External Sources



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


Non-financial costs Non-financial costs

Unwanted publicityUnwanted publicity


External Sources

Factors Influencing Methods & Sources of Finance

The purpose

Objectives

Legal Structure

The purpose

Objectives

Legal Structure

External Sources


Financial Position

Age

Size

Financial Position

Age

Size

External Sources


Reputation

Government Policy

Interest Rates

Reputation

Government Policy

Interest Rates

- END-

AS Marketing and Accounting and Finance

COMPANY ACCOUNTSCOMPANY ACCOUNTS

Sources of Finance

module 1 as marketing and accounting and finance company accounts sources of finance

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