pob finance lecture 1
TRANSCRIPT
Principles of Business Introduction to Finance – lecture 1
Overview
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• The importance of cash • Sources of finance for organisations
• Debt versus equity
• Profit versus cash
Learning outcomes
By the end of this session you should be able to:
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• Explain the importance of cash to a business• Compare and contrast debt and equity• Evaluate financing options for different types of
organisation• Understand the difference between cash and profit
Superficially, how do businesses operate?
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Company
Customers
Employees and contractors
Suppliers
Tax authorities
Raw materials/services
Wage
Trade on credit Payment
Product/service
Tax
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• Revenue = The gross inflow of economic benefit from the ordinary course of trading.
• Expense = cost incurred in acquiring a product or service
Cash versus Profit
Profit = Revenue - Expenses
Cash = Money or legal tender
The importance of cash
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• What would you do if you did not get paid for work you had done?
• What can the tax authorities do if they do not receive payment on time?
• What can suppliers do if they do not get paid on time?
Cash is crucial for a business, not profit!
The working capital cycle
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Company
Customers
SuppliersRaw materials/services
Trade on credit Payment
Product/service
Payable days Inventory days Receivable days
Sources of funding
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Characteristics of debt-based funding:
• Legal obligation to repay amounts borrowed• Interest or equivalent charged on funds borrowed • Usually a maturity date
Characteristics of equity-based funding:
• No legal obligation to repay amounts invested (therefore no maturity date)
• Usually funds are exchanged for shares• Investor rewarded through capital growth and/or dividends
Sources of funding
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Debt-based funding:
• Loans/debentures/bonds• Leasing• Overdrafts• Redeemable preference shares
Equity-based funding:
• Shares • Irredeemable preference shares
Other/hybrids:
• Crowdsourcing • Convertible shares• Factoring• Angels
Sources of funding
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Preference shares
Ordinary shares
Bank overdrafts
Debt factoring
Total finance
Long-term
Short-term
Finance leases
Hire purchase agreements
Invoice discounting
Securitisation of assets
Borrowings
Sources of funding: Shares
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Company
Shareholders
Investsfunds
Issues new shares (certificates)
Trade existing shares already in issue if company is Plc
Stock markets
Value of shares can go up or down over time
How expensive are sources of funding?
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Risk versus return
• Why is equity is more expensive than debt• Why is the average small business loan rate
5.3%? • Why are bonds cheaper than debentures?
1. Chapter 1 of the core text book2. Research the characteristics of various sources of finance
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Pre-seminar work