View
239
Download
7
Category
Tags:
Preview:
Citation preview
21 April 2023 © easilyinteractive.com 2006-10 1
Sources and uses of finance
21 April 2023 © easilyinteractive.com 2006-10 2
Sources and uses of finance
The various sources of finance are commonly categorised into: internal or external short-term, medium-term or long-term
Managers must match the source with the need
*
21 April 2023 © easilyinteractive.com 2006-10 3
Sources of finance
Types of finance
21 April 2023 © easilyinteractive.com 2006-10 4
Short-term finance
Less than 1 yearUsed to:
Bridge the finance gap Payments that have to be made for purchases
before the cash is received from sales Provide working capital for seasonal
variations in sales Pay for unexpected expenditure
*
21 April 2023 © easilyinteractive.com 2006-10 5
Medium-term finance
2 – 5 yearsUsed to:
Finance the purchase of machinery, vehicles etc.
Provide initial start-up capital to invest in fixed assets
Replace an overdraft which is difficult to clear
*
21 April 2023 © easilyinteractive.com 2006-10 6
Long-term finance
Over 5 yearsUsed to:
Finance the purchase of land and buildings Provide capital for major expansion
e.g. takeovers
*
21 April 2023 © easilyinteractive.com 2006-10 7
Select the appropriate source of finance
Types of financetask
New lorry
Extra stock
New factory
Short term Medium term Long term
??
?
*New computer
??
??
?
?
???
21 April 2023 © easilyinteractive.com 2006-10 8
Sources of finance
Internal finance
Phot
o by
Dam
ien
Jinsle
y . U
sed
with
per
miss
ion
Go straight to task
21 April 2023 © easilyinteractive.com 2006-10 9
Internal finance retained profitProfits are ploughed back into the
business Does not have to be repaid (unlike a
loan) Only available to profitable businesses!
*
21 April 2023 © easilyinteractive.com 2006-10 10
Internal finance working capitalUsing cash inflows (e.g. sales and
payments from debtors) to pay for cash outflows
*
21 April 2023 © easilyinteractive.com 2006-10 11
Internal finance sale of assetsSell surplus buildings etc.Could lease them back (sale and lease
back) Makes better use of capital tied up in
the business May take some time to sell assets at a
fair price
*
21 April 2023 © easilyinteractive.com 2006-10 12
Internal finance reduce stocks Reduces the opportunity cost and
storage cost of high stock levels May prevent the business from
responding to an increase in demand
*
21 April 2023 © easilyinteractive.com 2006-10 13
Internal financeowners’ savingsA sole trader or partnership may wish to
increase their investment (As unincorporated businesses are not
separate from their owners, this is internal finance)
Should be available quickly Increases the owner’s risk
*
21 April 2023 © easilyinteractive.com 2006-10 14
Sources of finance
External finance
1. Long term finance
Phot
o by
Dam
ien
Jinsle
y . U
sed
with
per
miss
ion
21 April 2023 © easilyinteractive.com 2006-10 15
External finance – long termissue of shares (equity)Only for incorporated businessesA permanent source of finance No interest is paid Dividends will be expected Ownership is diluted
*
21 April 2023 © easilyinteractive.com 2006-10 16
External finance – long termbank loan Quick to arrange Length of loan can match the need
Golden rule: The length of the loan should be matched to the life of the asset purchased
Collateral (security) is usually needed
*
21 April 2023 © easilyinteractive.com 2006-10 17
External finance – long termsell debenturesLong term loans issued by PLCsUsed for long term finance (e.g. 25
years)The loan is repaid on the maturity date Interest must be paid at a fixed interest
rate
*
21 April 2023 © easilyinteractive.com 2006-10 18
External finance – long termdebt factoringDebt factors are firms which ‘buy’ the
debts of a business at a discount for immediate cash
The risk of a bad debt is passed to the factor
The firm does not receive the full value of its debts
*
21 April 2023 © easilyinteractive.com 2006-10 19
External finance – long termgrants and subsidies e.g. from the government or lottery
commission Often do not have to be repaid Often have strings attached
e.g. location
*
21 April 2023 © easilyinteractive.com 2006-10 20
External finance – long termmortgageA loan secured against a specific asset
(collateral)
*
21 April 2023 © easilyinteractive.com 2006-10 21
External finance – long termventure capital (private equity) Venture capitalists are willing to risk large sums in
exciting projects for potentially high dividends Venture capitalists usually demand a ‘shares + loan’
deal in order to achieve an element of control whilst receiving ‘guaranteed’ interest
Control Guaranteed Interest
+Shares Loan
Finance available for a high risk project Venture capitalist will expect high dividends from a
successful project Loss of control*
21 April 2023 © easilyinteractive.com 2006-10 22
Sources of finance
External finance
2. Medium-term finance
Phot
o by
Dam
ien
Jinsle
y . U
sed
with
per
miss
ion
21 April 2023 © easilyinteractive.com 2006-10 23
External finance – medium termhire purchaseAllows a business to buy a fixed asset
over a long period of timeUnlike leasing, the firm owns the asset
once the final payment is made
*
21 April 2023 © easilyinteractive.com 2006-10 24
External finance – medium termleasingThe firm pays a monthly fee to borrow
an asset without ever actually owning it The firm does not have to find a large
sum to purchase an asset The firm is not responsible for
maintaining the asset The total cost of leasing will be higher
than outright purchase
*
21 April 2023 © easilyinteractive.com 2006-10 25
External finance – medium termalso…Medium-term (2 – 5 years) loan
*
21 April 2023 © easilyinteractive.com 2006-10 26
Sources of finance
External finance
3. Short-term finance
– for day to day operations
Phot
o by
Dam
ien
Jinsle
y . U
sed
with
per
miss
ion
21 April 2023 © easilyinteractive.com 2006-10 27
External finance – short termoverdraftThe bank gives the business the right to
‘overdraw’ its bank account A flexible form of borrowing – interest is
only paid on the overdrawn amount each day
Interest is higher than a loan Can be withdrawn by the bank at short
notice
*
21 April 2023 © easilyinteractive.com 2006-10 28
External finance – short termtrade creditTake advantage of credit offered by
suppliers and reduce the credit periods offered to customers
Effectively an interest free loan Suppliers may refuse to give
discounts/supply if delay is too long
*
21 April 2023 © easilyinteractive.com 2006-10 29
External finance – short termalso…Short-term (less than 1 year) loan
*
21 April 2023 © easilyinteractive.com 2006-10 30
Sources of finance
Task
Phot
o by
Dam
ien
Jinsle
y . U
sed
with
per
miss
ion
21 April 2023 © easilyinteractive.com 2006-10 31
Sources of financetaskUse your textbook to read about the
different types of financeComplete the grid exercise
*
Sources of finance grid exercise
Sources of finance grid answers
21 April 2023 © easilyinteractive.com 2006-10 32*
Short term finance
Medium term finance
Long term finance
Short term loan
Medium term loan
Bank overdraft
Debenture issue
Debt factoring
Flotation
Government grant
Hire purchase
Leasing
Mortgage
Retained profit
Savings
Share issue
Trade credit
Venture capital
1 2 3 4 5 6 7 8 9 10 11 12
Sources of finance – interactive answers
21 April 2023 © easilyinteractive.com 2006-10 33
Business plans
Recommended