A2 Objectives and Strategy - Unit 6

Financing Growth

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Reasons for Growth Growth is a natural development for a business

Provides benefits and opportunities and allows economies of scale to be achieved.

Large and dynamic companies are more likely to succeed

Growth through diversification spreads risk

If not managed correctly growth can be risky particularly if not financially planned

Sources of FinanceFinance is essential for growth to take place

Internal Sources (from within the business) Retained profit Controlling working capital Sale and leaseback of assets Sale of assets

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External Sources of finance Short term- Trade credit, Debt Factoring,

Bank Overdraft, Hire Purchase, Leasing

Long term - Share Capital, Bank Loan, Debentures, Venture Capital, Grants

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Type of business -

sole trader, partnership, Ltd., or Plc.

The stage of business development - new or

established determines the difficulty.

Success and financial

strength of the business

The state of the economy and the

stage of the business cycle - Boom,

recession?

The cost of finance - interest, cost of advertising and

admin. When issuing shares.

Use of funds - capital or revenue

expenditure?

Timing of the finance - short, medium or long

term need?

Attitude of Shareholders - do

they want immediate return

(short term)

Level of risk, effect on balance sheet and ratios -

Gearing and interest rates

Loss of control -

share issue

Factors determining the most appropriate source of finance

Student Activity

Students must match the most suitable source of finance to each scenario on the worksheet

Consider all of the factors discussed when making decisions

Answers

1. Retained profit2. Debenture3. Ordinary shares4. Trade credit5. Bank loan6. Venture capital7. Government grant8. Debt factoring9. Leasing10. Hire Purchase11. Bank Overdraft12. Sale and leaseback13. Controlling working capital

Cash flow and Overtrading Most common financial

problem during growth

Cash flow forecasts are essential to plan the timing of future inflows and outflows and to ensure that suitable working capital is available.

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Must forecast additional sales and costs growth will bring

Overtrading When a business fails to obtain the appropriate

finance to fund its growth and as a result experiences liquidity problems from growing too fast.

Growth - purchase of new fixed assets Liquidity problems - not enough cash to pay short

term debts may lead to liquidation (working capital problems)

Often a result of unplanned growth Short term cash used to purchase fixed assets for

growth Need careful budgeting and planning to avoid