PD-Kettle Source of Finance

8/3/2019 PD-Kettle Source of Finance

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SOURCE OF FINANCE FOR THIS PROJECT

1.0IntroductionThis is an informative and analytical report on Sources of finance. The report is written as an

assignment of Managing financial resources and decision module of the first semester for

the evaluation of our understanding and knowledge of the sources of finance to the lecturer

Mr. Arthur Henry and Ms. Anne Marie McCarrick. This assignment also tests our knowledge

on choosing the appropriate source of finance and financial planning. The report also

provides analysis of (Team 7 ) PLCs balance sheet for sources of finance. All of the

information and research for this report is through the World Wide Web.

2.0 Sources of Finance

Finance is essential for a businesss operation, development and expansion. Finance is the

core limiting factor for most businesses and therefore it is crucial for businesses to manage

their financial resources properly. Finance is available to a business from a variety of sources

both internal and external. It is also crucial for businesses to choose the most appropriate

source of finance for its several needs as different sources have its own benefits and costs.

Sources of financed can be classified based on a number of factors. They can be classified as

Internal and External, Short-term and Long-term or Equity and Debt. It would be

uncomplicated to classify the sources as internal and external.

2.1 Internal sources of finance

Internal sources of finance are the funds readily available within the organization. Internal

sources of finance consist of:

y Personal savingy Retained profitsy Working capitaly Sale of fixed assets


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2.1.1 Personal savings

This is the amount of personal money an owner, partner or shareholder of a business has at

his disposal to do whatever he wants. When a business seeks to borrow the personal money

of a shareholder, partner or owner for a businesss financial needs the source of finance is

known as personal savings.

2.1.2 Retained profits

Retained profits are the undistributed profits of a company. Not all the profits made by a

company are distributed as dividends to its shareholders. The remainder of the profits after all

payments is made for a trading year is known as retained profits. This remainder of finance is

saved by the business as a back-up in times of financial needs and maybe used later for acompanys development or expansion. Retained profits are a very valuable no-cost source of

finance.

2.1.3Working capital

Working capital refers to the sum of money that a business uses for its daily activities.

Working capital is the difference of current assets and current liabilities (i.e. Working capital

= Current assets Current liabilities). Proper working capital management is also vital as it is

also a source of finance for a business.

Current assets

Current assets are also known as cash equivalents because they are easily convertible to cash.

Current assets consist of Stock, Debtors, Prepayments, Bank and Cash. These assets are used

up, sold or keep changing in the short run. Stock this refers to the stock of goods available

to the business for sale at a given time. It is very important to maintain the right amount of

stock of goods for a business. If stock levels are too high it means that too much of money is

being held up in the form of stock and if stock levels are too low the business will lose

possible opportunities of higher sales. Debtors are a businesss customers owing money to

the business having been bought the businesss goods or service on credit. If a business has

cash flow problems it can maintain a low level of debtors by encouraging the debtors to pay

as early as possible.


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Prepayments these are the expenses paid in advance. The payment being made even before

the expense occurs is a prepayment. Bank and Cash Bank is the cash held in banks and cash

is money held by the business in the form of cash. Having too much of money in the form of

cash is also not good for a business since it can use that money to invest and earn a return but

however a business should have healthy current ratio (current assets : current liabilities) of

2:1.Current liabilities

Current liabilities are short-term debts that are in immediate need of settlement. Some

examples of current liabilities are creditors, accruals, proposed dividends and tax owing.

These obligations have to be paid within a year. Creditors also known as trade creditors are

suppliers from whom the business purchased goods on credit. Paying the creditors as late as

possible will ease cash flow requirements for a business. Accruals are the expenses owed

by the business.

Accruals are the expenses owed by the business. Dividends proposed are the dividends

payable for the year that is not yet paid. Tax owing is the sum of money owing as tax.

2.1.4 Sale of fixed assets

Fixed assets are the assets a company that do not get consumed in the process of production.

Some examples of fixed assets are land and building, machinery, vehicles, fixtures and

fittings and equipment. Sometimes where the fixed asset is a surplus and is abandoned, it can

be sold to raise finance in demanding times for the business. Otherwise businesses may

choose to stop offering certain products and sell its fixed assets to raise finance. Selling fixed

assets reduces the production capacity of a business affecting a businesss return.

2.2 External sources of finance

Sources of finance that are not internal sources of finance are external sources of finance.

External sources of finance are from sources that are outside the business. External sources of

finance can either be:

y Ownership capital ory Non-ownership capital

2.2.1 Ownership capital


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Ownership capital is the money invested in the business by the owners themselves. It can be

the capital funding by owners and partners or it can also be share bought by the shareholders

of a company. There are mainly two main types of shares. They are:

y Ordinary sharesy Preference shares

2.2.1.1 Ordinary shares

Ordinary shares also known as equity shares are a unit of investment in a company. Ordinary

shareholders have the privilege of receiving a part of company profits via dividends which is

based on the value of shares held by the shareholder and the profit made for the year by the

company. They also have the right to vote at general meetings of the company. Companies

can issue ordinary shares in order to raise finance for long-term financial needs.

2.2.1.2 Preference shares

Preference shares are another type of shares. Preference shareholders receive a fixed rate of

dividends before the ordinary shareholders are paid. Preference shareholders do not have the

right to vote at general meetings of the company. Preference shares are also an ownership

capital source of finance. There are several types of preference shares. Some of them are

Cumulative preference share, Redeemable preference share, Participating preference share

and Convertible preference share. Cumulative preference shares if a company is in a lossmaking situation and is unable to pay dividends for one year then the dividend for that year

will be paid the next year along with next years dividends. Redeemable preference shares

these preference shares can be bought back by the company at a later date. Normally the date

of redemption is usually agreed. Participating preference shares give the benefit of

additional dividends to its shareholders above the fixed rate of dividends they receive. The

additional dividend is usually paid in proportion to ordinary dividends declared. Convertible

preference shares convertible preference shareholders have the option of converting their

preference shares to ordinary shares.

2.2.2 Non-ownership capital

Unlike ownership capital, non-ownership capital does not allow the lender to participate in

profit-sharing or to influence how the business is run. The main obligations of non-ownership


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capital are to pay back the borrowed sum of money and interest. Different types of non-

ownership capital:

y Debenturesy Bank overdrafty Loany Hire-purchasey Leasey Granty Venture capitaly Factoringy Invoice discounting

2.2.2.1 Debentures

Debentures are issued in order to raise debt capital. Debenture holders are not owners but

long-term creditors of the company. Debenture holders receive a fixed rate of interest

annually whether the company makes a profit or loss. Debentures are issued only for a time

period and thus the company must pay the amount back to the debenture holders at the end of

the agreed period. Debentures can be secured, unsecured, fixed or floating. Secured

debentures are debentures that are secured against an asset. They are also called mortgage

debentures. Unsecured debentures these debentures do not have an asset as collateral. Fixed

debenture have a fixed rate of interest. Floating debentures do not have fixed rate of

interest and are noticed to any specific asset. Bearer debentures these debentures are easily

transferable.

Registered debentures are not easily transferable and legal procedures have to be followed

in case of a transfer. Convertible debentures can be converted to stock at the end of the

debenture repayment date.


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2.2.2.2 Bank overdraft

Bank overdraft is a short term credit facility provided by banks for its current account

holders. This facility allows businesses to withdraw more money than their bank account

balances hold. Interest has to be paid on the amount overdrawn. Bank overdraft is the ideal

source of finance for short-term cash flow problems.

2.2.2.3 Loan

Loans are amounts of money borrowed from banks or other financial institutions for large

and long-term business projects such as the development or expansion of the business.

However loans can be substituted by other alternative sources of finance which are more

suitable.

2.2.2.4 Hire purchase

Hire purchase allows a business to use an asset without paying the full amount to purchase

the asset. The hire purchase firm buys the asset on behalf of the business and gives the

business the sole usage of the asset. The business on its part must pay monthly payments to

the hire purchase firm amounting to the total value of the asset and charges of the hire

purchase firm. At the end of the payment period the business has the option of purchasing the

asset for a nominal value.

2.2.2.5 Lease

In a lease the leasing company buys the asset on behalf of the business and the asset is then

provided for the business to its use. Unlike a hire purchase the ownership of the asset remains

with the leasing company. The business pays a rent throughout the leasing period. The

leasing firm is known as the less or and the customer as lessee. Leasing is of two types,

namely Finance lease and Operating lease. Finance Lease this is where the lessees monthly

payments add unto at least 90% of the total value of the asset. Operating Lease this lease

does not run for the full life of the asset and the lessee is not liable for the full value of theasset. The residual risks taken up by the lesser

2.2.2.6 Grant


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Grants are funding given to businesses for programs or services that benefit the community or

public at large. Grants can be given by the government or private firms. For example a grant

may be given to open a new factory where unemployment is high.

2.2.2.7Venture capital

Venture capital is the capital that is contributed at the initial stages of an uncertain business.

The chance of failure of the business is great while there is also a possibility of providing

higher than average return for the investor. The investor expects to have some influence over

the business.

2.2.2.8 Factoring

This is where the factoring company pays a proportion of the sales invoice of the business

within a short time-frame to the business. The remainder of the money is paid to the business

when the factoring company receives the money from the businesss debtor. The remainder

of the money will be paid only after deducting the factoring companys service charges.

Some factoring companies even offer to maintain the sales ledger of the business. Factoring

is of two types: Recourse factoring and Non-recourse factoring. Recourse factoring In this

type of factoring the client company is liable for bad debts. On-recourse factoring is where

the factor takes responsibility for the payment of the debtors. The client company is not liable

if debtors do not pay back. Non-recourse factoring is usually more expensive because of the

high risks experienced by the factor.

2.2.2.9 Invoice discounting

In invoice discounting the client company send out a copy of the invoice to the invoice

discounting firm. The client then receives a portion of the invoice value. In contrast to

factoring, the client company collects the money from its debtors. Once the payment is

received it is deposited in a bank account controlled by the invoice discounter. The invoice

discounter will then pay the remainder of the invoice less any charges to the client.


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3.0 The financial costs of the different sources of finance

Personal savings

have low costs since they are provided by an owner, partner or shareholder. The owner may

charge a rate of interest for the loan provided.

Retained profits

have opportunity cost, that is the money could have been used elsewhere for some other

purpose. Otherwise there arent any other costs for this source of finance.

Working capital

They do not have any costs other than opportunity cost.

Sale of assets

By selling fixed assets it uses then the firms production capacity will diminish. If it sells

unused or abandoned fixed assets then only the potential production capacity reduces.

Sometimes firms will have to stop offering certain products or services in order to sell its

asset and raise finance. The asset may cost much more than what it sold for if it wants to

replace it.

Ordinary and Preference shares

Dividends have to be paid out of profits to shareholders as a return for their investment in

the business. There are administrative costs occurring from issuing shares like stock

exchange listing fee, printing and distribution fee and advertising fee.

Debentures

have to be paid a fixed or floating interest depending on the type of debenture that is issued.

Bank overdraft

Interest is a little higher than for bank loans and interest is calculated on a daily basis.

Loans

Interest is usually fixed for short term loans, and long-term loans usually have a variable

rate of interest. Interest rates are lower than for bank overdrafts.

Hire-purchase

The business ends up paying more than the original value of the asset for its purchase.


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Lease

the ownership of the asset remains with the leasing company even after the business pays

more than 90% of the assets value but however some leasing firms provide the option of

purchase of the asset nominal value.

Grants

are free and have no financial costs.

Venture capital

The venture capitalist will have some influence over the business and the business will have

to share profits with the investor. The investor will want the capital back at a later date.

Factoring

Factors charge a rate of interest of about 1.5% to 3% of the invoice value as finance

charges. Interest is calculated on a daily basis. Credit management and administrative fee are

also charged and ranges from about 0.75% to 2.5% of turnover.

Invoice discounting

Invoice discounting also charges a rate of interest of about the same but its credit

management and administrative charges are lower than a factor because only finance is

provided and sales ledger is not maintained by an invoice discounting firm.

4.0 Advantages and Disadvantages of the different sources of finance

4.1 Personal savings

Advantages

1. The owner would not want collateral to lend money to the business.2. There is no paperwork required.3. The money need not necessarily be paid back to the owner on time.4. Can be interest free or carry a lower rate of interest since the owner provides the loan.

Disadvantages

1. Personal savings is not an option where very large amounts of funds are required.


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2. Since it is an informal agreement, if the owner demands the money back in a shortnotice it might cause cash flow problems for the business.

4.2 Retained profits

Advantages

y They need not be paid back since it is the organizations own savings.y There are no interest payments to be made on the usage of retained profits.y The companys debt capital does not increase and thus gearing ratio is maintained.y There are no costs raising the finance such as issuing costs for ordinary shares.y The plans of what is to be done with the money need not be revealed to outsiders

because they are not involved and therefore privacy can be maintained.

Disadvantages

yThere may be opportunity costs involved.

y Retained profits are not available for starting up businesses or for those businessesthat have been making losses for a long period.

4.3 Working capital

Advantages

y Since it is an internal source of finance there are no costs involved.y No repayment is needed.y

External parties cannot influence business decisions.y Will not increase debt capital of the firm so gearing ratio is maintained.

Disadvantages

y Opportunity costs are involved.y Is not suitable for long term investments.y Working capital cannot raise large amounts of funds.y Total risk is undertaken by the company.

Using working capital as a source of finance will affect the current ratio of the business

4.4 Sale of assets

Advantages

y Funds are again raised by the business itself and therefore need not be paid back.y No interest payments are required.y Large amounts of finance can be raised depending on the fixed asset sold.


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y Would be the ideal source of finance if it was for an asset replacement.Disadvantages

y If the asset is sold then the business would lose opportunities to generate income fromit.

y If the business wants to buy a similar asset later on it may customer than it was soldfor.

y If the asset is sold and the money is spent without return then the business is broke.y The asset may be able to generate more income than the purpose it was sold for.

4.5 Ordinary share issue

Advantages

y The amount need not be paid back it is a permanent source of capital.y

Able to raise large amounts of finance.y If the company follows a rational dividend policy it can create huge reserves for its

development program.

y The dividends need to be paid only if the company makes a profit.y No collateral is required for issuing shares.y It will help reduce gearing ratio

Disadvantages

y Issuing shares is time consuming.y It incurs issuing costs.y There are legal and regulatory issues to comply with when issuing shares.y Possible chances of takeover where an investor buys more than50% of the total issued

shares value.

y Groups of equity shareholders holding majority of shares can manipulate the controland management of the company.

y May result in over-capitalization where dividend per share falls.y Once issued the shares may not be bought back and therefore the capital structure

cannot be changed.

4.6 Preference share issue

Advantages

y Have no voting rights and thus the management can retain control over the affairs ofthe company.


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y Preference shareholders need not be paid if the company makes loss.y Even if the company makes large profits preference shareholders need to be paid only

a fixed rate of interest

y Has other benefits similar to ordinary share issue such as no repayment required,large amounts of capital can be raised, permanent source of capital and no collateral

required.

y Redeemable preference shares can be redeemed.Disadvantages

y Even if the company makes a very small profit it will have to pay the fixed rate ofdividend to its preference shareholders.

y Preference shares are usually cumulative and thus twice the amount must be paid thefollowing year if dividends are not paid on the year they need to be paid.

y Taxable income is not reduced by preference dividends unlike debentures whereinterest paid reduces taxable income.

y Have other drawbacks similar to ordinary share issues such as the cost, timeconsumption and legal requirements.

4.7 Debentures

Advantages

y Debenture holders do not have rights to vote at the companys general meetings.y Tax benefits debenture interests are treated as expenses and charged against profits

in the profit and loss account.

y Debentures can be redeemed when the company has surplus funds.Disadvantages

y Debenture interests have to be paid regardless the company makes a profit or loss.y The money borrowed has to be paid back on an agreed date.

4.8 Bank overdraft

Advantages

y No security is needed for a bank overdraft.y Ideal for short-term cash flow deficits.y Easy and quick to arrange.y Interest is only paid when overdrawn and on the exact amount needed


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y Since overdraft is a short term debt it is not included in calculating the firms gearingratio.

Disadvantages

y There is a limit to the amount that can be overdrawn.y Interest has to be paid on an overdraft that is calculated on a daily basis and

sometimes the bank charges an overdraft facility fee too.

y Overdrafts are meant to cover only short-term financing and are not a permanent orlong-term source of finance

y Interest is calculated on a variable rate and therefore it is difficult to calculate the costof borrowings.

y Overdrafts can be recalled by the bank at any time if not stated in the agreement.4.9 Loans

Advantages

y Large amounts can be borrowed.y Suitable for long-term investments.y The lender has no say on how the money is spent.y Need not be paid back for a fixed time period and banks do not withdraw at a

short notice.

y Interest rates are lower than for bank overdrafts and are set in advance.Disadvantages

y Collateral is needed.y The amount borrowed has to be repaid at the agreed date.y Interest is charged.y Loans will affect a companys gearing ratio.

4.10 Hire purchase

Advantages

y The business gains use of the asset before paying the assets value in full.y The payment is made in affordable installments.y Hire purchase instilments are taxable expenditures.


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y At the end of the payments ownership of the asset is transferred to thecompany.

y Payments can be made from the assets usage and return of the asset.Disadvantages

y Ownership remains with the lender until the last payment is made.y The asset will cost the company more than the original value.y If payments are not made on time the lender has the right to repossess the

asset.

y If the asset is required to be replaced due to breakdown or because it is out-dated in which case the payment may still have to be made and the asset

replaced.

4.11 Lease

Advantages

y The amount in full need not be paid in order to start using the asset.y The total cost and the lease period is pre-determined and thus helps with

budgeting cash flow.

y In an operating lease, payments are made only for the usage duration of theasset.

y Lease is inflation friendly where the agreed rate is paid even after five yearswhen other costs increase due to inflation.

y It is easier to obtain a lease than a commercial loan.Disadvantages

y The ownership of the asset remains with the less or even after payments buthowever in finance lease the option is provided to buy the asset at a nominal

value.

y In a finance lease the lessee ends up paying more than the value of the asset.y Lease cannot be terminated whenever at lessees will.

4.12 Grants

Advantages

y Grants do not have to be paid back.y There are no costs involved in obtaining a grant.


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Disadvantages

y Grants are given on certain restrictions and laws imposed by the government.y Not all organizations are eligible for grants.y Grants are given freely and therefore are very competitive because lots of firms try for

the same source of fund.

4.13 Venture capital

Advantages

y Venture capitalists invest large sums of money in the business.y They may also bring a lot of experience and expertise along with the money.y Since they become owners by investing in the business they have equal interests in the

businesss success.

y Venture capitalists are only periodical investors wanting to exit the business at some

stage.

Disadvantages

y The profits will be shared with the investor.y Acquiring venture capitals is a lengthy and complex process whereas business plan

and financial projections must be submitted to the potential venture capitalist

y As an owner of the business the venture capitalist may want to influence the strategicdecisions and take control of the business.

4.14 Factoring

Advantages

y A large proportion of money is received within a short time-frame.y The sales ledger of the business can be outsourced to the factor.y The money collections from debtors are undertaken by the factoring company.y Helps a business to have a smooth cash flow operation.y Non-recourse factoring protects the client company from bad debts.

Disadvantagesy The business has to pay interests and fees for the factor for its services.y The cost will be a reduction on the companys profit margin.y Lack of privacy since the sales ledger is maintained by the factor.y Costumers would not like factoring companies collecting debts from them.


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4.15 Invoice discounting

Advantages

y The client company receives the money in a short period.y There is some amount of privacy since the sales ledger is maintained by the client

company and only some invoices are submitted for immediate cash.

y Less costly than factoring since the sales ledger is maintained by the Client Company.y Unlike factoring customers are not aware of invoice discounting since the debt

collection is undertaken by the client firm.

Disadvantages

y Debt should be collected by the client company itself and thus resources and time arewasted in debt collection.

y Sales ledger has to be maintained by the client company itself.

5.0 Choosing an appropriate source of finance

There are many sources of finance available to a business. Finance is needed for several

purposes and different purposes need sources of finance which are most suitable to them.

When choosing an appropriate source of finance some factors have to be considered. The

factors that need to be considered when choosing an appropriate source of finance are:y The amount of money neededy The urgency of fundsy The cost of the source of financey The risk involvedy The duration of financey The gearing ratio of the businessy The control of the business

5.1 The amount of money needed

This is the amount of finance the organization wants to raise. Not all sources of finance

provide all amounts of funds. Some sources are notable to raise large amounts of funds

whereas others are not flexible enough to put up for the small sum of money the business

requires. Therefore it is necessary to identify the amount of money needed by the company to


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choose a suitable source of finance. For example borrowing a commercial loan for a small

and short-term cash flow problem is unwise because loans may have a minimum amount that

can be borrowed so taking a bank overdraft would be wise where money can be borrowed in

small sums and bank overdrafts can be paid back quickly. Therefore the amount of money

required is a key factor in choosing a source of finance.

5.2 The urgency of funds

This refers to the amount of time the business can spend on collecting funds. If the business

has plenty of time before its financial needs need to be met then it can spend time searching

for cheap alternatives of sources of finance. On the other hand if the business wants the

money as soon as possible then it would have to make some cost sacrifices and accept asource of finance that may even cost higher. The urgency of funds needs to be identified also

because certain sources of finance need more time to be raised than other sources of finance.

For example issuing shares is a very long and complex process where there are legal

requirements and then the potential shareholders have to be informed (advertising) and after

all these the money is collected through the process of application and allotment which takes

more time.

5.3 The cost of the source of finance

Different sources of finance have different costs as discussed above. It is always more

profitable to a business to seek and obtain cheaper sources of finance. Sometimes however

the time does not permit organizations to look for cheaper sources of funds. Internal sources

of finance are always cheaper than external sources of finance.

5.4 The risk involved

The risk involved is the certainty of receiving returns for the lender on the investment made

using the finance. In simpler words it is the sureness of success of the project. If the provider

of finance is not confident that the project in which his money is invested in is less likely to

reap returns then the lender would be reluctant to provide the business with funds. In this case

the money can be secured against an asset as collateral which will encourage the lender to

lend.


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5.5 The duration of finance

This is the time period for which the money is needed. It can be for a short-term (within one

year), medium-term (one to five years) or long-term (five years and more) time period. By

identifying the length of requirement of finance the organization can eliminate inappropriate

sources of finance and choose a source of finance that is more suitable for the requiredtimeframe.

5.6 The gearing ratio of the business

The gearing ratio plays an important role in the availability of the sources of finance since the

gearing ratio shows the ratio of debt capital to the total capital of a business. If a business is

high geared then commercial lenders will be unwilling to give loans because the business is

already operating on more loans than equity capital. A high geared company will have to pay

more of its profits as interests on loans and other debt capital. That being the case potential

lenders fears the business ability to be able to cope with more interest payments and debt

settlement.

5.7 The control of the business

The existing shareholders of a company would be reluctant to issue shares because this would

cause a dilution in control of the business. Issuing shares in public limited companies also

gives opportunity of takeovers to outside parties. The same can be said for venture capitalists

where the money is invested as equity and being owners the venture capitalists have the right

to influence how the business is run. The existing shareholders and owners of a business whowould not want any change to arise in the control and ownership of the business would

disregard sources of equity finance.

Bank overdraft

This appears in the balance sheet as a current liability since it is short-term debt and has to be

paid back within a year. The interest charges and bank overdraft fee if charged are deducted

from the profit and loss account before tax is charged.

Loan

Loans are long-term debts and therefore come under long-term liabilities in a balance sheet.

The loan when displayed on a balance sheet will usually contain information about the

repayment date and the interest charged on the loan. The interest is charged in the profit and

loss account.


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Venture capital

This is an amount of money invested in the business as equity capital and thus comes under

equity capital in the balance sheet. The return for venture capitalists is a share of profits

which is recorded in the appropriation account.

Factoring and invoice discounting

This does not appear in the balance sheet. However the money received from factoring and

invoice discounting can show higher balances of cash. The interest charges and fee is

recorded in the profit and loss account.

7.0 The information needs of different decision makers

Different decision makers will want different information about the company regarding their

interests in the business. A long-term lender will always want to know the gearing ratio of a

company while the short-term lender will want to know about the liquidity ratio of the

business. The information for different parties is all taken from financial reports, cash flow

and financial statements such as the balance sheet and profit and loss account. The manager

needs accounting information to take managerial decisions since all functions of an

organization are tied to the financial strength of a business. Using the financial statements,

the financial stability and profitability of an organization can be analyzed and interpreted.

Using this information the interested parties make decisions regarding the business. The

businesss financial statement can be analyzed in a number of ways. Some of them arehorizontal analysis, vertical analysis, trend analysis and ratio analysis. Ratio analysis the ratio

shows the relationship between two relevant items in the financial statement. The relationship

is shown as a ratio or as a percentage. Different ratios calculable on a businesss financial

statements are:

y Liquidity ratios -Current ratio

-Quick ratio / Acid test ratio

y Working capital ratios -Stock turnover ratio

-Average debt collection period

-Average credit taken from creditors

y Profitability ratios -Return on capital employed


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-Gross profit margin ratio

-Profit before interest and tax/Sales

-Profit after tax/Sales

y Financial stability / Solvency ratio -Financial gearing ratio

-Debt/Asset ratio

-Interest cover ratio

y Investment performance ratio-Dividend per share

-Dividend yield

-Earning per share

-Price-Earnings ratio

-Interest yield

-Redemption yield

The above ratios being calculated the performance of the business can be assessed and

necessary decisions can be taken by relevant parties. Due to limited time the ratios have not

been explored in detail.

8.0 Financial planning

Importance of financial planning

Financial planning affects the terms and conditions on which the business will be able to

obtain funding required to establish, maintain and expand the business. Financial planning

influences the raw material a business is able to afford, the products it is likely to produce and

whether the business will market its product efficiently. It will affect the resources the

business is able to acquire to operate and it will be a major determinant of the success of the

business. A financial plan not only help the business to understand what it wants to do but

also helps the business understand how to achieve it. A healthy financial plan consists of thefollowing:

y The basic financial statementsy Ratio analysisy Budgets


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y Break-Even analysisy Pricing formulas and policiesy Types and sources of capital available to finance business operationsy Short and long term planning considerations necessary to maximize profits.

The business owner/manager who understands these concepts and uses them effectively to

control the evolution of the business is practicing sound financial management thereby

increasing the likelihood of success.

9.0 Conclusion

The early-growth of innovative enterprises requires both sufficient capital and proper

management expertise. Sources of finance is available from variety of sources but each

source has its own cost and benefits. It is important to choose an appropriate and cheap

source of finance for the smooth operation of the firm. There are important factors to consider

when choosing a source of finance for our company taking account the issue of financial and

control risk .

There are various institutions and agencies within Ireland that are dedicated to supporting and

promoting indigenous business development. These institutions such as City Enterprise

Boards, Enterprise Ireland and InterTradeIreland. offer a range of business supports in the

form of funding, consultation and incubation.

Many of these supports are offered by means of a grant whereby successful applicants receive

financial assistance in achieving a particular goal or objective. This is perhaps the most

beneficial means of raising finance for a business as there are usually no long-term

implications to be considered. Financial supports are available for almost all business

initiatives including marketing, research and development, recruitment, expansion,

international trade and many more which are outlined throughout this report. The most

difficult aspect in relation to these support funds is to successfully secure the support for your

business.

During the course of our research for the source of finance the funding details and eligibility

criteria for each support measure as outlined in their various web sites have being carefully

considered.


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Enterprise Ireland is the Irish state agency for the development and promotion of Irish-

owned industry. Enterprise Ireland deals with Irish enterprises and is particularly focused on

high-potential start-ups, business growth and research and innovation. Their funding is

specifically intended to meet expenses in the areas of research and design, training, job

creation and acquisition of capital assets. Enterprise Ireland focus on 'high potential start ups'

that fulfil their criteria as outlined in their web page and will support the costs involved in

testing a product to determine whether it meets the EUs sustainability criteria. The costs of

incorporating the Eco-label into successful products can also be supported.

The Eco-label is the established European symbol of quality. Under the Eco-label scheme,

various categories of products are assessed by the relevant authorities in conjunction with

established EU sustainability criteria. Products which meet the relevant criteria are permitted

to display the Eco-label symbol which opens up new Green Market opportunities.

Traditional financing institutions can increase the supply of funds to innovative enterprises if

assured by guarantees or other forms of credit enhancement. The effectiveness of these

programmes depends on the degree to which they can reach the intended recipients (i.e.

innovative enterprises), and the degree to which these enterprises, once funded, can source

and utilize proper management expertise.

The latter requires profound understanding of the management needs of innovative

enterprises and the coordination of policy initiatives that address the supply and distributionof management skills.

References

Arthur Henry hand out for 3rd

year.

http://www.enterpriseboards.ie/index.aspx

www.intertradeireland.com

http://www.enterprise-ireland.com/en/Invest-in-Emerging-Companies/Investors/

www.startingabusinessinireland.com

www.basis.ie

www.entrepreneur.com/money/finance/index.html

Documents

PD-Kettle Source of Finance