Transcript MODULE 1

AS Marketing and Accounting and Finance
MODULE 1
COMPANY ACCOUNTS
Sources of Finance
The difference between Methods & Sources
Method
Name given for how
finance is raised eg loan.
Source
From where finance is
obtained eg bank.
Difference between Internal & External Sources
Internal
Those generated from
within the business.
External
Those sourced from
outside of the business.
Short, Medium and Long-term Methods
Short-term
Up to 1 yr; fund working capital
Medium
1 to 5 yrs; purchase assets with
medium term life
Long
5 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.
Internal Sources
Trading Profit
Advantages
over other long-term methods:
 No interest to pay
(unlike loans).
 Control not diluted
(unlike shares).
Internal Sources
Trading Profit
Problems
For long-term investment:
 may not popular with
shareholders.
 sole reliance on profits expansion slow and limited.
Internal Sources
Working Capital
Reduction of Trade Credit
 Offer discounts to
encourage prompt payment.
 Tighter credit control
procedures.
Internal Sources
Working Capital
Reduction of Stock
 Frees up cash, reduces
costs.
Internal Sources
Asset Sales
Fixed assets sold off to provide ‘oneoff’ source of finance.
+
No interest charges or
dilution of control, but..
-
May restrict future flexibility.
External Sources
Ordinary Share Capital
Raising long-term funds by settling
shares to:
a) family & friends (ltd)
b) general public (PLC)
External Sources
Ordinary Share Capital
Shareholders receive variable
dividend and voting rights.
Only usually considered when
large sums required, eg
starting up, expansion.
External Sources
Ordinary Share Capital
Advantages

Disadvantages
No commitments to meeting
fixed interest payments.
External Sources
Ordinary Share Capital
Disadvantages

Process of share issue expensive.

Dilutes ownership and control.
External Sources
Bank Loans
Common method for all types of
business.
Used to purchase fixed assets /
fund expansion.
Interest - fixed or variable.
External Sources
Bank Loans
Bank / building society loan interested in:
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 greater the perceived risk,
the higher the security.
External Sources
Bank Loans
Unsecured Loans
Possible but rare.
Lenders need convincing of
high chance of success.
Interest charged - considerably
higher.
External Sources
Bank Loans
Advantages



Disadvantages
Straightforward to arrange.
No danger of recall (unlike o/draft).
Can be linked to pension plans tax relief).
External Sources
Bank Loans
Advantages


Variable rate interest - advantage
if interest rates fall.
Fixed rate - allows more accurate
predictions re: cash flow.
External Sources
Bank Loans
Disadvantages

Committed to regular interest
payments - increases costs /
affects cash flow.
External Sources
Bank Loans
Disadvantages


Less flexible / more expensive
than overdrafts.
Variable rate - if rates rise.
External Sources
Mortgages
Loans used to purchase land /
buildings - usually secured.
Advance - 75 to 85% of value
of property - 5 to 20 years.
External Sources
Mortgages
Repayments - usually monthly,
fixed or variable rates.
Suitable when large sums of
money required.
External Sources
Mortgages
Advantages

Disadvantages
As for loans, plus other initial
costs:
External Sources
Mortgages
Disadvantages


Professional valuation of property
required - paid for by the business.
Arrangement fee payable on
amount borrowed.
External Sources
Overdrafts
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.
The second most common
method of finance.
External Sources
Overdrafts
Use Short-term - working capital
finance, eg seasonal peaks in
demand - bridging facilities.
External Sources
Overdrafts
Advantages


Disadvantages
Simple, quick to arrange,
flexible and convenient.
Relatively cheap but…
expensive if used regularly
for large amounts.
External Sources
Overdrafts
Disadvantages

Repayable on demand / can be
recalled at any time.
External Sources
Debentures
Type of loan divided into smaller units,
bought and sold on Stock Exchange.
Members of public invited to lend
money to business for a fixed period,
usually long-term at fixed rate of
interest.
External Sources
Debentures
Companies involved – usually well
established, good profit record, sound
liquidity.
New / young companies – difficult to
secure confidence.
External Sources
Debentures
Advantages

Disadvantages
No dilution of control.
External Sources
Debentures
Disadvantages

Priority over shareholders.

Interest paid even if firm is not
making a profit.
External Sources
Venture Capital
Capital supplied by merchant banks,
specialised commercial banks, venture
capital companies.
Expect 15-40% shareholding, over
period of 3-7 years, appoint nonexecutive director, provide general
financial & managerial advice.
External Sources
Venture Capital
Often obtained by small / medium sized
businesses – those too small to be
quoted on the Stock Exchange.
Loans for £50,000 plus - £250,000 plus
– admin costs not worthwhile on
smaller projects.
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.
External Sources
Venture Capital
Advantages

Disadvantages
Companies offer valuable
management support, but...
External Sources
Venture Capital
Disadvantages

Negotiation fee.

Dilution of control.

Often want quick return on
investment.
External Sources
Government Assistance
Assistance from European
Union & UK government
• relatively cheap way of raising finance
• mostly medium to long-term
External Sources
Government Assistance
Applying for grants:

Costly
Preparing accounts /
cash flow information.
External Sources
Government Assistance
Applying for grants:

Conditions
Eg no. and type of
employees, how money
can be spent.
External Sources
Government Assistance
Applying for grants:

Non-financial costs
Unwanted publicity
External Sources
Factors Influencing Methods &
Sources of Finance
 The purpose
 Objectives
 Legal Structure
External Sources
Factors Influencing Methods &
Sources of Finance
 Financial Position
 Age
 Size
External Sources
Factors Influencing Methods &
Sources of Finance
 Reputation
 Government Policy
 Interest Rates
AS Marketing and Accounting and Finance
- ENDCOMPANY ACCOUNTS
Sources of Finance