Finance for Managers Assignment Sample PDF
Added on 2021-02-05
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Finance for ManagersUnit code T/617/1213Sean Bateson
Understanding the Sources of Finance Available to Organisations (LO1) Describing the Sources of Finance Available to Different Types of Organisations (AC 1.1) For a business to begin and continue operations they will often use many different sources of finance. These sources of finance can be put into different classifications, with each having their own advantages and disadvantages, which we will identify and discuss below.Internal Sources – this source of finance comes from within the business, it is the finance the business can disperse throughout the business from the moneythe business has generated itself. When a business first starts off the owners will often use their personal investment as the source of finance, and then when the business is up and running, other internal sources can include, retained earnings, depreciation provisions, sale of business assets, deferred taxation and reduction of working, which can all be used to raise finance for the business. Another major way to raise finance internally is the collection of its debts, this will give a quick injection of cash which will help the cash flow within the business.External Sources – this source of finance comes from sources outside the business, which the business may need to use for investment and growth opportunities which require a large sum of finance, or sometimes can be used by a business which is struggling with its cash flow. Issuing equity shares, bonds and debentures, preferred stock, taking term loans, venture capital, leasing, bank overdraft, trade credit, utilising debt factoring and hybrid instruments are some of the most common external sources of finance for businesses. External sources can also be broken down into three different groups, which will be discussed further.Short–Term Sources – this source is a type of finance which a business will attain from an external source, which will be due to by paid back within 12 months off taking out the finance. The types of this source of finance is trade credits, bank loans, commercial papers, bank overdraft, accrued expenses, deferred incomes, and public deposits. Short-term loans typically are much
easier to obtain than the longer-term loans, but they do come with a higher interest rate in general.Medium-Term Sources – this source of finance is one in which it will have a tenure of more than 12 months, but less that 5 years. Some of the most common medium-term sources of finance are preferred stocks, bonds and debentures, financial institutes, commercial banks, lease finance, hire purchasefinance and public deposits. This type of financing is typically used by many businesses that aren’t in the financial position to obtain the long term source of finance for their plans, so they can use this source to help them fulfil smallergoals in their future.Long-Term Sources – this source is a source with a length that exceeds 5 years with no set maturity date. Some of the most common sources of long-term finance are share capital, preferred share capital, retained earnings or internal accruals, bonds and debentures, term loans from commercials banks or financial institutions or the government, venture funding, asset securitisation, deferred credit and public deposits. This type of financing is one that a business can use in big plans for growth and expansion, such as buying a new factory. It is the hardest source to receive as it puts the provider of the finance under a larger case of risk due to the time scale on the long-term loan.Evaluating the Costs and Benefits of Different Sources of Finance (AC 1.2) As said with the larger number of different sources of finance to a business comes available, the business needs to realise the costs and benefits that each source will bring about when used. This will help the business make the right options for their situation. These costs and benefits are discussed below.Internal sources – using internal finance is a great way for a business to raise finance as it allows them to control their amount of financing, and their will be no risk involved and no interest charges involved, which will reduce the overall costs of the finance. This source of financing can also improve the debt to equity ratio allowing the business to become better geared. This will allow for the business to get external finance easier. The disadvantage of this type of financing is that it can mean the business may reduce budgets for other departments so that they can use this saving in a different department which
can disrupt operations. This can also limit the available of outside insights and increase the risk of bankruptcy for some businesses.External Sources – external financing has many benefits which include how sometimes they are necessary to keep a business afloat at short notices, (overdrafts) and how they can be used to achieve growth projects that the business would be unable to undertake without the additional help, however they come with their disadvantages too, which could be how they can put the business under more financial stress due to repayments with interest which can damage a businesses cash flow, and how these sources may require the business to use collateral with the loan agreements which would increase the financial risk of bankruptcy for the business.Issuing Share Capital – the benefits with this type of financing is that it can help increase a business’ equity which can then be used in the future for a business to attain debt easier such as a mortgage. The share capital does not require monthly repayments as it is an investment, so it does not put the business into financial risk of missing repayments. However, the business can come across disadvantages with this type of finance such as how a high level ofshare capital in a business can lead to the owners of the business losing a degree of control as they will have a high number of shareholders which will use their power to control certain decisions which could halt the owners growth projections.Banks Loans – the benefits of the bank loans a business can go for could be how they allow for the owners of the business to maintain complete ownership of the business so they can control the business decisions, the business bank loan is also a temporary source of finance so once they are paid off the business has no more obligation with the lender and therefore the business can build their credit score. A disadvantage of the bank loans could behow it can lead the business into becoming highly geared which then thereforemeans the business will have to deal with high interest rates while trying to maintain a good cash flow within the business.Retained Earnings – this form of financing comes with advantages such as howit can allow business to use their own profits in whatever way they want so they can become self-dependent in their financing. This source does not require applying for anything or setting up any repayments which lowers financial risk. However it can cost the business in other areas such as how it can deprive certain departments of the business as other areas get more
investment and it can also allow for management to become more inefficient with their budgets as they may be more content with over spending due to their over spending not placing the business into financial risk as it would with a loan.Leasing – the benefits of this could be how for a start-up business the cost of buying an asset can be out of reach but leasing gives these businesses the opportunity for this. Leasing will always be recorded as an expense which in turn will then lower the taxable income for the business. The disadvantages of leasing can be how in the long run they become very expensive for the business, as the leased asset will never be owned by the business meaning it can put financial stress on the business.Trade Credit – this can bring around the advantage that it can improve the cash flow instantly as bills owned to the suppliers of the business can be settled at a later date which means the business mightn’t need to take out a short term loan. However, it can also damage the credit score of the business ifrepayments are not meet and damage the relationship between the business and the suppliers for the same reason.Comparing and Contrasting the Sources of Finance for a Specific Project (AC 1.3) When a business takes on a new project, they can use the wide variety of finance sources which we have previously discussed, in this next section we will discuss the project of well-known food delivery company which is Deliveroo. Deliveroo generated a turnover of £476 million in 2015 with a gross profit of £91million, this was a increase in £200 million from the last 6 years, (Andrew. Seymour) and this increase came from the large amount of finance that Deliveroo invested in to expand the business. Deliveroo investing heavily from by using retained earnings as a source of finance and launched into Kuwait and Taiwan in 2018, this was method of finance for this specific project saved Deliveroo from using external sources of finance which would have meant their debt would have been increased and it meant the business did not have to acquire any financial leverage from loans etc. giving Deliveroo the control of their project. In the same year of 2018 Deliveroo also launched a project with
Marketplace which allowed them to double their fleet of delivery drivers, and this was financed through making an agreement with Facebook who owns market, which included giving Facebook a percentage of each sale Deliveroo made through the marketplace to Facebook. This source of finance was again loan free, which meant the business did not have to spend time and money on acquire a physical source of finance but instead an agreement with another business. Deliveroo in 2018 decided to seek for a potential investor so they could fund their technology research and development project. Amazon was the chosen investor who invested $575millon into the business which allowed Deliveroo to continue to develop and growth to reach the profits they make today. As Deliveroo is a private limited company, it cannot issue bonds and debentures to obtain external finance, so this would not be an option for thembut for their future projects for the company to obtain finance could be term loans from commercial banks or financial institutes. Obtaining loans from banks or financial institutes would be a suitable option to finance the project as the firm would be able to secure a loan with favourable terms because of itsexcellent financial performance and it would have to pay only a definite amount as interest and capital repayment. The loans also would provide the company with financial leverage. As the company is financially sound, there would be no immediate financial risk associated with term loans and that is why the company may finance the expansion project with loans from commercial banks or financial institutes.Evaluating the Strategic Implications of Choosing Different Sources of Finance (AC 1D1) For most businesses, the use of a bank is usually the first source of finance, weather the business is just starting off or an established business requires a loan the banks can offer many variations of them. For the start off business thebanks can offer overdrafts or short-term loans which will have a higher interestinvolved due to the risk associated with start off companies, and for the established businesses the banks can offer much larger long term loans like mortgages with a lower interest rate due to the business offering collateral to the banks. The advantages of a business using a loan as a source of finance can be how this will enable to managers and owners of the business to retain complete control of the business meaning they will be able to make all their
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