Financial Strategy Recommendation for GlaxoSmith Kline and AstraZeneca Group

On the basis of the provided information, it is clear that external sources fulfill an organization's finance needs for different time durations. Short-term finance needs can be met through overdrafts, trade credits, and negotiating bills, while medium- and long-term funds can be acquired through bank loans or issuing equity shares. The decision to select a suitable financial source depends on numerous factors, including the cost of external finance, corporate investment, and macroeconomic conditions.

Financial Management
Analysis
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Table of Contents
INTRODUCTION......................................................................................................................1
CONTEXT.................................................................................................................................1
MAIN BODY.............................................................................................................................2
Q.1. External source of finance for the companies...........................................................2
Q. 2. Factors that affecting the choice of appropriate finance source...............................4
CONCLUSION AND RECOMMENDATION.........................................................................7
REFERENCES.........................................................................................................................10
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INTRODUCTION
The success of the business is highly depends on the availability of funds. Every
organization needs funds for different purposes. Finance plays a major role in the companies
therefore, it become necessary for the organization to have adequate availability of funds
according to their requirements. Proper availability of finance helps to reduce future
uncertainty in the market. Financial management plays a vital role in generating the funds
and proper utilization of it. It is mainly concerned with the effective funds management.
The presented report will helps us in identifying the sources of finance for the organization.
There are two types of sources internal and external sources. Internal sources are available
inside the organization whereas externally funds can be generated through outside market.
CONTEXT
In this report, two companies AstraZeneca Plc and GlaxosmithKline are selected for
analysis purpose. Both the companies operation prevails in Pharmaceutical industry.
AstraZeneca Group: It is a British-Swedish multinational pharmaceutical
biotechnology company. The company was established on 6th April, 1999 through merging
the Sweden company Astra AB and UK based Zeneca Group. Headquarter of the company is
established in London, United Kingdom. Medimmune is its subsidiary company. It is the
seventh largest company in the world measured on the basis of revenues. The company
operates in 100 countries with 50000 employees over the world. Its primary listed on London
stock Exchange of FTSE 100 Index. It mainly deals with Cardiovascular, gastrointestinal,
infection, neuroscience, respiratory and inflammation diseases. The company develops,
manufactures and sells pharmaceutical biotechnology products to treat such diseases.
GlaxoSmith Kline Plc: It is often shortened to GSK. It is a British multinational
pharmaceutical company that headquartered in Brentford, London, UK. It is the sixth largest
pharmaceutical company in the world. The company was established in the year 2000
through merging the Glaxo Wellcome and SmithKline Beecham. The company is listed
primary on the London stock Exchange constituent of FTSE 100 Index. A Stiefel laboratory
is the subsidiary of it. The company major deals with the asthma, cancer, infections, mental
health, diabetes and digestive conditions. It is a global company that operates in 115 countries
with 99000 employees. The company is providing a variety of products for improving the
customers health and remove diseases. The main products are pharmaceuticals, healthcare
products, nutritional products and medicines. However, the top selling products of the
company are Advair, Avodart, Flovent, Augumentin, Lovaza and Lamictal. Moreover, under
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the consumer healthcare division it sells Aquafresh, Maclean and Sensodyne toothpaste and
healthy drinks such as Horlicks. All the products are listed in the World health Organization
Model list of Essential Medicines. In the year 2014, the company also take approval from
regulators for the malaria vaccines.
MAIN BODY
Q.1. External source of finance for the companies
Both the companies require funds for its successful operations. The company can fulfil
its short term, long term and medium term finance requirements through various external
sources that are described below:
Short term finance sources
Bank Overdraft: This facility is given by financial institutions such as banks to the
business customers. People that have current account can collect funds from these facilities
through drawing higher the amount than bank balance. Glaxosmith Kline and AstraZeneca
Group also get benefited through these facilities so as to fulfil its immediate and urgent
requirements (Scott, 2014). The advantage of this is that they do not have to give any
collaterals or any security to the banks. However, the cost is that bank charges higher the
interest rates on these facilities.
Trade Credit: Under this source, both the companies can purchase from the suppliers
at long grace period. It can range from 1 week to 90 days depending upon the industry. The
company can negotiate its bills through making delayed payments to the suppliers. The
organization only makes agreement with the suppliers to acquire funds from this source.
However, the disadvantage is that the company cannot get benefited from cash discount.
Factors of debts: In this source, AstraZenec Group and GlaxoSmith Kline Company
can sell its receivable bills to a debt factoring company. The cost of that is that bills are
factored at some discount rates.
Medium term finance sources
Medium term bank loan: Loans can be taken from banks for medium term funds
requirement. The cost of the capital is that company has to pay interest amount at chargeable
rate. The rates may be fixed or Fluctuating (Duchin, Ozbas and Sensoy, 2010). Moreover, the
companies also have to pay timely instalment payments to the banks.
Hire Purchase: Under this source, the assets can be purchased without making all the
payments to the creditors (Stickney and et. al., 2009). Glaxosmith Kline and AstraZenec
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Group can purchase assets through making only the down payments and rest amount can be
paid in instalments for the agreed period.
Leasing: Through leasing facility, company can use assets through paying only the
rental charges. The benefit is that the businesses do not require purchasing the assets
(paramasivan and Subramanian, n.d.). Moreover, the maintenance cost of the assets is also
done by the assets owner. However, the disadvantage is that leasing cost at the end of the
period may be higher than its purchasing cost.
Long term finance sources
Long term bank Loan: Borrowing from banks helps to acquire the funds for a limited
period of time. All the businesses are highly used this sources in order to collect funds for
long term period. GlaxoSmithkline and AstraZenec Group generate funds through getting
bank loans. The organization requires providing a collateral or security for the taken loan
(Paravisini, 2008). Moreover, the organization has to pay interest on respective loans.
Share Capital: It is a permanent source of finance through issuing share Capital
Company can gather funds. GlaxoSmith Kline and AstraZenec both can issue equity and
preference shares for this purpose. The disadvantage of this source is that business
organizations have to pay dividend to the shareholders. Moreover, floating cost also arises for
issuing the shares that company require to write off from its profits (De Graeve, 2008). On
contrary, shareholders are the owners of the company. Therefore, they have voting rights to
manage the business operations.
Debentures: Debenture is a certification of acceptance of loans to the holders.
Debenture holders have a right to get fixed return on the debenture amount on the basis of
interest rates. GlaxoSmith Kline and AstraZenec Group can issue debentures for long term
period. The advantage is that debenture holders have no voting rights to the company
(Midrigan and Xu, 2010). Therefore, no dilution of control is existed in this case. However,
the cost of this source is that the company have to pay interest out of the business profits.
Sales and lease back: Under this source, both the company can sell its assets to an
investment company and then lease it back for a long time period. By doing this the business
unit is able to use the assets without having the ownership and sales value of the assets can
use for fulfilment the finance needs.
Venture capital: All the businesses can provide venture capitals to their investors in
order to collect the required funds (Ayyagari, Demirgüç-Kunt and Maksimovic, 2010).
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GlaxoSmith Kline and AstraZenec Group can use these sources for fulfilling the financial
needs. Therefore, it is clear that by using all these sources the organization can use
Q. 2. Factors that affecting the choice of appropriate finance source
It is not possible for the organization to collect the finance through using only one
source. Therefore, they have to use a composition of all the finance sources that are available
at lower the cost. This in turn, helps to increase the business profitability. Each and every
organization requires taking important decisions to select appropriate source. While deciding
about the combination of appropriate finance source distinct type of information should be
considered by the management. There are numerous factors that affect such decisions. The
important factors that should be consider by the organization for choosing the best finance
sources are explained below:
Cost: Each and every finance source imposed some cost to the company. It includes
the cost of procurement of funds and cost of utilizing the funds. For instance, if the company
is collecting funds through loans then they have to pay interest periodically. However, if
funds are generating through leasing then they have to pay rental charges for using the assets.
On contrary, in case of share capital they have to pay return in form of dividends (Ughetto,
2008). Further, if business purchases the assets on the basis of hire purchase then some
amount of interest is charged by the sellers. In addition to it, on the overdraft balance and
debentures the company needs to pay a fixed interest. Another, the cost of equity capital gets
affected by the debt capital. The reason for that is higher the use of debt funds increase the
risk to the equity shareholders. This in turn, resulted in increased the cost of equity share
capital. Therefore, proper analysis should be done and select that finance source that can be
acquired at least cost.
Financial strength and stability: Another most important factor is that the financial
strength of the business. Business needs to financial sound so that they will be able to repay
the principal amount. Moreover, operations stability helps to pay the associated cost of
sources on time (Schuhmacher and et. al., 2013). When the organization operations and
financial position is not stable then fixed charges funds such as preference shares and
debentures should be carefully selected. It is because they imposed a financial burden to the
company.
Time period: It is concerned with the time period for which the funds are required. A
short term financial needs can be fulfil through trade credit at lower rate of interest. However,
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In case of long term requirement organization can issue debentures and share capital.
Moreover, loans can be taken by the companies.
Risk Profile: Business should analyse the risk involved in each type of finance source.
For instance, equity share capital involves lower risk as compared to the bank loans. The
reason behind that is organization does not require paying regular return to the equity
shareholders (de Vries, 2012). However, under the loans business has to timely instalment
plus the interest whether organization is incurred profit or loss.
Control: The sources that are use by the company may influence the control on the
business. In case of equity share capital they have voting rights so they can control the
business through take part in the management (Ghosh and Nanda, 2010). However, debenture
holders, banks and creditors cannot control the business. Therefore, it becomes necessary that
organization analyse the extent to which the management are willing to share the control over
business.
Tax benefits: Some sources bring some tax benefits to the organization. For instance,
the amount of interest on loans and debentures is allowable for tax purpose. However, the
shareholders return dividend is not deducted. Thus, it can be said that bank loans and
debentures can be used for this purpose.
Flexibility and Ease: Financial institutions banks require detailed investigation for
granting the loans to the enterprises. However, share capital and overdraft facilities do not
require many legal formalities (Bianchi and et. al., 2011). Moreover, under the trade credit
only the agreement should signed by both the parties.
Cash Flow ability: In order to considering the appropriate capital structure ratio
business is requiring to analyse the impact of each source on the business cash flows. Fixed
charges decrease the cash flow ability of the company and vice versa. For instance, in case of
debt financing organization pay fixed charges in terms of interest. Moreover, on the issued
preference share capital the business has to pay a fixed dividend to the shareholders (Asif,
Rasool and Kamal, 2011). On contrary, equity share capital does not involve any regular
payments. Further, sales and lease back and assets purchased under the hire purchase system
include regular instalment payments and rental charges.
Leverage: It is concerned to the degree at which the business is using debts. It is also
known as trading on equity. High leverage firms can have high risk in case of unable to make
payments on their debts (JS Ramalho and da Silva, 2009). Finance sources that imposed fixed
burden to the company contribute to the financial risk. Therefore, it is advisable that business
has to analyse their financial risk in order to select the best sources.
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GlaxoSmith Kline Company using debt worth 15841 and Equity amounted to 1454.
However AstraZenec Group is using 561 equity and debt worth 8397. Both having high
leverage because they are using higher the debt capital as compared to its equity capital. The
debt and equity capital or leverage ratio of AstraZenec Group and GlaxoSmith Kline are
14.97 and 10.89 respectively. It is higher in the case of AstraZenec Group. The charts for
debt and equity sources are prepared here:
Particular Debt Equity Debt equity ratio
GlaxoSmith Kline 15841 1454 10.8947730399
AstraZenec Group 8397 561 14.9679144385
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Debt Equity
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
Glaxo Smith kline

CONCLUSION AND RECOMMENDATION
Conclusion
On the basis of above information, it is clear that external sources fulfil the
organization finance need for different time duration. Short term finance needs can be met
out through using overdraft, trade credit and negotiate the bills. However, for acquiring the
medium term and long term funds organization can take bank loans. Further, hire purchase,
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Debt Equity
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
AstraZenec Group
1 2
0
2
4
6
8
10
12
14
16
10.89477303989
14.9679144385027
Debt equity ratio

sale and lease back are other sources that help the company to use the assets without
purchasing it. On contrary, long term funds can also be generated through issuing equity
shares without having any financial burden. The decision for selecting the appropriate or
suitable financial source depends on numerous factors. It is very much dependent on the cost
of the finance sources from which funds are generating. Further, associated risk, financial
strength, operation stability, time factor, financial leverage, tax benefit and willingness to
share the business control also impact such decisions. It can be said that through considering
all these factors organizations can identify comparative advantages and disadvantages of each
finance source to the company. The report explained that debt capital will be considered good
source on the basis of tax benefit as its interest amount is deducted while calculating the
amount of tax. However, equity share capital considered appropriate as it is permanent source
of finance. Moreover, the company has to pay dividend to the equity shareholders only in
case of profit availability. The company is not liable to pay return to the shareholders in case
of business loss. Therefore, it is clear that every business unit require deciding an appropriate
composition of available sources at least cost. It helps to increase the business profits and the
business performance. This in turn, ensures business sustainability and the business growth
for the future period.
Recommendations
GlaxoSmith Kline and AstraZenec Group: The Company is using high amount of debt
sources in its capital structure resulted in higher the interest obligations to both the business.
Moreover, it create financial burden to the company. This in turn, results in higher the
financial risk. Moreover, it also increases the cost of equity capital in case of business failure
to make payments. The reason behind it is that equity shareholders of both the company
demand higher returns on their investment. This increase the overall cost of capital to the
company. Therefore, it becomes advisable that the business has to reduce the debt capital in
both the business units. Company can reduce its debt proportion through using different
strategies. It can be done through increasing the business sales that yield high profits to the
business. Moreover, it can be done through generating the funds from share capital. The
benefits of equity financing are that it is less risky than the debt capital. Thus, by doing this,
the organization can reduce its financial risk and the costs through declining the financial
burden. Therefore both the companies will be able to financial strengthen its business. This in
turn, results in improving its financial position to a great extent. Further, financial
management also helps the organization to determine its funds requirements and select the
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best source. It also helps to make optimum utilization of the funds. Thus, it is clear that
effective and strategic financial management helps to decide appropriate capital structure for
the company. It also administrates the organization funds through analysing its sources and
their implication. Moreover, the companies should analyse the competitors’ financial
leverage through measuring its debt and equity proportion.
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REFERENCES
Books and Journals
Asif, A., Rasool, W. and Kamal, Y., 2011. Impact of financial leverage on dividend policy:
Empirical evidence from Karachi Stock Exchange-listed companies. African Journal of
Business Management, 5(4), pp.1312-1324.
Ayyagari, M., Demirgüç-Kunt, A. and Maksimovic, V., 2010. Formal versus informal
finance: Evidence from China. Review of Financial Studies, 23(8), pp.3048-3097.
Bianchi, M., Chiaroni, D., Chiesa, V. and Frattini, F., 2011. Organizing for external
technology commercialization: evidence from a multiple case study in the
pharmaceutical industry. R&D Management, 41(2), pp.120-137.
De Graeve, F., 2008. The external finance premium and the macroeconomy: US post-WWII
evidence. Journal of Economic Dynamics and Control, 32(11), pp.3415-3440.
de Vries, D., 2012. Introduction (pp. 1-15). Gabler Verlag.
Duchin, R., Ozbas, O. and Sensoy, B.A., 2010. Costly external finance, corporate investment,
and the subprime mortgage credit crisis. Journal of Financial Economics, 97(3), pp.418-
435.
Frank, M.M., Lynch, L.J. and Rego, S.O., 2009. Tax reporting aggressiveness and its relation
to aggressive financial reporting. The Accounting Review, 84(2), pp.467-496.
Ghosh, S. and Nanda, R., 2010. Venture capital investment in the clean energy sector.
Harvard Business School Entrepreneurial Management Working Paper, (11-020).
JS Ramalho, J. and da Silva, J.V., 2009. A two-part fractional regression model for the
financial leverage decisions of micro, small, medium and large firms. Quantitative
Finance, 9(5), pp.621-636.
Midrigan, V. and Xu, D.Y., 2010. Finance and misallocation: Evidence from plant-level data
(No. w15647). National Bureau of Economic Research.
Paravisini, D., 2008. Local bank financial constraints and firm access to external finance. The
Journal of Finance, 63(5), pp.2161-2193.
Schuhmacher, A. and et. al., 2013. Models for open innovation in the pharmaceutical
industry. Drug discovery today, 18(23), pp.1133-1137.
Scott, W.R., 2014. Financial accounting theory. Pearson Education Canada.
Stickney, C. adn et. al., 2009. Financial accounting: an introduction to concepts, methods
and uses. Cengage Learning.
Ughetto, E., 2008. Does internal finance matter for R&D? New evidence from a panel of
Italian firms. Cambridge Journal of Economics, 32(6), pp.907-925.
Online
Paramasivan, C and Subramanian, T., n.d. [Pdf]. Available
through:<http://vcmdrp.tums.ac.ir/files/financial/istgahe_mali/moton_english/
financial_management_%5Bwww.accfile.com%5D.pdf>. [Accessed on 11th December,
2015].
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