BUS5IAF: Optimal Finance Sources for Easy Shopping Start-up Phase

This report provides an analysis of appropriate finance sources for a start-up business named "Easy Shopping," which aims to supply merchandises at bargain prices. It considers various internal and external funding options, including bank loans, share capital, business angels, and venture capital, evaluating their suitability based on the business's size, nature, and financial requirements. The report also discusses appropriate sources of finance for future expansion, emphasizing the importance of reducing financial risk and building brand value. It explores options such as public issues (equity shares and bonds) and retained earnings, while also considering alternative sources for small businesses like line of credit loans and bank overdrafts. The report concludes by highlighting the key factors to consider when choosing the best source of funds, emphasizing that the decision should not be based solely on cost but also on the potential financial risks and long-term benefits for the company.

ACCOUNTING AND FINANCE
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EXECUTIVE SUMMARY
A company cannot survive in the long run if there are no available funds when required. So,
there are various sources through which funds are raised either internally or externally, these
funds can be used for starting up a new business or expanding the current business based on
the needs of the organisation. Certain factors are also looked upon such as the size and nature
of the business, the ultimate target, etc.
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Contents
INTRODUCTION.....................................................................................................................................4
Answer 1................................................................................................................................................5
Answer 2................................................................................................................................................7
CONCLUSION.........................................................................................................................................8
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INTRODUCTION
A company needs funds in order to carry out its operations. It has to make certain
investments in the fixed assets as well as working capital of the company. Financial
management helps us to acquire these funds from different sources and also helps in proper
application of the funds. This project report consists of the different sources of funds that
will be considered best for a newly set up business or for a company that has been seeking
expansion. (Bragg, 2016)
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Answer 1.
A company requires funds in order to start up a business. It has to raise funds by various
internal as well as external sources which require a lot of planning. In order to decide the
source of finance, we first have to know about the size of the business, nature of the business,
the amount of funds required, when and for how long the funds would be required and if
there is any security that the owner can provide . (Dickson, 2017).
There must be an idea of the proportion in which the finance is required for different areas,
which means how much funds will the company require for to set up the business, how much
will it require in order to spend on fixed assets and working capital etc.
The funds can be raised through internal or external sources. The requirement of funds also
depends on the size of the business i.e. if the business requires a huge capital then it has to
raise funds through an external source such as loan whereas if it is a small business venture
then it can raise funds internally i.e. borrow from friends and family or invest own savings.
As per the case study, the trading name for the business is given as “Easy shopping”. The aim
of this business is to supply merchandises at a bargain prices. As the merchandises include a
variety of products the requirement of the funds would be high (Hubig, 2013).. So, it would
be appropriate for the company to acquire funds through bank loan at the minimum interest
rate that is possible. In order to raise funds through bank loan the business has to provide
some security for it (Flood, 2017).
The second source of finance through which the company can raise funds is share capital.
However, the company cannot raise funds when it is not listed but it can raise funds from
their friends and family, they may get ready to provide funds for a longer time which is a
positive sign for the company.
The third source of finance can be business angels- it is considered as the main source of
finance for the start ups. They are the professional investors who invest funds in the business
if they are impressed with the business plan and can see that there are growth opportunities in
the future. These investors are entrepreneurial expertise as they have made their money by
either setting up a business or selling them. They have special skills, knowledge and
experience which is considered very advantageous for the newly setup business. But the only
disadvantage is that the entrepreneur has to lose control over the business.
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Raising fund through venture capital is the other and a very appealing method of rising
finance. Venture capitalists invest huge sum f money in the newly set up business, they also
provide a advices and ideas that would help the company to grow and prosper. So, it does not
only help to start up a business but also helps in its expansion. Although this source of
finance is more expensive compared to the other source of finance but it is worth it because
the venture capitalist themselves keeps a look on the potential growth and profitability of the
company. It also looks upon the technology, various distribution systems and the product
lines that the company has aimed to possess.
Since, all the source of funds has different cost and different advantages. So, the decision
should be taken keeping in mind all the perspective. It is not appropriate to take a final
decision based on low cost only, various other factors also has to be looked upon.
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Answer 2.
A business which has been newly set up has a huge financial risk as it has huge debt in its
balance sheet. In order to expand a business, it has to reduce the financial risk as much as
possible and also has to create a brand value in order to gain trust of the people. The financial
risk can be reduced when the company has sufficient profits over the years to pay off the
interest as well as the principal. A company cannot expand or survive in the long run if it has
huge financial risk.
So after the repayment has been done, the company should try to expand its business using its
existing revenue which was transferred to the retained earnings over the years. However, this
shall be done only when the existing business is running smoothly and efficiently without
using those funds. If there is a chance that this might affect the current business then it should
go for some other sources of financing (Edwards, 2014).
After a certain period of setting up a business, there comes an idea of expanding the business.
It is not possible to expand the business using huge debt. Therefore, the other alternative
source of raising funds is to make a public issue. The company thinks of expansion only
when it has created brand value in the market because only then it will be able to generate
profits. A company cannot make public issue so easily it has to follow a certain regulation. It
has to get itself listed on the stock exchange. Investors will invest in the firm only when they
can identify growth prospects in the future.
The company can raise funds through public issue by either issuing equity shares or bonds. If
the company issues equity shares then there are no contractual obligation of paying anything
to the investors but if the company raises funds through bonds then there lies contractual
obligation of paying interest and principal timely. Although there is no contractual obligation
of paying anything to the equity shareholders, the company pays dividend out of the profits
earned (Freeman, 2011).. We can also say that the cost of equity is the expectations of the
shareholders who have invested their hard earned money whereas the cost of bond is the
interest payments.
However there are some other sources of finance for small business. Such as Line of credit
loans, credit cards, bank overdraft etc.
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CONCLUSION
This report has helped me learn about the aspects we need to look upon for deciding the best
source of funds. The plan that the company has to set up and the information it should have
before raising funds. The funds may be raised through internal or external sources, as per the
time frame for which the money is required and what is the financial risk the company will
undergo if it raises funds through a particular source.
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REFERENCES:
Bragg, S. M. (2016). GAAP Guidebook. [S.I]: AccountingTools, Inc.
Case, P. (2012). Environmental Risk Management and Corporate Lending: A Global
Perspective. Boca Raton, Fla.: CRC.
Dickson, D. C. (2017). Actuarial Mathematics for Life Contingent Risks (International Series
on Actuarial Science) . Cambridge: Cambridge University Press.
Donanldson, T. (2012). Ethical issues in business. New Jersey: Prentice Hall.
Edwards, M. (2014). Valuation for Financial Reporting: Fair Value Measurement in Business
Combinations, Early Stage Entities, Financial Instruments and Advanced Topics . Hoboken:
John Wiley & Sons Inc.
Flood, J. M. (2017). Wiley GAAP 2018. [S.l.]: JOHN WILEY.
Freeman, K. P. (2011). Managing environmental risk through insurance. Boston (Mass.):
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Hubig, A. (2013). Introduction of a New Conceptual Framework for Government Debt
Management. Wiesbaden: Springer Fachmedien Wiesbaden.
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