Financial Management for Organisations: Auto Trader Case Study Report

This report analyzes the financial management practices of Auto Trader, an online car marketplace. It examines how Auto Trader raised £200 million in finance through a share issue, comparing this method to alternatives like crowdfunding, bank loans, and angel investors. The report further explores the mitigation of COVID-19's impact on working capital, short, medium, and long-term financing, including strategies such as reforecasting, cash flow reviews, and stakeholder engagement. Additionally, it evaluates a proposal to cancel dividends, considering implications for investors and referencing Modigliani and Miller's theories. The analysis provides insights into financial management principles and their application in a real-world business scenario, particularly in response to economic challenges. The report emphasizes the importance of proactive financial planning and adaptation to external factors for organizational success.

Financial Management
for Organisations

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
a. Discussion of the way in which Auto trader raised 200 m pounds of finance and comparison
of other methods that are available for same purpose..................................................................1
b. Considering the mitigation of impact of COVID to working capital, short, medium and long
term finance.................................................................................................................................3
c. Evaluation of Dave Ellis proposal to cancel the dividend with respect to the implication for
investors with reference to Modigliani and Miller......................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Financial management could be defined as the procedure which is required to be focused
by businesses for the purpose of meeting long term financial goals and objectives. While
planning to meet all the long term goals and objectives it is very important for all the businesses
to be focused with this process as it will result in attainment of all the desired goals (Altaf and
Shah, 2017). Present report is based upon Auto Trader which is an online car market place and
raised 200 m pounds to minimise the impact of COVID 19 on business. Main aim of this
assignment is to understand the importance of financial management for all the entities so that all
the planned activities could be performed in systematic manner. This assignment covers various
topics that includes discussion of the way in which entity raised the funding and comparison of it
with other methods, mitigation of working capital, short, medium and long term finance. Apart
from this, evaluation of proposal to cancel the dividend with respect to the implication for
investors with reference to Modigliani and Miller.
MAIN BODY
a. Discussion of the way in which Auto trader raised 200 m pounds of finance and comparison of
other methods that are available for same purpose
Auto Trader generated funding of 200 million pounds by selling shares in the market
after waiving the ad fees. It was raised by it by aiming to prevent the dealing to pull out the cars
from site during shutdown. It issued shares worth 200 million new shares to boost its funding
after letting dealerships use its marketplace without any cost during the lock down. Issuing
shares in the market was the mode which was selected by the entity to raise capital for future
operational activities (Auto Trader raised funding of £200m, 2020). The main objective of this
funding option is to raise money that is known as capital. As fresh shares were issued by the
organisation in the market to raise funding so with the help of it, the entity will be able to pay for
all its operations and grow the business. One of the main benefit of it for the entity is not
obligated to make the payments of shares unlike bonds. There are various other types of options
that could be focused by business like Auto Trade for the purpose of raising capital. Discussion
of them is as follows:
Crowd funding: It is an option which is available for raising capital in which an entity
can raise money by generating small amount of money from large number of individuals with the
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help of internet. It is a form of alternative finance and crowd sourcing. As Auto Trade raised
funding of 200 million pounds through share issue it could also be used for the same purpose
which would have helped the entity to generate funds for carrying out business after lock down.
Bank loan: Under this option of raising funds for business an entity can apply for loan
from a bank by providing a collateral security. When a loan is taken by a business then the
withdrawer will have a responsibility of providing interest to the bank for the amount which will
be withdrawn. If the organisation will not be able to make payment on time then bank can sale
the property and recover the whole amount. This option would also have focused by Auto Trade
to raise funding for operating business after shutting down. If the organisation would have
selected this option then the entity would be responsible for paying interest on a fixed percentage
on the amount which is withdrawn from the bank as loan (Bayar, Huseynov and Sardarli, 2018).
Angel investor: It is also an alternative for raising capital for business and all such types
of investors are also known as seed or private funder. These individuals have higher net worth
and they providing funding to the businesses which are having attractive business plan. They
offer funding in exchange of equity ownership of the company. This option would have also
focused by Auto Trade for raising the funding of 200 million pounds. The main disadvantage of
this alternative is that it is less transparent which may result in issues for business in future.
Comparison of all the sources of funding:
Basis Share issue Crowd funding Bank loan Angel investor
Definition Under this type of
option shares are
issues by the
organisation in the
market so that
funds for future
operations could be
raised.
It is a source of
funding in which
small amount of
funds is generated
from a large
number of
individuals
(Chang, McAleer
and Wong, 2018).
If this option is
selected by the
businesses then the
entities will be
required to provide
a security to the
bank and pay
interest on a fixed
rate.
In this source of
funding entities can
raise finance from
individuals who
provide funding to
businesses in
exchange of equity
ownership.
Distribution
of power
In this type of
funding the power
The decision
making power in
Decision making
power of
The angel investors
seek for equity
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of decision making
is shared with all
the shareholders of
the organisation.
this option is not
shared with any of
the investors as
their number is
very high.
shareholders is not
shared with the
bank as it is an
external party that
provides funds.
ownership in the
business in which
investment is made
by them so the
power is
distributed to them.
b. Considering the mitigation of impact of COVID to working capital, short, medium and long
term finance
Mitigation of the impact of COVID to working capital and short term finance: For
all the businesses such as Auto Trader it is very important to make sure that they are able to
minimise the impact of COIVD upon working capital and short term finance. Corona virus is
spreading all around the world and resulting in issues for the businesses that are dependent upon
the raw material imported from China. Some of the companies in auto mobile sector have
stopped their production because of lack of important parts which is affecting the execution of
business in systematic manner. It is very difficult to predict the future situation and to deal with
the current condition it will be very important for businesses to take effective actions (Golas and
Bieniasz, 2016). For this purpose several steps are required to be taken by Auto Trader. The
discussion of them is as follows:
 By reforecasting trading and cash flows it will be facilitative to the enterprise such as
Auto Trader to test all its assumptions and make sure that all of them are correct. It can
help to reduce the impact of COVID because it will guide the management to assume the
accurate amount which could be received in upcoming months.
 In order to mitigate the impact of COVID the entities like Auto Trader can review the
cash flow forecasts in detail so that estimation for upcoming inflow could be made which
can guide to take the actions to mitigate the implication of COVID. In the pandemic
situation all the entities are not able to carry out operations and the clients are not able to
make the payment of owed amount on time.
 In the situation of COVID it is very important for Auto Trader to manage and maintain
working capital and short term finance (Mitigation of impacts of COVID upon working
capital, 2020). For this purpose, it is required to review the lending documents so that
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estimation of outstandings could be made and the debtors could be asked to make their
payments earlier so that funds could be arranged.
 Auto Trader is also required to be in contact with key stakeholders such as creditors,
suppliers and investors so that their support and confidence could be retained and they
could be asked for help in the COVID situation in terms of providing credit. Apart from
this, they could also be asked to allow longer time period to make payment of goods and
provide short term investments to carry out day to day business activities (Gottardo and
Moisello, 2018).
 In order to manage the working capital in COVID situation the organisations such as
Auto Trader are required to analyse capability of suppliers to carry on supply and
production as it can help to mitigate the impact of pandemic. Apart from this,
contingency plans could also be made for finding alternative for suppliers so that goods
could be arranged to carry out operations and manage working capital.
 While planning to mitigate the impact of COVID upon working capital it will be essential
for Auto Trader to engage with critical suppliers because communication on regular basis
with them can result in analysis negotiation in the payment date. With the help of it, the
entity will be able to make late payment to the suppliers so that the threat of the pandemic
could be reduced for working capital (Groot, 2017).
 By analysing the debtor who will not be able to make payment of owed amount in
pandemic situation threat for working capital could be reduced by Auto Trader as in this
situation the organisation will be able to arrange funds for performing operation. It will
help to ignore possibility of negative impact of COVID on business as other sources will
be used to arrange funds for operations that would have been performed with the help of
receivables (Yakubu, Alhassan and Fuseini, 2017).
By paying attention towards all the above described actions entities will be able to
mitigate the impact of COVID upon working capital and short term finance.
Mitigation of the impact of COVID to medium and long term finance: Corona virus
is creating issues for all the businesses to arrange funding for business whether it is medium or
long term. It is essential for the companies to mitigate the implications of COVID upon these
finances. For this purpose, they are required to take corrective actions and deal with the issues in
systematic manner(Hyndman and Lapsley, 2016). Discussion of them is as follows:
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 In order to reduce the impact of COVID upon business it will be very important for Auto
Trader to retain all its customers because it can help to generate funding in long run. If
they will switch to other competitors then it may create difficulties for businesses to
sustain in the market. In the situation of pandemic it is essential for businesses to engage
the clients and retain them for long run as it is required for carrying out operations in long
run and secure medium and long term finance.
 By looking or searching for additional sources of funding Auto Trader can mitigate the
impact of COVID on long and medium term finance as it can help to deal with future
requirements of money in upcoming period (Khattak and Hassan, 2019).
 For sustaining in the market for long run it is essential for Auto Trader to keep options
and plans actively under review. With the help of it, sustainable financing could be
generated which is an iterative process that can facilitate the process of mitigating impact
of COVID upon medium and long term finance of business.
In order to make sure that negative implications of COVID are dealt systematically it will
be very important for businesses to pay attention towards above described actions. It can help
them to respond to all the challenges that are taking place because of the pandemic.
c. Evaluation of Dave Ellis proposal to cancel the dividend with respect to the implication for
investors with reference to Modigliani and Miller
Dace Ellis proposed to cancel the dividend as the organisation was not having enough
funds to pay the shareholders. Apart from this, the enterprise has also pushed back its annual
results. This decision will leave negative impact upon investors because if they will not receive
any type of return on their funds then it may affect their engagement level. All the stakeholders
need motivation to be the part of the organisation and for this purpose the entities need to make
sure that they are providing them reason to be engaged within the business (Kireeva, 2016)
(Sosnovska and Zhytar, 2018). In order to understand the concept of it Modigliani and Miller
theory could be analysed in detail. It is an influential element of economic theory which is
focused with formulation of basis for the modern thinking on the capital structure of the
organisation. It demonstrates that the market value of an entity is affected by the operating
income which is different from the risk which is involved in the investment. It states that value of
whole business is not dependent upon financing decisions of the enterprise or the choices of
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capital structure. It also demonstrates that in absence of tax the capital structure of the firm will
be irrelevant.
As Ellis proposed to retain the dividend for the purpose of managing organisation's funds
so it will leave impact upon functionality of business. If no payment related to dividend will be
made to the investors then it will affect the organisation as they may withdraw their funding from
the firm. Modigliani and Miller theoram states that market value of an enterprise is calculated
correctly as present value of the future earnings of business. Both the developers of theory
demonstrated that capital gain and dividend are equivalent when investors will be focusing upon
return on investment. If no payment regarding dividend will be made by Auto Trader then it may
result in failure of goals like highly engaged investors (Van Raaij, 2016).
The payment of dividend is made from external financing and the organisation is not
having sufficient outsider funding so it has decided to ignore the payment of dividend. It can
helps it to spend monetary resources upon operations. In case of having good relations with
investors the entity can share the information regarding pandemic situation and ask them to stay
engaged with business so that they can get benefited in future. Detailed analysis of the theory
helped to assess that the proposal to cancel dividend was beneficial for business as it will have
funds to carry out operations in systematic manner (Xu and Chen, 2020).
CONCLUSION
From the above project report it could be concluded that financial management is very
important element which is required to be focused by all the businesses as it can help to
determine company's ability to meet all the future goals. While planning to arrange funds for
businesses like Auto Trade different options could be used. These are issuing shares, bank loan,
crowd funding, angel investors etc. In order to mitigate the implication of COVID upon working
capital, short, medium and long term funding entities are required to take effective actions. Apart
from this, while determining the evaluation of proposal of dividend economic theory of
Modigliani and Miller could be used.
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REFERENCES
Books and Journals:
Altaf, N. and Shah, F., 2017. Working capital management, firm performance and financial
constraints. Asia-Pacific Journal of Business Administration.
Bayar, O., Huseynov, F. and Sardarli, S., 2018. Corporate governance, Tax avoidance, and
financial constraints. Financial Management. 47(3). pp.651-677.
Chang, C. L., McAleer, M. and Wong, W. K., 2018. Big data, computational science, economics,
finance, marketing, management, and psychology: connections. Journal of Risk and
Financial Management. 11(1). p.15.
Golas, Z. and Bieniasz, A., 2016. Empirical analysis of the influence of inventory management
on financial performance in the food industry in Poland. Engineering Economics. 27(3).
pp.264-275.
Gottardo, P. and Moisello, A. M., 2018. Capital Structure, Earnings Management, and Risk of
Financial Distress: A Comparative Analysis of Family and Non-family Firms. Springer.
Groot, M., 2017. A primer in financial data management. Academic Press.
Hyndman, N. and Lapsley, I., 2016. New public management: The story continues. Financial
Accountability & Management. 32(4). pp.385-408.
Khattak, M. S. and Hassan, K. U., 2019. The impact of management capabilities on SMEs
financial performance; the moderating role of financial access. NICE Research Journal,
pp.59-84.
Kireeva, E. V., 2016. The role of Russian financial system in the implementation of state
financial policy. In Тенденции развития экономики и менеджмента (pp. 112-114).
Sosnovska, O. and Zhytar, M., 2018. Financial architecture as the base of the financial safety of
the enterprise. Baltic Journal of Economic Studies. 4(4). pp.334-340.
Van Raaij, W. F., 2016. Understanding consumer financial behavior: Money management in an
age of financial illiteracy. Springer.
Xu, X. L. and Chen, H. H., 2020. Exploring the relationships between environmental
management and financial sustainability in the energy industry: Linear and nonlinear
effects. Energy & Environment. 31(7). pp.1281-1300.
Yakubu, I. N., Alhassan, M. M. and Fuseini, A. A., 2017. The impact of working capital
management on corporate performance: Evidence from listed non-financial firms in
Ghana.
Online
Auto Trader raised funding of £200m. 2020. [Online]. Available through:
<https://www.ft.com/content/2a80e047-5502-46b5-98c7-a0f010e7a865>
Mitigation of impacts of COVID upon working capital. 2020. [Online]. Available through:
<https://www2.deloitte.com/si/en/pages/about-deloitte/solutions/addressing-the-
financial-impacts-of-COVID-19.html>
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