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Business AS CIE

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  1. enterprise as
    6 主题
  2. business-structure as
    6 主题
  3. size-of-business as
    3 主题
  4. business-objectives as
    3 主题
  5. stakeholders-in-a-business as
    2 主题
  6. human-resource-management as
    8 主题
  7. motivation as
    4 主题
  8. management as
    2 主题
  9. the-nature-of-marketing as
    7 主题
  10. market-research as
    3 主题
  11. the-marketing-mix as
    6 主题
  12. the-nature-of-operations as
    3 主题
  13. inventory-management as
    2 主题
  14. capacity-utilisation-and-outsourcing as
    1 主题
  15. business-finance as
    2 主题
  16. sources-of-finance as
    3 主题
  17. forecasting-and-managing-cash-flows as
    1 主题
  18. costs as
    4 主题
  19. budgets as
    1 主题
  1. Business AS CIE
  2. sources-of-finance as
  3. sources-of-finance selecting-sources-of-finance
课 16, 主题 3
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sources-of-finance selecting-sources-of-finance

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Exam code:9609

Factors affecting the choice of sources of finance

  • Managers must consider a range of factors before deciding upon the type and source of finance required

    • They may need to use more than one source of finance at the same time

Factors affecting the choice of finance

Several factors affect the suitability of the choice of finance such as the timescale, the cost, the purpose, the legal structure of the business, the willingness to relinquish control, and the level of existing debt
The level of existing debt may be so high that a business will rather sell shares than borrow more

Factor

Explanation

What is the purpose of the finance?

  • Fixed assets are most likely to need a long-term source of finance, such as a bank loan

  • Day-to-day costs such as rent and wages could be covered by a short-term overdraft

How long is the finance required for and when can it be paid back?

  • Overdrafts are a short term option to help a firm who needs a smaller amount of finance urgently

  • Mortgages can be paid back over many years

How much finance is needed?

  • Large amounts of capital can be raised through the issue of shares to family and friends, or through a flotation on a stock exchange

  • Smaller sums may be accessed through business credit cards or overdrafts

What is the legal structure of the business?

  • Businesses which are already Public Limited Companies can issue shares or debentures

  • Sole traders often rely on owners’ capital

How much risk is involved? 

  • Businesses with existing loans may have high gearing and pay high rates of interest as they are seen as risky

  • Leasing involves little risk as assets can be returned if finance costs are not paid

How much control and ownership does the company want to keep?

  • If limited companies issue too many shares, the current owners may lose some control of the business

  • Borrowing retains control, though interest is payable

Reducing the risk of being unable to raise finance

  • The risk of not being able to raise the finance can be reduced in several ways

  • Bank loans will most likely be approved when

    • A business presents a convincing business plan, including a cash-flow statement, and income statement for the last time period 

    • Existing sources of external finance are minimal and being managed effectively

    • A business has collateral to reduce risk to the bank

  • Investment from shareholders will most likely happen when

    • The share price is improving

    • Dividends are generous

    • The company has good profit potential and is planning to grow

    • Alternative investments are less attractive

Choosing suitable sources of finance

  • Finance managers frequently have to make recommendations to their CEOs about the most suitable sources of finance to use

Example 1: Private Limited Company

Case Study

Oaky-Cokey Ltd is a very successful private limited company that manufactures and sells wooden educational toys. It has been running for 15 years and has an excellent reputation

Logo of Oaky-Cokey Ltd features a wooden elephant on wheels with a string, resembling a pull toy, and the company's name below in bold brown text.

Oaky-Cokey has previously reinvested profits to fund expansion but now needs more financing to fund growth into new markets

Key considerations

  • Oaky-Cokey is a limited company, so selling shares to family and friends is an option to raise a limited amount 

  • With 15 years of success, it is less of a risk than a new start-up, so a bank loan could be obtained

  • The scenario indicates that reinvesting profits will not be enough to finance growth plans

Recommendation

  • A bank loan could be easy to obtain due to business success over the last 15 years

    • Repayments are spread over several years, and interest must be paid

  • The business could issue new shares to existing shareholders, who may increase their investment due to business success

    • Family and friends may want to be part of its exciting growth plans

  • The decision will depend upon how much control and ownership the business owner may lose by issuing more shares

  • Most finance managers would recommend obtaining a bank loan, as this is often preferable to losing ownership and a share of future profits

Example 2: Sole trader

Case Study

Hoopla is a Warsaw-based retail store selling fashion trainers

The word "Hoopla" in bold, brown italics with dynamic, speed lines extending left from the "H" on a light beige background.

It has sold large quantities of stock since an influencer promoted the store on TikTok and Instagram. It needs to quickly replenish its stock

Its sole trader owner, Tobias, is considering using his existing overdraft or trade credit

Key considerations

  • New stock is needed quickly so the existing overdraft facility on his bank account could be an instant source of finance

  • Trade credit means he would not have to pay for stock straight away, which would avoid cashflow problems as stock can be sold before payment to the supplier is due

Recommendation

  • An overdraft is a short-term source of finance and Tobias will have to pay interest on the amount that he uses

  • Trade credit would ease financial pressure as stock is replenished and he may receive a discount when he sets up the agreement

  • Most finance managers would recommend to Tobias that he first seek trade credit

  • If he is unable to secure that, then he should consider using his overdraft facility

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