1. MODULE 1 AS Marketing and Accounting and Finance COMPANY ACCOUNTS Sources of Finance

2. The difference between Methods & Sources Name given for how finance is raised eg loan. Method Source From where finance is obtained eg bank.

3. Difference between Internal & External Sources Those generated from within the business. Internal External Those sourced from outside of the business.

4. Short, Medium and Long-term Methods Up to 1 yr; fund working capital Short-term Medium 1 to 5 yrs; purchase assets with medium term life Long 5 yrs plus; purchase of long-life assets

5. Internal Sources Trading Profit  Long term method - generated year after year.  Key to survival - fund working capital / fixed asset finance.  Long term method - generated year after year.  Key to survival - fund working capital / fixed asset finance.

6. Internal Sources Trading Profit  No interest to pay (unlike loans).  Control not diluted (unlike shares).  No interest to pay (unlike loans).  Control not diluted (unlike shares). Advantages over other long-term methods:

7. Internal Sources Trading Profit  may not popular with shareholders.  sole reliance on profits - expansion slow and limited.  may not popular with shareholders.  sole reliance on profits - expansion slow and limited. Problems For long-term investment:

8. Internal Sources Working Capital  Offer discounts to encourage prompt payment.  Tighter credit control procedures.  Offer discounts to encourage prompt payment.  Tighter credit control procedures. Reduction of Trade Credit

9. Internal Sources Working Capital  Frees up cash, reduces costs. Reduction of Stock

10. Internal Sources Asset Sales +No interest charges or dilution of control, but.. -May restrict future flexibility. +No interest charges or dilution of control, but.. -May restrict future flexibility. Fixed assets sold off to provide ‘one- off’ source of finance.

11. External Sources Ordinary Share Capital a)family & friends (ltd) b)general public (PLC) a)family & friends (ltd) b)general public (PLC) Raising long-term funds by settling shares to:

12. External Sources Ordinary Share Capital Shareholders receive variable dividend and voting rights. Only usually considered when large sums required, eg starting up, expansion. Only usually considered when large sums required, eg starting up, expansion.

13. Advantages Disadvantages  No commitments to meeting fixed interest payments. External Sources Ordinary Share Capital

14.  Process of share issue - expensive.  Dilutes ownership and control.  Process of share issue - expensive.  Dilutes ownership and control. External Sources Ordinary Share Capital Disadvantages

15. External Sources Bank Loans Common method for all types of business. Used to purchase fixed assets / fund expansion. Interest - fixed or variable.

16. External Sources Bank Loans Bank / building society loan - interested in: a)ability to meet interest payments (liquidity). b)security in case of failure to pay. a)ability to meet interest payments (liquidity). b)security in case of failure to pay.

17. External Sources Bank Loans The amount advanced will depend on security offered. The greater the perceived risk, the higher the security.

18. Possible but rare. External Sources Bank Loans Lenders need convincing of high chance of success. Interest charged - considerably higher. Unsecured Loans

19. Advantages Disadvantages  Straightforward to arrange.  No danger of recall (unlike o/draft).  Can be linked to pension plans - tax relief).  Straightforward to arrange.  No danger of recall (unlike o/draft).  Can be linked to pension plans - tax relief). External Sources Bank Loans

20.  Variable rate interest - advantage if interest rates fall.  Fixed rate - allows more accurate predictions re: cash flow.  Variable rate interest - advantage if interest rates fall.  Fixed rate - allows more accurate predictions re: cash flow. External Sources Bank Loans Advantages

21.  Committed to regular interest payments - increases costs / affects cash flow. External Sources Bank Loans Disadvantages

22.  Less flexible / more expensive than overdrafts.  Variable rate - if rates rise.  Less flexible / more expensive than overdrafts.  Variable rate - if rates rise. External Sources Bank Loans Disadvantages

23. Loans used to purchase land / buildings - usually secured. External Sources Mortgages Advance - 75 to 85% of value of property - 5 to 20 years.

24. External Sources Mortgages Repayments - usually monthly, fixed or variable rates. Suitable when large sums of money required.

25. Advantages Disadvantages  As for loans, plus other initial costs: External Sources Mortgages

26.  Professional valuation of property required - paid for by the business.  Arrangement fee payable on amount borrowed.  Professional valuation of property required - paid for by the business.  Arrangement fee payable on amount borrowed. External Sources Mortgages Disadvantages

27. External Sources Overdrafts Arrangements between firm and bank / building society to withdraw more money from account than is deposited.

28. External Sources Overdrafts Interest is charged on amount overdrawn. The second most common method of finance.

29. External Sources Overdrafts Use - Short-term - working capital finance, eg seasonal peaks in demand - bridging facilities.

30. Advantages Disadvantages  Simple, quick to arrange, flexible and convenient.  Relatively cheap but… expensive if used regularly for large amounts.  Simple, quick to arrange, flexible and convenient.  Relatively cheap but… expensive if used regularly for large amounts. External Sources Overdrafts

31.  Repayable on demand / can be recalled at any time. External Sources Overdrafts Disadvantages

32. External Sources Debentures Members of public invited to lend money to business for a fixed period, usually long-term at fixed rate of interest. Type of loan divided into smaller units, bought and sold on Stock Exchange.

33. External Sources Debentures New / young companies – difficult to secure confidence. Companies involved – usually well established, good profit record, sound liquidity.

34. Advantages Disadvantages  No dilution of control. External Sources Debentures

35.  Priority over shareholders.  Interest paid even if firm is not making a profit.  Priority over shareholders.  Interest paid even if firm is not making a profit. External Sources Disadvantages Debentures

36. External Sources Venture Capital Expect 15-40% shareholding, over period of 3-7 years, appoint non- executive director, provide general financial & managerial advice. Capital supplied by merchant banks, specialised commercial banks, venture capital companies.

37. External Sources Venture Capital Loans for £50,000 plus - £250,000 plus – admin costs not worthwhile on smaller projects. Often obtained by small / medium sized businesses – those too small to be quoted on the Stock Exchange.

38. External Sources Venture Capital Firms who succeed in securing such finance usually: inspire confidence operate in growth sector have distinctive competitive advantage capable of high growth. Firms who succeed in securing such finance usually: inspire confidence operate in growth sector have distinctive competitive advantage capable of high growth.

39. Advantages Disadvantages  Companies offer valuable management support, but... External Sources Venture Capital

40.  Negotiation fee.  Dilution of control.  Often want quick return on investment.  Negotiation fee.  Dilution of control.  Often want quick return on investment. External Sources Disadvantages Venture Capital

41. External Sources Government Assistance Assistance from European Union & UK government relatively cheap way of raising finance mostly medium to long-term relatively cheap way of raising finance mostly medium to long-term

42. External Sources Government Assistance Applying for grants: Preparing accounts / cash flow information.  Costly

43. External Sources Government Assistance Applying for grants:  Conditions Eg no. and type of employees, how money can be spent.

44. External Sources Government Assistance  Non-financial costs Unwanted publicity Applying for grants:

45. External Sources Factors Influencing Methods & Sources of Finance  The purpose  Objectives  Legal Structure  The purpose  Objectives  Legal Structure

46. External Sources Factors Influencing Methods & Sources of Finance  Financial Position  Age  Size  Financial Position  Age  Size

47. External Sources Factors Influencing Methods & Sources of Finance  Reputation  Government Policy  Interest Rates  Reputation  Government Policy  Interest Rates

48. - END- AS Marketing and Accounting and Finance COMPANY ACCOUNTS Sources of Finance