Module title: Module code |
Fundamentals of Business Finance. MGBBT1FBF |
Module leaders:
|
Sheuly Ahmed Jasim Ali Rathore |
Assignment No. Assignment type: |
1 Individual Presentation ( 2000 words) |
Assessment weighting: |
50% |
Submission date: Submission time |
Monday, 30th September2024. 14:00 |
Target feedback time and date: |
3 weeks from the Submission Deadline |
Student Name:
Student ID:
Business functions are usually of different types. Finance is one of the most important functions of every business. This is because without the availability of sufficient amount of finance, businesses cannot operate. GotoHolidays is a tourism business, which shows the presence of operations in diverse European markets. In this presentation, there is going to be a detailed evaluation of finance as a function in business and how it is related to other business functions. On the other hand, there will be discussions made on internal as well as external sources from which a business can acquire funding. Besides this, there will be an evaluation of the diverse sorts of benefits in addition to limitations that can be observed within sources of finance. There will also be an evaluation on the suitability of sources of finance under various possible scenarios.
Business finance is a business function that is dedicated to the planning, raising, managing and controlling of funds (Atrill and McLaney, 2018). According to Elloitt and Elliott (2019), the main goals that the finance function shows in a business are meeting the operational needs of a business as well as accomplish all its goals and objectives. This function estimates the financial resources a business requires for performing operations and determines its financing options as compared to its financing requirements. On the other hand, it is also concerned with obtaining funds from appropriate options while allocating and utilising those funds to different functions. Efficient management of available funds for accomplishing business objectives is yet another objective of the finance function.
Between all the other functions existing in businesses, one of the important business functions is the finance function. However, as opined by Weetman (2019), the finance function has an important relationship with all the other functions that exist in a business. This is because performing the activities of all other functions in a business needs the supply of adequate finance. The finance function plays the role of obtaining these funds needed by all other business functions. For example, in GotoHolidays, the HRM function is a significant function. Starting from job advertising to hiring, training and focusing on career development of employees, the function has to perform several roles for which substantial funds are needed. The HRM function depends on the finance function to obtain these funds and allocate them so that HRM activities can be performed smoothly.
On the other hand, in GotoHolidays, the marketing function and the operations function are the two other business functions. To perform the activities of the marketing function such as arrangement of marketing campaigns, conducting promotional activities and others, funds are needed. At the same time, to perform the activities of the operations function such as meeting day-to-day expenses, a consistent flow of funds are needed as well. Due to this, both these functions of the tourism business show a relationship with the finance function. In this manner, all other business functions are related to the finance function for the supply of funds.
The sources of finance generation in businesses, which are available inside a business, are known as internal sources for funding generation (Rao et al., 2023). Using such sources for financing purposes is usually not expensive. The availability of the sources is restricted as well.
Usually, the availability of internal sources, which are utilised for financing purposes, is quite limited. The four main internal sources from which businesses such as GotoHolidays can access finance are as follows –
The sources of finance generation in businesses, which are not available inside a business, are known as external sources for funding generation (Atrill and McLaney, 2019). Using such sources for financing purposes is usually expensive, as a business has to move outside to access them. The availability of the sources is not restricted as well.
Unlike internal sources, the availability of external sources, which are utilised for financing purposes, are numerable. The few main external sources from which businesses such as GotoHolidays can access finance are as follows –
Ordinary equity shares
This is a source of funding in which ordinary shares of a publicly listed business are sold to public for raising funds (Schell, Endreny and Koren, 2024). Every ordinary equity share is a small of capital of a listed business. In case if a business chooses to acquire its required finance by issuing ordinary equity shares, the likely advantages include no interests payable and higher flexibility and liquidity than loans. However, the other advantages of financing using this source are change in ownership due to sale of shares.
Preference equity shares
This is also a source of funding in which shares of a publicly listed business are sold to public for raising funds. However, according to Goodhart and Lastra (2020), preference shares are the shares against which fixed dividends have to be provided and no right to vote is provided to shareholders. In case if a business chooses to acquire its required finance by issuing preference shares, the likely advantages include low risks for investors because of fixed dividends. However, the other advantages of financing using this source are the option of converting preference shares to equity shares and inclination to preference shareholders during liquidation process.
Debt factoring
According to Berkeley et al. (2022), the specific source from which businesses obtain funds through the sale of its trade receivables to diverse third parties is referred to as debt factoring. In case if a business chooses to acquire its required finance by debt factoring, the likely advantages include enhancement of cash flows in a business. However, the other advantages of financing using this source are quick access to cash for businesses.
Loans from bank
Loans from banks are the financing sources of a business wherein there is an amount borrowed at an agreed interest rate, which is repayable over a specific timescale or period (Arnould et al., 2022). It is a suitable source when funds are needed in large amounts. In case if a business chooses to acquire its required finance with loans from bank, the likely advantages include availability of funds during all adverse economic situations. However, the other advantages of financing using this source are ease of cash management due to fixed repayment in instalments.
Financial lease
The funding source in which agreements are signed in between a business (lessee) and the owner of assets (lessors) for using an asset against exchange of a series of payments is called a financial lease (Agres et al., 2020). It provides the right of using a specific asset for a specific period. In case if a business chooses to acquire its required finance by financial lease of assets, the likely advantages include deduction of lease free from tax returns. However, the other advantages of financing using this source are acquisition of assets without any significant capital employment and flexible terms.
Ordinary equity shares
In case if a business chooses to acquire its required finance by issuing ordinary equity shares, the likely disadvantages include significant time needed for fund raising (Riddiough, 2022). However, the other disadvantages of financing using this source are dilution and loss of control on business ownership.
Preference equity shares
Issuing preference equity shares for financing purposes has several likely disadvantages, which include its inappropriateness for risk following investors (Lagerkvist et al., 2020). However, the other disadvantages of financing using this source are its no voting rights for shareholders and lower rates of fixed dividends.
Debt factoring
In case if a business chooses to acquire its required finance by debt factoring, the likely disadvantages include high fees charged by third party for discounting (Kouvelis and Xu, 2021). However, the other disadvantages of financing using this source are negative influence on customer relationships due to availing debt factoring.
Loans from bank
Obtaining loans from banks for financing purposes has several likely disadvantages, which include high costs because of interest payments (De Jonghe et al., 2020). However, the other disadvantages of financing using this source are rigid criteria followed by banks for loans. Another disadvantage is destruction of credit score due to untimely payment.
Financial lease
If a business chooses to acquire its required finance via leasing of assets, the likely disadvantages of the source involve extra charges if lease agreement is terminated early (Atseye, Mboto and Lawal, 2020). However, the other disadvantages of financing using this source are no right of making any modification to leased asset and repossession of asset by owner due to failed payments.
The discussions above helped in determining that sources of financing are actually of different types. However, the selection of sources for financing usually differs from one business to another one. In this context, Atrill and McLaney (2019) opined that in all businesses, using different sources for financing is important instead of using a single source for financing. This is because if businesses make the usage of different sources, the first benefit is low costs. Using different sources help to maintain a balance in the costs of financing. At the same, using different sources are helpful in striking a balance between the debts of the company and its equity. This balance is helpful for the maintenance of a good and strong capital structure. Apart from this, if there are different sources used for financing purposes, the risks related to every source for financing are distributed. There is also a control maintained on the cost of capital of the business due to the utilisation of different sources of finance. As a result, if different sources are used in businesses for financing, their financial stability can be fuelled and its overall growth can be ensured.
GotoHolidays has a strong position in different European markets. However, let it be assumed in the two to three upcoming years, this tourism business will be expanding its operations to new markets such as Australia, Brazil, India, Indonesia, Thailand and others. To ensure these successful expansions, the tourism business will need substantial funds. An approximate of 4 million GBP will be needed in this tourism business for these expansions. Since the amount is huge, it is obvious that the business will have to depend on sources of financing. Depending on the benefits and limitations determined above for sources of financing, it can be stated that for this possible scenario, loans and ordinary equity shares are the most suitable financing sources.
These two sources have been chosen as the most suitable ones for financing for the possible scenario because loans are a kind of debt financing and ordinary equity shares are a kind of equity financing. Using loans will ensure no loss of control or ownership dilution in the business while raising significant funds at once, which can be repaid over a long timescale. However, using ordinary equity shares for financing will be useful for ensuring that no repayment or interest payment has to be made for the funds obtained. Moreover, the funds raised will act as permanent capital for the business.
Hence, depending on all the findings of this presentation, it can be derived that finance is currently one of the most important business functions. All the other functions of businesses such as the marketing function or others such as HRM and operations largely depend on the finance function for raising finance. On the other hand, while internal sources for financing could be derived as limited, the number of external sources for financing could be identified as several. Apart from this, it could be observed that ordinary equity shares, preference equity shares, debt factoring, loans from banks and financial lease are the few most important sources for financing with different advantages and disadvantages. The importance of different sources of financing, for example, low cost, good capital structure and others could be determined. Moreover, how and why loans from banks and ordinary equity shares are suitable as financing sources could be recognised as well.
Berkeley, A., Ryan-Collins, J., Tye, R., Voldsgaard, A. and Wilson, N. (2022) The self-financing state: an institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom.
De Jonghe, O., Dewachter, H., Mulier, K., Ongena, S. and Schepens, G. (2020) Some borrowers are more equal than others: Bank funding shocks and credit reallocation. Review of Finance, 24(1), pp.1-43.
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