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 finance is needed in business organisations for different kinds of purposes. Starting from the anticipation of the financial resources need to perform organisational activities to efficiently managing funds available for accomplishing organisational objectives, business finance holds huge significance. This presentation will be conducting an evaluation on the finance as an organisational function in addition to identifying various aspects of business finance, specifically sources of finance. Discussions will be made on how the finance function is related to other kinds of business functions followed by the evaluation of different kinds of sources of finance in business organisations. Varied types of advantages and disadvantages of sources of acquiring finance will also be considered. In addition to this, different sources of finance for GotoHolidays will be examined followed by an identification of the most suitable sources of funding for the business organisation.
The finance function is a specialised organisational function, which is connected to planning, raising, controlling and management of different kinds of funds (Vernimmen, Quiry and Le Fur, 2022). These activities are helpful for the meeting of the operational needs of business organisations so that organisational goals and objectives can be accomplished. The finance function conducts detailed planning on the financing requirements of a business organisation while understanding the nature of financing requirements (Lingyan et al., 2021). On the other hand, the function is also concerned with raising finance in business organisations from a wide range of financing sources that are suitable. At the same time, the finance function also looks into the administration of the funds of business organisations by allocating funds to individual organisational functions (Chen and Bellavitis, 2020). Lastly, the finance function is also important for the management of funds for ensuring the efficient use of funds.
The need for finance in a business organisation is of diverse types. For example, for the expansion of an existing business organisation such as GotoHolidays in a new marketplace, substantial amount of funds are needed by the operations function. This funding needed by the operations function of the organisation is generated by the finance function only. On the other hand, for meeting the daily operational expenses of the organisation, for example, payment of utility bills and others, the operations function depends on the finance department. Similarly, as and when GotoHolidays expands its operations to new markets or even for its day-to-day operations, the marketing function needs substantial funds so that all marketing and promotional activities can be conducted in a smooth manner.
Even the funds needed by the marketing function are generated and allocated by the finance function. The same can be observed in the case of the HRM function. The HRM function of GotoHolidays needs a constant supply of funds for performance appraisals, new employee hiring, job advertisements and others. However, the funds needed for these HRM activities are generated and allocated by the finance function. Hence, it can be recognised that all the other functions of a business organisation are related to the finance function for meeting their funding requirements.
The funding in businesses that is raised from its internal members or environment is known as external sources of finance (Verma, Shome and Patel, 2021). Lesser costs in businesses can be identified for acquiring funds from these sources. However, the internal sources are usually restricted in number.
The internal sources of funding generation are usually restricted in number (Rao et al., 2023). A few most important examples of internal sources from which funds can be acquired in businesses include the following –
The funding in businesses that is raised from outside its internal members is known as external sources of finance (Mago and Modiba, 2022). In business organisations, the costs related to acquiring funds externally comparatively much higher. However, the potential external sources from which a business organisation can generate funds are several in numbers, unlike internal sources.
The external sources from which a business organisation can be generating finance are generally diverse (Adam and Alarifi, 2021). A few major examples of the external sources from which finance can be raised or acquired in business organisations are the following –
Ordinary equity shares
One defines ordinary equity shares are the issue of shares of business organisations in public for raising capital (Schell, Endreny and Koren, 2024). In case if there are ordinary equity shares being availed for raising funds in a business entity, the potential advantages of funding from the source is that no interests are to be paid. Moreover, the other potential advantages in this source are that they offer great flexibility and liquidity and it serves as a permanent capital source.
Hire purchase agreements
The hire purchase agreements are funding done in business organisations when financial institutions purchase assets from suppliers and enter into agreements with the organisations, as they purchase assets (Atrill and McLaney, 2019). Raising funds from loans from banks also possess a wide range of advantages. For example, in a business entity, the potential advantages of funding from the source is that to lend loans, bank have a rigid criteria and interest payments make loans expensive. Moreover, the other potential advantages in this source are that an organisation’s image can be spoiled if loans are not timely paid.
Debt factoring
The process followed in business organisations for funding when they sell all their accounts receivables to a third party is known as debt factoring (Giaretta and Chesini, 2021). In case if there is debt factoring being availed for raising funds in a business entity, the potential advantages of funding from the source is that it assists in enhancing cash flows. Moreover, the other potential limitations in this source are that it provides access to cash quickly.
Loans from bank
The amounts borrowed in business organisations from banks for an agreed timescale at an agreed interest rate is called loans from bank (Nugroho, Arif and Halik, 2021). Raising funds from loans provided by banks possess different kinds of advantages. For example, in a business entity, the potential advantages of funding from the source are that it ensures funding availability even during depression periods. Moreover, the other potential advantages in this source are that fixed loan repayments make cash management easier.
Invoice discounting
According to Moore and van Vuuren (2024), invoice discounting involves using the accounts receivables of a business organisation in the form of collateral for being used as loan. In case if there is invoice discounting being availed for raising funds in a business entity, the potential advantages of funding from the source is that it helps in higher cash flows for customers. Moreover, the other potential advantages in this source are that cash is received as soon as invoice is issued instead of waiting for customers.
Ordinary equity shares
In case if there are ordinary equity shares being availed for raising funds in a business entity, the potential limitations of funding from the source is high costs (Atrill and McLaney, 2019). High costs are incurred when ordinary shares are issued for funding when the owner’s capital is higher. Moreover, the other potential limitations in this source are that for funding, substantial effort and time is required and they might also cause ownership change.
Hire purchase agreements
Raising funds from hire purchase agreements also possess a wide range of limitations. For example, in a business entity, the potential limitations of funding from the source are the negative impacts when a financial situation changes during a fixed contract. Moreover, the other potential limitations in this source are that total payments for asset purchase turn out to be higher than asset’s actual price.
Debt factoring
In case if there is debt factoring being availed for raising funds in a business entity, the potential limitations of funding from the source is that debt factoring has higher fees (Spiteri, 2020). Moreover, the other potential limitations in this source are that using debt factoring might end up with negative effects on customer relationships.
Loans from bank
Raising funds from loans from banks also possess a wide range of limitations. For example, in a business entity, the potential limitations of funding from the source is that to lend loans, bank have a rigid criteria and interest payments make loans expensive. Moreover, the other potential limitations in this source are that an organisation’s image can be spoiled if loans are not timely paid.
Invoice discounting
In case if there is invoice discounting being availed for raising funds in a business entity, the potential limitations of funding from the source is that it has huge fees associated (Atrill and McLaney, 2019). This is because due to huge fees associated, it is one of the last resorts for financing in a business organisation.
The discussions made earlier on the different sources of finance helped in recognising that sources of finance are diverse. Sources of finance adopted in business organisations are of diverse sorts (Spiteri, 2020). This is because all business organisations aim towards the accomplishment of a balanced portfolio of funding sources. For example, in organisations such as the GotoHolidays, the usage of different kinds of sources is essential for funding is helpful for the maintenance of low amount of cost of capital. In addition to this, presence of diverse sources of funding is essential for the maintenance of sufficient level of working capital, thereby enabling them in terms of securing higher financial stability. There is also a balancing of the costs spent on generation of funding as well as lowering of risks related to sources of funding is also ensured due to the usage of different sources. A balanced and ideal capital structure is also established in business organisations such as the GotoHolidays through the means of different sources of funding generation.
Even though the sources of funding in business organisations are diverse, the suitability of sources of funding usually differs from one organisation to another one (Weetman, 2019). Let it be considered that GotoHolidays is looking for an expansion and it is currently aiming to enter growing tourist destinations in South Asia such as Indonesia, Sri Lanka and others. However, these expansions of the business organisation will require substantial amount of investments. A value of 2.5 million GBP is anticipated to be required in this business organisation for ensuring these expansions. However, in the current scenario, GotoHolidays does not sufficient retained profits to meet the funding requirements.
Due to this, the organisation has to rely on external funding sources for raising finance. In GotoHolidays, the two most suitable sources from which funding can be easily acquired are loans from banks and ordinary equity shares. This combination of sources of funding has been selected for raising funds in the business organisation since loans from banks is debt financing while ordinary equity shares is a form of equity financing. The usage of such balanced funding sources will be helpful for the business organisation in terms of maintaining an ideal capital structure. At the same time, bank loans will be useful because they can be repaid in fixed instalments over time without ownership dilution. On the other hand, ordinary equity shares can be generating funds in GotoHolidays that will act as the organisation’s permanent capital source.
This presentation on sources of funding helps in summarising that sources from which business organisations can generate are usually of different kinds. At the same time, it could be recognised that primarily, sources of funding can either be internal or be external. A direct relationship of the business organisation could also be identified with other kinds of organisational functions, for example, marketing, HRM, operations and others. On the other hand, a range of sources for acquiring funds, for example, invoice discounting, debt factoring, loans from banks, ordinary equity shares and hire purchase agreements could be identified. The usefulness in the usage of different sources of finance in GotoHolidays could be recognised. Moreover, in GotoHolidays, the two most suitable sources from which funding can be easily acquired for expansion are loans from banks and ordinary equity shares.
Giaretta, E. and Chesini, G. (2021) The determinants of debt financing: The case of fintech start-ups. Journal of Innovation & Knowledge, 6(4), pp.268-279.
Lingyan, W., Mawenge, Rani, D. and Patil, S. (2021) Study on relationship between personal financial planning and financial literacy to stimulate economic advancement. Annals of Operations Research, pp.1-21.
Mago, S. and Modiba, F.S. (2022) Does informal finance matter for micro and small businesses in Africa?.
Moore, W.R. and van Vuuren, J.H. (2024) A framework for modelling customer invoice payment predictions. Machine Learning with Applications, 17, p.100578.
Nugroho, M., Arif, D. and Halik, A. (2021) The effect of loan-loss provision, non-performing loans and third-party fund on capital adequacy ratio. Accounting, 7(4), pp.943-950.
Rao, P., Kumar, S., Chavan, M. and Lim, W.M. (2023) A systematic literature review on SME financing: Trends and future directions. Journal of Small Business Management, 61(3), pp.1247-1277.
Schell, J.M., Endreny, P.L. and Koren, K.M. (2024) Private equity funds: Business structure and operations. Law Journal Press.
Spiteri, S. (2020) Financial accounting: from its basics to financial reporting and analysis. Cambridge Scholars Publishing.
Verma, S., Shome, S. and Patel, A. (2021) Financial preferences of listed SMEs in India: An empirical study. Journal of Small Business Strategy (archive only), 31(3), pp.88-101.
Vernimmen, P., Quiry, P. and Le Fur, Y. (2022) Corporate finance: theory and practice. John Wiley & Sons.
Weetman, P. (2019) Financial accounting. 8th Edition. Harlow: Pearson.
