Finance Function in GotoHolidays: An In-depth Analysis

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, 20 May 2024. 14:00	Target feedback time and date:	3 weeks from the Submission Deadline

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The functions present within businesses are generally of different sorts. One of the primary functions existent in the field of business is finance. A constant and uninterrupted supply of finance is essential in businesses for ascertaining finance availability. GotoHolidays is a business that operates in the tourism sector. It has a presence in different European marketplaces. This presentation will conduct an in-depth discussion and analysis regarding the finance function in addition to how the finance function is related to other business functions. Followed by this, discussions will be made related to internal sources used for financing along with external sources used for financing. There will be five different sources considered for financing in addition to an evaluation of the advantages and disadvantages of each of the sources. Justifications for using different sources will be provided and suitable sources for GotoHolidays’ financing will be considered.

The finance function is a kind of business function, which deals with different types of activities that helps to meet the funding needs of a business (Vernimmen, Quiry and Le Fur, 2022). These activities are helpful for businesses to accomplish their goals and objectives. The few main activities of the finance function include the following –

Planning – Anticipation and understanding of the nature of a business’s finance needs

Raising – Examination of different financing options so that funds are acquired from appropriate options

Administration – Allocation of funds to the diverse sorts of organisational functions

Management – Assessment and ascertainment of efficient fund utilisation

There are various functions in businesses, which are related to one another. However, according to Weetman (2019), the finance function is a kind of business function that is connected or related to all other business functions. The reason for this relation is that all other business functions considerably depend on the finance function for the ascertainment of consistency in the supply of finance. For example, HRM, marketing and operations are the three most important functions existing in the business GotoHolidays. The HRM function is the organisational function, which assists in ascertaining that the workforce of the business is provided efficient training and development opportunities. It also ensures that they are provided with timely benefits and compensations.

However, performing all such HRM activities depend over the finance function to ensure the supply of finance. Similarly, the marketing function is a function that involves activities such as definition and management of brand, development of marketing materials, creation of content for search engine optimisation and others. The operations function, on the other hand, is responsible for the delivery of tourism services to customers in addition to managing resources, putting strategies into action and keeping check on quality. However, even for performing the activities of the marketing function and the operations function, supply of finance is required. Due to this, the two functions are related to the finance function.

The various areas, from which a business can obtain the funds that it needs from within it, are known as internal sources of finance. However, since these sources are present inside a business, their availability is restricted (Rao et al., 2023). It is especially limited in case of start-up or small businesses. The utilisation of these sources for obtaining finance is inexpensive as well.

As the availability of these is restricted, the examples of such sources are limited as well. The primary internal sources used for finance generation are the following –

The various areas, from which a business can obtain the funds that it needs from outside it, are known as external sources of finance. Since these sources are present outside a business, their availability is much more (Nguyen and Canh, 2021). However, external sources of finance often limited in case of start-up or small businesses. The utilisation of these sources for obtaining finance is found to be expensive.

As the availability of these is huge, the examples of such sources are much more and can be divided as short-term and long-term. The primary external sources used for finance generation are the following –

Ordinary equity shares

The potential advantages or benefits of firms that make the usage of ordinary equity shares for financing purposes are that the funds raised serve as permanent capital (Goodhart and Lastra, 2020). However, higher levels of flexibility and liquidity in this source of funding and no requirements of paying interests are the few other advantages present in the usage of this source for funding generation.

Preference equity shares

The potential advantages or benefits of firms that make the usage of preference equity shares for financing purposes are easy conversion of preference shares to equity shares (Lerner and Leamon, 2023). However, the few other advantages present in the usage of this source for funding generation are preference given to ordinary shareholders over preference shareholders in the liquidation process. No dilution occurring in the existing shareholders’ voting rights is another advantage of using this funding source.

Invoice discounting

The potential advantages or benefits of firms that make the usage of invoice discounting for financing purposes are that it helps to improve cash flows from customers (Hua, Xiaoye and Yuanfang, 2023). Hence, rather than waiting for customers to pay at the end of their normal credit period, invoice discounting helps to receive cash as soon as invoices are issued. These are the few other advantages present in the usage of this source for funding generation.

Loans from bank

The potential advantages or benefits of firms that make the usage of loans from banks for financing purposes are its usefulness in terms of cash management due to fixed repayment schedules (Wang, Chiu and King, 2020). However, loans are available in the periods of depression as well, unlike any other source. These are the few other advantages present in the usage of this source for funding generation.

Financial lease

The potential advantages or benefits of firms that make the usage of financial lease for financing purposes are flexible terms of lease payments (Barykina and Chernykh, 2021). However, usefulness of lease fee as a mode of saving tax return and facilitation of asset acquisition with little capital outlay are the few other advantages present in the usage of this source for funding generation.

Ordinary equity shares

The drawbacks or limitations of firms that make the usage of ordinary equity shares for financing purposes are changes occurring within ownership due to the sale of new ordinary equity shares. Besides this, raising funds by issuing such shares is time taking and effort making (Schell, Endreny and Koren, 2024). Cost of raising this capital is also quite high.

Preference equity shares

Firms that make the usage of preference equity shares for financing purposes have drawbacks or limitations such as inappropriateness for investors that follow risk (Atrill and McLaney, 2019). Other than this, it possesses drawbacks such as lower returns for investors, as fixed returns are offered to these shareholders. No voting rights provided to preference shareholders is also a major drawback of this funding source.

Invoice discounting

The drawbacks or limitations of firms that make the usage of invoice discounting for financing purposes are that it is used mainly as a form of last resort (Guerar et al., 2020). This is mainly because high fees are associated with in invoice discounting. Risk of non-payment is also a major drawback of this funding source.

Loans from bank

Firms that make the usage of loans from bank for financing purposes have drawbacks or limitations such as rigid criteria of banks for providing loans to business organisations (Besmir and Aliu, 2021). Another drawback is the security that banks need for providing loans. Apart from this, loans from bank, which are used for funding, can turn out to be expensive because of the need of paying interests. In this source of fund generation, another major drawback identified is the need of providing security on loan obtained, which might not be available always.

Financial lease

The drawbacks or limitations of firms that make the usage of finance lease are that lessors can repossess the leased assets at anytime. This can be done if the lessee ends up as a defaulter of payment (Nechaev et al., 2022). Moreover, the business organisation that leases assets does not have the freedom of making any modification to the equipment that has been leased. There is also a possibility of incurring some extra charges if the lease agreement is terminated early.

The discussions on the advantages and limitations of funding sources, it could be recognised that funding sources are of diverse types. However, as mentioned by Atrill and McLaney (2019), all business organisations actually need to maintain different sources for funding purposes. This is for a range of reasons. One of the main reasons for which different sources needed to be used for meeting the funding needs of a business organisation are that maintaining different sources is beneficial for balancing risks. There are different risks related to raising funds from sources of finance. However, if different sources are accessed at the same time, the risks can be balanced efficiently. On the other hand, another important reason because of which different sources are needed is that utilising different sources is helpful for the balancing of financing costs.

Apart from this, when different sources are utilised for funding generation, there is an efficient balance obtained in the equity of a business organisation and its debts. A balance in between equity and debts is helpful for business organisations, for instance, GotoHolidays to maintain a strong capital structure. This in turn allows in ensuring a good leverage and solvency position in business organisations. In addition, the cost of capital of business organisations is also under control if there is the utilisation of different sources to generate funding. This is because different sources help to balance the costs of financing, thereby accomplishing control over WACC (Weighted Average Cost of Capital).

Since GotoHolidays operates mostly in European marketplaces, the tourism business is now looking forward to entering different Asian markets, which have popular tourist destinations. However, this expansion is going to be significant and substantial amount of costs need to be incurred. The approximate estimations made for this expansion helps to identify that an average of 5 million GBP will be needed for the expansion of this business to different Asian markets. To raise this substantial amount of funds needed for the expansion, suitable sources of finance need to be accessed in this business. The two most suitable sources that are needed for GotoHolidays to meet its financing requirements are ordinary equity shares and loans from bank.

Ordinary equity shares is one of the most suitable sources of financing that is used in businesses for raising funds by issuing new shares in the market. If this source is used for financing, GotoHolidays will be able to raise permanent capital, which does not have to be returned. However, a part of the ownership of the business will have to be sacrificed if this source is used for funding. Loans from bank is one of the most suitable sources of financing that is used in businesses for raising funds by availing loans, which need to be repaid in the future. If this source is used for financing, a huge sum of money can be raised. Moreover, without any ownership sacrifice, the funds raised can be repaid over a long timeframe in instalments.

Thus, as per the findings of the presentation, one can identify that finance is undoubtedly one of the most important functions in every business organisation. This function has a strong interrelationship with other business functions, which include HRM, marketing, operations and others. The internal sources that are available for funding are generally limited. However, the external sources that are available for funding are several and can be used for the short-term as well as long-term. The five main sources determined to be useful for financing are ordinary equity shares, invoice discounting, preference equity shares, financial lease and loans from bank. A range of benefits and related to these sources of funding could also be determined. On the other hand, balance of risks, reduction of costs and maintenance of strong capital structure and such advantages of utilising different sources of funding could be identified as well. The suitability of loans from bank and equity shares for financing in GotoHolidays could be determined.

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