Fundamentals of Business Finance

Fundamentals of Business Finance

Individual Presentation

Student Name: Inita Vorpe

ID: 2135211

Group: A1

Name of the Lecturer: Dr. Benneth Nwafor

Campus Location: Manchester

Date of submission: 02/10/2023

Greetings to all present here today. I am ... and today I am here to show my presentation prepared on the topic fundamentals of business finance to identify a few most important sources of finance.

The agenda that underlies in the preparation of this presentation involves introducing business finance in the form of a concept followed by discussing the diverse external and internal sources of finance generation. Other agendas that underlie in this presentation are the reasons for which a business entity aims for the maintenance of a balanced portfolio of finance sources. Discussions will also be made on why business entities must aim for a balance in their finance sources followed by an evaluation of finance sources that are suitable for developing large projects.

Elloitt and Elliott (2019) defines business finance as the various kinds of business activities that are performed in a business entity for the planning, acquisition, controlling as well as management of funds. Business finance is helpful for addressing the needs of business operations in addition to the accomplishment of business goals and objectives (Banks, 2023). The nature of the financing need within a business entity involves a range of elements. In the section below, a discussion has been made on the nature of financing need in a business entity –

• Starting a new business venture

• Modernising a business entity

• Acquisition of long-term assets

• Expanding an existing business

• Improving an entity’s working capital

• Paying off loans and debts

• Producing new products

Funding obtained or raised from within a business entity is known as the internal sources of finance (Jerry, Paul and Donald, 2019). The costs of internal sources of financing are much lesser relative to the costs of raising finance externally. Funding obtained or raised from outside a business entity is known as the internal sources of finance (Atrill and McLaney, 2018). These sources help in fulfilling the requirement of funds in a business entity by a substantial amount. The costs of external sources of financing are much higher relative to the costs of raising finance externally.

A few key examples of internal sources of funding are the following –

• Sale of stock

• Retained earnings

• Debtors’ collection

• Sale of fixed assets

A few key examples of internal sources of funding are the following –

Short-term external sources

• Trade credit

• Bank overdraft

• Invoice discounting

• Debt factoring

Long-term external sources

• Ordinary equity shares

• Long-term loans (borrowings)

• Preference shares

• Hire purchase agreements

• Financial lease

The sources of funding available to business entities are usually of diverse types. However, as opined by Weetman (2019), maintenance of an uninterrupted and smooth flow of finances within business entities, the presence of a balanced portfolio of financing sources is important. The reason behind this is that the maintenance of a balanced portfolio ensures that there is always the availability of alternative sources of funding even if one source is unavailable to generate funds. At the same time, the presence of a balance between the debt financing and equity financing of a business entity assists in balancing and lowering the risks that are related to different funding sources. Besides this, there is also a reduction of the costs that are related to sources of financing whenever there is a balanced portfolio of financing sources present in a business entity.

There is a range of benefits associated with the maintenance of a balanced portfolio of different financing sources in a business entity. As opined by Atrill and McLaney (2019), the fundamedntal benefits related to the maintenance of a balanced portfolio is the maintenance of an ideal capital structure through the balancing of debts and owner’s equity. Another benefit that can be determined in a balanced portfolio is the reduction of weighted average of capital (WACC). Apart from this, one of the main drawbacks or limitations observed in the maintenance of a balanced portfolio is that not all business entities have an access to all financing sources. Moreover, the availability of different financing sources also depends on the legal status of business entities.

The construction sector shows the presence of a variety of projects. These projects are usually large ones such as IT upgradation projects, development of new hotels or renovating hotels. As these projects involve substantial investments, tourism businesses need to maintain a wide range of sources of finance.

Sale of fixed assets – In case if a new hotel development or similar large projects in the field of tourism construction, sale of assets are a significant source of finance (Huang, Ringgenberg and Zhang, 2023). It plays the role of a medium-term source of finance for large tourism construction projects. Selling fixed assets help in the generation of funds by selling off fixed assets that are either unproductive or not useful anymore in a business entity. The advantages relating to this source of finance are that no costs have to be paid for selling fixed assets and acts as a efficient and profitable way of using unused assets. However, the disadvantages relating to this source of finance are that the process of raising funds from selling fixed assets might be lengthy and fixed assets available for sale might be limited.

Trade credit – Trade credit is also a significant source of finance in case if a new hotel development or similar large projects are being developed in the field of tourism construction (Tingbani et al., 2024). It plays the role of a short-term source of finance for large tourism construction projects. The advantages relating to this source of finance are that the source provides continuous and convenient supply of funds and is readily available for businesses that have strong financial credibility. However, the disadvantages relating to this source of finance are that it might result the bsuiness entity to increased risks due to over-trading and trade credit duration is based on business reputation.

Retained profits – In case if a new hotel development or similar large projects in the field of tourism construction, retained profits are a significant source of finance as well. According to Dahmash et al. (2023), retained profits refer to the total amount of profits, which is present in business entities that have been trading for at least the past one year. They are the part of profits, whcih are retained for being utilised to perform future operations. Retained profits play the role of a long-term or medium-term source of finance for large tourism construction projects. The advantages relating to this source of finance are that funds do not have to be paid back. Moreover, interests also do not have to be paid while there is complete flexibility of using this finance source. However, the disadvantages relating to this source of finance are that retained profits are not available for setting up a new business venture and might dissatisfy shareholders.

All the discussions made in the above section helped in identifying that sources of funding in business organisations for large construction projects are of diverse types. However, other than large construction projects, there atre various other projects and investments for which business organisations require funds. The following is a detailed discussion presented on five key sources of funding generation in business organisations in addition to their individual advantages and limitations –

Equity shares – This source of funding is concerned with issuing shares to the public for raising capital. Small units of capital of a business organisation are sold to generate funds from investors (Schell, Endreny and Koren, 2024). If there is a selection of equity shares for the generation of finance, the few main advantages that can be observed are that they serve as permanent captial. This is because the funding generated from this source do not need to be repaid. The funding from ordinary equity shares helps in the ascertainment of higher flexibility and liquidity relative to loans. Interest payments are also not required for ordinary equity shares. However, if this source of generation of finance is selected, the few main disadvantages observed include change in business ownership whenever there is a sale of the shares of a business organisation. Higher cost of raising capital from this source is also visible.

Financial leases – Financial leases indicate the agreements signed between legal asset owners (lessors) and asset users (lessees) for using assets for an agreed timescale in return on a series of payments (Romanchukevych et al., 2023). If there is a selection of financial leases for the generation of finance, the few main advantages that can be observed are lease payment fee can be reduced as a kind of business expense on tax returns. Financial lease are also helpful for the effective management of cash flow in business organisations that have less amount of cash outflows. However, if this source of generation of finance is selected, the few main disadvantages observed include the facts that the lessee is not free for making any alterations to the leased assets. Moreover, lessors can repossess their leased assets if lessees are found out to be defaulters of payment.

Hire purchase agreements – The funding arrangements for business organisations wherein assets for business purpose can be purchased without immediate full payment of value with initial deposit (Tatar, 2023). Rest of the payments can be made in instalments. If there is a selection of hire purchase agreements for the generation of finance, the few main advantages that can be observed are that it allows asset deployment without substantial working capital drain. Moreover, payments and interest rates are fixed throughout the hire purchase term. However, if this source of generation of finance is selected, the few main disadvantages observed include negative influences if a financial situation is changed during a fixed contract. Another disadvantage is that total payments of hire purchase are usually higher relative to the full payment of asset purchase.

Invoice discounting – Invoice discounting is the financing of the invoices of a business organisation whenever the unpaid invoices are utilised as loan collateral (Esteva, El-Fakdi and Ballesteros-Rodríguez, 2023). If there is a selection of invoice discounting for the generation of finance, the few main advantages that can be observed are that they help in accelerating cash flow from customers. Due to this, rather than waiting for customers to make payments within the normal credit terms, cash is received almost as soon as invoice is issued. However, if this source of generation of finance is selected, the few main disadvantages observed are that invoice discounting is a last resort for various business organsiations. This is because there are significant fees related to this source of funding.

Bank overdraft – The funding option wherein a business organisation can write cheques and make paynments even if no funds are present in a business organisation’s bank account is called a bank overdraft (OVEDJE, 2024). If there is a selection of bank overdrafts for the generation of finance, the few main advantages that can be observed are the overdrafts lead to the maintenance of financial credibility by avoiding cheque bounce. It is also advantageous since it serves as a flexible source of funding during cash deficit period. However, if this source of generation of finance is selected, the few main disadvantages observed include higher interest rates relatibve to that of ordinary bank loans. Overdrafts can also be expensive and there might be a negative influence posed on business credit score.

The findings showed that sources from which funds are generated in business organisations can be generally categorised into two types, which are internal and external. While internal sources are less expensive, external sources are cost intensive but widely available. Trade credit, sale of fixed assets and retained profits are the three major sources of finance that are useful for the funding of large-size construction projects. Conversely, equity shares, financial leases, hire purchase agreements, invoice discounting and bank overdrafts could be determined as the few most important sources for funding generation. However, these sources have different advantages and limitations as well.

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