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, 30 Sept 2024. 14:00 |
Target feedback time and date: |
3 weeks from the SubmissionDeadline |
Student Name:
Student ID:
The availability of adequate amount of funds is essential for all firms not only to meet necessary capital expenditures but also to execute day-to-day operations efficiently. Without consistent supply of finance, it becomes difficult for firms to operate and meet funding needs. This presentation will be performing a detailed evaluation on the finance function and how it is related to other functions in a firm. On the other hand, the discussions will assist in determining the diverse internal in addition to external sources of finance. The five key sources of finance in firms alongside their pros and cons will be discussed. Discussions will also be conducted on why different sources of finance are needed in addition to the most suitable sources of finance.
This function is largely advantageous for the attainment of a firm’s goals and objectives. The main roles of the finance function in a firm include the following –
Planning – The finance function estimates and understands the nature of a firm’s financing requirements
Raising – The finance function also plays the role of acquiring the funds needed in a firm from various appropriate options
Administration – The finance function is also observed to allocate funds to the diverse functions of a firm
Management – The finance function executes a strong role in the examination and ascertainment of efficient fund utilisation
Apart from this, business finance helps in the determination of the financial resources, which are needed in a firm for carrying out its diverse operations (Amadasun and Mutezo, 2022). It is also needed for the analysis of the financing options present in a firm so that financing requirements can be met. Business finance also shows a huge role in the efficient management of the funds available in a firm so that business objectives can be attained. Besides this, business finance also helps to ascertain that funds are raised from different suitable options for being used in operations. It also shows a huge contribution in terms of allocating the funds that every other business functions need.
The importance of the finance function within a firm is huge. According to Gitman and Zutter (2013), one of the main roles of the finance function within firms is its relationship with other functions. This is because all other functions in a business need a consistent supply of funds for the execution of their activities, which are raised and allocated to the other functions by the finance function. For example, in GotoHolidays, the marketing function is a function dedicated towards the creation of a positive image, driving sales, managing social media, arranging promotional campaigns and others. However, to perform all these activities, consistent supply of funds is needed in the firm, which is raised and allocated by the finance function.
On the other hand, the HRM function is a function present in a firm, which performs activities such as recruitment, performance management, benefits and compensations, training and development and others. However, the funds needed in the HRM function of GotoHolidays to perform these activities are raised as well as allocated by the finance function. This helps to determine that in a firm, the main role of the finance function is to acquire and allocate funds to various other functions or departments.
The sources, which help in the generation of funds from within a firm, are referred to as the internal sources of finance (Zubair, Kabir and Huang, 2020). When sources of finance are available to a firm internally, costs of generating funds are relatively much less.
The number of internal sources of finance available to a firm is generally limited (Cecere, Corrocher and Mancusi, 2020). Sale of stock, retained profits, debtors’ collection and sale of fixed assets are the few main examples of internal sources of finance, as listed in the slide.
The sources, which help in the generation of funds from outside a firm, are referred to as the external sources of finance (Rao et al., 2023). When sources of finance are available to a firm externally, costs of generating funds are relatively much higher. However, these sources are useful for the fulfilment of the needs of finance for a significant amount.
The number of external sources of finance available to a firm is numerous (Weetman, 2019). However, these sources can be divided into long-term sources and short-term sources, the few main examples of internal sources of finance, as listed in the slide.
Long-term
Ordinary shares
Preference shares
Financial lease
Borrowings (loans)
Hire purchase agreements
Short-term
Trade credit
Invoice discounting
Bank overdraft
Debt factoring
Loans from bank
Loans are the amount borrowed from banks at an agreed interest rate, which has to be repaid for an agreed timeframe (Wang et al., 2020). When loans are accessed in firms from banks, the few main advantages involve the fact that loans have fixed repayments. Fixed repayments are generally easy for managing cash. The other advantages recognised for this source are that loans provide funds to a firm even when there is an existence of depression.
Bank overdraft
According to Klein (2022), bank overdrafts are funding arrangements in which firms can write cheques and make payments even if their bank account has no funds. When overdrafts are availed in firms from banks, the few main advantages involve avoidance of bouncing of cheques so that financial credibility is maintained. When used in shorter span, overdrafts are generally cheaper than loans. The other advantages recognised for this source are that they are a flexible source for efficient cash management even a cash deficit period.
Financial leases
Financial leases are agreements between asset owners (lessors) and individuals or firms (lessees) to use an asset for an agreed timeframe in exchange of a series of payments (Nechaev et al., 2021). When financial leases are availed in firms, the few main advantages involve flexible terms and best fit for them. Leases are also advantageous for effective cash management by lowering cash outflows. The other advantages recognised for this source are that lease payments can be considered as business expense on tax returns.
Ordinary equity shares
The ordinary equity shares of a firm are usually issued in the market for raising capital by providing a small unit of capital to investors purchasing the shares (Vernimmen, Quiry and Le Fur, 2022). When ordinary equity shares are issued in firms for funding, the few main advantages involve higher level of flexibility as well as liquidity relative to loans. The funds raised from the source also acts as permanent capital of firms. Moreover, the other advantages recognised for this source are that funds raised from shares have no interests payable.
Debt factoring
Debt factoring is a funding arrangement in which firms sell their trade receivables to a third party for generating cash by discounting the receivables (Ivaniš and Vapa-Tankosi?, 2020). When debt factoring is considered in firms, the few main advantages involve the enhancement of the cash flows of a firm. The other advantages recognised for this source are that debt factoring helps in providing quick access to cash.
Loans from bank
When loans are accessed in firms from banks, the few main disadvantages involve the rigid criteria provided by the bank for providing loan. Moreover, loans can prove to be expensive because of interest payment needs. The other disadvantages recognised for this source include the destruction of credit score due to untimely interest payment. Banks might also need security on loan.
Bank overdraft
If overdrafts are availed in firms from banks, the few main disadvantages of overdrafts involve higher rate of interests charged in comparison to that of ordinary loans. The other advantages recognised for this source are negative influence on a firm’s credit score and expensive if used for a long span.
Financial leases
When financial leases are availed in firms, the few main disadvantages involve etra charges if there is early termination of lease. Moreover, no alterations can be made to leased assets. The other disadvantages recognised for this source are that in case if lessee ends up with payment default, lessors can repossess the leased assets.
Ordinary equity shares
If ordinary equity shares are issued for funding, the few main disadvantages involve change in ownership because of issue of shares to investors. The other disadvantages recognised for this source are substantial effort and time for raising funds alongside higher costs of raising funds.
Debt factoring
When debt factoring is considered in firms, the few main disadvantages involve an increasing risk of harming the relations of customers. The other disadvantages recognised for this source are that the fees for debt factoring can end up being quite high.
The discussions made in the previous slides showed that sources of finance in firms are usually of diverse types. However, in firms, maintaining a single source of finance is not sufficient. There should always be the presence of a combination of different sources of finance (Spiteri, 2020). For example, GotoHolidays needs the presence of different sources for its funding purposes. This is because the usage of different sources of finance help in balancing the financing costs related to sources of funding. Using a range of sources of finance are helpful for keeping financing costs low since some sources of funding have low costs associated while some have high costs associated.
At the same time, using different sources is helpful for the management of the diverse risks, which are associated with sources of funding (Atrill and McLaney, 2018). This is ensured by maintaining a balance between funding sources that have high risks and the ones that have low risks. Apart from this, using different sources of funding is important, as different sources are helpful for the establishment of a desired capital structure within firms. This is because if funding sources are balanced between debt funding and equity funding, the balance in debt and equity helps in the maintenance of good capital structure in a firm.
The suitability of sources of finance or funding in firms is usually different for different firms (Atrill and McLaney, 2019). For example, GotoHolidays is a tourism company that mainly operates in the European market. However, the tourism company is now focusing on the expansion of its operations to other South Asian markets wherein several emerging destinations can be identified. To undergo this expansion, there will be a huge sum of money will be needed. An approximate 2 million GBP is expected to be spent for this expansion. To generate these funds, this tourism company will have to rely on a variety of sources of funding.
Ordinary equity shares and loans from banks are the two major sources that GotoHolidays can access for funding purposes. This is because balancing the funds from ordinary equity shares and loans from banks will help the tourism company to maintain an ideal capital structure. Raising funds from ordinary equity shares will be helpful for the company to ascertain that no interests have to be paid for the funds raised. It will also be helpful since there will not any return requirements present. Contrastingly, the access of loans from banks can be beneficial for raising funds without the dilution of the tourism company’s ownership structure. Hence, these are the most suitable sources of funds for GotoHolidays presently.
Hence, the discussions and findings of the presentation assist in the derivation of how importance the finance function is within firms. It could also be found out that the finance function is largely interrelated with the production, marketing, HRM and other functions of firms since this function is responsible for raising funds. On the other hand, it could be derived that ordinary equity shares, loans from banks, debt factoring, bank overdrafts and financial leases are five main sources used for funding purposes in firms. The diverse pros and cons related to all these sources could be recognised. Moreover, the reasons such as maintenance of good capital structure and others due to which different sources of funding is essential could be determined. Apart from this, loans and ordinary equity shares could be determined as the most suitable funding sources for firms.
Gitman, L. J. and Zutter, C. J. (2013) Principles of Managerial finance, 13th Edition, Prentice Hall. London.
Ivaniš, M. and Vapa-Tankosi?, J. (2020) Factoring as an important instrument of corporate finance. International Thematic Monograph" Innovation as a driver of development, pp.166-181.
Klein, A. (2022) Getting Over Overdraft.
Nechaev, A.S., Antipina, O.V., Rasputina, A.V., Tyapkina, M.F. and Ilyina, E.A. (2021) Methods of lease payments calculating in terms of innovations financing. Montenegrin Journal of Economics, 17(1), pp.133-149.
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.
Spiteri, S. (2020) Financial accounting: from its basics to financial reporting and analysis. Cambridge Scholars Publishing.
Vernimmen, P., Quiry, P. and Le Fur, Y. (2022) Corporate finance: theory and practice. John Wiley & Sons.
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Weetman, P. (2019) Financial accounting. 8th Edition. Harlow: Pearson.
Zubair, S., Kabir, R. and Huang, X. (2020) Does the financial crisis change the effect of financing on investment? Evidence from private SMEs. Journal of Business Research, 110, pp.456-463.
