introduction to raising finance
When a company is growing rapidly, for example when contemplating investment in capital equipment or an acquisition, its current financial resources may be inadequate. Few growing companies are able to finance their expansion plans from cash flow alone. They will therefore need to consider raising finance from other external sources. In addition, managers who are looking to buy-in to a business ("management buy-in" or "MBI") or buy-out (management buy-out" or "MBO") a business from its owners, may not have the resources to acquire the company. They will need to raise finance to achieve their objectives.
There are a number of potential sources of finance to meet the needs of a growing business or to finance an MBI or MBO:
- Existing shareholders and directors funds- Family and friends- Business angels- Clearing banks (overdrafts, short or medium term loans)- Factoring and invoice discounting- Hire purchase and leasing- Merchant banks (medium to longer term loans)- Venture capital
A key consideration in choosing the source of new business finance is to strike a balance between equity and debt to ensure the funding structure suits the business.
The main differences between borrowed money (debt) and equity are that bankers request interest payments and capital repayments, and the borrowed money is usually secured on business assets or the personal assets of shareholders and/or directors. A bank also has the power to place a business into administration or bankruptcy if it defaults on debt interest or repayments or its prospects decline.
In contrast, equity investors take the risk of failure like other shareholders, whilst they will benefit through participation in increasing levels of profits and on the eventual sale of their stake. However in most circumstances venture capitalists will also require more complex investments (such as preference shares or loan stock) in additional to their equity stake.
The overall objective in raising finance for a company is to avoid exposing the business to excessive high borrowings, but without unnecessarily diluting the share capital. This will ensure that the financial risk of the company is kept at an optimal level.
Business Plan
Once a need to raise finance has been identified it is then necessary to prepare a business plan. If management intend to turn around a business or start a new phase of growth, a business plan is an important tool to articulate their ideas while convincing investors and other people to support it. The business plan should be updated regularly to assist in forward planning.
There are many potential contents of a business plan. The European Venture Capital Association suggest the following:
- Profiles of company founders directors and other key managers;- Statistics relating to sales and markets;- Names of potential customers and anticipated demand;- Names of, information about and assessment of competitors;- Financial information required to support specific projects (for example, major capital investment or new product development);- Research and development information;- Production process and sources of supply;- Information on requirements for factory and plant;- Magazine and newspaper articles about the business and industry;- Regulations and laws that could affect the business product and process protection(patents, copyrights, trademarks).
The challenge for management in preparing a business plan is to communicate their ideas clearly and succinctly. The very process of researching and writing the business plan should help clarify ideas and identify gaps in management information about their business, competitors and the market.
Types of Finance - Introduction
A brief description of the key features of the main sources of business finance is provided below.
Venture Capital
Venture capital is a general term to describe a range of ordinary and preference shares where the investing institution acquires a share in the business. Venture capital is intended for higher risks such as start up situations and development capital for more mature investments. Replacement capital brings in an institution in place of one of the original shareholders of a business who wishes to realise their personal equity before the other shareholders. There are over 100 different venture capital funds in the UK and some have geographical or industry preferences. There are also certain large industrial companies which have funds available to invest in growing businesses and this 'corporate venturing' is an additional source of equity finance.
Grants and Soft Loans
Government, local authorities, local development agencies and the European Union are the major sources of grants and soft loans. Grants are normally made to facilitate the purchase of assets and either the generation of jobs or the training of employees. Soft loans are normally subsidised by a third party so that the terms of interest and security levels are less than the market rate. There are over 350 initiatives from the Department of Trade and Industry alone so it is a matter of identifying which sources will be appropriate in each case.
Invoice Discounting and Invoice Factoring
Finance can be raised against debts due from customers via invoice discounting or invoice factoring, thus improving cash flow. Debtors are used as the prime security for the lender and the borrower may obtain up to about 80 per cent of approved debts. In addition, a number of these sources of finance will now lend against stock and other assets and may be more suitable then bank lending. Invoice discounting is normally confidential (the customer is not aware that their payments are essentially insured) whereas factoring extends the simple discounting principle by also dealing with the administration of the sales ledger and debtor collection.
Hire Purchase and Leasing
Hire purchase agreements and leasing provide finance for the acquisition of specific assets such as cars, equipment and machinery involving a deposit and repayments over, typically, three to ten years. Technically, ownership of the asset remains with the lessor whereas title to the goods is eventually transferred to the hirer in a hire purchase agreement.
Loans
Medium term loans (up to seven years) and long term loans (including commercial mortgages) are provided for specific purposes such as acquiring an asset, business or shares. The loan is normally secured on the asset or assets and the interest rate may be variable or fixed. The Small Firms Loan Guarantee Scheme can provide up to £250,000 of borrowing supported by a government guarantee where all other sources of finance have been exhausted.
Mezzanine Debt
This is a loan finance where there is little or no security left after the senior debt has been secured. To reflect the higher risk of mezzanine funds, the lender will charge a rate of interest of perhaps four to eight per cent over bank base rate, may take an option to acquire some equity and may require repayment over a shorter term.
Bank Overdraft
An overdraft is an agreed sum by which a customer can overdraw their current account. It is normally secured on current assets, repayable on demand and used for short term working capital fluctuations. The interest cost is normally variable and linked to bank base rate.
Completing the finance-raising
Raising finance is often a complex process. Business management need to assess several alternatives and then negotiate terms which are acceptable to the finance provider. The main negotiating points are often as follows:
- Whether equity investors take a seat on the board- Votes ascribed to equity investors- Level of warranties and indemnities provided by the directors- Financier's fees and costs- Who bears costs of due diligence.
During the finance-raising process, accountants are often called to review the financial aspects of the plan. Their report may be formal or informal, an overview or an extensive review of the company's management information system, forecasting methods and their accuracy, review of latest management accounts including working capital, pension funding and employee contracts etc. This due diligence process is used to highlight any fundamental problems that may exist.
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Equity finance
Nhãn: Finance
What is equity?
Equity is the term commonly used to describe the ordinary share capital of a business.
Ordinary shares in the equity capital of a business entitle the holders to all distributed profits after the holders of debentures and preference shares have been paid.
Ordinary ( equity) shares
Ordinary shares are issued to the owners of a company. The ordinary shares of UK companies typically have a nominal or 'face' value (usually something like £1 or 5Op, but shares with a nominal value of 1p, 2p or 2Sp are not uncommon).
However, it is important to understand that the market value of a company's shares has little (if any) relationship to their nominal or face value. The market value of a company's shares is determined by the price another investor is prepared to pay for them. In the case of publicly-quoted companies, this is reflected in the market value of the ordinary shares traded on the stock exchange (the "share price").
In the case of privately-owned companies, where there is unlikely to be much trading in shares, market value is often determined when the business is sold or when a minority shareholding is valued for taxation purposes.
In your studies, you may also come across "Deferred ordinary shares". These are a form of ordinary shares, which are entitled to a dividend only after a certain date or only if profits rise above a certain amount. Voting rights might also differ from those attached to other ordinary shares.
Why might a company issue ordinary shares?
A new issue of shares might be made for several reasons:
(1) The company might want to raise more cash
For example might be needed for the expansion of a company's operations. If, for example, a company with 500,000 ordinary shares in issue decides to issue 125,000 new shares to raise cash, should it offer the new shares to existing shareholders, or should it sell them to new shareholders instead?
- Where a company sells the new shares to existing shareholders in proportion to their existing shareholding in the company, this is known as a "rights issue".(2) The company might want to issue new shares partly to raise cash but more importantly to 'float' its shares on a stock market.
When a UK company is floated, it must make available a minimum proportion of its shares to the general investing public.
(3) The company might issue new shares to the shareholders of another company, inorder to take it over
There are many examples of businesses that use their high share price as a way of making an offer for other businesses. The shareholders of the target business being acquired received shares in the buying business and perhaps also some cash.
Sources of equity finance
There are three main methods of raising equity:
(1) Retained profits: i.e. retaining profits, rather than paying them out as dividends. This is the most important source of equity
(2) Rights issues: i.e. an issue of new shares. After retained profits, rights issues are the next most important source
(3) New issues of shares to the public: i.e. an issue of new shares to new shareholders. In total in the UK, this is the least important source of equity finance
Each these sources of equity finance are covered in separate tutor2u revision notes. 0 nhận xét
Equity is the term commonly used to describe the ordinary share capital of a business.
Ordinary shares in the equity capital of a business entitle the holders to all distributed profits after the holders of debentures and preference shares have been paid.
Ordinary ( equity) shares
Ordinary shares are issued to the owners of a company. The ordinary shares of UK companies typically have a nominal or 'face' value (usually something like £1 or 5Op, but shares with a nominal value of 1p, 2p or 2Sp are not uncommon).
However, it is important to understand that the market value of a company's shares has little (if any) relationship to their nominal or face value. The market value of a company's shares is determined by the price another investor is prepared to pay for them. In the case of publicly-quoted companies, this is reflected in the market value of the ordinary shares traded on the stock exchange (the "share price").
In the case of privately-owned companies, where there is unlikely to be much trading in shares, market value is often determined when the business is sold or when a minority shareholding is valued for taxation purposes.
In your studies, you may also come across "Deferred ordinary shares". These are a form of ordinary shares, which are entitled to a dividend only after a certain date or only if profits rise above a certain amount. Voting rights might also differ from those attached to other ordinary shares.
Why might a company issue ordinary shares?
A new issue of shares might be made for several reasons:
(1) The company might want to raise more cash
For example might be needed for the expansion of a company's operations. If, for example, a company with 500,000 ordinary shares in issue decides to issue 125,000 new shares to raise cash, should it offer the new shares to existing shareholders, or should it sell them to new shareholders instead?
- Where a company sells the new shares to existing shareholders in proportion to their existing shareholding in the company, this is known as a "rights issue".(2) The company might want to issue new shares partly to raise cash but more importantly to 'float' its shares on a stock market.
When a UK company is floated, it must make available a minimum proportion of its shares to the general investing public.
(3) The company might issue new shares to the shareholders of another company, inorder to take it over
There are many examples of businesses that use their high share price as a way of making an offer for other businesses. The shareholders of the target business being acquired received shares in the buying business and perhaps also some cash.
Sources of equity finance
There are three main methods of raising equity:
(1) Retained profits: i.e. retaining profits, rather than paying them out as dividends. This is the most important source of equity
(2) Rights issues: i.e. an issue of new shares. After retained profits, rights issues are the next most important source
(3) New issues of shares to the public: i.e. an issue of new shares to new shareholders. In total in the UK, this is the least important source of equity finance
Each these sources of equity finance are covered in separate tutor2u revision notes. 0 nhận xét
Finance and manage
Nhãn: Finance
comparison of financial and management accounting
There are two broad types of accounting information:
• Financial Accounts: geared toward external users of accounting information
• Management Accounts: aimed more at internal users of accounting information
Although there is a difference in the type of information presented in financial and management accounts, the underlying objective is the same - to satisfy the information needs of the user.
Financial Accounts
1/- Financial accounts describe the performance of a business over a specific period and the state of affairs at the end of that period. The specific period is often referred to as the "Trading Period" and is usually one year long. The period-end date as the "Balance Sheet Date"
2/- Companies that are incorporated under the Companies Act 1989 are required by law to prepare and publish financial accounts. The level of detail required in these accounts reflects the size of the business with smaller companies being required to prepare only brief accounts.
3/- The format of published financial accounts is determined by several different regulatory elements:
· Company Law
· Accounting Standards
· Stock Exchange
4/- Financial accounts concentrate on the business as a whole rather than analysing the component parts of the business. For example, sales are aggregated to provide a figure for total sales rather than publish a detailed analysis of sales by product, market etc.
5/- Most financial accounting information is of a monetary nature
6/- By definition, financial accounts present a historic perspective on the financial performance of the business
Management Accounts
1/- Management accounts are used to help management record, plan and control the activities of a business and to assist in the decision-making process. They can be prepared for any period (for example, many retailers prepare daily management information on sales, margins and stock levels).
2/- There is no legal requirement to prepare management accounts, although few (if any) well-run businesses can survive without them
3/- There is no pre-determined format for management accounts. They can be as detailed or brief as management wish.
4/- Management accounts can focus on specific areas of a business' activities. For example, they can provide insights into performance of:
· Products
· Separate business locations (e.g. shops)
· Departments / divisions
5/- Management accounts usually include a wide variety of non-financial information. For example, management accounts often include analysis of:
- Employees (number, costs, productivity etc.)
- Sales volumes (units sold etc.)- Customer transactions (e.g. number of calls received into a call centre)
6/- Management accounts largely focus on analysing historical performance. However, they also usually include some forward-looking elements - e.g. a sales budget; cash-flow forecast. 0 nhận xét
There are two broad types of accounting information:
• Financial Accounts: geared toward external users of accounting information
• Management Accounts: aimed more at internal users of accounting information
Although there is a difference in the type of information presented in financial and management accounts, the underlying objective is the same - to satisfy the information needs of the user.
Financial Accounts
1/- Financial accounts describe the performance of a business over a specific period and the state of affairs at the end of that period. The specific period is often referred to as the "Trading Period" and is usually one year long. The period-end date as the "Balance Sheet Date"
2/- Companies that are incorporated under the Companies Act 1989 are required by law to prepare and publish financial accounts. The level of detail required in these accounts reflects the size of the business with smaller companies being required to prepare only brief accounts.
3/- The format of published financial accounts is determined by several different regulatory elements:
· Company Law
· Accounting Standards
· Stock Exchange
4/- Financial accounts concentrate on the business as a whole rather than analysing the component parts of the business. For example, sales are aggregated to provide a figure for total sales rather than publish a detailed analysis of sales by product, market etc.
5/- Most financial accounting information is of a monetary nature
6/- By definition, financial accounts present a historic perspective on the financial performance of the business
Management Accounts
1/- Management accounts are used to help management record, plan and control the activities of a business and to assist in the decision-making process. They can be prepared for any period (for example, many retailers prepare daily management information on sales, margins and stock levels).
2/- There is no legal requirement to prepare management accounts, although few (if any) well-run businesses can survive without them
3/- There is no pre-determined format for management accounts. They can be as detailed or brief as management wish.
4/- Management accounts can focus on specific areas of a business' activities. For example, they can provide insights into performance of:
· Products
· Separate business locations (e.g. shops)
· Departments / divisions
5/- Management accounts usually include a wide variety of non-financial information. For example, management accounts often include analysis of:
- Employees (number, costs, productivity etc.)
- Sales volumes (units sold etc.)- Customer transactions (e.g. number of calls received into a call centre)
6/- Management accounts largely focus on analysing historical performance. However, they also usually include some forward-looking elements - e.g. a sales budget; cash-flow forecast. 0 nhận xét
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