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Some ways to raise finance. Internal. External. . . Some ways to raise finance. Internal. External. Retained profits. Working capital. Asset disposals. Sale
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3. Some ways to raise finance
4. Retained profits
5. Retained profits main advantages Cheap (though not free)
The cost of capital of retained profits is the opportunity cost for shareholders of leaving profits in the business
Very flexible
Management control how they are reinvested
Shareholders control the proportion retained
Does not dilute the ownership of the company
6. Possible downsides of retained profits Danger of hoarding cash
Shareholders may prefer dividends if the business is not earning a sufficient ROCE
High profits and cash flows would suggest the business could afford debt (higher gearing)
7. Working capital as a source of finance Reducing working capital
A one-off benefit from lower working capital
The question can it be sustained?
Finance often wasted in excess stocks and trade debtors
Look for very low stock turnover ratio or high debtor days
8. Asset disposals Potentially another one-off boost to finance
Good examples: spare land, surplus equipment
Note not all businesses have spare assets
Often occurs after acquisitions
9. Example of assets sale Retailer JJB Sports has said it may be heading for a full-year loss of up to Ł10m after seeing sales fall in "extremely difficult" trading
JJB is looking to sell its Fitness Clubs business
10. Sale and leaseback Specialist method of raising cash
Involves selling fixed assets and then leasing them back from new owner
Tends to involve business properties (e.g. hotels, supermarkets, offices popular when property market was booming
Note: can only be done once!
11. Example of sale & lease back Sorry another football link!
Leeds football club are trying to raise funds by selling off Elland Road football ground for Ł6m and then lease back.
They are trying to sell to Leeds council.
The negotiations are still underway.
12. Issuing shares
13. Examples of issuing share rights Working lunch great visual example of what share rights involve
HSBC bank share rights issue
14. Methods of issuing shares for a plc
15. Share issues benefits and drawbacks
16. Raising Loan Capital
17. Debentures
18. Debentures key features Long-term: often 10-20 years
Issued by the company (not a bank)
Fixed rate of interest
Usually secured against the assets of the company (provides some protection for debenture holders)
Can be traded
19. Cost Minimisation Strategies
21. Possible sources of cost reductions Eliminating waste & avoiding duplication (lean production)
Simplifying processes and procedures
Outsourcing non-core activities (e.g. transaction processing, payroll administration, call handling)
Negotiating better pricing with suppliers
Improving communication
Pruning product ranges and customer accounts to eliminate unprofitable business
Using the most effective methods of training and recruitment
Introducing flexible working practices
Aggressive control over non-essential overheads (e.g. banning first or business class travel unless essential)
22. Potential problems with cost minimisation Business left with insufficient capacity to handle unexpected or short-term increases in demand
Cost reductions by one department may surprise and/or annoy other functions if they are not properly communicated and coordinated
23. Your go
24. Textbook p 55 Sainsburys - mini activity
VW - mini activity Q 1&2
25. Profit Centres
26. Examples of profit centres Individual shops in a retail chain
Local branches in a regional or nationwide distribution business
A geographical region e.g. a country (for multinationals) or county
A team or individual (e.g. a sales team, a team of installers)
27. Benefits and drawbacks of profit centres
28. Plenary Qs Why might a car manufacturer need to raise large sums of money?
What options are available internally & externally to raise such sums to a car manufacturer in todays economic climate?
What are the benefits of using retained profit for a major investment? What are the opportunity costs of using your retained profits too? (consider the ratios that will be effected)
29. Hwk Textbook read info on Profit centres p56 to 58
Make key revision notes:
What is a profit centre?
Benefits & limitations of profit centres.
Implications of profit centres.