<5.1 BUSINESS FINANCE>

'FINANCE' refers to the money that a company requires for business activities, for example:

• To SET UP A BUSINESS will require start-up capital involving cash injections from the owner(s) to purchase essential capital equipment and possibly premises.

• To FINANCE WORKING CAPITAL "Pay the bills" – the day-to-day finance needed to pay bills and expenses and to build up stocks or in the event of an unexpected sales decline, (e.g. during a recession, COVID etc....) or a large  customer failing to pay their bill, then simply to SURVIVE

• To FINANCE BUSINESS EXPANSION both INTERNAL and EXTERNAL (Via TAKEOVER, FRANCHISING) needs finance.

• Watch the video of Shark tank and write a brief paragraph for each product, explaining which of the REASONS above, and why they need finance.

Each of these scenarios requires finance to complete, CHOOSE THREE and decide whether it is a case of SHORT TERM or LONG TERM finance? Justify your answer.

• Funding extracurricular activities like sports events or field trips. 

  • • • "The finance needed to fund extracurricular activities like sports events or field trips @TES, is a form of short-term finance as it is for an immediate use."

• Purchasing expensive assets such as buses, laboratory equipment, or IT infrastructure.

• Managing cash flow issues caused by delayed tuition fee payments.

• Constructing a new building or expanding classrooms to accommodate more students.

• Covering unexpected repairs, such as fixing a broken air conditioner or plumbing issue.

• Paying substitute teacher wages due to staff absences.

• Installing renewable energy solutions, like solar panels, to reduce future operational costs.

• INTERNAL SOURCES OF FINANCE refer to those ways of financing a business which are GENERATED FROM ITS OWN OPERATIONS.

• RETAINED PROFITS refers to the REMAINING PROFITS after taxes and dividends are paid (if any), which can be REINVESTED into the company to fund expansions.

• Of course the firm must be PROFITABLE and not running at a loss for this source of finance to be an option in the first place.

• THE SALE OF ASSETS, that the owner or company owns can be sold to raise funds. 

• Imagine that when you graduate high school (🤞) you decide to go to University, and you only have access to internal sources of finance to pay for your tuition fees and living expenses. Explain in context how you will raise the finance:

• "When I go to University to further my education I will only be able to use internal sources of finance to fund my tuition fees and living expenses. These sources will consist of...."

• EXTERNAL SOURCES OF FINANCE refer to those ways of financing a business which are GENERATED FROM OUTSIDE THE BUSINESS.

• SHARE CAPITAL refers to money raised by a company through issuing shares to investors.

  • • What's a share? Its basically a % ownership of your company that you give away for money.

      • • Key features:

          • • Permanent source of capital.

            • No repayment obligation, but shareholders may receive dividends.

            • Ownership is diluted as more shares are issued.

• • LOAN CAPITAL refers to money BORROWED from external lenders, like banks, with a fixed repayment schedule and interest.

    • • • Key Features:

          • Debt financing; must be repaid with interest.

          • No loss of ownership/control.

          • Typically used for long-term investments.

• • OVERDRAFT refers to a short-term facility allowing a business to withdraw more money than it has in its account, up to an agreed limit.

    • • Key Features:

        • Flexible, short-term borrowing.

        • Interest is charged only on the overdrawn amount.

        • Often used for managing cash flow fluctuations.

• • TRADE CREDIT refers to an arrangement where suppliers allow a business to buy goods or services now and pay later.

    • • Key Features:

        • • Typically interest-free for a short period.

          • Helps manage working capital.

          • Overdue payments may incur penalties.

• For each of the four scenarios below suggest one of the 4 external sources of finance listed above and justify it by referring to the 'Key features' above:

• Scenario #1: A tech startup developing an AI-driven healthcare app seeks funding to expand operations globally. 

• Model answer: "I would suggest this company choose to raise finance through share capital as the startup has high growth potential but lacks immediate revenue. Share capital allows the company to raise large amounts of money without the pressure of immediate repayment and Investors are attracted by the potential future returns and willingness to share risks in exchange for ownership"

• Scenario #2:  A medium-sized manufacturing business needs to purchase a new assembly line to meet rising demand for eco-friendly products.

• Scenario #3: A small bakery experiences a cash flow gap due to delayed payments from a large client but still needs to pay for flour and utilities.

• Scenario #4: A clothing retailer needs to stock up on inventory for an upcoming holiday sale but doesn’t have immediate funds.

ADVANTAGES include: 

(+) May have NO INITIAL FEES to be paid to the crowd-funding platform 

(+) Can GUAGE PUBLIC REACTION to the new business venture

(+) Can be a FAST WAY to raise substantial sums of money 

DISADVANTAGES include: 

(-) Crowd-funding PLATFORMS MAY REJECT proposals.

(-) If the TARGET AMOUNT ISN'T MET, then the finance promised will have to be REPAID and the campaign ended.

(-) The campaign will need to be EXTENSIVELY ADVERTISED in order to GENERATE INTEREST FROM THE MASSES. 

(-) May allow COMPETITORS TO STEAL IDEA and reach the market first.

ADVANTAGES include: 

(+) May have NO INITIAL FEES to be paid to the crowd-funding platform 

(+) Can GUAGE PUBLIC REACTION to the new business venture

(+) Can be a FAST WAY to raise substantial sums of money 

DISADVANTAGES include: 

(-) Crowd-funding PLATFORMS MAY REJECT proposals.

(-) If the TARGET AMOUNT ISN'T MET, then the finance promised will have to be REPAID and the campaign ended.

(-) The campaign will need to be EXTENSIVELY ADVERTISED in order to GENERATE INTEREST FROM THE MASSES. 

(-) May allow COMPETITORS TO STEAL IDEA and reach the market first.

Explain the MAIN DIFFERENCES between MICRO FINANCING and PAY-DAY LOANS.

• A coffee shop needs around $10,000 to install Christmas decorations for its Christmas theme. the shop needs to get the job done asap. 

• It is a sole trader with no large outstanding debts, but who wishes to stay in control of the company.

• Considering this situation what sources of finance should they choose, and why? mention all 5 of the criteria above in your answer as well as the chosen sources.

"As the finance is only needed for a short-time period, then they should seek short to mid-term finance sources in addition, as the amount is relatively small...."

• As the finance is only needed for a short-time period, then they should seek short to mid-term finance sources in addition, as the amount is relatively small and they need it asap, then they should seek uncomplicated, methods thus, the idea of bringing in a partner and using their savings would take far too long, in addition, they stated that they didn't want to give away any control. and the possibility of issuing shares is not possible for a sole trader. Therefore as they have no outstanding debts it would be relatively easy to secure a bank loan with a low-interest rate using the shop as collateral. Another suitable choice would be overdrafts as this is a short-term way to buy what you want now and pay for it later. One final method of financing would be leasing, as they could lease the decorations and then return them once the season is over.

•  A DOUGHNUT CHAIN CURRENTLY CONSISTING OF THREE SHOPS NEEDS AROUND 3 MILLION TO BUY ANOTHER SHOP. 

• IT IS A PRIVATE LIMITED COMPANY WITH A LARGE OUTSTANDING LOAN.

• THE CURRENT OWNERS DO NOT WISH TO LOSE CONTROL.

• CONSIDERING THIS SITUATION WHAT SOURCES OF FINANCE SHOULD THEY CHOOSE, AND WHY? MENTION ALL 5 OF THE CRITERIA ABOVE IN YOUR ANSWER.

• Imagine yourself in the role of a bank manager who is being asked by a TES student for a loan to set up a sushi bar on campus. Politely refuse to grant it based on the the factors listed above.

• "Dear deluded TES student, I really appreciate you asking for a loan for your sishi-bar idea, but regrettably I will hve to refuse your loan request on the following basis, firstly..."

• BEFORE INVESTING POTENTIAL SHAREHOLDERS  NEED ANSWERS TO THE FOLLOWING QUESTIONS:

• How has the SHARE PRICE FLUCTUATED? 

• What is the GEARING RATIO?

• How does the DIVIDEND compare with other firms?

• What are the CURRENT RATES OF INTEREST? (NOTE: THIS IS IMPORTANT AS MAYBE IT'S MORE PROFITABLE AND LESS RISKY TO PUT YOUR MONEY INTO THE BANK IF THE INTEREST RATE IS ATTRACTIVELY HIGH)

• What are the FUTURE PROSPECTS of the firm and industry?

• Does the firm own any INTELLECTUAL PROPERTY?

• What are the CAPITAL GAINS TAX laws?

--Scenario: The Case of Bounomics.com--

Bounomics.com is a rapidly growing company specializing in educational technology, developing innovative platforms and tools for online learning, virtual classrooms, and adaptive learning solutions. The company has recently gone public, and you're considering whether to invest in its shares. As a potential investor, you must analyze the available information before making a decision.

Key Details Provided:

• Share Price Fluctuations:: Over the past year, Bounomics.com's share price has shown significant volatility. It started at $10 per share, peaked at $25 during the launch of its AI-driven tutoring platform, and then fell to $15 due to concerns about competition. It now stabilizes around $18.

• Gearing Ratio: Bounomics.com's gearing ratio stands at 65%. This indicates a high reliance on borrowed funds to finance operations, increasing the risk in a downturn.

• Dividend Comparison: Bounomics.com has declared a dividend of $0.50 per share. Competitor firms in the same sector, such as EduTechPro and Learnify, offer dividends of $0.70 and $0.80 per share, respectively.

• Current Interest Rates: National interest rates have recently increased to 4%. Some banks are offering fixed deposit schemes with returns as high as 5%.

• Future Prospects: Industry analysts forecast strong growth for educational technology due to increasing global adoption of digital learning tools. However, the market is competitive, with larger firms like Skill Core dominating.

• Intellectual Property: Bounomics.com holds patents for two key technologies: an AI-driven adaptive learning engine and a blockchain-secured credentialing system.

• Capital Gains Tax Laws: The government recently increased the capital gains tax rate to 20% for long-term holdings, reducing potential net gains from share price appreciation.

Student Task: Using the above information, decide whether you would invest in Bounomics.com. Justify your decision by addressing each of the following:

• Share price volatility and potential risks.

• Impact of the gearing ratio on financial stability.

• Attractiveness of the dividend relative to competitors.

• Comparison of returns from bank savings and share investment.

• Future growth potential of the firm and industry.

• Value of the firm's intellectual property.

• How capital gains tax affects your potential profits.

Be sure to conclude with a clear recommendation and reasoning.

• Define ‘crowd-funding’.

• Identify two reasons why obtaining finance isn't easy for a new business.

• Identify two reasons why a business might need finance.

• (NWA) Outline two possible problems for NWA of having a high level of debt.

• (YMG) Outline two sources of finance YMG could use for the new technology.

• (SI & RAMON) Identify and explain two possible sources of finance that they could use to obtain the equipment.

• (ELLA) Identify and explain two reasons why obtaining finance might be difficult for Ella’s business.

• (ALLPLAY) Do you think a bank loan is the best source of finance for Vince to choose? Justify your answer.

• (TWH) TWH can either use retained profit or a long-term loan to finance the purchase of new technology. Which option do you recommend TWH should use? Justify.

• (JOSH) Do you think a bank loan is the best source of finance for Josh to use for the new equipment? Justify

• (FJ) Explain one advantage and one disadvantage to Simon of using crowd-funding as a source of finance for FJ.

• (EC) Explain four sources of finance that EC could use for the investment in the new product.

• (CC) Explain two reasons why finance is needed by CC.

• (VG) Identify and explain one advantage and one disadvantage of leasing all the equipment used in the business. 

• (PP) Identify and explain two sources of finance PP could use for its expansion.

• (TT) Identify and explain one reason why TT will need short-term finance and one reason why TT will need long-term finance. 

• (HH) Consider the two options for HH’s additional helicopter. Recommend which option Harry and Fred should choose. Justify your answer.

• (GS) Consider the advantages and disadvantages of the following three sources of finance for the new equipment. Recommend the best source for GS to choose. Justify your answer.

• (FF) Thao and Liang need to raise finance to take over another business. Consider the advantages and disadvantages of the following three sources of finance which they could use. Recommend which source of finance Thao and Liang should choose. Justify your answer.

• (TP) Joey and Jennifer will need to finance the expansion plans for the factory. Consider the advantages and disadvantages of the following three sources of finance they could use. Recommend the best source to choose. Justify your choice.