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Financing Growth

Financing Growth . Chapter 15. Pages 80-83 . Aims for today. To identify ways of financing a business from Internal & external sources. To be able to recommend and justify the most appropriate source of finance to fund the growth of different businesses. . Growing a business.

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Financing Growth

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  1. Financing Growth Chapter 15 Pages 80-83

  2. Aims for today • To identify ways of financing a business from Internal & external sources. • To be able to recommend and justify the most appropriate source of finance to fund the growth of different businesses. To understand how to finance a business from Internal & external sources

  3. To understand how to finance a business from Internal & external sources

  4. Growing a business To understand how to finance a business from Internal & external sources

  5. Why might a firm want to grow larger? • Make a list or mind map of the reasons why a firm may want to grow larger. To understand how to finance a business from Internal & external sources

  6. Why do firms want to grow? To understand how to finance a business from Internal & external sources

  7. How can firms grow? The type of integration that firms use will depend on their situation. There are 3 ways it can be done: Internal Expansion – Expand by opening more outlets or employing more staff Mergers – Two businesses joining together to form a new or larger company Takeovers – Where one business buys at least 15% of another business to control it To understand how to finance a business from Internal & external sources

  8. Financing Growth Getting bigger requires investment. This can come from 2 main sources: To understand how to finance a business from Internal & external sources

  9. Sources of finance Internal External • Personal savings • Retained profit • Working capital • Sale of assets • Ordinary shares • Debentures(secured loans) & other loans • Overdrafts • Hire purchase • Trade Credit • Grants • Venture capital To understand how to finance a business from Internal & external sources

  10. Task 1: In pairs C grade: Summarise the Internal and external finance options that a business may have. B grade: Explain the advantages and disadvantages of each method. A grade: Recommend and justify the most suitable method for a small bakery, a LTD and a franchise. To understand how to finance a business from Internal & external sources

  11. Internal Sources of finance To understand how to finance a business from Internal & external sources

  12. 1. Retained profit When a business makes a profit and keeps it rather than spending it, it is called: RETAINED PROFIT The retained profit is available to use within the business, for developing the business or for a ‘rainy day’. To understand how to finance a business from Internal & external sources

  13. 2. Selling assets When a business sells off fixed and current assets which it no longer needs in order to raise finance for new projects. Fixed assets -buildings, land & equipment. Current assets - cash, stock & money owed. To understand how to finance a business from Internal & external sources

  14. 3. Owners Capital or savings When the owner uses his or her own savings to invest in the business. Usually a sole trader will part finance a new business with their own savings. To understand how to finance a business from Internal & external sources

  15. External Sources of finance To understand how to finance a business from Internal & external sources

  16. 1. Share capital - The monetary value of a company - Shareholders invest in a company (they have part ownership of it). An entrepreneur may use their personal savings (e.g. £5,000) as their share and they get others to invest as well. Only Public Limited Companies (PLC’s) can sell shares on the stock market. To understand how to finance a business from Internal & external sources

  17. 2. Venture Capitalists A person or company who buys shares in a business that they hope will grow fast. In the long term, they will sell the shares at a profit and often reinvest in other companies. To understand how to finance a business from Internal & external sources

  18. 3. Loans An amount of money is borrowed from the bank and then repaid with interest over a set period of time. The loan period can range from 1 year to 10 years. Look for the APR amount – the higher the APR the more interest is paid. To understand how to finance a business from Internal & external sources

  19. 4. Grants • Some businesses may get grants to help them start up (especially small businesses). • Organisation such as the Princes Trust give business start up grants to young people up to the age of 30. • Grants are also available from the government and the European Union. • Grants DO NOT have to be repaid To understand how to finance a business from Internal & external sources

  20. 5. Bank overdrafts • An overdraft facility is where you can use more money than you actually have in an account. An overdraft of £2,000 would let you go £2000 ‘in the red’ which may help a business in the short term. • Personal overdrafts tend to be between £100-£1000. To understand how to finance a business from Internal & external sources

  21. 6. Trade credit • TRADE CREDIT is when a supplier allows you a period of time (such as 30 days) to pay for goods and services. • However, your customers may also expect TRADE CREDIT so the advantages of this can be cancelled out! To understand how to finance a business from Internal & external sources

  22. 7. Factoring Is where a business is able to receive cash immediately for the invoices it has issued from a FACTOR such as a bank (instead of waiting the typical 30 days to be paid) A FACTOR is a financial service company like a bank and they charge a fee for this service. To understand how to finance a business from Internal & external sources

  23. Page 8 Mini book To understand how to finance a business from Internal & external sources

  24. Task 2: Role play You are a small business advice officer in a bank. Your client, Sam runs a successful mobile hairdressing business which he hopes to expand nationally within the next 3 years. Explain the advantages & disadvantages of different types of finance for Sam’s business and make some recommendations to him. Ext: Explain issues with the availability of finance (pg82) and then select the most suitable source for his firm. What issues does he need to consider when using the chosen method of finance? To understand how to finance a business from Internal & external sources

  25. Task 3: Finance matching activity A sum of money that has to be repaid with interest over a certain period. Retained profit Money that does not have to be repaid. Often from the Government or EU Leasing Money that a person has kept aside Share Renting of premises or equipment Short term finance Money that is borrowed or invested for more than 1 year Long term finance Profit that is kept and usually reinvested in the business Personal savings The owners of a company Grants Money that the business has to repay quickly like an overdraft Loans Where a business is able to receive cash in advance for the invoices it has issued. Shareholders Factoring Part ownership in a business

  26. Task 3: Finance matching activity A sum of money that has to be repaid with interest over a certain period. Retained profit Money that does not have to be repaid. Often from the Government or EU Leasing Money that a person has kept aside Share Renting of premises or equipment Short term finance Money that is borrowed or invested for more than 1 year Long term finance Profit that is kept and usually reinvested in the business Personal savings The owners of a company Grants Money that the business has to repay quickly like an overdraft Loans Where a business is able to receive cash in advance for the invoices it has issued. Shareholders Factoring Part ownership in a business

  27. Solutions Profit that is kept and usually reinvested in the business Retained profit Renting of premises or equipment Leasing Part ownership in a business Share Money that the business has to repay quickly like an overdraft Short term finance Money that is borrowed or invested for more than 1 year Long term finance Money that a person has kept aside Personal savings Money that does not have to be repaid. Often from the Government or EU Grants A sum of money that has to be repaid with interest over a certain period. Loans Factoring Where a business is able to receive cash in advance for the invoices it has issued. The owners of a company To understand how to finance a business from Internal & external sources Shareholders

  28. Task • Complete Worksheet 42 Financing growth To understand how to finance a business from Internal & external sources

  29. Plenary: Finance Bingo Draw a 9 box grid Choose 9 keywords from orange box and write them in. Long term Short Term Overdraft Factoring Loan Mortgage Leasing Share Dividend Savings Retained profit Collateral Venture capitalist Trade Credit Shareholder Share Capital To understand how to finance a business from Internal & external sources

  30. Give us a clue!– Identify theLong term Finance keywords Dividend Grants Venture Capitalists Mortgage Collateral Share capital Shareholders To understand how to finance a business from Internal & external sources

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