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Selecting Financial Strategies

Selecting Financial Strategies. A2 Business Studies. Aims and Objectives. Aim: Understand firm’s financial strategies Objectives: Define financial strategies Describe sources of finance Analyse financial strategies. Starter. In groups decide upon a definition of a financial strategy…

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Selecting Financial Strategies

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  1. Selecting Financial Strategies A2 Business Studies

  2. Aims and Objectives Aim: • Understand firm’s financial strategies Objectives: • Define financial strategies • Describe sources of finance • Analyse financial strategies

  3. Starter • In groups decide upon a definition of a financial strategy… Definition: • The long term financial plan to achieve the financial objectives.

  4. Sources of Finance To Fund Strategic Development

  5. Equity Share Capital Definition • Raising of capital through sales of shares • Firm decides a max amount of capital it is likely to need in future from sales of shares. • Then decides the percentage of this needed in the short to medium term. • Shares are then issued to raise this amount of capital. • Known as issued share capital.

  6. Equity Share Capital Example • Firm issues 400,000 shares at £1 each • Share capital = £400,000 • If shares are sold for more than their face value this is known as the share premium • Firm issues 400,000 shares at £1 each • Sell for £1.50 each • Share capital = £400,000 • Premium = £200,000

  7. Rights Issue • Existing shareholders are offered right to buy a number of new shares. • Number depends on how may shares already held by the shareholder. • Offered at a price below market value.

  8. Debt (Loans) • Banks or financial institutions • Not that risky to lender as secured against assets • Riskier for firm as interest payments may affect performance • Firm relying on debt capital is highly geared

  9. Advantages & Disadvantages • In groups brainstorm the advantages and disadvantages of share capital and debt as sources of finance.

  10. Financial Strategies

  11. Implementing Profit Centres Profit Centres • Identifiable parts of the business for which costs, revenues and profits can be attributed. • Subsection of firms get responsibility for the above. • May be identified by product, department or location.

  12. Implementing Profit Centres Discuss the benefits of using profit centres... Helps: • Achieve financial objectives • Monitor performance • Delegate responsibility • Motivate managers • Only appropriate if the subsection can manage it’s costs and revenues!

  13. Cost Minimisation • Allows a business to compete on price • Business with high market share can push down their costs from suppliers and therefore sell at low prices. • J.I.T. • Could put pressure on production functions

  14. Allocating Capital Expenditure Definition: • Purchase of long term assets. I.e. machinery • Usually a ‘sign off chain’ involved • Important to maintain/increase shareholder wealth • Important money spent wisely and benefits are closely monitored over time.

  15. Question (6 Marks) • If Primark was to set an objective of 20% growth over the next five years, would you recommend a strategy of cost minimisation or capital expenditure? (6 Marks)

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