selecting financial strategies a2 business studies
TRANSCRIPT
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…
Definition:
• The long term financial plan to achieve the financial objectives.
Sources of Finance To Fund Strategic Development
Retained Profits
Equity Share Capital
Debt (Loans)
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.
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
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.
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
Advantages & Disadvantages
• In groups brainstorm the advantages and disadvantages of share capital and debt as sources of finance.
Share Capital
A
B
C
DDeb
t
A
B
C
D
Financial Strategies
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.
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!
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
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.
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)