A2 Objectives and Strategy - Unit 6 Financing Growth Picture sourced from

Reasons for Growth  Growth is a natural development for a business  Provides benefits and opportunities and allows economies of scale to be achieved.  Large and dynamic companies are more likely to succeed  Growth through diversification spreads risk  If not managed correctly growth can be risky particularly if not financially planned

Sources of Finance Finance is essential for growth to take place Internal Sources (from within the business)  Retained profit  Controlling working capital  Sale and leaseback of assets  Sale of assets Pictures sourced from and

External Sources of finance  Short term- Trade credit, Debt Factoring, Bank Overdraft, Hire Purchase, Leasing  Long term - Share Capital, Bank Loan, Debentures, Venture Capital, Grants Pictures sourced from and

Type of business - sole trader, partnership, Ltd., or Plc. The stage of business development - new or established determines the difficulty. Success and financial strength of the business The state of the economy and the stage of the business cycle - Boom, recession? The cost of finance - interest, cost of advertising and admin. When issuing shares. Use of funds - capital or revenue expenditure? Timing of the finance - short, medium or long term need? Attitude of Shareholders - do they want immediate return (short term) Level of risk, effect on balance sheet and ratios - Gearing and interest rates Loss of control - share issue Factors determining the most appropriate source of finance

Student Activity  Students must match the most suitable source of finance to each scenario on the worksheet  Consider all of the factors discussed when making decisions

Answers 1. Retained profit 2. Debenture 3. Ordinary shares 4. Trade credit 5. Bank loan 6. Venture capital 7. Government grant 8. Debt factoring 9. Leasing 10. Hire Purchase 11. Bank Overdraft 12. Sale and leaseback 13. Controlling working capital

Cash flow and Overtrading  Most common financial problem during growth  Cash flow forecasts are essential to plan the timing of future inflows and outflows and to ensure that suitable working capital is available. Picture sourced from Must forecast additional sales and costs growth will bring

Overtrading  When a business fails to obtain the appropriate finance to fund its growth and as a result experiences liquidity problems from growing too fast.  Growth - purchase of new fixed assets  Liquidity problems - not enough cash to pay short term debts may lead to liquidation (working capital problems)  Often a result of unplanned growth  Short term cash used to purchase fixed assets for growth  Need careful budgeting and planning to avoid