1. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Chapter 13 Business Finance

2. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Objectives After studying this topic you should be able to:  Identify the main sources of short-term finance  Identify the main sources of long-term finance  Distinguish between the financing sources available to different sizes of organisation  Understand the specific financing options available to hospitality, tourism and events organisations

3. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Short-term Sources of Finance  Bank Overdraft  Term loan  Trade Credit  Deferred Income

4. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Long-term Sources of Finance  Equity  Retained profit  Preference shares  Debt  Term loans  Bonds

5. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Weighted Average Cost of Capital (WACC) The cost of capital is the minimum return that is acceptable to the provider of finance. High Low Cost Of Capital Equity Secured Debt

6. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Example Spiritual Spas has two sources of finance: equity provided by the shareholders and bonds. The cost of equity has been calculated at 14% and the cost of debt has been calculated at 6%. The capital structure of the company means that £750,000 has been provided by equity and £250,000 by bonds. The WACC can be calculated as follows:

7. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Answer Total capital invested is £750,000 + £250,000 = £1,000,000 The equity proportion is £750,000/£1,000,000 = 75% and therefore the debt proportion = 25% Weighted cost of equity = 14% x 0.75 = 10.5% Weighted cost of debt = 6% x 0.25 = 1.5% WACC = 12% Any investment that the company makes will need to earn a return over 12% in order to ensure the company remains successful.

8. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers SME’s and Micro Businesses  Face a funding gap  Inability to raise equity or debt easily  Can utilise government grants and funding

9. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Sector Specific Financing  Short term  Deferred income  Long term  Franchising  Management Contracts (REITS)  Entrepreneurial Activity

10. © 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers Summary  Short-term finance should be used where finance is required for short term projects and for working capital requirements.  The two main types of long term finance are equity and debt.  The relationship between equity and debt is important to ascertain the WACC.  A variety of bespoke financing methods are available in the hospitality, tourism and events sectors.