1. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.1 Financing a business OBJECTIVES You should be able to: Explain the role and nature of the Stock Exchange Identify the main sources of finance available to a business and explain the advantages and disadvantages of each source Outline the ways in which share capital may be issued Discuss the ways in which smaller businesses may seek to raise finance

2. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.2 The major sources of external finance Bank overdraft Ordinary shares Preference shares Total finance Long- term Short- term Loans/ debentures Leases Debt collecting Invoice discounting

3. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.3 The risk/return characteristics of long-term capital Return Risk Loan capital Preference shares Ordinary shares

4. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.4 Capital issues of UK Stock Exchange listed businesses, 1991–2000 Loan capital £m 199 3 1999 199 7 1995 1996199 4 199 2 1998 199 1 0 Ordinary shares Preference shares 200 0 1600 0 1000 0 12000 1400 0 800 0 600 0 400 0 200 0 1800 0 2000 0 2200 0 Source: Copyright © 2001 Crown Copyright material is reproduced with the permission of the Controller of HMSO

5. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.5 Loan covenants Other loans Dividend payments Access to financial statements May deal with such matters as: Liquidity

6. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.6 Finance leases Advantages Cost Flexibility Ease of borrowing Cash flows

7. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.7 Finance leases 1997–2001 6000 7000 5000 4000 3000 1000 2000 8000 0 £m 44 8 9000 9349 7692 6837 6929 6884 1997 1998 199920002001 1000 0 Source: Adapted from information kindly provided by the Finance & Leasing Association (www.fla.org.uk). Copyright © 2001 Finance & Leasing Association

8. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.8 The factoring process Client business Credit customer Factor Goods supplied on credit (1) Customer pays amount owing to factor (4) Factor invoices credit customer (2) Factor pays 80% to client immediately (3) Pays 20% balance to client (less fees) when credit customer pays amount owing (5)

9. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.9 Turnover for invoice discounting and factoring 1997–2001 Invoice discounting Domestic factoring Turnover £000m Year 0 10 40 30 20 50 1997 1998 199920012000 Source: Adapted from information published by the Factors & Discounters Association (www.factors.org.uk). Copyright © 2002 Factors & Discounters Association 70 60

10. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.10 Long-term versus short-term borrowing There are many issues that should be taken into account. These include: Flexibility Refunding risk Matching Interest rates

11. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.11 Short-term and long-term financing requirements Short-term finance Long-term finance Total funds (£) Time Permanent current assets Fluctuating current assets Fixed assets

12. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.12 Major internal sources of finance Total internal finance Tighter credit control Delayed payment to creditors Reduced stock levels Long-termShort-term Retained profits

13. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.13 Providing long-term finance for the small business Business angels Government assistance Venture capital

14. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.14 3i plc investments 1998–2002 1000 800 600 200 400 0 Start-ups Growth capital Management buy-ins Share purchases Recoveries 541 Management buy-outs 2536 213 5 664 501 194 220 0 240 0 200 0 £m 1800 260 0 Source: Adapted and reprinted with the kind permission of 3i Group plc, Copyright © 2002 3i Group

15. © Pearson Education Limited 2003 Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition OHT 12.15 Share issues The most common methods of share issues for cash are as follows: Offers for sale and public issues Private placing Rights issues