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)