Selecting Financial Strategies.
Objectives:
Understand the meaning and significance of specific financial strategies
Understand how these strategies interrelate with other functional areas
Assess the suitability of financial strategies, in a given context.
Sources of finance.
Businesses need finance for different purposes and time periods (short, medium and long-term).
For the capital expenditure (investment in fixed assets, long-term projects) we have been looking it is usually long-term finance that is most appropriate, given the time-scale involved.
A method of raising funds is through retaining profit, but if this is insufficient then raising equity or taking on debt are other options.
Define and explain the key features (information, benefits, limitations) of each method here: (page 33)
Equity Share Capital
Debt
Definition: money from shares
It exists for an unlimited term
Carries a voting right- for example at the AGMs (Annual General Meetings)
Dividends payable dependent upon company performance
Dividends paid after tax and therefore do not affects tax liability
Ordinary shareholders are towards the bottom of the list when payments are being made following the closure of a company
Not secured against assets of the business
Finance obtained from Banks and other financial is called a loan or debt capital. The loan is usually secured against an asset
Exists for a fixed term e.g a 10 year loan
Does not carry a voting right
Interest payable regardless of company performance and profits
Interest paid before tax and therefore reduces tax liability
Lenders are towards the top of the list when payments are being made following the closure of a company
Will usually be secured against an asset

"Real-world" examples of raising finance from these sources are....
HBOS- the financial group that owns Halifax and Bank of Scotland and it invited its existing share holders to purchase new shares in order to raise £4 billion. Implementing profit centres:
A profit centre is....
A section of a business for which costs and revenues and therefore profit can be identified.

They are useful when setting and monitoirng financial objectives because....
They help achieve the financial objectives but also makes it easier to monitor financial performance, allows for greater delegation of responsibility and