Businesses have access to various sources of finance to meet their funding needs. These sources include equity financing, debt financing, loan capital, share capital, and venture capital.
Equity financing involves raising funds by issuing shares and selling ownership interest in the company. While it provides a base for creating debt and loan capacity, it can be a costly source of finance as dividends must be paid to shareholders from the net profit after taxes, interest, and preference dividends.
Debt financing involves borrowing funds from external sources, which can be secured or unsecured. Debt holders are creditors and typically do not have voting rights in the company’s affairs.
Loan capital allows businesses to borrow from banks through loans or overdrafts with fixed or variable interest rates. Collateral may be required, and loans can have different terms, including short-term, medium-term, or long-term.
Share capital is relevant to limited companies that can raise additional capital by issuing shares to private investors or venture capital funds. Venture capitalists are interested in investing in businesses with high growth potential and provide financial backing, expertise, and connections in the business community. However, venture capital financing may lead to a loss of control for the business owner.
Different sources of finance have implications that businesses need to consider. Equity financing allows owners to retain control over the business but involves sharing profits with shareholders and potential conflicts. Debt financing allows control retention, tax-deductible interest payments, and predictable repayment schedules but may require collateral and financial discipline. Venture capital brings business expertise and additional resources but involves a loss of control and potential conflicts.
When evaluating appropriate sources of finance for a business project, the nature, size, business objectives, stage of development, and funding requirements should be considered. Internal sources such as owner’s investment, stock sale, debt collection, and retained earnings can be used, while external sources include bank loans, share issues, mortgages, and trade credit.
Understanding the costs associated with different sources of finance is crucial. The cost of debt includes interest payments, origination fees, and potential collateral or personal guarantees. The cost of equity involves expected returns by shareholders and potential dilution of ownership. The cost of capital represents the overall cost of raising funds through various sources, considering both debt and equity. The weighted average cost of capital (WACC) calculates the average cost of capital based on the proportion of each source of funding.
Financial planning plays a vital role in managing long-term and short-term sources of finance, income, expenses, and cash flow. It helps with fund allocation, budgeting, investment decisions, cash flow improvement, cost control, and meeting financial obligations.
Different decision-makers, such as government, stockholders, suppliers, creditors, and employees, have specific information needs. They require information related to taxation, creditworthiness, investment prospects, financial stability, and other relevant financial data to make informed decisions.
Finance activities significantly impact financial statements. Sales increase revenue and affect net profit, while money collection reduces accounts receivable and increases cash. Issuing shares increases equity and interest payable. Financing decisions influence stock prices and investor decisions. Lenders assess financial statements to determine creditworthiness and repayment capacity. Finance activities impact the balance sheet, income statement, cash flow statement, and financial ratios, providing insights into the company’s financial health and performance.
Finance activities significantly impact financial statements. Sales affect revenue, money collection impacts cash, and issuing shares increases equity. Financing decisions influence stock prices and lender assessments. Finance activities impact the balance sheet, income statement, cash flow statement, and financial ratios, providing insights into a company’s financial health.
Economic activities are divided into three primary sectors: the primary sector involves resource extraction, the secondary/ manufacturing sector transforms raw materials, and the service sector provides intangible services. Unilever, as a PLC, operates in the secondary sector, manufacturing value-added products.
Different legal business structures include sole proprietorships, general partnerships, limited partnerships, and public limited companies (PLCs). Unilever is a PLC, issuing shares publicly. Its objectives encompass sustainability, growth, well-being enhancement, income increase, and environmental impact reduction.
Business resources encompass financial, human, educational, physical, and emotional aspects. Stakeholders, including shareholders, managers, employees, suppliers, customers, partners, and lenders, have specific needs and responsibilities. Accountability is crucial for effective management.
Basic accounting principles include accruals and the equation “Assets = Liabilities + Equity.” PESTEL analysis considers Political, Economic, Social, Technological, Environmental, and Legal factors. Combining PESTEL with SWOT analysis provides a comprehensive overview for strategic planning.
Economies of scale lead to cost reduction as a company grows, influenced by internal factors like technology and automation, as well as external shared resources. Diseconomies of scale result in inefficiencies with growth. Business location is influenced by factors such as cost, accessibility, infrastructure, workforce, regulations, market, and competition.
To evaluate Unilever’s production process, consider transformation and transaction processes, labor turnover’s impact and reasons, alignment of HR and business needs through workforce planning, and suggestions for improving motivation using concepts like Maslow’s Hierarchy and Vroom’s Expectancy.
In summary, finance is crucial for businesses, involving various funding sources. The economy encompasses primary, secondary, and service sectors. Different business structures and stakeholders have distinct roles. Basic accounting principles, PESTEL analysis, and economies of scale impact business strategies. Unilever’s production process can be evaluated through various lenses.
References
Financial statements. (2017). Compare formats of financial statements for different business.
Next Generation Library. (2017). The Objectives and Importance of Financial Planning for an Organization.
Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset. John Wiley & Sons.
Gitman, L. J., & Zutter, C. J. (2018). Principles of managerial finance (14th ed.). Pearson.
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2018). Essentials of corporate finance (11th ed.). McGraw-Hill Education.
Bls.dor.wa.gov. (2017). Types of business structures. http://bls.dor.wa.gov/ownershipstructures.aspx
