Role of finance for businesses: capital expenditure & revenue expenditure

All businesses need finance. There are a number of funding sources used by organizations.

Why business needs finance

Finance refers to sources of money for a business. Firms need finance to:

• Start up a business, eg pay for premises, new equipment and advertising.
• Run the business, eg having enough cash to pay staff wages and suppliers on time.
• Expand the business, eg having funds to pay for a new branch in a different city or country.

New businesses find it difficult to raise finance because they usually have just a few customers and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money.

Difference between capital expenditure and revenue expenditure

Capital transactions are those that affect the organization in the long term, as well as in the current period. Capital expenditure is expenditure on non-current assets, and capital receipts would result from the disposal of those assets. Other transactions that are regarded as capital transactions are the obtaining of and repayment of non-current finance. Capital transactions initially affect the figures in the statement of financial position. Of course, non-current assets are used up over a number of years, and so eventually they will be consumed. We account for this by including depreciation in the income statement.

Capital expenditure

• Expenditure on the acquisition of non-current assets required for the use in the business, not for resale
• Expenditure on existing non-current assets aimed at increasing their earning capacity
• Capital expenditure is long-term in nature as the business intends to receive benefits of the expenditure over a long period of time

Revenue transactions are those that affect the organisation in the current period. Revenue expenditure is expenditure on items that are consumed in the period, for example the running expenses of the organisation, cost of sales and so on. Revenue transactions affect the figures in the income statement.

Revenue Expenditure

• Expenditure on current assets
• Expenditure relating to running the business e.g. electricity costs
• Expenditure on maintaining non-current assets e.g. repairs
• Revenue expenditure relates to the current accounting period and is used to generate revenue in the business

Task 1: In each of the following cases indicate whether the item is capital or revenue expenditure

a) Payment of wages $1000

b) Purchase of premises $10000

c) Extension of premises $5000

d) Annual rental of equipment $4000

e) Wages of own workers involved in building above extension $990

f) Company materials used in building extension $1000

g) Light and heating used in new extension during year $150

h) Depreciation of equipment $1000

i) Long-term lease on new premises $4500

j) Annual rates not covered in lease $1250

The following internal sources of finance: personal funds, retained profits & sale of assets

Internal sources of finance

The main internal sources of finance for a start-up are as follows:

1. Personal sources These are the most important sources of finance for a start-up.

a) Savings and other "nest-eggs" (unincorporated entity). An entrepreneur will often invest personal cash balances into a start-up. This is a cheap form of finance and it is readily available. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur – e.g. redundancy or an inheritance. Investing personal savings maximises the control the entrepreneur keeps over the business. It is also a strong signal of commitment to outside investors or providers of finance. Re-mortgaging is the most popular way of raising loan-related capital for a start-up. The way this works is simple. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too.

b) Share capital – invested by the founder (incorporated entity) The founding entrepreneur (/s) may decide to invest in the share capital of a company, founded for the purpose of forming the start-up. This is a common method of financing a start-up. The founder provides all the share capital of the company, retaining 100% control over the business. The advantages of investing in share capital are covered in the section on business structure. The key point to note here is that the entrepreneur may be using a variety of personal sources to invest in the shares. Once the investment has been made, it is the company that owns the money provided. The shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold.

2. Retained profits This is the cash that is generated by the business when it trades profitably – another important source of finance for any business, large or small. Note that retained profits can generate cash the moment trading has begun. For example, a start-up sells the first batch of stock for £5,000 cash which it had bought for £2,000. That means that retained profits are £3,000 which can be used to finance further expansion or to pay for other trading costs and expenses.

3. Sale of Assets

Sale of assets - this will depend on the value of the assets, but the firm may either be able to sell surplus assets (if they have any) or perhaps sell existing assets that they use to a specialist leasing company and then lease them back. This will give them access to some capital, though they are then burdened with annual leasing costs. The sale of a firm's assets is most profitable for a mature firm. A mature firm can sell older and unneeded assets. If the assets have been fully depreciated and have little or no book value, then you will have a gain from the sale. Even though it is not a profit in the true sense of the word, it will add to your bottom line. Sale and Leaseback arrangements involve the sale of assets to an investment institution, such as an insurance company or pension fund, and immediate renting back of the asset by the original owner. These arrangements usually relate to property but in some exceptional cases can cover large items of plant and machinery

The following external sources of finance: share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capitalists & business angels

External sources

Loan capital

This can take several forms, but the most common are a bank loan or bank overdraft.

a) A bank loan provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments. The bank will usually require that the start-up provide some security for the loan, although this security normally comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets and are generally at a lower rate of interest that a bank overdraft. However, they don't provide much flexibility.

Loans – short-term finance

Short-term loans are usually employed for more specific purposes than an overdraft. Their main features include the following:

• Guaranteed availability subject to compliance with terms and conditions for a fixed period up to one year
• A specific purpose e.g. purchase of stock or an advance in anticipation of some specific future inflow.
• A fixed interest rate if it is for a very short period (3 to 6 months) but more commonly a floating rate linked to the bank’s base or overdraft rate
• It may be drawn down in one lump sum or in fixed minimum amounts
• Repayment may be in one lump sum or in fixed minimum amounts at fixed times.

Advantages of short-term loans

1. They cannot be withdrawn for reasons outside of the control of the business
2. They are usually at the bank’s best rate for the particular credit category of customer and, if at a fixed rate, will give an advantage in times of rising interest rates
3. They provide a degree of certainty both in terms of availability and repayment requirements
4. They may have some degree of flexibility in terms of drawdown and may be specifically linked in time and amount of drawdown to a specific transaction.

Disadvantages of short-term loans

1. If required to be drawn in fixed amounts or a lump sum, they will force the business to draw down funds which are not specifically needed at that time.
2. Fixed repayment amounts and times will mean that, even though funds are available, the loan will have to continue to its agreed termination date.
3. If at a fixed interest rate, they will be disadvantageous in times of falling interest rates.

Bank Overdrafts

A bank overdraft is a more short-term kind of finance which is also widely used by start-ups and small businesses. An overdraft is really a loan facility – the bank lets the business "owe it money" when the bank balance goes below zero, in return for charging a high rate of interest. As a result, an overdraft is a flexible source of finance, in the sense that it is only used when needed. Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time).

Advantages of overdrafts

1. It is relatively easy to negotiate because it is repayable on demand and the bank can reduce its exposure quickly
2. It is a simple system to set up and operate
3. The interest rate is usually the best available. Also, because the interest is calculated daily, it minimizes the interest charges and no excess funds are paid for.
4. Its flexibility is a major advantage. It is linked directly to the payment pattern of the business and reflects its daily cash requirements.
5. Because it is generally renewable, it is effectively a permanent or revolving source of finance

Disadvantages of overdrafts

1. It is repayable on demand. The bank may say that it rarely exercises the option to demand repayment, but there are three circumstances in which it could exercise the option:
2. When the bank itself is under pressure and needs to reduce its commitments
3. When the regulatory authorities decide that credit should be restricted, overdraft lending is usually the first to go
4. When the financial condition of the business deteriorates
5. If interest rates rise, the overdraft rate will rise more quickly than some other forms of finance

Task 2: Which of the following statements about overdrafts is incorrect?

(a) There is usually a condition that it should run into credit for a minimum period each year

(b) It is one of the cheapest forms of finance available to a business

(c) The bank will only demand repayment when the regulatory authorities decide that credit should be restricted

(d) Because it is generally renewable, it is effectively a permanent or revolving source of finance

A business would opt for an overdraft to cover temporary shortfalls in cash flow and to finance working capital provided that its cash flow budget shows that it will be able to liquidate the overdraft within the period of time set by the bank, typically a year. Otherwise it would opt for a short-term loan. However, for most businesses it is what the bank is prepared to offer and not what the business wants that is the deciding factor.

Trade Credit

Trade credit means many things but the simplest definition is an arrangement to buy goods and/or services on account without making immediate cash or cheque payments.

Trade credit is a helpful tool for growing businesses, when favourable terms are agreed with a business’s supplier. This arrangement effectively puts less pressure on cashflow that immediate payment would make. This type of finance is helpful in reducing and managing the capital requirements of a business.

When a business enters into a trade credit arrangement with its suppliers, a limit is usually set, commonly called credit terms. For example, you could set cash, cheque or bank transfer payments to be made within 15 days from the date of the invoice, hopefully allowing you to still qualify for any early payment discount. If payments are not made within the terms, all outstanding amounts are required to be settled within the normal time period set from the date of purchase.

COSTS

There are three main indirect costs of trade credit as there is no direct cost involved:

• loss of early payment discount
• spoiling your relationship with your supplier if you do not adhere to the agreed trade credit terms
• working capital cost if the net effect of receiving and providing trade credit puts your business in a negative working capital situation.

The loss of the early discount can be taken into account when negotiating your trade credit terms. However, spoiling your relationship with your supplier can be more detrimental to your business and in extreme circumstances could tip a business into receivership. Therefore, any deviation from an agreement must be discussed with your suppliers before it becomes a problem.

TIMEFRAME

It is not unheard of for trade credit terms to be agreed on the phone and confirmed in writing later. This will depend on your relationship with your suppliers and your history with them.

ADVANTAGES

• an agreement can be very easy to organise
• an agreement is relatively easy to maintain, as long as the conditions are met
• can be used by most business, for supplies of goods or services
• businesses can be protected by late payment legislation
• a potentially low-cost form of working capital finance.

DISADVANTAGES

• possible loss of early payment discount
• failure to comply with the conditions could lead to the loss of a supplier
• provision of cashflow advantage rather than additional finance
• your own customers may ask for favourable trade credit terms and therefore cut into any cashflow advantage
• cannot be used by all businesses, such as online retailers

Source - https://www.accaglobal.com/ie/en/business-finance/types-finance/trade-credit.html

Debt Factoring

Factoring is the sale of debts to a third party (the factor) at a discount, in return for prompt cash. A factoring service may be with recourse, in which case the supplier takes the risk of the debt not being paid or without recourse when the factor takes the risk.

This relieves the business of the need to chase and collect the debts and, at the same time, allows it to obtain cash flow from the debtors in advance of the due date of the debts.

The factoring company becomes the legal owner of the debts and pays a proportion of their value up front (usually up to 80%). The balance is paid over a period of time.

The responsibilities of the factoring company include:

• The factor provides a sales ledger accounting service from the time of issue of invoice
• The factor assumes responsibility for collection of debts
• The factor provides up-to-date credit information on customers
• The factor will set credit limits based on the level of business with, and the credit standing of, each debtor. Some debtors may, as a result, be omitted from the factoring arrangement

For this work, the factoring company makes two charges to the business:

a) A fee for sales ledger accounting and other services

b) An interest charge on amounts advanced against debtors

Advantages of factoring

1. For a small growing business it provides better credit control than it might be able to afford. Management becomes free to concentrate on business development.
2. It ensures faster and more predictable cash flows
3. It is an adaptable and flexible form of finance which is closely aligned to the daily operations of the business and allows it to deal with unexpected cash requirements or to take advantage of discount and other opportunities that arise from time to time
4. It avoids the disadvantages associated with the conditions and restrictions which apply to other forms of finance

Disadvantages of factoring

1. The interest charge usually costs more than other forms of short-term debt
2. The administration fee can be quite high depending on the number of debtors, the volume of business and the complexity of the accounts. If it is non-recourse, then the charge for bad debt cover will be based on these factors as well as the credit standing of the debtors. In addition, it is often found that the services of the factor are duplicated in the business and in such circumstances there is a double expense
3. Where there is a dispute between the business and a customer, having a factor in the middle leads to confused three-way communication which can hinder collection of the debt. Debtors also complain about problems with the factor arising from disputes about goods returned, credit notes and payments made to the business’ representative. There is also the risk of debtors using this potential for confusion to deliberately delay payment
4. The image of factoring in the eyes of some is one of last resort and this perception may adversely affect the standing of a business factoring its debts.

Medium-Term Debt

Medium-term debt usually has a 2 to 5 or at most 7 year repayment. Under the matching principle, it should be used to finance assets with a corresponding life-span. Such assets would include most types of plant and machinery, motor vehicles, office furniture and fixtures and fittings. Medium term debt is appropriate for financing part of the permanent portion of working capital. Its function in that context might be to fund part of working capital while equity is built up to take over the funding.

Medium-term bank loan

A term loan is a fixed contract loan which commits the borrower and lender for the full period of the contract subject to compliance with all the loan’s terms and conditions. The main features are:

• It is a fixed contract for a specified period of time
• It has an agreed schedule of repayments which are usually but not necessarily spread evenly over its life.
• It is usually at a variable rate of interest which moves in line with general movements in interest rates. The actual rate will depend on the credit rating of the business, the period of the loan, and the repayment schedule
• It sometimes can have a fixed rate
• It usually has to be drawn down in fixed amounts and there is sometimes a commitment fee on the un-drawn portion of it
• There is sometimes a negotiation fee to cover its set-up costs
• It is usually subject to a detailed loan agreement which will contain the terms and conditions, covenants and events of default.
• It can be negotiated in isolation but usually forms part of a financing package for the business

Advantages of medium-term loans

The business is assured by contract of both the term and amount of the loan. The financial risk is, therefore, less than on an overdraft

1. It allows the business to make a more confident estimate of future cash flows
2. It can be geared both in terms of drawdown and repayment to fit the cash flow profile of the business
3. If the rate is variable, it gives advantages over fixed rates in times of falling interest rates. Similarly, if the rate is fixed, it gives advantages over variable rates in times of rising interest rates.
4. It can enable an overdraft to be more appropriately funded, where there is difficulty complying with its requirements
5. It can provide stability to the business’ balance sheet in a way that short-term debt cannot do.

Disadvantages of medium-term loans

1. If the agreed terms are subsequently fund to be unsuitable, there is usually a penalty for changing or cancelling the contract
2. If there is uncertainty about the precise drawdown needs of the business, the commitment fee can make it very expensive
3. If it has fixed minimum draw-downs and repayments, it may force utilisation to a level not required and a build-up of cash pending repayment.

Task 3: Which of the following statements about a medium-term loan is incorrect?

a) It is a fixed contract for a specified period of time

b) It carries a fixed rate of interest

c) It can be geared both in terms of drawdown and repayment to fit the cash flow profile of the business

d) If the agreed terms are subsequently found to be unsuitable, there is usually a penalty for changing or cancelling the contract.

Leasing

Leasing is a form of rental and is therefore a method of financing the use rather than the purchase of an asset. This is what distinguishes it from other forms of asset financing, most of which end up with ownership of the asset by the business. It differs from hiring primarily in that the equipment being leased is usually selected by the business for purchase by the leasing company.

Advantages of leasing

1. Instead of paying all of the cost of an asset upfront, the lessee pays the total cost over a number of periods, which reduces the drag on its cash flows in a particular period. Payments for the use of asset are due exactly when the asset is generating cash flows which makes it more manageable.
2. Leasing adequately guards the lessee against the risk of obsolescence, i.e. the risk that assets may lose their utility due to rapid changes in technology. A lessee can adjust the term of the lease such that it is no longer burdened with the asset when it is no longer efficient to operate.
3. Since the lessor owns the asset during and after the lease term, the higher security normally results in lower cost of lease for the lessee than the financing cost it would pay in case of purchase of the same asset.
4. Leasing offers flexibility, for example a lessee might need an asset for six months and the asset’s useful life might be 5 years. In such a situation purchasing the asset might not be a practical option, while leasing may offer a term corresponding to the lessee’s requirement.

Disadvantages of leasing

1. Leasing has a rate of interest embedded in the required lease rentals. For example, Company ABC has an option to purchase the car at invoice price of $50,000 or lease it out against 6 annual payments or $12,000. In short, the lease rentals do not only include contribution towards the use of asset, they also include a finance cost.
2. In a leasing arrangement, the lessee does not own the asset during and after the lease term which means that he can’t sell or transfer or pledge it. However, some leases might include a clause entitling the lessee to purchase the asset at the end of the lease term against a payment.
3. The lessee is liable to bear the maintenance cost of the leased asset during the term of the lease even if he does not own it in the end.

Source - http://accountingexplained.com/financial/leases/advantages-and-disadvantages

Long-term debt

Long term in this context is taken to mean 5-7 years plus. This may appear to be taking a rather short perspective as most general references to long term usually mean more than 10 years. However, in recent years, planning perspectives have got shorter and investors and investment analysts are taking increasingly shorter-term views. Another feature of modern financial markets is that all forms of debt are being increasingly traded so that the effective life in the originating business of many long-term loans is much less than the stated maturity of the loan.

Long-term debt has an important role in providing stability to the capital structure of the business. The financial risk associated with long-term debt is lower than in all other forms of debt and, particularly is it has very long maturity, is the closest to equity.

Long-term loans

These are exactly the same as the term loans except that the maturity is longer and could be up to 20 years. In such circumstances the loan will normally be secured either by individual assets or by all the assets of the business under a fixed and floating charge debenture.

Mortgage loans

These are similar to term loans but are specifically secured on individual assets. They are used mainly in financing the purchase of land and buildings. The specific asset being purchased would be mortgaged to the lender as security for the loan. Usually up to 80% or 90% of the value of the property would be advanced by way of mortgage loan. They have all the advantages of term loans with the added one of tying up just one asset as security and thus keeping all the other assets free for use as security for other loans.

Debentures

A debenture is a document which provides evidence of the obligation to service and repay debt. The term debenture is used generally to describe long-term secured debt.

Main features

• Descriptive title: $2,000,000 Smiley sweets 10% debenture stock 2012-2016. This indicates a total amount issued of $2,000,000; a fixed interest rate of 10% gross; and a variable redemption date between 2012 and 2016
• A debenture acknowledges a debt
• It is in the form of certificate issued under the seal of the company (called Debenture Deed). It usually shows the amount & date of repayment of the loan.
• It has a rate of interest & date of interest payment.
• Debentures can be secured against the assets of the company or may be unsecured.
• Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company’s general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures.
• The interest paid to them is a charge against profit in the company’s financial statements.
• Half-yearly interest payments in arrears
• Secured by a fixed and/or a floating charge on the assets of the business. A fixed charge is one which secures a loan on specific assets, while a floating charge secures a loan on all the assets of the business or on groups of assets such as stocks and debtors. A fixed charge takes precedence over a floating charge in relation to the specific assets over which the fixed charge has been taken.

Advantages of debentures

1. They can have a maturity of over 10 years which provides a long-term stable source of finance
2. If they have performed well and have given reasonable returns to their holders, they can generally be redeemed through a new issue thus not affecting the cash flow of the business
3. If well-secured, the interest rate is generally lower than other forms of long-term debt.
4. The interest paid is usually tax-deductible

Disadvantages of debentures

1. The locking in of security to the public issue like this is very restrictive in terms of the security that can be given to other lenders. It leaves little capacity to undertake other major projects which would require secured debt to fund them. However, it is possible to seek permission from the trustees for such undertakings
2. Because it is a public issue, its monitoring and control will be more rigorous than it might be on a term loan with a bank
3. Similarly, if anything goes wrong, it becomes public knowledge and this could be damaging to the reputation of the business.

Task 4: Which of the following statements about debentures are correct?

a) There is a fixed redemption date

b) They are secured by a charge on the assets of the business

c) The interest is tax deductible

d) Because it is a public issue, its monitoring and control will be more rigorous than it might be on a term loan with a bank

Share capital – outside investors

For, a start-up, the main source of outside (external) investor in the share capital of a company is friends and family of the entrepreneur. Opinions differ on whether friends and family should be encouraged to invest in a start-up company. They may be prepared to invest substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business. Both of these are positives for the entrepreneur. However, there are pitfalls. Almost inevitably, tensions develop with family and friends as fellow shareholders.

The main advantages of equity finance are:

• The funding is committed to your business and your intended projects. Investors only realize their investment if the business is doing well, eg through stock market flotation or a sale to new investors.
• You will not have to keep up with costs of servicing bank loans or debt finance, allowing you to use the capital for business activities.
• Outside investors expect the business to deliver value, helping you explore and execute growth ideas.
• Like you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.
• Investors are often prepared to provide follow-up funding as the business grows.

The principal disadvantages of equity finance are:

• Raising equity finance is demanding, costly and time consuming, and may take management focus away from the core business activities.
• Potential investors will seek comprehensive background information on you and your business. They will look carefully at past results and forecasts and will probe the management team. Many businesses find this process useful, regardless of whether or not any fundraising is successful.
• Depending on the investor, you will lose a certain amount of your power to make management decisions.
• You will have to invest management time to provide regular information for the investor to monitor.
• There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments.

Source - https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-equity-finance

Tesla's Debt-to-equity ratio 2009 to 2019

Business Angels

Business angels are the other main kind of external investor in a start-up company. Business angels are professional investors who typically invest £10k - £750k. They prefer to invest in businesses with high growth prospects. Angels tend to have made their money by setting up and selling their own business – in other words they have proven entrepreneurial expertise. In addition to their money, Angels often make their own skills, experience and contacts available to the company. Getting the backing of an Angel can be a significant advantage to a start-up, although the entrepreneur needs to accept a loss of control over the business.

Advantages of business angel financing

The advantages of BA funding for your business can include:

• BAs are free to make investment decisions quickly
• no need for collateral - i.e. personal assets
• access to your investor's sector knowledge and contacts, mentoring or management skills
• better discipline due to outside scrutiny
• no repayments or interest

Disadvantages of business angel financing

The disadvantages of BA funding for your business can include:

• not suitable for investments below £10,000 or more than £500,000
• takes longer to find a suitable BA investor
• giving up a share of your business
• less structural support available from a BA than from an investing company

Venture Capital

You will also see Venture Capital mentioned as a source of finance for start-ups. You need to be careful here. Venture capital is a specific kind of share investment that is made by funds managed by professional investors. Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over £1m, often much more). They prefer to invest in businesses which have established themselves. Another term you may here is "private equity" – this is just another term for venture capital. A start-up is much more likely to receive investment from a business angel than a venture capitalist.

Task 5: Young Chinese venture capitalist eyes powerful Silicon Valley fund

- http://www.scmp.com/business/money/markets-investing/article/2064391/young-chinese-venture-capitalist-eyes-powerful

Grants

Grants are non-repayable funds disbursed by one party (grant makers), often a government department, corporation, foundation or trust, to a recipient, often (but not always) a non-profit entity, educational institution, business or an individual. In order to receive a grant, some form of "Grant Writing" often referred to as either a proposal or an application is usually required.

Most grants are made to fund a specific project and require some level of compliance and reporting. The grant writing process involves an applicant submitting a proposal (or submission) to a potential funder, either on the applicant's own initiative or in response to a Request for Proposal from the funder. Other grants can be given to individuals, such as victims of natural disasters or individuals who seek to open a small business. Sometimes grant makers require grant seekers to have some form of tax-exempt status, be a registered nonprofit organization or a local government.

Source - https://en.wikipedia.org/wiki/Grant_(money)

Subsidies

A subsidy is a form of financial or in kind support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.^[1] Although commonly extended from Government, the term subsidy can relate to any type of support - for example from NGOs or implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans), indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates).

Source - https://en.wikipedia.org/wiki/Subsidy

Task 6: You are given a variety of different business scenarios. You must decide what type of finance the business in question should go for and why. There could of course be more than one appropriate source of finance - you could decide on a combination but again, ensure you explain why you have decided on this route.

The Cases:

1. A medium sized engineering firm with an annual turnover of £2.5 million has decided to install a new piece of machinery to help improve its productivity. The equipment needs to be housed in a new building to be constructed on the site. The forecast cost of the building is £150,000 and the equipment £400,000.

2. An individual has been made redundant after 20 years with a major organisation and has received a lump sum redundancy payment of £70,000. The individual is planning to set up a bookmakers and has identified a suitable premises valued at £180,000 near to a major town centre shopping precinct.

3. A major plc is planning on moving a major part of its production facility to Cornwall. It has identified a site near a former chalk pit that is now not used. The estimated cost of the facility is £4.5 million.

4. A local Do It Yourself (DIY) store has experienced problems with acquiring goods from its suppliers because it has been an erratic payer of its bills with them. The reasons it has experienced these problems is that it has contracts to supply building materials to a number of local firms all of whom only pay the bills for their orders every 3 months.

5. A rugby club is anticipating turning fully professional after the team secured promotion to the Zurich premiership. To take its place in the league, the League committee has insisted that it also improves facilities at the ground. It has been estimated that the cost of these two measures will be £550,000.

6. A major UK plc is planning the takeover of a rival business. The move has been investigated by the Competition Commission and permission has been granted. The current share price of the rival firm is 260p and the firm has made an offer of 340p per share. The current market capitalization of the target firm is £4.5 billion.

7. A small partnership business has developed a new piece of software that would massively improve the efficiency of personnel management processes at large sized business organizations of all kinds. The software has massive potential but at present is not commercially viable because of lack of funds. The partners are contemplating their next move.

8. A small newsagent in a rural village centre has decided to purchase a new freezer cabinet and oven/roasting unit to provide hot meals for village workers and for students at the secondary school which serves the surrounding area which is located half a mile from the village centre. The cost of the units is £3,500.

9. A large charity organisation has followed a consultancy programme on streamlining its records. The consultants have suggested investing into a software package that will provide a sophisticated database programme that will do all the things that the charity will require for the next 10 years. The cost of the software package is £65,000.

10. Following the construction of a new housing estate on the outskirts of a major city, a group of 10 ambitious young professionals have decided to try to exploit the type of resident moving into the area by setting up a gym and health centre on earmarked land within the development. The building has been bought by the group for £800,000 but needs to be furnished and fitted out for the purpose intended. The cost of the bar, restaurant and gym facilities is estimated at £95,000 but the other major cost is the swimming pool, spa and sauna area. This could be utilised on a separate project to the fitness centre as the local council want to secure use for local school children and elderly residents - this being part of the purchase arrangements associated with the new housing development.

Sources of Finance and Tesla

Task 7: Using the following sources, what are the main issues concerning Tesla's raising of capital?

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