Chapter 20 – Financing the

Business
Gowthorpe – Business Accounting and
Finance, 3rd edition

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Learning Outcomes
After reading the chapter and completing the exercises, students
should:

•Understand the key issues involved in financing a business start-

up.

•Know about some of the most important sources of small

business finance.

•Understand the problems and opportunities presented by

business growth, and some of the financing issues related to
growth.

•Know about sources of finance for larger business.

•Know how the UK stock market operates, and the advantages

and disadvantages of operating as a listed company.
Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)
© Catherine Gowthorpe, 2011
 Introduction
This lecture provides a progression
through the different stages of growth of
a business. The type of finance available
to businesses depends to some extent
on the stage of growth they have
reached.

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
Financing the Small Business
Money is required for:
• Purchase of equipment
• Supporting owner and family
• Paying for premises
• Paying for staff
• Expenses

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Sources of Finance – New
Business Start-up
• Existing cash resources
• Family or friends
• Grant finance
• Commercial borrowings

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 The Business Plan (1)
• Description of business content
• Detailed description of product or
service
• Market research, analysis of
competition
• Profile of entrepreneur

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 The Business Plan (2)
• Initial investment required
• Other people (NB costs of
employment)
• Insurance and legal issues
• Professional advisers
• Detailed financial projections
– Budget: projected profit and cash
flow

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Why do Businesses Fail?
• Poor management
• Lack of working capital
• Lack of long-term finance
• Bad debts
• Loss of market

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Stages in Business Growth
and Expansion
• Employing people
• Developing the business organization
• Moving into new markets or products

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Sources of Finance for the
Growing Business
As previously mentioned!
But also:
• Venture capital
• Individuals – ‘angels’ and ‘dragons’
• Leasing

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Sources of Finance for Large
Businesses
ISSUE OF SHARES
• Ordinary shares/equity shares
• Nominal value, e.g. 50p, £1
• Market value (quoted shares)
• Market capitalization (market value x
number of shares in issue)

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Rights of Shareholders
• Equity shareholders entitled to vote at
Annual General Meeting (AGM)
• Right to receive dividends
– Interim dividend
– Final dividend
– NB dividend determined by directors

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Benefits of Limited Company
Status
• Liability of shareholders is limited
• Ownership can be widely spread
• Ownership of large companies likely to
be very widely spread
• Possibility of raising finance by
obtaining a listing

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
The London Stock Exchange
• Trades in the shares of quoted
companies, government bonds and
company bonds (loan
stock/debentures)
• London Stock Exchange (LSE)
– Primary market
– Secondary market

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Organization of the London
Stock Exchange
• The main market
• The Alternative Investment Market
(AIM)
– Deals in shares of smaller/newer
companies
– Investment in AIM companies may be
potentially riskier

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Stock Market Indices
FTSE = Financial Times Stock Exchange
FTSE 100 = top 100 listed companies
FTSE 250 = 250 companies next in size
FTSE 350 = FTSE 100 + FTSE 250
FTSE All-share = FTSE 100 + FTSE 250 + FTSE
Small Cap
FTSE Fledgling = Smaller companies below Small
Cap size
FTSE TechMark = Separate market category for
high tech companies

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Flotation
Floating a company

• Between 200 and 300 companies each year

• Placing of shares, or
• Offer for sale
–Prospectus required

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Other Types of Share Issue
Other types of share issue
• New issues
• Rights issues
–Offer to existing shareholders
–Allows retention of same percentage
shareholding: ownership is not diluted
if rights are taken up

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 To List or Not to List? (1)
ADVANTAGES OF LISTING
• Company raises more finance.
• Increase profile and credibility.
• Company founders can liquidate their
shares.
• Can increase pool of investors and value of
the company.

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 To List or Not to List? (2)
DRAWBACKS OF LISTING
• Company in public spotlight
• May become target for takeover
• Increased pressure on management
• Expensive to obtain listing
• Additional regulation
• Fluctuations in share value

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011
 Summary
• There are many potential sources of
finance for businesses of all sizes, but
the financing options available are
more numerous for larger businesses.

Use with Business Accounting and Finance, 3 rd edn (ISBN 9781408018378)

© Catherine Gowthorpe, 2011