Source of Finance

1.0 Introduction
This is an informative and analytical report on Sources of finance. The report is written as an
assignment of Managing financial resources and decision module of the first semester for the
evaluation of our understanding and knowledge of the sources of finance to the lecturer
Mr.Chamila. This assignment also tests our knowledge on choosing the appropriate source of
finance and financial planning. The report also provides analysis of Singer (Sri Lanka) PLCs
balance sheet for sources of finance. All of the information and research for this report is through
the World Wide Web.

2.0 Sources of Finance

Finance is essential for a businesss operation, development and expansion. Finance is the core
limiting factor for most businesses and therefore it is crucial for businesses to manage their
financial resources properly. Finance is available to a business from a variety of sources both
internal and external. It is also crucial for businesses to choose the most appropriate source of
finance for its several needs as different sources have its own benefits and costs. Sources of
financed can be classified based on a number of factors. They can be classified as Internal and
External, Short-term and Long-term or Equity and Debt. It would be uncomplicated to classify
the sources as internal and external.
2.1 Internal sources of finance
Internal sources of finance are the funds readily available within the organisation. Internal
sources of finance consist of:
Personal savings
Retained profits
Working capital
Sale of fixed assets
2.1.1 Personal savings
This is the amount of personal money an owner, partner or shareholder of a business has
at his disposal to do whatever he wants. When a business seeks to borrow the personal money of
a shareholder, partner or owner for a businesss financial needs the source of finance is known as
personal savings.
2.1.2 Retained profits
Retained profits are the undistributed profits of a company. Not all the profits made by a
company are distributed as dividends to its shareholders. The remainder of the profits after all
payments are made for a trading year is known as retained profits. This remainder of finance is

saved by the business as a back-up in times of financial needs and maybe used later for a
companys development or expansion. Retained profits are a very valuable no-cost source of
finance.
2.1.3 Working capital
Working capital refers to the sum of money that a business uses for its daily activities.
Working capital is the difference of current assets and current liabilities (i.e. Working capital =
Current assets Current liabilities). Proper working capital management is also vital as it is also
a source of finance for a business.
I. Current assets
Current assets are also known as cash equivalents because they are easily convertible to
cash. Current assets consist of Stock, Debtors, Prepayments, Bank and Cash. These assets are
used up, sold or keep changing in the short run.
Stock this refers to the stock of goods available to the business for sale at a given time.
It is very important to maintain the right amount of stock of goods for a business. If stock levels
are too high it means that too much of money is being held up in the form of stock and if stock
levels are too low the business will lose possible opportunities of higher sales.
Debtors are a businesss customers owing money to the business having been bought
the businesss goods or service on credit. If a business has cash flow problems it can maintain a
low level of debtors by encouraging the debtors to pay as early as possible.
Prepayments these are the expenses paid in advance. The payment being made even
before the expense occurs is a prepayment.
Bank and Cash Bank is the cash held in banks and cash is money held by the business
in the form of cash. Having too much of money in the form of cash is also not good for a
business since it can use that money to invest and earn a return but however a business should
have healthy current ratio (current assets : current liabilities) of 2:1.
II. Current liabilities
Current liabilities are short-term debts that are in immediate need of settlement. Some
examples of current liabilities are creditors, accruals, proposed dividends and tax owing. These
obligations have to be paid within a year.
Creditors also known as trade creditors are suppliers from whom the business
purchased goods on credit. Paying the creditors as late as possible will ease cash flow
requirements for a business.
Accruals are the expenses owed by the business.

Dividends proposed are the dividends payable for the year that is not yet paid.
Tax owing is the sum of money owing as tax.
2.1.4 Sale of fixed assets
Fixed assets are the assets a company that do not get consumed in the process of
production. Some examples of fixed assets are land and building, machinery, vehicles, fixtures
and fittings and equipment. Sometimes where the fixed asset is a surplus and is abandoned, it can
be sold to raise finance in demanding times for the business. Otherwise businesses may choose to
stop offering certain products and sell its fixed assets to raise finance. Selling fixed assets
reduces the production capacity of a business affecting a businesss return.
2.2 External sources of finance
Sources of finance that are not internal sources of finance are external sources of finance.
External sources of finance are from sources that are outside the business. External sources of
finance can either be:
Ownership capital or
Non-ownership capital
2.2.1 Ownership capital
Ownership capital is the money invested in the business by the owners themselves. It can
be the capital funding by owners and partners or it can also be share bought by the shareholders
of a company. There are mainly two main types of shares. They are:
Ordinary shares
Preference shares
2.2.1.1 Ordinary shares
Ordinary shares also known as equity shares are a unit of investment in a company.
Ordinary shareholders have the privilege of receiving a part of company profits via dividends
which is based on the value of shares held by the shareholder and the profit made for the year by
the company. They also have the right to vote at general meetings of the company. Companies
can issue ordinary shares in order to raise finance for long-term financial needs.

2.2.1.2 Preference shares

Preference shares are another type of shares. Preference shareholders receive a fixed rate
of dividends before the ordinary shareholders are paid. Preference shareholders do not have the
right to vote at general meetings of the company. Preference shares are also an ownership capital
source of finance. There are several types of preference shares. Some of them are Cumulative

preference share, Redeemable preference share, Participating preference share and Convertible
preference share.
Cumulative preference shares if a company is in a loss making situation and is unable
to pay dividends for one year then the dividend for that year will be paid the next year along with
next years dividends.
Redeemable preference shares these preference shares can be bought back by the
company at a later date. Normally the date of redemption is usually agreed.
Participating preference shares give the benefit of additional dividends to its
shareholders above the fixed rate of dividends they receive. The additional dividend is usually
paid in proportion to ordinary dividends declared.
Convertible preference shares convertible preference shareholders have the option of
converting their preference shares to ordinary shares.
2.2.2 Non-ownership capital
Unlike ownership capital, non-ownership capital does not allow the lender to participate
in profit-sharing or to influence how the business is run. The main obligations of non-ownership
capital are to pay back the borrowed sum of money and interest. Different types of nonownership capital:
Debentures
Bank overdraft
Loan
Hire-purchase
Lease
Grant
Venture capital
Factoring
Invoice discounting
2.2.2.1 Debentures
Debentures are issued in order to raise debt capital. Debenture holders are not owners but
long-term creditors of the company. Debenture holders receive a fixed rate of interest annually
whether the company makes a profit or loss. Debentures are issued only for a time period and
thus the company must pay the amount back to the debenture holders at the end of the agreed
period. Debentures can be secured, unsecured, fixed or floating.
Secured debentures are debentures that are secured against an asset. They are also called
mortgage debentures.
Unsecured debentures these debentures do not have an asset as collateral. Fixed debentures
have a fixed rate of interest.

Floating debentures do not have fixed rate of interest and are not tied to any specific asset.
Bearer debentures these debentures are easily transferable.
Registered debentures are not easily transferable and legal procedures have to be followed in
case of a transfer.
Convertible debentures can be converted to stock at the end of the debenture repayment dates.
2.2.2.2 Bank overdraft
Bank overdraft is a short term credit facility provided by banks forits current account
holders. This facility allows businesses to withdraw more money than their bank account
balances hold. Interest has to be paid on the amount overdrawn. Bank overdraft is the ideal
source of finance for short-term cash- flow problems.
2.2.2.3 Loan
Loans are amounts of money borrowed from banks or other financial institutions for large
and long-term business projects such as the development or expansion of the business. However
loans can be substituted by other alternative sources of finance which are more suitable.
2.2.2.4 Hire purchase
Hire purchase allows a business to use an asset without paying the full amount to purchase the
asset. The hire purchase firm buys the asset on behalf of the business and gives the business the
sole usage of the asset. The business on its part must pay monthly payments to the hire purchase
firm amounting to the total value of the asset and charges of the hire purchase firm. At the end of
the payment period the business has the option of purchasing the asset for a nominal value.
2.2.2.5 Lease
In a lease the leasing company buys the asset on behalf of the business and the asset is
then provided for the business to its use. Unlike a hire purchase the ownership of the asset
remains with the leasing company. The business pays a rent throughout the leasing period. The
leasing firm is known as the lessor and the customer as lessee. Leasing is of two types, namely
Finance lease and Operating lease.
Finance Lease this is where the lessees monthly payments add upto at least 90% of the
total value of the asset.
Operating Lease this lease does not run for the full life of the asset and the lessee is not
liable for the full value of the asset. The residual risk is taken up by the lessor.
2.2.2.6 Grant

Grants are funding given to businesses for programs or services that benefit the
community or public at large. Grants can be given by the government or private firms. For
example a grant may be given to open a new factory where unemployment is high.
2.2.2.7 Venture capital
Venture capital is the capital that is contributed at the initial stages of an uncertain
business. The chance of failure of the business is great while there is also a possibility of
providing higher than average return for the investor. The investor expects to have some
influence over the business.
2.2.2.8 Factoring
This is where the factoring company pays a proportion of the sales invoice of the
business within a short time-frame to the business. The remainder of the money is paid to the
business when the factoring company receives the money from the businesss debtor. The
remainder of the money will be paid only after deducting the factoring companys service
charges. Some factoring companies even offer to maintain the sales ledger of the business.
Factoring is of two types: Recourse factoring and Non-recourse factoring.
Recourse factoring In this type of factoring the client company is liable for bad debts.
Non-recourse factoring is where the factor takes responsibility for the payment of the
debtors. The client company is not liable if debtors do not pay back. Non-recourse factoring is
usually more expensive because of the high risks experienced by the factor.
2.2.2.9 Invoice discounting
In invoice discounting the client company send out a copy of the invoice to the invoice
discounting firm. The client then receives a portion of the invoice value. In contrast to factoring,
the client company collects the money from its debtors. Once the payment is received it is
deposited in a bank account controlled by the invoice discounter. The invoice discounter will
then pay the remainder of the invoice less any charges to the client.

3.0 The financial costs of the different sources of finance

Personal savings - have low costs since they are provided by an owner, partner or shareholder.
The owner may charge a rate of interest for the loan provided.
Retained profits - have opportunity cost, that is the money could have been used elsewhere for
some other purpose. Otherwise there arent any other costs for this source of finance.

Working capital - they do not have any costs other than opportunity cost.
Sale of assets - by selling fixed assets it uses then the firms production capacity will diminish. If
it sells unused or abandoned fixed assets then only the potential production capacity reduces.
Sometimes firms will have to stop offering certain products or services in order to sell its asset
and raise finance. The asset may cost much more than what it sold for if it wants to replace it.
Ordinary and Preference shares - Dividends has to be paid out of profits to shareholders as a
return for their investment in the business. There are administrative costs occurring from issuing
shares like stock exchange listing fee, printing and distribution fee and advertising fee.
Debentures - have to be paid a fixed or floating interest depending on the type of debenture that
is issued.
Bank overdraft - interest is a little higher than for bank loans and interest is calculated on a
daily basis.
Loans - Interest is usually fixed for short term loans, and long-term loans usually have a variable
rate of interest. Interest rates are lower than for bank overdrafts.
Hire-purchase - The business ends up paying more than the original value of the asset for its
purchase.
Lease - The ownership of the asset remains with the leasing company even after the business
pays more than 90% of the assets value but however some leasing firms provide the option of
purchase of the asset a nominal value.
Grants - are free and have no financial costs.
Venture capital - The venture capitalist will have some influence over the business and the
business will have to share profits with the investor. The investor will want the capital back at a
later date.
Factoring - Factors charge a rate of interest of about 1.5% to 3% of the invoice value as finance
charges. Interest is calculated on a daily basis. Credit management and administrative fee are
also charged and ranges from about 0.75% to 2.5% of turnover.

Invoice discounting - Invoice discounting also charges a rate of interest of about the same but its
credit management and administrative charges are lower than a factors because only finance is
provided and sales ledger is not maintained by an invoice discounting firm.

4.0 Advantages and Disadvantages of the different sources of finance

4.1 Personal savings

Advantages
The owner would not want collateral to lend money to the business.
There is no paperwork required.
The money need not necessarily be paid back to the owner on time.
Can be interest free or carry a lower rate of interest since the owner provides the loan.
Disadvantages
Personal savings is not an option where very large amounts of funds are required.
Since it is an informal agreement, if the owner demands the money back in a short notice it
might cause cash-flow problems for the business.
4.2 Retained profits
Advantages
They need not be paid back since it is the organisations own savings.
There are no interest payments to be made on the usage of retained profits.
The Companys debt capital does not increase and thus gearing ratio is maintained.
There are no costs raising the finance such as issuing costs for ordinary shares.

The plans of what is to be done with the money need not be revealed to outsiders because they
are not involved and therefore privacy can be maintained.
Disadvantages
There may be opportunity costs involved.
Retained profits are not available for starting up businesses or for those businesses that have
been making losses for a long period.

4.3 Working capital

Advantages
Since it is an internal source of finance there are no costs involved.
No repayment is needed.
External parties cannot influence business decisions.
Will not increase debt capital of the firm so gearing ratio is maintained.
Disadvantages
Opportunity costs are involved.
is not suitable for long term investments.
Working capital cannot raise large amounts of funds.
Total risk is undertaken by the company.
Using working capital as a source of finance will affect the current ratio of the business

4.4 Sale of assets

Advantages
Funds are again raised by the business itself and therefore need notbe paid back.
No interest payments are required.
Large amounts of finance can be raised depending on the fixed asset sold.

Would be the ideal source of finance if it was for an asset replacement.

Disadvantages
If the asset is sold then the business would lose opportunities togenerate income from it.
If the business wants to buy a similar asset later on it may costmore than it was sold for.
If the asset is sold and the money is spent without return then thebusiness is broke.
The asset may be able to generate more income than the purpose itwas sold for.

4.5 Ordinary share issue

Advantages
The amount need not be paid back it is a permanent source of capital.
Able to raise large amounts of finance.
If the company follows a rational dividend policy it can create huge reserves for its
development program.
The dividends need to be paid only if the company makes a profit.
No collateral is required for issuing shares.
It will help reduce gearing ratio
Disadvantages
issuing shares is time consuming.
It incurs issuing costs.
There are legal and regulatory issues to comply with when issuing shares.
Possible chances of takeover where an investor buys more than50% of the total issued shares
value.
The groups of equity shareholders holding majority of shares can manipulate the control and
management of the company.
May result in over-capitalisation where dividend per share falls.
Once issued the shares may not be bought back and therefore the capital structure cannot be
changed.

4.6 Preference share issue

Advantages
Have no voting rights and thus the management can retain control over the affairs of the
company.
Preference shareholders need not be paid if the company makes a loss.
Even if the company makes large profits preference shareholders need to be paid only a fixed
rate of interest.
Has other benefits similar to ordinary share issue such as no repayment required, large
amounts of capital can be raised, permanent source of capital and no collateral required.
Redeemable preference shares can be redeemed.
Disadvantages
Even if the company makes a very small profit it will have to pay the fixed rate of dividend to
its preference shareholders.
Preference shares are usually cumulative and thus twice the amount must be paid the following
year if dividends are not paid on the year they need to be paid.
Taxable income is not reduced by preference dividends unlike debentures where interest paid
reduces taxable income.
Have other drawbacks similar to ordinary share issues such as the cost, time consumption and
legal requirements.
4.7 Debentures
Advantages
Debenture holders do not have rights to vote at the companys general meetings.
Tax benefits debenture interests are treated as expenses and charged against profits in the
profit and loss account.
Debentures can be redeemed when the company has surplus funds.
Disadvantages
Debenture interests have to be paid regardless the company makes a profit or loss.

The money borrowed has to be paid back on an agreed date.

4.8 Bank overdraft

Advantages
No security is needed for a bank overdraft.
Ideal for short-term cash flow deficits.
Easy and quick to arrange.
Interest is only paid when overdrawn and on the exact amount needed
Since overdraft is a short term debt it is not included in calculating the firms gearing ratio.
Disadvantages
There is a limit to the amount that can be overdrawn.
Interest has to be paid on an overdraft that is calculated on a daily basis and sometimes the
bank charges an overdraft facility fee too.
Overdrafts are meant to cover only short-term financing and are not a permanent or long-term
source of finance
Interest is calculated on a variable rate and therefore it is difficult to calculate the cost of
borrowings.
Overdrafts can be recalled by the bank at any time if not stated in the agreement.

4.9 Loans
Advantages
Large amounts can be borrowed.
Suitable for long-term investments.
The lender has no say on how the money is spent.
Need not be paid back for a fixed time period and banks do not withdraw at a short notice.
Interest rates are lower than for bank overdrafts and are set in advance.

Disadvantages
Collateral is needed.
The amount borrowed has to be repaid at the agreed date.
Interest is charged.
Loans will affect a companys gearing ratio.

4.10 Hire purchase

Advantages
The business gains use of the asset before paying the assets value in full.
The payment is made in affordable instalments.
Hire purchase instalments are taxable expenditures.
At the end of the payments ownership of the asset is transferred to the company.
Payments can be made from the assets usage and return of the asset.
Disadvantages
Ownership remains with the lender until the last payment is made.
The asset will cost the company more than the original value.
If payments are not made on time the lender has the right to repossess the asset.
If the asset is required to be replaced due to breakdown or because it is out-dated in which case
the payment may still have to be made and the asset replaced.

4.11 Lease
Advantages
The amount in full need not be paid in order to start using the asset.
The total cost and the lease period is pre-determined and thus helps with budgeting cashflow.
In an operating lease, payments are made only for the usage duration of the asset.

Lease is inflation friendly where the agreed rate is paid even after five years when other costs
increase due to inflation.
It is easier to obtain a lease than a commercial loan.
Disadvantages
The ownership of the asset remains with the lessor even after payments but however in a
finance lease the option is provided to buy the asset at a nominal value.
In a finance lease the lessee ends up paying more than the value of the asset.
Lease cannot be terminated whenever at lessees will.

4.12 Grants
Advantages
Grants do not have to be paid back.
There are no costs involved in obtaining a grant.
Disadvantages
Grants are given on certain restrictions and laws imposed by thegovernment.
Not all organisations are eligible for grants.
Grants are given freely and therefore are very competitive becauselots of firms try for the same
source of fund.
4.13 Venture capital
Advantages
Venture capitalists invest large sums of money in the business.
They may also bring a lot of experience and expertise along with the money.
Since they become owners by investing in the business they have equal interests in the
businesss success.
Venture capitalists are only periodical investors wanting to exit the business at some stage.
Disadvantages
The profits will be shared with the investor.

Acquiring venture capitals is a lengthy and complex process where a business plan and
financial projections must be submitted to the potential venture capitalist
As an owner of the business the venture capitalist may want to influence the strategic decisions
and take control of the business.

4.14 Factoring
Advantages
A large proportion of money is received within a short time-frame.
The sales ledger of the business can be outsourced to the factor.
The money collections from debtors are undertaken by the factoring company.
Helps a business to have smooth cash flow operation.
Non-recourse factoring protects the client company from bad debts.
Disadvantages
The business has to pay interests and fees for the factor for its services.
The cost will be a reduction on the companys profit margin.
Lack of privacy since the sales ledger is maintained by the factor.
Costumers would not like factoring companies collecting debts from them.

4.15 Invoice discounting

Advantages
The Client Company receives the money in a short period.
There is some amount of privacy since the sales ledger is maintained by the client company
and only some invoices are submitted for immediate cash.
Less costly than factoring since the sales ledger is maintained by the client company.
Unlike factoring customers are not aware of invoice discounting since the debt collection is
undertaken by the client firm.
Disadvantages

Debt should be collected by the client company itself and thus resources and time are wasted in
debt collection.
Sales ledger has to be maintained by the client company itself.

6.0 The impact of several sources of finance on the financial statements

Financial statements keep record of a businesss trading year (Trading, profit and loss account)
and show the financial position of a business as at a date (Balance sheet). Obtaining finance from
different sources bring about a change in the financial statements. This portion of the report
investigates how each source of finance is recorded and affects the financial statements.
Personal savings
Personal savings when lent to the business are considered as loans. The amount lent will appear
as Long-term liabilities on the balance sheet.If any interest payments are to be made they will be
recorded in the profitand loss account and charged against profits.
Sale of assets
Sale of assets will reduce the value of fixed assets on the balancesheet. The profit or loss made
on the sale of asset will be recorded in theprofit and loss account for the year. The depreciation of
the asset alongwith its original price will be removed from the balance sheet.
Ordinary shares and preference shares
The issue of ordinary shares and preference shares increase thevale of equity capital in the
balance sheet. If the issued shares marketprice is greater than the nominal value of the share then
share premiumis also increased in the balance sheet. The number of shares issued is
alsodisplayed in the balance sheet and for preference shares the rate of dividend is also shown.
The dividends paid to the shareholders arerecorded in the appropriation account after tax is
deducted from netprofit.
Debentures
Debentures are a type of debt capital. The value of debenturesalong with the rate of interest and
the repayment date is presented in theequity and liabilities section of the balance sheet. The
interest paid ondebentures is reduced from profits before tax is charged.

Bank overdraft
This appears in the balance sheet as a current liability since it is ashort-term debt and has to be
paid back within a year. The interestcharges and bank overdraft fee if charged are deducted from
the profitand loss account before tax is charged.
Loan
Loans are long-term debts and therefore come under long-termliabilities in a balance sheet. The
loan when displayed on a balance sheetwill usually contain information about the repayment date
and theinterest charged on the loan. The interest is charged in the profit and lossaccount.
Venture capital
This is an amount of money invested in the business as equitycapital and thus comes under
equity capital in the balance sheet. Thereturn for venture capitalists is a share of profits which is
recorded in theappropriation account.
Factoring and invoice discounting
This does not appear in the balance sheet. However the money received from factoring and
invoice discounting can show higher balances of cash. The interest charges and fee is recorded in
the profit and loss account.

5.0 Choosing an appropriate source of finance

There are many sources of finance available to a business. Finance is needed for several
purposes and different purposes need sources of finance which are most suitable to them. When
choosing an appropriate source of finance some factors have to be considered.
The factors that need to be considered when choosing an appropriate source of finance are:
The amount of money needed
The urgency of funds
The cost of the source of finance
The risk involved
The duration of finance
The gearing ratio of the business
The control of the business

5.1 The amount of money needed

This is the amount of finance the organisation wants to raise. Not all sources of finance
provide all amounts of funds. Some sources are notable to raise large amounts of funds whereas
others are not flexible enough to put up for the small sum of money the business requires.
Therefore it is necessary to identify the amount of money needed by the company to choose a
suitable source of finance.
For example borrowing a commercial loan for a small and short-term cash-flow problem
is unwise because loans may have a minimum amount that can be borrowed so taking a bank
overdraft would be wise where money can be borrowed in small sums and bank overdrafts can
be paid back quickly. Therefore the amount of money required is a key factor in choosing a
source of finance.
5.2 The urgency of funds
This refers to the amount of time the business can spend on collecting funds. If the
business has plenty of time before its financial needs need to be met then it can spend time
searching for cheap alternatives of sources of finance. On the other hand if the business wants
the money as soon as possible then it would have to make some cost sacrifices and accept a
source of finance that may even cost higher. The urgency of funds needs to be identified also
because certain sources of finance need more time to be raised than other sources of finance. For
example issuing shares is a very long and complex process where there are legal requirements
and then the potential shareholders have to be informed (advertising) and after all these the
money is collected through the process of application and allotment which takes more time.
5.3 The cost of the source of finance
Different sources of finance have different costs as discussed above. It is always more
profitable to a business to seek and obtain cheaper sources of finance. Sometimes however the
time does not permit organisations to look for cheaper sources of funds. Internal sources of
finance are always cheaper than external sources of finance.
5.4 The risk involved
The risk involved is the certainty of receiving returns for the lender on the investment
made using the finance. In simpler words it is the sureness of success of the project. If the
provider of finance is not confident that the project in which his money is invested in is less
likely to reap returns then the lender would be reluctant to provide the business with funds. In
this case the money can be secured against an asset as collateral which will encourage the lender
to lend.
5.5 The duration of finance

This is the time period for which the money is needed. It can be for a short-term (within
one year), medium-term (one to five years) or long-term (five years and more) time period. By
identifying the length of requirement of finance the organisation can eliminate inappropriate
sources of finance and choose a source of finance that is more suitable for the required
timeframe.
5.6 The gearing ratio of the business
The gearing ratio plays an important role in the availability of the sources of finance
since the gearing ratio shows the ratio of debt capital to the total capital of a business. If a
business is high geared then commercial lenders will be unwilling to give loans because the
business is already operating on more loans than equity capital. A high geared company will have
to pay more of its profits as interests on loans and other debt capital. That being the case
potential lenders fears the business ability to be able to cope with more interest payments and
debt settlement.
5.7 The control of the business
The existing shareholders of a company would be reluctant to issue shares because this
would cause a dilution in control of the business. Issuing shares in public limited companies also
gives opportunity of takeovers to outside parties. The same can be said for venture capitalists
where the money is invested as equity and being owners the venture capitalists have the right to
influence how the business is run. The existing shareholders and owners of a business who
would not want any change to arise in the control and ownership of the business would disregard
sources of equity finance.

8.0 Financial planning

Importance of financial planning
Financial planning affects the terms and conditions on which the business will be able to
obtain funding required to establish, maintain and expand the business. Financial planning
influences the raw material a business is able to afford, the products it is likely to produce and
whether the business will market its product efficiently. It will affect the resources the business is
able to acquire to operate and it will be a major determinant of the success of the business.
A financial plan not only help the business to understand what it wants to do but also
helps the business understand how to achieve it.
A healthy financial plan consists of the following:
The basic financial statements

Ratio analysis
Budgets
Break-Even analysis
Pricing formulas and policies
Types and sources of capital available to finance business operations
Short and long term planning considerations necessary to maximise profits
The business owner/manager who understands these concepts and uses them effectively to
control the evolution of the business is practicing sound financial management thereby
increasing the likelihood of success.

9.1 Identifying sources of finance in Singer (Sri Lanka) PLCs balance sheet.
Fixed or Non-current assets that can be sold are potential sources of finance that is categorised
as sales of assets
Property, Plant and Equipment = LKR 1,419,011,146
Working capital is current assets minus current liabilities
Working capital (7,855,964,730 6,302,249,382) = LKR 1,553,715,348
Retained earnings are the accumulated earnings of a company
= LKR 373,951,178
Share capital
= LKR 629,048,050
Loans and borrowings
= LKR 1,383,661,616

10.0 Conclusion
Sources of finance is available from variety of sources but each source has its own cost
and benefits. It is important to choose an appropriate and cheap source of finance for the smooth
operation of the firm. There are important factors to consider when choosing a source of finance.

However further work need to be done. The limitedness of time has not allowed for further
research and more detail.

Finance is essential for a businesss operation, development and expansion. Starting a

restaurant business is not an easy task, as there are number of restaurants that have been opened
and these restaurants compete with each other incredibly. I decided to run Mexican food
restaurant which will add a different dishes of food to the traditional foods menu and it will cater
superior quality food. The restaurant business is notoriously tough as it requires huge number of
operations in it to be carried out. Initially I will open a restaurant on rent.
The total Investments will be 250,000 approximately as it will cover the other costs
which may include the certification cost and getting license for running. The Working capital
will be the stocks needed by the business e.g. Raw Materials, Allowance for amounts that will be
owed by customers once sale of Mexican restaurant begins and the Growth and development
(e.g. extra investment in capacity). Sources of financed can be classified based on a number of
factors. They can be classified as Internal and External, Short-term and Long-term or Equity and
Debt. The possible sources of finance available to a business are;
1.
2.
3.
4.
5.

On hand shareholder and directors funds

Family and Friends Financial Support
Clearing Banks (Business Overdrafts, Term Loans)
Loans from Business supporting organizations
Business Angels sources of Finance(www.businessangelnetwork.co.uk/ national-

business -angels-network)
6. Community Development Finance Association (CDFA - www.findingfinance.org.uk)
7. Business Financing Institutions (www.businessfinanceforyou.co.uk)
8. Hire buy and leasing
By striking equilibrium between equity and liability it is ensured that funding structure suits the
business. These are the sources of finance that are available for running Mexican restaurant.

1.1.2 Range of Sources to Montezuma

Harry Wong has privately developed to offer broad range Mexican wines and with his
colleague Ron Douglas has many developed experience for caters to all of its customers by
providing according to each customer taste, down to the smallest detail. In order to do this, the
company can have private source such as friends and relatives, credit unions, partners etc. But
the company has some other available sources of finance.
For Montezuma, the sources of finance are accessible in relation with Sole traders,
partnership and Limited companies. Sole trader is mainly involved in running of companies and
has to afford the capital to start the business. Then, profits of business are all for sole trader. As
the sole trader, Montezuma can find the finance sources by borrowing money from the Bank,
Business Angels and by making sales. Firstly, being the sole trader, own capital money is the
suitable way to start the business. After that, we can expend to run the business by borrowing
money from the banks and receiving money from venture capitalists with business background
image. In the same cases, Montezuma can use the other ways of borrowing as the above
presented.

1.1.3 Other ways of borrowing

Partnership is the type of relation that is the cooperation of two or more persons with the
same aim to get profits on the same business. Partnership type of relation doesnt depend on
laws. It directly upon on just their own agreements and then accepts the ratio of agreement
shares. If Montezuma run the business in the relation of partnership, the sources of finance is
mainly from the partners own capital then we can borrow from the bank easily as the business
large enough. Moreover, the other ways of borrowing such as Factoring, Leasing, Hire
purchasing and so on.
Company is the type of business that operates with more than two people based on legal
laws. Its control on the company is vary depend on the share amounts on that business. The
company law is that 51% of share owner can control the company and that owner is more
powerful than others. As Montezuma, if we run the business with the company type, we can gain
the sources of finance by selling ordinary shares to public. Being the company type, we can

borrow money from the bank, from venture capitalists easier than partnership type. In the same
way, we can earn money from factoring, invoice discounting, leasing and Hire purchasing upon
the needs and requirements of company. Thus, as above facts Montezuma should run the
business within company relation because it is more suitable than others and it can upload the
sources of finance easily.