Selecting Financial Strategies

Financial strategies are plans of action that will help a business to develop and maintain a competitive advantage and achieve financial objectives.

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Sources of Finance

Financial strategies are plans of action that will help a business to develop and maintain a competitive advantage and achieve financial objectives.

Sources of finance for a business come from many different areas as they have many options available to them. Raising finance to fund business operations include; banks, venture capitalists and share capital. The largest source of finance for many companies is retained profit, but the two main external sources of long term finance include equity share capital and debt (loans).

Equity share capital is common for a business in need of finance, as they raise finance through the sale of shares. A company will decide upon the maximum amount of capital it is likely to need in the future from the sales of shares and will set this as the authorised share capital.

 Debt is finance obtained banks and other financial institution is called loan or debt capital. For the loaner there is less risk than equity capital as the loan will be secured against an asset. The risk to the company itself is high interest payments which are compulsory regardless of the company’s performance. A company relying heavily on debt is known to be highly geared.

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Profit Centres and Cost Minimisation:

A profit centre looks at the costs associated with running an organisation and the different areas within it, and the revenues to calculate the profit. For example, an organisation like the BBC can be split into profit centres and each can be set profit targets to work towards. Dividing an organisation into profit centres makes it possible to identify the parts of the organisation that generate the profits and the parts that do not.

Cost minimisation is the process by which businesses attempt to maximise profits by keeping costs low. There are many things a business can do to adopt this technique to achieve an objective.

  • A business with high market share or market leader will be in a position of power for negotiating terms and conditions with suppliers.
  • They may use techniques within their resources such as just-in-time, but this puts more strain on production staff and can damage good relationships with suppliers.
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Capital Expenditure

Capital expenditure occurs when a business gets a long term advantage due to that expenditure. It is usually incurred for accusation of an asset. These expenditures do not occur in the regular day to day transactions of the business.

Common examples:

  • Purchase of furniture, office building etc.
  • Purchase of additional furniture or machinery
  • Expenditure incurred in connection with the purchase of a fixed asset. For example, carriage paid of machinery purchased.
  • Purchase of patent right, copy rights etc.
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