Selecting Financial Strategies

  • Created by: Soph
  • Created on: 03-06-14 15:04

Raising Finance


  • Retained profits
  • Working Capital
  • Asset Disposal
  • Sale and Leaseback


  • Issue shares
  • Bank loan/ overdraft
  • Debentures
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Retained Profits

Retained profit is the profit kept in the company rather than paid out to shareholders as a dividend.


  • Cheap- The "cost of capital" of retained profits is the opportunity cost for shareholders of leaving profits in the business, no interest rates
  • Flaxible- Management control how they are reinvested, shareholders control the proportion retained. They can be left in the business as cash in the bank.  They can be invested in more fixed assets, extra stocks and so on.
  • Do not dilute the ownership of the company


  • Directors of quoted companies occasionally get criticised for restricting the value of dividends and for hoarding too much cash in the business.  If retained profits don’t result in higher profits then there is an argument that shareholders could make better returns by having the cash for themselves.
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Other sources


  • Likely to be long term
  • May lead to difficulty repaying debts and thus having to make cuts to be liquid
  • Relatively quick to arrange
  • High interest rates
  • Become highly geared

Selling Shares:

  • Only available to public limited firms on the stock exchange
  • A slow and expensive process
  • Reduces the control of other shareholders
  • Doesn’t commit to regular payments
  • Can be flexible in amount
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Other sources 2

Sales of Assets:

  • Avoids payments
  • Results in loss of assets which could increase in value
  • Loss of secure income
  • Selling non-current asset can result in a one-off inflow of cash
  • Immediate injection of cash
  • When leasing back there is a risk the firm may pay more for the asset in the long term

Loan Capital:

  • Overdraft: Overspend on a current account up to an agreed amount for a stated period of time
  • Loans: Sums of money provided by a bank for a specific, agreed purpose
  • Debentures: A form of bond or long-term loan at a fixed rate of interest
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Working Capital

  • Reducing working capital- A one off benefit from lower working capital, is it sustainable
  • Finance often wasted in excess stocks and trade debtors
  • Look for very low stock turnover ratio or high debtor days
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Implications of a Strategy of Raising Finance:

  • Likely to accompany a corporate objectives or expansion
  • Human Resources: Recruit, retrain and corporate objective of expansion
  • Operations: Research and development into new products and production methods
  • Marketing: Investigate new markets and advertising
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Implementing Profit Centres:

  • An area, department, division or branch of a firm that is allowed to control itself separately from the larger firm
  • It is allowed to calculate costs and revenues and can make their own decisions in pursuit corporate objectives. 
  • Enables the firm to manage the elements of operations separately

 Benefits/ Drawbacks 

  • Diseconomies can be avoided
  • Important to divide the firm in some way to ensure effective management
  • Allows areas to make faster and more responsive decisions to changes in the local environment
  • Delegating power improves motivation- monitoring performance is much easier
  •  Individual centres can become too narrowly focused
  • Individual performance can be affected by local market conditions
  • Some individual decisions may not be best for the firm as a whole
  • Costs may rise due to lack of economies of scale
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Implications of a Strategy of Implementing Profit

Implications of a Strategy of Implementing Profit Centres:

Doing so means the firm will undergo a period of change from a centralised system to profit centres

Human Resources:

  • Uncover skills of existing employees
  • Recruit new employees
  •  Redeploy existing employees
  •  Redundancies
  • Communication becomes more important and more difficult


  • Lean production becomes more complex
  • Can’t fully benefit from economies of scale
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Allocating Capital Employed

  • Spending on new non-current assets
  • Limited access to capital
  • Opportunity cost

 Investing in Technology:

  • Reduce amount of labour deployed
  • Heavy initial expenditure
  • Increased productivity
  • High initial costs and retraining workers

 Investing in Property:

  • Trade effectively or support corporate image
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Cost Minimisation

A firm reduces its level of expenditure as far as possible to allow it to provide goods/services of an appropriate quality

Minimising Labour Costs:

  • Reductions in staffing levels
  • More flexible workforces
  • Outsourcing


  • Relocating to areas where production costs are lower
  • Cheaper land and property
  • Few laws which can expensive to adhere to
  • Cheaper employee wage rate
  • Offshoring: transferring part of operations abroad
  • Will cause short term relocating costs
  • The language barrier may make communication difficult

 Using Technology:

  • Replace expensive staff
  • Employee fewer workers to reduce operating costs
  • Used on the production
  • Will result in high short term expenditure
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