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Discuss, using examples, the factors a manager should consider when selecting sources of finance for expansion. - Leaving Cert Business - Question 5(B) - 2005
Question 5(B)
Discuss, using examples, the factors a manager should consider when selecting sources of finance for expansion.
Worked Solution & Example Answer:Discuss, using examples, the factors a manager should consider when selecting sources of finance for expansion. - Leaving Cert Business - Question 5(B) - 2005
Step 1
Factors to Consider: Cost/Interest
Answer
When selecting sources of finance, a manager should first consider the cost of capital associated with each option. For instance, equity capital may offer a low cost initially but can become expensive if dividends are expected. In contrast, debt capital incurs regular interest payments, which must be cash-flow manageable. A clear understanding of the cost structure is crucial.
Step 2
Factors to Consider: Purpose/Business Needs
Answer
The purpose of finance plays a significant role in the decision-making process. If a business is expanding significantly, it may benefit from long-term loans rather than short-term lending. For example, using equity may be suitable for growth through development projects, while loans might be more appropriate for immediate operational needs.
Step 3
Factors to Consider: Access/Availability
Answer
Access to different sources of finance often depends on the company's creditworthiness and purpose. For example, established businesses may have easier access to loans due to their credit ratings, while startups might rely on equity inputs from venture capitalists. Understanding what options are realistically available is essential.
Step 4
Factors to Consider: Risk
Answer
Each financing option carries its own risks. Equity financing dilutes ownership but does not require repayments, thus reducing financial stress. Conversely, debt raises financial risk due to the obligation to make repayments even in downturns. Managers must assess their risk tolerance carefully.
Step 5
Factors to Consider: Flexibility
Answer
The flexibility of the chosen finance source is another crucial aspect. For instance, long-term loans may restrict a firm's ability to react quickly to market changes due to binding agreements, while equity financing can provide more operational freedom but at a potential cost of control.
Step 6
Factors to Consider: Control and Ownership
Answer
A manager should also consider how different sources of finance will affect control over the company. Issuing shares can lead to loss of control, as new shareholders may demand a say in company operations. Understanding the potential ownership changes is crucial for strategic planning.
Step 7
Factors to Consider: Exit Strategy
Answer
Finally, a manager needs to consider the exit strategy associated with the financing options. For example, venture capitalists may have exit timelines which can affect long-term planning. Understanding how and when investors expect returns is vital for maintaining alignment with company objectives.