Finance in Tesco

Topics: Generally Accepted Accounting Principles, Corporate finance, Stock Pages: 9 (2599 words) Published: June 27, 2011
Liquidity plays an important role in the success or failure of business. In UK, 75-80% businesses collapse not because they are unprofitable but because of liquidity. For running a business successfully, plans have to be prepared to cope with the changing needs and these must be capable of modification. It is not good to wait until the end of the financial year to discover that the plan started to go wrong 11 months ago. For this purpose managers need information quickly, accurately and this information must reach to the concerned persons directly. They require financial analysis carried out weekly or monthly at least. Availability of funds is prerequisite to start any business. Most important sources of funds available to the organization are, * Equity capital- owner’s own saving

* Long-term Loan, borrowed for period of five years or more * Short-term loan, borrowed for (1-4) years

1. Sources of Finance
There are various sources of Finance for a business which can be categorized as External and Internal sources of Finance. 1.1 Internal sources of Finance:
These sources do not require the agreement of any other person, party or organization formally such as retained profits. The directors can use those profits in the company without the permission of shareholders. 1.2 External sources of Finance:

These financial sources require the agreement of some outsiders or beyond the Directors and company management. This type of finance adopts the shape of new share in which they require the agreement of potential shareholders. 1.3 Permanent source of Finance:

To get a good understanding of External sources of Finance, it is probably helpful to explain Long Term and Short Term External sources of Finance. Long term Finance can be explained as a source of income which is due for repayment after approximately one year. On the other hand, short term finance is due for repayment only within a year. Permanent capital is the funds obtained from the owners of the business either from their own resources or form the profits retained in the business instead of distributing them as dividends. Long Term capital is the borrowed money from either individuals or from the financial institutions that will have to be repaid at some time. It can be raised by the issue of different shares such as:

* Ordinary Shares
These shares can be defined as business risk capital which acts as the financial structure of a business. They are usually the owners of the business and appoint directors to act on their behalf. These shares have no fixed rate of dividends and they can be repaid after others or preferred shareholders being paid. They receive dividends if the profits are available to be divided. They are entitled to receive any return in the case of Business wound up after the others have been paid. Owing to the high risks associated with this form of sources of Finance, high rate of return is required. The potential returns of Ordinary shareholders are unlimited in the sense the after paying Preference shares remaining goes to Ordinary shares and they also enjoy the voting right to interfere directly in the election of directors and company governors. * Preference Shares

These shares have the fixed rate of dividends and usually they are given a dividend each year. In case of business wound up they are paid before Ordinary shareholders and they also have the right to claim over the Ordinary Shares. Preference share holders do not have the voting right to directly affect the company decisions * Long Term Capital

Long-term capital is raised by borrowing from the money market such as: * Loans and Debentures
Loan is another source of finance for a business. Long term loan can be obtained by banks and other financial institutions according to the Business needs. This source of finance is useful in the way that the amount of loan, term period and repayment terms and interests are open to negotiation. For instance, if the...
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