Business Management - Case Study Example

Business Management Introduction Every growing business requires substantial amount of capital in order to grow more. If the business functions within a sales environment, then it requires more finances when it comes to improving its services and acquiring more innovative stocks or products to be offered. There is a need to improve business or sustain daily business activities and this requires capital in order to be successfully implemented. Business cannot just function alone without capital. In order to get this capital, there is a need to find for reliable sources of finance. However, not every source of finance can apply to each business group. Each source of finance must function within the need of an organisation in order for it to be remarkably useful. Any business cannot just simply function without cash. That is why it is important to understand the current state of liquidity of a certain company. There is a need to understand the level of its cash flow. Understanding this will pave way to the basic knowledge on how much money needs to be considered prior to taking into account the assurance that business will continue to function and grow. In this paper, the proponent considers to critically assess some common sources of finance employed within different organisations and critically consider the sources of finance of Vodafone. Thus, prior to understanding the sources of finance of Vodafone, it is important to take a look at some sources of finance commonly used in most organisations. The sources of finance To continue business operation, capital is indeed needed. In the case of Vodafone, capital and fixed assets are not the same since the nature of its business is much more in the offering of services. This is eventually far from categorising the capital which is also known as fixed assets if used in production (Brigham, 1992). Vodafone certainly remains focus on the essential aspects in business. After all, it is clear that a business should operate with substantial amount of cash in which it shall be invested in land, facilities, personnel, equipment and other materials for the continuation of work and investment associated with businesses and subsidiaries. Vodafone clearly operates business through borrowing and equity which are parts of the three ways in which cash can be acquired. Mostly, firm’s reserves, disposal of assets or by borrowing are essential sources of funds. In the case of Vodafone, greater weights are clearly given to equity and borrowing. And in order to make them profitable there is a need to increase on revenue (Fess and Warren, 1984). Vodafone ensures increase of its cash generated by operations. This is remarkably clear from its consolidated financial position report from 2009 to 2010. Since it remarkably relies as well on equity aside from borrowing, Vodafone needs to ensure healthy status for its cash flow. Vodafone and even other firm’s balance sheet is composed of capital components such as different types of debt, preferred stock and common equity which are used to raise money (Brigham, 1992). One common source of funds to acquire assets is through the funds coming from creditors or stockholders at fixed rate of return (Garrison and Noreen, 2000). Considerably, this principle was applied by Vodafone considering the amount of dividends it has readily available for its stock holders specifically from 2006 to 2010. Most businesses rely heavily on either short-term or long-term bank loans and regarding other financing methods as complicated or risky (Mott, 2008). This is eventually clear in the case of Vodafone in which it obviously relies heavily on equity and borrowings so as not to complicate it sources of funds. Vodafone remarkably has outstanding short and long-term borrowings aside from the equity and funds from its shareholders. However, older business groups are risk-averse and they rely heavily on generated funds for reinvestment which is different from the exercised borrowings and stock floatation to the investing public by modern business groups (Ling, 1992). Vodafone therefore combines the modern and traditional way of reinvestment principle. However, in the case of wide spreading globalisation of businesses, the sources of finance can be categorised into three: short-term finance, medium-term finance and long-term finance (Howes and Tah, 2003). In the case of Vodafone for instance, it shows that the company can have better management of its sources of funds if borrowings have to be identified either as short term or long term. It can be observed that if all those methods used in securing additional finance sources for the company will be classified, there are just eventually three common sources of finance and these are through grants, borrowings and equity. According to Harris (2006), grants, borrowings and equity are basic sources of funds of businesses especially those that are still starting up. In the case of Vodafone, it remarkably focused on bank loans and the money raised from its stakeholders. Grants in some way does not need to be paid by the company or even reduce ownership. However it includes terms and conditions that the company must adhere to. Conditions attached to grants can sometimes delay the need for additional fund especially if the business itself requires another business model rather than pursuing for grants (Parrish, 2007). This type of source of funds does not apply to Vodafone considering that the terms and conditions that may apply are not in line with the company’s organisational goal. This type of fund therefore should create a link between company’s organisational objectives and preferable sources of funds. However, the good thing about grant is for the firm to secure funds by issuing award like stock option to key employees within a stock plan (Investopedia, 2010). While the firm is able to secure funds, shareholders on the other hand are able to enhance themselves too. Debt includes not just loans and overdraft but it includes repayment and including the payment of attached interest. Borrowing is a matter of development of relationship. For so many years Vodafone has operated business not just to earn but for the development of relationship especially to its shareholders and senior lenders. According to a study, borrowing relationship has a significant effect to initial public offerings and equity (James and Wier, 1990). With established relationship, it is easy to borrow and develop relationship between the borrowers and lenders. The cheapness and its ease are some of the advantages of borrowing (Lough, 2010). Due to the greater security that it needs to offer to the lenders, securing co-owner to generate funds is a lesser advantage than cheaper borrowing. It is a fact that borrowed capital and yield of such have significant relationship. The large proportion of borrowed capital leads to large yield of owned capital. Therefore, acquiring a business requires usage of a little portion of an investor’s money. The rest can be borrowed. However, borrowing that a business cannot safely repay suggests benefits provided by leverage (Goldstein, 1981). All of these essential and basic ideas about borrowing are clear enough with Vodafone. There is no wonder why borrowing remains one of the most common and useful sources of finance. However, the disadvantages of borrowing stem to its cost which include lost earnings, shortfall from interest payment, expensive fees, cost of account replenishment, extra taxes, financial game plan upset, better alternatives, time bomb and spousal consent (Katzeff, 2010). Normally, businesses weigh the benefits over the disadvantages brought by borrowing as a source of finance. In fact, the mere reason why Vodafone stays with borrowing as its main source of finance, and as it continues its business operation for many years are significant proofs that so far the advantages of borrowing are above of its conceivable disadvantages. Another common ways to secure funds for financial consideration is the equity. At its basic level, Vodafone tries to sell its equity to investors and the raised fund is used for its further growth. There are many good reasons why Vodafone stays with equity as another source of funds. The individual tax advantages to equity may offset those to debt at firm level (Auerbach, 1986). Equity financing is flexible and there are various available sources in line with it (Gray, 1986). Equity does not add to a firm’s fixed cost because it has no fixed payment requirements (Seidman, 2005). However, in the case of financing a business by selling equity, it dilutes ownership and providing investors their unlimited benefits provided that the business is successful, equity is more expensive than debt when business succeeds and there are no ways for the reversal of transaction for either the company or investors (Case and O’Grady, 2003). It is in this reason that Vodafone significantly increased the amount of dividend paid to its shareholders particularly from 2006 to 2010 because the business continues to improve and become productive (Vodafone Annual Report, 2010). Equity and borrowing as Vodafone’s sources of finance Vodafone is one of the largest companies operating in the UK. Due to its continuing growth, there is a need to consider the amount of finance it needs to take into account prior to maintaining a healthy cash flow which is enough to keep its business operates and grows. However, there is still a need to consider sources of its finance considering that its business continues to expand or grow. From its report on financial position and resources, Vodafone has short-term and long-term types of borrowings. The short term borrowings significantly increased from 2009 to 2010, from £9,624 million to £11,163 million and the long-term borrowing decreased from £31,749 million to £28,632 million (Vodafone Annual Report, 2010). Remarkably, the company’s confidence to pay its debt increases considering the increase of its short-term debt. On the other hand, this is beneficial for the company in order to save on the interest incurred from the total amount of debt. Due to its borrowings, Vodafone was able to maintain its liquidity. However, it is not only through borrowings that Vodafone was able to secure liquidity for the company’s financial standing. There was also a great contribution coming from the generated cash of the operation and dividends from borrowings. This is the reason why the long-term borrowing of Vodafone decreases from 2009 to 2010 due to the fact that it relies on other sources of finance. In the case of Vodafone, it is clear that it combines both borrowings and equity as its stable sources of finance and this contributed 26.5% increase for its cash flow aside from increasing amount of revenue (Vodafone Annual Report, 2010). As it can be observed, there is a positive impact of combining borrowing and equity in the case of Vodafone prior to improving liquidity status or healthy cash flow to continue operate the business. These two sources of finance are good combination in the case of Vodafone. This implies that combining whatever sources of finance that will benefit the company is especially important as in line with the innovative ways in achieving healthy cash flow in the modern economy. However, there can be substantial risks to this knowing the fact that each source of finance has remarkable limitations as stated earlier. This is to say that combining sources of finance can possibly create complex set of disadvantages. However, for as long as the needs of the company are essentially addressed by the chosen source of finance, then it is safe to say that combining sources of finance is effective as long as it will address the eventual needs. This can be remarkably observed in the case of Vodafone. In my personal opinion, it is good to go for borrowing considering the greater advantages it has over the disadvantages in other sources of finance. However, as stated earlier, it is also important to understand that whatever source of finance to be employed, it depends on the level of conservatism applied in the company and the significant contribution it can guarantee. I would significantly go for borrowing or debt but it has to be with open credit line. This is to ensure that I can have finance source of a significant amount whenever it is needed. However, as stated earlier, this requires building of a remarkable relationship and reputation. This needs more than just trust, but it has to be the basic. Building such trust requires timely payment. Substantial consideration of timely repayment and payment of the interest rate is very important. In doing this, senior lenders will be convinced that the company is performing financially well. On the other hand, healthy cash flow aside from having substantial asset that can guarantee the amount of debt is another important consideration. Financial performance will always be the basis among lenders and this remains the basic consideration even until today as businesses go global and grow advanced. References Auerbach, A. J. (1986) ‘Financing Corporate Capital Formation,’ in B. M. Friedman. The Economic Effects of the Corporate Income Tax: Changing Revenues and Changing Views. 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[Online] Available at: http://www.investopedia.com/terms/g/grant.asp (Accessed: 14 October 2010). James, C. and Wier, P. (1990) ‘Borrowing relationships, intermediation and the cost of issuing public securities.’ Journal of Financial Economics, Vol. 28(1-2): 149-171. Katzeff, P. (2010) Getting Started in Rebuilding Your 401(k) Account. USA: John Wiley and Sons. Ling, S. L. M. (1992) ‘Southeast Asian Capitalists’ In R. McVey (Ed.), The Transformation of Malaysian Business Groups. New York: SEAP. Lough, W. H. (2010) Business Finance a Practical Study of Financial Management in Private Business Concerns. USA: Read Books. Mott, G. (2008) Accounting for Non-Accountants: A manual for managers and students. 7th ed. India: Replika Press. Parrish, D. (2007) T-Shirts and Suits: A Guide to the Business of Creativity. Liverpool, England: ACME. Seidman, K. F. (2005) Economic development finance. USA: Sage Publications. Vodafone Annual Report (2010) ‘Vodafone financial position and resources’. [Online] Available at: http://www.vodafone.com/static/annual_report10/performance/financial_position.html (Accessed: 14 October 2010). Read More