Chapter 13
Business Finance
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Objectives
After studying this topic you should be able to:
 Identify the main sources of short-term finance
 Identify the main sources of long-term finance
 Distinguish between the financing sources available
to different sizes of organisation
 Understand the specific financing options available
to hospitality, tourism and events organisations
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Short-term Sources of
Finance




Bank Overdraft
Term loan
Trade Credit
Deferred Income
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Long-term Sources of
Finance






Equity
Retained profit
Preference shares
Debt
Term loans
Bonds
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Weighted Average Cost of
Capital (WACC)
The cost of capital is the minimum return that
is acceptable to the provider of finance.
High
Cost
Of
Capital
Low
Equity
Secured
Debt
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Example
Spiritual Spas has two sources of finance: equity
provided by the shareholders and bonds.
The cost of equity has been calculated at 14% and the
cost of debt has been calculated at 6%. The capital
structure of the company means that £750,000 has been
provided by equity and £250,000 by bonds. The WACC
can be calculated as follows:
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Answer
Total capital invested is £750,000 + £250,000 = £1,000,000
The equity proportion is £750,000/£1,000,000 = 75% and therefore
the debt proportion = 25%
Weighted cost of equity =
14% x 0.75
= 10.5%
Weighted cost of debt =
6% x 0.25
= 1.5%
WACC = 12%
Any investment that the company makes will need to earn a return
over 12% in order to ensure the company remains successful.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
SME’s and Micro Businesses
 Face a funding gap
 Inability to raise equity or debt easily
 Can utilise government grants and
funding
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Sector Specific Financing
 Short term
 Deferred income
Long term
Franchising
Management Contracts (REITS)
Entrepreneurial Activity
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Summary
 Short-term finance should be used where finance is
required for short term projects and for working capital
requirements.
 The two main types of long term finance are equity and
debt.
 The relationship between equity and debt is important to
ascertain the WACC.
 A variety of bespoke financing methods are available in
the hospitality, tourism and events sectors.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers