Introduction
In this constant business evolutionary era, financing a business is considered as initial and the most challenging task for any business for duly commences their operations and enters into the world of various business identities. The business finance is one of the core business activities that are typically associated with the acquirement and preservation of resources or funds. These capital funds are mainly acquired in order to manage the different obligations of business in best possible manner as well as meeting the other necessities of business entities for development and get survived in the market (Damodaran, 2011, pp. 12-19). In searching for funding a business in any economic climate is as difficult as to put a thread into the needle, whether looking around for setting up cost, investment requires for business enhancement or certain amount that is required for any potential uncertainty. However, securing investment or funds in current circumstances is as tough as never before. This competitive business environment also ascertains numerous ways to financing a new or vacant business. All the funds acquisition methods have equivalent benefits and restrictions. The sources of traditional business financing were plunged sharply after being stumbled with recent economic crunch. Due to that incident, numerous other forms of business finances have emerged. In this case, it is useful to segregate different types of financing under the caption of traditional and alternative business financing opportunities. The traditional approach for financing a business is often comprised of debt finance and equity finance. Whereas, crowd funding, Peer to peer debt rollover funds are usually come under the sphere of alternative business financing. The main perspective of this assignment is to analyze the stance of financing a fashion retain business in the United Kingdom (UK). Apart from this, it is also required to select a fashion retailer of the UK and analyze its three year’s performance (Ryan, 2007, pp. 22-27). The company this is chosen for the analysis of financing is a hypothetical company with the name of Fashionista Plc, a clothing retailer, listed on the London Stock Exchange (LSE). Currently, the market capitalization of the company is just over £2billion which is quite high.
Analytical Framework
There are three different financing options have by Fasionista Plc, which have been used and described in this analysis. The options are issuance of shares, granting a loan from the bank and owner’s own equity. Each of this option has its own cost benefit advantages and disadvantages.
Issuance of Stocks as Financing a Business
The company issues stocks to raise capital from the market to finance the business operations and activities. It is also known as equity financing. In this financing company sells a portion of ownership in the stock market. The market value of a share is its face value: the total capital of the company is divided into a number of shares. The good thing in issuance of stocks is that company is not liable to pay back the money or interest payment along the way (Tirole, 2009, pp. 10-13). All shareholding individuals get in return for their money is the hope that shares of the company will be worth more than the purchase price of the share. The stocks that are issued by company first time are called initial public offering (IPO).
It must be highlighted that there are no guarantees when it comes to the return of individual stocks. Few companies pay out dividends to its stockholder, and some do not. And there is no any liability of the company to pay out dividends even for those enterprises that traditionally gave them. An investor can make money from the stock only by the appreciation of the share price in the stock market, if the company is not paying dividends (Weaver and Weston, 2008. P. 45). On the other side, any stocks can be bankrupt, in which case the investment of shareholder is worth nothing.
It is one of the most important and widely used equity financing method and most of the companies around the globe are now using the same method to get their equity range wider. Fasionista Plc has the chance and option to raise their equity in the primary or secondary market in particular and allow shareholders to invest directly in the company through buying of shares of the company. Fasionista Plc needs to place an Initial Public Offering (IPO) and it would contain a heavy cost on all of the process that includes heavy fees of the underwriter may incurred.
The main advantage of having this type of equity financing is that it is a quick and easy process, and shareholders have a firm confidence in the companies listed on a particular stock exchange of the country. However, the biggest disadvantage of this method is that, the company should entitle to provide a continuous amount of dividends to its shareholders each year or sometimes semi-annually.
Granting a Loan to Finance a Business
Business financing is majorly depended upon the credit (Loan or Debt) & equity (stocks) financing. Financing of business refers to the means by which an entrepreneur or business owners acquire money to start a business or support business activity to continue its operations. There are many ways of financing each has its own benefits and limitations. This is also known as debt financing; the core advantage of borrowing loan from a lender is that it (lender) will not have any right to take involvement in business management and lender will not be entitled of any profits that a business may generate.
Credit financing is based on the reputation of company or credit worthiness of the firm that takes responsibility for the financing. Loan is issued to firm from banks and lending institutes. These institutes initially ensure that the loan will be repaid before lending loan to the business (Ferran, 2008, pp. 31-33). When taking final decision whether or not to provide loans, lenders first analyze the gross annual sales or revenues of the company, analyze the financial position of the business, also analyze the market of the company to ensure whether the firm will be capable of pay back loan with interest or not.
Granting a loan is yet another important method used specifically by those companies that have nothing in their hand. It is the least effective method for the companies and also for Fasionista Plc as well. Most of the organizations with the word don’t even like this equity financing method merely because of associated costs and conditions with this method. If Fasionista Plc uses this particular method to finance their equity, then their balance sheet would become very horrific as higher would be a debt and lower would be the equity. Apart from that, the biggest disadvantage of this method is a high amount of the costs that would be returned to the bank on the name of interest along with the principle amount; however, it is easy to process and it is the most dominating advantage of this particular method.
Owners Capital as financing a business
There are a number of sources through which the business can keep their operations up and among them equity finance is one of them. The term equity finance can turn out to be of varied channels that may encompass with debt finance, issuance of shares and owner’s equity is another way to avail equity finance. The equity is an amount tends to be invested by owner’s personal cash or the finance acquired by one or couple of sponsors in the business. Moreover, the foundation of business is primarily based on the owner’s equity in order to initialize the operations, while this provision would certainly shape the essence of liability in the form of capital as the business is typically considered as a separate entity in relation to its holders (Graham and Smart et al., 2010, pp. 41-44). The core purpose of the Enterprise is to keep the accountability of assets and liabilities into consideration that is generally known as the accounting equation. After liabilities have been reimbursed, the positive remaining balance would be taken as owner’s interest to business. This is often referred as a residual claim in relation to business assets as the liabilities contain a relatively higher preference. Therefore, Owner’s capital is usually regarded as risky equity financing.
Owner’s own capital as equity financing is yet another important type and method to finance a business, and it is also an important one. In this method, the owner of the company would finance the equity of the company from their own pocket (Quiry and Vernimmen, 2011, pp. 29-32). This method has its own advantage and disadvantages, like there would be no liability on the company which is a positive sign, while the biggest disadvantage of that the risk of losing money would increase in this method. Fasionista Plc has the chance to use this particular method, as well.
Recommended Method
The most recommended method of all of these three would be the issuance of shares in the primary market and utilization of owner’s own equity. Fasionista Plc should not emphasize on a single method of equity financing as it would derail their essence from being economically active. Fasionista Plc is a new company and in terms of having new operations in the vast market, the company requires cost efficiency and effectiveness in particular. Emphasizing on a single equity financing option may not be effective for the company in a broad nutshell, and it requires to lean down on two different methods of equity based financing that have been mentioned above.
Debt versus Equity for Selected Company
The company that has been chosen for the same analysis is “Burberry Plc”. Gearing and Market Share ratios would have been used here to complete the analysis. The company has a fashion house which distributes clothing, fashion, accessories sunglasses and fragrance. It is known as one of the largest companies of the world in terms of fashion retailing. Burberry Plc is a British fashion house with its current listing with LSE. The company has its headquartering located in London United Kingdom (UK). The total revenue earned by Burberry Plc in the fiscal year 2013 was GBP 1.33 billion, while the net income earned by the company in the same year was GBP 265 million in the year 2013.
Gearing Ration Analysis
There are a number of ratios that specifically come under the ambit of Gearing Ratios and among them, only two would be used which are Debt to Equity Ratio (D/E) and Leverage Ratio.
Debt to Equity (D/E) Analysis
Equity is a liability that is used to finance any start-up venture for keeping their operations on; therefore, equity may comprise of owner’s equity, shareholder’s equity and debt equity. Debt to equity ratio tends to another form of leverage ratio that is applied to identify the proportion of debt in the total amount of equity to finance the business purposes. It is figured out by dividing the sum of liabilities with total shareholder’s equity (Hillier, 2010, pp. 51-55). The term can also be referred as individual debt to equity ratio that is being exploited in personal as well as corporate income sheets. The high proportion of debts in equity generally reflects the perception that the company is intended to raise its finance through debt that would ultimately contain a risk of volatility in income due to the considerable ratio of debt.
Debt to equity ratio is one of the most important risks or gearing ratios used to assess the level of financing of the company. A company with a high rate of financing through debt would not be worthwhile for the company, but a company with lower rates of debt to equity would be counted as less risky.
The Gearing ratio of Burberry Plc was extremely high in the fiscal year 2011, showing a net proportion of 86% of the debt and only 14% of equity. However, the pressure of debt has been decreased accordingly in the upcoming years, and it went on a reasonable position at the end of the fiscal year (FY) 2013 by showing a proportion of 66% of the debt and 34% of equity. The average Debt to Equity of Burberry plc is having 77% of debt proportion and 23% of equity proportion.
Leverage Ratio
Leverage ratio is the most used technique that determine the financial tendency of the company in order to come across the with the companys’ modes of financing. In addition, it also divulges the financial capacity of the company that indicates either the company is in a position to fulfill its financial obligations (Ehrhardt and Brigham, 2013, pp. 56-61). There are set of various ratios, but the main factors that need to be looked over encompasses with debt, equity, assets and interest expense.
A ratio that is all about analyzing the main difference between the assets and liabilities of the company is known as a leverage ratio. High Leverage means that the company is less risky while low leverage means that the company is highly risky.
This particular analysis is showing that the leverage between the total assets and liabilities of Burberry plc is high that means that the company is less risky and in a position to attain their milestones.
Market Value
Price to Earnings
The price to earnings ratio can also be denoted by P/E is a basic financial technique that pertains to the valuation of shares. It is calculated by using the price of per share and divided by income over each share. However, the process of price-earnings ratio can be performed through a number of ways such as considering the forecasted or realized in stakeholders would be attracted to make an investment in such company whose price per earnings ratio is superior rather to those with a low P/E ratio (Moles and Parrino et al., 2011, pp. 14-17). It is effective enough to judge the P/E ratio between two companies of the same industry, the market as a whole or for the comparing the historical P/E ratio of the company.
Price to earnings ratio is a combination of the market value of the share with earnings per share
Justification
The main reason behind choosing these ratios for the analysis purpose is that all of these ratios would provide a thoughtful and comprehensive analysis to us in terms of equity finance of Burberry Plc.
Conclusion
Financing is an important part of the business, and no company could be in the phase of economic prosperity without having proper financing. Especially new companies require a high amount of financing in particular merely to have increased their financial belongings for a long span of time. The main perspective of this assignment is to analyze the stance of financing a fashion retain business of the United Kingdom (UK). Fashionita Plc is the company that has been analyzed in this particular provision, and it is found that there are two methods that the company has to use to raise their equity finance, and both of these methods would be worthwhile for them in the future. Both of these methods would certainly work for them and will affect over the financial statement of the company.
Reference List
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illier, D. 2010. Corporate finance. London: McGraw-Hill Higher Education.
Moles, P., Parrino, R. and Kidwell, D. S. 2011. Fundamentals of corporate finance. Hoboken, NJ: Wiley.
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Tirole, J. 2009. The Theory of Corporate Finance. Princeton: Princeton University Press.
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