Identifying Financing Needs and Constraints

Ruken Turker

I will be carrying out an investigation on a Morrison financing needs and any constraints placed on them in regard to their legal form. I will be looking at their legal form and its advantages and disadvantages. I will also be looking at what financial sources they have available. I will also use their Accounting documents i.e. Balance Sheet and Profit and Loss Account to carry out my analysis.

The Business I Have Chosen is Wm Morrison Supermarkets PLC

Morrisons was established by William Morrison in 1899, initially as egg and butter merchant in Rawson Market, Bradford, England. His son Sir Ken Morrison is chairman of the company now. The company was taken over by Sir Ken in 1952 and started to grow the business. In 1967 the business became public limited and the company was listed in the London Stock Exchange.

Morrisons as a company now has 368 superstores in United Kingdom including the new store opening by the end of 2007 and those it retained following its purchase of Safeway plc. The company has its core focus on groceries and homewares, with fewer electronics, clothing and furnishing than the company’s key supermarket rivals.

The Trading Performance of Morrisons

Morrisons has announced that the outcome of its strategic review, as well as its initial results on 15 March 2007. The Turnover was up 3% to £12.5bn (2006: £12.1bn), like for like sales (ex fuel) up 5.2% (2006: 2.4%), and profits jumped to £369.0m before taxation- a company record (2006: (£312.9m)). It also announced that most of the targets from its original three- year 'Optimisation Plan' had been met, including its plan to increase gross profit margin by 90bps, in one year.

The business now has £450m to modernise itself.

PLC

Morrisons has become Public Limited Company in 1967. Companies within PLC should audit their accounts and make sure the accounts are ready for any inspection. Morrisons uses PLC abbreviation in its name to indicate that it is a public limited company. This is also stated to warn traders that their liability is limited and debts cannot be recovered from the personal funds of the company shareholders. Some advantages of public limited company are to raise large amount of capital from share issue and benefit from economies scale such as bulk buying. Disadvantages may be the possibility of takeover or merger because shares can be bought by anyone, and may become too large resulting in poor labour relations.

Morrisons is a public limited company which also means that some of its capital is raised from the sale of shares. The share capital cannot be redeemed because it is permanent capital. Morrisons also uses retained profit to refurbish its own shops.

All limited companies are incorporated (a firm with separate legal existence) this means that they are able to sue or own assets in their own right. The ownership of limited companies is divided up into equal parts which are known as shares and whoever owns a share is called the shareholder.

There are differences which legal structure makes on the finance available to the business. This also has some advantages and disadvantages for the business.

Public Limited Companies

The other advantages for this type of ownership are economies scale such as bulk buying. They can also benefit from earning capital from selling of their shares.

The other disadvantages are being takeover by another company or merger with another company. Morrisons has been a merger with another company which is the detriment for the business itself.

Long-term and Short-term Finance.

Long-term Finance

Both Long-term and short-term finance is an external source of finance. Long term finance may be paid after many years or not at all.

A Public Limited Company has right of entry to capital markets and can present its shares for sale to the public through a recognised stock exchange. It can also issue advertisements offering any of its securities for sale to the public. In contrast, a private company may not offer to the public any shares in itself

Long term shares may be the ...

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Long-term and Short-term Finance.

Long-term Finance

Both Long-term and short-term finance is an external source of finance. Long term finance may be paid after many years or not at all.

Long term shares may be the following:

Ordinary shares (equities) - These shares are ordinary shares of the company and there are no special rights or restrictions. These shares may be divided into classes of different value.

Ordinary shareholders have voting nights
Dividend can vary
Last to be paid in the event of collapse
Share price varies with trade on stock exchange

Preference shares

Paid before ordinary shareholders
Fixed rate of return
Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment.

Right issues – existing shareholders given right to buy new shares at discounted rate.
New share issues – arranged by merchant or investment banks.
Redeemable – the company makes an agreement to buy these shares back after a period of time or on a fixed date, at the option of the other company and shareholder. A company cannot have just redeemable shares.
Bonus or scrip issues – change to the share structure increases number of shares and reduces value but market capitalisation stays the same.
Bearer shares - Are a legal appliance indicating company ownership, and are normally in the form of share warrants. A share warrant is a document which says that the bearer of the warrant is permitted to the shares stated in it. If authorised by its articles, a company may alter any fully paid shares to `share warrants`. These warrants are effortlessly transferable without any need for a transfer document; that is, they can basically be passed from hand to hand. When share warrants are issued, the company must strike out the name of the shareholder from its register of members and state the date of issue of the warrant and the number of shares to which it relates. Subject to the articles, a share warrant can be submitted for cancellation. If so, the holder is entitled to be re-entered into the register of members. Vouchers are generally issued with the share warrants in order that any dividends may be claimed.

Finance being used?

Some of financial uses are internal sources. Internal sources are as follows:

Organic growth – growth generated through the development and expansion of the business itself. Can be achieved through.
Generating increasing sales – increasing revenue to impact on overall profit levels.
Use of retained profit – used to reinvest in the business.
Sale of assets – selling assets/property of your business.
Working capital – these may be tighter credit policy, reducing stock of raw materials, and finished goods, or developing payment to suppliers and creditors. This is important because it keeps the company solvent.

Long – term loans are as follows:

Debentures – this is a loan that is usually secured and has a fixed rate of return or floating charges with them. A secured debenture is one that is specially joined to the financing of a particular asset such as a building or a machine. The debenture holder has a legal interest over the asset and it is then similar to a mortgage for a private house because if the debenture holder does not agree the company cannot dispose the asset. It can be called a debenture mortgage if the debenture is for land or building. Debenture holders can benefit from having to be paid their interests payments before any dividend is payable to shareholders and another main important issue is that if the business makes a loss they will still need to pay interest rates. Debenture holders will be to the lead of receiving their repayments before shareholders receive anything if the business fails.

Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan. The bank may lend some money for long periods like 25 years or even more in some circumstances. A mortgage is a loan which is specially used for to purchase a property. The bank will ask for a security to guarantee that they will receive their money back if the borrower is unable to pay back. A popular way of doing this is using the borrower’s property such as their house. If the borrower cannot pay the money back then the bank has the right to sell the property to recover their money. Small businesses usually use mortgages and it is popular but it has a big risk.

Venture Capital – this source of finance is becoming popular with companies which are growing. Venture capitalists are known as groups of individual or companies who are usually wealthy and they are set up specially to set up to invest in growing businesses. The targets for venture capitalist are businesses with potential. Venture capitalists are able to offer capital for those businesses which are developing. By these venture capitalists has the right to say something in the business running and share of the profits made. Some banks do not want to get involved in projects with risk so venture capitalists are able to take on these projects.

Merchant or investment banks – act on behalf of client to organise and underwrite raising finance. Investment banks are often known as wholesale banks or merchant banks. These banks do not deal with the public at a retail level, they offer loans and advice on other financial sources and they are like brokers. They may also be able to arrange shares on equity markets. The loans which they offer are much more than a retail bank can offer and the deposits and loans they take are recognised as wholesale deposits.

Government/EU – may offer loans in certain situations. Funding from government is attractive because it is often cheap. Government loans are available for periods of between 2-10 years and the some varies between £5,000 and £100,000. There are range of different loans and grants existing. To qualify for financial help firms often have to set up in areas where unemployment is relatively high.

Short-Term Finance

Short-term finance is used to cover fluctuations in cash flow. Some of the short-term financial sources are as follows:

Bank loans – bank loans are amount of money which is being borrowed and agreed to pay back during a certain periods of time with repayment schedule. The repayment will be decided on the amount of money borrowed, duration of the loan and the interest rates which the bank charges. Loans are generally used for assets such as machinery and buildings or to start up a new business. Repayment periods 1 year or over which can be 5-10 years at the most. An advantage of bank loan is that some businesses may able to negotiate and obtain a repayment holiday which means that the business only pays back interest for certain amount of time and during that period of time the repayments on capital are stationary. The business does have to pay the interest but they do not have to give a percentage of their profit to the bank. There are many banks which offer loans so a business may easily be able to find the loan which is suitable for them as bank are being competitive.

Overdraft facilities – bank overdraft is a common source of short-term finance. It is the right to be able to withdraw funds you do not currently have. It allows a business to spend more than the money they have in their account. The business has the option to use the bank’s money till the agreed limit and go overdrawn. Bank overdrafts are very flexible and the interest rate only takes place when a business goes overdrawn. There is a competition in the interest rates but if a business exceeds its overdraft limit the rates can be very high.

Trade-credit – this is when a firm sells goods to a customer with an agreement of billing them later. The business will try to obtain some stock from its suppliers and decide to pay after a certain date. The supplier will give a time of period to the business to pay for the stock. The time will be given regarding how well the business is doing, how the sales of the business are, how long the business is being trading with the supplier and the payment records. It is interest free for trade credit but businesses may be charged for late payments. Trade credit facility may not be available for new, small and risky businesses because as they may not be able to pay back. Trade Credit helps to ease cash flow and it is usually paid back in 28-90 days.

Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service. Simply the business decides to sell their debtors to a factoring company and by this way the business does not wait for the customer to pay them. Instead the factoring company usually pays around %80 and the final %20 with deductions of factoring company will be received when they receive the debt. Retailers will not use factoring because they do not have debtors, this means that in appears when there is business-to-business trading. It may be expensive to use factoring so it is actually suitable for businesses with high profit margin. Factoring companies may only buy debtors after they have checked the businesses credit history and decided that they are likely to get paid.

Leasing – provides the opportunity of renting an asset. This is similar to renting. If a business cannot afford to buy assets such as property, machinery or vehicles outright then they may decide to lease. This is also a good way of acquiring such resources as they may be needed for only short period of time. Leasing company also covers the maintenance and repair costs. If the leasing is for long periods of time this may be expensive for the business. There are different types of leasing and most common types of leasing are Operating Lease and Finance Lease.

Operating Lease - this is when the business pays for the use of the asset for particular period of time and then the asset is returned to the leasing company.
Finance Lease – this takes place when the business leases the equipment and at the end of leasing they may have the option of purchasing the equipment.

Leasing is a main source of finance and by leasing a company can obtain assets to keep the business operating and keep their cash flow tight. There are some advantages of leasing. A business can save money by leasing because they do not have to pay full amount for the asset and it is only paid for a fixed period of time. Interest rates are also fixed for leasing this will ease the cash flow of the business and they will know how much they will need to pay each month. If a business prefers they may pay over a long period of time which will also ease the cash flow and they may match the payments to their income.

Hire Purchase (HP) – Hp may be used for to purchase plant, machinery or equipment. When a business decides to use hire purchase they borrow money from a specialist which is known as the finance house. A business may decide to buy an asset on HP. The finance house then pays the supplier of the asset and then the business pays the finance house monthly instalments until the full cost and the interest has been met. The asset does not belong to the business until the last instalment is paid. Until that the asset belongs to the finance house. Hire purchase may be expensive for the business because of its high interest rates regarding this it is actually easy to get HP.

Credit cards – credit cars are commonly used to obtain materials, services and fuel needs of the business. When a credit card is being used there is no exchange of cash. At the end of the month credit card users will receive a statement which states all transactions been made and the amount owed. If the payments are made within 25 days then there will be no interest but if is past the payment period then there will be high interest rates to be paid back.

Long-Term and Short-Term Finance for Morrisons

For balance sheet refer to Appendix 1

For Profit and Loss Account refer to Appendix 2

Morrisons uses both long-term and short-term finance. This can be seen by looking at the balance sheet of the company.

Short-term sources for Morrisons

There are some short-term sources which Morrisons use at the moment which helps to cover fluctuations in their cash flow.

One of the sources they use is leasing. This relates to a contract between a lessor and lessee for hire of an asset. The lessor has the ownerships of the assets. The lessee has possession of the asset on payment of specified lease rentals over a period. Morrisons balance sheet shows the figures of £227.9m for leasing. This is the amount which this business uses for its leasing purposes.

Another short-term source is creditors. Creditors form part of a business’s liabilities and represent amounts due to third parties. Creditors are analysed in the balance sheet into those due within one year and those due after more than one year. For most businesses, the main creditor is “trade creditors” – amounts owed to providers of goods and services on credit terms to the business. The figure for creditors show £1,501.1m in the balance sheet of Morrisons. The main creditor for Morrisons is similar to other businesses. The creditor is trade creditor. The amount for trade credit is £905m as on balance sheet of this business.

There are no bank loans or overdrafts in the balance sheet.

Long-term sources for Morrisons

Long-term finance is being used by Morrisons. Some of the sources of long-term finance are:

The Long term share Morissons uses is Ordinary shares. They have ordinary shares because the share price fluctuates with trade on stock exchange. Morissons sells shares on stock exchange and from this the business earns a capital of £267.7m.

Retained profit is another source of long-term finance for this company. Retained profits are those profits that have not been paid out as dividends to shareholders, but retained for future investment by the company. The figure on the balance sheet for retained profit is £1,039.5m for Morrisons.

Some Other Financial Uses for Morrisons

Morrisons as a business also invest their some of their funds in property. The balance sheet confirms the figures of £240.5m under the name of investment.

In the balance sheet of Morrisons there is also a figure which is for merger reserve. The amount is stated as £2.578.3m.

In the balance sheet there is also a part which is named as ‘other financial assets’ and this is £19.1m.

Bibliography

http://www.morrisons.co.uk/Corporate/Resources/pdf/annualreport07.pdf

http://www.morrisons.co.uk/Corporate/Templates/Investors/FinanceNReports.aspx

http://www.morrisons.co.uk/Corporate/Resources/pdf/annualreview07.pdf

http://www.morrisons.co.uk/Corporate/Resources/pdf/PRESENTATION7.pdf

http://en.wikipedia.org/wiki/Public_limited_company