Internal And External Sources Of Finance For Tesco

A source of finance used by Tesco is retained earnings. Tesco re-invest a certain percentage of their end of the year profits back into Tesco, so they can improve it. Each year Tesco decide how much money they re-invest, this depends on the profit they make.

Fixed assets:

Another type of an internal source of finance for Tesco is fixed assets. Fixed assets are an asset that is not consumer or sold during the normal course of business, these are land, buildings, equipment, machinery, vehicles etc.

These assets are very hard to convert into cash as it takes time to sell, Tesco would use these assets to fund future operations.

Current assets:

Current assets are a key financial source to Tesco’s business. Current assets are cash and other things such as inventory that can be converted into cash easily. An asset that will be in use for less than a year is a current asset as they transfer into money once sold.

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Tesco’s stock in their stores is a current asset as they transfer into money once sold. An essential thing for Tesco to ensure is to ensure that their assets aren’t lower than their current liabilities (debt) as this may force Tesco to close as they want to be able to pay off their debts.

Working capital:

Working capital can be both a good and a bad thing, this will depend on the debt a company has in this case Tesco. Tesco are a massive company so they will have a lot of working capital, this will ensure Tesco grow as they can expand their brand.

Companies like new starts will have finances to expand and grow their business. In 2014 Tesco’s working capital reduced massively by over 300 million this will have an affect on their company in 2015.

In this task I am going to write about what internal and external sources of finance are available to Tesco. Internal sources are funds that come from within the business. An example of an internal source is profits. They can be used to expand a business. Another way is to sell assets that the company don’t use to free up capital. External sources are found outside the business. An example of an external source would be a bank lending company money. External sources of finance (Tesco)

Investments:

An investment is when a person or persons invest their own money into a business, hoping to make a profit on their investment into the organisation. Tesco rely massively on investments just like any organisation. Tesco’s share prices depend on just how much is being invested into the company, and over the past year their share prices have dropped as the amount being invested has decreased. Warren Buffet who is an American billionaire, who made his fortune by investing said that “ Investing in Tesco was a big mistake”.

Ordinary shares:

Ordinary shares, are shares within an organisation that any member o the oublic can buy. Tesco’s shares are currently selling for around £189.75p , with Tesco buying the shares back at around £190.05p, since the horse meat scandal, shares have decreased rapidly. Since November 2013 Tesco’s shares have declined drastically. Tesco are unable to buy back the shares at a price high enough to push customers to sell back, as the customers wouldn’t be making enough profit.

Corporations:

As Tesco are a corporation they can part-take in all the activities any corporation are involved in such as hiring new staff, sue other companies, be sued by other companies and also own their own assets. An asset that Tesco own is their very own oil plant in America

Institutions:

An institution of Tesco would be their bank. The institutions are companies that work with Tesco and that Tesco own. Any money that Tesco receive from the customers and clients of their bank, gets directly put in the profits. The money they make from the institutions gets invested directly back into Tesco

Business angels:

Business angels are people who look to invest into new or successful businesses to try to make a profit. For Tesco business angels would’ve invented at the start of the companies journey in 1919. Business angels usually invest in companies around their home so they can check up on their investments.

Government Grants:

Tesco are Britain’s biggest supermarket and due to this they employ thousands. The government can give Tesco grants and money to invest back into Tesco. The government will benefit because if Tesco invest the money wisely they will have a successful year therefore the government will receive more tax. An example of Tesco receiving a government grant was in 2009 when they received £5 million to open a new store in Glasgow.

HP:

Hire purchase is when a company or person lends out goods to companies for a short period of time, with added interest. Tesco could benefit if they were the company as they would lend out equipment, machinery, property and vehicles, as they would gain interest and also regain some of their investment into the product.

Suppliers credit:

Supplier’s credit is when a supplier offers the buyer the product they want on credit. This is like getting a loan of sorts as Tesco can pay at a later date. This benefits Tesco as they can order as much stock as they need even if they haven’t got the finances at that time.

Sale and lease back:

This is when Tesco sells something to a buyer such as equipment,machinery etc and the buyer leases the product back to Tesco immediately. This benefits Tesco as they can use the product without being tied down to the product financially. To Tesco there is some tax benefits to leasing the product rather than actually owning the product. Tesco can sell the products and lease them back for a long period of time.

Internal and External Sources of Finance for Tesco Company

Internal sources of finance for Tesco

Tesco’s main internal source of income will be their retained earnings. Retained earnings are the amount of net income that Tesco have retained and not paid out. Retained earnings are what are paid to the business owners. Fixed assets are another form of an internal source of finance; this form of finance is a lot harder to convert into cash as fixed assets tend to be things such as vehicles, machinery, buildings and factories.

Fixed assets can take a while to convert into cash so Tesco would not rely on them to be a short-term access to finance. Current assets are a key source of finance for Tesco; current assets are cash and things that are easy to convert into cash. The things that can be converted into cash easily are things such as stock; once the stock has been sold earning will be retained by Tesco. Tesco have to ensure current assets are no lower than current liabilities as this may prevent them from paying off any possible debts they may have.

External sources of finance for Tesco

As Tesco are a large company some forms of external finance do not apply to them, things such as loans, credit cards and bank overdrafts will be of no interest to Tesco as they are too financially significant to benefit from them. However, the sources that do apply to Tesco are investments from shareholders, Tesco have many competitors all competing for the same thing, to be the biggest supermarket within the UK. For Tesco to take that title they will need as much investors as possible. An average loan from the bank would not benefit Tesco as the loan is likely to be small; however, if Tesco needed a quick source of finance of a large quantity, things such as a government grants would be beneficial; it would be beneficial as the grant is likely to be large.