business finance uk

business finance uk

The Dynamics of Business Finance in the United Kingdom

1. Introduction to Business Finance

Many other countries today, with less developed social and economic institutions and ways of life, have more people, resources, and territory, and it is their urgent problem to find results. Business investment and finance are not the only factors entering the economic process, but in estimating the probable unemployment and under-utilization of materials, it is instructive to use the reason that these difficulties arise because, in practice, it is very much more difficult to increase the amount of business investment, that is, to increase the amount of production of certain national products. Investment and finance are very closely associated. The entire field of business finance, however, covers the provision and control of the money and credit required within the economic system to achieve profits and promotion and provide the services necessary to make money circulate within the system which we are all striving to live in and maintain at a high level of efficiency and dynamism.

Introduction In the present century, the United Kingdom has held a leading position among the economic systems of the world. Long-established trading practices, a stable social background based upon the doctrine of a natural and free society with obligations between members of that society, economic institutions of long standing, and respect for legal rights are among the reasons which have contributed to its achievement. The practical application of the incentive of private financial gain to management in the conduct of economic affairs, together with other institutional features, has helped it notably to keep ahead in promoting and spreading the use of scientific research and technological advancement within all world areas. This process has meant that large resources have constantly been made available for investment and business finance activities.

2. Key Financial Concepts and Tools

The world of counterparties represents the buyers and maturities representative to the intermediary. Generally, the investors are concerned with their return, safety, and liquidity. They depend on the strength of the intermediary to promise all these and then they worry less about what the actual underlying investments are. So there is a certain confidence in trading with the intermediaries. The marketability of securities depends on the actual availability of intermediaries to stand behind them, particularly during volatile and risk-increased periods, and that their promised search in delivering value are also important. The question arises whether the needs of the intermediaries can be satisfied from tradeable corporate securities and that these securities are the same caliber as bank liabilities would have been in providing the same or similar role. These are the financial risks to the issuer and stability of the public-company businesses. Corporate businesses are constantly challenged by the need for improvements through change in structure and the development of confidence through relative financial gains decisive risk positioning seems clearly an issue related to corporate securities. We begin our survey of the financial tools by describing the relationship between financing decisions and cash flows.

The roles are intermediaries in the financial markets, whether investment banks or commercial banks, insurance companies, or pension funds. Financial intermediaries are there to channel savings funds into the economy. They save through buying assets which are obligations of somebody else. These intermediaries aim to earn a return on their investments, out of which they have to pay their operating expenditures and reserve profits. The risks which are associated with their investments are spread by diversification of their portfolios. Generally, the intermediaries would like a correspondence between their liabilities and the asset incorporation in the liability structure. The public expects this kind of correspondence. This means returning short-term funds with correspondingly short-lived assets (shares and securities).

Key financial concepts: A distinction can be drawn between flows of funds, which correspond to the statement of total recognized gains and losses, and stocks of funds which are reported in the balance sheet. We use the word “real” for the non-financial side of the economy in the sense of non-financial assets: fixed assets, inventories and work in progress, and securities. The business itself is doing things like making goods and selling them, organizing methods of production, training employees, and investing in technology as well as organizing new financing. These are characteristic of the functions of the business firm and could therefore be described as typical business financial activities. The funds that are associated with these activities are the circulating and fixed type activities discussed earlier. These can be thought of as the financial dimension to the business function.

Aims of this chapter: This chapter is concerned with a set of tools for describing business finance. Tools are necessary because the relationships which exist between different types of business finance and the connections between the business world and the capital market, which are discussed below, are not generally very well understood.

3. Financial Management Strategies in the UK

The support of innovative investors, such as venture capitalists and similar financiers, is particularly valuable at an early stage in the development of a firm because of the high profits usually available to those who can provide risk capital before substantial profitability is demonstrated. A commonly observed financial management strategy in the United States is to develop new, high-growth, and potentially profitable businesses, from the mid-1970s, closely to the market for initial public offerings (IPOs). This benefits both the parent firms, which can realize substantial financial gains by selling important fractions of the businesses on the public capital market, and the startup businesses, because venture capitalists channel investment and management skills to new managers of the business to a greater degree of ownership. Finally, there are particular financial strategies designed to enhance the bargaining power of the firms vis-à-vis potential financial proponents, including banks and influential shareholders, who are also able to provide strategic resources of particular interest to the institution.

The success of many of the financial management strategies described in the previous section depends crucially on the readiness and willingness of apt and efficient financial systems for their implementation. These areas of finance – distortions, information provision, and innovation support – represent the specific forms of indirect support necessary to enable businesses to operate the particular strategies of the financial management function from the earlier section presently. Other financial activities are also required to support broader strategies in portfolio creation and asset trade-off. These investment and financing activities are directly directed at the creation of assets and the support of financing processes. Without the existence of extensive and viable financial markets, self-financing would be relatively inefficient and entail high costs.

4. Regulatory Environment and Compliance

The EU Accounting and Company Law Directives, which were expected to be adopted by the EC Council at a July 1989 meeting, would have required all member countries of the European Union to introduce provisions into their national law to give a significant cap on the liability of auditors. In order to provide the profession with the necessary protection from litigation, and in the absence of firm proposals in the Companies Bill, which was being considered by Parliament, the professional bodies, in conjunction with the Bank of England, formulated the Code of Best Practice. This does not require legislation but it can take effect where shareholders approve its application in a company’s Annual General Meeting. The Code of Best Practice has now been approved by the Institute and the two other main professional bodies, the Committee on the C&AG and the other influential accounting bodies.

The Code of Best Practice on Limitation of Auditors’ Liability was published on October 19, 1989 by the Institute of Chartered Accountants in England and Wales (the Institute), the Institute of Chartered Accountants of Scotland, and the influential Committee on the Financial Aspects of Corporate Governance (the Cadbury Committee). A draft code was first published on August 24, 1987 in response to strong representations by the profession over a number of years that the law on liability was materially inhibiting the issuance of audit reports, particularly on larger companies. The 1987 code was approved in 1988 by the professional bodies, representing the interests of UK accountants. No further action to implement the code was taken because of the subsequent introduction of the Enterprise and Deregulation Bill, which provided for a significant cap on the amount of damages following the issue of an audit report.

5. Case Studies and Best Practices

One aspect not discussed in detail here is if, or how, the underwriting process can be used to minimize asymmetric information problems between any firm and the financial markets. But it would be highly desirable that, as the UK is a center for the location of many international corporate governance-advising houses, all investment banks which wish to provide underwriting advice should refuse to do so for any firm which could be considered even mildly opaque in its financial reporting. The corollary is that a short list of merchants should refuse to provide this advice. After all, it would be best for the corporate governance consultants to push their heavy weather clouds somewhere else – the clients would generously thank them for it!

Big firms should have at least one non-executive director who is remunerated entirely (or at least primarily) in the form of a pre-determined annual retainer, fixed regardless of time spent. This director should have a veto on the selection of the independent auditor. Medium-sized firms (having say at least 200 employees and/or sales of £50-100m) should also do this. The possibility of repeated use of complex and incompletely understood derivative transactions makes the case for this clear – and this is true whether the counterparty to the transaction is the board of directors or external parties in the financial markets. And boards that allow large sums to be spent on specialist derivative transaction advice (whether for advice on the termination or appropriate pricing of a particular set of transactions or simply to allow the board to give up to their shareholders independent assurance on derivative pricing risk-management) in any year should be defenestrated if they appoint an auditor for the following year who charges less than a third of this sum.