Helen Strong

MSc English Language Teaching Management

Business and Financial Management

The question

Your new language school is in desperate need of new equipment, including office furniture, classroom desks and tables, up-dated computers and audio-visual equipment. With a view to raising the required capital, discuss the choices you may have along with their relative merits. For example, if equity finance, that is, capital from investors, may be raised, what are the pluses and minuses? If debt finance from a bank is to be considered, what will the bankers wish to know and why? To what service could financial ratios be put in this regard? In considering the offer of finance the banker may provide, how do we decide whether it is a good deal or not? What assurances will they require and why? Include in your discussion the role played by interest rates, collateral, cash flow, assets and liabilities and profitability.

The extract

The business which can make a profit with zero assets is a rare one indeed. To begin operating, most businesses need to invest, to differing degrees, in fixed assets such as buildings and equipment. This leads logically to the question as to how these assets should be funded, i.e. where does the money come from to obtain them? A resource such as money is scarce*. Money has a time value, that is, money invested today can return a greater amount in the future. Thus, spending money today forgoes the opportunity cost of its future returns. This is a major consideration in the decision on financing purchases for a business, and will be explored further in this paper.

For the purpose of the analysis, a number of assumptions have been made:

• the alternatives to buying new equipment have already been examined, with the conclusion that buying this equipment is justified;
• the manager has shopped around and considered alternative sources of where to purchase the equipment (for example second-hand from local colleges and businesses);
• it has been decided that new equipment will be purchased, and the approximate costs have been calculated;
• the language school is owned by one person employing a small number of freelancers;
• the school was originally set up using the owner's own capital;
• the markets have been analysed, and the school owner is confident that the business will continue to grow in the coming years.

The paper will firstly describe, in no specific order, five sources of finance available to the owner of a small language school, and examine their merits. Secondly, a scenario will be presented in which the language school owner has calculated the cost of the equipment and is faced with the decision as to which of the aforementioned options to choose. Each alternative will then be evaluated according to its suitability in this particular instance, and the most viable option will be suggested. The paper concludes with a summary of the choices available.

For ease of reading, the words he, his and him will be used when talking about the owner of the school.

*"A scarce resource is one for which the demand at zero price would exceed the available supply." (Begg, Fischer & Dornbusch, 1984: 3).

Back to the essay titles.