Financing methods on firm’s financial performance Essay
The main focus of this study was to investigate the impacts of financing methods for start up businesses on the financial performance of the firm. Businesses Starts ups are common in the current environment of market liberalism and increased innovations (Maroney 2005:46). However, setting up a business requires that one has capital to establish the business and ensure its growth. There are many sources of finances for start ups and these include traditional means of acquiring start up funds such as family lending, personal savings, bank loans and borrowing from friends among others (Wilson 2001 :101).
Alternatively, firms nowadays resort to venture capital where investors evaluate the business potentiality, before sponsoring its growth. Business start ups can also begin from acquisitions. This dissertation expounds on the investigation done on the impacts of financing methods start up companies on the firm’s financial performance. The central idea was that the method of financing for the start up to its downfall, depending on the level of financial performance.
The study analyzed;-first, the business start up financing methods such as loans, venture capital, acquisition financing, and private equity investors in relation to the financial performance of firms. Second, the prevalence of financing methods among the business
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Moreover, the knowledge gathered in this dissertation is vital to the finance educators who later in return will impart the knowledge to the students enabling them to make informed financial decisions when setting up their businesses. 1. 1 BACKGROUND AND CONTEXT The study aimed at identifying different financial methods used for business start up and their impacts on the financial performance of the firms. To achieve this, questionnaires were administered to the identified sample population and the data gathered analyzed using SPSS.
The findings were then compared with the information obtained from the secondary data and conclusion deduced. 1. 2 SCOPE AND OBJECTIVES The study covered 1000 start up businesses ran by the Greek in UK as the sample and their financing methods n relation to their financial performance. The main objectives of the study were; • Identify the start up businesses in UK and their financing methods. • To establish the financial performance of the businesses. • To investigate the impacts of start up companies financing methods on firm’s financial performance
• To establish the relationship between financing methods and business performance. 1. 3 ACHIEVEMENTS The study findings were very fruitful as they met the initial laid objectives. 1. 4 OVERVIEW OF THE DISSERTATION The following sections are covered in the rest of the dissertation; • Literature Review • Methodology • Findings and interpretation • Conclusion and Recommendation CHAPTER 2 2. 0 LITERATURE REVIEW Several studies report on the means which founders seek to finance the start up business, but there is limited research on how the financial methods affect the financial performance of the firm.
Langeland (2006:44) asserts that lack of competent capital is a major hindrance to financing start up business, yet these businesses could be having a huge potential for growth. Aspiring business owners seek methods to which they can finance the establishment of the business. According to Sander and Koomagi (2007), the business start up is a period of uncertainty because it is still early to establish the success of the business. New businesses face the financial, technological, and economical challenges, and strategic management of finances is required to ensure that the right investment was made.
Other than management of internal resources for the start up other external factors come into play. Duffner, Schimid and Zimmerman (2009) highlight the importance of business valuation before the founder settles on the financial method. According to the authors, valuation hastens the founder‘s attractiveness to the conventional financing methods such private equity investment and venture capital. Business valuation at start up level can occur from cost, income or market approaches (Pratt 2001:82). Valuation is necessary for the purpose of financing the start up business comprehensively.
It would be unfortunate to under finance a business with a lot of potential, or over finance a business one that will fail to bring returns to the investment. Despite the financing method it is always the desire of the founder and the management to propel the business growth (Leleux & Surlemont 2003:83). Substantial research points out to the high prevalence of venture capital as a means of financing start up businesses, especially in the current technological era, where innovations are prioritized (Jungwirth and Moog, 2004:566).
External sources of finances ensure the perpetuation of the business as the investor wants to reap from the investment. However, venture investors need to be convinced of the capability of the innovation to sell and hence establish a growth avenue of the firm into the market. Venture capitalists and private equity take a control role in the firm, and influence supervisory and management decisions for the purpose of safeguarding their financial interests (Kirilenko, 2001; Sander & Koomagi 2007:190).
Consequently, high and speedy growth is experienced with firms that are financed by the external sources such as venture capital and private equity. However, the study failed to show whether it is the business founders who seek such financing methods to ensure that the business grows or whether it is the venture capitalist that recognizes the potential of the business and thus finance its growth. On the other hand, Nenova (2003:326) points out that very few venture capitalists invest in start up business as majority go for companies alternate methods to financing such traditional and conventional loans.
Personal and family loans can be easy to acquire but it is not certain on the duration it can sustain the financial growth of the firm. Loans from banks and other institutions highly depend on the previous credit history of the debtor and they widely affect the financial health of the business (Padachi 2006:46). CHAPTER THREE 3. 0 METHODOLOGY The main aim of this dissertation was to establish the impact of financial methods of start up businesses on the financial performance of the firms.
A quantitative approach was used as proved suitable by Lazaridis 2001:68 where a number of start up businesses were investigated on the bases of finance for initial capital, and the financial performance at the later stages of growth. Following a survey methodology a primary examination was done to determine the impact of finances on companies at start up and initial stages of growth and their sustenance of financial performance. The study aimed at verifying the number of companies in relation to the impact from their start up finances and how the sample companies represented the whole population.
The data was generated through both primary and secondary research. In the primary research structured questionnaires were administered and the respondents adequately answered. A total of 1000 respondents was used and were randomly selected to increase the validity of the findings and effectively represent the entire population. In addition, the data was cheaply and easily gathered easing the contrasting and the comparison of the impact of financial methods on business starters.
Prize draw competition was introduced as a way of overcoming the challenges faced while administering the questionnaires. The competition motivated the respondent to fill and return the questionnaires. This proved to be of much help while collecting the data. Secondary research was achieved by collection of data through literature review of scholarly studies. A critical analysis was done for the purpose of comparison filling in the existing research gaps, drawing of the conclusion as well as stating of implications. Data collected was summarized, organized, simplified and analyzed using SPSS.
Pie charts, Tables and graphs were used to present the data. Survey methods are widely used in management and social studies. For instance, Sander and Koomagi (2007) used a survey method of structured interviews to survey the prevalence of venture capitalists in the control and management of the businesses which they finance, in Estonia. Padachi (2006: 46) reports on the number of survey based approaches used in the UK, Belgium, and the US in determining the push factors that make start up firms settle on particular financing methods.