Sources of capital to fund logistics Lecture 11

On completion of this topic you should
be able to:
• Identify a balance sheet and income statement
• Recognise the problem of sourcing capital funding
• Outline sources of short, medium & long term finance
• Recognise the risk involved in sourcing finance
• Demonstrate how different sources of capital can be
applied in a logistics business
• Outline main methods of logistics appraisal
7032maa – Lecture 11 1
A trading entity’s basic
accounts
7032maa – Lecture 11 2
The Income Statement
Revenues
Assets (cash or AR) created through
business operations
Less Expenses
Assets (cash or AP) consumed through
business operations
Equals Net Income or (Net Loss)
Revenues – Expenses
7032maa – Lecture 11 3
An example Company Income Statement
For the Years Ended December 31, 2018 & 2019
2019 2018
Revenues:
Sales £100 £ 85
Other revenue 38 15
Total revenues £138 £100
Expenses:
Cost of goods sold £ 62 £ 58
Operating & admin. 16 12
Income tax 20 18
Total expenses £ 98 £ 88
Net Income £ 40 £ 12
7032maa – Lecture 11 4
Accounting Equation
Assets = Liabilities + Owners’ Equity
Sources of Funding
Creditors’
claims
against
resources
= +
Owners’
claims
against
resources
Resources
Resources
to use to
generate
revenues
7032maa – Lecture 11 5
Assets
Cash £ 40
Accounts receivable 100
Land 200
Total assets £340
Liabilities
Accounts payable £ 50
Notes payable 150
£200
Owners’ Equity
Capital stock £100
Retained earnings 40
£140
Total liabilities
and owners’ equity £340
Sample Balance Sheet 2019
Must
Equal
7032maa – Lecture 11 6
Where is the capital?
7032maa – Lecture 11 7
Sources of finance
Source: Dyson J 2010 Accounting for non-accounting students 8th ed Prentics hall p426 fig 19.3
7032maa – Lecture 11 8
Risk & sources of finance
• Capital finance is sourced from banks and various
markets that trade in ‘financial instruments’
• Credit status of businesses affects risk
• Interest rates reflect risk lender is prepared to take
• Confidence of business performance also affects
level of risk taking
• Trading markets give value to shares and other
IOUs
7032maa – Lecture 11 9
Risk & sources of finance
All based on confidence of business performance
• What happens when businesses fail to meet profit
levels?
• Or economic performance is poor?
• Or international trade and competition harsh?
• Or assets held against IOUs fall in value?
Holders of IOUs, shares and loans want cash back
• Can create a panic which is self fulfilling and assets
fall further in value
7032maa – Lecture 11 10
Other sources of finance?
• Can you identify other souces of finance
other than the ones mentioned?
Internal sources External sources
7032maa – Lecture 11 11
Uses of capital in logistics
Short term finance:
• Used for working capital to keep business
running smoothly
Medium term finance:
• Purchase of vehicles and machinery
Long term finance:
• Funding of buildings and long term assets
7032maa – Lecture 11 12
Transport & logistics utility
• Economically transport & logistics services are
heavily asset based
• Its often difficult to predict a satisfactory return on
investment on transport & logistics assets
• Externalities often affect transport markets
• Must recognise economic utility extracted from the
resources allocated to transport & logistics assets
• Economic utility often has diminishing returns
• Transport & logistics appraisal is about measuring
the utility derived from the use of transport assets
7032maa – Lecture 11 13
Methods of transport
appraisal
Two main methods:
• Examine performance of similar existing transport
& logistics projects
• Use various predictive models
Drawback to these methods:
• Difficult to predict future with any accuracy
• Funding is often both private & public
– Private funding utility is usually profit
– Utility is measured differently for public funds
7032maa – Lecture 11 14
Social cost benefit
analysis
Cost-benefit analysis appraisal methodology
includes:
• Costs such as capital & operating costs
• Benefits such as time savings, accident
reduction, revenues earned & reductions in
operating costs
• Social factors difficult to quantify
• What to leave out? What to include?
• Known as SCBA (social cost benefit analysis)
7032maa – Lecture 11 15
Principles of SCBA
Source: COWIE, J., (2010) The Economics of Transport, Routledge p347, fig14.3
7032maa – Lecture 11 16
Comparison of appraisal
methodologies
Source: COWIE, J., (2010) The Economics of Transport, Routledge p343, fig14.2
7032maa – Lecture 11 17
The appraisal process
Lots of
projects
competing for
Govt funding
– how do we
know where
to spend our
money?
APPRAISAL
PROCESS
Systematic
comparison of
projects
Projects
ranked in
order of
priority:
Project 1
Project 2
Project 3 etc
Source: COWIE, J., (2010) The Economics of Transport, Routledge p339, fig14.1
7032maa – Lecture 11 18
Transport appraisal in
practice
• In theory transport appraisal is about comparing
the costs & benefits of different projects to identify
the greatest possible return of the investment
• In practice:
– Very difficult to maximise society’s utility
– No perfect knowledge of costs & benefits to society
– Public money not allocated in a perfect manner
– Distorted between Government departments
– No common method to measure costs & benefits
– Politics interferes with decision making (eg HS2)
7032maa – Lecture 11 19
Effect of assumptions
• SCBA & objective based appraisals rely on
forecasting and modelling
• Can be subjective, optimistic and inaccurate
• Benefits and costs need to be expressed as a
net present value
Difficult to value:
• Time savings
• Accident valuation
• Operating cost savings & revenue generation
7032maa – Lecture 11 20
Holistic view of logistics
economics
• An understanding of economic scarcity aids
analysis of logistics activities
• Micro economic view helps pricing/costing & aids
understanding of resource behaviours
• Macro economic view aids understanding of
market & growth behaviours
• Being informed of behaviour of global markets,
foreign economies & business trends helps
decision making
7032maa – Lecture 11 21
Holistic view of logistics
costs
• Costs should be viewed from either a marginal
or activity based approach
• Appraisal techniques such as NPV should be
used to assess transport investments
• Much transport investment is funded by public
money and cannot always be quantified
financially
• Pricing is often market influenced
• Profit depends on maximising asset utilisation
7032maa – Lecture 11 22
Holistic view of logistics
analysis
• Often includes budgets & variance analysis
• Much data derived from budgets and accounts
departments & needs re-interpreting
• Over use of averages
• Need for standard deviation & normal distribution
curves
• Graphs, linear and regression analysis useful for
modelling activity & forecasting
7032maa – Lecture 11 23
Holistic view of logistics
finance
• Banks and other finance institutions judge
creditworthiness on past performance
• Use of balance sheet & income statement to
generate various KPIs & financial measures
• All finance is supplied based on the perceived
level of risk of default
• The state is prepared to finance logistics and
transport projects if returns are beneficial to
society as a whole
7032maa – Lecture 11 24
Summary
• Identified a balance sheet and income statement
• Recognised the problem of sourcing capital
funding
• Outlined sources of short, medium & long term
finance
• Recognised the risk involved in sourcing finance
• Demonstrated how different sources of capital
can be applied in a logistics business
• Outlined main methods of logistics appraisal
7032maa – Lecture 11 25

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