Unit 3.2 Sources of finance
Failure to innovate forces DAC to seriously re-think
For decades, Digital Access Cards (DAC) have made access keys for various clients, which grant digital access to corporate buildings. It is 100 % owned by Kleiner family members. New apps on mobile smartphones may soon replace traditional access cards. Corporate workers will have in their phone an “access e-key”, which will unlock doors using biometric technology. Corporations like the idea of “access e-key’s because they are cheaper, don’t have to be replaced and can be upgraded using software instead of being bought repeatedly. They are also, ecologically sustainable, and can be easily downloaded!
This innovation in “access e-key’s” could put Digital Access Cards (DAC) out of business! Shareholders are shocked. For years, they believed that DAC had a reliable place in the market. DAC’s market share and profits were high, and debt was low. However, rather than make investments in new product lines and development, DAC made only minor modifications to the physical access keys and paid high dividends to satisfy shareholder expectations. As a result, DAC does not have a portfolio of products. It relies on one single product that is now seen as increasingly outdated. Despite this, DAC owns their two factories, land and machinery with no existing debt. These assets are currently valued at $2.5m. They have a good relationship with their current bank who has granted them business loans in the past.
DAC conducted market research and identified two other systems it could manufacture using batch production. DAC has forty skilled workers, and the factories will have to be upgraded at significant cost or work outsourced. DAC is now looking for ways to finance the renovation of the factories. If “access e-keys” become more popular (as predicted) and action by DAC is not taken quickly, then DAC may find themselves out of business.
DAC has met and discussed a range of different options to finance the upgrading of factories, but cannot clearly decide whether internal sources of finance or external sources of finance would be preferable. During a recent meeting, the following sources of finance were mentioned (though not a complete list); leasing, hire purchase, debentures, bank loan, business angel, silent partner, divestment, venture capital, personal saving, trade credit, debt factoring, mortgage, sale of assets and
retained profit.
KEY TERMS FROM THE CASE
QUESTIONS FROM THE CASE STUDY
Questions
1.) Identify one form of capital investment suggested from the case [1]
2.) Explain two advantages that are possible with “access e keys” [4]
3.) List three internal sources of finance and three external sources of finance mentioned in the case [6]
4.) Explain two sources of finance that would be inappropriate to use to finance upgrade of the existing factories [4]
5.) Discuss two appropriate sources of finance for the renovation of DAC’s factories. [10]
SUGGESTED ANSWERS TO 3.2 SOURCES OF FINANCE
Unit 3.2 Sources of finance suggested answers
1.) Identify one form of capital investment suggested from the case [1]
Answer: One form of capital investment suggested in the case is the renovation or upgrade of DAC’s factories to manufacture two other systems using batch production.
2.) Explain two advantages that are possible with “access e-keys” [4]
Advantage 1: Cost Efficiency: “Access e-keys” offer cost advantages as they are cheaper to produce compared to traditional access cards. They eliminate the need for physical replacements and can be upgraded through software, reducing long-term expenses.
Advantage 2: Ecological Sustainability: “Access e-keys” align with environmental sustainability. They eliminate the production of physical access cards, reducing waste and contributing to ecologically conscious practices.
3.) List 3 internal sources of finance and three external sources of finance mentioned in the case [6]
Internal Sources:
Retained Profit, Personal Saving, Sale of Assets
External Sources:
Bank Loan, Venture Capital, Debentures
4.) Explain two sources of finance that would be inappropriate to use to finance the upgrade of the existing factories [2]
Inappropriate Source 1: Trade Credit: This short-term financing method is more suitable for purchasing goods and services rather than funding significant upgrades to factories.
Inappropriate Source 2: Personal Saving: Utilizing personal savings, especially from family members, might not be appropriate for a large-scale renovation as it could strain personal finances and create conflicts of interest.
5.) Discuss two appropriate sources of finance for the renovation of DAC’s factories [10]
Appropriate Source 1: Bank Loan: DAC’s good relationship with its current bank makes a bank loan a viable option. It provides a substantial amount needed for renovations with a structured repayment plan.
Appropriate Source 2: Venture Capital: Given the need for significant investment and the potential for diversification into new product lines, venture capital could bring both funding and expertise to support DAC’s strategic shift.