Introduction:

To analyse the fund raising strategy and investment strategy, Next PLC company has been chosen. The report discusses about carious strategies that deals with the fund raising strategies and investment strategies. To analyse the financial condition of the company and sustainability of the company, the financial ratios are formulated based on the income statement and balance sheet of the company. This ratio assists to determine the financial position of the company and also profitability of the company. After analyzing the annual report of Next PLC of 2019, 2018 and 2017, the company mainly focuses on debt strategy for raising fund from the market, which is one of the prime reasons that the company allocated maximum amount of bond in the market (Dutordoir et al 2014). The company also raised funds from the market through loans. On the other hand, the investments that distributed mainly distribute among the shareholders and the assets.  

Strategies Adopted By Next Plc To Raise Fund:

The companies who aspire to expand or want to enter into a new project normally strategize to raise fund from the market. The fund rising strategy of the company are being mainly decided by the financial management team and the executives of the company. The management of the company is the ones who decide the funding strategy. After analyzing the market condition and the company’s financial and operational condition, the management of the company decides the fund raising strategy for the company. In the business environment there are many funding strategies. These funding strategies may include crowdfunding, angel investment or by raising the fund from the stakeholders of the company.   

In case of Next PLC, the company’s primary objective is to fulfill the shareholder’s interest. The company aspires to provide long term return to the shareholders. The company fulfills the shareholder’s interest by bringing out the sustainable growth in earnings per share and paying off cash dividends to the shareholders. To maintain and fulfills this strategy the company mainly improve the product ranges. The company even develops new products for the customers. This strategy enables the company to see a sustainable growth in the sales. Due to the increase in the sales the overall performance of the company increases. The company also focused in increasing the customer base for the company. The increase in customer base also enables the company to see a sales growth, which in long run assists the company to gain more revenue from the market. The company also seen was increasing its business by entering new international market. The new market enables the company to gain new customers from the international market. The company also focused in improving the gross margin and net margin. The management of the company manages the gross profit margin and net profit margin through stock management, product sourcing and cost control. The company also focuses in increasing the customer service. This will increase the customer satisfaction. The increasing customer satisfaction led to the increase in the performance of the company, which in turn satisfies the shareholder’s interest.

Apart from the internal operations, the importance of the external operating environment in the fundraising strategy is immense. The external operating environment of the business can be measured using the SWOT analysis and PEST analysis. These strategies will enable the company to determine the position of the company in the market. The marketing position of the company assists the management of the company to take financial decisions and also the fund raising strategies.

As per the analysis of the annual report of 2019 of Next PLC, it can be determined that the company’s total equity is stated as £553.8 million. On the other hand, the total equity of the company in 2018 was £482.6 million and the annual report of 2017 is £650 million. This states that the company’s fund raising strategy involves both borrowings from bank and the debt strategy. The company also involves equity fund raising strategy. Next PLC was also raise funds from borrowings made from bank loan.

Financial Theories For Raising Fund:

Borrowings: 

Borrowings are one of the best policies, which the company often adopts to enhance the financial structure of the company. The borrowings are mainly done from banks or from market as bonds. Against the loan from the bank, the company often enters into deal to pay interest after stipulated period. This period may vary according to the agreement. Monthly, yearly and quarterly policies of paying interests are available in the market. The company also promises to pay the actual amount after the predetermine period of time. If any case, the company fails to pay the loan amount then the bank file a case in the court. This only happens when the company goes for bankrupt. During the bankruptcy the bank often sell the assets of the company to recover their losses.

As in the case of Next PLC, the company has adopted borrowings strategy for raising fund. As per the annual report of the company of 2019, the company has borrowed £377.3 million from the bank. The borrowing amount from the bank is much bigger than the last year. In 2018, the borrowings of the company stand to £180.

Bond:

Another source to raise fund for the company is bond. The company often adopt the equity strategy. A bond is the contract, where the borrower agrees to repay the amount, which was borrowed after the predetermined time period. The company also agrees to pay interests. It is almost similar to loan from bank, but here, the company goes into contract with the investors. The bond are basically found in the stock market.

As per the annual report of Next PLC of 2019, it can be observed that the company enters into contract with the investors on several occasions and that is the reason the amount keeps on increasing. In 2019, Next PLC has raised capital of £905.2 million from corporate bonds. In previous the company also opted for the corporate bond for almost £908.5 million.

After analyzing the balance sheet of the company, it is evident that the company has created a portfolio for raising capital. In this portfolio Next PLC raised maximum fund from debt capital like corporate bond than borrowings like taking loan from the bank.

As per the analysis of the annual report of Next PLC of 2019, it can be determine that the company has opted for Modigliani and Miller Theory approach. In this theory capital structure has been used for creating the fund raising strategies. As it can be clearly be seen that the company mainly raised fund from the bonds and borrowings. These prove that the company mainly depends on the debt fund raising strategy.

Strategy On Distribution Of Funds:

As per the analysis of the annual report of Next PLC of 2019, it can be determined that the fund, which is collected from the borrowings and bond are mainly distributed among fixed assets like property, plant and equipment. As per 2019 balance sheet the company has invested £564.9 million, which is almost similar to the previous year amount that stands to be £558.9 million. It is also seen that the company has invested considerable amount in inventories. In 2019, the company’s inventories amounted to £502.8 million. In 2018, the company’s inventories were £466.7 million. This means that the company is expecting to have high sales in 2019, which is the reason for such investment in the inventories. The company also invested sufficient amount to customer and other receivables. The receivables stand to be £1339.8 million and £1248.2 million in 2018. This indicates that the company’s sales increases, which lead to the rise in the investment of the company in the inventories.

The company also distributes the funds by investing in the associates of the company and also in joint ventures of the company. Next PLC realizes the investments at cost, which increases or decreases depending on the Group’s share of the change in the net assets of the associate or the joint venture.  

To facilitate the shareholders of the company, the company provides considerable amount of dividend to the shareholders of the company. As per the annual report of Next PLC of 2019, the company tends to provide dividend of 110p. The company also wants to provide ordinary dividend of 165p per dividend. As per the analysis it can be determined that Next PLC tends to provide 4.4% more than the last year. The management of the company also tends to provide the dividend from the surplus cash generated from operations to the shareholders of the company. The directors of the company also want to pay the special dividends as interim dividends. The company has paid dividends to the shareholders in 2019 amounting to £215.7 million. In 2018, the company paid dividend amounting to £479.7 million.

The company has also invested in paying off the debt. In 2019, the company paid £39.5 million. This proves that the company is in a position where the company can easily avail interests (Nextplc.co.uk. 2019). This also proves that the company’s liquidity position in very good state. Due to the high liquidity ratio the company’s retained earnings remained in good state and thus the profitability and sustainability of the company remained intact. As per the analysis it can also be determined that the company has invested more in the financial cost in 2019 than 2018. This also proves that the company’s liquidity rate is high and the profitability is also high.

Corporate Finance Throies:

There are many corporate financial theories that assist the company to determine the investments strategies of the company. The management of the company decides the strategies for efficient investments. The different theories for the investments, which the corporate finance has to offer, are as follows:

Efficient Marketing Hypothesis Strategies:

The management of the company often adopts this strategy when they wants to create their own portfolio. The management usually checks the market price of shares. As per the efficient marketing hypothesis strategies, it can be determined that the market price of share assists the company to incorporate all the known information about the stock. The market price of the share indicates the current position of the share and the company’s condition.

Gordon Theory on Dividend Policy: 

Gordon’s theory is one of the dividend policy theories, which are related with the relevance of the dividends concept. As per this policy the market value of the company are to be determined using the dividend policy (Foley and Manova 2015). In this theory the company uses mathematical models in Gordon’s theory. The Gordon Policy theory uses the rate of return (r) and the cost of capital (k). As per this model if the company’s price decreases then the rate of return increases more than cost of capital. The opposite happens when the company’s price per share increases.

After analyzing annual report of Next PLC of 2019, it can be determined that the financial position of the company is in very good. As per the analysis the company it can determine that the management of the company uses the Gordon’s Theory for providing the dividend of the company.       

Conclusion And Recommendation:

It can be concluded that the company mainly focused in using the debt strategy for raising fund. The company also uses equity strategy for raising fund from the market, but the debt strategy si the dominant one. The raised fund is mainly used in paying dividend, interests for loan and bonds and also in joint ventures. The company also uses the investment in assets.

The company needs to focus more on equity strategy than the debt strategy for raising fund. In this way the company needs to pay less interests and also will face lower amount of risks. The company needs to invest more in the associates and the joint venture than on the fixed assets.

Referencing:

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