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Analysis of The Financial factors Influencing The Financing Decision of New Ventures in UK: A Study on The Hospitality Sector

University: University of Greenwich

BUSI1498 PPD3 Dissertation

Question:

Write the Dissertation on the topic "ANALYSIS OF THE FINANCIAL FACTORS INFLUENCING THE FINANCING DECISIONS OF NEW VENTURES IN UK: A STUDY ON THE HOSPITALITY SECTOR"?

Answer

Abstract

This research shall focus on the influence of financial factors on the financing decision or the capital formation decision for a newly formed hospitality businesses. This discussion shall consider the financial factors such as financial risk, interest rate and the financial control. The researcher would consider the primary and secondary research. The survey would be conducted in order to run regression test to make conclusion. Moreover, the research shall focus on the implication of the financial factors on capital structure decision making in startup hospitality businesses in the UK. Nevertheless, the researcher shall make recommendations to make financial decisions for the startup hospitality companies.    

Chapter 1: Introduction

1.1 Introduction

New ventures and new Entrepreneurial ideas lead to the introduction of innovation and new business ideas as well as helps in entrepreneurial development. As the conventional business approaches tends to become outdated in context to the growing complexities in the modern world, entrepreneurial ventures are a welcoming change for the society as well as in growth and development of the economy (Bertoni et al.2016). Evidently, a new venture needs a huge amount of capital investment, adoption of technology, other non-financial resources and related infrastructure. It is seen that, there lies a good scope and growth opportunities in entrepreneurial ventures in the hospitality sector. In this sector, the requirement of resources consists of detailed control system, significant work force as well as a necessary spark of the entrepreneurial energy. It is observed that, in the UK market the hospitality sector has undergone a series of changes that has affected the market structure significantly (Andersson et al. 2014). 


These includes the tastes and preference of the customers, the consumption patterns, technology, selling and distribution channel, etc. the changes adopted has brought in innovation and technological advancement in the industry and has enhanced the scope of new entrants with pristine ideology to expand the market of the hospitality industry. In addition to that, the financial factor tends to play a pivotal role in initiation of a new business venture. While incorporation of a new start up the entrepreneurs need to make certain decisions regarding the procurement of funds, source of finance, the competitors in the market, the potential investors in the market, capital structure of the organization, etc. The capital structure is a significant factor while going ahead with a new venture. Usually it is noticed that, the growth rate of the hospitality sector in UK is slow. Hence, financing decisions tends to have a significant impact on the business operations. 


In this regards, attempts has been made in the study to illustrate the factors that affect entrepreneurial ventures in the hospitality sector. In addition to that, efforts has been made in the study to present a detailed discussion on entrepreneurship, related theories and models, factors affecting new ventures in a country, etc. Furthermore, this study also illustrate the current market structure of the hospitality sector in UK, data analysis based on surveys and interviews that was conducted based on the research subject and analysis of the findings of the research.

1.2 Background 

The hospitality sector in the UK market has embraced a new spectrum that specifically includes Hotel businesses, Clubs and restaurants, places for accommodation, etc. The hospitality sector is largely dependent on the loyalty of their customers as well as the current market structure. These factors have increased the pressure on the industry related to the hospitality sector in providing quality products and services to the customers.  However, it is implied that, due to the constant focus on the large and listed companies have undermined the development of the hospitality sector in the market. In this context, the researcher has attempted to illustrate the debt policy and equity decisions made by the organizations in this sector. The absence of a strong economic capital adds up to the hindrances in the growth of this sector. Evidently, the hospitality sector holds a large share in corporate tissue in UK. In the UK market, the hospitality sectors are one of the largest employers, employing around 4.49 million people and significantly contribute to the economy. However, it is seen that, the hospitality sectors currently faces certain challenges that hinders their operations. They include lack of skilled staffs, lack of technological up gradation, and the issue of Brexit (Bruton, et al. 2015). Due to prevalent of these contingencies, the hospitality sector in the UK market the future prospect of the industry remains stagnant. 


Notably, in the year 2014, the hospitality sector alone stood at 2.8 million jobs that is equivalent to approximately 9 % of the total UK population (Andersson et al. 2014). Over the years this figures has increased significantly and currently stands at 4.9 million jobs. This accounted for over 17 % of the net employment growth in UK for the period of 2014 to 2017. All this factors have contributed significantly to the enhancement of the hospitality sector in becoming the fourth largest sector in UK. It is observed that, on a regional basis London and the southeast region of UK holds the largest share of the market of the hospitality industry (Burns, 2014). In this regard, it has become essential to investigate the management of the capital structure of the organization, starting from the incorporation of the new venture until its use, the decision-making policy to be adopted as well as the availability of the financial sources of the organization. 

1.3 Problem statement 

The current hospitality sector in the United Kingdom is facing several problems that may prove as a challenge for new companies that are try to penetrate this market. These challenges collectively are making it a problem for the already existing companies to make a profitable turnover. Thus, it is only natural to assume that any new company that is going to set up its business here, are also going to be facing some unprecedented situations that are going to hinder the growth process and create a problem on the context of making money - which is undoubtedly the primal objective of any company or industry. Some of the most talked about aversive situations are being discussed below:

Increase in the wage rate

The introduction of the National Living Wage (NLW) requires the companies to pay its entire staff, who are aged above 25, at a minimum of £7.20 per hour. This decision received a mixed response from the hospitality industry - while some of the giants of the sector agreed to increase the wages ahead of the April deadline, the smaller ones and the start-ups objected to the saying that they would have to incur a lot more money this way. Likely, it would become virtually impossible for them to go about doing business normally and still make money out of it. They argued that this decision would harm the relation between the government and the industry, as the politicians did not consult the companies before finalizing the bill (Cowling et al. 2015). The NLW also has plans to increase the wages further to £7.50 an hour in April 2017 and then pushing it as high as £9 an hour by 2020. The hospitality chains argue that this may very well prove disastrous for the industry. 

Lack of trained workers

The sector warned the government earlier that the whole industry is suffering from a severe shortage of workers who are skilled enough to make sure that the hospitality chains run smoothly without hiccups. The main reason behind this, they said were the newly formulated tight immigration laws of the country that are preventing people from other European countries to enter the UK. These very immigrants were the reason the sector could hire cheap labor and provide good service at relatively lower costs. They blamed Brexit negotiations for this (Fayolle and Liñán, 2014). 

Security threats

The British Hospitality Association warned the government that many private sites are running pseudo hotels and under the veil are doing illegal things that may very well prove to become a threat for the national security of the country. These hotels also run without adhering to a single safety regulation that is mentioned by the government (Frank et al.  2015). This may result in an imminent crackdown by the government upon these fake hotels, which may also cause some of the legal establishments to suffer, being caught in the crossfire.

Increased competition in the market

Recent market research states that, the market competition in the hospitality sector has increased over the years and is likely to grow in the future at the same rate. Although, the increased competition has resulted in price reduction in order to attract more customers, it has decreased the profitability of the organization. Due to the steep fall in the occupancy ratio in the market share, the room rents have gone down significantly. In light of the global slowdown and tight competition in the market the hospitality sector in the UK market have been hard hit. The increased competition in the market necessitates the need for innovation and adoption of improved financial policies in order to revive the business operations. Due to the reduction in the service charges and profitability, the cost implications of the companies in the hospitality sector have gone up dramatically. With no such financial subsidies or support, the hospitality sector are facing challenges in reducing their cost implications and increase the profitability. In this regards, the organization needs to other sources of funds instead of the conditional sources in order to improve their financial stability in the market. 

1.4 Research aims 

The current research has aimed to investigate the factors influencing the development of a new venture in the UK market. The researcher has aimed to spot the considerations to be adopted while creating a new business in the concerned country. In specific, the hotel industry in the key focus of this research were completion of the study provides a clear view on the factors, an entrepreneur needs to consider while developing a hotel business in the UK.

1.5 Research Objectives

Based on the above aims, the prime objectives of this study are as follows:

  • To understand the financial factors that affect the Hotel industry in the UK,
  • To investigate the factors influencing new hospitality ventures to form capital in the UK,
  • To recommend a potential plan for a new hotel to form capital

1.6 Research Questions

Research questions are listed below:

  • What is the current interest rate of the UK hotel industry?
  • What are the financial factors having significant impact on a new venture development?
  • What are the financing obstacles that a new hotel would face at its development phase?

1.7 Formulation of hypotheses

H= Financial factors do not influence the financing decision of the startup hospitality ventures in the UK.

H= Financial factors influence the financing decision of the startup hospitality ventures in the UK.

1.8 Structure of the research

Chapter 2 Literature review

2.1 Introduction 

Many factors affect the new ventures and business like Hotels and restaurants In the UK. It is seen that the Hotel industry in UK is growing at a rapid pace and there a lot of new opportunities for new entrepreneurs to enter the industry and try out gain new, experiences to achieve new heights in the industry. The GDP growth of the UK is also a factor, which has affected and played a vital role in the growth of hospitality sector. In 2016, the Gross domestic progress was 2.65, which is relatively higher in the preceding years, which has benefited the growth of hospitality industry. The growth of the shared accommodations like travel mob, one fine stay and other has invited more travelers, which has ultimately played a helping hand in the development of the industry. Demographic factors are also factors, which affect the hospitality industry (Porfírio et al.  2016). The Tourism in UK has grown in the recent years, which has affected in the growth of the hotel industry.  Demographic factors like location and population has played an important role in the growth of the industry in England. There other factors like tourist spots and the quality of the render service are the factors, which has affected and played a vital role in the growth of hospitality industry.

2.2 Entrepreneurship 

Entrepreneurship has been defined as the way of designing launching and running a new business. The business involve init is a small business. The small businesses are called startups. The most prominent way of entrepreneurship is by opening a small business, which is involved in the production process or in rendering services. It has also been defined as process of creating idea into realities. There are various idea and perception through which an entrepreneur starts a business. Proper idea, sufficient funding and proper support all contribute to a successful entrepreneurship. The main objective of the process is to start a business and earn profit through it for a living. In UK this process it is a very prominent way of incurring an income as most of the entrepreneurs start small business to earn a living (Sarasvathy et al.  2014). The small business enterprise is one of most rising components in the UK market and has a huge hand in the growing economy of UK as well. The process of entrepreneurship is a tough one and needs a lot of struggle. There are various factors, which affect a successful entrepreneurship factors like motivation, determination and market profitability. 


Traditionally entrepreneurs have been defined as an individual that initiates, organizes and operates a business organization along with considerable amount of risk. The process of entrepreneurship is dynamic and involves the creation of incremental wealth in the economy. Thus, they form an integral in economic contribution of a country. The significance of entrepreneurship is listed below:

  • Growth in economy: Growth in economy is one of the factors that necessitate new entrepreneurial ventures. Evidently, entrepreneurship is the new advent that tends to bring in innovation and technological advancement in the business community. Thus, it becomes necessary to encourage new entrepreneurial ventures for the growth and development of the economy. 
  • Creation of employment opportunities: Creation of employment opportunities is also one of the significant factors that necessitate the need for new entrepreneurial ventures in the economy. Notably, in the year 2014, the hospitality sector alone stood at 2.8 million jobs that is equivalent to approximately 9 % of the total UK population. Over the years this figures has increased significantly and currently stands at 4.9 million jobs. This accounted for over 17 % of the net employment growth in UK for the period of 2014 to 2017. All this factors have contributed significantly to the enhancement of the hospitality sector in becoming the fourth largest sector in UK (Williams and Martinez, 2014).
  • Innovation: It is said that, entrepreneurial ventures acts as the incubator of innovation and technological advancement in the business community. It tends to create a state of disequilibrium in the present order of society. In regards to the complexities in the modern world, it has become essential to incorporate creative and innovative ideas that will help not only to bring about a change in the society but in growth and development of the business as well. 

2.2 Theories and models on entrepreneurship 

There are various models and theories, which have defined and described various practices of entrepreneurship. 

Psychological Theories of entrepreneurship

In this theory of entrepreneurship, there is psychological, attitudinal attributes that differentiates the entrepreneur from non-entrepreneurs and differentiates successful entrepreneurs from the unsuccessful one as well. The theories include Need for achievement model, Locus of control, psychodynamic model and the risk-taking propensity.

Need for achievement model    

In this model of entrepreneurship, it states that the entrepreneur has to achieve or to get for their respective inner feeling of satisfaction. There have been many observation and criticisms that have been made about this model. The theory have been criticized because it was said to be contradictory and also had limited evidence, it is not relevant in every cases of entrepreneurship and the theory is only related to the business people while it is very evident that other people also show the same behavior (Sarooghi et al.  2015). 


Locus of Control

This theory states that there is a degree to which one can believe that he/she can controls anyone destiny that can be either internal and external. By internal and external, it is said that the person believes that everything's happening with him is a result of the internal efforts. This theory has also faced some criticism that the theory relates to the people who are internal and need achievement than the externals. There is limited research don on this theory so no proper evidence have been collected to support the theory, the people who are internal do not run business (Schaper, 2016).    


Psychodynamic Model

This model states that the people tend to be self-employed and achieve success due to troubled childhood. Through troubled childhood, it means that the person was deprived of security and has faced lot of problem in his childhood. There are various situations like parental loss, broken marriages and extreme poverty. When the person grows up he has an intention of rebelliousness for stating his own firm or business to have success. The theory has also faced criticism about being concentrated towards only one group of population leaving the others. 


Risk Propensity

In this theory, it is said that a successful entrepreneurship is achieved when one accepts the risk of failure. The theory also states that the risk is can be mitigated only through acceptance. This theory has also faced various criticisms like calculated is risk are taken by every individual but all of them are not successful entrepreneurs, generally people who are in business take moderate risk so the theory does not hold there (Zucchella and Magnani, 2016). 

Social Marginality Model

This theory suggests that the individuals who have a high level of incongruence among their personal attributes and the roles they have in the society will motivate to change and reconstruct the social reality. While some of them use development of careers, some may also choose self-employment. The theory also faced some criticism because it had no specific explanations for the over representation of certain people.  

2.3 Significance of a new venture in a country 

International expansion, for a business, means when a business tries to capture the markets beyond the borders of the country in which it was originally established. There are various reasons for a company to try to expand its business overseas. There are certain advantages to expanding operations to new countries, which entail better workings and higher profits. Both small-scale businesses as well large multinational corporations can reap the harvests of going big and reaching out to new countries. As with the process of setting up a new business, expansion overseas also requires meticulous planning and needs a lot of time to be invested into it (Zucchella and Magnani, 2016). Paying attention to the different cultural platforms of the two countries should always be kept in mind if one wishes to run the same business in two different countries with the same level of efficiency or wants to generate the same amount of profits. 

There are several arguments that work in favor of deciding whether to expand business overseas or not. 

New markets

A business or industry may very well offer the commodity or service that was not available in the market of the country where the business is expanding. This would mean high demand for the new product and the business can exploit the advantages to the fullest. Moreover, since the product is not available in the first place, the off chance of facing competition is also reasonably low. It is also often seen that the government of the country provides the new business with certain incentives in form of subsidies or decreased tax rates so that they can expand freely. 

A business climate that helps the organization

A new country, more often than not, provides an organization with more favorable business environments than its own country. Businesses often expand to countries when the company faces a restrictive government regulation in the country where the company was initially set up in. This constraint on yielding profits often propels a business to shift its operation overseas where it will not face such limitations (Wang and Rafiq, 2014). 

More exposure for the business

Overseas expansion is always good for a company if it seeks to increase exposure and capture a global market. Companies get better brand recognition by expanding to newer territories, where the other companies acknowledge it as some degree of competition. This helps a company in great many ways to grab the market. 

Revitalizing the company

When a business expands to new countries, it normally means the business is already established and made good profit. However, in the off chance that the business is struggling to yield enough returns, going to a new country can help to bring it back to life by providing a fresh new market and many potential customers. A business that is witnessing shrinking market in the country of its origin can very well find a new and much bigger customer circle to cater to in a country where it would expand to (Stringfellow et al.  2014). A business, which is struggling to obtain the supplies to run its production in the current country, can also be able to lay its hands on the necessary inputs easier in the new country.

2.4 Factors affecting the capital formation decision making for newly formed firms  

Evidently, in almost every startup firms the capital structure consists of either equity capital or debt from various financial institutions. It is noted that, usually new start up tends to procure funds from banks or other financial institutions in the form of debt capital. The debt capital of an organization generally comprises of insider debt that includes funds from family and friends or external debts that includes procurement of loans from banks. In addition to that, several factors affect the selection of sources of finance of an organization. These factors include credit scores of the organization and the associated risk. Usually, a firm with high credit scores and low risks factors has more chance of availing a loan from the market. Other factor that affects the capital structure of an organization includes the nature and type of the business, the current financial structure of the organizations, entrepreneur and demographic location. The factors that affect capital formation decision of new entrepreneurial ventures are listed below:


  • Current market structure: The current structure of the market or the position of the organization in the market also determines the capital formation decision making in new entrepreneurial start-ups. Notable the market factor tends to play a pivotal role in the capital structure of an organization. the market factors includes, banks, various financial institutions, the potential investors, the current interest rate, etc. these factors determines the capital structure that is to be adopted by a new start up. Of it is noted that, there are potential investors in the market then the organization may go for equity capital. Otherwise, the organization may opt for debt financing from banks or financial institutions (Westlund et al. 2014). It is noted that if tech market is facing a financial crunch, then the investors tends to draw significant amount capital from the market, thereby limiting the access of the organization to capital. In that case, it is recommended to the entrepreneurs to halt the procurement of funds until the market condition returns to normal. 


  • Tax implications: One of the significant advantages of debt capital is that, payments of debt obligations are tax deductible. On that, other hand equity, capital has no such benefits and the payments are met only after proper tax deductions. Thus, while incorporation of a new venture, the entrepreneurs must strategically adopt the capital structure such that it will reduce the payment obligations and will tend to reduce the tax implications. Notably, if the rate of interest of debt capital were high then it would be advisable to the organization to adopt debt financing that may act as a means of financing by reduction of the tax implications (Keeble and Wever, 2016)


  • Associated risk: Notably the debt capital of an organization determines the level of risk held by the firm. The higher the risk associated with an organization, the lower will be the optimal debt ratio. It is noted that a new entrepreneurial venture tends to procure funds from banks or other financial institutions in the form of debts rather than opting for equity capital. This in turn the payment obligations of the firm and thereby increases the market risks (Cowling et al. 2015). In light of the current scenario in UK, it is noted that the hospitality sector faces financial crunch and there is no such subsidy from the government. Thus, it is recommended to the new entrepreneurs to formulate an effective financing plan such that are not faced with any financial constraints in the future. 


  • Financial flexibility: Financial flexibility provides a firm with the ability to procure funds at bad times. It is noted that, certain organizations are able to raise capital from the market even at difficult times like increase in generation of revenue from sales. This not only facilitates a firm with a good financial stability during the normal course of action operation but also helps them to survive any contingent events. If the cash flow rate of an organization is well enough, then it would help the organization to attract more potential investors from the market thereby increasing the capital structure. In regards to new startups, it is viable to formulate proper financing plan based on certain strategies and accordingly procure funds from the market. Usually, it is noted that, the lower the debt capital of an organization, the higher will be the financial flexibility. In that case, the company may look forward to raise more equity finance rather than debt capital. if a new entrepreneurial venture opt for debt capital it would not only increase the payment obligations but also increases the market risks. Thus, for new start-ups the best mode of finance for capital formation is equity financing. 


  • Management structure: Notably, the structure of the management of an organization also affects the capital formation decision making. However, it is noted that the management styles adopted by most of the organization that tends to vary from conservative to aggressive. It is noted that, the more the conservative the management structure of an organization, the less likely it will be to procure funds from debt financing. On the other hand, if an organization adopts aggressive style of management structure, it is likely that the organization will try to grow its business more quickly and thus will require more funds. In such case, they may opt for debt capital instead of equity capital. In addition to that, it is noted that, procurement of debt capital also increases the earnings per share of an organization (Mason, 2015)


  • Growth rate: The growth rate is one of the significant factors that affect the capital formation decision of an organization. Usually, it is noted that, organizations that are still in the growth stage tends to finance their business operation through debt financing. This is done by the organization in order to grow their business more quickly (Ahlers et al. 2015). However, it is noted that, the organizations that are growth oriented, revenue from operations is unstable for this organizations and thus, it would not be viable to go ahead with debt financing. Evidently, the more stable an organization is, the more likely it is to procure its capital from equity financing. 


  • Financing policies: In regards to new entrepreneurial ventures, the financing policies like the sources of finance, the mode of financing, etc. significantly affect the decision of capital formation. The management of the organization needs to formulate policies that will help them not only in carry on with their business operations smoothly but in meeting any future contingencies without any burden (Block et al. 2014). Hence, it is evident that, the capital structure of the new start-ups will be in accordance with the financial policies adopted. 

Hence, from the above discussion, it is noted that, the financial strategy adopted is key to its business operations and tends to have significant implications of the organization’s behavior. The factors cited above tend to affect the selection of the capital structure of the organization. It is noted that, in certain cases, it would be advisable for the firm to go ahead with debt capital. On the other hand, it is seen that, in certain situations raising capital through equity financing. Thus, it is important for the new entrepreneurs in the market to consider these factors and formulate action plan to procure capital accordingly (Cowling et al. 2015)

2.4 Factors affecting the financial decision making of hospitality businesses at the initial phase 

In the hospitality business, the capital formation depends on the factors that influence the capital formation decision making of normal firms. In this context, Jayawarna et al. (2012) stated that the capital formation decision making relies on the market condition, economic condition and the tenure of a business. in the market condition, the degree of competition plays an important role in capital formation. In this context, it is to mention that the finance managers ignore debt funding if the business belong to perfect competition market. On the other hand, it is to state that the companies involving in the hospitality business could not issue equity capital as the investors could not get any financial information regarding the company. Hence, it can be said that the companies in the initial phase could not form capital base by considering equity share capital. 


If the researcher considers the economic factors, the factors such as interest rate and inflation are required to be analyzed properly. In this regard, it is to mention that the at the formation stage, the hospitality business are required to be operated by considering debt capital as issuing equity capital would be difficult for the businesses. In this same context, Ellis and Bosworth (2015), stated that the interest rate in an economy directly affects the capital formation decisions of a company. Hence, it can be said that the interest rate of the central bank of the UK would be an important factor for making financing decision of a new hospitality venture. A high interest rate of the central bank of the UK could result in low capital formation as the interest rate of commercial banks in the UK changes directly with the bank rate. Therefore, it can be said that the decrease in the bank rate would be beneficial for the newly formed hotels in the UK. 


In addition to the economic factor, the researcher is required to consider the tenure of a business for analyzing the influencing factors while making decision regarding the formation of capital. According to Williams and Martinez (2014), hospitality businesses with small tenure or in case of short ventures, the capital formation depends upon the debt, however, companies require equity capital in operating businesses as equity capital has no redemption term. Therefore, it can be said that the capital formation depends on the term of the business. The other financial factors influences the capital formation decision of a hospitality business in the initial phase could be discussed by considering the below factors.

Risk of the business

In the initial phase of a business, management plans to minimize the level of risk and therefore, it can be said that the managers of an organization make plan to minimize the risks. According to Williams and Martinez (2014), the risk of an entity could be classified into two parts, such as operating risk and financial risk. In this context, the researcher could state that the managers of a newly formed hotel are to concentrate on the operating risk and the financial risks of the organization as these risks impacts on the operating profit of the company.  In other words, the business risks can be termed as the probability of an organization will earn less profit from its operation than the anticipated amount due to certain market risk or contingencies. Risk is an inherent factor of any business and management of an organization needs to consider these factors and carry on with its operations accordingly.  The factors that affects the risk associated with business includes the current market trends, input and out costs for production, the policies adopted by the competitors, the sales volume of the organization and economic factors.


Operating risk

Operating risk influences the financing decision of a company involved in hospitality business. However, this factor has no direct impact on the capital formation of the hospitality businesses as the hospitality business is to be considered as a capital-intensive business. In this context, it is also to mention that the operating risk depends upon the fixed costs of the business and in hospitality business, the management is required to pay a significant amount of fixed costs such as rent of rooms, garages, cars, gardens, furniture and salary to staffs. Hence, it can be said that the hospitality businesses face pressure due to enhanced operating costs in the process of the business. As the hospitality businesses are to incur high amount of fixed costs, the profitability of the businesses becomes less, which results in low formation of internal capital. Therefore, the hospitality businesses are to rely on the external capital in the initial level of business. 


Figure 2: Financial leverage

(Source: Williams and Martinez, 2014)

In this context, it is also to mention that if the operating risk of a business enhances with the financial risk, it would negatively affect the growth of the business. Therefore, it can be said that the companies in hospitality business are to have optimum level of debt that would result in balanced leverage.     

Financial risk 

As discussed earlier, the operating risk and the financial risk influences the financing decision of a hospitality business and the operating profitability declines with the enhancement in the operating risk. The financial risk also impacts upon the capital formation of an organization involved in the hospitality business. In this same context, Ellis and Bosworth (2015) explained that highly leveraged firms could not accumulate profit for future investment and therefore these firms would require preference capital or short term debts from financial institutions. Therefore, the researcher is to state that the financing decision-making depends upon the financial risk of the business. If the business is in low leverage class, it could indulge in high debt capital and on the inverse situation; it is to be funded by equity capital. It is noted that, the more the financial leverage of an organization the higher the risk associated with that organization. Thus, the management of an organization needs to identify the key issues that tend to increase the financial risk or leverage organization, recognize the reasons and formulate certain action plan in order to eliminate the same.


Financial flexibility

In case of start up of hospitality businesses, flexibility in operation is to be considered as one of the most crucial strategic issues. As the management of start up businesses is to make quick decisions, the managers intend to have a flexible financial structure. In this context, Williams and Martinez (2014) opined that the complex capital structure causes low degree of flexibility and therefore, the managers ignores complexity in planning the capital structure. If the startup companies accumulate a high amount of capital by issuing debt instruments funds, it would lose the financial flexibility, as it would require making payment of interest and the principal amount at a certain point of time.     

 

Tax payment

As per the International Accounting Standard 1 and the IFRS regulations, the companies are to pay tax on the profit after charging interest on borrowed capital (Jayawarna et al. 2012). Therefore, it can be said that the companies could minimize the quantity of tax payments by enhancing the amount of debt capital. In this contrary, Ellis and Bosworth (2015) argued that the Government of the UK allows a tax holiday for five years. The hospitality business are not to pay tax on the profits for the initial five years and therefore, it can be said that the companies need not make tax planning by considering the payment of annual interests.   


Growth rate of the industry 

While making financing decisions, the management is required to consider the growth of the industry and it is to mention that growth depends on the retention of profit and the expected rate of return (Jayawarna et al. 2012). For a startup company, the retention of profit is required to be ignored and therefore the expected rate of return reflects the growth of the business.

Figure 3: Growth rate of industry

(Source: Burns, 2014)

From the above figure, it can be said that the hospitality business has an increasing trend as the capitalization value has increased over the last decade. In this regard, Williams and Martinez, (2014) opined that the firms belong to the growing industry, have a higher expected rate of return as compared to the cost of debt. Therefore, the firm's could give a higher return to their shareholders. Therefore, the growth firms are required to be financed by debt capital to take the advantage of trading on equity.   

2.5 Impact of Cost of capital on new start ups in the UK market

From the corporate point of view, cost of capital refers to the total funds of a company comprising of both debt and equity capital. From the point view of an investor, cost of capital is the required rate of return on a company’s existing shares or securities (Core et al. 2015). In other words it is the minimum rate of return that an investor expects to get in return against the capital invested in an organization after taking into consideration the equivalent risks. Usually, the total funds of an organization consist of both debt and equity and thus, cost of capital must be determined through computing cost of debt and cost of capital. In addition to that, the cost of capital also comprises of cost of retained earnings as well as cost of preference shares (Li, 2015).  


Cost of equity: In financial terms the cost of equity refer to the rate of return than an organization pays to the equity shareholders against the equivalent risks undertaken by them through investment of capital. Evidently, an organization needs capital in order to carry on with its operation as well as expand the business. However, unlike the debt capital, the equity shareholders are not paid interest and instead are paid dividend at a certain rate. In other words, the cost of equity is the rate of return that an organization decides on whether an investment meets the capital return requirements (Robb and Robinson, 2014). Usually, the cost of equity is used as a threshold for capital budgeting. Notably, the cost of equity of an organization tends to represents the compensation demanded by the market factors in return for having ownership of the assets and breaking the market risks. Conventionally the cost of equity is calculated by two methods, i.e., capital asset Pricing Model (CAPM) and Dividend capitalization method (DiMasi et al. 2016)


The cost of equity can be categorized into two concepts depending on the involved party. On the investor’s perspective, the cost of equity refers to the required or expected rate of return from the investment made in equity. On the other hand, from the corporate perspective, the cost of equity acts as a tool for determining the rate of return required on a particular investment or project. One of the significant factors of cost of equity to an organization is that, as equity capital does not need to be returned immediately, even if the cost of equity in higher than cost of de3bt, equity investment tends to generate higher return than debt (Keeble and Wever, 2016)


Impact of cost of equity on the startup

Usually, it is noted that new entrepreneurs are not aware of the various sources of finance from where they can procure capital in order to finance their growth. Thus, it is essential for them to explore the market and look for the most viable source of finance available to them. If the new entrepreneurs are looking to finance through issue of equity shares in the market, then it is essential for them to calculate the cost of equity to the organization (Ahlers et al. 2015). As discussed earlier, the cost of equity usually, tends to be less than the cost of debt and thus, procuring cost of equity from the market may seem beneficial for the organizations. However, for new startups in the hospitality sector, the UK market seems to be hostile and provides tough competition and thus, it may be difficult for new start ups to procure funds through issue of  equity shares.


Cost of Debt:  Usually the cost of debt refers to the amount of interest paid by an organization on the borrowed funds. Notably, an organization may utilize both equity and debt capital to finance its operation. If the organization takes certain amount of debt capital from the market, it is obliged to a certain amount based on the interest rate annually during the term of the debt. Thus, the cost of debt is the cost or the effective rate of return that an organization has to incur on the debt capital it has acquired. It is noted that, as debt acts as a deductible expenses, the cost of debt is computed as an after tax cost in order to make it comparable to cost of equity. In addition to that, the cost of debt is calculated taking into consideration the risk of premium, term tax rate and the risk free rate of return. One of the significant differences between cost of debt and cost of equity is that of the impact of risk on the total cost of capital (Autio et al. 2014)


However, as compared to equity capital, acquiring debt capital from the market tends to give the investors an idea about the risks associated with the organization and this helps them to make better investment decision. It is seen that, an organization with a higher risk profile tends to have a higher cost of debt and thus, the cost of borrowed funds reduces as the debts become less risky (Keeble and Wever, 2016)


Impact of cost of debt on new startup: In the market of UK, debt financing is one of the major sources of income for the organization in the hospitality sector. It is evident that in the hostile market of UK, it becomes hard for new start-ups to procure funds through the issue of equity shares. Thus, debt financing is one of the easily available and effective sources of finance for the new startups (Westlund et al. 2014). Although, it is evident that debt financing tends to increase the financial leverage of an organization. This, in return increases the risks and although the operating profit generated is comparatively higher, the net profit of the organization tends to be decreased. Thus, while procurement of capital through debt financing, an organization needs to assess all other market factors thoroughly, including the amount of capital to be procured, the expected future stability of the organization, expected rate of return, etc. Usually, debt capital tends to increase the payment obligation of an organization and the organization are not able to meet them in due time, they will gradually lose their credibility in the market.  This indicates the cost of debt capital s higher on the organization and the organization needs to have a good financial ability in order to meet the payment obligations (Atkinson and Storey, 2016).


Cost of retained earnings: Retained earnings refer to the amount of profit that is retained by an organization after the payment of all dues and dividends. Usually, after the meeting all the payment obligations, i.e., interests, taxes, etc. a certain part of the profit is distributed among the shareholders of the organization as dividend. The rest of the profit is retained and is reinvested in the business operations. The retained capital by the organization is called retained earnings. Hence, the cost of retained earnings refers to the required rate of return by the stakeholders on the common stock of an organization. Because of the relationship between dividends and retained earnings, the cost of retained earnings is relative to the cost of capital as a source of capital for the organization (Grinblatt and Titman, 2016). In addition to that, it is observed that, for organization that usually retain back a part of the profit, the shareholder tends to expect more rate of return in the future in the form of dividends. Thus, the concept of opportunity cost arises in retained earnings; retained earnings cannot be treated as a cost free source of income. Notably, the cost of retained earnings needs to less than the rate of return of shareholders on the reinvestment of the dividend paid by the organization. 


It is evident that, the retention ration of an organization tends to depend on the relative dividend payout ratio due to the concept of opportunity cost.  The cost of retained earnings of an organization is determined by three different methods namely, Capital asset Pricing model (CAPM), Bond yield plus premium approach and discounted cash flow approach (Rostamkalaei and Freel, 2016)


Impact of cost of retained earnings on new startup: It is seen from the previous section that, retained earnings refers to the amount of profit that is retained back by an organization after the payment of dividends to the shareholders. Usually, after the meeting all the payment obligations, i.e., interests, taxes, etc. a certain part of the profit is distributed among the shareholders of the organization as dividend. The rest of the profit is retained and is reinvested in the business operations. The amount of profit that is retained back by the organization is called retained earnings (Devereux et al. 2014). Hence, in regards to new start ups cost of retained does not have any implications as the organizations needs to earn any kind of profit in order to retain a part of it.


Cost of preference shares: The cost of preference share capital refers to part of the cost of capital that indicates the amount paid to the preference shareholders of an organization in the form of dividend at a fixed rate of return. Usually, it is noted that, payment of dividend to the preference shareholders is not mandatory and the decision entirely lies in the hands of the board of directors. However, regardless of this fact, it is necessary for an organization to calculate the cost of preference, as it tends to affect the capability of the organization to procure funds from the market (Storey et al. 2016). Notably, the cost of preference share capital is not relevant for any kind of evaluation of project plans, as this cost does not indicate the rate at which any further capital will be procured. 


It is evident that preference shares of an organization are issued at a fixed rate of return upon the face value of the shares. However, unlike debt capital, payment of dividend to the preference shareholders is not compulsory and does not create any legal obligations as well. Nevertheless, in case the company declares the payment of dividend, they need to pay out to the preference shareholders as a priority and then pay to the equity shareholders. In a broader sense, preference shares tends to be of two types and thus, cost of preference share capital is computed based on the type of the preference share the organization is dealing with (Davies et al. 2014). They include Redeemable preference share capital and Irredeemable preference share capital. 


Impact of cost of preference shares on new startup: In regards to the UK market, cost of preference share may or may not have an implication on the new start-ups in the hospitality sector. The UK market in the recent phase has become hostile and become tougher due to market competitions. The hospitality sector alone is one of the significant contributors in the UK economy but due to lack of development opportunities and proper subsidies from the government, there is no significant growth in the sector. Thus, it becomes difficult for them to procure capital from the market through issue of shares. However, instead of equity shares the organizations may opt for issuing preference share capital in the market. Notably, preference shares are almost same as debt as they bear a fixed rate of return except that payment to the preference shareholders is not mandatory (Cannone and Ughetto, 2014). Nevertheless, preference shares tends to hold a preferential position compared to equity shares as the organization needs to pay out dividends to the preference shareholders first before payment to equity shareholders. Thus, while procuring capital from the market in the form of equity capital, the entrepreneurs needs to take into consideration the cost of preference share that the organization needs to bear in the future based on the expected financial stability of the firm.

2.6 Factors affecting capital structure of the new start-ups in the hospitality sector

The first step towards to the establishment of new business in the market is that of identification of the sources of finance and accordingly formulates action to go ahead with the same. The capital structure of an organization is one of the important factors that help to determine the organization’s fiscal as well as financial health in the market. Thus, notably, the financial executives tend to create more capital structure through diversification of the organization’s debts and through outstanding shares. Notably, optimal capital structure is the key to reduction of expenses as well as increasing the profitability for the shareholders (Fritsch and Storey, 2014)

The capital structure of an organization acts as a significant tool for the investors in making important financial as well as investment decision. This is because, the capital structure of an organization helps to determine the financial stability of the organization and the financial practices that are adopted by the organization as well (Chesbrough et al. 2014). Notably, the optimization of the capital structure of an organization is crucial for its growth both in the short-term as well as in the long-term. The factors that affect the capital structure of an organization are as follows:

  • Control of interest: Usually the equity shareholders are the owners of an organization. Among the publicly held companies, the equity investors are the elected directors of the organization. It is noted that, the equity shareholders tends to carry more leverage as compared to the preference shareholders or any other debenture holders of the organization. This is due to the privilege of voting rights that is enjoyed by the equity shareholders, while the preference shareholders enjoys comparatively less voting rights and the debenture holders has no voting rights at all. Thus, most of the organization desires to retain capital through debt rather than equity (Robb and Robinson, 2014). This is because, the decision making power of the current director tends to be reduced through the issue of more and more equity shares.
  • Contingencies: In any business, risk is an inevitable factor. It is evident that, for any organization the more the amount of market risk held the more likely it is to earn higher profits. However, in certain cases, due to high mainly of risk the organization may also incur significant amount of losses and may damage the operational efficiency in the due course of time. Thus, it is best to plan for any of contingencies that the organization may ace in the future in advance. In this regards, it becomes essential for the management to make their organization responsive to market changes through revenue fluctuations and financial availability. In this context, an organization usually, tends to issue debentures in order to improve the corporate financial responsiveness of the organization (Klotz et al. 2014).
  • Cash flow and Debt capital: Usually, the cash flow to debt analysis helps to determine the borrowing capacity of an organization during the high and low revenue cycle. On the other hand, the ability of an organization to meet all its payment obligations helps you determine the debt capacity of the firm. Notably, in the UK market, the financial condition is volatile and thus it makes difficult for the organization to meet its financial obligations. It is noted that, these organization tends to operate with a minimal amount of debt in order to ensure continued operations (Chesbrough et al. 2014). Thus, it is evident that the cash flow as well as the debt ratio of an organization determines significantly affects the capital structure.
  • Changes in the rate of interest: The rate of interest on the debt capital tends to affect the profits of the company. An organization may procure debt capital from several sources like the banks or other financial institutions, through the issue of debentures, etc. Thus, it is essential for the organization to take into consideration the changes in the potential, rate of interest on the debt capital in order to avoid any kind of contingencies. If the rate of interest in the market on debt capital is higher than the organization will aim to procure, more capital through issue of equity shares and vice versa (Klotz et al. 2014).
  • Economic conditions: The economic factors of a country tend to have a significant effect on the stock market prices and thereby, the capital structure of an organization. Notably, when the financial or the stock market is at its low, companies usually forms debentures or loan capital into their capital structure. On the other hand, when the stock market of a country is at its high, the organization inclines to maintain an equity capital structure. It is conspicuous that, organizations usually aims to procure short-term funds from banks  or other financial institutions and on the other hand, procure long-term capital from  through the issue of equity shares or debentures (Robb and Robinson, 2014). It is implied that the cost of money, which is determined by the economic factors, tends to affect the capital structure as and when an organization raises capital through issue of any securities.
  • Equity and debt financing: Notably, the substantial equity capital of an organization as compared to its debt capital indicates the optimal overall performance of the firm. However, it is implied that both equity and debt capital are important to an organization based on the given circumstances. On one hand, financing through debt capital helps the founding members of the organization to retain their decision-making authority. On the other hand, in debt financing the amount of financial and operational leverage tends to be more as compared to equity finance. Thus, in this regards, it is essential for the management of an organization to make appropriate decisions in context to the amount of capital required by the organization and the type of capital they want to procure (Fritsch and Storey, 2014).
  • Degree of Financial and Operational leverage: The expenses that are incurred by an organization in regards to its business operation generally affect the capital structure. It is thus, important for the organization to note the fluctuation of the operational expenses as well as identify the reason. The financial or the operational leverage held by an organization tends to have a significant effect on the capital structure of an organization. The amount of leverage determines the marker risks held by an organization. The more the financial ort the operational leverage, the more risks the organization is holding. Although, it is seen that the more the risk the more the chance to earn profit, it may not be the case for every situation (Chesbrough et al. 2014). Thus, it is essential for the management of an organization to identify the factors that increase the risks and accordingly formulate action plan in order to mitigate the same.

2.7 Financial obstacles for the new hospitality businesses in the UK 

In light of the EU referendum, there has grown a uncertainty among the business community in UK and the current economic growth is expected to be slow. With the fall in value of pound, UK has become an attractive tourist destination that can be termed as a positive aspect for the hospitality industry. The EU Referendum is one of the significant drivers of economic growth in the country and give rise to concerns like security concerns, consumer as well as corporate uncertainty and average growth in supply. These issues may create an unfavorable backdrop for the economy and as a result of this the hospitality sector may face hindrances in their operations. Although the weak currency may provide the industry some boost, due to the ongoing disruption the future of the hospitality sector in the UK market looks uncertain. In regards to the current situation, the hospitality sectors are facing difficulty in capital formation and oth4er financial crunches. The factors that may affect the capital formation for the new ventures in the UK market are listed as below:

  • Large capital requirements: Initially, the hospitality firms require a large amount of capital as the business is recognized as capital intensive. In the initial phase, the business entities involved in providing hospitality services, require to buy or lease lands for constructing buildings, which would require a large capital base. The other activities involves installation of technology, recruitment of the required staffs, decoration of the building, marketing and promotional activities, etc. in this regards, the new ventures needs to procure funds from the market either through loan from banks or bother financial institutions or through issue of equity shares. However, for new startups, it is difficult to procure funds through issue of shares. The entrepreneur's needs to develop certain strategies that will give them an insight about the type or the size of the business they are venturing into and the related requirements of funds. Usually, the organization in the hospitality sector requires huge capital investment and this may create a certain amount of difficulty for investors or entrepreneurs with low capitals. The rest of the capital needs to procured in the form of bank loans but again the loan availing process is cumbersome and needs mortgages. Usually, before sanctioning a loan to a party, other bank checks his or her credibility as well their financial stability and the future expected rate of return. In this context, the new ventures in the hospitality sector in the UK market tend to face certain challenges. 
  • Legal consequences in formation of capital: The Companies Act 2006 provides rules and regulations for the companies, which are listed as companies in the UK (Chesbrough et al. 2014). In this context, it is to mention that the public limited companies could issue ordinary share in the market to form capital for the business. On the other hand, the private limited companies could not issue shares in the market due to the restriction of the Companies Act 2006. The sole proprietorship businesses could not form capital by using share capital as this kind of businesses do not have separate entity as per the act of the country. In case of newly established firms in the UK, the firms are to consider the legal formation of the businesses to form capital. Hence, it can be said that the newly formed firms could not form capital without abiding the legal consequences in the country. As the legal consequences decreases the flexibility of forming capital in the UK, this factor is required to be considered as an obstacle in financing new businesses (Fritsch and Storey, 2014). In case of hospitality businesses in the UK, the requirement of initial capital has been seen as high, and therefore, it can be said that the legal consequences in forming capital could restrict the company to get financing from different sources.           
  • Incorporation of business: In the initial phase of a business, incorporation of the businesses is required to be considered as one of the most important aspects as the formation of capital depends upon the legal existence of the businesses. According to ), new ventures in the hospitality businesses requires significant amount of capital to take land or building on lease and to recruit staffs and therefore new hospitality businesses are to incorporated with the UK corporation acts to get the facility to issue shares and debentures. In this contrary, Fritsch and Storey, (2014) argued that the new ventures in hospitality businesses face difficulty in getting incorporated as per the corporation act as it requires a large amount of funds. As the incorporation of newly formed ventures requires incurring preliminary expenses, it can be considered as a problem in forming capital. Apart from incurring the preliminary expenditure for being incorporated as per the corporate acts of the UK, the companies are to make registration expenses to form business as per the corporate acts.        
  • Uncertainty of return on investment: The current market of UK seems to be hostile and the ongoing disruption tends to create more problems for the hospitality sector. According to Andersson et al. (2014), the fall in the value of pound has provided a boost for the hospitality industries in attracting tourist to the country. This statement is somewhat true as there was a good flow of foreign tourist in the previous season and the organizations related to the hospitality industry earned good revenue during that period. On the contrary as stated by Chesbrough et al(2014), there has been gradual declination in the industry and the current market trends tend to reduce the growth pace of the hospitality industries. All these factors have posed a new challenge for the start-ups to determine the return the return on their investment. Usually, due to lack of past financial analysis and any past evidences, it becomes difficult to ascertain the return on investment for any new business. This is one of the major factors that creates ambiguity for the entrepreneurs whether or not to enter into this specific industry, the exact capital requirement for the organization, the uncertainty in the rate of return or the return that may be generated from the operations.   
  • Lack of previous financial data: For any business organization, it is essential to carry on with their operations in accordance with past experiences. However, in case of new start ups this may not be the case. As argued by Fritsch and Storey, (2014), past financial data acts as an integral tool for assessing the financial stability of an organization, the key financial issues that the organization is facing as well as indicates the next financial approach to be adopted by the organization. Availability of past financial information and evidences not only helps an organization in evaluation of the company’s performance in the market, financial, crisis that the organization is facing and from this the management formulates action plan to adopt the best way of capital formation that may mitigate the current financial issues. However  in case of new ventures, the lack of any past financial data creates problem for the entrepreneurs to ascertain the required level of funds for the start up, the method of capital formation, that is whether it will be debt capital or equity capital and the financial policies to be adopted. 
  • Lack of internal capital: In case of existing businesses, it is a common practice than a certain amount of the profit is retained back by the organization as retained earnings. This acts as a free source of fund that is generated internally within an organization and is usually used for reinvestment purposes. However, in case of new ventures, lack of any internal capital may cause financial obstacles in certain situations. For entrepreneurs with low or marginal capital for investment, this factor may cause a serious problem. Due to lack of any internally generated capital within the organization, the organizations may not be prepared for any contingencies that may arise in due course of operations.

2.8 Gap of literature

From the above discussion, it is evident that capital formation is one of the crucial parts for a new venture in the market. With the help of various books journals and scholarly articles the researcher has attempted to illustrate the significance of capital formation for a new start up, the various implications of the financing factors on the capital formation as well as the financial obstacles that may be faced by the new ventures while procurement of capital from the market. However, while carrying out the research work the researchers was faced with certain hindrances that posed difficulties in effective conduct of the study. They are listed as follows:

  1. Time constraints: the time limit given for the assignment is not at      par with the research subject. The research subject consists of a wide      area of study and thus, the reader study could not include all the      essentials due to the time constraints.
  2. Cost implications: Cost implications involved are one of the      factors that limits the research study. While doing the research work,      there were various cost involved that mainly caters to collection of data,      conduct of interview and analysis of the collected data. Due to limited      resources, the researcher could not conduct the research in an effective      manner.
  3. Lack of evidences: it was noted that there no relevant data on the      research subject and thus, due to lack of proper data or research      evidences, it was difficult for the researcher to include all the      constraints in the study.
  4. Lack of past research works: One of the major      limitations, faced while conducting the study, is that of lack of any past      research work on the subject. It has been noted that, there was no proper      research work on the subject and thereby increased the sources from where      the data can be collected. 

However, the present shortcomings and the limitation create a scope for further research on the research subject in the future. In addition to that, this research study may act as a secondary source of data for other researchers working on the same topic. 

2.9 Conclusion

In the review of literature, the researcher has analyzed various factors that affect the financing decision of the new ventures in the UK. In this context, notably the researcher has focused on the hospitality businesses for analyzing the factors that forces the capital formation decision-making. In the initial part of the discussion, the researcher has seen that the macroeconomic factors such as interest rate, discounting rate, inflation and tax rate influences the capital formation of the hospitality businesses in the UK. Moreover, it is also to mention that the micro-economic factors such as the requirement of capital, legislative requirement and the internal cost of capital affect the capital formation of the hospitality businesses in the country. 

On the other hand, the researcher has also seen that the formation of the companies in the country affects the financing of the company as the issue of shares and debentures depend upon the legal framework of a company. Sole proprietorship business and the private limited companies could not get long-term finances by issuing share capital. For these companies, the capital could be formed by considering the bank loan and the business reserves. In this context, it has been found that the formation of business also affects the capital formation of a company, which has initiated its operation. Finally, it is to mention that the capital formation decision of new hospitality ventures depends upon the macroeconomic factors, micro-economic factors and the formation of business.

Chapter 3 Research methodology

3.1 Introduction 

In the research, the analysis shall be made by considering the primary and secondary research. In this context, Flamez  et al. (2017) opined that the primary analysis in the financial research helps to identify the practical view about a topic and therefore, the researcher shall consider the primary research for making the conclusion. On the other hand, it is to mention that the secondary research shall be used as the supportive evidence for the research to make the research according to the objective of the research. Initially the researcher shall consider the survey, which shall take place by considering the management of the companies involved in hospitality industry in the UK. The researcher shall make statistical analysis in order to identify the factors that influence the financing decision making for newly formed hospitality ventures. After this part, the researcher shall consider the secondary analysis by considering thematic research on the topic to support the primary analysis.

3.2 Research Strategy

In regards to research study, the methodology of the research tends to provide a philosophical framework that helps in conducting the research in a structured manner. It not only helps to create a base for the research but also helps in monitoring the progress made in the research so far and makes necessary amendments as needed. It is essential to meet the objectives as well as the aims of the research and thus, it is important to carry out the research in an effective manner. In other words, the research philosophy tends to provide an interpretative framework that guides in completing the research study in an effective and efficient manner. As stated by Flamez  et al. (2017), the research philosophy is based on certain beliefs and they can be further segregated into three categories namely, epistemology, ontology and methodology. The research philosophy or the research paradigm can be both quantitative as well as qualitative based on certain criteria.

3.3 Research philosophy

In regards to research study, the methodology of the research tends to provide a philosophical framework that helps in conducting the research in a structured manner. It not only helps to create a base for the research but also helps in monitoring the progress made in the research so far and makes necessary amendments as needed. It is essential to meet the objectives as well as the aims of the research and thus, it is important to carry out the research in an effective manner. In other words, the research philosophy tends to provide an interpretative framework that guides in completing the research study in an effective and efficient manner. As stated by Marshall et al. (2017), the research philosophy is based on certain beliefs and they can be further segregated into three categories namely, epistemology, ontology and methodology. The research philosophy or the research paradigm can be both quantitative as well as qualitative based on certain criteria. 

3.5 Research onion

The research onion can be defined as a design that tends to provide an effective progression of the research methodology. The adaptability of the research onion can be reflected through its usefulness in various contexts. According to Marshall et al. (2017), a research onion helps to get a clear understanding of the structure through which the research has been conducted. The outermost layer in a research onion is the research paradigm or the research philosophy. It indicates that the first step to be taken in regards to the research study is the orientation of the research study. The next layer of the research onion involves the methodological implications of the study. The final or the innermost layer of the research onion is the analysis of data. This part of the study is the most crucial as it tends to give an overview of the findings from the conduct of the research. 

     

Figure 4: Research onion

(Source: Marshall et al. 2017)

3.6 Research Strategy

In this particular research study, the researcher has used both primary and secondary sources of data. Attempts has been made in the study to illustrate the fundamental knowledge on the research subject in order to provide the readers and users of the research an  in-depth insight into the various aspect of the financial factors that tends to affect  the capital formation decisions of new ventures. In this regards, primary data than includes conduct of survey as well as secondary data like book journals and several scholarly articles and journals of other researchers has been used. This was done to include all the aspect regarding the research subject and cover almost all the principles. The primary sources of data have been collected from the conduct of a survey that was based on a questionnaire. The participants of the survey were selected on a random sampling basis and each of them has been provided with a questionnaire relating to the research subject. The responses of the participants have been thoroughly assessed and a critical analysis has been made on the same.   

3.7 Data Collection

For the research, the data shall be collected by considering the questionnaire survey. The researcher shall collect data from the management of the hospitality businesses. In this regard, it is also to mention that the sample size of the survey would be thirty people comprises of finance manager and the CEO of hospitality companies. In addition to that, the researcher is to mention that the data of the researcher shall be collected by online survey. As the researcher shall make online survey, the respondents would be asked close-ended questions to get rid of the chance of manipulated information.  

3.8 Population and sampling

The sampling method of Hospitality sector determines the brief segmentation of market policy as per the market standards of the hospital industry. There tends to be a brief indent of the data manipulation method that tends to dictates the entrepreneurship methodology of high-level scenario in the market growth path. The statistical method of analysis gives a predominant methodology of the data base system for a schematic approach of a large-scale economy based on market segregation. The total base of the population concerning the sampling process in the study dictates the gross managerial staffs of 30 organizations in the hospitality sector to propose a new venture in the market segment for the sustainability of the business. The survey was done on the management crew of a few organizations in order to conduct a gross analysis of the market trends in order to make a strong customer base in the market portfolio.

3.9 Data analysis method

The past and current data of the given business proposal are analyzed in a schematic fashion to equip with the changing market strategies for the sustainability of the latest venture in the business. The macro as well as microeconomic factors is grossly substituted for accommodating the entire diverse domains of the relevant sector. The obligation regarding the data sampling method gives a subjugator approach for achieving a wide range of business strategies in the given market. There are predominantly two types of data analysis method that includes qualitative and quantitative analysis method in a schematic sense. The quantitative approach is chosen in this given context for the hypothetical setup of the latest data and its analysis to evaluate the favorable conditions for proposed growth of the business venture. The quantitative method covers a wide range of data governing all the constraints of the business venture paves a way for sustainable development of the proposed organizational framework.

3.10 Shortcomings and contingency plan

The shortcomings of the given research proposal determines the non-availability of resources and its valuable constraints in all prospects of the research proposal. The resource constraints played an important role in the sustainability and viability of the business framework for all round development of the proposal subjective in a schematic way. The predetermined factors in the business development scenario lacks a hypothetical approach for the broader aspect of the business proposal and the portfolio activities for the financial aspects of the entire business plan. The Contingency plan revolves around the proper addressable of the shortcomings of the given business proposal by establishing a brief plan to achieve the brief objective of the business venture. The main purpose of the business venture is to attract a huge customer base in that locality, which can be approached through the eradication of the narrower perspective of the project.

Chapter 4 Result and Findings

4.1 Result

4.1.1 Primary research 


Capital structure and its effect on business style

Opinions

Responses

Total respondents

Percentage

a. Strongly agree

16

30

53%

b. Agree

8

30

27%

c. Neutral

1

30

3%

d. Disagree

4

30

13%

e. Strongly disagree

1

30

3%

Total

30


100%

Table 1: Capital structure and its effect on business style 


Figure 5: Capital structure and its effect on business style

(Source: As created by the researcher)

From the table and figure above, the researcher could state that the capital structure affects the business style as most of the respondents disclosed that selection of sources of capital influences the business style. 

Financing through debt capital

Opinions

Responses

Total respondents

Percentage

a. Strongly agree

12

30

40%

b. Agree

5

30

17%

c. Neutral

6

30

20%

d. Disagree

6

30

20%

e. Strongly disagree

1

30

3%

Total

30


100%

Table 2: Financing through debt capital


Figure 6: Financing through debt capital

(Source: As created by the researcher)

The figure and table reflects that new hospitality businesses in the UK use debt as the primary source of capital. The most of the respondents have strongly agreed that the newly formed hospitality firms get fund from debt capital.  

Financial leverage   and its effect on capital formation 

Opinions

Responses 

Total respondents 

Percentage 

a. Strongly agree

18

30

60%

b. Agree

7

30

23%

c. Neutral

2

30

7%

d. Disagree

2

30

7%

e. Strongly   disagree

1

30

3%

Total 

30


100%

Table 3: Financial leverage and its effect on capital formation 


Figure 7: Financial leverage and its effect on capital formation

(Source: As created by the researcher)

On the other hand, the researcher has found that financial leverage enhances the risk to a new firm. This approach has been reflected in the responses of the survey as majority of the respondents have strongly agreed that the financial leverage affects the capital structure decision making. 

Problem regarding   loss of control while issuing ordinary shares 

Opinions

Responses 

Total respondents 

Percentage 

a. Strongly agree

14

30

47%

b. Agree

7

30

23%

c. Neutral

0

30

0%

d. Disagree

8

30

27%

e. Strongly   disagree

1

30

3%

Total 

30


100%

Table 4: Problem regarding loss of control while issuing ordinary shares


Figure 8: Problem regarding loss of control while issuing ordinary shares

(Source: As created by the researcher)

In the response of the question on losing the control over the organization, it has been found that highest number of respondents opined that the control in a company could decline by issuing ordinary shares. In this contrary, a significant number of respondents have disagreed the fact that ordinary share could result in losing the control over a company.   

Loss of control of   shareholders 

Opinions

Responses 

Total respondents 

Percentage 

a. Strongly agree

16

30

53%

b. Agree

8

30

27%

c. Neutral

1

30

3%

d. Disagree

4

30

13%

e. Strongly   disagree

1

30

3%

Total 

30


100%

Table 5: Loss of control of shareholders


Figure 9: Loss of control of shareholders

(Source: As created by the researcher)

The above table reflects that shareholders’ control over the company could get affected by the enhancement of ordinary shares. 53% of the respondents opined that the control over the hospitality businesses could get affected by increasing the equity capital.


Financial   difficulty in taking financing decision

Opinions

Responses 

Total respondents 

Percentage 

a. Strongly agree

12

30

40%

b. Agree

11

30

37%

c. Neutral

0

30

0%

d. Disagree

6

30

20%

e. Strongly   disagree

1

30

3%

Total 

30


100%

Table 6: Financial difficulty in taking financing decision


Figure 10: Financial difficulty in taking financing decision

(Source: As created by the researcher)

The researcher has found that management staffs face difficulty in taking financing decisions. The survey has resulted in a strong feedback in favor of enhancement of difficulty while taking financing decisions for the initial phase of hospitality businesses.   

Performance in the   initial stage of the hospitality business

Opinions

Responses 

Total respondents 

Percentage 

a. Strongly agree

9

30

30%

b. Agree

6

30

20%

c. Neutral

5

30

17%

d. Disagree

5

30

17%

e. Strongly   disagree

5

30

17%

Total 

30


100%

Table 7: Performance in the initial stage of the hospitality business


Figure 10: Financial difficulty in taking financing decision

(Source: As created by the researcher)

In the survey, the researcher has discovered that the hospitality businesses have shown a mixed performance in the initial phase. In this context, it is to mention that the respondents were indifference in stating the business conditions in the initial phase.  


Regression  

Debt and financial leverage

SUMMARY OUTPUT


















Regression   Statistics








Multiple R

0.870536








R Square

0.757833








Adjusted R Square

0.749184








Standard Error

0.54466








Observations

30

















ANOVA









 

df

SS

MS

F

Significance F




Regression

1

25.99367

25.99367

87.62268

4.05E-10




Residual

28

8.306329

0.296655






Total

29

34.3

 

 

 













 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.060759

0.201383

0.30171

0.765102

-0.35176

0.473275

-0.35176

0.473274887

Financing through debt

0.702532

0.075051

9.360698

4.05E-10

0.548796

0.856267

0.548796

0.856267056

Table 8: Regressionon Debt and financial leverage

(Source: As created by the researcher)


Loss of control on enhancement of equity capital

SUMMARY OUTPUT

















Regression   Statistics








Multiple R

0.879171








R Square

0.772941








Adjusted R Square

0.764832








Standard Error

0.66276








Observations

30

















ANOVA









 

df

SS

MS

F

Significance F




Regression

1

41.86763

41.86763

95.3159

1.63E-10




Residual

28

12.29904

0.439251






Total

29

54.16667

 

 

 













 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.290997

0.227051

1.281638

0.210482

-0.1741

0.756089

-0.1741

0.756089

Loss of control

1.004823

0.102922

9.762986

1.63E-10

0.793998

1.215649

0.793998

1.215649

Table 9: Regression on Loss of control on enhancement of equity capital

(Source: As created by the researcher)

 

Difficulty in the initial phase and the capital formation 

SUMMARY OUTPUT

















Regression   Statistics








Multiple R

0.794103








R Square

0.6306








Adjusted R Square

0.617407








Standard Error

0.77022








Observations

30

















ANOVA









 

df

SS

MS

F

Significance F




Regression

1

28.35599

28.35599

47.79863

1.62718E-07




Residual

28

16.61068

0.593239






Total

29

44.96667

 

 

 













 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.173665

0.295013

0.588668

0.560803

-0.430642491

0.777973

-0.43064

0.777973

Performance in the initial stage

0.664075

0.096053

6.913655

1.63E-07

0.46731979

0.86083

0.46732

0.86083

Table 10: Regressionon Difficulty in the initial phase and the capital formation

(Source: As created by the researcher)


4.1.2 Secondary research

4.1.2 Theme 1: Financial factors:

In an organization, the capital formation decision making depends on the internal risk, tax and the cost of capital as these factors influence the financial performance of a company. According to Marshall et al. (2017), the capital formation of an organization needs to consider the risk factor as capital structure affects the internal risk in an organization. In this context, it is to mention that the enhancement of debt increases the financial risk in an entity (Burns, 2014). Therefore, it can be said that the financial risk is affected by the capital structure decision making. On the other hand, Ahlers et al. (2015) stated that the enhancement of the equity capital results in lose in control over the company. Therefore, it can be said that the control of the investors is another factor that could affect the capital formation decision making. 

Theme 2: Financing decisions of startup hospitality businesses:

In a startup organization, the financing could be done by considering either of debt or equity capital (Marshall et al. 2017). In this context, it is to mention that the combination of the debt capital and the equity capital could also result in formation of capital base for an entity involved in hospitality business. Retained earnings also forms capital base for companies, however startup companies could not retain earnings as the companies do not have profit bases. 

4.2 Findings and analysis

In the result section of the research, the researcher has found that the financial factor such as interest on debt, degree of control over the company and the financial risk have influence on the financing decision making of startup hospitality businesses in the UK. In this context, it is to mention that the researcher has found that the debt financing and the enhancement in risk in the organization are positively correlated. Therefore, the management of the hospitality businesses is to consider risk factor while making the financing decisions. In the primary data research, the researcher has found that the correlation coefficient between the debt and the financial leverage is 0.76 (approximately). Therefore, it can be said that the enhancement of debt capital and the financial risk are positively correlated. On the other words, it can be said that the risk enhances with the increase in the debt financing. Therefore, it can be said that the risk factor affects the financing decisions of the new startups in the UK. 

In the second research, the researcher has calculated the correlation coefficient between control over board and the enhancement of equity capital. In this regard, the researcher is to mention that the control over board decreases with the enhancement of equity capital. On the other hand, it is to mention that as the R square value of the regression analysis has been calculated at 0.76 or 76%. Therefore, the researcher is to mention that the independent variable reflects the variability at a degree of 76%. Therefore, it can be said that the statistical analysis is fitted and well explained. 

In the final portion of the primary research, the researcher has considered the difficulty in the financing decision and the capital formation decision. The researcher has seen a high positive correlation coefficient in this part. Therefore, it can be said that companies face difficulty in the initial phase due to capital structure decision making.           

Chapter 5: Conclusion and Recommendations

5.1 Conclusion

In light of the above discussion made, it can be established that the financial factors tends to significantly affect the capital formation decision of a start up. It is seen that, in the recent times the UK market is hostile and is going through a disruption phase. This has created a major problem for the hospitality sector. Although it is argued by some authors that the fall in the value of the pound has somewhat given a boost to the organization in the hospitality industry, but still no sign of growth or development has been noticed so far. Thus, it has become essential for the new entrants in the market to take into consideration all the financial factors like the cost of debt or the cost of equity, the source of finance, the method of procurement of capital or the capital structure of the organization before incorporation of the business. In this regards, it is noted that, the factors like the tax implications, the market risks, operational risks and the current economical condition of the country significantly affects the financing decision as well as the capital formation decision of the new business. 


Evidently, any new venture needs a huge amount of capital investment, adoption of technology, other non-financial resources and related infrastructure. It is seen that, there lies a good scope and growth opportunities in entrepreneurial ventures in the hospitality sector. In this sector, the requirement of resources consists of detailed control system, significant work force as well as a necessary spark of the entrepreneurial energy. Usually it is seen that, in the UK market the hospitality sector has undergone many changes that tends to significantly influence the market factors. These consist of the factors like that of customer’s tastes and preferences, the consumption patterns of the customers, innovation and technology and channel of distribution. The changes adopted have brought in innovation and technological advancement in the industry and has enhanced the scope of new entrants with pristine ideology to expand the market of the hospitality industry. In addition to that, the financial factor tends to play a pivotal role in initiation of a new business venture. While initiation of a new start up it is the responsibility of the potential entrepreneurs to make certain decisions regarding the source of finance, the market competitors, and the potential investors in the market and capital structure of the organization. Thus, it can be concluded that the new entrants in the UK market must be able to identify the factors that affect the financing decision, the source of financing of the organization as well as the capital structure decision of the business.

5.2 Recommendations

From the above discussion it is evident that the financial factors related to an business operations tends to significantly influence the financing decision and the capital formation of new entrepreneurial ventures in the market. Notably, the market factors in UK is hostile and this necessitates the organization to focus on the factors like the sources for financing the business operation the mode of financing, the risks taking capability of the organization and the probable capital structure of the organization, i.e., whether it will be debt capital or equity capital. In addition that, financial factors, the financial leverage, rate of interest in the market, the degree of control influences the day-to-day operation of an organization and thereby, affecting the capital structure.  In this regards, it can be stated that, selection debt as a mode of financing tends to increase the risks associated with the organization. On the other hand, in light of the market instability that UK is facing in the recent phase may pose certain financial obstacle for the companies in the hospitality sector. They include large capital requirements for the new ventures, legal consequences in the formation of capital, uncertainty in the future rate of return and lack of any past financial evidences. 


Moreover, because of the EU referendum, there has been a growing uncertainty in the UK market and the current economic growth is expected to be slow. With the fall in value of pound, UK has become an attractive tourist destination that can be termed as a positive aspect for the hospitality industry. The EU Referendum is one of the significant drivers of economic growth in the country and give rise to concerns like security concerns, consumer as well as corporate uncertainty and average growth in supply. These issues may create an unfavorable backdrop for the economy and because of this; the hospitality sector may face hindrances in their operations. Although the weak currency may provide the industry some boost, due to the ongoing disruption the future of the hospitality sector in the UK market looks uncertain. In regards to the current situation, the hospitality sectors are facing difficulty in capital formation and other financial crunches. 

In regards to the factors discussed above, the following recommendations are made to the new entrants in the UK market in the hospitality industry:

  • The company needs to identify the factor that affects the financing decisions of their organization and accordingly frame their financial policies.
  • One of the essential factors that the new entrepreneur must focus on is the nature and the size of the organization into which they will be venturing, conduct a market analysis to research about the current market trends and look for the most viable options available to them. 
  • Financial leverage of an organization is an important factor and is related to the risks an organization has to bear. Usually it is noted that, the more the financial risks the more the financial as well as the operational risks or an organization. Thus, it is essential for the organization to critically analyze the risks involved and formulate action plan to minimize the same. 
  • One of the important decisions that an entrepreneur needs to take is the degree of control he or she wants to hold. In this regards, the entrepreneur needs to create a mix between the debt and the equity capital such that the degree of control remains in his or hand.
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