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Managing Financial Resources and Decisions

Projektarbeit 2013 22 Seiten

BWL - Investition und Finanzierung

Leseprobe

Contents

Introduction

Sources of Finance

Sole Trader

Owner’s Capital

Implication

Bank Loan

Implication

Partnership

Trade Credit

Implication

Hire Purchase

Implication

Private Limited Company

Debt Factoring

Implication

Retained Profit

Implication

Appropriate sources of finance for the client

Costs of different sources of finance

Financial Planning

Information needs of different decision makers

Impact of finance on financial statements

Profit and Loss Account

Balance Sheet

Appropriate financial statements for different businesses

Conclusion

Bibliography

Introduction

This report will identify the sources of finance available to a variety of businesses along with implications of using these types of sources. Also it will assess and consider the suitable sources of finance for the client on behalf of the financial consultancy firm ‘Fast Forward’ and assess the costs of having a variety of diverse sources of finance. In addition the report will explain why it is imperative for businesses to conduct financial planning as well as indicating what information requirements are mandatory for a variety of decision makers. Finally it shall examine the main financial statements and suggest suitable financial statements for different organisations.

Sources of Finance

There a wide range of sources of finance available to a variety of businesses (sole trader, partnership etc) which would only be suitable to specific types of organisations.

Sole Trader

Bendrey (1996) suggests a Sole Trader is a proprietorship which is possessed by a single entity who accepts the entire profit that is generated by the business and whose liability towards the business’ losses is boundless. The resources of the company as well as the arrears acquired by the business also belong to the sole owner.

The following sources of finance are available to a Sole Trader:

Personal Savings

Retained Profit

Bank Loans

Working Capital

Sale of Assets

Hire Purchase

Mortgage

Owner’s Capital

A source of finance which would be available to a sole trader would be Owner’s Capital. Gilbertson (2008) implies this internal source is the personal funds the owner has invested him/herself into their company. Sheeba (2010) says the owner of the business would use their savings to start-up and continue its financial running and if the business suffers a loss then the owner will suffer a personal financial loss in regards to their savings which have been invested into the company. Dodge (1997) states the advantage of such a method is there is no debt owed to third-party thus the owner will be able to give themselves an unlimited amount of time to see a return in the money they invested to the company.

Kravitz (1999) states the disadvantage for this source of finance is if the business is unsuccessful and enters into liquidation then the amount of personal funds invested into the business will not be returned and could possibly lead to personal financial problems for the owner.

Implication

The implication for a business to use this type of source is it could either be fruitful or futile. Albrecht et al (2010) states the risk factor will be established upon the business since the return of the owner’s investment is dependent on the profitability of the business. Thus risks are not spread out and cannot be contained since the owner ‘put all his eggs into 1 basket’ implicating serious thoughts will have to be taken when considering to make business decisions. And if some dire decisions are made this wouldn’t just cost the company’s liquidity but also the owner’s own personal wealth.

However Mankiw (2008) declares if a business does carry out this source of finance it would implicate the business from being ‘held ransom’ by its creditors which would mean the company has a longer period of time to payback its investment. Also as no loan has been taken out the business could apply for a bank loan in the future if its need of more financial help to aid it in continuing to operate i.e. stock purchases or marketing.

Bank Loan

The second source of finance available to a Sole Trader is Bank Loan. Fabozzi (1998) proposes this external source is funded by banks are willing to provide long-term and short-term loans to businesses. Coyle (2002) states the loan must be paid punctually along with the agreed interest rate per month. The loan would have to be taken out on an individual account (Personal). If the Sole Trader enters liquidation then he/she must reimburse the bank from their pocket.

Arnold (2008) says the advantage of a bank loan is it is typically available constantly thus start-up newsagents can apply for a bank loan which would be available to them as soon as possible. Mannino (1989) states the disadvantage for this source of finance is not everyone meets the criteria to obtain a bank loan as they need very high credit scores thus if a newsagents requires a loan however the owner has a bad credit then he/she won’t be able to get a loan which means the business could face financial difficulties.

Implication

Longenecker (2005) says positive implication for a business to use this type of source is it is a secure method of lending as businesses will not be gaining too high interest rates from loan sharks and are provided from a credible source. This is beneficial for the business as they can take out a loan on the basis of whether or not from their current financial standing they are able to pay off the money requested so businesses won’t be given ludicrous sums of money whilst not deciding whether the company can return the money within the agreed period of time hence containing the risk of selling assets or the business itself to finance its creditors.

Woods (2008) states however if a business takes this source of finance it means the business will have to pay a specific amount of interest related to their credit rating. If it has a below average credit score then it would expect to pay significantly higher rates of interest along with penalty charges if prompt payment of instalments aren’t made. This means a bank loan isn’t always a cheaper alternative for businesses and could hamper the revenue of the business because of its past credit rating when it could in the present be much more financially stable to pay off debts punctually.

Partnership

This is a form of business agreement where a minimum of two individuals collaborate together to forge an alliance in which the responsibilities and profits are shared equally amongst the partners.

The following sources of finance are available to Partnerships:

Personal Savings

Trade Credit

Hire Purchase

Bank Loans

Retained Profit

Working Capital

Sale of Assets

Trade Credit

A source of finance available to a Partnership is Trade Credit. Drury (2008) suggests this source is a proposal between two businesses to agree upon paying the purchase of goods in a specific period of time. Edwards (2004) declares this source of finance is where a business is able to obtain goods from a supplier and pay for the items on a later date i.e. pay in 30 days time instead of paying straight away. Graham (2000) suggests the advantage of such a method is it helps improve the cash-flow of a business due to the fact an increase in disposable income which can be invested into other areas of the business since more inflows are occurring whilst outflows have been stalled for the time being.

Seal (2011) states the disadvantage for this source of finance is if the business cannot pay its creditors on time or when deemed appropriate then there is a high possibility they will notify credit agencies which would damage the company’s reputation for creditworthiness meaning future trade credit prospects will be difficult to acquire thus assets could be confiscated and the business’ cash flow would be negative as they cannot halt payments for its creditors.

Implication

Melville (2011) proposes that the negative implication to use this source is if a business has too much trade credit from a variety of suppliers then it would be harder for them to pay all of them together and the business will not gain any discounts for bulk buying as they are using trade credit. This is detrimental for the business as they are reliant on their creditors to provide them with loans and credit for their financial situation meaning they will have imposed a strict time frame for payment and if not adhered this would damage the company’s credit thus banks won’t provide loans in the future thus limiting options for sources of finance.

Watson (2004) declares however if a business does take this source of finance then businesses do not have to provide any sort of collateral to obtain this source of finance. Trade Credit is based on eligibility the business is capable of paying off the money owed to them in an appropriate space of time. This means trade credit will be given on the business’ financial position and thus the business will be aware of how much money the business is capable to obtaining which indicates how the business is performing to previous years by analysing whether their trade credit quantity has increased or decreased.

Hire Purchase

The second source of finance available to Partnerships is Hire Purchase. Gee (2006) suggests this personal source is used by paying credit in instalments and when the final instalment has been paid the hire-purchase customer becomes the legal owner of the goods/service. In other words a business would rent a product for a specific period of time and after the payment period has completed the business legally owns the product. Gillies (2004) states the advantage is Hire Purchase agreements are generally accepted more than other common unsecured borrowing methods hence they are an easily accessible source of finance and if any financial troubles arise in regards to payment a debt management scheme can be organised to practise a viable solution for both parties.

Hussain (1989) declares the disadvantage for this source of finance is if at least a third of the funds haven’t been paid then the creditor has the ability to repossess the assets of the company until the payment has been cleared (without a court order). And this also requires a credit check in order for this source of finance to also be obtained moreover the source of finance can be given provided the business pays at a high interest rate.

Implication

The positive implication to use this source is as Jennings (2001) states Hire Purchase agreements tend to last for medium terms which cannot be withdrawn by the supplier. That means if a business has for a short period of time not made as much profit as expected it can still have the product which it current has leased without being forced to return the product just for not being able to perform as successfully as predicted continuously. Also a business is able to budget on its future regarding whether it is expected perform well by examining its payments with the revenue the business expects to generate.

However Sangster (2008) says if this source of finance is taken then it can impact it negatively because if the product in question is no longer needed or deemed unsuitable for the job then the business would have to incur penalties to remove the Hire Purchased product before the agreed period of time. Furthermore by the time the product has been fully acquired the product’s value would have depreciated because of its age which would mean businesses are unable to gain a complete return on its assets.

Private Limited Company

A Private Limited Company (PLC) is a business entity where responsibility of the shareholders has been restricted and the shares of the organisation are never sold on or to the public market to prevent possible business takeovers.

The following sources of finance are available to a Private Limited Company:

Debt Factoring

Retained Profit

Venture Capital

Share Capital

Sale of Assets

[...]

Details

Seiten
22
Jahr
2013
ISBN (eBook)
9783656893554
ISBN (Buch)
9783656893561
Dateigröße
643 KB
Sprache
Englisch
Katalognummer
v288166
Note
98% (Distinction)
Schlagworte
Finance Financial Planning Retained Profit Sources of Finance

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Titel: Managing Financial Resources and Decisions