Finance is essential for a business’s operation, development and expansion. Finance is the core limiting factor for most businesses and therefore it is crucial for businesses to manage their financial resources properly. Finance is available to a business from a variety of sources both internal and external. It is also crucial for businesses to choose the most appropriate source of finance for its several needs as different sources have its own benefits and costs. Sources of financed can be classified based on a number of factors. They can be classified as Internal and External, Short-term and Long-term or Equity and Debt. It would be uncomplicated to classify the sources as internal and external
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A essential introduction to sources of finance for different businesses. Used as a group work out where each group is given a business scenario and are given a set of cards. Each card has a piece of in order which is identified as a source of finance e.g. a loan, grant etc. The group would then sinuses. Used as a group exercise where each group is given a business scenario and are given a set of cards. Each card has a piece of information which is identified as a source of finance e.g. a loan, grant etc. The group would then sort through the cards and decide which sources of finance would then suit the scenario .A good starting point to understanding the different sources of finance. Chapter1. Sources and finance
Q. Suggest john caird what are the different possible options available for him. What initiatives and legal steps he would need to take to start any of forms of business? The different possible options available for john there are: 1. Sole proprietorship 2. General partnership 3. Corporation
Being a sole trader is the simplest way to run a business – it does not involve paying any registration fees, keeping records and accounts is straightforward, and you get to keep all the profits. However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.
A partnership is a business where two or more people own a company, work together and share the profits or losses on an agreed basis (mostly in equal portions).
In a general sense, a corporation is a business entity that is given many of the same legal rights as an actual person. Corporations may be made up of a single person or a group of people, known as sole corporations or aggregate corporations, respectively. Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation. This limitation ofÂ liabilityÂ is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate; particularly those involved in highly litigated trade. Initiatives and legal steps he would need to take to start any of forms of business are: There are certain legal steps that you need to take when starting any small business including one that provides general repairs. First, you should contact your local, county or state government to find out if any licenses or special certifications are required to operate a general repair business in your area. If so, ask them to send you the necessary paperwork. From there, you will need to determine the basic legal structure of your business and appropriately record the business name. If you intend to operate the business as a sole proprietorship or a partnership using a name other than your personal name, you will need to register your fictitious name with your city, county or state. Basically, you are going on record stating that you are the owner of the business. You should only have to pay a small fee for registering the name. If you decide to establish the business as a corporation, you will need to file articles of incorporation with your Secretary of State. It is appropriate to hire an attorney to complete this process for you. You will also need to determine what local, state or federal tax obligations you are required to pay. Your tax advisor or accountant should be able to help you out with this step. Finally, make sure you thoroughly research your federal and state employer requirements. As an employer, you will have certain labor, safety and tax obligations. Again, it is strongly recommended that you consult a professional tax advisor, accountant or attorney before starting any business. Do all of the above, before you repair anything consult an attorney, that initial fee to an attorney may seem like allot, but down the road may save you thousands of dollars, if you are going into business with someone don’t think for one minute you don’t need an attorney, protect yourself at all costs, you do not want to lose money if your partner or family member screws up no matter what they do.
Q. Classify the financing needs in short, mid and long term? Classify the financing needs in short, mid and long-term sources. Building and Fixtures Long-term sources Office Vehicle Long-term sources Security System Long-term sources Payroll expense Short term sources Office Stationary Mid-term sources Marketing Expenses Short term sources Printing and Publication Mid-term sources
Classifies these sources of finance under equity and debt category . Classify these sources of finance under equity and debt category: Personal Savings Equity Bank loan Debt Trade Credit Debt Invoice Factoring Equity Hire-purchase Debt Mortgage Loan Debt Share Capital Equity Bond &Debenture Debt Invoice Discounting None Cash Management None Leasing Debt Retail Earning Equity Chapter2. Implications of different sources
Q. Explain the leasing contract to john. Show him the way he will get engaged in leasing for $200,000 building and fixture. Also discuss the risk and other implications of leasing. Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lesser is the owner of the assets. The relationship between the tenant and the landlord it’s called a tenancy, and can be for a fixed or an indefinite period of time. The consideration for the lease is called rent. Under normal circumstances, an owner of property is at liberty to do what they want with their property, including destroys it or hand over possession of the property to a tenant. However, if the owner has surrendered possession to another then any interference with the quiet enjoyment of the property by the tenant in lawful possession is unlawful. Similar principles apply to real property as well as to personal property, though the terminology would be different. Similar principles apply to sub-leasing, that is the leasing by a tenant in possession to a sub-tenant. The right to sub-lease can be expressly prohibited by the main lease. Risk management has become an integral part of international business strategy, and accountants use quantitative tools to measure and analyze risk. The job of the Chief Financial Officer is to identify and address all types of risk, establish support and control mechanisms for dealing with it, and set the course for the risk management team in terms of its policies and objectives.
Q.Explain invoice factoring and discounting to john. Inform him when he will be able to use these Sources of finance. Suggest him the either factoring or discounting based on cost. Take note that john prefers safety and quality rather than cheaper techniques.
A method to draw loans from a company’s outstanding invoices that does not require the company to relinquish administrative control of the invoices. An invoice discounting company will review the outstanding invoices on the company’s ledger, and will determine the amount of loans that it will extend. Because the money is loaned, the company will be responsible for interest payments, as well as a fee to the invoice discounting company. Factoring invoiceÂ allows you toÂ bring tomorrow’s money in today Invoice factoring – or the selling of an accounts receivable invoice to a “factor” benefits your business with the cash flow it needs. Here are some of its key points: Elimination of bad debt. A non-recourse factor will assume the risk of bad debt, thus eliminating this expense from the business’ income statement. Invoice processing. Factors handle much of the work associated with processing invoices, including posting invoices, depositing checks, entering payments and producing regular computer reports. Unlimited capital. Factoring is the only source of financing that grows with your sales. As sales increase, more money becomes immediately available. This allows your business to constantly be able to meet increasing demand. Take advantage of early payment discounts and volume discounts. If you can save 2 – 5% of your raw materials cost because you have the cash to pay within ten days, in addition to volume purchasing, you significantly reduce the true cost of factoring. Stop offering early payment discounts to your clients. Since you receive your money immediately, you don’t need to offer early payment discounts. Factoring will save every dollar in discounts that your clients were taking. Don’t give up equity. You do not have to give up any equity in the company (as is usually required with venture capital) or take on any partners with factoring. Don’t incur any additional debt. Factoring is not a loan and therefore your business is not incurring any additional debt Invoice discounting is a form of short-term borrowing often used to improve a company’s working capital and cash flow position. Invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid. To do this, the business borrows a percentage of the value of its sales ledger from a finance company, effectively using the unpaid sales invoices as collateral for the borrowing. Although the end result is the same as for debt factoring (the business gets cash from its sales invoices earlier than it otherwise would) the financial arrangement is somewhat different.
When a business enters into an invoice discounting arrangement, the finance company will allow the business to draw down a percentage of the outstanding sales invoices – usually in the region of 80%. As customers pay their invoices, and new sales invoices are raised, the amount available to be advanced will change so that the maximum drawdown remains at 80% of the sales ledger. The finance company will charge a monthly fee for the service, and interest on the amount borrowed against sales invoices. In addition, the finance company may refuse to lend against some invoices, for example if it believes the customer is a credit risk, sales to overseas companies, sales with very long credit terms, or very small value invoices. The lender will require a floating charge over the book debts (trade debtors) of the business as security for the funds it lends to the business under the invoice discounting arrangement. Responsibility for raising sales invoices and for credit control stays with the business, and the finance company will often require regular reports on the sales ledger and the credit control process. Benefits By receiving cash as soon as a sales invoice is raised, the business will find that its cash flow and working capital position is improved. The business will only pay interest on the funds that it borrows, in a similar way to an overdraft, which makes it more flexible than debt factoring. Invoice financing can be arranged confidentially, so that customers and suppliers are unaware that the business is borrowing against sales invoices before payment is received.
Q.Explain trade credit to john and identify the costs that can be financed through trade credit. Trade credit is the course of buying equipment and supplies for your business start-up from suppliers or vendors, letting them finance your purchases. In other words, trade credit is “buying now, pay later.” Some suppliers call this an “open account,” because they keep your account open and you can buy from them on credit as long as you continue to pay regularly. Identify the cost Printing and Publication Trade Credit Marketing Expenses Trade Credit
Q. Briefly discuss when john will be able to raise fund by issuing share capital or bond/debenture. Explain the differences between share capital and bond/ debenture. In terms of cost and risk, make a rank of share capital and bond.
A company seeking to obtain additional equity funds may be: a) An unquoted company wishing to obtain a Stock Exchange quotation b) An unquoted company wishing to issue new shares, but without obtaining a Stock Exchange quotation c) a company which is already listed on the Stock Exchange wishing to issue additional new shares. The methods by which an unquoted company can obtain a quotation on the stock market are: a) An offer for sale b) a prospectus issue c) a placing d) an introduction.
An offer for sale is a means of selling the shares of a company to the public. a) An unquoted company may issue shares, and then sell them on the Stock Exchange, to raise cash for the company. All the shares in the company, not just the new ones, would then become marketable. b) Shareholders in an unquoted company may sell some of their existing shares to the general public. When this occurs, the company is not raising any new funds, but just providing a wider market for its existing shares (all of which would become marketable), and giving existing shareholders the chance to cash in some or all of their investment in their company. When companies ‘go public’ for the first time, a ‘large’ issue will probably take the form of an offer for sale .A smaller issue is more likely to be a placing, since the amount to be raised can be obtained more cheaply if the issuing house or other sponsoring firm approaches selected institutional investors privately.
A bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. In the interim, bondholders receive interest payments at fixed rates on specified dates. Holders can sell bonds to someone else before they are due. Corporations benefit by issuing bonds because the interest rates they must pay investors are generally lower than rates for most other types of borrowing and because interest paid on bonds is considered to be a tax-deductible business expense. However, corporations must make interest payments even when they are not showing profits. If investors doubt a company’s ability to meet its interest obligations, they either will refuse to buy its bonds or will demand a higher rate of interest to compensate them for their increased risk. For this reason, smaller corporations can seldom raise much capital by issuing bonds. Stocks (aka Equities): Stocks represent partial ownership of a corporation. If the corporation does well, its value increases, and you share in the appreciation. However, if the corporation goes bankrupt, you can lose your entire initial investment. Bonds (aka Notes): Bonds represent a loan you make to a corporation or government. For example, you can buy a US Treasury bond for $100, and get a guaranteed 4.75% interest rate for 5-years, and can expect to get your $100 back at the end of those 5-years. Your risk is repayment of the principal (amount invested). Because loaning $100 to the U.S. government is much less risky than loaning $100 to the Brazilian government, U.S. government bonds pay a much lower rate of interest (“coupon”) for borrowing your money.
Stocks are EQUITY. They represent shares of ownership in a Corporation. A Stockholder is actually one of many owners of a Publicly Owned Corporation. If a Corporation dissolves for any reason owners of Common Stock (the main type of stock issued) receive the value of the sold assets of the Corporation AFTER everyone else is paid, including the IRS, Employees, Bonds, Accounts Payable, etc. Bonds are DEBT. They are sold by the Corporation in order to raise money for various purposes for use by the company. Bonds offer an interest rate to the Bondholder for the period of time that the Bondholder owns the bonds. Since bonds do not represent ownership, the bondholder could lose their investment if the Corporation dissolves, but are paid BEFORE owners of stock. Name Cost Rank Ratio Share capital High High 55% Bond Low Low 45% Chapter3.choosing the appropriate sources of finance
Q. Suggest him the best sources of finance for each of the requirement listed in previous page. Also explain why you think those sources as best for john.
Building and Fixtures Leasing, Bank loan, Share Capital &Mortgage Loan Office Vehicle Leasing, Bank loan, Share Capital &Mortgage Loan Security System Leasing, Bank loan, Share Capital &Mortgage Loan Payroll expense Retail Earning, Personal Savings Office Stationary Retail Earning, Personal Savings Marketing Expenses Invoice Factoring, Hire-purchase Printing and Publication Invoice Factoring, Hire-purchase
Q. Identify the probable sources of finance for cairns new investments in property, plant & equipment. Explain deferred tax liability. Explain called up share capital and share premium to john. An account onÂ a company’s balance sheet that is a result of temporary differences between the company’s accounting and tax carrying values, theÂ anticipated and enactedÂ income tax rate, and estimated taxes payable for the current year. This liability may or mayÂ not beÂ realized during any given year, which makesÂ the deferred status appropriate. BecauseÂ there are differences between what a company can deduct for tax and accounting purposes, there will be a difference between a company’s taxable income and income before tax.Â A deferred tax liability records the fact that the company will, in the future, pay more income tax becauseÂ of a transaction that took place during the current period, such as an installment sale receivable. Value of the issued shares which have remained fully or partially unpaid,and whose holders have now been called upon to pay the balance .
Excess amount received by a firm over the par value of its shares. This amount forms a part of the non-distributable reserves of the firm which usually can be used only for purposes specified under corporate legislation.
Q.Explain EPS, explain dilution and diluted EPS. What is the approximate cost of cairn is long debt finance. Calculate the percentage of finance cost to operating profit of business. What does the percentage indicate?
The portion of a company’s profit allocated to each outstanding share of common stock.Â Earnings per shareÂ serve as an indicator ofÂ a company’s profitability.
When calculating, it is more accurate to use aÂ weighted average number of shares outstanding over the reporting term, because theÂ number of shares outstanding can change over time. However, data sourcesÂ sometimes simplify the calculationÂ by using the number of shares outstanding at the end of the period. Approximate cost=63.3 Percentage of financial cost to Operating profit =63.3/62.6 The percentage=101.1%it is very bad any kind of business.
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