UK Tax System - Assignment Example

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In the report “UK Tax System” the author focuses on the UK tax system, which might encourage the company to adopt a relatively lower gearing ratio so as to increase its investments and experience growth. The lower the gearing ratio the lesser interest the company has to pay…
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UK Tax System
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Download file to see previous pages Profit margins are small: Higher expenditure and lower selling prices will lead to a lesser bottom-line and so lower dividend payments. This problem can be overcome by working efficiently and effectively to generate high sales and stand up competitively by not lowering the prices of goods. Late payments from customers will seriously influence the cash flow: In this case, credit terms should be discussed beforehand with customers and be kept strict so as to make inflows earliest. Key supplier (s) will gradually be dissatisfied: If payment problems to suppliers arise due to the expansion or new orders being taken, suppliers will be alarmed and dissatisfied with the company. To cure this problem, the company should beforehand discuss the situation with the suppliers and the credit terms should be precisely conveyed so as to prevent future problems. (b) There are a number of short-term finances available to the company to finance its proposed expansion; two of them are discussed as follows: Bank Loan, and Bank Overdraft Bank Loan: In the case of this company, bank loan pertains to the short-term period usually equal to or less than a year. The bank according to the credit rating lends the company a certain amount of loan needed and on an interest rate negotiated. Strengths: Amount will be received on one-time basis and the payment will be done in monthly, quarterly or semi annually installments Cost of borrowing is lower than other means such as Bank Overdraft Interest rates are low Reliability and security is always there in terms of getting the money from the bank on time and for a certain period of time contracted upon with the bank Weaknesses: The loan will be secured against the company’s assets The riskier the business is, the higher the interest rate the bank will charge to cover up its risk Arrangement fees, as well as repayment fees, will have to be paid In case of early repayment of loan, an extra charge will have to be paid Bank Overdraft: It is a kind of loan arrangement under which a bank extends credit allotted to a company up to a maximum amount called the overdraft limit against which a customer or company who has current or checking account with the bank can write checks or make withdrawals (Business Dictionary 2011). Strengths: Appropriate for short-term financing Not secured against any asset of the company so the process of obtaining the loan Is expedited Only charged for the amount overdrawn from the bank account and also pertaining only to the period of time the overdraft facility had been used by the company Weaknesses: The bank overdraft amount has to be paid on demand of the bank. This puts the company at a great risk in the case when the bank decides to request the money back at an inconvenient time for the business High-interest rate is charged (c) Capital Gearing Ratio This ratio tells us that how much risk the company is in terms of financial risk and it is used by companies as well as its shareholders to analyze the company’s capital structure and leverage (Accounting for Management 2011). ...Download file to see next pagesRead More
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