Managing Financial Resources and Decisions - Assignment Example

?Running Header: Financial Resources and Their Management Topic: Managing Financial Resources Module Section One - Sources of Finance (LO1 and LO2) Opportunity in business world is good for both of you and your twin brothers who just left the university and plan to engage in a small-time consultancy business.  Making a decision on the kind of legal forms  you will use to start-up must shield you a better understanding of the pros and cons if you are trying to make up your mind on choosing  a business structure of  being a sole trader as your twin brother  as your employee, or make a business partnership with him. In business world, a sole trader trades on his business own. He is managing, controlling and most importantly, the sole owner of the business. He is personally entitled to all the benefits and profits of his business at the same time, liable for all the business debts and taxes so if you will become a sole trader of your small consultancy business with your twin brother as your employee that is very easy to establishas it follows no formal or legal processes to employ people to help run your business. The advantages of being a sole trader make a business owner easy to start and run his business, no retirement for registration but it has boundless liability for debts, greater personal assets are at risks and many business taxes to settle. You may find lack of credibility when it comes to marketplace, hard to attract loans and investments and get it more difficult to sell your business. You need to consider that business imply lasts based on the lifetime of the sole trader. Thus, if you want to start up your business as a sole trader, it is good to search for company office and secure the Intellectual Property Office to make sure that the name you want for your business is not existing and protected by other business owner/s. Partnership, on the other hand encourages you and your brother to run together in the business that you both are trying to venture. Each of you shares responsibility in running the consultancy business, shares equally on profits or loss unless otherwise stated in your terms and agreement. Both of you are liable within the partnership. Your partnership with your brother gives full advantages which requires no pay for income tax and it distributes the partnership income to the partners and both of you will pay the business tax on their own share.  The partnership in business structure you plan involves no registration between you and your brother and it offers wide-range to share the costs of business operation costs such as those people who operates to share a joint office. The disadvantages of this type of business form includes the partners liable for debts acquired by any of you, partnership conflicts may arise, possible complicating issues such as when their partner dies, or leave the partnership and personal assets are also at risk. Since you are the more business oriented compared to your brother and he is undoubtedly a little more technically gifted than you, the good blending or combination of your effort and his skill make both of you best to invest and make a partnership on your business. It offers the quality steps a long way your business works also the contribution of your brother’s work to make both of you successful in your business consultancy, besides the combination of your heads as engineers surely will make you reach your successful business venture. Possible financial sources for your business are: Own Capital   Partnership is the form of structure of your business together with your brother so own capital is the common source of finance, especially for startup is money from the individuals who are forming the business. Advantage: Own capital is a costless form of finance, but carries the risk of the money being lost. Disadvantages: The money once mismanage is totally lost and considered a personal endeavor which can affect business operations adding to liabilities.   Leasing Leasing is like renting a piece of equipment or machinery. The business pays a regular amount for a period of time, but the item belongs to the leasing company. The advantage:   •             Cheaper in the short run than buying a piece of equipment outright. •             If technology is changing quickly or equipment wears out quickly it can be regularly updated or replaced. •             Cash flow management easier because of regular payments. The disadvantage:   •             More expensive in the long run, because the leasing company charges fees which make the total cost greater than the original cost.   Trade Credit Trade credit is an important source of finance for nearly all businesses – since it is effectively a free source of finance. Advantages: •             You can buy the stock and pay later when you have sold the stock and made enough money to pay them back •             Eases the cash flow as you can pay after 28-30 days Disadvantages •             If you do not pay them back on time you can build up a bad credit history •             Only companies with good credit history are acceptable intrade credit grant   Borrowing money from friends and family Borrowing some amount from friends and family are also common.  Friends and kinfolk who are helpful and agree on business idea provide money either directly to the entrepreneur or into the business.  Advantages: This can be faster and inexpensive to arrange as well as the interest and reimbursement terms may be more flexible than a bank mortgage.  Disadvantages: However, this kind of money outsourcing can add to the stress, particularly if the trade gets into problems.     Section Two - Finance as a Resource (LO2) a.       Appendix A Cash flow forecast for proposed organization. You have produced an initial cash flow forecast for the proposed organization. You are able to start the business with money in the bank equal to ?1000. Monthly Sales for the first six months has a total of ?9760. The payments composed of the wages and salaries of ?4500, supplies of ?3540, rent and rates of ?480, advertising of ?740, and miscellaneous has a total of ?75 which all payments  is equal to ?9335. The balance carried forward is ?425 in accordance with the cash flow forecast below.     Month 1(?) Month 2(?) Month 3(?) Month 4(?) Month 5(?) Month 6(?) Sales 1,150 1,250 1,380 1,680 2,050 2,250 PAYMENTS Wages and salaries 750 750 750 750 750 750 Supplies 375 395 470 570 940 990 Rent and rates 80 80 80 80 80 80 Advertising 300 100 100 80 80 80 Miscellaneous 10 10 10 15 15 15 TOTAL 9335 Receipts minus payments 9760 - 9335 Balance brought forward 1,000 Balance carried forward 425   b.      Yet after a discussion with your brother, you decided to recalculate the cash flow forecast, inserting the following changes such as 10% decrease in supplies costs each month, 20% increase in rent and rates each month and 100% increase in miscellaneous costs starting in the fourth month along with the changes made in the original cash flow forecast that you must show the amended cash flow forecast incorporating the changes. Thus, you are able to start the business with money in the bank equal to ?1000. Monthly Sales for the first six months has a total of ?9760. The payments composed of the wages and salaries of ?4500, supplies of ?3366, rent and rates of ?576, advertising of ?740, and miscellaneous has a total of ?120 which all payments  is equal to ?9302. The balance carried forward is ?458 in accordance with the cash flow forecast below.       Month 1(?) Month 2(?) Month 3(?) Month 4(?) Month 5(?) Month 6(?) Sales 1,150 1,250 1,380 1,680 2,050 2,250 PAYMENTS Wages and salaries 750 750 750 750 750 750 Supplies 337.5 355.5 423 513 846 891 Rent and rates 96 96 96 96 96 96 Advertising 300 100 100 80 80 80 Miscellaneous 10 10 10 30 30 30 TOTAL 9302 Receipts minus payments 9760 – 9302 Balance brought forward 1,000 Balance carried forward 458   The result of the first six months cash flow in recalculated data showed that there is an increase on the balance carried forward from ?425 to ?458 with a difference of ?33 despite the fact that there is an increase in of 20% in rents and rates for every month and 100% in miscellaneous while there is a 10% decrease made in supplies costs each month. It only shows that you and your twin brother can get a higher balance carried forward if you will decrease the costs of supplies use in your business while increasing the rents and rates as well as miscellaneous costs. Such good trend can help you and your brother use the financial resources wisely in running your consultancy business profitably and manage the payments intelligently.   c.        It is very important to manage the cash flow effectively because cash flow is a life-blood of any business. Nowadays, uncertainty in economy gives rise to the increase in interest rates with many small time businesses with inadequate financial training making it impossible for staying alive. In the latest data, 63% don’t survive in 6 years among new businesses and those who are working at home for business usually fails within six months. The main reason for lack of survival in economy is bad management on cash.  It is important to make a proper management not to make a business not on shaking ground.  Some points to consider are:   Fast Collection Increase and quick business cash collection through several strategies such as speed up customer order through faxon their orders, send out invoices with indication of payment due and specifying the on interest for penalty for those who will make payments after the due dates or late. Business owner/s can use the bank lock box for mail checks and processing checks as well as credits especially if the owner/s makes appropriate business gross of $25 million per year.   Fast Deposit Checks   This is exceedingly important for getting the quickest availability on business deposited checks. The availability of getting the deposited checks from 0 to 2 days and business owners must show that they are persistent through asking the bank for its availability schedule and scan to check receive fast availability of 2 days or less with a key reminder that checks is lose when 3 days it floats without depositing Friday’s check up to Monday.   Each bank has its own availability schedule and it is important. Availability counts the number of days until such money is available through check cash. It is highly discouraged to deposit checks using the Night Depository or ATM because it will provide no evidence on transaction actually deposited checks in ATM and there is no receipt when you use the Night depository. MICR is a machine that prints magnetic ink on the bottom of the check which can actually encode customer’s checks.  It is better that transacting the bank, one must know the deadline on receiving the availability on deposited checks.   Establish a Receivable Policy for Super Tight Accounts   There are several tips for handling receivable accounts. Check the financial history of a new customer before offering them credit. One way of doing this is using the rating service. It is better to get the customers five business references without neglect to make a call to them. 15% is a better rate of 1.5% cash discount as it is less costly. It is fair to charge 2% for late fee per month when a customer pays late and charge back clients who take discounts when discount period is over. Late payers must be well-monitored via mailed letter or phone calls but after 30 days is over, start the steps as : 1st send letter notarized from your attorney, 2nd turn over the customer’s account to a collection agency, and 3rd utilize the collection attorney. It is a need to deposit automatically on returned checks though asking  the bank for Return Item box service for re-depositing the check and charge back the bank    Instruct your bank to automatically deposit "returned checks." Ask your bank if they offer Return Item box service. If they do, then use it to redeposit your check and charge back the bank return item free to your customer.   Disburse Your Money Slowly   Disbursing the money wisely is indeed necessary and one can do it with the following tips: paying the invoices on the end day of the due date; trying to mail the payments every Thursday or Friday in picking up the extra days; using the business credit cards in business expenses; avoid issuing advances among employees while encouraging them to use their own personal credit cards or business cards that the business owners provide, taking a consideration on remote disbursement.   Small businesses often take for granted the reconcilement of service which is not good. Several suggestions which encourages for reconcilement of service are: when you have a monthly check volume of at least 500 checks. The following six suggestions may help for the reconciliation of service such as making the business men with monthly check volume of at least 500 checks, preparing a specialized reports, currently performing an own reconcilement, finding a software that meets the business needs of a specific  PC or any other kind of computer system.   Save enough Money in Your Bank Account   It is highly a good practice to keep enough yet not too excessive money on the bank.  Using enough money for bank services as well as making use the extra to pay off a loan or use it as an investment for bank services.                   Account Analysis Statement Utilization Get a price list of bank charges for services such as account maintenance, deposited checks, paid checks, wire transfer and stop payments. The bank use by many business men can issue an account analysis statement to help the business people in managing the business. In the count analysis, one can see if he/she gave overcompensation on the bank.   Inventory isn’t Cash Since inventory is dead cash, it is not having a cash flow so business owners must avoid spending a lot in item inventory. Making a forecast each day, month and year more accurately is good to expect in selling. Developing the best policy to make a stern inventory can make the lesser expenses on inventory process.   Keep updates on Continuity Sales   It is good to employ the continuing sales as well as services. It makes the contract to buy products or services required in one’s business like in magazine subscription that makes the publisher money in the long run when dealing with customers. Continuity is applicable to anything.   Licensing Agreements Aside from inventory, receivable accounts, equipment, equity and other key aspects in small time business partnership are all playing significant role for the successful business. Adding cleverness in business includes posting ads and promotional activities against business competitors. One can also take the license rights to utilizespecialized strategies or assets in non-competitive enterprise.     Section Three - Financial Decisions (LO3)  Using and completing Appendix B. Anticipated capital cost (in year zero) ?6,000, Year Cash Inflow Cash Outflow 1 2,430 1,150 2 3,540 1,800 3 4,890 2,550 4 5,580 3,830 5 6,650 4,530 Expected cash flows 9230   a.)           Calculation for the payback period, accounting rate of Return and Net Present Value on this investment. (LO3) Capital budgeting is also known as capital budgeting which involves several techniques such as Payback period, ARR or Accounting Rate of Return (ARR),  Discounted Payback Period, NPV or Net Present Value, MIRR or Modified Internal Rate of Return, IRR or Internal Rate of Return ,APV or Adjusted Present Value.  Payback period is non-discounted method while all other are in the form of discount methods. Using discount methods meant that the time value of money is considered in these methods. Among the different techniques in capital budgeting you need to solve for the payback period, ARR and NPV for you and your brother business.   Payback period = Investment required / Net annual cash inflow*  Solution 2.5 years =23090/9230 Accounting Rate of Return ARR = Average Profit/Average Investment   Solution: ARR = 9230/4215                    ARR = 2.19        Where: Average Investment = (Printer’s Value at the beginning of year 1 + Printer’s Value at End of Useful Life)/2 Solution: AI = (?2430 + ?6000)/2                    AI = ?8430/2                    AI = ?4215   Net Present Value on this investment Solution:   b) Explain to your brother why Accounting Rate of Return might not be the best way to appraise this proposal and, with reasons, suggest a superior investment appraisal technique (LO3) You found out that ARR or accounting rate of return is not the best appraisal on your business proposal because although it has advantages such as familiarity and ease it offers in business communication as well as manager’s performance is well criticize which is often use to select the projects again with such the same reference, it has also greater disadvantages on which calculations may take several ways, profit for cash flow is a not a good substitute,  there is no given allowance intended for the time money value, has changeable cut off on dates and you can use it to make perverse decisions which is unlike the Payback Period that when it comes to its advantages, it computes with simplicity, gives some info on investment risks, and makes some crude measure in liquidation yet its disadvantages gives no best decision standards that indicates increase of investment in the business value, easy to ignore cash flows without payback period along with money and other risk in the future. While the most superior appraisal technique in investment is the   Net Present Value because of its best approach for the accurate way of appraisal through evaluating an investment project like the plan small business consultancy of you and your twin brother. In NPV method, the PV or Present Value of all cash inflows from the business plan has its own comparison from me or initial investment.  In fact, among the advantages of this method are: It provides wise decision advice in a capital market, offers absolute value and allowing time yet it has a little disadvantage as it has a difficulty on identifying the precise discount rate and it requires decision criteria prior on appraisal. c. It is therefore necessary to know the type of products and services as well as the quality of such when setting the prices. (LO3) d. In 5 years you cannot think likely that the printer that you buy can produce 800 copies for consultancy reports as this equipment also undergo the ages of time to become old and may take some impairment which might require repair and lessen its productivity or performance. (LO3)   Section Four - Analyzing Financial Performance (LO4) a. Balance sheets and income statement go hand in hand in business as they both have the purpose of making transparent and clear reports on the financial status of the business. The  balance shhet or B/S has information on prior or previoustransaction which are related to the firm’s liabilities while income statement or I/S contains the vital information on revenues, net income and business expenses which the period of accumulation is clearly stated. b. There are two formats of a balance sheet to present the information, the statutory horizontal and vertical forms of balance sheets. In horizontal form of B/S, aside from the idea that it’s done horizontally, it has footnotes with instruction according to the assets and liabilities while the vertical forms show the detail at the bottom of each items above, with schedules, above reference and other accounting policies which is optional to attach, figures of balance is rounded off to the nearest zero and footnote is optional.   c. Determining the best profitability and liquidity in ratio analysis, it is good to know first the business if profitable or not using the Gross Profit ratio, Operating Profit and Roce. Like for instance when  small  companies and big industries on their own business world made and check their ratio analysis,  gross profit ratio, operating profit and return on capital employed, then finally revealed or showed high rating upon computation, then such businesses are highly profitable and when getting its liquidity ratios, they indicate a positive and good financial result, which reflects on higher ratio of current assets compared to liabilities or quick ratio is over and exceed the current liabilities together with the gearing ratio, which has a greater result along with Interest cover, that speaks of huge profit over interest expenses. d. Books of Prime Entry are far better and very efficient use as a guide for those who wants to learn or get some info on accounting with double-entry.   In accordance to the simple double-entry which is posted in general accounts of the ledger yet created in general journal. This is originally from Venetian way making a tip or suggestion to move on the next preceding step. This book acts towards a speedy step in manual operations.  References Bamford, C. (2004). Economics. Oxford University Press Brigham, E. (2004) Financial Management. Southwestern Pub Horne, J. V and Wachowicz, J. (2004). Fundamentals of Financial Management. Prentice Stimpson, P and Borrington, K. (2002). Business Studies. Oxford University Press Read More