Strengthening the Management of Financing - Research Paper Example

FINANCE MANAGEMENT AND ACCOUNTING Financing One of the frequent reasons of business failure is poor management and insufficient and poor management of financing comes second. For starting or relocating or expanding a business sufficient capital is required. Having good financing is not enough in attaining profits; proper knowledge and planning are required to manage it well. These help in strengthening the management of financing and avoid common mistakes like miscalculating or underestimating the cost. The following points had to be addressed before inquiring about financing: 1. How much capital is needed 2. Why it is required Is it for expansion or for tackling risks 3. Are the risks involved greater than anticipated 4. At what stage of development is the business 5. How is the capital used 6. How is the business going Whether it is stable or depressed 7. Does the management team can withstand the challenges 8. How does the financing helps the business plan Financing is of two types, equity financing and debt financing. When you are in need of money or looking for capital, company's debt-to-equity-ratio should be considered. It is the relations between the Dollars or Euros that an entrepreneur has borrowed and Dollars or Euros invested in the business. The more the investment by the owners the more they attract the financing. When the equity to debt ratio of the firm is high then debt financing should be taken. If the proportion of the debt to equity ratio of the firm is high then it is advised that the owners should increase their equity investment, that way they cannot jeopardize firm's survival. Equity Financing Limited equity financing is used by most of the small or growth stage businesses. Whereas in debt financing, funds pour in from different quarters like from friends, relatives, etc. Venture capitalists are the most common source of equity funding. Venture capitalists may be institutional risk takers, financial institutions, wealthy persons, etc. and most of them specialize in industries. Venture capitalists are risk takers and show interest only in three to five year old companies that result in more than average profits. These venture capitalists are called as investment gurus whose interest lies in those companies that have major regional and national concerns. Debt Financing Commercial finance companies, financial institutions, banks, savings and loans, Lloyds Bank small business, etc. are some of the sources for debt financing. Because of their positive impact on the whole economy local and state government encourage the growth of the small companies. In debt financing additional funds comes from friends, family, relatives, and industry colleagues, etc when capital investment is smaller. Generally banks formed as a major source for loans for the establishment of small businesses. Banks don't offer long term loans to small firms instead they grant short term loans for machinery and equipment, they also offer demand loans to small firms that reduces the risk of leveraging the funds available. Applying for a loan Loan application should be well written, so that the reader could get a clear picture of what your plans are. The presentation should be of the best quality in the initial loan proposal and application. Only industry specific details should be included so that reader can easily understand. Business description: a. Organization type. b. Information date. c. Location. d. Product or service. e. Firm's previous commitments (if any). f. Future plans. g. Competition. h. Customers. i. Suppliers. Management experience Resume of the owner and important employees should be included. Personal Financial Statements Care should be taken that the financial statements are not older than 90 days and financial statements of all principal owners and guarantors should be included. A copy of last year's income tax return should also be included. Loan Repayment The method of repayment of loan should be included and supporting documents of cash flow schedules, budgets and other required information supporting the statement also should be attached. Existing Business The following should be included: a. Financial statement for the last three years. b. Financial statement not older than 90 days with balance sheets, profit & loss statements and net worth. c. Account payable and account receivables. d. Schedule of term debt. Proposed Business a. Submit a pro forma balance sheet of sources and b. Uses of equity and borrowed funds. Projections Projections of future plans should be shown for at least one year and should be in profit and loss format. The projections should be explained in industry standards that include figures, tables, charts, etc. Accounting Breakeven Analysis Breakeven Analysis is an important tool that helps us to determine whether a company or a firm is able to properly use available funds and gain profits. For the businesses that just started it is important for them to know their startup costs, which provides the required information that helps in generating the sales revenue to pay the expenses for running the business. When revenue equals all business costs then breakeven point is reached. Calculating breakeven point Breakeven point = annual fixed costs/ gross profit percentage Break-even Analysis: Monthly Units Break-even 22 Monthly Revenue Break-even $1,615 Assumptions: Average Per-Unit Revenue $75.00 Average Per-Unit Variable Cost $10.00 Estimated Monthly Fixed Cost $1,400 Pro Forma Profit and Loss FY 1 FY 2 FY 3 Sales $4950 $9000 $9360 Direct Cost of Sales $609 $1124 $1247 Other $0 $0 $0 ------------ ------------ ------------ Total Cost of Sales $609 $1124 $1247 Gross Margin $4290 $7800 $8112 Gross Margin % 86.66% 86.66% 86.66% Expenses: Payroll $0 $0 $0 Sales and Marketing and Other Expenses $247 $450 $468 Depreciation $0 $0 $0 Leased Equipment $0 $0 $0 Utilities $150 $15 $15 Insurance $180 $200 $220 Rent $510 $510 $510 Payroll Taxes $0 $0 $0 Other $0 $0 $0 ------------ ------------ ------------ Total Operating Expenses $1087 $1175 $1213 Profit Before Interest and Taxes $3203 $6625 $6999 Interest Expense $0 $0 $0 Taxes Incurred $800 $1657 $1754 Net Profit $2403 $4968 $5245 Net Profit/Sales 48.54% 55.2% 56.00% All recorded transactions, which are of the same type and nature, are grouped under one head. Cash sales, credit sales and sales to owner, etc., are grouped as total sales. Cash purchases, credit purchases etc., are classified as total purchases. Important business transaction is presented in a format. Business profits and financial position. These are known as financial statements or profit and loss account and Balance sheet. With the help of analysis, useful information is obtained form financial statements. The users of the information then interpret the information derived. Such interpretation helps interested parties in taking prompt decisions. The whole process of recording, classifying, summarizing and interpreting is known as accounting. The art of recording, classifying, summarizing, analysing and interpreting the business transactions systematically and communicating business results to the interested users. These interested users may be owner himself of herself, creditors government, etc.; accounting is also viewed as discipline. It has its own principles, rules and concepts, which guide accountants in their accounting practices. The meaning of the word consistency is continuity in methods or practices. In accounting context, consistency means followers using the same accounting methods or practice year after year. You can also say that the methods followed for making accounting information is not altered generally during its life. A businessman fro example, follows the following practices or methods generally year after year: Method of charging depreciation Method of valuation of unsold goods Machines and other fixed assets used in a business slowly decline in value over time. In accounting, we provide for depreciation (i.e. decline in value for using an assets) on machines and other assets. There are different methods to calculate depreciation like, straight line method, written down value method etc., all these methods are acceptable in accounting. The businessmen can adopt anyone of these methods, they prefer, the method, once adopted should be followed every year so that financial results become comparable. There are various methods for valuation of unsold goods at the end of the year. These may be valued at cost price or market price or at the lower of two. Generally, unsold goods are valued a cost price or market price whichever is lower by businesses concerns, However, in some cases like precious metals, mineral oils, the unsold goods may be valued at market price. As per the convention of consistency, the same accounting methods should be adopted every year in preparing financial statements. This should no be taken to mean that this convention does not allow a business to change accounting methods and procedures under any circumstances. Whenever a change in methods is necessary, it must be disclosed by way of footnotes in the financial statements of that year. Reference Mills R. W. and Robertson, J. (1991) Fundamentals of Managerial Accounting and Finance. Oregon: Mars Business Associates Limited. Read More