Essential Financial Services - Essay Example

FINANCIAL SERVICES Question a) 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. The Income Statement presents the summary of the income earned and the expenses incurred during a financial year. Position statement presents the financial position of the business at the end of the year. b) Financing One of the frequent reasons of business failure is poor management and insufficient and poor management of financing comes second1. 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 Income Statement presents the summary of the income earned and the expenses incurred during a financial year. Position statement presents the financial position of the business at the end of the year. By Financial Statements, we mean two statements - (i) Profit and loss A/c or Income Statement, and (ii) Balance Sheet or Position Statements. These are prepared at the end of a given period of time. They are indicators of profitability and financial soundness of the business concern. Thus, analysis of Financial Statement means establishing meaningful relationship between various items of the two financial statements, i.e., income statement and position statement. 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. Earning capacity or profitability The overall objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend. 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. The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar business, such comparison also help the management to study the position of their firm in respect of sales expenses, profitability, and using capital, etc. 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. Efficiency of management The purpose of financial statement analysis is to know that the financial policies adopted by the management are efficient or not. Analysis also help the management in preparing budgets by forecasting next year's profit on the basis of past earnings. It also helps the management to find out the shortcomings of the business so that remedial measures can be taken to remove these shortcomings. Financial strength The purpose of financial analysis is to assess the financial potential of the business. Analysis also helps in taking decisions on whether funds required for the purchase of new machinery and equipments are provided from internal resources of the business or not. How much funds have been raised from external sources. http://www.advsofteng.com/gallery_finance.html c) Trade restrictions Let's take the case of United Kingdom and its policies towards foreign trade. At the time of Serbian war the country's economy was mediocre and accordingly the living standards of the people. Unemployment was on rise and there was no perfect system to maintain law and order between the EU countries. There was chaos all the time. The post war era was the beginning of expansion in the trade sector. The benefits do not come that easily. Treating those who hurt by trade, equitably a difficult public policy issue. The important issues that were to deal with are controlling the rapid growth of trade deficit, high inflation rate and soaring prices of crude oil. The post war era has seen a rapid expansion in trade and accordingly the economic and political structure has experienced steady and substantial growth. Gaining profits from trade depends on individual economic behaviour. Instead of building own automobiles, manufacturing own goods, producing own food, it is better to manufacture goods in which they have specialisation and trade them for other goods that are required. This thought made the UK a leading exporting country in international trade. The most surprising thing is that the total UK imports amount to only about 12 percent of the country's GDP. International trade brings rich dividends and imposing restrictions to such exchanges will hinder the further improvement and in realising the true gains from trade. Protectionism is the factor that's becoming hindrance to international trade. In the context of trade jobs were created and destroyed as well. Creation and destruction of jobs depends on comparative advantages and disadvantages. Cutting of jobs does not have any net loss on the economy further more it improves the living standard and raises the economy. There is a possibility of gaining profits by not following the rules and regulations. If an exporting industry has been given subsidy, though it benefits the domestic consumer it will badly hurt the domestic market. From standpoint of overall economic welfare domestic market should be provided with alternatives and should allow foreign goods into the domestic market and gain in real income. Effects of tariffs and quotas To protect the domestic market the governments of respective nations imply tariffs and quotas. Though this is the clear case of protectionism it is every government's duty to protect the domestic interests. Tariffs, quotas and other regulations differ in their impact on trade and also in static deadweight losses that they will cause. Under competitive conditions the losses due to the exit of consumers, unable to substitute the domestic product and rent seeking will be same if we keep the imports allowed into the country as a constant. Goods should be classified into categories to administer the quotas. There is no significant diversion in trade if quotas are auctioned, moreover its look like non-discriminatory tariff system in its welfare effects. If quotas are given as first come first served basis there will be an increase in deadweight losses due to the quota race. If the quotas are given as fixed shares to individual exporting nations there again lies a danger of giving quotas to less efficient suppliers. In sum, quotas are of no good when we look from a welfare standpoint than a non-discriminatory tariff. It is seen that quota system is always inferior to non-discriminatory tariff. The reasons for this are due to the quota races, diversion in trade and disability of trade negotiators to reach an accord on concessions. d) Mercantilism is nothing but a trade theory established in Europe around seventeenth and eighteenth centuries. This trade access assumed that a nation state tries to increase it is exports to other nations, at the same time tries to limit their imports. One of the aims of trade were to increase or maximize exports while limiting imported goods and services so that they can gain more foreign exchange or revenue as much as possible. The emerging nation states get transfer of as much wealth as possible. The theory of mercantilism is popular even today. There are four factors, which have an affect on international trade and investment. They are country advantages, industry structure, organizational structure and strategy and government policy. The standard economic theory of comparative advantage depends on industry structure and competition in the market. Multinational companies will have a little chance to influence trade patterns in this regard. Multinational enterprise behave strategically buying market share and wait profits for a relationally long period of time. The roles of senior management personnel and the board of directors of the corporations depend upon the structure and strategy of organisation. Interested groups have spent much of their efforts in seeking to influence new legislation, as the great deal of law is no enacted by the legislature. The policy making number of policy making processes but they have one common thing each process operates within a legal frame work authorized in statute or in subordinate legislation. The interest groups or firm donate some funds to political parties, in term, the political parties provide them a tariff which monopoly in setting standards, to define the terms of licenses, to fix rates that come be charged for services extended and so on. Reference Mills R. W. and Robertson, J. (1991) Fundamentals of Managerial Accounting and Finance. London: Mars Business Associates Limited. Malcolm, G. (1987) Economics of development. London: W.W. Norton & company Ltd. Philip, H. (1990) An introduction to modern Economics. London: Longman group. Slaydon and James Lee. (2004) The skewness preference of investors in initial public offerings in the long run: a theoretical and empirical test of asset pricing models. London: Pearson Edu. Jay Heizer & Barry Render. (2005) Operations Management - Flexible Version. Raleigh: Pearson Prentice Hall. G. Mankiw. (2003) Macroeconomics. London: Worth Publications. Agarwal, S. and Ramaswami, S.N. (1992) "Choice of foreign market entry mode: Impact of ownership, location and internalization factors", Journal of International Business Studies, first quarter. Michael Burda and Charles Wyplosz. (2001) Macroeconomics: A European Text. London: Oxford University Press. Brian Snowdon and Howard Vane. (1997) A Macroeconomics Reader. London: Routledge. Read More