Managing Financial Resources and Decisions in SkyLimit Ventures - Case Study Example

1 Managing Financial Resources and Decisions Part A Task The Business): The form of business is Sole Trader, and its name would be SkyLimit Ventures. The main materials the organization would be dealing on are aircraft parts and other aviation articles. The main customers of this organization would be airlines, chopper tour operators and aircraft manufacturers. Task 2 (The Initial Costs): It would require about 50,000 pounds to start the business. The capital required for setting up this organization may be sourced from either banks or the sale of personal assets. Though the sale of personal assets seems the most secured form of raising enough money to start the business, but in case the price of the assets suddenly drops, it may be practically impossible to get enough capital for the organization. Banks, on the other hand, expects that some strict requirements are fulfilled before they could award any loans (Mentre 1984). It is not always possible to secure a loan from banks because the requirements are often many. Therefore, it is better to rely on the sale of assets to raise the needed capital for the commencement of the organization. The assets that would be sold to obtain this capital include a block of flat and a six-month-old salon car. Task 3 (Financing everyday activities): Below are the day-to-day activities at the organization and their possible costs: Warehousing…………………………..250 pounds/day 2 Sales/Marketing………………………400 pounds/day Employees’ salaries…………………..1000 pounds/day/5 employees Transportation………………………100 pounds/day Communications……………………50 pounds/day Refreshment/Office Entertainment……30 pounds/day Aircraft parts/accessories………………40, 000 pounds/in stock Running Capital………………………8,170 pounds/on-going The organization has a limited number of daily operations being a trading one and small-scale in nature. The major activities involve purchasing, stockpiling and distributing orders to customers. The organization is not involved in price control and does not engage in market manipulation as would a big trading company. Therefore, choosing to finance the organization using the capital raised through the sale of personal assets appears to be safe and would not threaten business continuity (Doughty 2000). The fact is that whenever banks refuse to grant loan applications, the business activities at the organization would be slow down. No entrepreneur that is profit-oriented would want his/her business enter a phase of financial dryness: a critical condition when it would be seriously difficult to obtain the necessary funds to keep operating. Relying on the capital raised from personal assets would solve this unique problem. 3 Task 4 (The Cost of Finance): The cost of finance for the sales of my asset is, in principle, the total expenses made in the course of selling them. Below is the exact cost of finance that came up during the selling processes: I hired an Estate Agent that negotiates the selling price with prospective customers at a rate of 1000 pounds per month (the total cost of 2000 pounds). I used the service of a property lawyer to legalize the documents involved in the sales for 1500 pounds/month (total expenses = 3000 pounds). Transportation and communication expensive = 1600 pounds Personal expenses in the course of the selling my car = 1000 pounds. …………………………………………………………………………………… Total cost of finance = 6,600 pounds The cost of finance shown above is moderate compared with the cost I would have paid to obtain similar amount of loan from a bank or other financial institutions. Even though the bank charges may be minimal, but the value of collaterals required is far greater than the amount I had spent on selling my assets. In all fairness, a business that is established with far less cost of finance will likely operate with little or no financial stringency as entrepreneurs would not be bothered with the urgent need to make enough profit and pay off the loans (Pratt 1998). U.K banks are particularly hard to deal it when it comes to the issue of securing loans: they could raise the bar by requesting that several conditions be met before 4 such loans could be made available. Incidentally, this increases the cost of finance for such loans. Task 5 (The Future): It is hard to imagine how a business’ future would be; however, I can only share my aspirations or dreams for my business. These include but not limited: (i) Increase the number of items of aircraft parts that I sell. (ii) Introduce post-sale services that may also bring in some extra revenues (iii) Hire more employees as the business expand. (iv) Establish many branches of the same business in the U.K, most especially at the areas that are very close to the airports, whether national or international airports. (v) As a long-term plan—venture into the business of travel agency, which might eventually become a local airline business. The highlights above are possible expectations of growth in my business. There are unforeseeable changes that may occur in the course of doing business. These changes may evolve from U.K government making new laws or other business organizations providing new regulations about how business should be carried out. Aircraft parts’ business involves getting the right information about the aviation technology, which changes often as new airlines are manufactured and marketed all over the world. 5 Although, I also envisage increasing my capital base from what it is now to 250,000 pounds in a matter of ten years. This would be possible if all my business aspirations fall through as expected. Another area I would be interested in working on is employee development: I would want all my employees to have enough knowledge of the business. This would go a long in helping them to be aware of all the problems inherent in this kind of business and how to avoid them in order to achieve an expected level of profitability. Part B Task 1: Financial statements can be defined as the documents that gives comprehensive details about the economic or financial activities of an entity, be it a big company or a personal business (Fabozzi 2002). Examples of financial statements are balance sheets, income statements, trading profit and loss account, statements of retained earnings and cash flow. Trading profit and loss accounts are useful for revealing the company’s capability to be profitable or not. Investors are mostly interested in this document as it shows that the company they are interested in can make some profits. Balance sheet is a very useful document as it reveals the assets, liabilities, and shareholders’ equity of a company. Future investors can predict the financial performance of a company through its past balance sheets (Fabozzi 2002). Apart from investors, governmental agencies that regulate financial activities of all companies may be interested in the financial statements of companies. Likewise, students of finance are also interested in using the financial statements of companies to do their assignments. 6 Task 2: For sole traders, financial statements are not that important, and the format is very simple: it shows a simple bookkeeping entry of expenditure, revenue, profit and loss. However, the format of financial statements for limited company and partnership are more advanced, including vital information as shareholders’ value or equities, debt and asset estimation, liquidity or solvency estimation, operating income, and so on. This added information is helpful to prospective investors. However, sole traders do not need to provide such information as there are no shareholders or investors to worry about. Task 3: Barclays Bank Plc is a prominent financial institution in the U.K. offering services to both private and public customers in the areas of savings and current accounts; stock and currency trading; estate industry, and so on. (a) Profitability of a company can be estimated using the formula below: Gross profit = Revenue – Cost of revenue In 2008, Barclays Bank’s financial statement shows that: Using the data in the financial statements for 2006 to 2008, the gross profits came to: 2006------------------5,195,000,000 pounds 2007-----------------5,095, 000,000 pounds 2008……………….5, 287,000, 000 pounds 7 The liquidity ratios can be calculated using the formula below and the provided financial statements: Current assets : current liabilities The liquidity ratio for 2007 is 1.03 The liquidity ratio for 2008 is 1.02 The three activities’ ratios are as follows: (i) Creditor’s Turnover = Average Creditors/ Cost of sales x 365 = 27 days (ii) Debtor’s Turnover = Average Debtors / Credit Sales x 365 = 29 days (iii) Stock Turnover = Average Stocks / Cost of Sales/365 = 30 days Gearing ratio = Long-term liabilities/ Equity Shareholders’ Funds = 31503/36618 = 0.860 Task 4: Rate of interest = Interest earned/ Amount saved Rate of interest measures the amount of interest the company earns with a certain period of financial activities. Return on Capital Employed (ROCE) = Profit for the year/ Equity Shareholders’ Fund. ROCE measures the amount of profit made in the investment the shareholders have invested in a particular company. Task 5: The analysis ratio of Barclays Bank Plc is as follows: Gross profits: 5195,000000; 5095,000,000; 5287,000 000 pounds 8 Liquidity ratios: 1.03; 1:02 Activity ratios: Creditor’s Turnover: 27 days Debtor’s Turnover: 29 days Stock’s Turnover: 30 days Gearing ratio= 0.860 From the above data, I would advise my friend to invest his money in Barclays Bank Plc because the company has an appreciable profitability. It does not take the company a long time to pay off its debt and satisfy creditor’s requirement. The stock’s turnover is fast, in about 30 days. References Doughty, K 2000, Business continuity planning: protecting your organization’s life, CRC Press, Florence, Kentucky. Fabozzi, FJ 2002, The handbook of financial instruments, John Wiley & Son, London. Mentre, P 1984, The fund, commercial banks, and member countries, International Monetary Fund, Washington, D.C. Barclays Bank (2010). Financial statement. Barclays Bank, Retrieved from Pratt, SP 1998, Cost of capital: estimations and applications, John Wiley, London. Read More