Finance according to Madison Plc - Case Study Example

Sources of Finance

Bank Loans

The expansion of an organization is a fundamental step in strategic objectives of the company. Essentially, the company is expected to finance the process. However, there are other sources of financing that the expansion program can use. Companies can borrow money from the bank. These loans are very integral given the fact that they will finance all the funding needs of the project including the short-term, mid-term, and long-term needs. In addition, bank loans may well be essential to finance all the assets that may be required in the expansion. However, there are other factors that a company should consider before choosing this source of financing. According to studies, the interest rates that are attached to bank loans may be too high or too restrictive for the company (Brooks & Mukherjee 2013, p. 34). Additionally, the bank will have security over the company’s assets. Consequently, it turns into a secured creditor that possess a collateral regarding the business’ assets. Also, the bank loans do not have the kind of flexibility that is necessary for the amount of loan that will be involved. These disadvantages may be navigated by the company. The organization ought to evaluate all the banks and consider all the interest rates that are on table so as to arrive at a friendly decision (Brigham & Ehrhardt 2013, p. 23). Nonetheless, the company needs to ensure that it does not end up paying interest for an amount that it will not use in the project.

Government Loans and Grants

Companies can also bank on government assistance to jumpstart the project. In the United States, there are numerous sources of government assistance that can benefit the company. Loans and grants are some of the available government kitties that can help such companies. The grants and loans offered by government are at times specific in nature. Certain criteria are made that direct the provision of the loans and grants and the companies must meet them (Lasher 2013, p. 29). The loan is advantageous in the essence that they are very valuable source of financing. Various government levels that offer these loans similarly give tax credits to these companies. Nevertheless, the process that is involved to get the loan can be very tedious. Besides, the review procedures involved may be very slow hence lengthening the approval. There are stringent application rules and eligibility prerequisites regarding the tax credit schemes. In order to overcome these bottlenecks, a company should start the application process in earnest. By doing so, everything will be ready by the time the project will finally kick-off.

Venture Capital

Moreover, venture capital can be used by a company to finance the expansion program. This should be the last source in the event that the organization is unable to attract proper financing from the normal sources. The ‘angels’ that may finance this project may be proficient in this line of business, hence expert advice is expected from them. Intrinsically, contacts of the ‘angels’ in the financial sector may also benefit the business (Lerner, Hardymon, & Leamon 2012, p. 15). If the capital venture is from capital institutions, then they may be prepared to finance the project for a long time just in case there are issues during the initial stages. Other venture capitalists can offer a company debt financing services further boosting its capacity to source for resources for the project. However, this mode of financing may possess certain disadvantages.

In the event that the company will rely on informal venture capitalists, they may demand to possess equity position within the business set-up as a conditionality for financing the project. This is a big issue if the company does not envisage ceding control. To avert such a situation, the laws governing the operations of the company need to be clear and water-tight. Also, the institutional capitalists will want to have equity positions. The company may decide to give them those positions that are not influential to limit their impacts in the management of company affairs.

Strategic Alliances

The company can also finance its expansion plans by entering into a strategic alliance with other peers in the same business. The parties’ interests and imaginations are the only things that may limit the partnership. Hence, the pursuit of the strategic alliances may be very advantageous to Madison Plc. Entering into partnership with a strong partner will allow Madison to benefit not only with regard to the financial offer, but also other things such as equipment, employees, business acumen as well as other resources (Steinhilber 2013, p. 50). Nevertheless, it would be prudent for Madison Plc to decide on certain issues like profit-sharing, responsibilities, decision-making, and the control from the beginning. The above-mentioned issues should be properly documented in a binding agreement so as to avoid future problems. Furthermore, the company ought to ensure that the chosen partners are complementary to them as to eschew certain glitches.

Efficient Working Capital Management

The purpose of working capital management is to make certain that a company possess enough cash flows so as to achieve its short-term debt commitments. Since it is an accounting stratagem, its main focus is to maintain efficacious levels of current liabilities and current assets, also referred to as working capital (Orobia, Padachi, & Munene 2016, p. 98). The implementation of an effective working capital is a sure way of ensuring that a company excellently enhances its earnings.

In order for the company to achieve an efficient working capital management, a company can execute various strategies. The management of inventory is a key process in the enhancement of the working capital management. Indeed, experts claim that the debilitating effects of a poorly managed working capital management begin from this point. As such, the organization should look to begin right away to apprehend the situation. In addition, the company should properly forecast the cash flow. By taking into account multifarious factors such as competitor actions, forfeiture of the prime clients, market cycles, and unforeseen happenstances; the company will be able to improve its working capital management (Michalski 2014, p. 34). Additionally, the company should focus on the impact that unforeseen demands may have on the working capital.

Companies ought to have contingency plans for purposes of overcoming unexpected events. The nature and capacity of the company to manage risks need to be assessed to determine whether this is necessary or not. The risk management procedures that the organization will have in place should be founded upon an objective as well as realistic viewpoint regarding the purpose of its working capital (Burkner 2014, p. 58). In addition, the company should also consider having dispute resolution strategies concerning customers that are very effective. This may enable certain dispute funds to be released. Also, the company perception on the customers will be improved while other activities such as sales that impact the working capital will be positively impacted. Indeed, the operational and financial aspects of the company may also affect its working capital management. Professionals believe that a proper combination of the financial and operational skills yields a positive results thereby translating towards the growth of the entity. Therefore, a holistic strategy encompassing the operations of a company are going to help it establish and execute short-term strategies that will in turn produce short-term cash giving room for its expansion in the long-term perspective.

Investment Decision Using the Net Present Value (NPV)

While there are numerous methodologies that can be used to appraise the investment decisions of firms, the NPV has been demonstrated to be the best (Pasqual, Padilla, & Jadotte 2013, p. 207). Since the decision is considered as part of capital budgeting, the NPV is used to determine the current value of every future investment cash flows generated by a project, minus the primary investment capital.

When comparing the two projects, it is advisable to invest in one having the greatest NPV. This is the decision rule. As such, the Madison Platform with 12,691 has a higher NPV compared to Madison Super with an NPV of 8666.94, which means that it is advantageous for the company to invest in the Madison Platform Software proposal.

There are other investment appraisal measures that can be used by firms. The Pay Back Period (PBP) is used to measure the period that the initial investment in a particular undertaking is recovered. Therefore, a firm sets a benchmark within which it can comfortably recover the investment. If the time is less or more than that particular time-frame, then it will not accept the PBP (Gorshkov 2014, p. 82). However, the method does not take into account the time value of money. Also, the cash flows after the period is not considered under the PBP.

Moreover, the Internal Rate of Return (IRR) can be used. This is used to determine the rate of return that may be given by the project. It does this notwithstanding any other factors. Nevertheless, the method does not comprehend economies of scale as well as disregard the project’s dollar value (Percoco & Borgonovo 2012, p. 527). It also presupposes reinvestment and discounting of cash flows at equal rates.

Profitability index can also be used to appraise the project. It is defined as the ratio between the discounted cash inflow to the initial cash outflow (Bierman Jr. & Smidt 2012, p. 97). The project experiences the issue of relativity. The IRR for the Madison Super Software is 42% while the IRR for the Madison Super software is 39%. From the ration, the Madison Super Software will produce a higher turnover compared to the Madison Platform and so the company should prefer to invest in the latter.

Other Investment Proposal techniques

Return on Investments

This is a technique that is used to analyze investments by the investors for purposes of determining the returns that their investments will produce. The one with a higher return on investment is one that should be considered.

Payback Period

This is among the customary ways that investors use to analyze their investments proposal. The methodology is important as it is used to demonstrate the necessary period for a company to obtain the money that it may have put in an investment. It is essential as it is used to indicate whether an investment is viable or not. The Payback for Madison Platform is 1.4 while that one for Madison Super is 1.5. This implies that the Madison Platform will return the money that was invested in it in a faster way in comparison to the Madison Super.

Other factors to consider when making investment decisions

Have a Goal you want to achieve

Having an investment goal is one of the most important things to an investor. This allows them to analyze the available projects for investment so as to excel without really exposing themselves to risk. The usage of a financial professional may be necessary here. Nevertheless, this is not a guarantee that one is going to be wealthy but someone can still optimize their investment when they have an understanding of their investment fundamentals and savings.

Understand your Personal Risk Preference

The perspective that one has regarding their risk preference is important. This preference is going to influence the investment pattern that a person has. If one wants to succeed, then they need to make sure that their investments are aligned to their risks.

Balance your Portfolio

Investment diversification is key in the investment world. It is advisable that an investor outs their funds in derivatives that are different and react differently to market conditions. This permits them to reduce the risks that their portfolio may be exposed to. Choosing investment options such as stocks, cash, and bonds should be done in a manner that is balanced since they are affected differently by the market conditions.

Liquidity

Liquidity refers to the capacity to change assets into cash. Similarly, it refers to the ability to either sell or buy a security minus influencing the price of an asset. During investment decisions, it is important that one invests in assets that can be turned into cash very fast. This allows an investor to get them fast and turn them into cash quickly when in need. It is particularly key for the short-term goals of an investment.

Source of Finance

An investment cannot be made without finance. While it is important that one has their own funds when they want to make investments, there are other sources. Indeed, the source of finance can very much influence the size of one’s investment.

Usage of Break-Even Analysis

A break-even point is the point when the total costs and total revenues of a company are the same (Grant et al. 2014, p. 3). A company reaches a break-even point when it does not have a net gain or a net loss.

The break-even analysis can be presented using a chart. In this chart, one side may represent the total sales volume while the other one will represent the total profits line. The intersection between the two graphs will provide a break-even point.

From the graph, the company is going to break after selling 320,000 units of the software. The variable cost used in the production of each component of the products is going to be £2,500. The anticipated sales will be 5,000 units. Each unit will be sold at £5,000. The total revenue is going to be £25,000,000. Therefore, given the amount of outlay that each proposal is going to take, it is advisable that Madison Super Software be chosen due to a lot of units produced beyond the break-even point, giving the company profits.

Ratio Analysis

Ratio analysis is an important undertaking in the evaluation of a financial statement of a firm as it demonstrates the direction that a firm is taking. It has numerous integral features. If data regarding industry averages are available, then the ratio analysis can effectively compare the performance of the firm (Uechi 2015, p. 490). Ratio analysis can help us to compare the two investment options for Madison.

The following facts were unearthed after computing the ratios.

The return on capital invested by Melia Spain was 27.40% while the return on invest capital as made by Puteaux France was -124%. In addition, the profits made by Melia Spain are 19.1 % while those made by Puteaux France are -7.0%. All these are caused by the saddling administrative costs.

The receivable turnover ratio is the only area that the Puteaux has edged. Melia Spain would have to consider registering longer days compared to the latter. The implication of this is that the French firm is characterized by a tight credit policy relative to the Spanish company.

Recommendations and Conclusion

In conclusion, the company should invest in Madison Platinum after considering the Payback period, IRR, and NPV. Madison Platinum possess a higher NPV (12691) compared to Madison Super (8,666.94). In addition, it has a shorter period of time in which the initial investment can be acquired back (1.4 years to 1.5 years). Although the IRR of Madison Super is 39% compared to Madison Platinum’s 42%, this is not the only aspect that can make the company to choose the Madison Super over the Madison Platinum proposal since there are other factors that are not in favor for it.

Presupposing that the Puteaux France firm could be made available to Madison Plc, the former could have been acquired with strategies to streamline the administrative costs being operationalized. However, the available information cannot inform the take-over decision since various other factors need to be considered.