Developing a Financial Plan: Identifying and Analyzing Sources of Finance
Added on 2019-12-03
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Managing financial resourcesand decisionStudent name: Radu Teodor Cristea1
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TASK 1INTRODUCTIONFinancial resources are the essential elements of company and it is important for the manageriallevel people to make optimum utilisation of available funds or money so that different activities can becarried out in a suitable manner (Peirson and et.al, 2014). In the present study, researcher aims atevaluating different sources of finance for new and old, large and small and for the new business start-ups. Along with this, report will assess the implications of different source and lastly, appropriatesource of finance will be recommended to the small business for start-ups, large business for expansionand group of people who are planning to buy up an existing medium sized company. On addition tothat, information included in different statements and their purposes have been presented in the report.Various calculations have been made in an order the information is provided in different scenarios. Theinvestment appraisal techniques, unit costing and ratio analysis tools are used with respect to differentcases.Scenario 1Identifying different sources of funds:Looking at the present corporate market, there are several opportunities that are available for theentrepreneur, small and large sized companies to start, enhance or expand the business operations.Thus, in order to establish business in new market or expand the existing one or buy up an organisation,it is important for the entrepreneur or management to ensure adequate amount of funding (Demir andCaglayan, 2012). In this context, there is a wide range of sources of finance that are available fordifferent needs and wants of entrepreneurs and businesses. Owner's Capital: In terms of starting a new business, owner's capital is considered as the bestsuitable source of finance. However, this is the reason, entrepreneur already owns them and thecost of acquisition is minimal. In this, individual does not have any kind of liability like intereston bank loan or sharing returns to investors (Bernstein, 2015). According to the present givenscenario, this source can be used by the entrepreneurs who are planning to open a new venture.However, there are certain drawbacks of owner's capital but the most significant one is thatindividuals have to invest personal savings into business and if operations are not carried outproperly then it could lead to position of loss which may affect the entire financial status ofindividual. 3
Retained earnings: In general, retained earnings can be defined as the money kept reserved afterpaying all the debts and share of the shareholders. However, this source can be used bycompanies which already exist in the market and making valiant efforts to generate higherprofits so that they can keep it reserve even after satisfying the monetary needs and wants ofdifferent stakeholders. On the basis of present case, retained earnings can be used by the largeor medium sized enterprise who has already established their mark in the corporate environment(Dada, Azim and Ullah, 2014). Main aim of using this fund is that there is no increase ofliability on firm and management can use it for future expansion. Furthermore, advantage ofthis source is that it can be used for long term as there is no compulsory maturity like term loansand debentures. Sale of Fixed assets: It is one of the internal sources of finance that existing companies can usein order to raise adequate amount of funds for the future expansion. However, for the shortterms financial needs of business, this source is considered as the best. However, it is theresponsibility of management of large or medium sized businesses to focus on those assetswhich are of no use or less use can sell them and raise money for buying new machinery orfuture investments (Philippon and Reshef, 2013). But in contrary to this, once the asset is sold,it will be used in the near future and company has to make investment for new assets. Third Party Investment: Top level management for large or small sized firm or entrepreneur fornew start-ups has to influence third party to invest in their business ideas so that they canprovide adequate amount of money and would help in carrying the operations. However, thirdparty investors have less interest than the shareholders (Morana, 2014). But it is important forsenior officials of large or small enterprise to provide accurate and wide range of information tothe investors so that they can assess business for risk and accordingly, make decisions for thefuture contingency.Bank loan: This source of finance is the most appropriate source that is considered to be anexternal source of finance. Bank loan is available for all kinds of business including new start-ups, existing business as well as an entity that wants to expand business. The loans are generallyborrowed money against which company has to pay interest. These sources can be categorisedin short term, long term and medium term. The companies who want to take loan should havekept some securities with bank. The major advantage of using bank loan is flexible repaymentterms. Nonetheless, the higher interest can be a limitation. For existing firms, it becomes4
difficult to obtain funds from such source due to poor credit rating. However, the business mayloss assets for secured borrowing. The advantage of this source for firms who are willing toexpand business is that they can raise funds with appropriate methods of financing fixed assets.For small entity, it becomes hard to arrange bank loan due to higher interest rate.Government grants: Government grants are the systems in which the organization provideshuge monetary rewards for the start-up or existing firms against their business proposal that canbe designed with respect to the welfare of society. This is the most appropriate source of financefor the existing large scale organization as most of government grants can total in the millionsof dollars. The most common advantage of such sources is that companies can receivegovernment grants in an easier way from government and private sources. The large scaleorganizations who wants to expand business can also approach to such sources along with aworthy investment proposal. Another advantage of this source is that these sources areprestigious and can provide instant credibility and public exposure to corporate entity. The hugecompetitive for preparing government grants is the limitation of this source. The disadvantageof these resources is that it is a lengthy process (Cunningham, 2006).Hire purchasing:These sources of finance can be seen in two categories such as short tomedium term. This is the arrangement in which company can acquire new machineries andequipment against easy down payment and a range of instalment. This source of finance can beused by all type of business whether it is a small of large company. However, new ventures aswell as existing companies and partnership firms can use such sources of finance. The majoradvantage of these sources is the availability of instalment credit such as rental, purchase andinterest being paid. The disadvantage of these sources is that the entities are provided ownershipoutright at the end of payment term (Sources of finance, 2012). The companies can use thatassess that are acquired from hire purchase and can pay out the full amount over a definedperiod. However, the business entities have to stick to the terms of agreement for owning theassets at the end.Issue of shares:Issue of shares is the most common source of external finance that is called asequity financing. This source of finance can be used by the limited company who has registeredthemselves for IPO (Initial public offerings). In these sources of finance, funds are usuallyinvested by shareholders and this is a long term source. However, the advantage of this sourceis that company has not to pay interest against the funds raised from public but it has to pay5
dividend. The major advantages of using issue of share are that company can raise large amountof funds to invest in business projects. However, there is certain disadvantage of using suchsources of finance (Pour, 2011). The business has to share the ownership of company withexternal parties and the members become shareholders of company. As an advantage of thesesources, it can be said that the shareholders have opportunity to profit if company performswell, but also take the risk of loss in case of non-performance of business. Hence, this source isappropriate for the large scale organization that is looking for business expansion.Implications of sourcesSources Legal Dilution of Ownership Bankruptcy Owner's capital There is no legalrestriction of generationof funds by the owner'scapital.Controlling power of thecompany will bediluted. There will be nofinancial obligation onthe organization with theowner capital due toinsolvency situation willnot arise.Sale of fixed assetsSimilar to the owner'scapital, there will be nolegal implications onsale of fixed assets.With the sale of assetthere will be no changein ownership position ofthe business (Dransfield,2004). Solvency of businesswill be affected inadverse manner becausevalue of business will bereduced.Retained earningsOn this restriction canbe imposed byshareholders of thecompany because it canreduce the return ofinvestment as dividendpolicies are adverselyaffected by it. Throughretainedearnings there is nochange controllingposition of the business. It is a part of reserve andsurplus thus, financialobligations are notaffected by it.Consequently, it cannotlead to the situation ofinsolvency(Zoan,2014). There are no legalIt will vary as per theIn situation where6
Venture capitalistimplications of theventure capitalist. conditions imposed bythird party (Parkinson,2012). organisation is not ablepay their liability to thethird party then theydeclared as insolvent Bank loanMore and more paperwork is to be done Ownership remains withBank (Managementaccounting, 2014)There will be nofinancial obligation ofusing such sources Government grantsThis source requiredeffective proposal that isbased on ethical terms Ownership remains withorganizationLoss to government insuch case Hire purchasingThese sources are usedafter making loss ofpaperwork The ownership comes tothe owner at thepayment of lastinstalmentThis creates a loss forhirepurchasingcompanyIssue of sharesThe company has toregistered for IPO(Dada, Azim, and Ullah,2014)Decreases the level ofownership percentage ofshareholdersThe shareholder are notentitles to have funds incase of bankruptcy(Sources offinance,2012)The above stated are the implications associated with different sources of finance. However, it isthe duty of senior officials of the company to make sure that they evaluate both negative and positiveaspects of the sources and accordingly make smart decisions regarding selection of appropriate source.In the present case, different sources has been evaluated for different users thus, before selecting themode, management also have to understand the needs and wants. Appropriate source of finance for three different casesIn the above study, different source of funds has been identified and it’s positively and negativeshave been evaluated. However, for a firm senior officials and entrepreneurs for new start-ups areresponsible to understand different implications of the sources and accordingly make decisionregarding selection of suitable and reliable sources (Read, 2002). According to the present given case,researcher illustrates the appropriate source for small business start-up, a large business expansion and7
small group of people for acquiring medium sized company.Case 1: Sources of finance for Small business start upsFor starting a new venture is not an easy task for the individual, it is important for theentrepreneur to take appropriate decision regarding selection of sources so that activities can be carriedout it appropriate manner. For starting a new small business, two sources are feasible for theentrepreneur that is personal savings and bank loan. Bank borrowings is the source through the help ofwhich large amount can be raised in short span of time. For this, entrepreneur only has to complete thefew legal formalities (Kawai, Mayes and Morgan, 2012). However, repayment of loan is also based onmonthly instalments which would be feasible for the individual to start new venture. Along with this,owner's capital another good source for small business start-ups. It is because, for initiating anybusiness, owner has to invest his/her own money so that other investors can be influenced. On the otherhand, there is not such liability on the part of firm but if investment is not used in suitable manner thenit can be major loss for the entrepreneur.Case 2: Sources of finance for large business expansion Herewith, in this section a case of existing firm is taken into consideration that is willing toexpand business in new markets. For example: This organisation is so called retail entity who has takenregistration for initial public offerings. There are various internal and external sources of financeavailable for the business (Booker, 2006). For an expansion project the company requires large amountfor with the appropriate sources of finance are required. It has been assumed that the company is goingto open new outlets in the market so it becomes important to put money in expansion project. Forraising large amount of funds the company is suggested to go for equity financing as it will be the mostimportant sources of finance for large scale company (Morana, 2014). Through issuing shares in themarket the large amount of funds can be acquired by the company. The rationale behind suggestingissue of share as sources because, it will provides benefits in terms of raising large amount of funds atminimal cost. The company has not to pay interest but its can pay dividend as well. The second and appropriate sources of finance for this large scale company for expansion isretained earnings. These are that source available with companies in manner of saving from last year’sbusiness. The profit that are retained from past year business have been used to for expanding business.The rationale behind using retained profits is that it is a cost effective source of finance but thecompany has to pay opportunity cost for using such source of finance.Case 3: Sources of finance for Small group of people8
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