Funding Options for Ferry Business Expansion: A Financial Report

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BUSINESS SCENARIO FOR INDIVIDUAL REPORT

Executive summary
Financial management helps in gaining competitive advantage. The management of financial
resources as required by the company can aid to increase profitability. Zylla Limited is Ferry
Company that needs to determine the financial sources for investment in new vessel for
business expansion. This study aims to analyse long and short-term sources for investment to
make the plan fruitful. The analysis of long-term financial sources, such as NPV and IRR
proved that the investment would be beneficial and profitable for the company. Therefore, it
can be recommended to continue with investment processes by considering the debts and
future prospect of the company. This study is successful in addressing the issues and deriving
suitable conclusion effectively.
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Table of Contents
Introduction..............................................................................................................................................4
Findings and analysis...............................................................................................................................4
Short-term financial sources................................................................................................................4
Long-term financial sources................................................................................................................7
Conclusion and recommendation.............................................................................................................8
Reference list...........................................................................................................................................9
Appendices.............................................................................................................................................10
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Introduction
Financial reports are essential to determine new investments and management of services to
acquire new assets. Zylla Limited is successful in its operation of ferry services through
merchant vehicles. With increasing demand of ferry services for people and business goods,
the business is booming and has scope for expansion. In order to facilitate business
expansion, the management has decided to invest in new ferry boat and the financial
department is responsible to determine its feasibility. This study aims to analyse financial
transactions to facilitate financial decision-making. In this regard, this study ensures analysis
of long and short-term financial sources to raise fund for viable purchase of the new vessel.
Findings and analysis
Short-term financial sources
Bank loan
It is the amount of fund borrowed with the agreement of repayment schedule within given
time. Companies with profitability record are preferred for bank loans for sustaining
increased return on payment.
Figure 1: Pros and cons of bank loan
(Source: Influenced by Cassar et al. 2015)
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AdvantagesDisadvantages

Bank loans as a financial source can support the investment for business growth; however, it
is needed to be weighed to determine the feasibility of the investment. The return on payment
and interest rate determines the profitability to facilitate this mode of finance source. It can be
seen that the advantages are greater for small investment. Therefore, Zylla Limited can opt
for this method to buy its new vessel. [Referred to Appendix 1]
Overdraft of bank
This facility of bank loans supports the investment of more money than present at bank
account. The transaction is limited and leads to debt for the company accessing this facility.
The authorised overdraft includes a service fee charged at regular intervals along with
interests. Unauthorised overdraft involves higher charges and is more expensive.
The advantages include the prevention of check bouncing, ensure on-time payments and
provide convenience when payment is needed to be done certainly. However, Lee et al.
(2015) commented that disadvantages include high-interest rate and service charges that can
burden a company with expenses that are not forecasted. Therefore, Zylla Limited needs to
cater to feasible budgeting to avail such services.
Trade credit
Trade credit helps in cash available for investment and gain scope of business expansion.
Delayed payment to suppliers can be helped in accessing required finances by creditors. The
working capital can be accessed by evaluating credibility, liquidity position payment records
and ability to make profit.
Figure 2: Facilities of trade credit
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(Source: Influenced by Fraser et al. 2015)
The terms of payment and credit limit dictate the process and affect business processes.
However, the management of small investment can be facilitated through this method.
Personal loans
It can be obtained from friends and family on the basis of goodwill and trust. The agreement
between debtors and creditors lay on personalised terms rather on specific policies. This
source is easy to access as it can be arranged effectively without official processes and
negotiable payment related agreement can be conducted. Moreover, the interest rate if any
present is very low than that of the bank (extension.iastate.edu, 2019). However, these
agreements have no clarity and boundaries to maintain transactions transparently. It solely
depends upon understanding as no legal procedures are considered here.
Invoice discounting and debt factoring
Invoice discounting support borrowing of cash and debt factoring is the process of selling
company’s invoice to gain capital for business investment. Small-scale companies gain
benefit from debt factoring as it supports cash flow, accelerates growth and gains marketing
facilities. On the other hand, invoice discounting support gaining quick cash by liquid cash
process. The collection of repayment is also reduced to support the company to gain profit
and repay effectively.
Figure 3: Disadvantages of invoice discounting and debt factoring
(Source: bbc.com, 2018)
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Thus, Zylla needs to evaluate the scope of present business demand to identify best-suited
method top resource the new vessel.
Long-term financial sources
Equity-ordinary shares
Shareholders are participative in financial statement and active in investment processes. It is
advantageous as there is no fixed repayment period of long-term funds if affordable.
However, it affects company’s stock market and public reputation when shareholders did not
get their profitability share (Lee et al. 2015).
Net present value (NPV)
Continuous rise in inflation rate supports the increment in price value of assets in future.
Evaluating this element of finance helps a company to evaluate the profitability of present
investments. It can be calculated with formula:
Present value= cash flow
(1+i)n
Considering positive investment, it helps in obtaining clear insight into profitability and
support decision-making. However, the formula does not support analysis of two instances at
once and thus, difficult for long-term processes.
Debt
Borrowing money from bank or other sources can be advantageous when company
essentially is in need of large investment and interest rate is low. However, repayment can
result in penalties for company reputation and financial status.
Internal rate of return (IRR)
IRR is a form of metric used to estimate profitability by budgeting. This represents the
investments in project that can return high profitability. This is influenced by internal factors
of the project only (Cassar et al. 2015). It is advantageous in clear communication about
profitability, whereas, disadvantageous as it influences unconventional cash flow.
Period Discount factor (1.000) Cash inflow (in £) Cash flow with discount (in £)
1st year 0.971 55,230 53,628.33
2nd year 0.943 70,045 66,052.43
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3rd year 0.915 88,375 80,863.12
4th year 0.888 79,870 70,924.56
5th year 0.863 57,555 49,669.96
Ferry sale 0.863 45,000 38,835
Table 1: IRR for Zylla
(Source: Created by learner)
Since the total is £209,973.4; therefore, the cash outflow is £150,000 and NPV is
£359,973.4.
Conclusion and recommendation
By analysing NPV and IRR, it can be concluded that the investment in new vessel for Zylla
can be profitable. The positive value for NPV assures that Zylla Limited will gain profit with
this investment. Moreover, the management of financial resources and shareholders can help
in increasing the profit effectively. It can be recommended that the management can
undertake the operation of new asset acquisition as the assessment of five years provided
evidence that the investment will be feasible and worthy. Moreover, this investment will
enable the company to address customer needs effectively, resulting in higher reputation.
Moreover, the company can also work to reduce the debt to increase the profit share among
stakeholders.
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Reference list
bbc.com, 2018. Sources of finance. Available at:
https://www.bbc.com/bitesize/guides/zmj7tfr/revision/2 [Accessed on 15 May 2019]
Cassar, G., Ittner, C.D. and Cavalluzzo, K.S., 2015. Alternative information sources and
information asymmetry reduction: Evidence from small business debt. Journal of Accounting
and Economics, 59(2-3), pp.242-263.
Eniola, A.A. and Entebang, H., 2015. Small and medium business management-financial
sources and difficulties. International Letters of Social and Humanistic Sciences, 58, pp.49-
57.
extension.iastate.edu, 2019. Types and Sources of Financing for Start-up Businesses.
Available at: https://www.extension.iastate.edu/AGDm/wholefarm/pdf/c5-92.pdf [Accessed
on 15 May 2019]
Fraser, S., Bhaumik, S.K. and Wright, M., 2015. What do we know about entrepreneurial
finance and its relationship with growth?. International Small Business Journal, 33(1), pp.70-
88.
Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the
financial crisis. Research policy, 44(2), pp.370-380.
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Appendices
Appendix 1: Private funding and bank loans
(Source: http://www.innovation.public.lu/en/financer/creation-entreprise/fonds-propres-
emprunts/index.html)
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