Managing Financial Resources and Decision
The integration and recognition of comprehensive business planning are essential aspects in order to avoid business failure and that, the following discussions are needed to have knowledge on business fundamentals and determine basic foundation of the business to start up with.
Planning and starting a business assumes wisdom, as well as right amount of decision making, as doing business, operating processes and all is not that easy and free flowing, and that to effectively run a certain kind of business, a lot of financial matters will be put into consideration for example, knowing how much business capital will be exposed in order to realize the business?, and such finance sources have to be noted and applies, allowing awareness to fit in from within costs of various finance sources and other related domains. Money is a factor for running a business, without ample flow of money, ideally speaking business will fail its definite purpose and goals, as for instance there is a need for the business to pay their locations in such rentals, pay their employees and other payments deemed relevant for business operations.
a) Identify the sources of finance available to a business. What amount of owner's capital will the business need?
The sources of business finance are of various types, and may depend on the present standing of the overall business and its environment from within financial context.
The sources of finance can range from owner’s capital, this means own money invested by the owner as one source of finance capital to keep the business from moving into markets positively. The other sources of finance can be from the banking industry from within there are internal as well as external sources of finance from where there is profit, a profitable business can assume good finance aside, the loan sourcing can be used for the business, as it may came from several banks, as the latter will lend for either short-term or long-term purposes, as there can be an amount lent for example, HK$210,000 for two years, as the bank will charge an consolidating interest on a monthly basis but, if the loan is obtained, then this frees up other capital held by the business, which can then be used for other purposes.
The amount of owner’s capital the business needs can depend on the accumulated sources of finance the owner has gathered and collated for operating the business as there can impose to such situations like, in terms of capital accounts for example, for the “existing owners, as contributed based on some cash flow projections that the firm makes simultaneously with the preparation of the annual budget. If business will need total capital of HK$1,000,000 and there already have HK$800,000, then owner capital call can sum to HK$200,000. Indeed, if the individual is a 5 percent owner, the amount capital should be HK $50,000 (5 percent times HK$1,000,000)”. The capital percentages are tied somewhat to income percentages assuming that older partners with enough capital balance could actually receive refunds being paid in tax-free mode, and if amount is not tied up, business might pay interest on capital making finance sources in whole notion.
b) Assess the implications of the different sources. (e.g. What will it do to the business? Sole Pro, Partnership or limited company)
The business will become successful and effective depending on how the flow of money is being handled by the executives and that sources of finance for example, pointing to venture capital, there assumes that capital pooling will outcome into limited companies noting to ‘Venture Capital Companies’ aside, there may look for investment opportunities into high rated business and its prospects, the presence of business angels to keep the business stature as there constantly searching for finance options and have better say in running the business to move forward. The sole proprietorship will strengthen product channelling and supply distribution if bank loans and other forms of debt are being handled properly into business function and stance. For partnership, the source of finance can be supported by a friend or a close family member, into networks of informal investors and can assume connection to ‘business angels’, pertaining to individual who desires to help certain business. There can be positive and negative implications, for positive there maybe easy access to money sources and other funds if need thus, for negative implication, the business could have too many missing links when it comes to financial accounting and assessment and due too over and or under resources, the business will have more losses than profits and will outcome to unrealistic statements and reports.
c) Select appropriate sources of finance for a business project.
The appropriate source of finance can account to the theory of raising capital/funds, determining what finance source is best to utilize from within a number of factors, ample cost as important, the using of overdraft can be expensive way of gaining money and the business need to look carefully into the costs for best options. Good combination of internal as well as external sources is appropriate to exercise effective financial planning for the project, recognizing strength of the business finance thus, controlling equity, liquidation as well as such gearing ratio, the business finds out if there is access to the internal sources of finance before borrowing again or enter more loan allowing business to be in tough financial position.d) Assess and compare the costs of different sources of finance.
Every business needs short-term finance from the very beginning to
start up the business and to cover day-to-day running costs. This
provides the business with working capital. However business also
need long-term capital to help them to grow and expand, and this is
paid back over a number of years. Without finance a business would
find it difficult to accomplish anything, for example someone who
decided to start up a shop would need finance at first to just buy the
shop and the stock. Business finance rule amiably into such sources as the following: (quoted from, www.bized.co.uk)
Long Term – finance cost can be too high
Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan
Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance
HK Government – may offer loans in certain circumstances
Grants
Short Term –the covering of such fluctuations in business cash flows, the finance costs can be in moderate reality
Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most
Overdraft facilities – the right to be able to withdraw funds you do not currently have
Trade credit – Careful management of trade credit can help ease cash flow Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service.
Leasing – provides the opportunity to secure the use of capital without ownership
‘Inorganic Growth’ – certain finance cost are high depending on agreements made
Acquisitions and Mergers, firms agree to join together – both may retain some form of identity
Takeover, one firm secures control of the other business, the firm taken over may lose its identity
e) Explain the importance of financial planning.
Financial planning is not the same as financial advice. It is not a recommendation to purchase a particular product but an evolving action plan, regularly reviewed to ensure that your goals are met.
The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan on how you can meet your goals given your current and projected situation. In practice, the strategy will utilise available tax allowances, target liquid assets into appropriate vehicles, ensure your investments are structured correctly and managed professionally. Having created a plan you will be able to understand how each decision you make affects other areas of your finances and you can consider the short and long term effects on your goals. You can also adapt more easily to life changes and feel more secure that your goals are on track. However, the true objective of financial planning is to ensure that this strategy is not neglected and its value is not diminished. Only through regular reviews can you ensure that you remain on track to meet your goals and maximise new ideas and opportunities.
Indeed, objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions and it should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently (in, Ulrich and Stella, 2008). Then, there require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures as these banks are external users can be outside the business but need financial information about the business for diverse number of reasons. They are financial institutions able to decide whether to grant company with fresh working capital or extend debt securities to finance expansion and other significant expenditures (in, Ulrich and Stella, 2008).
Financial strength was used in describing certain extent to which an entity is constrained by its financial situation in pursuing its strategic goals or policies. An entity is financially strong when it is relatively unconstrained and weak when financial constraints are binding on policy choices. The financial strength of the banks is intimately linked to the successful management of the enterprise. Henceforth, enterprises with a large market capitalization have either been successful at generating earnings in the past and/or are expected to be profitable in the future. Furthermore, what appears to be confusion over micro and macro performance is responsible for a certain lack of general understanding about the importance of the bank financial strength. The financial accounts do provide useful information on the cost of achieving policy outcomes. Indeed they provide information vital to any discussion as to whether the outputs are being attained at least cost (in, Ulrich and Stella, 2008). The bank deals in financial markets to achieve policy goals, not to maximize its revenues. When the issue of financial strength does arise in business, it is difficult to argue that marginal deterioration in bank’s financial strength would be inimical to macroeconomic performance. Ideally, the financial strength is positively associated with good policy performance. Financially weak institution generates losses which undermine business stability and call into question the credibility of their policies. In assessing banking financial strength careful examination of the policy regime and the volatility of the economic environment is necessary and conventional measures of private enterprise financial strength, profitability and capital can be very misleading when applied to banks (in, Ulrich and Stella, 2008).
f) Describe the information needs of different decision makers. (First you need to identify the decision makers and describe their needs accordingly)
Decision makers will be needing information in order to guide business operation smoothly and have it directed into the right financial status and modification
The following are some noted decision makers and their information needs (business context)
Chief Executive Officer – they need complete and comprehensive financial information and reports, modifying data and explain it presumably, to have correct and accurate copies of financial statements
Business Finance Board – information on business nature and finance matters, how much finance gains there is for the business as well as the looses, projected cash flow, budget for the year
Auditing Division Team – latest accounting standards and principles as well as finance laws and regulations imposed and enacted upon into Hong Kong business operations such as those laws and principles pointing on IAS, the International Accounting Standards, ASB for example, in 1999
Shareholders – information on business standing in global market, data shareholders capital and equity, cash statements as well as balance sheets as requested
Investors – annual financial statements and reports, also projected profit and loss accounts and other finance documents as necessary
g) Describe the impact of finance on the financial statements.
In Asia, Hong Kong has the most developed markets in the area of business financing as compared to other Asian countries since, the outlook of Hong Kong is stable, supported by strong liquidity position and the absence of protracted fiscal imbalances within financial institutions. For example, small businesses in Hong Kong as borrowers may have several options for calling into mortgage for example that can be prior to maturation of payment duration and time (in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson, 1998) There is the need to understand such terms as discussed below.
The impact of finance on financial statements can be useful into viewing of certain products of specific products allowing good outcomes into the business markets as well as the strengthening of government and or political process and business interactions and market communications, for maximum formation of financial resources. There is impact into economic regulation and public choice as the financial statement offers an explanation for the finance form taken accordingly. Aside, there can also be impact towards accurate and timely financial statement preparation which serves as critical domain for the success or failure of a business. For example, CEO of the business must review the business financial statements and have conforms to the good understanding of them. The visualization impact is viewed from determining finance costs in the areas of sales, production, accounting and administration. Indeed, timely and accurate financial statements preparation creates confidence, credibility, reliability and business awareness of the owner and senior management in the eyes of bankers and other financial institutions and investors who provide cash and working capital to the business. Bankers and other financial institutions are more apt to provide the necessary cash and working capital when they have confidence the owners and senior management know what's happening in the business. The greater the level of confidence bankers and other financial institutions have in timely and accurate financial statements preparation, the easier and faster it is to obtain the necessary cash and working capital at attractive interest rates, with satisfactory covenants, terms and conditions and the easier it is to increase cash and working capital as the business grows. This is especially valid when the business experiences ups and downs during the various economical cycles of the domestic and worldwide economy. The understanding and analysis of these factors provides financial advisors, owners and management with the ability to anticipate cash and working capital needs before events occur in the business. There is nothing worse to owners and management than to find themselves with inadequate cash and working capital to grow the business and when an opportunity is presented to it. Understanding business financial statements, financial ratios, interrelationships among the various business functions - sales, production, warehousing and inventory control, engineering and accounting - are the keys to a successful business. It enables the business to better budget the future and not find itself in the difficult and sometimes insurmountable situation of having no cash nor working capital to fulfill its objectives and insufficient or no time to explore options to obtain cash and working capital.
Assumptions
The impact of finance on financial statement is geared towards spontaneous development of the business, as a graduate of business administration from the University of HK, good finance points and sources recognition is needed to be a part of the process as with presence of positive finance, the financial statement understanding and formation from education context will impose accurate data and figures with tactfulness and true details and if without good finance financial statements are not met accordingly and its information can assume failures of categories and sequence there is. I am a fresh graduate mastering in business and finance, I have some extra capital to use for business, the business in mind can deal to small kiosks selling variety of products particularly, snack foods like pancakes, doughnuts, waffles and some drinks, the particular business type is being chosen as it does not rely heavily on too much finance source and there needs only enough amount of budget as well as capital and business will be located in school campuses and convenient stores. Indeed, to realize this simple business, to raise money is ideally important can be through business angels, some finance support coming from friends and family. Another option can be through bazaars asking permission to my colleagues to sell some of their personal items in order to raise good capital amount of around HK$25,000. Furthermore, a sole trader will be unable to issue shares and may also face much higher rates of interest on loans as they may be considered a greater risk. The business status does influence the routes that are available to them for raising money. The business needs to plan ahead carefully to see how long they will need the funds for. The shorter the time period, the more they may be able to reduce the cost of the borrowing. If it is very long-term finance required then they may want to look at debentures or share issues. In the short-term, a simple overdraft may be the most flexible solution.
REFERENCES
ASB (1999), Statement of Principles for Financial Reporting, Accounting Standards Board, London
Biz/ed (2009), Sources of Finance available at: www.bized.co.uk
Chow, Y.F., Huang, C., Liu, M. (2000), "Valuation of adjustable rate mortgages with automatic stretching maturity", Journal of Banking and Finance, Vol. 24 No.11, pp.1809-29
Hilliard, J.E., Kau, J.B., Slawson, V.C. (1998), "Valuing prepayment and default in a fixed rate mortgage: a bivariate binomial options pricing technique", Journal of Real Estate Economics, Vol. 26 No.3, pp.431-68
Ulrich, K. and Stella, P. (2008), “Central Bank Financial Strength and Policy Performance: An Econometric Evaluation,” forthcoming (Washington: International Monetary Fund)
0 comments:
Post a Comment