Identify the deferent sources of finance available to Mr.. Norman for buying the new online learning system to expand his service business. There are many different sources of finance available to Mr.. Norman for investment in order to expand his business. These include: using personal savings to invest in the business growth Raising equity through issue of new shares.
Short term bank loan Long term bank loan Bank overdraft using retained earnings from the profits earned In the past Issuing loan notes Leaseback options Analyses the cost of different sources of finance and explain what the likely implications are of the various sources of finances that you identified In preparing the task above. Using personal saving to Invest In the business growth means that Mr.. Norman will be using his own money to buy the new online learning system. There Is no real cost of this source of finance.
However, there is an opportunity cost of this investment that is the interest that the money will earn if it is left in the bank (or any other income that it could generate if it is not invested in the business). However, it is to be noted that Mr.. Norman wants to keep his expenses to the minimum therefore his may not be an appropriate source of finance In this scenario. Raising equity through Issue of new shares mean that Mr.. Norman will be Issuing new shares for his company to people other than himself. Equity Is a high risk Investment and consequently the cost of equity is also very high as compared to the debt finance.
The new shareholder will not only take away a share of the profits but issuing new shares will also dilute the control of the business. Short term bank loans are a very good source of finance. The cost is relatively lower than the equity finance and unlike he equity finance the principal amount Is redeemable after some time and is not perpetual. Mr.. Norman may be able to get a short term bank loan In order to finance the purchase of the new online learning system. Like the short term bank loan, a longer term bank loan may also be used to finance the purchase of the new online learning system.
The rate of interest charged for the longer term loans is usually lower than the rate for shorter term loans. However, the total cost of finance becomes higher because of the longer period of borrowing. The long term bank loans are best f the organizations want to Invest In a long term project and want to pay back the loan In Installments of relatively smaller amounts. Bank overdrafts are also a very good source of finance available to the businesses. Overdrafts are very flexible as the organizations can borrow the exact amount that they need to borrow from the bank and for the exact period of time that it is needed.
However, the higher level of flexibility means that the cost is very high. This means that these are only appropriate for supporting the day-to-day operations of the business. Using the attained earnings from the profits earned In the past Is similar to Mr.. Norman and the opportunity cost is the only cost in this case as well. The difference is that the retained earnings are the savings that have already been separately kept for re- investment into the business. Issuing loan notes is also an option for the company to raise new finance.
The company can issue loan notes at their own terms and conditions such as the redemption period and the interest rate. The only problem with the loan notes is that the company cannot be certain as to whether the loan toes will be taken and how long it would take the company to raise the required amount. Some financial institutes also offer leaseback options. Mr.. Norman can sell one or more of the company assets to a financial institute and then lease the asset back from the institute. This will raise sufficient funds to finance the purchase the new online learning system.
Another option would be to directly lease the software through the financial institute. Suggest three best possible and appropriate sources of finance to Mr.. Norman taking into consideration benefits and disadvantages of each suggestion that you make. Make recommendation which is best. The new online learning system is a long term investment and therefore requires a long-term source of finance. Therefore, the short term sources of finance are not appropriate. The three most appropriate sources of finance that may be available to Mr.. Norman in the given scenario are listed below: Raising equity finance through issue of new share.
Taking a long term bank loan. Sale and leaseback Raising finance through issue of new shares will keep the gearing of the company low. This will keep the financial risk low. There is no actual cost of equity. It is the share in profits that accounts for the cost of equity finance. However, this share of profit may be more than the cost of borrowing from another source of finance. Nonetheless, this extra cost comes with a reduced risk and without the burden of repayment of the principal amount. Taking a bank loan will be a wise decision in the given scenario. The company is 100% equity based.
Taking a loan to finance the purchase of the new online learning system will raise the gearing ratio for the company but it will still be under an acceptable level. Moreover, the ideal financial Truckee of a company should not be too highly geared or too low geared. There should be a balance between equity and debt in order to keep the balance between the cost and the level of financial risk that the company carries. Sale and leaseback is also a very good option for the company. The company premises can be used as the underlying asset that is to be sold and leased back.
The biggest advantage of this option is that if properly negotiated, the terms of the leaseback contract may be very flexible and suited to the company’s future financial plans. The cost of this source of finance is also low. However, the problem with this option is that there will be a risk of losing the premises if the company fails to make the lease payments on time. The best option is therefore to take a bank loan in order to finance the purchase of the new online learning system. TASK 2 Prepare a memo for the attention of Mr.. Norman explaining the importance of financial planning.
Finance is one of the most important departments in an very important. Financial planning helps the organization to predict any need for additional finance in future. By doing so, it enables the organization to cater for its uncial needs in due time. Without proper financial planning, the organization may end up in a finance deficit which will lead to the organization taking higher costing finance in the emergency situation that is created or worse, a huge cash deficit of such kind may put the company out of business.
This is because even if the company is profitable, failure to make payments on time can lead to bankruptcy. Effective financial planning helps maximize the profits of the organization. The function of financial planning is to identify the finance surplus or deficit in future and arrange additional finance in times of deficit and make sensible investments when there is a surplus. Only through effective and efficient financial planning a company can predict this and then take necessary actions.
Financial planning also helps the company maintain the optimum capital structure that reduces the finance costs to a minimum while keeping the risk to an acceptable level. A low geared company has a high cost of capital while a company too highly geared carries a high risk. Only through financial planning can a company maintain the optimum financial structure. Through financial planning, a company can manage its cash inflows and outflows in such a way that there is always enough cash to pay off the credits without having the need to borrow additional finance to make the payments in time.
Financial planning helps support the long term growth by financing the projects that benefit the company in the long term. Assess the information needs of different decision makers There are many different stakeholders related to an organization that need certain information in order to take informed decisions. It is very important that the company revised them this information because the decisions that they take may have a direct impact on the organization itself. These decision makers along with their information needs are given below.
The shareholders and other investors are the most important stakeholders for any organization. These are the people, or other entities, that have invested in the organization and have a direct interest in the financial performance and the financial position of the company. They need to have the information about the current financial performance of the company, its financial session, the forecasts and future plans of the company regarding growth and investments in any major projects. Prospective investors are the people or other entities that may invest in the organization in near future.
Their stake is very similar to the current investors except for the fact that they have not yet invested in the business. The information requirements of these prospective investors are also similar to the current investors of the company. The management and the directors of the company need to have each and every detail of what is going on within the organization. As they are the people running the company, it is vital that they are aware of each and everything related to their departments. Otherwise, there is a chance that they may take wrong decisions due to lack of information that may lead to a disaster for the company.
The government of the company in which the organization operates also has a stake in the company. As the company is using the country’s resources and providing employment opportunities to its residents, the government is concerned with the company’s performance and profits. The the profit figures. The customers need information about what the company does and how the products are made. For example, some customers may not buy products that have gone through a certain process. Other customers may choose to buy the products based on the philanthropic action that the company takes.
The customers are also concerned about the pricing policies and any future increase in the prices of the products. The suppliers need information about the performance of the company. This is because the company provides business to its suppliers and they are dependent on the company for profits. In order to make their forecasts more realistic and reliable, the suppliers need information about the financial performance of the company and the planned level of its operations in future. Prepare the income statement and the balance sheet of the Norman Training Institute.
Briefly discuss the four main financial statements The four main financial statements are: Income statement Statement of changes in equity Balance sheet Statement of cash flows the financial performance of the company during a given period. This period of time can vary but is usually one year. The income statement helps us understand how well the company is performing. It shows the incomes and expenses of the company over the period under consideration. By segregating the incomes and expenses into different heads, the income statement helps us understand the effectiveness of the actions of the different departments and the efficiency of the processes employed at the company. Statement of changes in equity presents the structure of equity and any changes that have occurred during a given period of time.
By breaking down the total value of equity into different components, the statement of changes in equity helps us understand the equity in a better way. Moreover, the changes that have occurred in the shareholder equity during the given period are presented in very detail. This is very helpful for the current and the prospective shareholders of the many as information, like the dividends per share and the earnings per share, can be calculated from this statement. Balance sheet is the statement of the financial position of the company at a given time. It presents the assets, liabilities and the shareholder equity all in one statement. This information gives us important ratios such as the liquidity ratios and the profitability ratios.
These ratios are very important for the shareholders, the investors and more or less all the stakeholders who have a direct financial interest in the profitability or the survival of the company. Statement of cash flows is the summary of the cash flows that have occurred within the company for a given period of time. In order to keep consistency, this period of time is usually the same for the income statement, the statement of changes in equity and the statement of cash flows. The statement of cash flows gives us information about how well the company is managing its cash flows. This is very important as despite a company being profitable, failure to make payments on time can lead a company to liquidation.
The statement of cash flows gives us this information and helps the takeovers take informed decisions. Calculate the ratios and comment on their significance Gross profit percentage The gross profit percentage is the ratio of the gross profit to sales revenue. This ratio shows what percentage of the sales revenue is the gross profit. As calculated below, the gross profit percentage of EBB Ltd is 25% which is higher as compared to the industry average. This means that the production efficiencies of EBB Ltd are higher than the industry. Moreover, the ratio shows that the company is purchasing its production materials at good rates when compared to the industry average.
