Finance Basics

A few statements will aid in empowered its wide meaning: Finance in common terminology means management of cash or other valuables, which can be transmuted Into money. In broader term finance Is the science of funds management. Finance Involves Inflow of money and often outflow of money. Simon Andre, defines the term finances of the following ways: 1) “Area of economic activity in which money is the basis of the various embodiments, whether stock market investments, real estate, industrial, construction, agricultural development, so on. , and 2)” Area of the economy in which we study the performance of capital arrests and supply and price of financial assets ” According to Boodle and Morton, finance “study how scarce resources are allocated over time” For O. Ferret C. And Geoffrey Hire, the term finance refers to “all activities related to obtaining money and effective use” Features of Finance Importance of Finance Necessary to start business Aids expansions of the business Finance Is required as a part of working capital for the businesses – Finance Is also required for research and development. In addition, a solid financial base benefits the business earn goodwill. A solid uncial base aids the business increases consumers and investors’ confidence on the business. [LO-1. 1] Identify the sources of finance available for the business? Sources of finance can be allotted Into two categories Internal and external source of finance. Internal sources of finance Self-Financing/Own investment – one of the ways to start-up a business is by Investing personal saving or any other kind of Investment Into the business as start- Friends and family – this is a favorable source of finance as you can gather finance from some friends and family, they can be willing more than other to invest.

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It is done on legal basis by an agreement. External sources of finance Bank Overdrafts – is where the bank agrees to lend money to the business up to a certain agreed limit and interest rates. The interest rates are very high and it is a short- term source of finance. Bank Loans – is where money is borrowed from a bank, which is to be paid back over a period with the agreed interest rates. They vary depending over the sum of money you borrow and have different repayment time.

Business Angels [Individuals with high net worth] – are people who are interest in our business, they may be affiliated directly or indirectly, they are people invest in your business if they see potential. In exchange, they require certain amount of profit or a piece in business Which will be valuable in future. Hire purchase – this is about first short deposit and then monthly payments/ installment and after the completion of all the payments, the asset is owned by the business. Partnership – one of the best source of finance for start-up businesses as the amount invested is not to be repaid.

Details of Partnership according to Auk’s Partnership Act 890, which imply to all partnerships until and unless partners have agreed to vary the terms -: ; All partners are entitles to contribute equally to the capital of the partnership. ; Partners are not entitled to interest on the capital they have contributed. ; Partners are not entitled to salaries. Partners are not to be charged interest on their drawings. ;Partners will share profits and losses equally. Partners are entitled to interest at 5% per annum on loans they make to the partnership.

Government grants – there are government organization which assist new genuineness by funding them but these grants “funds” are limited to certain projects. Assess the implications of the different sources? Self-Financing/Own Investment – is good as nothing is to be repaid and can be a good start-up capital, lets you keep complete control over the business. Being the investor it gives you are the complete view of the business as planning and management of the resources are to be done carefully. Time is saved, as there is no presentation and meeting for investors.

Even though self-financing offers high control over the business and there is, no profit sharing but there is a limit to the mount of capital that can be invested into the business and also the loss of access to high experience, intelligence and social capital. Friends and Family – advantages of borrowing cash family and friends is that they will agree to loan money on low interest rates compared to the bank or other financiers and favorable repayment terms. The other financiers might not be as flexible when compared.

Borrowing money from family members has it drawbacks as you are taking risk with their money and if you lose, it they may lose their trust in you and never invest in any of your equines plans or ideas and it might create problems in relationships/bonds with them. Bank Overdraft – Is a short – term source of finance? It is quick to get and very flexible so a very suitable option to maintain businesses cash flow. Even though it may seem a good option but it has, its drawbacks as the interest rates are too high compared to loan for long-term borrowing and withdrawing more money than the agreed limit might result on high larges.

Until and unless there are any specific terms overdraft at any time if you fail to make any repayments or break one of their terms and conditions. Assets might be needed as security against overdrafts. Bank loans – is the most universally known source of finance and easily accessible by all business and co-corporate. It gives you total control and authority over the business and the bank does not assume any control over the business, their only requirement is to meet your loan repayment requirements. The main advantage of borrowing money from bank is that maintains a flow of your cash in the business.

There is no immediate payment for the loan and there are regular reminders on the payments made by you and what you own. The interest rates and charges are quite reasonable hen compared with other sources of finance such as credit cards and bank overdrafts. Bank loans also do not require apportion of share or control over the business in comparison with other investors. Inflexible terms of payment as once the terms for the loan is set one needs to stick to them or you might borrow too much and end up paying more of unnecessary interest.

A regular payment from business makes it difficult to grow fast. There is a risk of losing security if the loan repayments are not made or are irregular. There are charges even for paying loans earlier than the payback period. Business Angels hug source of finance. Bag’s have high experience regarding business decisions and make them quickly. There is no need for security as Bag’s finance it completely. It is extensively helpful as you can access to Bag’s sector knowledge, contacts, managing and monitoring skills.

There is also no need for repayments and interests. Bag’s are one of the safest way of finance but takes a long time to find a suitable BAA for investment and the amount in for investment cannot be less than (EIA,OHO and more than IEEE,OHO). There is a loss of control over the business, as you have to give some control of your business through hares to the BAA. Partnership – One of the best ways to start-up a business. It helps to gather more capital for the business. Partners experience and contacts may help with business problems efficiently. Losses are to be shared with the partner. With a partner, you can divide work and work fast and you specialize on tasks. No interest payable. The biggest disadvantage is about losing control over the business, having a partner leads to clash of views. In addition, profits are to be shared with partner. Government grants – are funds provided by the many government co- operations, its free, no interest or charges applicable. Government support helps a lot as large resources can be at deposed. There can be tax relief by the government.

The advantage of government grant is limited as they are only available to certain businesses or projects, not all businesses can enjoy the benefits of them. You lose your freedom of decision up to certain extent because if you are taking grants from government, you might be requested to setup your business in a place, which is not of your preference as the government might be interested in development and gob creation of that particular area. LO – 1. 3] Select appropriate sources of finance for the business project?

After studying the case of Joy Dalton it is visible that after working out the revised investment plan her the business. Moreover, it also shows that she has received E,OHO as immediate funding from the princess trust, but she still needs more of EIA,OHO to start-up her Relating to the setting THE AUTHOR would advise Joy Dalton to go for bank loan, as it is the best source of finance for her compared to other sources of finance as easy to access and finance for a very long time, it also lets you keep the total control over the equines.

There are also no immediate payments required by the bank as payments and the interest are fairly reasonable compared to other sources of finance if compared to credit cards and bank overdraft and the bank does not require her to give away some share or part of the business. Loan can also support to maintain monthly cash flow of the business. Bank Loan also saves time as if she were to go for Business Angels as source for finance she would have wasted lot of time in searching and convincing. Personal savings is not an option, as she has no saving or previous earnings can be assumed in in this case.

Friends and family can be considered as source of finance but here is a limit, to the amount of money that can be borrowed from them. She can also opt for partnership but that might conflict to her motive of running her own business mentioned in the scenario of the case. Hire purchase is not a suitable source of finance as she has no cash on hand to even make monthly payment for the business and it will only help with purchasing equipment’s this source does fulfill the requirement of working capital.

As THE AUTHOR have already stated bank meets all the conditions as a source of finance compared to other resources of finance, so THE AUTHOR would advise her to go forward with a Bank Loan to borrow money and also to have fixed interest rate, as sometime there are terms of fluctuating interest rates. THE AUTHOR advise that Joy Dalton should get the bank loan of EIA,OHO from HASH Bank (I-J) at 7. 9% per annum for 3 Years. Joy Dalton will take at least 6 months to enter and understand the market and make a settled position for her business, the repayment amount on the loan is mentioned in Table B.

She will have to pay nominal interest and focus on her business as the loan would require any of her sets as security, she can also go forward for unsecured loan as well but the interest rate will be too high up to 15% to 35% as the lender takes all the risk of lending money and if she fails to payback the amount there will be consequences like the lender forcefully taking over her established business etc. The technicality of the Business Bank Loan is that currently I-J has an interest rate of 4. 0% to 10% per annum which makes the repayments as follows. The scenario for the Loan repayment table below is 3 years. ) Interest Rates Loan Amount (E) Total Repayment Amount (E) Monthly Repayments to one decimal place) 6. 4% 10000 10640 53. 3 7. 9% 10000 10790 65. 8 9. 5% 10000 10950 79. 2 (Table B) Source of interest rates – http://www. Testimony. Co. UK/money/news/article-1607881/ When-UK-rates-rise. HTML The author has only considered simple interest With the Table above it is clearly visible that Joy Dalton can have various total repayment amounts and different monthly installment depending on the bank and banks terms and conditions for his small business loan.

If she is unable to fails with monthly installment or the repayments of the loans she will lose her security. [LO – 2. ] 2. 1 Assess and compare the costs of different sources of finance: If Joy Dalton is using her own finance to start-up her business, then she will not have any overheads to be repaid and as it’s her own money she won’t have to go through any trouble to get it, but there is an opportunity cost to her own capital, as the same amount of money can be invested in bank or used to buy shares of company high rate of returns or any other form of investment with good returns.

Loaning money from friends and family or relatives is easily accessible by Joy Dalton, as they will trust her. She will also get favorable repayment terms and there will be low interest or no interest in repayments, but other sources of finance can be more flexible and, if she fails to repay them money there can be loss of trust/grudges, break in the bond you share with them. Bank overdrafts are in easy reach as a source of finance but have high interest rate and have to be repaid really fast compared to the other sources of finance.

It has too many procedure, terms, and conditions, which might be laborious. Bank Loans are comparatively easy to get than other financial resources, which is if you match the eligibility criteria of the loan. The interest rates can be high compared to some other sources of finance be reasonable. It has too many procedures and documentations, which can be exhausting. The biggest risk of this source of finance is the loss of security given to bank in exchange for getting the loan in regards to Joy Dalton failing to follow up her repayment installments.

They are one of the biggest financial resources to any business but hard to get has Business Angels are the people who are highly qualified individuals who have high net worth’s and they finance your business if you can grab their attention with your business plans and kills. There are no overheads for this source of finance but there can be loss of control over the business, as in exchange for the investment in the business they will secure certain percentage of share in the business.

Joy Dalton has the advantage of accessing all the experience and other resources of the business angel, which will lead the business one-step closer to success. Hire purchases is an inexpensive source of finance as they have low monthly installments compared to the bank loans and overdraft but they do have fees and charges in the agreement and the percentage of interest involved in the agreement. Joy Dalton will only have to surrender the machinery she purchases if she fails to pay the installments; there is no risk of security.

It will be inexpensive even if the business fails. She is only required to pay a 10 to 12 percent of down payment at the start and then small Dalton as she can gather a lot of capital; resources for like the factors of production and having partners can help with division of work and add skills to the business and there are no overheads. The cost of partnership is there is a loss of control over the business. The default terms of partnership guides that profits are equally shared which also leads to loss of profit. There is also possibility of conflicts in the business.

Government Grants are one of the sources of finance but are not available for all the business, they are particular to limited number or sector of business and accessing them can lead to making unfavorable decisions. The government might limit the choice of where to establish the business according to their objectives but in return, you have access to lot of resources. [LO -2. 2] 2. 2 Explain the importance of financial planning and design a financial plan for the What is Financial Plan? It is always essential to recognize scarcities and oversupplies in any business.

The financial plan is a self-supporting document proposed to support and direct activities of the business. It elucidates what your business can pay for, how it can afford to do it and can anticipate the amount of profits in future. Importance of Financial Planning? Http://fingerprinting. Wordless. Com/2010/10/11 ‘the-financial-planning-process/ (Figure 1) Financial planning is a process of framing policies, procedures, objectives, budgets and programs regarding some financial activities of any concern. This helps in adequate investment and financial policies.

This even ensures effective. There are some importance which are being outlined: This helps in keeping a balance between the inflow and the outflow of funds due to which the stability is also being maintained. Adequate funds have to be ensured anyhow. It even ensures that weather the suppliers of fund are easily investing in the exercise financial planning companies or not. Financial planning even reduces uncertainties due the change in the market trends which are faced easily through enough funds. Reducing uncertainties can be a hindrance to growth of the company.

It helps in making the growth, ensuring stability and profitability in concern. It even helps in expansion of programs. The expansion of programs and making of growth helps in the long-run survival of the company. Financial plans are drawn to help know the business has sufficient amount of funds the business. It helps to reduce the risk of a loss in the business. All businesses need to have a backup survival scheme to be in the industry and with a financial plan, long run survival is achievable. They act as a tool to review financial positions at fixed intervals and manage finance efficiently to reach business goals.

Step 1 is determine current financial situation meaning what financial resources Joy Dalton has like the EWE funding she received from princess trust for her business plan and additional IOW she will receive later when she applies for the bank loan. Step 2 is develop your financial goals every business needs have financial goals, it the aim to have certain level of funds to run or reach aims of the business in Joy Dalton case as we know she already has EWE and her goal is to get another IOW from other financial resources to start up her business as all that finance will be required as working capital of the business.

Step 3 is identify all alternative course of action is to identify all course of action that can be engaged in this situation. Create a second option plan as “Plan B” which could be getting finance from friends and family by presenting her aims, objectives and her business plans, which could interest them and make them invest in her business. Step 4 is to evaluate alternatives is to asses all alternatives by getting them down on paper with estimates, numbers, amounts and other values this helps businesses to come up with better course of action when facing problems and thus help take better sections.

Step 5 is create and implement your financial action plan – after getting all the alternatives variables and the on paper evaluation now it’s the companies Job to draw up a plan and implement it accordingly. For example, in Joy Dalton asking her financial advisor for the source of finance the advisor has to identify all the options of getting that finance and various risk and costs associated to them and also help Joy Dalton to implement financial plan by ensuring that the bank loan is sanctioned.

Step 6 is review and revise the financial plan – this is the final step where the plan is hacked to track any problems in it and make changes accordingly and if there are changes revise the whole plan according to the changes made. Every financial plan over time need to be studied as unexpected activities keep on coming in any business for e. G. – any problem arising in the equipment’s or machinery which needs immediate care for the performance of the business.

Income and expenditure account, sales account, purchases account, budgeting and the final accounts are required to draw up a good financial plan as this accounts tell the business how well the money is being managed. For monthly track of funds cash low forecast are helpful as it gives information of cash in and cash out of the business on monthly basis, which is necessary to track surplus. Is a problem relating to the fund such investments can help them run smoothly.

Sources of finance for Joy Dalton business is the loan of EWE she received from Princess Trust, the bursary of El 500 adding up to EWE and the bank loan that she received of IOW totaling the total to El 5000. Source of Fomentation (E) Princess Trust (Loan Amount + Bursary) 3500+1500 sank Loan 10000 Table ICC Joy Dalton Financial Plan for One Financial Year = 5000 Expenses Amount (E) Equipments 5210 Rent 2000 Inventory 3000 wages 2500 Interest Payable on Bank Loan Sundry Expenses 1500 Total 15000 (Table ID) [LO-2. 3] 790 2. Describe the information needs of different decision makers Various decisions makers need all kinds of information regarding the business depending on their type of interest in the business. The people interested in the business are stakeholders they are the ones interested in your business. Stakeholders are separated into two categories internal and external stakeholders. The internal are the ones in the business and are directly related to the business and external are who are outside he business but are indirectly related and thus have an interest in the business.

Stakeholders in Joy Talon’s business Internal Joy Dalton herself as the owner of the business is the first stakeholder as she is taking risks for her business and needs to make her business a profitable one. She will need to know everything about her company and information from final accounts, purchase and sales ledger, cash flow forecast; budgeting and income and expenditure account will help her gain all the information she needs for the business. (Assets and liabilities of the business) After she has setup, her business he needs to appoint a manager for the business, who keeps the business running in her absence.

The manager will need all the same information as Joy Dalton to keep the business running. In long run, Joy needs to have a staff of employees for her information as the production team needs to monitor the inventory and the sales team on the sales made, as they need to have their targets fulfilled and get commissions and doing their Job efficiently reflects on the performance of the business which will ensure the profits of the company and also regular payment of their salaries and also Job security External

Creditors – the people who give inventory to JDK business will look at various information of the business like the sales, profit and loss account and also check the creditability of the businesses continuity to determine the future supplies of inventory to JDK business. Customers will look at the information on the business is working to know the quality of the food by researching that the supply of JDK business are good or not are they environmental friendly or not. Customers will also check whether the prices charged on the products are fair, and the product is a value or money product.

Government will be interested profits of the business for the taxes to be collected, the growth and expansion of the business so more taxes can be collected and Job creation and the safety of the people, by checking the hygiene factor of the food. Government will look at the information like the final accounts and the expenditure account. Investors will look at the profitability of the business so they can invest money and get good returns on their investment. They will probably look for the profitability, liquidity, interest cover ratio and gearing ratio of the business