Finance concepts and applications

¶ … Business Finance

The most difficult task for individuals starting business is raising the initial capital required to kick-start the business. A budding entrepreneur may have the necessary ideas about starting a successful business empire but without initial investment, the idea may as well be dead and gone. For this reason, this report outlines several sources of finance a business can source from, their implications, cost as well as appropriateness. These sources include venture capital, bank loans, friends and family, savings and credit cards among others.

Cost

Payback Terms

Sizes

Against

Personal Savings

No cost

Easy, cheap

Risk of Loss

Friends & Family

Usually good rate or none

Very flexible

Flexible, best value

Can create friction

Home Mortgages - Traditional or Seconds

7-9%

8-14% on equity loans

Very long and flexible

80-100% + of home equity value

Cheapest, longest term

Your house is at risk in the event of non-payment

Credit cards

16-23%

40-60 months

3,000-10,000

Easy qualifying, no collateral

Small amounts

Suppliers

Free

30 days +/-

Inexpensive, unsecured

Short-term

Landlord

Adds to rent cost

Over term of lease

Preserves cash for assets you can't take with you

Hard to get; assets acquired are usually only good at one location; difficult to move

Venture capital

25-40%

5-7 years

$500,000+

Can get large amounts

Very hard to get; share ownership

Commercial mortgage

7-9%

25-year payment; all due in 10 years

$300,000+; 75% of appraisal

Specialized lenders (industry expertise, auto, business brokers, high tech, specialized equipment, computers, phones, etc.)

12-18%

5-7 years

Varies

Accessible through dealer, who is motivated to make sale of equipment or business; payback terms more favorable than bank

Debt service can be high

Leasing companies

12-18%

5-7 years

Varies

Same as above; also 100% financing

SBA

7-9%

7-20 years

$50,000-1,000,000

Longest payback for other than real estate loan

Can be a complex process

Finance companies

14-30%

1-3 years

$100,000+

An alternative when you don't have many financiers

Expensive; picky about collateral

Banks

6-9%

1-5 years

$50,000+

Generally least expensive

Generally hardest to qualify for Task Two

Financial Planning and Information Dissemination

Financial planning assists business owners the expenditure to me made in order to keep the company moving and remain competitive in the market. This is done by setting realistic targets compared to the previous years' results. Thus, the entrepreneur can focus on the areas that led to low profits to help in maximizing gains. In addition, trends in sales of products help business owners make decisions about how to price their products to remain competitive.

Planning helps in well utilization of capital to help bring increased productivity to the business, efficiency as well as market penetration via advertising. In addition, planning helps in prioritization of activities to undertake in any fiscal year by comparing operation costs with the benefits of proposed expenditure.

Dissemination on information in the workplace helps improve employees' knowledge and help them make better judgements. Disseminated information helps educate or promote a concept among the employees to help them tackle workplace tasks. Instructions as well as memoranda are ways information is disseminated to encourage recipients to comply with a procedure in the belief of enterprise improvements.

Impact of Finance on Financial Statements

A loan is a business liability. Obtaining a 2-year interest free loan of £5,000 from the A Alex Ltd. is a current liability would increase the current liabilities of Riggs. This is likely to reduce the company's total assets from 30,317 to 25,317 euros.

By obtaining a 5-year loan of £10,000 at 10% interest per annum, Riggs long-term liabilities would increase. A 5-year loan is a long-term liability and would increase the liability of the company from the current amount to 10,000. This would result in the reduction of net assets to 25,337 euros.

A one 1-year line of credit with a major supplier for purchase amounting £1,500 is a current asset for the company. This current asset would result in increasing the total amount of current assets from 35,974 to 37,474 euros.

Issuance of shares is a factor that would increase the firm's capital. Issuing additional 1,000 shares at £3.50 per share would increase the share capital of the firm from the current 11,400 to 14,900 euros.

The sale of organization's furniture is likely to increase the fixed assets and would increase current assets. Selling some office furniture worth £2,000 at their net realisable value, with no profit made on disposal result in reduction of net assets from the present 5,020 to 3,020 euros. In addition, the sale brings about higher current assets to 37,974 from 35,974 euros.

Task Three

Budget Analysis and Decision making

Budget variances are unpredictable factors that cause a company to spend more or less than it expects to spend in its budget. The company separates out labor costs and material costs when it calculates its budget variances. Each of these factors is separate, so a company can spend more than it expects on wages and less than it expects for materials, still spending less money than it budgeted for.

Labour costs are affected both by the budgeted pay rate and the number of hours that employees work. The organization in study may have been using more experienced workers to perform various tasks leading to the variance in the budget. In addition, the employee in this case are likely to be taking longer than expected to perform their job; a factor that is making the company paying more wage as well as for overtime; so if workers receive more overtime than usual causing the budget variance.