The Vital Role Behind Financial Management Finance Essay

The Vital Role Behind Financial Management Finance Essay

A concern needs money for their twenty-four hours to twenty-four hours concern and other disbursals. Businesss have to happen ways to finance the concern. For that there are so many beginnings of Finance. Besides there are different categorizations of beginnings of finance.

The chief categorization is external and internal.

Beginnings of Finance

Internal Sources of Finance External Sources of Finance

Personal Savingss Share Capitals

Retained Net incomes Preferential Share capital

Working Capital Management Ordinary Share Capital

Gross saless of Assetss Debentures

Chemical bonds

Overdraft Facilities

Hire Purchase

Renting

Internal Beginnings:

Personal Savingss

In really lament footings personal nest eggs means the money that the owner or the concern proprietor disposal. If he has invested that money so that money categorized under personal nest eggs. He can reinvested that money either his ain or in any other concern.

Retained Net incomes

The entire earning that the company retained at their disposal without paying to the portion holders as dividend. Most companies invest that retained net incomes in their ain. Retained net incomes are recorded in the Balance Sheet.

Working Capital Management

Working Capital is how much a company has liquid assets in order to develop its concern. And the working capital direction is a managerial scheme in order to pull off current liabilities and current assets of the organisation.

Gross saless of Assetss

An organisation can do financess with the returns of sale of an plus. Although it is non a recommended beginning of finance still the concern can do fund.

External Beginnings:

Share Capital

This is a really common fund raising method of a company. Company issues common or discriminatory portions to the populace. Buyers of the Share capital become proprietors of the company and they have the right over the company ‘s operation up to certain bounds. This is besides known as Equity Financing. There are two chief facets in Share capital

Discriminatory Share Capital

Discriminatory Share holders besides get the ownership to the company and they have the privilege of dividend.

Ordinary Share Capital

Ordinary portion holders get the equity ownership to the company and these are the most common portions in concern universe. These ordinary portion holders have the right to vote at the company ‘s Annual General Meeting. But they are the people who get their portions at last at the clip of settlement of a company. Therefore in that mode ordinary portion holders falls under high hazard class.

Unsecured bonds

Unsecured bonds are unbarred debt instrument. That means it has non been secured by collateral or any other physical plus. These unsecured bonds are categorized under medium and long term liabilities. Unsecured bond holders have no right in voting and they are entitled for a unsecured bond involvement.

Chemical bonds

Chemical bonds are normally known as securities and those are fixed income securities. Chemical bonds are merely like loans and bonds provide the borrowers with external financess to put in the long term investings. Chemical bonds must be repaid.

Overdraft Facilities

An overdraft is a short term beginning of finance. Overdraft is a installation provided by a bank for the company under their company current history. Banks allow the concern to pay an agreed amount certain extra sum through their history. Normally Bankss charge high involvement rate on overdrafts and they consider several things before allowing installation. The concern has to travel under an recognition hazard rating procedure to acquire the overdraft installation approved.

Hire Purchase

Goods can be purchased under a fixed period installment loan. The purchased point is kept on under lien and it is the lone security has over the loan. During the installment period the purchaser has the ownership of the point where merely can utilize it but non the ownership.

Renting

Renting is a some kind of a contract. This can be used to obtain some fixed assets. There are chiefly two parties involved. In a contract it ‘s lesser and Lessee. In a occupancy its renter and landlord. The consideration to a rental is rent.

B ) .

Advantages

Disadvantages

Personal Savingss

– Reliance on external unanticipated events is really less.

– There are restricted beginning

of capital

Retained Net incomes

– Easy and direct entree.

– There is no demand of refunding as in debts.

– No operating cost involved as in other beginnings of finance.

– It takes long clip to bring forth financess.

– Reduces the liquidness of the company.

-There is an chance cost involved.

Working Capital Management

– a ready beginning of speedy financess

– adverse consequence on the hard currency flow

Gross saless of Assetss

– less operational fee and cost

– would be incur many losingss

Share Capital

– No fixed involvement duty

– Easily available in initial phases of concern

– In instance of little concerns good advice can be obtained from equity portion holders

– Dilution of Control

– Some ( IOP ) initial public offering are expensive to administrate

Unsecured bonds

– Maintain ownership

– Tax Tax write-off

– Lower Effective Interest Rate

– Refund even in hard concern state of affairs

– Even after revenue enhancement advantage involvement rates can still be inflated

– Impacts on recognition evaluation due to undue debt

Chemical bonds

– Chemical bond holders get involvement and are paid principal on a fixed day of the month

– Some bonds do n’t acquire involvement as an option they are issued at a price reduction and redeemed at par

They are usually issued by investment bankers

Overdraft Facilities

– In instance of a loan involvement is paid on the entire sum conditions utilised or non, nevertheless in the instance of an overdraft it is limited merely to the sum truly used

– Flexible- accessible when you want it

– facilitates keep up hard currency flow

– speedy beginning to increase finance

– immediate callback by Bankss ( if footings and conditions apply ) in

instance borrower fail to pay, bank

damagess program or there is a

interruption of status by the

borrower

– require to sheltered against

concern assets

Hire Purchase

– widen the cost of finance so companies do n’t hold to take large loans for investings

– free of charge recognition

– Higher blessing rates because of nowadays of a warrant protection

– clients can acquire benefits of a sale or price reduction still with unequal financess

– Put option excess monthly debt weight on clients

– No ownership rubric boulder clay last payment is paid

– Needs recognition cheques which can reject some clients from profiting

– The marketer can recover goods if less than 1/3rd has been paid. Seller be besides able to take tribunal consent for those goods on which more than 1/3rd has been paid to repossess them

Renting

– No monolithic investing

– Less excess warrant

needed

– Tax compensation

Its trouble-free to budget a steady sum paid towards a rental so to financess a ball amount sum

– No right to the goods

– No long term cost

– Accountable for any care disbursals

Ms.Raman Grewal ‘s talk notes

degree Celsius ) .

Constructing a high manner in Sudan is a huge undertaking which the company will hold to pass a batch of money in that. There for the company may be given to seek for necessary fiscal support from others. That mean the company should be financed by 3rd party fiscal establishments or companies.

In this instance should non utilize any short term fiscal beginnings like set overdrafts and shout term loans. Because the company will acquire the returns and benefit of building the main road in Sudan merely after some times. Therefore if the companies go for a short term fiscal method the company may run out or money and they might confront many troubles to paying it back.

There for company should ever travel for long term financing methods such as venture capital, grants, tonss, retained net incomes, engage purchase ( Long term ) and portion holders capital.

Venture capital:

This would be categorized under the best method of fiscal the company for the undertaking. In this instance a affluent Entrepreneurial company or an single would put on the undertaking. This big company usually good experient and affluent companies. Since our company is new to the trade and this is our first international undertaking we can seek for venture capitalists help in order to continue with the undertaking

Geting networking chances and assisting in acquiring initial public offering would be advantages to the company.

But most of the venture capitalists are more expensive and really difficult to attempt such sum at the initial phases.

Grants:

Grants could be acquiring from local or national authoritiess. Since this and international undertaking authorities could be able to finance on this. They can supply the bid with big pecuniary rewords. Besides if the company would do grants available from the authoritiess other private beginnings would be willing the wages the company with fiscal supports.

But most of the clip authoritiess are loath to finance on these type of undertakings and there is a really drawn-out processs. Besides authorities would come out with some predefined regulations and ordinances when difficult to run into with.

Loans:

Geting a loan from bank for this type of undertaking would be hard. Because in this instance you will hold to supply collateral in order to acquire the loan granted. Besides Sudan is categorized under high hazard state and based on the state hazard sets may non willing to allow the company on the undertaking.

But the company may seek chances to acquire a loan from a organisation like universe bank or from any ( NGO ) Non Government Organization.

Hire Purchase ( Long Term ) :

Company may travel for long term hire buying in purchasing machinery and equipments for the building undertaking. All those machineries are heavy and large machineries and sometimes they will hold to look for foreign hire purchases in order to carry through their demands.

Rather purchasing those complex and large equipments and machineries company may engage those from another building company which proceed these type of huge undertakings would be a best method of geting equipments. Besides this would be a good method in pecuniary footings.

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Question 2

a ) .

Beginning of finance

Cost to the Company

portion capital

Dividend

Company may hold to pay dividend from their net incomes or net incomes to the ordinary portion holders and discriminatory portion holders

Retained earnings/Personal nest eggs

Opportunity cost

There will be an chance cost of maintained net incomes. In most of the instances retained net incomes are in the mean of bank money or invested in any other agencies. So there will be a debit revenue enhancement or backdown revenue enhancement on that sum

Loans/ Long term loans/ Bank OD/ Short term loans/ Debentures/ Bonds

Interest

The company has to pay an involvement to the bank/ mortgage company or fiscal establishment for the installation that they have obtained

Renting

Monthly installment

Company will hold to pay a preset fixed monthly installment covering the principal sum and the involvement constituent

B ) .

A company is fundamentally done fiscal planning before the fiscal twelvemonth starts. In every twelvemonth they allocate some financess for disbursals and put money in different money bring forthing fiscal beginnings in order to bring forth more money by looking at the last fiscal twelvemonth ‘s net incomes and disbursals.

Basically most companies prepare hard currency budget in order to supervise their income and disbursals. In other words to supervise their hard currency influxs and hard currency escapes.

If the company is acute to make proper fiscal planning at the beginning of the fiscal twelvemonth company can run their concern during the whole twelvemonth without any Pomaderris apetala.

Overtrading Meanss:

Performing more concern other than the company ‘s on the job capital be able to normally go on, hence amendss on insolvency, or hard currency flow will be reduced.

Securities ‘ trading means utmost purchasing and merchandising actions by an agent in an attempt to take out more charges or fees from clients.

hypertext transfer protocol: //www.businessdictionary.com/definition/overtrading.html, day of the month accessed19/07/2010

Besides holding a proper fiscal planning would take the company to hold proper hard currency budgeting and avoid overtrading.

degree Celsius ) .

Information needed for determination shapers would be as follows,

Gross and net net income of the company

Expenses paid out and the form of the disbursement money

Liabilitiess taken from 3rd party companies and persons

Value of assets that the company have under them

Entire net incomes of the company

Value of debts and sum paid as dividend for them

Retained net incomes

Investings or the company

vitamin D ) .

Beginnings of finance, shows up in the balance sheet

Working capital

Share capital

Sale of assets

Unsecured bonds

Chemical bonds

Beginnings of finance, shows up in net income and loss history

Overdrafts

Hire purchases

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Question 3

a ) .

Angus Ltd

Cash Budget

For the period of September to February

Figures in & A ; lb ;

Particulars

September

October

November

December

January

February

Cash Inflow

Cash Gross saless

Recognition Gross saless

Tot. Cash influx

Cash Outflow

Vehicles

Operating expenses

Purchases

Tot. Cash outflow

Opening Balance

Cash Inflow

Cash escape

Loan / Deficit

3,000

3,250

4,000

3,250

4,500

3,250

4,500

3,250

0

2,200

0

2,200

6,250

2,200

2,500

7,250

3,500

2,200

2,500

7,750

2,200

2,500

7,750

2,200

2,500

( 2,200 )

25,000

0

( 2,200 )

( 2,200 )

22,800

0

( 2,200 )

( 4,700 )

20,600

6,250

( 4,700 )

( 8,200 )

22,050

7,250

( 8,200 )

( 4,700 )

21,100

7,750

( 4,700 )

( 4,700 )

24,150

7,750

( 4,700 )

22,800

20,600

22,050

21,100

24,150

27,200

B ) .

Prada Manufacturing Fine Jewelry

Per one Ag ring

Silver 8 gms

Cost of Silver & A ; lb ; 15 per gm

Labor clip taken 2.5 hours

Labor cost & A ; lb ; 20 per hr

Polishing clip 40 min

Polishing labour cost & A ; lb ; 8 per hr

Entire mill direct cost ( for 500 rings ) & A ; lb ; 10,000

Direct cost per pealing & A ; lb ; 10,000 / 500

& A ; lb ; 20

Monetary value to bring forth one ring

Silver cost 8 x 15 = & A ; lb ; 20.00

Labor cost 20 x 2.5 = & A ; lb ; 50.00

Polishing Cost 8 x 40/60 = & A ; lb ; 5.33

Direct cost 10,000 / 500 = & A ; lb ; 20.00

& A ; lb ; 195.33

Cost to bring forth 60 rings

195.33 x 60

= & A ; lb ; 11,719.80

degree Celsius ) .

The Sunrise Ltd

Year 1

Year 2

Year 3

Year 4

Gross saless unit

SP / Unit

Gross saless

Direct Mat cost p/unit 5.75

VC / unit 5

FC / unit 4.5

Entire Direct Material Cost

Gross Net income

Entire Variable Cost

Entire Fixed cost

Ad

Depreciation ( 750,000/4 )

Net Net income

Tax

Net Net income after Tax

Depreciation

Cash Flow

100,000

30

3,000,000

575,000

2,425,000

500,000

450,000

550,000

187,500

737,500

147,500

590,000

187,500

777,500

80,000

25

2,000,000

460,000

1,540,000

400,000

360,000

230,000

187,500

362,500

725,000

290,000

187,500

477,500

70,000

20

1,400,000

402,500

997,500

350,000

315,000

187,500

145,000

29,000

116,000

187,500

303,500

55,000

15

825,000

316,250

508,750

275,000

247,500

187,500

( 201,250 )

( 201,250 )

187,500

( 13,750 )

Internet presented value for the twelvemonth 1 for 10 % :

= 0.909 tens 777,500

= 706,747.5

Internet presented value for the twelvemonth 2 for 10 % :

= 0.909 tens 477,500

= 434,047.5

Internet presented value for the twelvemonth 3 for 10 % :

= 0.909 tens 303,500

= 275,881.5

Internet presented value for the twelvemonth 4 for 10 % :

= 0.909 tens ( 13,750 )

= ( 12,498.75 )

706,747.5 + 434,047.5 + 275,881.5 + ( 12,498.75 )

= 1,404,177.80

If the net presented value is greater than 0 is accepted and if the net presented value is smaller than 0 so the undertaking is a waste and pointless of puting on the undertaking.

That means, if NPV & A ; gt ; 0, accepted and if NPV & A ; lt ; 0 rejected.

: :

Question 4

A ) .

Net income and loss history:

Net income and loss history shows an income and disbursals for peculiar fiscal period. This is besides known as income statement or Trading net income and loss history.

Ex-husband: for the period of 1st January 2010 to 31st December 2010

Balance Sheet

Balance sheet shows the fiscal place of the concern at the peculiar point of clip and it shows exact values of assets and liabilities the company has with their ownership.

Ex-husband: As at 31st December 2010

Cash flow statement

Cash flow statement is an indicant of the hard currency influx and escape of the company during a peculiar period of clip.

B ) .

Under accrual based fiscal accounting system concerns prepare two different types of fiscal statement.

Income statements

Balance Sheet

And hard currency flow statements are largely prepared in a little medium concerns besides if they have different type of wage functions so they ever temp to fix hard currency flow statements for their easy mention.

C ) .

Current Ratio / working capital ratio:

Current ratio is a method of proving of fiscal power of the company. It computes how many sums of assets are likely to be changed in to hard currency inside a twelvemonth in order to pay debts.

2008 2007

Current Ratio = Current assets / Current Liabilitiess

= 125,000 / 100,000 = 140,000 /70,000

= 5: 4 = 2: 1

Gross net income border:

Although this is non an exact conjecture of the company ‘s costing policies it gives a better apprehension of the company ‘s fiscal stableness. Company may happen troubles in paying out of future disbursals of the company ‘s twenty-four hours to twenty-four hours operations without a sufficient gross net income border.

2008 2007

Gross net income border = Net Gross saless – Cost of gross revenues / one-year gross revenues return

= 600,000 – 300,000 / 600,000 = 650,000 – 400,000/650,000

= 0.5 = 0.38

By and large gross net income border of a company ought to be changeless. If it is fluctuating clip to clip it will non be a good indicant of the pricing or bing schemes adopted by the company. Besides this would straight impact for the cost of gross revenues.

Equity Employee turnover:

This ration is to cipher the company ‘s capableness of making gross revenues out of entire sum of equity invested. Equity means the portion holders wealth ( fundamentally ordinary and discriminatory portion holders ) invested in the concern.

Owners equity = Share capital + Retained net incomes + Net net income

If the company ‘s equity turnover ratio is 3 that mean the company will bring forth 3 lbs of gross revenues for each and every lb invested as equity.

2008 2007

Equity Turn over = Net gross revenues / Average entire Equity

= 600,000 /170,000 = 650,000 / 220,000

= 3.5 = 2.9

Source – hypertext transfer protocol: //www.investopedia.com/exam-guide/cfa-level-1/financial-ratios/operating-efficiency-ratios.asp, day of the month accessed 21/07/2010

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Appendixs / Mention

Lecturer Raman Grewal ‘s Notes

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