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There are a significant number of available sources, although they very depending upon what type of entity are involved. As a financial advisor, needs to find out the best source of finance by critical analysis of various alternative sources. Figure 1 is showing the best sources of finance for Best Coach Plc following below:
Short Term Finance
Medium Term Finance
Long Term Finance
Sales of Assets
Sale of Share
Internal Source of Finance
External Source of Finance
Retained Profit: A company distribute certain amount of profit to its shareholder's and rest of the profit are kept or retained in the company, it doesn't spend- that's call retained profit. This internal source of finance is easy to arrange and within short time Best Coach Plc can utilize this source of finance to fulfil the contract. If the company keep retained profit instead of dividend some shareholders may prefer because share value will be increase as a result. Atrill, P and Mclaney, E (2008). On the other hand some shareholders might be unhappy for their shortage of dividend.
Rights Issues: Rights issues are a way in which Best Coach Plc can sell shares in order to raise capital to their existing shareholders. This source is a quick and cheap way of raising new funds. On the contrary shareholders may react badly to firms continually making rights issues as they are forced either to take up their rights or sell them. They may sell their shares in the company, driving down the market price.
Sale of new shares:
As a public ltd. Company, Best Coach Plc can sell new shares to raise fund. When they will issue new shares then they don't need to pay interest and the risk is very low. They don't need to pay dividend as well. However, issue of new share for the company is very lengthy process. It will take more time to raise money. When a company will look new share, they might loose control of liabilities.
Sale of Assets:
Best Coach Plc can raise financial fund by selling surplus, inefficient or non useable assets. They might sell their unusable garage, inefficient coaches etc. This source is easy and quicker to arrange finance. But still there is some problem to arrange finance from this source. They might have to sell their assets at a discounted price or some time it can be wrong signal in the market.
Hire Purchase/ Leasing:
According to Samuels et al, (1999) "The distinguishing feature of a lease agreement is that one party (the lessee) obtains the use of an asset for a period of time, whereas the legal ownership of that asset remains with the other party (the lessor)". Best Coach Plc, hire purchase or leasing can use for the time being not for the whole life of the business. As a transport company they need own coaches to run their business smoothly. Before arranging their capital to expand their coaches they use this source of finance for a period of time. This is easy to arrange. Payment is instalment periodically and the assets can be used or returned any time. On the other hand deposit is very high and the company may not have adequate money.
Trade creditors: This source of finance is suitable for Best Coach Plc to arrange coaches from their suppliers. This is quicker, interest free and cheaper arranging cost as well. According to Dyson, J, R (2004) "Trade credit is a form of financing common in all companies." It is more liberal to arrange. But this source company cannot use for long term. If the company default to pay on time then trade creditors might charge a fee or start charging interest or even take the business to court to get its money back.
Bank Overdraft: It will be arrangement between bank and Best Coach Plc. It is very easy to arrange, no interest fee, no cost at all to arrange and short time arrange. According to Samuels et al, (1999) "For many companies bank borrowing is the cheapest form of short- term finance for a company, the only exception being that under certain conditions finance may be available for export purpose at a cheaper rate." However, if it exceeds the limit then interest and penalty will be involved.
Bank Loan: Loan is a long term source of finance. According to Capon, C, (2009) "Loans are for a definite period and repayable with interest." Best Coach Plc can arrange huge finance to expend business from this source. This is easy way to finance. But the interest is high. Also business must pay a fixed rate of interest whether it makes profit or not (Cox, D and Fardon, M. 1997 P.61). In order to gain agreement company need to reveal its plan which may be confidential for the company.
Govt. Grant: Government provide finance when business runs to improve countries prosperity. It can be good source of finance for the company. According to Atrill, P and Mclaney, E (2008) "One of the most effective ways in which the UK government assists small business is through the small firms loan guarantee scheme."
Company do cash budget to know how much cash need in business and how much cash earned and also to gain loan or finance from others. Cash budget helps to make the movement of idle cash and unexpected cash deficiencies. Best Coach Plc recently acquired a 3 year contract worth £12 million from Sunset Holidays Ltd. Company need to prepare cash budget to predict the effects on the cash position. Figure 2 is showing the Cash Budget for Best Coach Plc as following:
The cash budget for the six months ended 30th December is:
Revenue receipts from Sunset Holidays
Food & drinks sold
Travel equipment sold
Lease of 3 buses
Wages & Salaries
Office & Garage rent
Notes on Cash Budget:
Receipts from Sunset Holidays Ltd:
The new project of Best coach plc with the Sunset Holidays. Indeed, the amount is negotiable between Best coach and Sunset holidays. It is very important, good collection receipts of cash for account Prediction. According to Horngreen et al, (2002) "Prospective collectibility of debtors is needed for account predictions." The £12 million contract of new project, Best coach plc will receive cash revenue £3300000 up to 36 months and whatever is the balance will be settled at the termination of contract. Best coach plc also earn some cash by selling light food, drinks and travel Equipment in every month.
In terms of purchase settlement with Coach Manufacturer, payment will be made every month £2900000 up to 36 months for the new buses.
Company need to expense for maintain new buses, purchases spare parts, road tax, insurance etc. that will be in general overhead. In the month of January £110000, February £225000, March £357000, April £227000, May £130000, June £145000 company will pay as a general overhead.
Lease for 3 buses:
For the new project Best coach plc has taken lease 3 buses for 3years and payment will be made £225000 in one month interval. Therefore, the new project is for three years Best coach plc has decided to acquire three buses as a lease. Cause it would be benefited to acquire lease than purchase.
Wages and Salaries:
To run the business company need to arrange wages and salaries for coach drivers, office executives and Coach mechanic etc. Best coach plc will pay every month £100000 for wages and salaries. This is a core payment for the business.
Best coach plc need to pay office and garage rent £30000 in every month.
Cost Analysis: The Pie chart in Figure 3 is showing the Cost Analysis of Best Coach Plc below: To run the new project Best coach plc need to purchase new buses for serving highest quality of service, that's why company purchase or expanse 87% of total cost. They also expense some cost for miscellaneous like new bus maintenance, new parts purchase, road tax and insurance of coaches which is include in General overhead. There company cost is 6%. To make the new project profit business decided to lease 3 buses. Because the new project is for 3 years. For the time being lease is profitable than purchase and it is only 3% cost from total cost. In a new project some vacancies has created in the Best coach plc. They have to provide 3% wages and salaries to their staffs of the total cost. From the total cost, 1% need to expanse for office and garage rent.
However, six months cash budget of Best coach plc is showing one months shortage and five months surplus which means business is doing very well. It will help management in persuading providers of funds.
Investment appraisal is concerned about project. Critical analysing about project that is it profit or not. Shareholders don't like to take risk. Money shortage is not a matter for a public ltd. Company. Competition is the major problem to identify a new project for Plc Company. To evaluate investment opportunities of the new project, there are four methods have been used which is shown by Diagram in Figure 4 as follows:
Rate of Return
Payback Period: By which period the invested amount is recovered that is Payback. According to the Abraham et al, (2008) "This method is more of a liquidity measure than a profit ability measure." Best coach plc has recently acquired a 3 year contract worth £12 million from sunset holiday's ltd to tour its customer around Europe that's why Best coach plc needs to invest £5 million. (£3million to acquire new buses and £2 million for other business infrastructure improvement.) From the Sunset holidays, Best coach plc received revenue in every month £3300000.
Cumulative cashflow (£000)
Here it's showing the cumulative cash flows become positive at the second year. The precise payback period would be:
1year + (17/33) years = 1.52 years
Where 17 represented (£1700000) the cash flow still required at the beginning of the second year to repay the initial amount and 33 (£3300000) is the projected cash flow during the second year.
Payback is the easiest method for cost investment appraisal. This method is very important which project is very risky. On the contrary, it overlooks the time value of money as a result sometimes it doesn't provide the actual information which could be helpful to make the decision.
Accounting Rate of Return (ARR): To Analysing the new project, ARR is not as sophisticated as other methods which is used by modern accountant. The method not always indicates whether the original cost of investment should be used.
To calculate the accounting rate or return the formula is as follows:
Annual operating profit
Investment to earn that profit
ARR = ==
Net present value (NPV): Net present value is one of the most productive techniques for investment appraisal. According to Glautier, M and Underdown B, (2001) "This method is based on an assumed minimum rate of return. Ideally, this rate should be the average cost of capital to the firm and it is this rate which would be used to discount the net cash inflows to their present value." It is the difference between discounted cash inflows of the present value and discounted cash outflows of the present value. This technique uses the cash flow in the company and hence it is difficult to manoeuvre. In a project if NPV is positive or marginal then the project can be acceptable and it will also increase the shareholders wealth. When in the project, NPV comes negative then the project is not workable and it should be discarded. Here 10% discount factors assuming for Best coach plc.
If 10% discount factor for £1 of best coach plc then:
Year 0 =
Year 1 =
Year 2 =
Year 3 =
Cash flows (£000)
Discount Factors (10%)
Present Value (£000)
Hence, the net present value for the project of Best coach plc is positive. In that case the project is acceptable to the business. But using to measure Cost Investment appraisal by NPV, it is difficult to forecast future cash flows and to estimate a reliable discount factors. It may also ignore the level of risk.
Internal Rate of Return: Internal rate of return is a rate of return on an investment. The IRR is the discount rate that will give it a net present value of zero. IRR is closely related with NPV. The result of IRR is easy to compare within projects. It is note that if the Project shows high IRR then it is a risky project because high risk provides high return. Therefore IRR face the same problem as NPV.
Cash flows (£00)
Discount Factors (40%)
Present Value (£00)
Discount Factors (45%)
Present Value (£00)
The expected investment in the project is £5 million. If the company expects a rate or return of 40%, the project will be acceptable, because the NPV is positive. On the other hand, if the required rate of return is 45% then it will not be acceptable, because the NPV is negative. Now The IRR will find or calculate the rate of return at which the project would just pay for itself.
The IRR will be done by using the following formula:
a= Rate @ NPV (40%)
b = Rate @ NPV (45%)
A= 24 (NPV)
Figure 5 is showing The Relationship between the NPV and IRR
10 15 20 25 30 35 40 45
Rate of Return (%)
Hence, the project of Best coach plc will be profitable provided that the company does not require a rate of return in excess of about 44%. Although this calculation does not depict precise rate of return but it is adequate enough for decision making purpose.
Financial statements are the reflection of company performance. For the Best Coach Plc, the intention to demonstrate the financial position of Best Coach Plc at a particular time and to show how the company performed over a particular period by making financial accounting statement and also the financial statements of Best Coach Plc relates to the future financial performance as well.
Accountability and the regulation of Financial Accounts:
Best Coach Plc is externally accountable for company action and activities. Company will make financial reports on the basis of company performance that will reflect their objective and the share holders to whom company is accountable. Best Coach Plc also needs to maintain the Accounting standards while making the financial Statement.
There are three financial accounting statements that help to achieve company's financial aim for the Best Coach Plc, shown in Figure 6 as following below:
Figure 7 is showing the income statement of Best Coach Plc:
Best Coach Plc.
Income Statement for the Period ending 31 December2009 (£)
From Sunset Holidays
(-) Cost of Sales:
Opening Stock of foods and Travel Equipments
Closing Stock of foods and Travel Equipments
Rent and Rates
Postage & Stamp
Wages and Salaries
Figure 8 is showing the Balance sheet of Best Coach Plc:
Best Coach Plc.
Balance Sheet as at 31 December 2009 (£)
Fixture & Fitting
Coaches at Cost
Cash at Bank
Cash in Hand
Net Current Assets
Financed by Capital:
Here the income statement is a summary report of Best Coach Plc which list and categorized the various revenues and expenses from during a year period. The difference between revenues and expenses are represented Best Coach Plc's net profit. The amount shown in the income statement are the amounts recorded for the giver period- a year. Then next periods income statement of Best Coach Plc will start over with all amounts reset to zero. While the balance sheet shows accumulated balance since inception.
The statement of financial position of Best Coach Plc shows the amount of accumulated earnings that have been retained within the company since its inception. At the end of each fiscal year - end, the amount of net income or net loss is added to the opening amount of retained earnings to arrive at the closing retained earnings. Retained earnings can be decreased by providing dividends to the Best Coach Plc's shareholders.
Ratio analysis has been done to compare the performance of the Best Coach Plc within its industry and previous year as following:
Returns on capital employed (ROCE):
ROCE indicates the management efficiency of Best Coach Plc in utilizing the assets of the company. To calculate the ROCE, the formula as follows:
This fiscal year ROCE of Best Coach Plc is showing 36% where the previous year it was 32%. Comparing with previous year it is showing that the efficiency of Best Coach management has improved and for which shareholders of the company will be happy.
Net Profit Ratio:
It shows ratio of net profit from sales. To calculate the net profit ratio the formula as follows:
Net profit ratio is comparing with gross profit ratio. In Best Coach Plc GPR is 88% where the NPR is nearly 24%. Here in the company expenses is very high so that net profit has gone down up to 24% (88%-64%). Company must need to reduce the expenses to increase the net profit.
To calculate the capital Structure ratio the formula as following:
Capital + Debt
The capital structure ratio for the Best Coach Plc is 23% which is good capital structure for the Best Coach Plc compared with industry average. High capital structure may show weak financial strength because the cost of debt may increase its default risk.
EPS (Earning per share):
To calculate EPS, the formula as following:
No of Share
Here the investors (Shareholders) of Best Coach Plc is earning per share 50p. By this investment ratio it can be easy to understand for the market that how much company can return to their shareholders. Hence, EPS showing the Best Coach Plc is doing very well in their business.