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Managing Financial Resources
This paper is a financial report created by Kemawor’s and Evans consulting firm for a group of small investors purchasing an existing business (Healthy Cuisine Restaurant). These investors have limited knowledge on how to apply financial principles to business and required assistance.
This report will enlighten the investors about the sources of finance available to the business both internal and external. The implications of the different sources and also will be able to form an idea of appropriate sources of finance for the business project.
The report provides a broad knowledge of how to manage financial resources and decisions. A long-term gold was recommended that the company aim for a substantial growth within the next five years. A conclusion was drawn that a company will experience loss or failure without proper financial planning.
Introduction / Background
Our mission is to maximize our client business potential hence providing high level of customer satisfaction. We work hard to keep these values at core of operation and retain our competitive edge.
Kemawor’s and Evans Consultant Firm (K&E) is a partnership business that has been around for 15years and still going strong. Over the years we have been loyal to our customers hence we aim to deliver the best services. Our strength and main functions is to analyze existing and start-up businesses, creates solution to problems, and help small businesses with legal aspects. We are a team of trained experience strategic management consultants with years of experience, specializing in implementing well proven management skills. We conduct keen research and effective investigation to detect present problems and to invent solution for current problems with measures in place to prevent future problems to improve the organization. With all the successful stories over the years it make us more aware of the competitive market, the numerous of agreements made daily conducting a business. We understand the challenges facing businesses in today’s competitive climate. With our experience, understanding and business knowledge we are able to assist small business owners with limited management and legal experiences. K&E LTD. Was hired by the new owner of Healthy Cuisine Restaurant to deal with the aspects of financial sources. Here we will analyze the different sources of finance available to the business and explain the importance of finance planning.
Healthy Cuisine Restaurant
To ensure that customers received well-prepared nutritional meals using fresh and quality ingredients at a fair price. Providing prompt, professional, friendly and courteous service in a clean, comfortable and well maintained environment to meet customer’s expectation and beyond, so that every customer can feel appreciated.
Healthy Cuisine was founded in the year 2000. It is a partnership business which employs a head chef, sous chefs, pastry chef, finance manager, hostess and host, servers, supervisor, marketing managers and a human resource manager. Healthy Cuisine is located at #7 Ocean Boulevard, New Kingston, Kingston Jamaica. This restaurant was established with the peoples’ health in consideration. At healthy Cuisine, only heart healthy meals are prepared and served. There are a wide variety of dishes, one cannot be bored. Our dishes are mainly grilled, baked, broiled and steamed. Healthy Cuisines caters to vegetarians, meat eaters, diabetics, dieters basically the entire family. One feature that puts us above our competitors is the services that allow customers to create their own dishes and have it done to their specifications.
- To identify the sources of finance available to a business.
- To evaluate appropriate sources of finance for a business project.
- To evaluate the implications of the different sources.
“The aim of financial accounting is to provide a recording system which fulfills the requirements of the companies Act ‘to keep proper books of account’ in the terminology of the 1844 Act, and to use this information to produce financial reports that are published in accordance with current legislation and standards, for external users.” (Mick Broadbent, John Cullen).
The researcher wished for this research to be efficiently conducted and ensure that it was carried out in a professional and accurate manner, so that there was little or no inference and tampering. The researcher collected data by the use of qualitative and quantitative methods. With the used of these methods research was better carried out, more options presented itself, data was more accurately collected.
The researcher source of collecting data was secondary sources such as books, newspaper articles published at the time and the internet. The use of secondary data gave a wide and a clearer in sight on the topics with numerous of source to gain information. Primary source of data collection was also used to gain additional information regarding the topic.
Data was compiled to explain how financial resources and decisions are managed, as well as to evaluate and understand the implications of finance as a resource within the business.
“A goal is an outcome to be achieved or a destination to reached over a period of time through the exercise of management functions and the expenditure of resources.”(Management, Warren R. Plunkett, Gemmy Allen and Raymond Attner 2012).
This research seeks to investigate and evaluate existing and start up business, also to select the right strategy and practices to assist and guide the business in making the best financial decision also to explore the sources of finance available to the business and its implications. The information gathered by conducting this research will be used back in the business to make better financial decisions. By gathering all these information and strategizing suitable plans will save both time and money and minimize investment risks.
A group of small investor hired the firm to study and improve their new business. The new undertaking will include investigation into the potential business to analyze and create solutions to problems and to develop efficient plans for meeting the goals of the clients.
Healthy Cuisine must become a profitable and sustainable business ready to meet customer needs and maximize market opportunities. K&E Business Consulting Firm aims to protect its client’s business investments. This means that meaningful business research will take place and sustainable strategies developed to match the business and industry. Business Research is critical when entering a competitive market. It enables the company to learn about the business, its products, its competitors and its customers and how best to satisfy the customers’ needs. The business research will investigate the nature, performance and potential of the acquiring company, and inform the investors in selecting and applying new strategies and business models to improve the performance of Healthy Cuisine.
Sources of Finance Available to Business
“All new businesses need capital to fund fixed assets such as vehicles, equipment, premises and stock if the business is selling goods”( Heinemann, 2004 Business for foundation degrees and higher awards).
There are different types of business such as sole trader, partnership; public company etc. one thing they all have in common is the need for finance to operate. Therefore each enterprise must be clear on the financing that best suits the company’s need.
Sources of Finance can be classified as internal and external;
Internal financing is related generating and raising funds from within the organization example;
- Retained earnings- this is profit that is injected back in the business instead of paying out as dividends.
- Sales of assets- the exchange of assets for cash or its equivalent.
- Depreciation provisions
External financing is related to the means of obtaining money from outside of the business, for example;
- Bank Loans- This is a form of capital for a business. A bank loan provides short or long-term finance; this attracts interest rate and a set fixed period for repayments and the amount.
- Overdraft- this grant the account holder the privilege to draw more money than the account holds.
- Government grants- This is a financial assistance from the federal government with no expectation of repayment.
- Leasing- This is by which a lessor of a specific asset grants a second party the right to its exclusive possession under specified condition. A lease can be long-term or short term.
- Hire purchase- This gives the buyer privilege to enjoy the use of the asset while paying for it. However the buyer is not in full ownership until full payment is made.
- Issue of shares –
- Factoring of debts- this is a financial arrangement in which business selling its bills receivable to a debt factoring company at a discounted price.
The Implications of the different sources
According to Rob Jennings, Demand Media, “choosing the right source of financing for your unique situation can be challenging. While you can ideally choose from several options, each source of financing comes with its own set of advantages and drawbacks”.
There are both negative and positive implications of the sources of finance;
- Bank Overdraft: the advantage of bank overdraft is that no collaterals or security needed. It’s more flexible and the overdraft amount can be adjusted every month according to needs. On the flipped side, interest rates are usually variable and higher than bank loans and the bank can ask to be repaid at short notice which can cause cash flow problems.
- Loan: According to Jim Riley 2012, “A bank loan is an amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan and the rate of interest.” He continue to expressed the advantages of a bank loan for a growing business:
- The business is guaranteed the money for a certain period.
- Loans can be matched to the lifetime of the equipment or other assets the loan is for.
- While interest must be paid on the loan, there is no need to provide the bank with a share in the business.
- Interest rates may be fixed for the term, making it easier to forecast payments.
”The main disadvantage of a bank loan is the security that usually has to be given to the bank assets of the business. The bank becomes a secured creditor with collateral over the business assets, also lack of flexibility.” Expressed by Jim Riley.
- Government grants: “A grant is an amount of money given to an individual or business for a specific project or purpose.” Even though a grant is a none repayable fund there are a lot of competition and they are almost always awarded for a specific purpose or project.
- Grant do not attract interest nor the need to pay it back
- Business owners won’t lose control over the business
- Sourcing that grant to suits your specific project can be challenging
- There’s a lot of competition for grants.
- Grant awarded only cover part of the cost of the project.
- Application process can be time-consuming
- Grants are only awarded for proposed projects, not ones that already started
- Overdrafts: “An overdraft is a credit facility you agree with your bank. It allows you to temporarily spend more than you have in your account to cover short term financing needs.”
- It’s flexible- It’s cheaper than a loan since the business/individual only need to borrow what is needed at the time.
- Less time to arrange
- Extended periods required will attract a charge.
- You can only obtain an overdraft from the bank that hold your business current account.
- The bank can request the money back at any time.
- Leasing: “Leasing an asset/s eg machinery or office equipment can save the initial cost of buying outright.”
- The business can have access to high standard equipment that it might not have been able to afford otherwise.
- There are usually fixed rates on monthly instalments.
- The leasing company carries the risks if the equipment breaks down.
- It’s less risky compare to a secured bank loan, for example you won’t lose your assets if one can’t make payments.
- A deposit or some payments may be required in advance
- It can be more expensive than buying the asset outright
- Difficultly may arise to cancel some long-term contracts early.
Factoring debts: According to Dr Gurusamy (2009). “Factoring, as an innovative service, commands the following advantages:”
- “Cost savings Factoring allows for the elimination of trade discounts. Besides, it also helps in reduction of administrative cost and burden, facilitating cost savings.”
- Leverage helps improve the scope of operating leverage
- “Liquidity factoring enhances liquidity of the firm by ensuring efficient working capital management.”
- “Enhance return factoring is considered attractive to users as it” helps enhance return.
- “Cash flows- Accelerated cash flows help the client meet liabilities promptly, as and when they arise.”
- “Cost both factoring and discounting services come at a price, and the combination of financing charges, commissions and fees can make it an expensive source of finance. The prepayment financing for instance is typically charged at a few percentage points above bank overdraft rates.
- “Risk factoring and invoice discounting companies will only finance those debts which they regard as recoverable, in other words the good quality accounts. The company is usually left to manage poor credit risk accounts. Business circumstances can change and charges can increase.” (Jim McMenamin, 2002 Financial Management).
Retained earnings: according to (Charles Gibson 2010, Financial Reporting and Analysis) “Retained earnings, an account on the balance sheet, represents the undistributed earnings of the corporation. A reconciliation of retained earnings summarizes the changes in retained earnings.”
Advantages of retained earnings:
- Ready Availability
- Cheaper than external Equity
- No Ownership Dilution
- Positive Connotation
- Limited Finance
- High Opportunity Cost
Evaluate Appropriate Sources of Finance for a Business Project.
“Funds for financing a business come in many forms and guises. A sensible way to differentiate between such sources is by the length of time such funds are available and the terms and conditions for repayment if relevant.”(Rob Dransfield et al. 2004).
For the operation, expansion, elevation, development and the starting up of any business finance is crucial. Healthy Cuisine being a startup business will have to manage finances wisely, it is also crucial for the business to choose the most appropriate source of finance for the business project.
Sources of finance can be classified based on a number of factors eg, the size and type of organization. Sources of finance according to period can be classified as long-term, short-term and medium term.
Issue of debenture
Issue of preference shares
Venture capital financing
According to Jim Riley, “A good entrepreneur will judge whether the finance needed is for a long-term project or short term and therefore decide what type of finance they wish to use.”
Short-term loans are less risky for lenders since its only needed for a short period.
The main types of short-term finance are:
- Suppliers credit
- Working capital
The main types of long-term finance that are available for to a business are:
- Bank loans
- Shares issue
- Hire purchase
- Retained profits
K&E limited would recommend that Healthy Cuisine Restaurant read and analyze this report, in order to take the most appropriate measures to put suggestion in place. It is recommended that the company try to use the cheapest options available which are Personal savings, Retained profits, working capital and trading profits. The business should try as best as possible to avoid external loans that attracts a lot of interest example bank loan, and the risk of losing assets for short-term project. The advantages and disadvantages of different sources of finance must properly be scrutinized to ensure suitability for its purpose.
The company must appoint a qualified, trustworthy and competent finance controller that will not only make a budget but adhere to it.
Sources of finance is deem very important in the operation of the business. The type of finance chosen depends on the nature of the business and its gold. Large organizations are exposed to wider variety of finance sources than a smaller organization.
Both internal and external financial sources have advantages and disadvantages. Lenders want to be aware of the business opportunities and risks and therefore would want to provide a secured loan.
Without proper financial planning a company could become bankrupt and suffer severe lost. If the investor of Healthy Cuisine Restaurant understand and implement the strategies and suggestions made the business will become a successful business.
Mick Broadbent, John Cullen (May 4,) Managing Financial Resource.
Rob Dransfield. Eddie Fox. Philip Guy et al., 2004 Business for foundation degrees and higher awards.
Dr. Gurusamy (2009) Merchant Banking and finance service 3E
Jim McMenamin (2002) Financial Management
Charles Gibson, (April 6, 2010) Financial Reporting and Analysis.
Sudhindra Bhat (2008) Financial Management (2nd ed.)