Analytically, Softwood Ltd has been experiencing growth in the recent years thanks to its large client base. In its effort to expand, the business should make sound financial decisions to avoid a possible decline of its current position.
In their endeavor to expand, Softwood Ltd has various sources of finance to rely.
1. Internal sources
Internal sources encompass all sources of finances within the company. These could be retained profits, proceeds from sale of furniture of the company’s property and personal savings by the owners of the venture (Dlabay, 2008).Examples of internal sources are;
- Retained profits
- Tighter credit control
- Reduce inventories
- Delay paying trade payables
2. External sources
External sources ,on the other hand, encompass all sources from outside the venture which may be in form of bank loans, bank overdrafts, hire purchase, credit from suppliers, grants from the government, factoring
As stated by John Mathew-the managing director of the company, he had held quite promising talks with a bank manager and a bank loan proved to be one of the probable sources of finance for the furniture company.
Softwood Ltd may acquire property and equipment necessary for expansion through hire purchase. This pertains making a down deposit and paying the remaining amount in installments. This would minimize the financial pressure and burden of the venture.
Credit from suppliers
Invoices have a payment time allowance of up to thirty days or more. In this sense the company may take the maximum time to pay the suppliers and subsequently channel this money towards expansion (Rodgers, 2007).
The Company may apply for a grant from the government or any other willing financial sponsor.
Softwood Ltd may outsource its invoice arrangements to another organization. The venture can thus acquire finances from the worth of the outstanding invoices (Palepu, 1996).
Lease of property is another source of finance that could be used by the company. The company could lease property for a specified period. However, this should be guided by a thorough analysis of its impacts on the business’ expansion plan. The company can probably lease property that has no effect on the expansion plan. This could be possibly (Golis, 1998).
Each of the above mentioned financial sources carry various financial, legal and bankruptcy implications.
Internals sources of finances do not carry any legal implications what so over, except for accountability and transparency within the venture .However, they carry financial implications to the business. Failure to utilize the internal sources in the most appropriate manner may lead to the collapse of the business and subsequently call for an external sourcing which carry legal, financial and bankruptcy implications (Meckin ,2007).
The implication is a possible loss or withdrawal of shareholders.This may rob the company a future source of revenue and subsequently reduce its gearing in future.
Tighter credit control:
The implication of this source is a possible loss of customers who acquire products on credit, leading to financial losses due to reduced sales volumes.
Reduction of inventories may compromise a company’s ability to meet its demand due to reduced amounts of stock and hence revenue loss.The biggest risk is loss of customers and hence reduced gearing.
Delay paying trade payables:
This may tarnish the reputation of a company and subsequently its credit worthiness. This may lead to financial crises in the event that the creditor is primary to the operations of a business.
External sources of finances have legal and financial implications to the Softwood Ltd. During the application of these external sources, the venture has to follow pre-determined legal procedures such as providing security, collateral and guarantors. In the event that Softwood Ltd may default in payment of the funds, the creditor may use the company’s property as collateral and thus a means to recover the defaulted amount (Dlabay, 2008).
Sources such as bank overdrafts, bank loans and factoring carries financial implications in terms of interests that will be agreed upon by the creditor and the debtor (Softwood Ltd)
In the event that the company defaults in payments, it may risk auctioning of its property and hence bankruptcy. This may be through a court order to do so.
Leasing is usually accompanied by a legal agreement between the leasee and the leaser. In this case, if the company acquires equipment through lease may lose its ownership before completion of the lease period if it defaults. This may lead to bankruptcy if the equipment was a primary requirement in its operations.
Factoring reduces the overall revenue of a company since it comes at a cost, say, 20%of the invoices.
The granter has power in decision making which may have an overall effect on the company’s cost reduction strategies. This may lead to bankruptcy whereby the company operates under tight grant agreements that bar it from cost reducing decisions such as laying off.
This may lead to chances of a possible lawsuit and auctioning of property in case of a default. This may lead to bankruptcy.
May lead to a lawsuit and auctioning of property in case of a default. This may lead to bankruptcy.
This comes at a legal and financial cost if the company fails to fulfill the terms of agreement between shareholder and the company.
Losses within the company that a venture has invested in may lead to financial crisis and possibly bankruptcy.
This may lead to a possible lawsuit or auction of property in the event that the company defaults in payments. This may lead to financial crises and finally bankruptcy.
Factors thet Softwood Ltd should consider include the above-mentioned implications which are associated with each of the financial source.A viable viable financial source should have more pros than cons.The company may also consider the decision by the various stakeholders in oder to avoid conflicts of interests.Softwood Ltd has at its disposal various sources of capital which it can utilize in its expansion bid. From the high returns it has been experiencing over the past two years as reflected in the balance sheets for the said years, softwood Ltd stands a good chance of acquiring a loan from any top credit institution, subject to their drafting of a proposal. The returns from the current venture are used to calculate the feasible amount the lender can afford to lend softwood, reducing the risk of defaulting. Profits of $782,000 in the first year against invested capital of 925,000 long-term loan, and 420,000 share capital is a positive outlook on the future health of the company, in terms of its ability to generate an income. Additionally, the capital held by the owners is a small fraction in comparison to the capital financed by long-term debt. The shareholders have the option of ploughing back their profits into the expansion bid increasing their stake in the company. In the first year for instance, the company made $782,000 in comparison to the share capital held by all the shareholders of $420,000. In the second year, the company made $608,000 in profits, while the shareholding capital stagnated at $420,000. The utilization of these supernormal profits to invest in the expansion plans is a major avenue the company should consider utilizing.Therefore from the analysis, use of a bank loan and profits ploughed back proves to be the most plausible sources of financs for the company.
Every business has various sources of finance. These fall in the category of external sources and internal sources. It is the role of the decision-making team to decide which source of capital to use. This should be guided by a thorough study of the pros and cons presented by each source.
Cost of internal sources of finances
Although there are no direct costs of internal sources in terms of interests, other indirect costs accrue. For instance, internal sources of finances are not tax-deductible. On the other hand, internal sources of finances have an overall effect of shrinking Softwood’s capital base. It may also limit the company’s expansion plan due to its comparative inflexibility (Rodgers, 2007).
Companies may retain part of their profits for expansion purposes. In this sense, shareholders may be deprived dividends and the funds retained, as profit. The cost of this source is loss/withdrawal of shareholders due to reduced dividends.Tighter credit control:
This involves implementation of measures aimed at a quick credit returns from debtors. For instance, it may take activities such as aggressively chasing receivables held by credit customers. The cost of this is a possible loss of customers, especially those who acquire products on credit.Reduce inventories:
This may be aimed at reducing the costs of storage and purchase and using the funds for other purposes such as expansion. The cost of this comes indirectly in terms of failing to meet the demand, especially a large placed on a short notice.
Delay paying trade payables:
This is the deliberate delaying of payables to creditors such as suppliers and using the funds for financial expansion. The cost of this comes indirectly. For instance, it damages reputation and minimizing chances of acquiring equipment or finance on credit in future.
Cost of external sources
Hire purchase costs are tied to its relative expense over acquiring the equipment on cash basis. The prolonged period of payment through installments exposes Softwood Ltd to a myriad of financial costs. One, the financier or the creditor may repossess the equipment acquired on hire purchase in the event that the venture defaults in payment. In the end, hire purchase is expensive and may put a stress on the company’s fiancés.
Similarly, leasing carry similar financial costs as hire purchase. Leasing is expensive in the end. In the event that the company defaults in payment, the leaser may repossess the equipment. The company pays for all maintenance and repair costs during the time of lease.
Factoring on the other hand carries costs. The factoring company may pay Softwood Company, say, 80 % of the total accounts payable. Therefore, Softwood Ltd loses 20% of its accounts payable to the factoring company.
Grants and finances from the government or financial sponsors come with terms. These terms may be in form of, helping start new businesses, employing more workers, help in delocalization of employment and protect jobs. These terms may limit Softwood Company in terms of implementing strategies. For instance, when a need to reduce the number of workers arises, the venture may be held back by such terms. This indirectly puts a pressure on the company’s financial resources.
The cost of bank drafts can be attributed to the relatively high interest rates since an overdraft is a short notice financial borrowing. Compared to bank loans, overdrafts are comparatively expensive in terms of servicing the debtor.
On the hand, the cost of bank, loans is tied to the interest of the loan. It is upon the company to choose the bank that offers the loan in the friendliest terms. Another cost of bank loan, is that it puts Softwood’s property at the risk of repossession in the event that it defaults in payment.
This refers to the part of a company’s shares obtained through trading stock to a company’s shareholder. The shareholding capacity of shareholder may be increased for services rendered. This has an overall effect of reducing the financial burden imposed by direct cash payments. This however, comes at a legal cost when the company fails to meet the terms of an agreement securing such a deal.
Venture capital fund is obtained generates capital by owning equity in the company it invests in. This may be costly to a company if the company that a venture has invested in starts to suffer financial losses.
A debenture is a certificate of loan and is used to acquire short term and long-term loans without collateral. The debenture acts as evidence that the company is liable to meet its financial obligations in the event that it receives a loan. The cost of this payment is interests. Legal action may be taken if the company fails to meet its loan payment obligations. Such actions may involve auction of the company’s property that may lead to bankruptcy.
Financial planning is the comprehensive analysis of an investor’s current and future financial state by using present indicators to determine present financial well being and to predict future cash flows and growth plans for the firm. In utilizing financial planning, softwood Ltd enjoys the benefits associated with prudent financial planning methods such as manageable growth and avoidance of losing track of its growth agenda. Finacial planning comes in handy to Softwood Ltd esspecialy during thjis time that the company wants to expand its operations.A business’s future is determined by its present position.A close look and analysis of the company’s financial statements such as the profit-loss account and the balance sheet,one may easily know how the company has been performing and whether it has the capacity to expand its operations.For instance,the company’s profit margin has grown with a certain skill for the last 3 years.Then during financial planning Softwood may be able to get a rough picture of how the profit margins would look like ,say,three years to come.
Good financial information is identified by characteristics such as its verifiability, predictive value, faithful representation, timelessness, understandability, and materiality. For instance, relevance means the information presented must be relevant to the intended of the information to whom it is presented. The firm would find information that not only reveals the possible sources of finance to the firm, but the associated costs of the finance, such information would be relevant.
Information that decision makers for Softwood Ltd would require includes information on financial position of the company. Such information would be available from sources such as the balance sheet, sales, and purchases ledgers, ledgers indicating the purchase of assets and information about costs. In the case of soft wood, the financial position of the company helps the management in determining the course that the business shall take, whether to finance through institutions or raise the required capital for expansion internally. The cost of the intended machine and the expected payment frame is important information that the decision makers of The Company may utilize in determine whether the machine shall be affordable to the firm, given the payment schedule. John also needs information on the cost of the capital intended. Ploughing back of earnings into the company holds the cost of opportunity cost to the shareholders in that they hold the earnings down as capital thus unavailing the cash in case of a future venture opening. In case of a bank loan on the other hand, the company incurs the cost of interest on the capital acquired. The interest paid to the bank would be prospective earnings for the shareholders. The bank would require that the firm provide it with a copy of its recent balance sheet, and profit and loss account statements. The balance sheet indicates the ratio of the liabilities to the assets of the company, thus revealing the risk the bank would be exposed in advancing a loan to the firm. The profit and loss accounts reveal the ability of the firm to finance the loan from current proceeds.. With this information available to Softwood, then the management would make the appropriate decision informed by the circumstances of the company.The greatest stakeholder to any business is the client.The client may provide useful information which relates to their level of satisfaction and the methods that the company may use to bring more satisfaction to the clients.On the other hand,employees are another source of information.Workers are in direct contact with the clients and may provide vital information about the nature of the market.
Softwood Ltd has two plausible sources of financing, bank loan, and internal financing through re-investment. The use of a bank loan shall reflect in the balance sheet as an increase in the long-term liabilities section. The bank loan shall also merit the opening of a ledger entry in the creditors’ account. The capital figure shall also reflect an increase owing to the additional funding from the bank. In case of the utilization of internal source of financing, such as ploughing back profits, the profit and loss account is affected where the earnings are reduced with the amounts intended for re-investment. The total amount of the capital shall not be affected by this move with the difference only indicating in the allocation of funds for different use, i.e. re-investment rather than shareholder earnings. In case of the shareholders investing in the firm with funds that were not earned in the current accounting period, the capital of the firms shall reflect an increased figure, while the shareholder capital, as one of the financing options for capital shall show an increase in the profit and loss account of the business.
The cash budget guides a business in its plans. A cash budget is an estimation of the cash available, and the expenses expected for a certain period.the major objectiuve oif develkping a cahs budget is to ascertain the amount of finances vaialble to enable the company meets its operational obligations. It also gives a clue as to whether the available funds have been directed to the most viable projects to avoid channeling them to unnecccesary or unproductive business operations. To avoid liquidity problems that may be caused by the company’s decision to extend credit servueces to the customers, the cash budget acts as an important tool. It provides a detailed overview of the companies financial position.
A cash balance is a financial document prepared to show cash flows over a given period.A cash balance shows both cash inflows (revenues) and the cash outflows (expenses).As such,a company may know its degree of spending and subsequently put relevant measures to increase revenue and minimize expenditure.Managing cash is a technical but crucial aspect of business. It holds the key to the financial health of the business. To manage cash effectively, it is important that the company focuses on minimizing the expenditure by eliminating those operations that add little or no value to business operations. On the other hand, the company should also seek ways of increasing the sales through marketing strategies aimed at widening the clientele base.
Soft-Wood Company Cash Budget for Month of January to September 2015