Evaluating and Assessing the Cost of Various Sources of Business Finance

Evaluating and Assessing the Cost of Various Sources of Business Finance

Cost of Different Sources of Finance

Every enterprise requires funding to sustain its business operations. There are various forms of funding that a corporation ought to consider its size and nature of business operations, among other factors. The most common type of financial assistance is grants that are a sum of money that does not have to be repaid, but there could be some conditional agreements that the borrower must agree to and authorize; this is known as financial covenants.

An example of a common financial covenant is for the borrowing corporation to promise that it will maintain the conventional accounting ratios above or below a determined threshold. The ratios indicate the financial position of a corporation, that is, if it’s making losses or profits. The risk associated with lending money is reduced by a legal binding that dictates a corporation should maintain its cash flow, an asset-to-equity ratio, at a desirable rate (Isik et al., 2013, p. 18). This is beneficial for borrowing corporations because they can also maintain financial stability and comply with the terms postulated in the covenant.

Grants involve large sums of money, mostly from government institutions to companies. Therefore, the government offers professional advice to corporations interested in the best practices to manage the acquired funds for maximum utilization. In some instances, a specific supplier can be used to produce accurate, reliable accounting information as systems enable real-time data synchronization.

Another method where a company can get funding is through acquiring loans. Loans are different compared to grants, for they must be repaid in full after a specific period. The repayment is usually with a fixed simple interest rate. Moreover, there is an agreement on the interval of repayment until fully paid. A breach of the repayment interval by the borrower can warrant an increase in the amount payable to the lender or a reclamation of funds remitted.

The facilitation of income from the bank account transfer or, if required, in the form of a cheque is a procedure that requires planning to ensure the money gets into the intended purpose. The information flows rapidly within an organization so that by the time the mundane operations are completed, the funds are received by the borrower. There is usually a small fee charged on the products purchased or money remitted by a borrower. The money is commonly known as arrangement fees that are charged, especially by state-backed lenders.

Information Needs of Different Decision Makers in a Business

The process of making pertinent decisions in a company is a daunting task. It requires painstaking musing and contribution from multiple channels of energy. The best decision-makers are decisive and insightful with the ability to act promptly with respect to mainstream information. Generally, to be a good decision-maker, it is important to identify the competencies that are important for a business.

Every corporation has a set of objectives that they desire to achieve at the end of a trading period. The goals are characterized by long, medium, and short-term objectives outlined by the business. A stakeholder should thoroughly analyze the information available on objectives and develop the most appropriate decision. The stakeholders need to be acquainted with the nature of business operations and the resources used in delivering quality goods and services. From the information provided, they can determine the most relevant decision to make when required.

The economic industry has many businesses competing to compete for the available consumers. A careful evaluation enables the stakeholders to determine the best decision to make considering the key performance indicators as they are comparable to related firms (Daskalakis et al., 2013). Then, the shares can be bought or sold according to the shareholders’ analysis of the expected performance of the corporation. However, having a strong and wilfully determined leadership in a corporation can restore the stakeholders’ confidence in its future growth predictions.

Impact of Sources of Finance on Financial Statements

A corporation obtains its funding from two main sources. Capital, also known as equity, is the amount brought to the corporation through a direct investment of funds by stakeholders. Debt financing comes from sources outside the business owners. The capital structure alteration resultantly leads to the change in net income obtainable, leverage ratios, and the liability of corporations that trade on capital markets.

The profitability of a company is not affected through equity financing that involves the selling of shares to the public to raise capital. However, the existing shareholder’s equity will be reduced as the net profit will be distributed among many shareholders. The shares are usually traded on a value slightly higher than their face value. Therefore, the balance sheet will record an increase of the common stock according to its face value.

Raising capital through debt financing, that is, the use of borrowed money, will record an increase in the cash flow statement and also an increase in liability on the balance sheet. The value of ownership does not change with increased debt, but the net income and cash flow are reduced since debts need repayment and interest payable according to the agreement  (Minnis, 2011, p. 502). The reduction in net income is beneficial to a corporation as the amount of tax remitted is reduced as the category of tax obligation changes.

Budgets and Decision Making

Budgeting ensures a business operates within its financial capabilities. The future can be predicted with the use of existing financial information. An extrapolation of the existing data, given that some constraints remain unchanged can help realize the financial goals of a corporation. Budgets give realistic information on the business growth over time, and through calculated risks and conjectures, a company can determine its current financial position and make plans based on existential data (Savvides, 2014, p. 3).

Pricing Decision Using Relevant Information

In every market where there are many or few sellers and many buyers, the pricing is usually competitive to attract many consumers. An organization sets appropriate goals that will be used as a roadmap in the achievement of outlined goals and objectives. Broadly, the goals are categorized into short and long-term goals. The appropriate product mix enables a company to identify the choicest of products from consumers and improve its quality and marketing to reach an even larger audience (Savvides, 2014). To cut the cost of production, some services can be outsourced to reduce the pressure on price, increasing its competitiveness. A reduction in the cost of production will increase the profit margin. Hence, the prices can be maintained fairly consumer-friendly.

Viability of a Project Using Investment Appraisal Technique

Before the commencement of a project, it is important to assess the return on investment of the venture. Initially, it is important to consider the length of time the project will take to return the capital invested in an attempt to generate profit. For every business activity, there is the desire to make a profit. Therefore, the amount of profits evaluated from statements of the financial position expressed as a percentage of the capital invested provides a meticulous understanding of business performance (Palepu et al., 2020, p. 79). The value of goods at the moment is calculated by the difference of future expected income and expenses related to carrying out the business activity. The future expected cash flow can be measured against the initial investment to determine the liquidity ratios that offer an accurate prediction of business performance. A forecast of the profitability of an investment can provide insight into the expected return on capital investment.

Formats of Financial Statements Appropriate for Different Types of Business

Three types of financial statements exist that are used in the analysis of the performance of a business. They are income statements, cash flow statements, and balance sheets. They all identify different types of weaknesses that cannot be identified in the other types of financial statements. A basic income statement lists all the revenue obtained from a specific trading period and the expenses subtracted from it to obtain the net income.

All businesses are required to evaluate their performance, especially by analyzing profit and loss. The balance sheet is one of the oldest financial statements used to show the performance of a business by listing all the current and non-current assets on the left with capital and liabilities on the right (Palepu et al., 2020, p. 83). The balance sheet is commonly used in small and medium enterprises where there is no a myriad of transactions. Larger organizations still consider the balance sheet an important tool for financial analysis, as it appropriately categorizes assets, liabilities, and owner’s equity. A cash flow statement monitors the flow of money in and out of a corporation. The accounting principles dictate that transactions are recorded on an accrual basis and not when the money is received. Therefore, the final amount indicated on a cash flow statement should be the cash at hand. Cash flow statements are usable by both large and small business enterprises.

Interpretation of Financial Statement Using Appropriate Ratios

The financial statements enable the relevant stakeholders to assess the performance of a business at a given period. Some ratios measure the ability of a corporation to meet its short-term obligations by taking into consideration the value of current assets to short-term liabilities. The profitability ratios are calculated by taking into account the cost of goods sold in a ratio that is comparable to the expenses in selling. These ratios comprise net and gross profit margins. The fixed asset turnover or the rate of sales amounting to revenue generated per employee determines production efficiency. Profitable companies have increased efficiency. Investors need information calculated from the price-to-earnings ratio to determine the amount paid to shareholders per dollar in sales by a company.

References

Daskalakis, N., Jarvis , R. & Schizas , E., 2013. Financing practices and preferences for micro and small firms. Journal of Small Business and Enterprise Development.

Isik, O., Jones, M. C. & Sidorova A, 2013. Business intelligence success: The roles of BI capabilities and decision environments. Information & management, pp. 13-23.

Minnis, M., 2011. The value of financial statement verification in debt financing: Evidence from private US firms. Journal of accounting research, pp. 457-506.

Palepu, K. G. et al., 2020. Business analysis and valuation: Using financial statements. s.l.:Cengage AU.

Savvides, S. C., 2014. The pursuit of economic development. Journal of Finance and Investment Analysis, p. 3.

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1. Determine the costs of different sources of finance. (Please Elaborate/expand on the answer below)
COSTS OF DIFFERENT SOURCES OF FINANCE.
Grant – Covenant compliance costs + Professional advice + use of a designated supplier.
Loan – Rate of interest + arrangement fees

2. Assess the information needs of different decision-makers in a business. (Please Elaborate/expand on the answer below)
INFORMATION NEEDS OF DIFFERENT DECISION MAKERS IN A BUSINESS
 Objectives – Because of the complex nature of the decision-making process, the decision-maker must have extensive knowledge of the details of the objective. The decision-maker must analyze this information and factor it into the process when concluding how to act (Isik O, 2013).

 Resources – The decision-maker must have a firm grasp of all of the resources at his disposal before making his decision. Most of these said resources are somewhat financial in nature and may also include human capital. In many cases, managers and business owners will decide based on financial considerations, including how much capital is available, how it will be allocated, and what types of reserves the company can fall back on if things don’t go well (Isik O, 2013).

 Alternatives – The decision-maker requires a firm grasp of the alternatives and their consequences. While executives may have a single primary aim and may push for their viewed vision, the decision-maker should be conscious of alternate solutions. This may involve complex financial analysis or merely weighing the pros and cons of each possible decision (Isik O, 2013).

 Leadership – An executive must be confident that the company can carry out the mission once it is established. Knowing the leadership qualities of others in the organization can give him confidence in his decision (Isik O, 2013).

3. Explain the impact of sources of finance on the financial statement. (Please Elaborate/expand on the answer below)
IMPACT OF SOURCES OF FINANCE ON THE FINANCIAL STATEMENT
If borrowed funds are invested in projects that provide a return over the cost of debt capital, the shareholders will enjoy an increased return on their equity. In distributing shares to the public, the business will incur substantial expenditures that are not tax-deductible. As far as companies are concerned, debt capital is a potentially attractive source of finance because interest charges reduce the profits chargeable only to corporate tax (G, 2010).
4. Analyze budgets and recommend appropriate decisions.
5. Make pricing decisions using relevant information.
6. Assess the viability of a project using investment appraisal techniques.
7. Compare formats of financial statements appropriate for different types of business.
8. Interpret financial statements using appropriate ratios and comparisons, both internal and external.