Access and compare the costs of different sources of finance
There are various sources of finance that entrepreneurs can rely on. These sources can either be classified as equity or debt capital. There are various financial costs that refer to tangible costs associated with these sources of finance (Chartered Institute of Management Accountants, 2010, p.1). For example, debt sources of finance like loans from a financial and nonfinancial institutions are linked to a predetermined interest rate. The firm is required to pay the interest amount periodically in line with the loan agreement. Failure to pay interest can result in the firm being placed under receivership. On the other hand, equity sources of finance which include issuing of shares (either ordinary or preferred) have associated costs. For example, by using ordinary and preferred shares as a source of finance, the firm commits itself to the payment of dividends to these shareholders. In addition to dividends, preferred shareholders are also entitled to interest. Retained earnings can also be a potential source of finance. By utilizing retained earnings as a source of finance, an opportunity cost is experienced. This arises from the fact that the firm loses on alternative projects.
Over-trading
Over-trading is defined as an imbalance that occurs when a firm is not in a capacity to finance its operation due to a shortage of working capital or current assets. Overtrading can affect the performance of a firm but the newly established and rapidly expanding firms are the worst culprits. Financial planning contributes greatly towards the efforts of a firm to overcome overtrading problems. Financial planning refers to the process of determining a firm’s surpluses and shortages. One of the financial planning techniques that can be incorporated includes the use of the Just-In-Time technique (JIT). Through the JIT technique, a firm is able to minimize the need for additional working capital. In addition, JIT reduces the amount of time that a firm holds its stock.
Through financial planning and cash budgeting, the firm’s management team can be able to conduct cash flow forecasting in the event that the firm expects an improvement in business performance. Cash flow forecasting enables the management to project the flow of money in and out of the firm. This means that both cash budgeting and financial planning technique enables the firm to effectively determine the possible risk of overtrading. This arises from the fact that both financial planning and cash budgeting can be conducted periodically (Chartered Institute of Management Accounts, n.d, p. 20).
Financial planning also incorporates ration analysis techniques. By monitoring its financial ratios, a firm can be able to avoid overtrading. This arises from the fact that it will be possible for the management to understand its cash needs. Financial forecasting using financial ratios is an effective way of overcoming overtrading problems. Compared to financial planning, cash budgeting is relatively weak since it only uses information related to the firm’s sales and expenditure in forecasting the flow of money in and out of the business (ICAEW, 2009, p. 20).
Information needs of different decision-makers
The management process entails a series of decision-making. As the business environment becomes more complex, individuals in different management levels are required to make decisions that will contribute towards the firms attaining a high and sustainable competitive advantage (Marie & Higgins, 2001, para. 1). Marie and Higgins (2001, para. 2) assert that for the decision-making process to be effective, it is vital for the decision-makers to have sufficient and regular knowledge of the required information. Information needs can be classified as either simple or complex. According to Skyrius and Bujauskas (2010, p. 3), simple information needs to relate to routine activities. This entails searching the environment to identify situations from the environment that can result in effective decision making. Some of the information searched relates to opportunities, problems, and uncertainties. On the other hand, complex decision-making requires a comprehensive understanding of the issue. Some of the decisions that should be of great concern to these parties related to their product, suppliers, customers, new business opportunities, and technical developments. In addition, the decision-makers should consider information that can enable a firm to identify possible worsening of firm performance such as a decline in sales level and increment in customer complaints. In evaluating these problems, decision-makers should have information on the possible causes of these problems and measures that can be integrated to eliminate these problems. In order to attain a competitive advantage, decision-makers should also evaluate the performance of their competitors. This will aid in determining the most effective way of dealing with competition as a risk (Skyrius & Bujauskas, 2010, p. 4).
Impact of finance on financial statements and the interaction of assets and liabilities in the balance sheet
A firm’s finance has an effect on its financial statement. If a firm is highly geared towards the achievement of both short and long-term debts, the resultant effect is that the firm’s financial returns are negatively affected. For example, the amount of returns available for shareholders is greatly reduced. This arises from the fact that the firm is obligated to pay off debts before it can approve returns to shareholders in the form of dividends. The resultant effect is that the firm’s retained earnings are reduced meaning that the firm is faced with financial constraints in its operation. There is a strong association between assets and liabilities in a balance sheet. According to CEA (2007, p. 1), a firm’s capital structure is dependent on the difference between its assets and liabilities. This is attained by evaluating the firm’s market-consistent values in the balance sheet. In addition, a firm’s capital requirements are determined by conducting a comprehensive analysis of the firm’s risks. This is conducted by considering the interaction of its assets and liabilities.
B:
Price production of one ring:
8 grams silver @ £15 per gram = £ 120
60 rings = £ 120 * 60 = £ 7200
Labour: £ 20 per hour * 2.5 hours = £ 50 per ring.
60 rings = £ 50 * 60 = £ 3000
Polishing:
1 ring takes 40 minutes to polish. If polishing is £8 per hour, how about 40 minutes?
= 8 * 40/60 = £ 5 per ring
60 rings = £ 5 * 60 = £ 300
Total factory indirect costs for 500 rings = £10,000
Therefore, 60 rings will be: 60 * 10,000/500= £ 1200
Therefore, the price of producing 60 rings = = £ 11, 700.
Reference List
- CEA., 2007. CEA working paper on the total balance sheet approach. London: CEA Insurer of Europe.
- Chartered Institute of Management Accountants. 2010. Practical advice for business; avoiding the problem of overtrading. [On-line].
- Chartered Institute of Management Accountants. n.d. Improving cash flow using credit management: the outline case. Albany: Albany Software.
- FAO corporate document repository n.d. Basic finance for marketers: sources of finance.
- How to finance your startup n.d., How to target and land financing for your startup: the Decathlon Metaphor, 2010.
- ICAEW. 2009. Budgeting. ICAEW: Library and Information Service.
- Khan, M. Y. & Kumar, P. 2005. Basic financial management. New Delhi: Tata McGraw Hill Publishing Co. Ltd. p. 43-47.
- Medina, R 1988, Sources of business finance. New York: Oxford University Press.
- Skyrius, R. & Bujauskas, V. 2010. A study on complex information needs in business activities. Vilnius, Lithuania: University of Vilnius.
- Williams, G. & Howard, T., 1994, Highway finance: past, present and future. U.S. Department of Transportation: Federal Highway Administration.