Financial Resources And Decisions-Btechnd
Financial resourcesof the business organisation shall be managed in effective manner so that operations can be effective conducted and controlled by the management.In this report, management of finance by business organisation in terms of identifying sources of finance sand its various implications. Cost related to different sources of finance were discussed in this report and on the basis of nature of projects sources of finance has been selected. For making pricing decisions, per unit cost is calculated and profit margin has been added to it. Capital budgeting methods has been discussed and used for decision making process in terms of accepting and rejecting the capital project. In last section financial statement and its use has been defined. Ratio analysis technique has been applied and used in decision making process.
Report to Directors of the enterprise Agency
Following report is prepared to provide information related to financial management of the business organization or of Enterprise Agency. In this report 8 sources of finance along its legal, dilution in control and bankruptcy implications. Cost and tax effect on each and every sources if finance that has been identified were mentioned in this report. What sources of finance shall be used for business expansion or other projects that organisation were mentioned in the report.
An identification of 8 sources of finance that participants may choose together with an assessment of the legal, dilution n control and bankruptcy implication of each source.
Following is the sources of finance that can be used for different project that organisation undertakes:
1: Equity shares- Equity shares are owner’s fund that can be used for the business projects. Equity shares represent share in the total capital or ownership in the business organisation. Major funds can be gathered by issuing equity shares by the organisation but there is high cost and legal implication on equity shares(Kesari 2012).
2: Bank Loan- It represents that part of non-current liabilities in the statement of financial position which is required to be repaid on equal instalments from revenue earned during the year. Bank loan can be of short term, medium term and long term and is taken on the basis of security provided by organisation.
3: Debentures- Debentures are acknowledgement of the debt obtained by the business organisation from the investors. Debentures are repayable or redeemable by the organisation by using various methods. For issuing debentures, business organisation is required to get registered first then only they are able issue debentures(Wolff 2014).
4: Preference share- Preference shares are those shares that are issued by the organisation for raising funds from the various investors. Institutional investors are the major investors in preference shares. It carries preferential right over equity shares in terms of dividend payment and has fixed per cent of dividend.
5: Hire Purchase- Hire purchase is the transaction that is undertaken for purchasing asset (that includes huge investment) on instalment basis. Hire purchase is the transaction under which organisation is required to pay for purchased asset and interest is charged on the outstanding hire purchase price.
6: Bank Overdraft- It is the sources of funds or it is rather facility that is provided by bank to its customer. Under this facility, when customer requires funds in the situation of zero balance in the bank account, then bank still makes payment to creditors of business organisation. On overdraft amount interest will be charged by the bank(Kesari 2012).
7: Venture Capital- It is the source of finance that can be taken by the business organisation. Venture capitalist is the investors that invest funds in the business organisation to be used for business operations. There are generally higher cost of finance that organisation undertakes and risk is at higher side.
8: Trade Credit-Trade credit can be used by the business organisation in their normal course of business. Time provided by creditors to make payment for the purchases that were purchased by the business organisation. These are actually deferment of payments to creditors.
Following is the different types of implications on sources of finance:
Source of Finance
|Legal Implication||Dilution in Control||Bankruptcy Implication|
|Equity shares||There is huge legal implication in terms of registration requirement, public announcements, etc.||Equity shares holders are owner of the business organisation. Therefore there is complete dilution of control in ownership(A 2011).||There is no bankruptcy implication in terms of equity share as they are owner of organisation.|
|Bank loan||Documentation, security for bank loan, processing of documents, etc. are some legal implications.||There is no dilution of control.||Bank loan has bankruptcy implication i.e. if bank loan is not repaid on time then security asset can be sold by bank.|
|Debentures||Registration of business organisation us required for issuing debentures, debenture trustee shall be appointed, creation of charge on fixed assets, etc. are some legal implications of debentures.||No dilution in control.||There is huge implication of bankruptcy on debentures because of charge created on fixed assets i.e. in case of non-payment it can be sold.|
|Preference share||Preference shares have low legal implication as compared to other sources of finance. Documentation is required in terms of registration, issuing shares, level of capital employed, etc.(A 2011).||There is no voting right or transfer of ownership therefore no dilution in control.||Preference shares cannot claim their dues by sealing property of organisation.|
|Hire purchase||Hire purchase agreement is the legal implication of this source of finance.||No dilution in control.||Hire purchase asset can be taken back by vendor if instalment is overdue.|
|Bank overdraft||Approval of bank, maintenance of funds, bank guarantee, etc. are some legal implication of bank overdraft.||No dilution in control.||There is no bankruptcy implication as amount of bank overdraft is generally small.|
|Venture capital||There is huge implication of contract and its convents that organisation has to follow.||When equity shares are issued as consideration of funds provided then there is dilution in control.|
High chances of dilution in control if funds are pulled back then organisation can face serious problem of bankruptcy.
An analysis of the cost and tax effect on each source of finance identified in (1) above.
Source of Finance
|Cost Effect||Tax Effect|
|Equity shares||Dividend and growth on dividend is the cost of equity.||There is tax effect in issue of equity shares but on dividend tax is to be paid by company i.e. dividend distribution tax|
|Bank loan||Interest charged by the banks on outstanding amount of bank loan is the cost of bank loan(Gallo, A Refresher on Cost of Capital 2015).||There is tax saving on payment of interest on bank loan.|
|Debentures||Interest rate payable on outstanding amount of debentures is cost of debenture.||Tax saving is the benefit that organisation can get on the payment of interest on debentures.|
|Preference share||Fixed percentage of dividend is the cost of preference shares.||There is no tax benefit on payment of dividend.|
|Hire purchase||Interest charged on the hire purchase price is the cost of this source.||Tax benefit is available on the payment of interest on hire purchase price(Gallo, A Refresher on Cost of Capital 2015).|
|Bank overdraft||Interest cost is the cost and interest rate is higher than bank loan.||Interest cost is not available for deduction for tax purpose.|
|Venture capital||In terms of venture capital there is huge cost implication i.e. interest cost or cost of equity.|
Tax benefit is available on the payment of interest.