assignment 2ab

7/30/2019 Assignment 2ab

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Students name: Nguyen Hoang Loc Anderson.

The costs of different sources of finance:

1. Hire Purchase: Financial costs:

o Interest is the main cost. The rate of interest may either be fixed or variable. Avariable rate is usually the bank base rate plus an extra amount so that the bank

makes a profit. On the whole business prefer fixed rate loan because they then

know for certain how much their future costs are going to be.

o Tax relief on interest reduces cost of debt capital.o Documentation feeso Interest surcharge for missed repayments - this means an additional amount of

interest will be charged on the amount unpaid

o Penalty fees for missed or late paymentso Completion fee for ownership of the goods to pass to youo Repossession charge - if the goods are repossessed.o Rescheduling charge - if the lender agrees to change the loan termso Any balloon payment charged on a hire purchase loan - while it is not an extra

charge - has the effect of postponing part of the costs until after the loan. This

means that in the earlier months and years, consumers are paying less off their

loan that they would for a bank or a credit union loan.

Non-Financial costs:o Less in control of the business.o Psychological pressure

2. Franchising:The initial franchise fee covers the cost of training and assistance in setting up the

business including recruitment, territory analysis, site identification, stationary,

franchisee launch, etc. In addition, there will be an element of recovery of franchise

development costs by the franchisor.Some franchisors may charge all or some (or none!)

of the following fees: Training fees, initially and on-going, consulting fees, site selection

fees, leasing fees, blueprint and specification fees, grand opening fees, auditing fees,


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accounting fees, on-site management fees, application fees, exclusive territory fees,

renewal fees, transfer fees. Non-financial cost is psychological pressure.

3. Bank Overdraft and loan Financial costs:

o Interest is the main cost.o Tax relief on interest.o Documentation fees.o Factors charge commission for advancing funds as well as interest for the period

during which a debt remains unpaid.

o The loan itself has to be repaid, too.o A useful concept in many circumstances is opportunity cost.

Non-Financial costs:o Psychological pressure

4. Government Aid:It may appear to be without cost. However there may well be opportunity cost associated

with eligibility for a grant. Being based in a certain region may deprive a business ofcertain sales opportunities. There will also be certain administrative costs to cover

applying for the grant and filling in forms on a regular basis to reassure the grant-giving

authority that the business is still eligible to receive it.

5. Leasing:If a business needs a piece of equipment for a shorter time, then operating leasing may be

the answer. The leasing company will lease the equipment, expecting to sell it

secondhand at the end of the lease, or to lease it again to someone else. It will, therefore,

not need to recover the full cost of the equipment through the lease rentals.

The finance lease or 'full payout lease' is closest to the hire purchase alternative. The

leasing company recovers the full cost of the equipment, plus charges, over the period of

the lease. Although the business customer does not own the equipment, they have most of


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the 'risks and rewards' associated with ownership. They are responsible for maintaining

and insuring the asset and must show the leased asset on their balance sheet as a capital

item.

6. Selling of assets and increasing sells: Financial costs:

o Abusinesss sales are only generated by incurring costs such as wages, rent,materials, electricity and so on.

o Business have to pay tax on their earningso Dividends are a cost of retained earnings as well as cost of share capital. If

dividends are not paid, shareholders goodwill will be lost.

o Like capital not needed immediately, retained earnings may be invested in theshort term and this will have certain costs.

o The concept of opportunity cost is again relevant here. Financial costs:

o Psychological pressure

7.

Adding a partner Financial costs:

o Dividends in cash that means the money paid to stockholders, normally out of thecorporation's current earnings or accumulated profits. All dividends must be

declared by the board of directors and are taxable as income to the recipients. The

amount of dividend paid is up to companys management within certain legal

constraints. However, shareholders usually expect the amount they receive in

dividends to increase over time and to be reasonably consistent from year to year.

Dividends also have some quite complicated tax implications, both for investors

and for companies. These are well beyond the scope of this book.

o Scrip dividend is a scrip issue made in lieu of a cash dividend. Shareholders areable to choose whether to receive a cash dividend or shares. This is the difference

between a scrip dividend and a scrip issue. Shareholders who wish to reinvest will


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prefer a scrip dividend to a DRIP as it avoids dealing costs, and the number of

shares received is known at the time the election to receive shares rather than cash

is made. In the case of a DRIP, the number of shares bought will depend on the

share price on the day of the purchase itself. Sometimes, instead of paying out

dividends in the form of cash, a company pays them in the form of new shares.

o If funds are not needed immediately there may be a cost associated with investingthem until they are wanted for use in the operations of the business.

Non-financial costs:o Uncomfortable feeling of being watchedo Less in control of the business fortune

In conclusion, with many financial cost

Opportunity cost:It is the value of the alternative action which you go without because you do the first action.

It is the sacrifice related to the second best choice available to someone, or group, who has

picked among several mutually exclusive choices.

The opportunity cost is also the cost of the forgone products after making a choice.Opportunity cost is a key concept in economics, and has been described as expressing

"the basic relationship between scarcity and choice".

The notion of opportunity cost plays a crucial part in ensuring that scarce resourcesare used efficiently.

Thus, opportunity costs are not restricted to monetary or financial costs: the real costof output forgone, lost time, pleasure or any other benefit that provides utility should

also be considered opportunity costs. ( wekipedia)

The importance of financial planning to Kopps

Working capital:


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The working capital of a business can be defined as its current assets, which include cash, stocks

of raw materials, work in progress, finished goods and amounts receivable from debtors (

accounts receivable), less its current liabilities. Current assets comprise cash, stocks of raw

material, work in progress and finished goods and amounts receivable from debtors. Current

liabilities comprise creditors who have to be repaid within one year, and may include amounts

owed to suppliers of raw materials, taxation payable, dividend payments due, short term loan and

so on.

The definition of working capital is fairly simple; it is the difference between an organizations

current assets and its current liabilities. Of more importance is its function which is primarily to

support the day-to-day financial operations of an organization, including the purchase of stock,

the payment of salaries, wages and other business expenses, and the financing of credit sales.

Maintaining adequate working capital is not just important in the short term. Sufficient liquidity

must be maintained in order to ensure the survival of the business in the long term as well.

Sufficient liquidity means having enough cash to pay for wages and salaries as they fall due, or

enough cash to pay creditors.

The important aspects of working capital management are:

1) Planning - Companies should begin by determining what their working capital requirements

should be and tune the working capital model accordingly. The model could be aggressive or

moderate based on the market situation affecting the company. Assessing the risks present and

future also plays an important part in planning for the working capital requirements.

2) Reassess internal working capital policies such as credit periods for customers, suppliers,

short term finance, long term finance, equity participation, inventory, securities etc.

3) Benchmarking-Companies should benchmark their requirements against similar companies in

their industries to have information on working capital requirements.

4) Balance growth and profitability- Companies should balance growth with profitability with

sound working capital policies.

To be successful, working capital and cash management initiatives require buy-in and support

from senior levels of management and logically, should be led by the Chief Financial Officer, or


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in some cases, the Chief Executive Officer. Dramatic improvements in working capital are

possible. The best organizations are shifting their focus to a more strategic approach to the

finance function, by taking responsibility for performance improvement initiatives that have a

direct link to enhancing the economic value of the organization.

Improving your businesss cash-flow management system is critical to freeing up your capital

and using it to your advantage. These operational improvements can contribute to strategic

success and help sustain your competitive advantage.

Overtrading:Overtrading happens when a business tries to do too much too quickly with too little long term

capital, so that it is trying to support too large a volume of trade with the capital resources at its

disposal. This is often caused by unforeseen events such as when manufacture or delivery take

longer than anticipated, resulting in cash flow being impaired. Overtrading is a common

problem, and it often happens to recent start-ups and rapidly expanding businesses.

There are some symptoms of overtrading are:

There is a rapid increase in turnover. There is a rapid increase in the volume of current assets and possibly also fixed

assets. The rate at which stock and debtors are turned into cash might be slow down,

in which case the rate of increase in stocks and debtors would be even greater than the

rate of increase in sales.

There is only a small increase in proprietors capital. Most of the increase in assets isfinanced by the following methods of credit.

Trade creditors. The payment period to creditors is likely to lengthen. A bank overdraft, which often reaches or even exceeds the limit of the

facilities agreed by the bank.

Cash budgeting:


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This is an estimation of the cash inflows and outflows for a business or individual for a specific

period of time. Cash budgets are often used to assess whether the entity has sufficient cash to

fulfill regular operations and whether too much cash is being left in unproductive capacities.

Budget for cash planning and control that presents expected cash inflow and outflow for a

designated time period. The cash budget helps management keep cash balances in reasonable

relationship to its needs. It aids in avoiding idle cash and possible cash shortages. The cash

budget typically consists of four major sections: receipts section, which is the beginning cash

balance, cash collections from customers, and other receipts; disbursement section comprised of

all cash payments made by purpose; cash surplus or deficit section showing the difference

between cash receipts and cash payments; and financing section providing a detailed account of

the borrowings and repayments expected during the period.

A cash budget is extremely important, especially for small businesses, because it allows a

company to determine how much credit it can extend to customers before it begins to have

liquidity problems. For individuals, creating a cash budget is a good method for determining

where their cash is regularly being spent. This awareness can be beneficial because knowing the

value of certain expenditures can yield opportunities for additional savings by cutting

unnecessary costs.

The importance of managing the cash budgeting:

1. It gives managers greater control. They can make decisions based on variance analysis.

For example, if they spot unfavorable variances they can take actions such as: costs too

high - cut out waste or change supplier, sales too lowincrease advertising or promotion

or sales effort production too low - look to remove bottlenecks, labor efficiency etc.

2. It enables forward planning and the setting of targets to work towards. These targets

can be set for the various components (e.g. departments) of an organisation.

3. It provides a means of measuring performance - i.e. the budgeted figure is the desiredperformance. A favorable variance shows that we are exceeding performance targets. An

adverse variance shows poor performance.

4. A budget sets motivating targets for everyone to work towards achieving.


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Budgets don't have to be set in tablets of stone. Some budgets can be 'flexed' i.e. allowed

to be flexible to take account of changing circumstances. A flexible budget is therefore a

plan that can be revised in the course of time.

Budgets need to be regularly monitored (i.e. checked) to see if action needs to be taken.

Source: http://businesscasestudies.co.uk/business-theory/finance/budgeting-and-cash-

flow.html

Proper management of the working capital is an important aspect in the financial planning

Financial planning is the task of determining how a business will afford to achieve itsstrategic goals and objectives. It is a process of setting objectives, assessing assets and

resources, estimating future financial needs, and making plans to achieve monetary goals.

Many elements may be involved in financial planning, including investing, asset

allocation, and risk management. Tax, retirement, and estate planning are typically

included as well. Financial planning plays a starring role in helping individuals get the

most out of their money. Careful planning can help individuals and couples set priorities

and work steadily towards long-term goals. It may also provide protection against the

unexpected, by helping individuals prepare for things such as unexpected illness or loss

of income.Financial planning would normally involve corporate budgets and the working

capital. Proper financial planning would require proper management of the working

capital which includes debtors, creditors, stocks, cash and bank account.

A good financial plan can alert an investor to changes that must be made to ensure a

smooth transition through life's financial phases, such as decreasing spending or changing

asset allocation. Financial plans should also be fluid, with occasional updates when

financial changes occur.

It is important to plan finances in order to reap long term benefits through the assets in

hand. The investments that one makes are structured properly and managed by
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professionals through financial planning. Every decision regarding Kopps finances can

be monitored if a proper plan is devised in advance.

Income

To manage income more efficiently. The cash and need analysis and incomeexpenditure budgeting will show the best way possible in managing income.

Regardless of the amount of income earned, part of the earning will go for tax

payment, expenditure and what's left would be the saving. Thus, proper

management of income is necessary in increasing cash flow.

Cash flow

To increase cash flow and monitor spending habits and expenses. Financialplanning will help in determining what should be done to generate cash flow in

order to make investing possible. Tax planning, careful budgeting and prudent

spending are aspects that need to be paid attention to in generating cash flow. This

will help as part of the cash can be preserved for long term use.

Capital

To build a long term capital-base and shape your financial future. Once there is anincrease in cash flow, it means an increase in capital base too. This allows one to

be able to venture into various portfolio investments. With a strong capital base,one can have a wider portfolio of investment.

Investment

To identify investment opportunities relevant to your financial situation. Financialplanning can help in evaluating the best investment opportunities. A good

investment planning can turn goals from dreams into realities. Apart from picking

the `right` investment, it shows how to allocate money among different type of

investment. This can have a greater effect on investment success.

Family security

To provide for your family's financial security with proper coverage through rightkind of policies. The good old days when a worker retired with a nice pension


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seem to be gone now. Today, one need to take charge and plan for the family's

future security. How much income should one plan in needing for the family's

financial security? In doing these projections, inflation effects must be considered

too. This is where financial planning can be of help.

Financial understanding

To get a whole new approach to budgeting and gain control over your financiallifestyle. One can evaluate the level of risk in an investment portfolio or adjust a

retirement plan due to changing family circumstances for example. It becomes

obvious that financial understanding has been attained when measurable financial

goals are set, the effect of each financial decision is understood, the financial

situation is periodically evaluated, financial planning is done as soon as possible

with realistic expectations and ultimately when one realizes that only he or she is

fully in charge of it.

Standard of living

To maintain your family's present standard of living by maximizing the householdinsurance portfolio. One can create a personal and family financial plan so that

there are clearly defined goals or targets and there is enough savings to get there.For example, one can make sure that there is enough disability coverage to

replace any lost income. This can ensure that the family remains financially

secure if the head of the family or the bread winner dies. Thus, the family's

standard of living doesn't suffer and is maintained.

Savings

It used to be called saving for a rainy day. But sudden financial changes can stillthrow one off the track. An emergency fund for example might be be ideal. It has

to be always very liquid. It means that it should be very easy to convert that fund

into cash. Savings bank or money market accounts are examples of investment

with high liquidity. This way, a systematic and organized saving and investment


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plan can be provided to fund children's education and secure a comfortable

retirement and on top of that, be ready for any unexpected occurrences.

Assets

To insure assets accumulation and liability cancellation to leave the maximumamount of wealth to your heirs. In the process of accumulating assets, many fail to

realize that it usually comes with a liability package. In order to determine the

true worth of any asset, the liabilities need to be settled, or cancelled. Only then,

the true value of the assets would be of use and help for the heirs. Otherwise,

assets can easily mean unwanted or unexpected financial burden.

Financial security and mastery

To assist you and your family to attain the ultimate objective of financial securityand mastery. Financial planning will provide directions and meaning to one's

financial decisions. It allows an understanding of how financial decisions made

can affect other areas of finances. By viewing each financial decision as part of a

whole, the short and the long term effects on one's life goals can be considered.

This will help in adapting more easily to life changes and feel more secure

financially, knowing that financial mastery has been achieved.

Source:

http://www.pppnetwork.com/?view=The_Importance_Of_Financial_Planning&mid=1563&mid=1563

Management of debtors:There are several factors that Mr Kuhn should consider by management when a policy for

managing debtors is formulated:

The administrative costs of debt collection.
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The procedures for controlling credit granted to individual customers and for debtcollection

Cost of additional finance required for any increase in the volume of debtors Any savings or additional expenses in operating the credit policy The ways in which the credit policy could be implemented The effects of easing credit, which might include the following

o To encourage a higher proportion of bad debtso An increase in sales volume

Management of creditors:

Trade credit is an arrangement between businesses to buy goods and services on account

(on credit) i.e. without making immediate cash payment. It is a source of short term

finance because it helps to keep working capital down. It is usually a cheap source of

finance, since suppliers rarely charge interest. Trade credit will have a cost, whenever a

company is offered a discount for early payment, but opts instead to take longer credit.

Therefore, Mr Kuhn should attempt to extend credit during periods of cash shortage in

order to achieve visibility and control over all payments (including direct debits) and Mr.

Kuhn must have a clear process for recording and tracking liabilities and payment dates.

This will normally be controlled through the accounting system but additional processes,such as critical payment control schedules, may be employed. He also needs to attempt to

obtain satisfactory credit from suppliers and maintain good relations with regular and

important suppliers. The reason is building strong relationships with suppliers is critical,

especially given the current economic climate. A good starting point is to review the

number and frequency of use of suppliers. Consider concentrating supplies to a smaller

number of suppliers and developing strategic supplier relationships. Such an approach

can deliver financial savings, in terms of better prices and payment terms, and greater

reliability in terms of product quality and supply. However, care must be taken to ensure

that over-dependence on too few suppliers does not carry too high a risk for the business.

Management of stocks:


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Stocks can be in a form of consumables (i.e. office supplies) or in the form of raw

materials, work in progress, finished goods (i.e. inventories). Some businesses attempt to

control stocks on a scientific basis by balancing the costs of stock shortages against those

of stock holding. Good stock management by Mr. Kuhn will lower costs, improve

efficiency and ensure production can meet fluctuations in customer demand. It will give

the firm a competitive advantage as more efficient production can feed through to lower

prices and also customers should always be satisfied as products will be available on

demand. Mr. Kuhn also needs to control stocks on a scientific basis by balancing the cost

of stock shortages against those of stock holding. The control of stocks form a financial

point of view may be analysed into three parts:

The economic order quantity model can be used to decide the optimum order sizefor stocks which will minimize the costs of ordering stocks plus stockholding

costs.

If discounts for bulk purchase are available, it may be cheaper to buy stocks inlarge order sizes so as to obtain the discounts.

Uncertainty in the demand for stocks and the supply lead time may lead acompany to decide to hold buffer stocks in order to reduce or eliminate the risk of

stock outs

Management of cash:

Holding cash and cash equivalents has a cost i.e. loss of earnings which would otherwise

have been obtained by using the funds in another way.

The steps that are usually taken by a company when a need for cash arises, and when it

cannot obtain resources from any other source such as a loan or an increased overdraft

are as follows:

Postponing capital expenditure. Some capital expenditure items are moreimportant and urgent than others.

o It might be imprudent to postpone expenditure in fixed assets which areneeded for the development and growth of the business.


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o Some capital expenditures are routine and might be postponable withoutserious consequences.

Accelerating cash inflows which would otherwise be expected in a later periodo Press debtors for earlier payment thru offering discounts for earlier

payment

Reversing past investment decisions by selling assets previously acquired Negotiating a reduction in cash outflows so as to postpone or reduce payments

o Longer credit might be taken from supplierso Loan repayment could be rescheduled by agreement with a banko Deferral of payment of corporation taxo Dividend payments could be reduced.

assignment 2ab

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