Managing Financial Resources Decision Making Finance Essay

Preface

I have written this assignment mainly to complete course requirement of HND 1st semester. My assignment is related to the subject named as “Managing Financial Resources and Decision Making”. I collected most information for this assignment from internet, my course book and mostly from the notes that I had collected from class lectures. Though I suffered bit difficulties in completing this assignment but it was pretty interesting and full of experience. I hope my work will be esteemed.

Scenario:

Mr. Javed wants to invest 5 million in a business project in Pakistan. Some of his friends are willing to invest their capital with Mr. Javed but Mr. Javed does not want to have partnership with someone.

My advice:

There are three types of businesses available for Mr. Javed which includes sole proprietorship, partnership and corporation.

Sole proprietorship: (one owner)

“It is a form of business which is run and managed by single person”.

Explanation: It does not mean that sole proprietorship type of business will not have workers or assistants; it may have workers or assistants. In partnership profit or loss belongs to the owner. In such type of business the owner of the business is taxed not the business.

Advantages: Such type of business is less expensive. Usually this type of business does not require a lot of legal formalities.

Disadvantages: liabilities are unlimited that is personal assets can be claimed. Owner cannot leave business for long time that you cannot go for holidays etc because the business is totally dependent to the owner. Life of the business depends upon the life of the owner.

Partnership: (two or more owners)

“As its name indicates it is such type of business in which two or more owners are involved”.

Explanation: partnership is basically an agreement, this can be written or verbal there is not rule from the government that agreement of partnership should be written but mostly owners prefer written agreement. In partnership business profit and loss and distributed among partners according to the agreement. In such type of business the owners of the business are taxed not the business.

Advantages: It does not require a lot of legal formalities. Life of the business can be certain that it depends upon the agreement and partners. Less amount of capital is required to run such business.

Disadvantage: Decision making is difficult in such type of business. Too many conflicts may rise in such type of business. Liabilities are unlimited which means that personal assets can be claimed.

Corporation: (company)

“It is such type of business in two or more than two owners are involved, it is an artificial person, company’s ownership is different from management”.

Explanation: In such type of business owner is called as shareholder and shareholder provide capital for running this business. The business is run by managers which are selected by Board of Directors and Managers. Profit and loss is distributed among shareholders, which is called as dividend. In corporation type of business, business is taxed not the owners.

Advantages: Owner is can be easily transfer by selling shares. Life of the business does not depend upon the life of the owner. Liabilities are limited, personal assets cannot be claimed.

Disadvantages: So many legal formalities are required to run this business. Formation of this business is very difficult. Large amount of capital is required to run this business. Due to retain earning shareholders confidence may loss because shareholders want more dividends.

Business which I have selected for Mr. Javed:

Keeping in mind that Mr. Javed does not want to have partnership business. So I prefer Mr. Javed to start a business of sole proprietor because as I mentioned above it is easy to start, no legal formalities are required and less amount of capital is required. So I have come up with an idea of opening an educational institute, which should provide HND (Business) and HND (Computing) in Khyber Pukhtoonkhwa Pakistan, because number competitors are less and demand is getting higher day by day. HND’s studying formation is different and interesting as compared to the education system of Khyber Pukhtoonkhwa. Mr. Javed will need more amount of 3 million for this project. There are some factors which will ensure success of this project which are discussed below.

Factors which are important for the profitability:

There are different factors which clearly show that this project is worth to start and is profitable. Some factors are given below.

Advertisement:

Advertisement plays great role in the success of any project before starting this projects people should be informed about this institute by advertising through T.V and billboards and through flyers etc. Special events of institute like parties and funfair etc should also be advertised by various methods.

Choosing location:

Choosing an appropriate location is the key to the success of this project. The building should be good. Location for this project should not be in such place where reaching for student is hard.

Class rooms of institute:

Classes should be well equipped with modern technologies that is should have good quality multi-media, well furniture for the students etc which will satisfy and increase interest of students.

Staff:

The main thing in this project is the selecting of the staff. Mr. Javed should hire well qualified teachers. Because it teacher who run an intuition. Staff on institute should visit each class regularly, because absentees will disappoint students.

Reasonable fees:

This institute should have reasonable fee. At the beginning institute must have as low fee as possible in order to compete competitors. Fee prices shouldn’t be so high that people avoid this institute. Institute can increase fee with the passage of time.

Scholarships:

Institute should issue scholarship to the bright students this will attract more students toward institute and there should be extra curriculum activities in institute.

Sports and Library:

Institute should be limited to studies only there should be proper arrangement for the sports activities for the student so that they don’t feel institute boring and there should well standard library in the institute which should have all the related course books and other books as well.

Other facilities:

Institute must have canteen in institute which should sell neat and clean foods and beverages, there should be internet facility in institute so that students face no problem in new researches. Different parties should be arranged by the institute because parties and different seminars attract students.

Task for P1:

Sources of finance defined:

Basically there are two main sources of finance internal sources of finance and external sources of finance .Sources of finance means from where to make capital (money) in order to run business. There are different sources of finance which are explained below.

Internal sources of finance:

Definitely before starting business the owner will have some capital (money), it is not really mean cash but it also include building, machinery etc which is called as internal source. The more you have internal source less will be the burden of loan on the owner. (GCSE business studies Finance and Accounting)

External sources of finance:

It involves sources which are not owned by the owner like bank, government grant, and loan from friends, leasing, factoring etc. (GCSE business studies Finance and Accounting)

Sources of finance available for Mr. Javed:

There are different sources of finance available for Mr. Javed which is discussed below.

Loan from Banks:

Banks are external sources of finance. Banks in return takes interest on loan. Bank will provide you loan on the basis of four factors.

Character:

Bank will analyze your previous record like how have you been in returning loan of taken before. You character is checked.

Collateral:

Banks ask security for loan that is if tomorrow you are not capable of returning loan the will take that particular thing which you provided for loan security. Example bank will take legal document of land, building etc.

Conditions:

While taking loan from bank they might impost some legal condition of borrower like if you take loan from our bank you will not take loan from another bank till our loan is returned.

Commitment:

The bank checks the purpose of the loan. Banks will not give you loan for running illegal businesses.

Banks overdraft:

Short loan for a short period of time from loan is called as bank over drafting. The banks do charge you some interest on it and bank may impose some of their policies.

Borrowing from individual:

It involves taking loan from your colleagues, friends or relative which is called as borrowing from individuals. Individual in return takes interest. Individuals may provide you loan on below factors.

Loan will returned within sound time.

They charge interest.

Franchising:

When a successful business gives it patent and slogan to new business. This is called as franchising. There are two parties involved in franchising which is explained below.

Franchisee:

Franchisee is a party who uses patent and slogan.

Franchiser:

Franchiser is a party which provides patent and slogan.

Leasing:

Leasing is another source of finance. It is basically a contract between two persons, lessor and the lessee.

Lessor:

Lessor is the owner of the asset.

Lessee:

A person who uses asset is called as lessee.

Explanation:

It is used in such conditions when the person needs asset for some time and the agreement is established by lessor and lessee. There are two types of leasing.

Operating lease:

It is that type of lease which is for short period of time.

Finance lease:

Leasing for long period of time is called as finance leasing. Lessee is supposed to be the owner of the asset till the leasing agreement.

Grants:

When government provides asset, capital etc to our business this is called as grants. Government provides us grants when our business is helpful to society like providing employment for society etc.

Factoring:

It is that source of finance in which third is involved. This is called as factor organization. Basically it provides money against the security of invoices (client debtors). Factor organization provides you capital (money) up to 80% of the invoice value. Factor organization takes control of managing invoices. Example: “A” order’s goods from “B” on credit. When “B” needs money, it will consult factor organization. So “B” will give its invoice to factor organization. After this “B” will be given 80% of the invoice then factor organization will take control of invoice.

Invoice discounting:

Concept of invoice discounting is as same as factoring but the only difference in factoring and invoice discounting is that in invoice discounting it does not have control of managing client’s invoices.

Hire purchase: (HP)

It is also source of finance. When an individual or businesses buy goods on credit and pay money on installments is called as hire purchase. It is also consist of three parties which are.

Finance manager

Hire purchaser

Supplier

Hire purchase is similar to leasing, the only difference in leasing and hire purchase is that after completing installments of hire purchase you become owner of that good etc, while in leasing you do not become owner of that good etc after paying complete money.

Debt securities:

Securities are general term used for a promise to repay the debts. The company which provides security over debts is called as debentures. They are basically like a company takes loan from an individual. The company will repay the debt with interest in a certain time in the future. Both individuals and investors can use debt securities.

Task for P2:

Advantages and disadvantages of the sources of finance:

There are different advantages and disadvantages of different sources of finance which are discussed below.

Load from bank:

Advantages:

Banks may provide good amount of loan on the basis of your project.

Banks also provide loans for long time.

If borrower pays loaned amount before due date, banks may provide borrower with discount like decrease in interest rate etc.

Disadvantages:

Too much paper work is required to take loan from bank.

Borrower must provide security for loan.

Security provided for the loan can be taken as bank’s property if loaned amount is not paid.

If loan borrower fails to payback loan on time interest rate may be increased by the bank.

Loan from individuals:

Advantages:

It is simple and easily acquirable.

Borrower does not need to provide security on taking loan.

Lender may extend due date of paying back loan by negotiation of borrower.

Personal assets can be claimed if loaned amount is not paid.

Loan must be paid on time.

Clashed may arise on late payment.

Debt securities:

Advantages:

Company gains a lot of profit.

Investors get profit by taking interests.

In debt securities there a benefits of tax as well.

Disadvantages:

The investor will have to be given interest whether the company is in loss or in profit.

Investor will be given their money on the time which is fixed in agreement.

Banks overdrafts:

Advantages:

Too much paper work is not required by taking overdrafts from bank.

Bank overdraft is good for short period of time.

You don’t need to give bank security while taking overdrafts from bank.

Disadvantages:

You can only take specific amount of overdraft which is provided by the bank.

The bank may implement some of their policies like interest rate or specific time to give back over drafted amount.

Bank might charge you on providing facility of overdraft.

Hire Purchase:

Advantages:

Purchaser becomes owner of the asset after completing installments.

After installments purchaser become owner of the asset.

Disadvantages:

Usually price of goods or assets are higher as compared to original price in hire purchase.

Purchaser is not supposed to be the owner of the goods or assets till the completion of complete payment.

If payment is not given lender can retake goods or assets back from hire purchaser.

Leasing:

Advantages:

Lessee is supposed to be owner of the leased asset or good till the leasing agreement.

Lessee gets the required asset or good without paying complete amount at a time.

Inflation does not affect leasing because agreement once done cannot be changed until agreement date is finished.

Disadvantages:

Lessee does not become owner of the leased asset or good after paying complete amount as said in agreement.

Leasing rates may vary after agreement is finished.

Lessor does not have the right to change or to finish agreement before its finished date.

Grants:

Advantages:

Grants are free.

Grants do not require to be paid back.

Disadvantages:

Grants not given without proper rules and regulations.

Difficult to achieve grants because they have tough competitors.

Factoring:

Advantages:

Large amount of capital (money) is gained in short time.

Factor organization takes control of client’s invoices.

This system helps in controlling cash flow problems and helps in maintaining good business

Disadvantages:

Clients usually do not like this source because factor organization will take payments from them.

Factor organization charges interest and fees on providing services.

Privacy becomes nil because clients invoices becomes invoices of factor organization.

Franchising:

Advantages:

Franchisee does not need to spend money on advertisement and promotion.

Franchisers cannot make another franchisee, where one franchisee is situated.

Franchisee does not need to worry about customers because franchiser already has customers.

Disadvantages:

It is quite expensive.

Franchisee will run business as guided by the franchisors.

Franchisor might stop doing business in the future.

Task for P3:

Sources of finance which are viable for Mr. Javed:

Mr. Javed will need finance of rupees 3 million more because in order to make this project successful Mr. Javed must have good amount of capital. .Plus Mr. Javed will need to take a building for institute will cost too much money. There are different sources of finance available for Mr. Javed, but most feasible sources for this project are

Bank loan:

Mr. Javed will need more amount of 3 million so the best source can be bank. Because banks offer loan for long time.

Leasing:

Leasing is important for Mr. Javed because for this project land (building) is important so buying building will cost Mr. Javed a lot so instead of buying building its better to lease building.

Task for M1:

Justifications and implications of advised sources:

Bank Loan:

Bank provides loan of large capital (Money).

Loan can be taken from bank for long period of time.

If the project earns profit by giving loan back to bank before due date Mr. Javed can get discount as well.

Once you start relationship with bank, bank can further help you with more amount of money.

Bank might offer Mr. Javed for partnership which will take place by will of Mr. Javed.

Bank also provides discount in interest rate by paying loaned amount before due time.

Leasing:

It will be cheaper as compared to buy building for the project.

Leasing is easily accessible. Building for leasing can be found everywhere Mr. Javed wants.

If Mr. Javed earns profit if he wants to buy the leased building he can but this will take place after the will of lessor.

Instead of buying building leasing is better because if Mr. Javed wants to shift his institute to somewhere else he would easily do that without having tension of selling bought building.