There are various forms in which an individual can finance a business. The major sources of financing a business include debt and equity financing among others. An individual is therefore faced with a task of making a decision on the best form of financing depending on the size and the nature of business.
Forms of financial financing
Debt financing refers to an act of acquiring funds through borrowing. This form of financing can be obtained through various ways which include commercial banks. Major Banks gives a wide range of services while the smaller banks are focused mainly on specific variety of services. These banks offer two categories of debt financing based on the type of loan that one requires. These types of financing are; short term which deals mainly with provision of capital deficit businesses finances for a period of not more than one year and long term debt financing which gives these finances for a longer duration. It is mainly given to the business entity that faced with scarcity of capital.
The implication of debt financing is that the lender does not achieve interest related to business ownership in ones business and the duties of the business owner are restricted to loan repayment. In most cases personal guarantees are needed on debt instruments hence it becomes equated with personal financing (Atrill, 2008, p. 215).
Equity financing is another form of financing a business. It refers to an exchange of money for a split of business possession. This form allows one to get funding for his or her business without being faced with an obligation of paying back a certain amount of money at a certain time. This form of financing often tampers with rights benefit and there is often possible loss of personal direct managing of the business that comes with division of company possession.
Both debt and equity financing gives varied opportunities for obtaining funds for entrepreneurs. They should therefore take care to maintain an acceptable ratio between the debt and equity, this is because this ratio for the lender gives an approximate figure of the quantity of material goods available to repay a debt incase one does not settle it in time. On the other hand too much debt financing makes your business to be considered as risky and not safe. It also indicates that one is not making full use of available capital or that the owner is not in any way committed to the business (Correia & Ferrel, 2007, p. 52).
Another form of financing that is offered by a bank is overdraft, which is a short term credit restricted to the company’s existing bank account. It gives a company an opportunity to remove or use all the money it has to a certain maximum value agreed which is known as an overdraft limit. This overdraft is meant to cater for most urgent needs and stabilize irregular cash flow. The importance of this form is that it allows the business owner to have access to extra funds than what they have in their accounts and hence are able to expand their existing businesses or start new business.
However this form of financing has some shortcomings as it requires an entrepreneur to obtain considerable amount of money which proves to be a tedious experience for most entrepreneurs. This issue can only be dealt with if one obtains help from companies that deal with sponsorship of businesses with an aim of giving a solution to businesses which are seeking finance to develop and those which are experiencing financial constraints.
Operating line of credit can also be used as it is almost similar to overdrafts. It is most useful and convenient for entrepreneurs with minimal financial requirements. This form of financing a business is fast and often the most reliable though it calls for quick reimbursement which may end up straining an entrepreneur.
Another form of financing that they can seek is obtaining investment loan which is meant for funding new projects. It mainly helps in purchasing of fixed assets which include putting up an office or acquiring production facilities. The period of funding for savings loans varies from a period of not more than 15 years usually based on the lending institution (Horne & Wachowicz, 2008, p. 194).
A financial institution can also offer a start up loan which is usually given to a business that is just starting and lack strong assets. These startup loans help an entrepreneur to handle the risks related to loans and business. For these loans as compared to others an entrepreneur has to take risks with their own possessions.
Entrepreneur can also obtain financial aids through seeking government loans and incentives. The government offer assistance to the operators of small businesses through its financing programs such as federal agencies. This helps in starting, growing or expanding business operations. Both the state and local governments are involved in this funding exercise. They are most important for they are obtained with minimum interest rates as compared to the loans from other commercial institutions. However the processes of obtaining this form of funding proves to be time consuming and demands that the investor should meet the required characteristics of requiring the attention of the credit services.
There are some other forms of financing a business which include use of term loans which cater for major financial needs of an entrepreneur and are accessible in forms of fluctuating and non fluctuating rates of interests. Financial aid can also be obtained through use of business credit cards especially if one needs an immediate funding. It is seen as easy and the quickest as compared to other forms. However this form can prove to be expensive as it offers charges high financial rates. This form has some other reward features.
Entrepreneurs can also obtain financial assistance through borrowing from friends, donors and personal gains from his business. An entrepreneur can also opt to seek financial assistance from micro financial institutions or finance through venture capital. Therefore before one make a decision on the form of financing an entrepreneur should consult an advisor who is well versant with all the available forms so as to give him or her most appropriate financial advice (Lasher, 2007, p. 89).
The cost and benefits of all the above forms of finance is done by ascertaining the net worth of the form of finance. The benefits of each and every form are to be calculated with respect to all the associated cost. Discounting the benefits of all the forms is very important so as to come up with a true and exact figure which enables the entrepreneur to come up with a reasonable form to utilize.
Loans from banks and other financial institutions are always repaid with an interest rate. These interest rates have been estimated by factoring in the inflation rates in the country. This will enable one identify the exact cost of repaying such loans. The bank overdraft normally has to be repaid after a certain specified period of time such as after 30 days with a higher cost. This is very expensive for starters hence can be avoided unless otherwise stated by the owner. Forming a partnership in form of shares will be one of the best means but mainly good for those companies which are established or the business which are fairing on well.
Personal financial planning can be termed as a process of establishing the goals purpose and the priorities that an individual has set in life. A financial plan is a document that presents the existing financial situation of an individual, organization or a country and the necessary amendments in the pattern of spending so as to achieve the expected goals.
Financial planning for Flash Tec Company is important in various ways. Poor planning haunts an individual in the future. A good financial plan is beneficial to the company for a longer period stretching to the years to come. An entrepreneur therefore needs to have a financial plan that will enable one to face the situations that one encounters in business path.
It has also been found that most businesses fail due to lack of proper planning. Taking time and using some energy to prepare a good plan prepares an individual both psychologically, financially and emotionally. One can be ready to deal with the losses that may occur in the company or be able to set up plans that will improve your profit beyond the present needs for it. It will also offer some piece of mind that will make an individual to participate fully in the business without being interrupted (Blanchard, 2008, p. 137).
First it will enable the company to attain their long term profits using the available assets. It does this through ensuring that the reserves that an entrepreneur makes are planned and managed by experts. A decision concerning finances can only be examined with care if a good plan is established at the initial stage. Financial planning enhances the money in and effective use of the money which will not lead to being bankrupt. Cash flow can only be increased by establishing procedures such as tax arrangement, wise utilization of cash and planning for the future.
An efficient financial planning also helps in building a firm financial base in business. It enables an entrepreneur to think about savings and hence be focused on improving his financial situation. In terms of income a good financial plan enables an entrepreneur to manage it effectively. One will be able to divide all the available income into various arts covering tax resettlement, investments and some other monthly expenses.
Financial planning also provides family security various financial policies that are provided in the market targets the provision of family security. A good financial plan also puts into consideration both the income and the expenses of an individual. This helps an entrepreneur in selecting the precise investment policy. This helps an individual in attaining the goals that he has put forward.
It also plays a role in raising the standards of living of an individual. The investments made through proper planning helps an individual during difficult times.For example the demise of the sole provider may destabilize the access to the daily needs by the family members as they have been used to. A well set up financial plan acts as a source of security in such like situations as it enables the family to carry on with their daily chores.
Financial planning also enables an entrepreneur to obtain an understanding of the present financial point. This makes it easy for an individual to understand any alterations made on the plan of the future security in finance or be able to calculate the send-off money of the employees when they retire. One also with a good financial plan will be able to establish the true worth of an asset. When one is equipped with an understanding of finances, it becomes easy to withdraw and settle liabilities that most assets come with. The whole process involved here helps an individual to put up assets that are not going to be a load in the future.
Good financial planning enables an individual to put aside savings which will help in the future both for emergency purposes or educational needs. Due to the liquidity of the savings made through good financial planning, one can easily utilize in times of need. Business financial planning has an effect on how an entrepreneur will attract financial assistance that is needed to start, grow and run a business. It determines the raw materials that one is able to acquire, the goods that one will be able to produce and whether one has the ability to market the business efficiently. It also has an effect on both human and physical resources that one will obtain in order run the business. It also establishes whether one will make a profit or loss in the business. It is essential for one starting a business to have a proper financial plan so as to be able to fight an opportunity of succeeding in a business environment which is highly competitive today (Tsikata & Moreira, 2009, p. 71).
Cash flow plan
This is used to estimate the cash which flows in and out of the business. This is important when starting a business to be prepared so as to establish the main areas which require a lot of money. It’s is also useful when Flashtec wants to put aside the savings or invest in other forms of securities when there are unused reserves. It enables an entrepreneur to decide on the amount of money that is required for the whole business operation.
It also assists the company ion obtaining loans from financial institutions. This is because it acts as a convincing document or a proof of the business performance and determines whether it is worth credit risk.
A cash flow plan also referred to as a cash flow projection is a very important used in business. In preparing a cash flow plan three sections have to be included. The first section contains revenues which have been collected in cash and those which are collectible. These are mainly in form of sales in the company in a specific month in question.
The second section contains the expenditure. In preparing this part establish the total expenses from your various accounts and record the projected figure that you are to incur in that particular period.
The third section is dealing with balancing revenues and expenditures while factoring in those particular balances brought forward from the previous period or carried forward to the next period. In this particular case we add the balances brought forward from the previous period to the revenues of this period and less the amount of money paid this period and any other balance which relates to the next period.
Importance of financial statements
Financial statements are normally prepared by the companies at the end of their financial period. The financial period is the operation period in which the company has been carrying own business. This is the period in which the company has to report its performance on it. This is very useful since the company portrays how it has been operating and managing the details of the investment.
The financial statements are very important to various users who want to relate with the quality management of the company. The main financial statements which are required as per the international auditing bodies include, statement of the company income and expenditures, the TP and loss; and the balance sheet. All this statements have got to be prepared as at the end of each period. The company reports this to the shareholders of the company as to their performance.
The main user of these statements is the company itself. The management of the company will use these statements to set plans which are useful in the future operations as a means of increasing the revenues and expanding. The statements are also used by the management of the company to establish a strong market share in the industry in which the company operates in. The company management is also using the statements in coming up with the forecasts in the industry and in the entire economy.
This will ensure that comparisons are made which will establish the strength of the company quality management and the market share they control in the economy. The management will be of the great view in establishing also the goals which are to be attained in future operations. The goals which are set are based on the financial statements which have been presented in the company. The financial statements in the company are used by the management to make decisions which are of the benefit to the employees and which also enhances their performance (Moyer & McGuigan, 2009).
The credibility of the company also is attained through the reports of the financial statements. These are very important especially in the execution of the legal processes which affects the company. The financial statements also are used by the external users in identifying the credit worthiness of the company. The shareholders are the main external users who will be able to identify the management of their equity. The shareholders’ equity is the main backbone of the company finance hence their main concern is on the profit which has been reported by the company. This profit is what the shareholders are entitled to be shared equally as per the numbers of shares one has acquired. This is normally paid in form of dividends after the reserves have been deducted (Mankiw, 2008, p. 23).
The government also is another external user of the financial statements of the company. The government uses them in calculating the tax which the company is supposed to remit through the revenue authority wing of the government. The taxes are the main incomes of the government which are used in the execution of its functions. This is the main need of the government in requiring the financial statements to be prepared by the company every time their financial period comes to an end. Corporate sectors are the main tax remitters in an economy hence the need for preparing the financial statements.
The statements also are of great concerns since the major policies made by the government will directly affect the performance of the company. The government may pass some incentives to a particular industry depending on the performance mainly indicated by the final statements.
The company lenders are also the main body which requires the financial statements. They need to establish the position of the company in meeting their payments. The creditors are the users who also want to know how much the company has reported and their future plans in settling their credits. This is very useful in predicting the future dealings with the company whether the bond will be strengthen or weakened. Forecasting is important when the financial statements have been prepared since the computation of the ratios is enhanced. The ratios which are calculated best defines the efficiency of the company management hence all the users will benefit from them (Baumol & Blinder, 2008, p. 88).
Financial statements are also used by the company employees in determining the future stakes of the company. It’s important for them since they would want to know how their service delivery is fairing on. The company employees would want also to associate themselves with the end products of the company hence the image of the company is very important when the employees are well treated in the company since they are the main consumers and sales people for the company products. The employees also use the statements in negotiating for better pay when the company performance is highly improved.
This is when the company is making profits which are as a result of the employees’ hard work. This will prompt the employees to push for more pecks which are of their benefits. The employees also would want to use the chance of the company expansion in terms of promotions to be the heads of departments, supervisors especially in the new departments created or sites of expansions (Tracy & Andrews, 2007, p. 69).
Employees are very important human resources in the company hence they need to be well treated in the working conditions and the pay. Workplaces should be well catered for and the welfare service should be organized by the company. When the financial statements are being reported, the employees would always want to know the amount of money which they have been allocated for their welfare services hence their importance is appreciated through the presentation of the financial statements.
The investor institutions also are one of eth users of the financial information of the company. The really require the final statements of the company is determining the amount of their investments and the company to invest in. The best performing company normally attracts local and international investors who actually boost the company equity hence enhancing the rates of expansions. The investor institutions are interest on the good qualities of management of the company which will be an indicator of how ell their investments will be for good returns.
The company also is the main beneficiary of its own good performance as it will attract more investors in the company, its image will be well established among the consumers and this will lead to a well established market growth. Investors are also consumers of the company products hence when the final statements are reported with indications of excellent management, the company will be able to increase it revenue as well. The revenue boost is due to the reputation which the company will be receiving as a result of the quality management seen through the final financial statements.
The media people and the ordinary citizens in a country also require the financial statements. The media will be using them to analyze the performance of various companies in similar industries as well as those in other industries. This will enable the media to rank the best performing companies and award them with the certificates as per their best level of performance.
The ranking will be done in terms of the social, economic, environmental, community delivery services, employees’ treatment, gender related issues, and the employees assisted programs, among others. The normal public also would want to know the financial performance of the companies so as to know how they will be able to benefit from the company in terms of the social amenities, procurements services, employment and the business associated with the company indirectly (O’Sullivan & Sheffrin, 2005, p. 76).
Formats of the financial statements
There are various formats which are being used by the companies in various industries depending on their systems which are in use. The various formats are as a result of the industry, country, region, technology, level of employee competence, history of the nation among others in the company. There is a universal body which guides and regulates the financial statement preparations (Brigham & Edwards, 2008, p. 212).
The International Financial Reporting Standards have been acknowledged by all the companies in all over the world to be the best ever standards in the field of accountancy. The standards are of the accounting and auditing background which should be prepared by a professional accountant who has been certified by an accountancy body in the country by passing the require accounting examinations. The financial statements should be audited by an independent person or body who also has been certified by the examination body and has the practicing certificate as per the laid down procedures (Krugman, 2009, p. 182).
The auditor is an independent person (s) who is charged with the responsibility of reporting the financial statements as they are. They should also reflect the true and fair values of the companies’ performance. They prepare these statements as per the format stipulated by the international financial reporting standards body. The standard demands that the balance sheet of the company should be prepared accordingly (Brigham & Daves, 2010, p. 45).
The balance sheet should indicate all the current assets of the company such as the cash at hand, inventories, debtors and the accruals due from the customers. The non current assets also should be included which includes the main assets of the company used such as the equipments, machinery, vehicles, plants and the buildings as at their book value. The current liabilities such as the short term loans are also included. The non current liabilities also should be shown such as the long term loans among others should be shown. The share holders’ equity should be the main one also indicated in the statement.
Trading profit and loss statements should be prepared which indicates all the transactions which the company has been able to execute through the use of the cash invested in the company. The trading profit and loss statement indicates the amount of money received in form of revenues from the sales of all the products whether in cash or credit, and the gross profit which is arrived at by deducting the cost of the goods sold.
All the operational cost incurred in the company through the process of producing the company products are also deducted so as to attain the profit from operating activities. The operating activities includes the salaries paid to the employees, the wages, the depreciations, the interest rates, the rent, the electricity bill, the water bill among others. The tax also to be paid to the government should be indicated in this statement after the profit from operating activities so as to get the profit after tax. The amount of money due to the owners of the company is deducted as per the predetermined rate.
The amount also to be kept as a net profit reserve should be included so as to determine the amount of money the company is having in readiness to tackle any emergencies and the expansions in future. The final statements are very important as they show clearly the breakdown of the companies’ incomes and expenses. The acquisitions also made in the company are shown hence this indicates the true and fair values of the companies’ performance. The Flashtec company should employ all these standards which are required as per the international body as a way to compete effectively with other companies and also to attract foreign investors through the final statements which they can interpret (Krugman & Wells, 2009, p. 111).
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