Firmshave many projects to initiate while others are just renovation andmaintenance. Sometimes businesses run with negative cash flows(Hoggett, 2012). A situation whereby the expenses of the firm aremuch higher than the money available. Other companies want to startnew projects, but they don`t have enough capital to start andcomplete the projects. Other individuals or a group of people wish tostart a new business but don`t have any capital (Stittle &Wearing, 2008). All these reasons have led to the application ofmodes of acquiring these additional finances. Many models have beenadopted to finance the project one wants to initiate, depending onthe time taken to complete, the collateral among other reasons. Themanager ought to be keen on the modes to apply while acquiring thesources of financing, ensuring that the projects run without delays,and they are cost effective.
Thereare three common sources of financing a project. These areshort-term, medium-term, and long-term sources. In this report onlytwo will be covered short and medium term sources of financing.
Theseare sources of funds that are readily obtained and help the businessseize abrupt opportunities and cover up immediate expenses. Shortterm finances are payable in less than a year. They include bankoverdraft, trade credit, leasing, bank loans and credit cards.
Businesseshave bank accounts where most of their cash transactions take place(Stittle & Wearing, 2008). A bank overdraft is a situationwhereby a business withdraws more money than they have saved in theiraccount.
Businessescan purchase goods on credit whereby they are expected to pay for itin future. Businesses acquiring products and services this way aresupposed to make payments within 28 days.
Creditcard purchase loan is very similar to trade credit. The business hereacquires goods or services using a credit card, and they are requiredto make partial or the full payment at a future date (Kimmel &Weygandt, 2007).
Leaseimplies that a business pays for a particular product that it`susing, but it does not own it.
Coordinationis cheaper than when purchasing a product. It`s flexible goodsneeded for a short time can be leased instead of buying them (Stittle& Wearing, 2008). The business does not incur the cost of upkeeping the product because it`s the duty of the owner. Payments inleasing do not fluctuate due to the changes in interest.
Financesoffered by banks and earn interest in return. Payments of these loansvary in one way or another.
Disadvantagesof short-term finances
Perceptionof the ill financial position of the business. A company thatrequires quick funds creates a picture that they in an economicproblem which is seen as a negative attribute by other stakeholders(Paramasivan & Subramanian, 2009). Business is ranked negativelyduring the credit risk assessments. Short finances are insufficientfor long-term projects. A firm that takes these loans is consideredriskier hence strict rules are applied to payments and high penaltiesfor default.
Mediumterm sources of finances
Mediumterm sources are used to fund business projects that run in a span of3-5 years (Kimmel & Weygandt, 2007). Medium term financesinclude preference shares, debentures, medium term loans, leasefinance and hire purchase finance.
Theseare shares that have both debt and equity. They have a higher claimon assets as compared to the ordinary shares (Stittle & Wearing,2008). Preference shares are offered to the public, and cash iscollected to finance the business.
Adebt instrument that does not use any physical commodity as a form ofcollateral. These are offered to the public, money is collected, andthe public has just been issued with a certificate.
Theseare loans that have a fixed maturity period of between one and tenyears.
Alsoknown as a capital lease, it`s a type of contract in which a financecompany is the legal owner of the asset during the lease.
Thefirm will acquire the goods on debt to repay later, but they startowning it immediately.
Advantagesof medium-term finances
Repaymentof the loans can be made for short periods. Acquiring other loans ispossible. Less interest is payable as compared to long term loans.The business has a better public image as compared to when it`sreceiving the short term finances (Paramasivan & Subramanian,2009). Banks offering the loans will be more willing to give out theloan because these firms are considered to be less risky
Profitmade by a business can be used in financing its projects. In thiscase, shareholders are not considered. Instead, the money supposed tobe given to them in a form of dividends is ploughed back to thebusiness and used to finance new or ongoing projects.
Oldproperties and the unused ones from the business can be sold out, andthe money made used for project funding.
Soleproprietorship businesses use this means for financing their projectsbecause it`s quick and does not require collateral. In this case, onecan request capital from friends or the family members and, in turn,use it for financing their projects.
Manysmall businesses are started using money that the owner has beensaving for a particular period.
Notax benefits are acquired (Kimmel & Weygandt, 2007). It`sattached to a risk if not paid within the required period. Takes alonger period to acquire as compared to the short term finances.
Thereare several things that a lender has to observe before giving anyfirm a loan. They include: the creditworthiness of the borrower,collateral the company`s intent on the loan borrowed and ways thatthe firm has planned to repay the loan.
Applicationof the means of financing to the mother cares refurbishment project
Mothercare is a firm based in the UK, and it is involved in retailingproducts of parents to be and kids. It has been experiencing lossesand having huge debts in the past few financial years. The firm wantsto improve its status and resume making profits and minimizing itsreliance in huge debts.
Thecompany is planning to close down the stores that are making lossesand refurbish the profitable stores to pay back the bank loans. Inits refurbishing process, the firm needs to purchase relevantmaterials. They also need to improve their distribution channels bypurchasing new vehicles. The company will also need to spend money onadvertisement fees to market itself.
Themanager needs to evaluate all these expenses and rank them regardingwith the time of their completion and the amount of money that isrequired to finance them (Stittle & Wearing, 2008). The projectthat requires more time for completion is funded with the mediuminvestments whereas short-term projects funded via the short funds.The firm can sell preference shares that will ensure that there isenough capital to run the profitable projects, and even some can beused to repay the bank loans to avoid more interest expenses pilingup.
Sellingof debentures can be a reliable form of acquiring capital forpurchasing of the vehicles. This because it does not need anycollateral (Kimmel & Weygandt, 2007). It’s appropriate to usedebentures in this situation because vehicles require high capital topurchase hence quick funds are not advisable. Debentures can resultin enormous resources which need not be repaid in short periods.
Whileinitiating these projects, the firm must have employees or takecasual laborers. To cater for its employees` remuneration, thecompany can take bank loans or overdrafts to ensure that there are nodelays in payments.
Leasingsome of the machines needed for refurbishment is the best option.It`s because when the whole process is over, the firm might neverneed it at all. Hence, it will be easier for it to lease thanpurchasing those commodities (Paramasivan & Subramanian, 2009).Cost reduction achieved. The firm is not even responsible for themaintenance of the leased equipment for it’s the responsibility ofthe leasing firm.
Hirepurchasing is a reliable tool of financing in a firm. Equipment likethe screens needed in advertising can be acquired through this tool.The mother care company can obtain these materials on credit to repaythem in installments. Assurance of ownership is created in this modeof financing which is important because the firm will need thesematerials now and then.
Saleof old property by the mother care company can also be a bettersource of financing its project. The things which were in the storesthat were closed if they are not being used in the opened stores canbe sold, and the funds realized used in financing other projects.
Sellingof preference shares has been a common way of creating capital forthe large companies. Despite the time is taken in acquiring thesefunds, they are much appropriate for they do not need any collateralneither are the funds refundable. Once an individual receives theseshares, he or she can only trade them in the stock exchange markets.Preference shares are suitable for supporting a project becauseunlike the loans that have to be repaid and interests still attached,these are free and no any interest is payable.
Manyfirms have been operating in critical conditions due poor managementof finances. Many of these firms are not aware of the many ways thatexist in financing projects. Cash flows of this business are alwaysnegative, sometimes forcing the companies to withdraw some of theirplans or leaving them incomplete. Many firms pay their employeeslate, hence demotivating them. People also fear to venture into thebusiness due to lack funds, leading to their having fewentrepreneurs. The common problem here is the availability ofresources. That’s the only puzzle a manager ought to solve to helphim or her run the firm smoothly.
Whena business wants to initiate a certain project, evaluation is done.Suitable financing methods should be adopted to ensure that thecompleted project at the right time and that the cost incurred iseffective (Stittle & Wearing, 2008). Proper analyzes should bedone by the financial managers and the best advice given to themanagement team. Regarding the appropriation of funds, the bestfinancing options and the best ways of initiating the project(Hoggett, 2012). Guidance to the management team given to projects isundertaken on a long term basis and those on the short-term basis.They also need to provide advice on the proper channels of acquiringfinances, whether to take loans, sell the debentures, makeoverdrafts, lease property and other sources (Paramasivan &Subramanian, 2009). All these measures ensure that the firm pays thelowest cost, thus ensuring cost effectiveness of the finances.
Ifthese steps are taken by the manager’s cases of project failure canbe a nightmare to many organizations. Project initiation will alsobecome simple because the availability of finances will not be aproblem. Firms will not fear taking new projects hence innovationsand technological advancement will also increase. Availability offunds will ensure this.
Financemanagement is an important tool in management, for it ensures thatthe goals set are achieved, profits are made, and the firm’spicture to the stakeholders is admirable. When the face of thecompany is attractive, many people will be interested in investing inthat business, and the corporate role of that firm will be achieved.
Thesewere all the measures that the manager of mother care needed toadhere to so as to achieve his set goals. It would help him realizethe three years’ term plan and make the firm once more profitable.It would assist the adverse organization conditions to improve, andthe picture to the stakeholders develop. And by this, everyone wouldwish to be associated with the group. The customers would once morebuy goods promptly the lenders would not hesitate to give credit tothe firm and increment to profit making will be an achievable dream.
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