Financial Analysis

Financial Analysis

Managerial Financial Resources and Decisions

Q1.1 Alternative sources of finance

There are many of us who decide to start a new business for the sake of profits. I am thinking to start a business of office furniture which would be consisting of mainly office chairs and tables. Plus in the future we would be looking to expand our operation into producing various types of office fixtures and fittings. A capital of $40,000 is required to start this business.

In order to start this business, I should have the capital by myself. It is needed to be analyzed that may be there are some cash savings, matured life insurance policy, stocks, bonds, equity in real property or other retirement accounts. Furthermore, if personal capital get short, I should seek a loan from friends or relatives, trade or supplier credit, leasing assets, commercial finance companies, customers and equity financing, small business administration, venture capital, certified development companies and some government agencies (Anonymous, 1999, p. 01)

Q1.2 Implication of identified sources

I have selected the two methods debt and equity together to avoid risk of losing all of the owner's equity. Yet, I have kept aside 40% of my savings in order to back my business from any upcoming losses, and financed the same 40% with debt. Debt financing is 40% of the total capital and will allow me to easily pay off the amount as the business's estimated cash flows are stable in future and will help to pay the fixed payment of interest. The Debt to Equity ratio of 40/60*100 = 66.67% will be maintained near the same level in order to ensure that the business is not falling into any risks of bankruptcy and is still under the control of the owner. To keep control in my hands I have kept 60% of equity in the total investment amount to ensure that if there is a situation of break-even at some point in the earnings, then I will not have a burden of paying a larger fixed payment of Interest. Moreover, as the business starts generating revenue, I have plans to keep some amount of earnings in the Retained earnings account in order to create a third source of financing in future (Mitchell, 2005, p. 01-03).

Q1.3 advantages and disadvantages of the different sources of finance

If debt financing increases, then it means one is optimistic towards payment of interest. If the prevailing interest rates are low and there is good money supply then, debt financing has a positive aspect of increased earnings enjoyed by the single or existing partners. On, the other hand, if business risk increases and moreover the prevailing conditions are not favourable for debt financing than, expected earnings will decrease and if extensive borrowing has been made, then business may encounter with bankruptcy also.

If the prevailing conditions are not favourable for debt financing, then equity financing can be the option which ensures profits when business generates revenues. But if the business is unable to generate revenue then it ...