FINANCIAL DECISIONS

Managing Financial Resources and Decisions



Managing Financial Resources and Decisions

Introduction

BOATLINE Ltd. markets ready-made high quality chocolates. To maintain its competitive position in the industry, BOATLINE Ltd. requires a cash injection of £1 million in (R&D) over the next two years.

TASK 1

L.O 1.1 Identify and explain four sources of finance available to this business

Capital of the organization is a significant part of the funding organization, guided by the current, financial and investment activities for profit (Donald, 2010). The main characteristics of the capital structure refer to the division of the sources of formation, the object of investment, in the form of being in the process of circulation (Ehrhardt, 2010). Four sources of financing that company can use have been discussed below.

Retained Earnings

BOATLINE Ltd. can make use of its retained earnings to finance its business as an internal source of financing. Retained earnings represent the portion of income that a company sets aside and accumulate, once it has set the dividend. Retained earnings are accumulated by the company and shown on the balance sheet under the equity (Osborne, 2010). Following a successful period, the company may (at the discretion of the Executive) distribute the portion of its income to its shareholders and keep the rest as retained earnings for internal financing needs (Lasher, 2010).

Commercial Credit

The trade credit is an important source of financing use as short-term liabilities of the company to obtain resources as inexpensively as possible. For example, accounts payable is a form of trade credit that company can obtain to fulfill its financing needs. They are short term loans that suppliers grant to the company (Shapiro, 2005). This gives opportunity to company to streamline their operations business. 

Bank Credit

Another external financing source for business includes obtaining Bank credit. It is a type of short-term financing that company obtains through the banks. Bank credit is one of the most used financing modes by the businesses today to obtain necessary financing (Donald, 2010). Almost all commercial banks handle the checking accounts of the company and have a greater lending capacity in accordance with the laws and banking regulations.

Line of Credit

Line of credit is an external financing option for the company that can be obtained from the bank in the form of Bank Overdraft (Helfert, 2002). The Line of Credit represents money in the bank that is always available for a period agreed in advance. 

L.O 1.2 Assess the implications of the different sources of finance discussed above.

The main implication of retained earnings is that the undistributed profits of previous years have become an integral part of working capital firm. Retained earnings does not result in increasing the financing cost of the business as company can utilize it to cover its internal financing need at zero interest rate cost, with no major obligation in case of bankruptcy (Shapiro, 2005).

In commercial credit, if company is not able to settle its debt, strong risk exist that the creditor does not cancel the debt and may results in a possible legal action. The finance executives should know well the answer to leverage the benefits of trade credit. Payment terms range from classical immediate payment in ...