MANAGING FINANCIAL RESOURCES AND DECISIONS

Managing Financial Resources and Decisions

Managing Financial Resources and Decisions

Introduction

Obtaining financial resources and then managing them is critical to the success of the organisation. Financing decisions have to be taken with care as they can have significant impact if not managed properly. Financial resources need to be managed at the inception of the business and also when the business is performing smoothly (Fao.org, 2013).

Discussion

A 1.1

I am considering setting up a manufacturing business that will deal the manufacturing of fast moving consumer goods such as shampoos, edibles, household insecticides etc. The business will primarily be engaged in the production, packaging, distribution and retail of the goods manufactured. Being consumer oriented in nature business dynamics will be concerned with consumer orientation and product perfection.

An initial investment to setup the business will be around £800,000. This amount will be used to purchase land for operation, purchase of delivery vehicles, purchase of plant and equipment etc. Apart from this an investment of £500,000 will also be required to finance working capital requirements that comprise of funds needed to purchase raw materials, pay wages and salaries and pay all other bills i.e. utility bills and ancillary costs.

Possible sources of finance include investment by the investor if the investor wants to run the business as a sole trader. Other option is to set up the business as a public limited company. This will allow financing from share capital. Since the business has just started it will not have access to finance from retained earnings (Businesscasestudies.co.uk, 1995). However start-up capital can be sought from a bank loan, bank overdraft, venture capitalists etc (Extension.iastate.edu, 2013).

A 1.2

There are several implications that different sources of finance have to offer (Blurtit.com, 2013). If finance is raised through share capital put in by external investors cost of capital will have to be borne in the form of dividends (Jstor.org, 2013). Further implication is the divorce between ownership and control (Tutor2u.net. 2013, 2013). Had the business been operated as a sole trader ownership and control would have been with one person but since issuing capital to outsiders has limited the amount of control as was previously offered by a sole trader setup. Ownership gets diluted as more and more shares are issued.

If a bank loan has been used to finance the setup, interest payments will need to be made (Boundless, 1933). Secondly if the business is unable to repay the loan (principal and interest) creditors have absolute right to liquidate the business (Wisegeek, 2013). Using a bank overdraft to finance day to day working capital requirements may fulfil the purpose but has severe implications (InvestorWords.com, 2013). A bank overdraft often carries high interest rates and is immediately repayable on demand so if a business fails to repay the bank overdraft the bank can force the business to liquidate (BMS, 2013).

A 1.3

The business supplies Fast Moving Consumer Goods (FMCG) and requires £1.3m in total. Most suitable source of finance is a mix of debt and equity finance that ...