SBM1203 Business Finance Assignment Sample
Due date: Week 11
Word count/Time provided: 2500 to 3000 words
Unit Learning Outcomes: ULO1; ULO2; ULO3; ULO4
Assessment 3 Detail
As an project manager you will need funding to complete your project/venture. A corporate decisionhas been made that all funding is internal. You may, however, argue that alternate sources may beappropriate (i.e. banks, angel investors, micro-finance organisations, crowd funding, etc.).You will need to present you rideasin a succinct, coherent and persuasive report, to assess the viabilityof your project. This assessment simulates this professional practice, where you present the key analysis to persuade your potential key stakeholders to invest in your project in a safe environment.
You should consider the following and write case study for me .
• Identify the stakeholders you are presenting to in this assessment. In this case assume that the lecturer is the manager of the company.
• Introduce the project idea. Include what the idea is and why it matters to the business. You are free to make any assumptions about the business as needed – provided they are logical.
• Provide details of your financial analysis and assessment of the project viability. Ensure that you consider the key risks and the results of sensitivity analyses.
• Close the deal. Why should the manager approve the project. Be persuasive.
A business organization needs to have certain funds to complete their projects and also to achieve organisational success. Hence the first duty of the board management is to fix the goal of their organisation. After fixing their goal they have to create the financial budget to complete the goal. If they can create the budget for their organisation, then they can understand how much funds be needed to assess the scale of operation. After fixing the quantity of fund needed to finance the project, they have to choose the right sources through which they can collect all the amount. There are two different sources the internal and external sources. Both the sources have their different advantages and disadvantages. Hence, they have to fix their source of funds practically that will reduce the level of risk.
In this particular case, the management has decided to introduce a project venture through which they will utilise flower wastage and will produce lather from it. The business idea indicates that there will be diverse stakeholder group starting from supplier of flower wastage, logistic department, who will collect those wastages and will bring to the production centre, the labours working at the production centre as well as the management itself. Hence, a succinct stakeholder management plan is also essential. This study will provide detailed stakeholder management plan, the financial aspect of this project that includes source of funds, viability of the project etc.
The stakeholders are those who have a large interest in the organisation and who have affected or be affected by the organization’s operation and performance. There are two types of stakeholders in any company, which are internal and external. The internal stakeholders directly related to the company’s performance and operation the example of these are, employees, management, investors or owners of the company. Since, the project is to produce leather from flower wastage, the role of internal stakeholder, specially the logistic and supply chain management people are key to attain the success. This specific stakeholder group needs to work efficiently to maintain the flow of flower wastage. The external stakeholders are those who have less affected by the business operation, such as the Government, regulatory authority, customers and suppliers of the company. Here, the project required permission from regulatory authority as they business will utilise wastages and will produce leather from it. For successfully running a business for a longer period any company must understand its stakeholders. As the stakeholders of the company indirectly played a significant role in the business decision. The main problem arises in the stakeholders is that company has various stakeholders and the interest of each stakeholder are different. Hence,sometimes it is not possible to meet all stakeholder’s interests at a time (Bottenberg, Tuschke&Flickinger, 2017). As an example, this difference can be understood. The primary goal of the company to profit maximisation to increase the value of its shareholders. Therefore, it controls its costs including employee’s salaries and wages of the workers. Moreover, the interest of these two stakeholders is to earn more from the company. Here, the interest of the employees and workers directly conflicts with the investor's interests. This type of issue in the company is very common but the efficient management of the companies can manage all the interests of all stakeholders (Heikkinen, 2017).
All through the word, stakeholders and shareholders seem similar but there are large differences that shareholders are also stakeholders of the company. The interest of shareholder sislimited they have only financialinterests whereas the stakeholders have vested inters in the company for a long period (Schneider & Sachs, 2017).
External sources of capital
Similar to the internal sources of capital there are several sources through which a company can maintain their capital. In the case of an external source, a company must have to take high risk as the capital needs to pay a higher amount of interest. Rhus. It is too much risky. However, there are several advantages also available of this source. Hence before fixing the right sources of capital, they have to understand the level of risk.
Family and friends
A business organisation can get their required amount of capital from their family and friends. This type of loan is generally taken based on vocal consideration and sometimes in a written measure. The amount of loan must be given back to the party after some time. Hence the percentage of risk in this type of loan is zero.
This is also a type of external source of capital through which a business organisation gets their loan amount or the amount of capital. Here the person can take the amount of capital greater than the deposited amount. Here the company or the business houses must have to pay some interest to the excess amount of capital withdrawn from the bank (Belanova, 2018). This type of capital source has a little level of risk. Banks have charged a very less amount of interest for the overdrawn. Thus, it can be a reliable source.
Venture capital and the business angles
Venture capital is the source of capital. This type of capital is generally external. Different companies want to invest in different new companies and existing companies. They provide the loan based on the percentage of profit to be given to them at the end of the year. They used to keep an eye on the business component and the business prospects of the company where they have invested. This type of loan is also risky but the level of risk is comparatively low (Damanpour, Sanchez?Henriquez & Chiu, 2018).
This is also a type of external source of capital. This type of capital can be earned by the company by selling some of the percentages of shares. The buyer if the share is generally getting some percentage of the ownership of the company. At the end of the year, the company must have to give some of the percentages of profits as dividend to those shareholders. This is the popular method of capital acquisition. Sometimes companies do not prefer this type of capital as they have the ownership of the company and also the voting right. Hence the companies like to use debenture capital as the preferred one. This type of loan holder has not any right of voting as they are not the owner of their company.
Issue of debenture
This is also a very popular source of capital. This is the long-term capital source. Here the company issues the legal stamp paper of the company that generally uses some of the assets as underlying for the sake of the registered and sealed paper of the company. Using this type of lean paper, they can get a higher amount of loan or capital for long-term use. The company has to pay some fixed rate of interest in the borrowed capital. This type of capital is too risky. As the owners, if the bondholder has the right to take the assets of the company if the company cannot pay the amount of interest on the debt capital. However, there is an advantage of using this type of capital, the amount of the interest taken as the expenses of the company. Therefore, the company get a deduction at the time of paying the tax to the government.
Supposed if an individual is trying to enter a business but they can face the risk of low capital. Here they can take any individual and any other company as a partner of their company. They are taken as a partner to the company for some percentage of the state and they also have to pay some amount of capital. They will agree on themselves to share the profit within them in an agreed percentage. All the responsibilities are also to be discussed at the time of joining any other persons in the partnership. This is also a very popular method for getting the amount of capital for a company (Vinczeova&Kascakova, 2017).
It is also an external source of capital. Here the company can lease one of the other assets to a company or a party who needs the machine or the services very much. Here the company that has taken the services or the product must have to pay a semi-monthly instalment to the assets and services. This is how the company can maintain liquid capital.
This is not that popular tool for capital sourcing. Governments generally give some amount of capital to the company for completing some of the criteria. This too if capital is not refundable and also the company does not have to pay any kind of interest. Instead, they have to fill the employment gap. If they can provide higher employment opportunities then the government can pay some of the capital as a subsidy. Thus, companies can avail this type of source by providing higher job opportunities to society (Anebo, 2019).
This is also an external source of capital. This type of capital is the capital source. Here a company is thinking to purchase any machinery or equipment from a company then by paying some of the instalment the company can use the machinery or the equipment for business. However, at the time the company has paid their final instalment for the machinery, they will get the ownership of the machinery. Therefore, it is a kind of financial benefit that is given by the owner company to the purchasing company.
The internal funding for a company
The funding is the collection of money for capital. There are two types of funding available to any company one is internal funding another is external funding. Internal funding is the company’s seed money means the money that company-owned is called internal funding. Here the company needs to funding a project and now discussing if the internal funding will be worth it to the company or not. As the internal fund is raising within the firm hence the funds came from the net profit after adjusting the interest and taxes and the reserves that available to the company (Fikasari&Bernawati, 2021).
The advantages of internal funding
1. Allows full control to the project:
The internal financing is free from any repayment and time-bound of the project, therefore the management has full control over the project and they can set the strategy and set the time of completion of the project. This type of financing also free from any external tern ad condition of the financer.
2. It improves the process of planning:
Companies tend to be more concerned and careful when financing any project internally compare to external financing. The company used the excess profit in the project financing thatis assured of extra income than the current income amount. Therefore, t can say that internal financing is increasing the level of planning (Madra-Sawicka, 2018).
3. Decreases the cost of the projects:
The internal financing is free from the external borrowing cost such as the cost of the interest and the processing cost of borrowing. Therefore, the cost of the projects will be less than the externally funded projects.
4. Maintain capital structure and risk of financing:
The increasing debt in a company is a bad sign for its investors as the cost of the debt financing is effected the profit of the company and also affected the capital structure of the certain company. Too much debt on the balance sheet indicates the risk associated with the company in the long term if the debt is too high then it is considered as a high risk of financing. To maintain a stable market performance and ensures the interest of the shareholders the company needs to avoid external financing (He, Chen & Hu, 2019).
5. It limits the external influence:
Debt financing or external financing is influenced by macroeconomic factors such as inflation, exchange rate, interest rate and market risk. However, internal financing does not influence these. Therefore, it can say that internal funding limits the external influence.
The disadvantage s of the internal funding
Although there are several advantages of internal funding alongit, some disadvantage s also exist. The disadvantages of internal financing discussed below:
1. Low cash availability:
As the money is taken from the internal source of the company. Therefore, the company can see low cash within it. If the expense of the project is huge then the company can be out of cash and the financing affected the working capital of the company. Sometimes the internal financing affected the operation of the company (Bellavitis et al., 2017).
2. Required accurate estimation:
When the project is financing from the internal funds then the management needs to estimate the accurate cost of the projects as the cost is incurred from the company’s capital there for any excess cost in the future will impact the operation of the company. Any mistake in the estimation can harm the interest of the company (Baker, Kumar & Rao, 2020).
3. It requires control over the spending:
As this type of financing reduced the working capital of the company, hence the management needs more control over the spending of the company to avoid the out-of-cash situation and short-term insolvency. In addition, the company needs to control the spending of the project as these also impact the company’s operation (Mashayekh&Morshedi, 2020).
4. It takes more time to complete:
In this type of financing, the project has not any time-binding. The external sources of funding have time commitments involves and for avoiding the extra cost of interest they started as soon as possible but the internal source company has not faced any time issue that slowed the completion time of the project(De Massis etal., 2018).
Risk included in the funding
Whether the source of financing is internal or external the risk of funding is in both cases. The risk associated with the founding is major as it can dissolute the business. The main concern in the funding is the project completion. This means if the project will be completed or not that is not sure as the external factor matter. The risk of internal sourcing is mainly capital-related as it influences the cash flow and the working capital of the company also this funding affected the position of the company. On the other hand, external financing hasa larger risk as it is influenced by macroeconomic factors. Any changes in the economy impacted the project costing and also the cost of the funding. Therefore, the risk of uncertainty is associated with external sources of funding (St?Pierre &Lacoursière, 2017).
The debt financing from the project increases the risk of the company in the longer period as it changes the capital structure of the company. High debt in the capital structure means high interest or finance cost in the income statement which is decreased the income of the company. In the end, it can say that internal financing impacts the operation management of the company but external debt impact both operational management and in profit of the company (Goldstein & Kearney, 2020).
Evaluation of funding and judging the economic viability
The following table is showing the economic viability of the chosen project return that has undertaken by the company management. NPV (Net present Value) analysis is the capital budgeting tool that is generally used by the different business analyst to check the financial viability of any investment project (Setiawan&Fahrurrozi, 2017).
Here are some assumptions has taken. It is assumed that the company has an initial investment of 1000000 and they’re investing in the project for the next 5 years. This initial investment includes, purchase of machinery to produce leather from flower wastage, installation, site preparation etc. Also, the cost of capital is 10%. After the calculation of the NPV, it can be seen that the company has a net present value of 177977.8. As the initial investment is giving a positive net present value then it can be understood that the project investment will be done and the project will be accepted as per the economic viability.
The payback period is also a capital budgeting that is used to find the viability of the return (Shaban, Al-Zubi& Abdallah, 2017). Keeping all the assumption the same as above, the value of the payback period is 4.000052 years, which is less than the life time of this project. Then it can be said that the project will be accepted.
From the above discussion and analysing here it can be concluded very easily the best financing sources for the projects. The project as discussed above has some benefits towards the society by removing flower wastage and converting it into leather which can be used any several ways. Not only has that the solution indicates that the project would be a financially beneficial project. Hence, the chosen project must be funded. The discussion on source of funding indicates that in this specific case, the internal financing option would be beneficial.From the advantages of internal financing, it is found that internal funding has more leverage in project financing than finance from external sources. Also, the risk of the financing represents that the external funding has a larger risk area as these are influenced by external factors such as inflation, interest and government policies. After critically analysing the advantages and disadvantages of internal-external resources of financing it can conclude that the internal sources of financing are the best option to choose.
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