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Finance, cash flow and insolvency

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Introduction

Kishan Hirani Unit 7 Finance, cash flow and insolvency Finance, cash flow and insolvency To: Head of Finance Department From: Kishan Hirani Date: 31/03/2008 Re: Sources of Finance Task1 (P1) An additional need of finance is always required by the business to expand. In this case my client intends to set up a business as a hairdresser. Operating from a small hairdressing salon in south Woodford, as he intends to establish the business as a sole trader and convert to a partnership In the near future, therefore he will need the help of additional finance to be successful. However the amount of finance available to my client to trade as a sole trader and then as a partnership is limited, however there is still a range of options from which he can make a decision. Some of the options available to him include. Trade Credit Sale of Assets Personal Capital Hire Purchase/Lease Bank Loan Retained Profit Credit Cards Bank Overdraft Borrow money from Mortgage Family/Friends Personal capital: He can use his saving to start off as a sole trader; this is his own personal savings. Trade credit: This is a good way as requesting credit from suppliers is a good way of helping cash flow situation, however trade credit is not a method of financing expansion of a company. This method of agreeing trade credit can help my client to pay its creditors some time after the goods are delivered. However to obtain 'credit', he will need to build up a good credit history by paying suppliers on time and keeping up Payments on loans and credit cards. His bank will often be approached by companies for references; thereafter a number of months proving credit-worthiness a sole trader or partnerships business is eligible for trade credit. Therefore basically this is time given by other companies to pay bills e.g. gas bill. Sale of assets: My Client can sell his own personal assets or when he converts from a sole trader to a partnership business, he can sell some of the assets he does not need when he was trading as a sole trader. ...read more.

Middle

* Public limited companies must publish far more detailed accounts than private limited company. Advantages of Public limited companies Disadvantages of public limited companies A listed company will find it easier to raise finance then private limited company. The cost of floating the business on the stock exchange is high. Some of the outlay is fixed and therefore falls heavily on small issues. This makes gaining listing more cost effective as the company increases. Public limited companies will be regarded by lenders representing a lower risk investment than private limited companies; they are also far more likely to benefit from smaller interest charges on any loan obtained. A public limited company must keep a wide range of people informed about its financial performance. As a result it will face greater administration cost than a private limited company and more sensitive data will be available to the public and competitors. The company has limited liability, so the company can be sued but not the owners. Stock market investors place a great emphasis on the short term financial performance of the business, in order to maintain dividends and share price, rather than other long term objectives, private limited companies do not face the same immediate pressure for short term profit maximisation. Therefore it can be concluded that, public limited companies are similar to private limited companies, but are much larger. They are able to raise capital by selling their shares on the London stock exchange if they are listed; the shares of some of the largest plc are also traded o the New York and Tokyo stock exchange. This enables plc's to raise very large sums of money in a way that is much cheaper than borrowing from banks. Task2 (P2) Chosen manufacturing company is Coca Cola from the soft drinks manufacturers. The chosen product is 'Coke' Above: Simplified Money Cycle The movement of money in and out of the business as a result of these inflows and outflows is known as the money cycle. ...read more.

Conclusion

Unfortunately, that doesn't happen, but you can still improve your cash flow by managing your receivables. The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash. Here are specific techniques for doing this: * Offer discounts to customers who pay their bills rapidly. * Ask customers to make deposit payments at the time orders are taken. * Require credit checks on all new non cash customers. * Get rid of old, outdated inventory for whatever you can get. * Issue invoices promptly and follows up immediately if payments are slow in coming. You may be able to raise cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even office furniture. Leasing companies may be willing to perform the transactions. It's not cheap, however, and you could lose your assets if you miss lease payments. Solvency ratios are used to evaluate and determine the financial strength of an organisation. They show the extent to which a business is leveraged and designate the business's ability to survive risk and stay solvent. Current Ratio Current Ratio Current Asset Current Liability 90,000 53,000 1.7:1 or 1.698% The current ratio is the standard measure of any business' financial health. It will tell you whether your business is able to meet its current obligations by measuring if it has enough assets to cover its liabilities. The standard current ratio for a healthy business is two, meaning it has twice as many assets as liabilities. But for Fixit Ltd, the ratio is 1.7:1, which means that the company can just about pay its liabilities and still have 0.7:1 left. If the ratio were below one, it would have meant that the company the liabilities were more than the current assets and the company would have been in trouble. Acid test or quick test ratio 2) Acid Test Ratio Current Asset - Stock Current Liability 90,000-20,000 53,000 1.3:1 or 1.320% Kishan Hirani Unit7 ...read more.

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