Debt Factoring is another way of finance its expenditure .A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company. The factoring company pays the business - say 80-90% of face value of the debts - and then collects the full amount of the debts. Once it has done this it will pay the remaining amount to the business less a charge. It is a good way of raising cash quickly, without the hassle of chasing payments. But it is not so good for profits since it reduces the total revenue received from those sales.
Another common way in which firms can finance their business in the short term is through trade credit. In business it is common practice to purchase items and pay for them later. The supplier will normally send the purchaser a statement at the end of each month saying how much is owed. The buyer is then given a period of time in which to pay, normally around 30-60 days.
A credit card works very much like trade credit. If you buy something using a credit card, you will receive a statement once a month with the details of the amount spent during the last month. You then have a certain period of time to either pay the full amount or a minimum amount. Many businesses have a company credit card. It can be a useful way of managing expenses and if paid off in full can be a useful and cheap source of short term finance.
JC should consider several factors to choose the most appropriate source of finance such as cost, financial outlook, legal status and time period. Taking into consideration that Jane Flowers is sole trader, who is going to start a new business with a capital of 40000 pounds and she does not know how the business will prosper, she should use short term finance. Due to that the computer company has not long term assets and supposing that Jane Flowers is going to rent the premises instead of buying it, I think an appropriate source of finance would be a short term loan to finance her temporary working capital need. If the business is taking off, Jane could return the money to the bank ahead of schedule, so interest and costs are reduced.
As a computer software business may not get paid straight away when the goods are delivered, the company may have call flow problems from time to time. For this reason, Jane Flowers should consider to have an overdraft as more flexible solution as the interest payable on it is calculated on daily basis. So if the company borrows only a small amount, it only pays a little bit of interest
2. Business expanding
Partnership
In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. Partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.
Partners raise money for the business out of their own assets, and/or with loans. As partners are self-employed, they are taxed on their share of the profits as well as they need to pay Class 2 and Class 4 National Insurance contributions.
There are other advantages of partnership such as:
- There are few formalities to setting up and trading as a partnership.
- The financial resources of more than one person are likely to be better than in a sole proprietorship.
- Responsibility can be shared, thus allowing time off
Limited liability companies
Limited companies exist in their own right. This means the company's finances are separate from the personal finances of their owners. Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees - for example, a bank loan. However, they may lose the money they have invested in the company if it fails. In limited liability companies the profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital. Limited liability can usually protect directors, who act in good faith, from legal actions brought against them. A limited company pays corporation tax on its profits. There are some disadvantages of Limited liability such as:
There is more administration involved in running a Limited liability company than there is for a Partnership o sole trader.
The business cannot be kept affairs private. It has to hold a An Annual General meeting for all the shareholders. You must also submit an Annual Report to the Companies registration Office.
Main types of Limited liability companies are:
Private unlimited company: This type of company may or may not have a share capital but there is no limit to the members' liability. Because the members’ liability is unlimited, the company has to disclose less information than other types of company.
Public limited company: This type of company has a share capital and limits the liability of each member to the amount unpaid on their shares. A public limited company may offer its shares for sale to the general public and may also be quoted on the stock exchange. A PLC must have an authorised share capital of at least £50,000 and it must have allotted shares to the value of at least £50,000 before it can start business.
Private limited company: This type of company has a share capital and the liability of each member is limited to the amount, if any, unpaid on their shares. A private company cannot offer its shares for sale to the general public.
In my view, Jane should expand the business forming a Private Limited Company. With this kind of structure Jane would have the advantage of being a separate corporate body and the company’s owners and shareholders are not personally liable. It gives Jane protection if the company fails. She will only be required to pay what they have already paid or agreed to pay towards settling the limited company’s debts, which means her personal possessions and assets are not at risk. Also, it will be easier for Jane to raise finance, either from a financial institution or via the sale of shares.
Being Private Limited Company, the status of Jane´s Company will be commonly perceived to be higher and it has advantages with regard to lenders and suppliers due to the fact that they are more likely to meet requirements for her.
In addition, with this structure, Jane could retain more funds within the business to meet future financial commitments which aids year on year growth, assisting in building a more sustainable business and medium term profits growth.
As Private limited company Jane could use the same sources of finance than a sole trader. But there are also other types of finance available such as:
- Capital- shareholder funds
- Retained profits- call profits that are kept and not spent
- Debentures- are loans that are usually secured and are said to have either fixed or floating charges with them
As Jane has planned to buy new premises, she could this investment the shareholder funds. However ,as the premises is a long term finance, I think it would be better if she keeps this capital as savings for different project in the future an d get a mortgage debenture to fund the purchase of the new premises.
Due to that it is a computer software business and the computer equipment depreciate quickly, Jane should lease the equipment. The usual lease runs for three years, what is the same time the computer technology usually gets upgrade. Therefore, leasing computer equipment pushes Jane into more structure refreshing of her technology.
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3. Financial Planning
Financial planning is a process of setting objectives, assessing assets and resources, estimating future financial needs, and making plans to achieve monetary goals.
Financial Planning has got many objectives to look forward to:
- Determining capital requirements-. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
- Determining capital structure- The capital structure is the composition of capital
- Framing financial policies with regards to cash control, lending, borrowings, etc.
- A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
Importance of financial planning
Financial planning is the backbone of a successful company. Without a solid financial road map, even a thriving company may find itself in over its head when it comes to making payroll or in the realm of accounts payable. By starting with a thorough financial plan, owners are better able to weather the bad times and excel during the good times. Proper planning means fewer surprises down the line.
By having a proper plan in place, a business owner is prepared to deal with outstanding debt and rising costs by anticipating these things in advance. In addition, financial planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
Other of the biggest reasons why is important to a business is that it gives the owner a chance to estimate their earnings for an upcoming period. This period may be five years or it may be two months. It makes possible some growth and expansion programmes which helps in long-run survival of the company.
The need for information
Sales Managers
- Costs of logistic
- Revenues from sales
- Cost of production
- Product contribution margins
- Incentive Budget
- Travel expenses (airplanes, hotels etc..)
- Consumer margins
- Available payment methods and costs of it
Finance department
- Selling prices
- Costs of materials
- Wages
- Debts
- Bills
- Payments
- Interest
- Cost of fix assets and machinery
- Annul profit
- Purchases and sales
- Cost of the premises(Purchase or rent)
- Credit
- Suppliers
4. Bibliography
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“Sources of finance grants”
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“Sources of Finance - Long Term Sources of Finance”
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“Sources of finance for business”
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“Legal structures: the basics”
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BPP Learning Media (2010) Business environment. London: BPP Learning Media Ltd.
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BPP Learning Media (2010 ) Managing financial resources and decisions. London: BPP Learning Media Ltd.
