TASK 1
Give one possible internal source of finance and one possible external source of finance that Top Sounds could use, motivating the reasons?
v Sale of Assets
It's when a business sells some of its assets for a productive purpose or to finance other projects, as a form of acquiring working capital for the business.
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.
Top sounds has to sell some it's assets as a form of acquiring a source of finance for its daily expenses since business has been quite lately and have insufficient working capital.
Since the projector and the screen are out-dated they can sell them and acquire more working capital to finance its day-to-day expenses, as thus wouldn't have an effect to the business as they will be replaced by the video monitors.
v Leasing
Leasing involves paying monthly instalments to use an asset, but a business doesn't own it afterwards, an agreement in which one party gains a long-term rental agreement to use assets of another party for a specific period of time and predetermined rate and the other party receives a form of secured long term debt.
Advantages of Leasing
ü Leasing provides 100% financing
Most leases simply require first and last payments paid in advance and a small documentation fee. No security deposits or up-front money is required. Enterprise Financial Solutions, Inc. (EFSI) pays your vendor in full including installation, delivery and taxes unless state law prohibits.
ü Leasing preserves credit lines
Credit lines with banks and other depository institutions are precious and hard to establish. Conserve those lines for inventory, A/R or other uses and emergencies. EFSI will take care of the financing for your capital equipment so that your lines of credit remain free.
ü Leasing increases purchasing power
Your needs may be for a $50,000 machine but your available cash/credit only allows for $30,000, hence you settle for a smaller piece of machinery that only meets your needs half-way. EFSI can increase your purchasing power by allowing you to finance the needed equipment for the job. That way you get the equipment you need to meet demand and promote growth.
ü Leasing balances usage and cost
Leasing makes sense when the equipment you use creates a return that exceeds its cost. In other words, leasing allows you to set a fixed monthly payment for the use of equipment that creates an anticipated return exceeding that payment. That way you are certain that your operation is profitable and the equipment serves its purpose.
ü Leasing provides fixed rate financing
Leasing is not subject to market fluctuations and interest rate increases. You can negotiate the monthly payments up front and secure a fixed rate for the life of the lease. This makes it much easier to project cash flow and budgets for planning purposes.
ü Leasing conserves working capital
Keep your hard-earned cash on hand or invested. Enterprise Financial Solutions, Inc. enables you to enjoy the working capital your company receives since it covers all costs associated with capital equipment purchases. This ability to grow and keep your cash ultimately puts you ahead of your competition and ensures long-term profitability.
ü Leasing is convenient
Unlike dealing with bank loans and other alternative types of financing, leasing is an easy and convenient process. Typically, all we require is a one-page application for any request up to $50,000. Any request above that amount will require some financial disclosure.
ü Leasing is tax-advantaged
When structured properly, a lease agreement may allow you to receive tax benefits. These benefits and their availability are subject to an array of factors and we suggest you talk with your accountant about these benefits. Similarly, any tax benefit received from the ownership of the equipment by EFSI is passed on to the lessee through competitive rates and lower fees.
ü Leasing is a hedge against inflation
Since your payments apply to the use of the equipment you do not pay for ownership on equipment that consistently depreciates. Furthermore, your cash savings can yield a return that fights inflationary pressures.
ü Leasing provides flexible payments
Lease payments can be structured to meet your needs. This adjustment is possible by correcting the residual value of the equipment due at lease end. By changing your end of lease balloon payment from $10,000 to $25,000 for example, you can lower your monthly payment significantly.
ü Leasing provides options
Leasing provides flexible end of lease options. Equipment at the end of the lease term can returned, extended or purchased.
The gross profit outlines the percentage of the total selling price which is greater than the cost price. This indicates that for every R1 per sale, 40.09-45.29 was gross profit, the remaining 59.91-54.71 cents form part of the cost price of the goods.
Depicting from the company's profitability ratios, there is a considerable decline, deriving from the poor performance. Profitability ratio's can be seen as against the sales growth. Management has implemented policies that are of lucrative interest towards the company's turnover, this has led to a substantial increment towards the value of the rand, relatively to the profit margins, increase, and a constant growth, in profit of shareholders. Management has to shift more of it's attention more on the incorporations it has made as a basis of boosting it's sales.
b) Current Ratio
The liquidity ratios have improved over the years, although they haven't met the set criteria/forecast of 1.1, indicating the business is in a bad state of position, meaning the company needs to cut down on short term liabilities and increase their debtors and current assets as a basis of improving it's current state. The company has to meet it's forecast of 1.1 for both ratios, especially the Acid Test Ratio.
c) Fixed Asset Ratio
The fixed asset ratio indicates how efficient the fixed assets of the company were in the past three years, the ratios indicate the fixed assets have been inefficient; for every R1 invested, there was 88 cents generated in sales in 2006 and 98 cents in 2008.
The creditors collection period is improving, since the days are increasing, which the company more time to deal with it's cash flow and means of payment. The company is in an aggravated situation, as they have less time to pay their debt and more time to collect from debtors, and poses as the main cause of the poor liquidity ratios, which has to improve before the company can increase it's current ratios.
d) Financial leverage ratios examine the financing structure of the company; they focus on the combination of owners equity and outside (long and short-term) used by the company. The ratios indicate whether the company uses debt to finance it's assets or not. The financial leverage ratios are used to see if the company has a low or high risk and it's creditworthy.
The debt ratio has the total assets compared with the total debt. This means that 28.89 cents per R1 in 2006 were financed by other sources other than the ordinary shareholders, and 43.18 cents in 2008. This means the company is increasing to finance it's assets with debt/deficits.
Assembly and finishing department overheads are recovered on the basis of direct labour hours, since direct labour hours represent the predominant activity. In the machine department overheads are likely to be most closely related to machine hours.
The cause of the under absorption is that the company used the money allocated to them and didn't go over budget, instead they used less so they have made a profit rather than a loss.
