Literature Review To Support Your Accounting Models Used (Case Study Sample)
write a management report to the leadership of coco limited regarding the following issues.
• Provide an explanation on the different sources of funding the company can have and their advantages and disadvantages and make recommendations as to how the company can manage the same to help in the planned expansion program.
• Analyse the Investment proposals by using NPV (net present value) and provide recommendations. You should also briefly comment on other investment proposal techniques that Coco may use, and the limitations of using those techniques
• The use of management tools such as Breakeven analysis and Budgets.
• A computation of your breakeven analysis and the cash budget for the first 3 months.
• An evaluation of the estimated company performance or position during the same period
• A detailed Literature Review of the tools you have used such as and budgets and their importance to business.
• Other issues for management to consider that you think are vital for them to survive and make a profit.
Table of Contents TOC \o "1-3" \h \z \u 1.0Executive Summary PAGEREF _Toc512451291 \h 32.0Introduction PAGEREF _Toc512451292 \h 33.0Literature review to support your accounting models used PAGEREF _Toc512451293 \h 34.0Sources of Funding PAGEREF _Toc512451294 \h 44.1Equity financing PAGEREF _Toc512451295 \h 44.2Advantages of equity financing PAGEREF _Toc512451296 \h 44.3Disadvantages of equity financing PAGEREF _Toc512451297 \h 44.4Debt financing PAGEREF _Toc512451298 \h 44.5Advantages of debt financing PAGEREF _Toc512451299 \h 54.6Disadvantages of debt financing PAGEREF _Toc512451300 \h 55.0Investment appraisal PAGEREF _Toc512451301 \h 55.1NPV PAGEREF _Toc512451302 \h 65.2Advantages of NPV PAGEREF _Toc512451303 \h 75.3Disadvantages of NPV PAGEREF _Toc512451304 \h 75.4Cash budgeting for the new office in Scotland PAGEREF _Toc512451305 \h 76.0Break even analysis PAGEREF _Toc512451306 \h 87.0Evaluation PAGEREF _Toc512451307 \h 88.0Any other issues to be considered PAGEREF _Toc512451308 \h 89.0Conclusions and Recommendations PAGEREF _Toc512451309 \h 810.0References PAGEREF _Toc512451310 \h 811.0Appendixes PAGEREF _Toc512451311 \h 8
Every organization at one point must seek financial assistance in its quest to achieve its strategic investments. Sourcing of funds may be precipitated by need to purchase new equipment, purchase of new machinery and building. For the case of coco limited, the company wishes to raise funds for developing a new software and establishment of new offices in Scotland. Some investment require small amount of capital while other investment may require huge capital. Organizations therefore have the option to either use internal sources of funds such as retained earnings. Others may opt for external funding such as long term loans from financial institutions. The source of funding depend on various factors such as expected cash flow to be generated by the investment, the current gearing ratio of the company, shareholders expectations and market value of its shares if it were to be sold out. Before making any investments, companies should consider conducting viability analysis of the investment of interest. In broad terms, financial source of a company can be categorized as into two; equity funds which is internal and external financing in form of debt. Source of funds may also be categorized in terms of short term and long term duration. Short term funds are need for a period less than one year while the later stretches for a period greater than one year. For the case of coco limited however, the funds need for the two investments are long term source of funds since the proposal stretches for several years.
3.0Literature review to support your accounting models used
Break-even analysis is a wide technique used by the production department and management accountants in making informed decisions. The technique categorizes cost into two; fixed cost and variable cost. Fixed costs are those cost that do not change depending on the level of output. This means that a company with a production level of 200 units has the same fixed cost with a company with a production level of 0 units. Variable costs on the other hand vary depending on the level of activity or output by a company. The totals of both the variable and fixed cost and compared with the overall sales revenue. The comparison is aimed at determining the point where the business production, sales value has reached a point where it’s neither making a loss nor profit. Budgeting in terms of management accounting is the process where an organization focuses its financial and non-financial aspects in the future. Businesses can use budgets as a financial control, forecasting and management tool especially when conducting high cost projects. There are various types of management accounting budgets; master budget, operating budget, cash budget, production budget and static budget.
4.0Sources of Funding
Companies can raise funds through sale of shares. Equity financing means the company sells out some of its ownership to the public who form part of the company’s ownership as shareholders. Equity finance applies to both companies listed in the stock exchange and private ones. Large companies that have gone public such as coco limited attracts institutional and retail investors during sale of its common shares. When seeking equity funding, coco limited should take into consideration the fact that interested investor have the rationality to seek information regarding directors, financial statements and the purpose of the funds raised.
4.2Advantages of equity financing
Business angels in form of investors may bring valuable skills to the company. Such skills may be rare and come at no cost in most circumstances. Take for example the current scenario where the company is willing to bring in an IT expert from United States to develop the software. Angel investor during the equity funding process may come in with highly qualified IT knowledge hence saving the Coco limited the cost of financing the IT expert.
Equity investors just like the management of Coco limited have interest in business growth. The new owners may therefore help in developing new strategies that could help coco limited improves its profit level.
4.3Disadvantages of equity financing
Raising of equity capital is demanding regarding the management activities. The whole exercise is time consuming, costly and may in the long run affect the management concentration.
Loss of decision making- equity funding means that coco limited will attract new investors who will demand ownership of the company. The new owners will therefore have powers to contribute in decision making of the company during annual general meetings.
Coco limited can resort to acquiring funds to be paid in the near future with interest. Financials institutions can lend coco limited funds depending on their rating level. Debt financing in most circumstances are secured using finances of the company. In the case of coco limited therefore, assets such as buildings can be forwarded as collateral to the financial institutions lending the desired loan to coco limited. Loans have diverse installment rates depending on the agreement between coco limited and the lender. Most debt finances do not poses strict regulations such as payment periods. Coco limited can therefore negotiate for monthly, quarterly or half year installments periods. From my perception as an advisor therefore, the company should repay the said loan monthly. Monthly payments can help the company’s financial department in tracking how the debt finance cost is covered.
4.5Advantages of debt financing
Ownership of the company remains- unlike equity financing where ownership of the company is given out to shareholders during IPOs, debt financing is a matter of funds that will be repaid in the future with an interest but the company ownership remains with the owner. The most unique aspect of debt financing at this juncture is that the loan is only secured using collateral. Collateral may be in form of long term assets such as building or machinery depending on the amount lent out. In case of default of the loan, the company does not have legal obligation to out a portion of its stake to repay the loan but give out the agreed collateral.
Payable interest is not subject to taxation- any interest paid a company on money borrowed to finance its projects is not subjected to tax. According to international accounting standards, so long as there is a legal creditor- lender relationship between a company and the lender, all proceeds paid out as interest from a loan payable for a certain period in future, interest for such funds are not subjected to taxation.
Builds business credit score- since coco is rapidly expanding as evidenced by its strategies of opening up an office in Scotland, the company may need debt financing in the future so as to expand rapidly. The company can therefore build its credit score by taking up a loan to finance its current projects and repay the loan on a timely basis. This will boost its credit score among various lenders and investors.
4.6Disadvantages of debt financing
Increase in liabilities- debt financing is a liability that affects the working capital negatively. Interest paid to the lender is in form of cash, debt therefore increases current liability of a company hence causing a decrease in working capital. Small working capital may create an impression to the company’s stakeholders such as suppliers that the company may face challenges in meeting its obligations in the near future.
Impact of interest payments- interest payment means that a company develops regular outflows from its fanacial statements. This may negatively affect its working capital hence causing constrains on the company’s regular expenses.
Investment appraisal is a collective technique applied by originations in determining the attractiveness of an investment. This is in terms of profit level and cash flow consistency depending on the period scheduled. Investment appraisal is used to determine the viability of a project of interest. Appraisal should not only be focused on a single project. This means that an investment appraisal should be able to accommodate the diversity of an organization portfolio in terms of investments and projects. For the case of coco limited therefore, the aim of the investment appraisal is to justify the cost of investing in the desired projects. The most common financial appraisal techniques applied by companies are internal rate of return (IRR), discounted cash flow method and net present...
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