Composition Of Short Term Financing

Published Date: 02 Nov 2017

1.0 Introduction

Finance can be defined as the methods of managing money and capital along with the ways to generate and acquire funds. The scope if finance would include the study of the financial systems which takes account of private, public and also government spaces. It also includes the study of capital along with financial instruments which is strong related to assets and liabilities. This subject can be categorized into 3 distinct groups; public, private and corporate finance. Financial activities such as evaluating investments and ensuring that it’s safe to be pursued after, attaining low-costs credit, fund allocations to cover liabilities and banking will be focused on in this subject.

2.0 Sources of Finance

There exist numerous methods as to raise money and funds to finance a business and/or project. The methods relevant to the firm/ project would be dependent on multiple factors of which the size of the firm itself/ scale of the project are one of the main factors. In most cases, large firms or huge scale projects that are well known and renowned would face fewer obstacles as to raise funds and sources to finance their operations as compared to small firms and insignificant projects. One of the key elements which cause this effect is the savings and financial strength of the firm/ project. Investments would be a highly recognizable way of bringing in wealth and capital into a business. Although it is possible for small company to borrow money as capital from friends and family members, the main determinant would be based on the ability of the firm to issue shares, which only large companies are capable of. The issue of shares facilitates the firm to gain a large amount of capital from its shareholders.

Basically finance can be supplied from two sources. This would be internal and external financing.

Internal Sources of Finance.PNG

External Sources of Finance.PNG

Figure 1: Internal and External Sources of Finance (Sourced from costello.hants.sch.uk)

This can be a method of categorizing the sources of finance, however for this report, the sources of finance will be categorized based on the term and duration of the finance.

2.1 Financial Term

2.1.1 Short Term Finance

Short term financing can be categorized into 4 categories which are:

Spontaneous Financing

Negotiated Financing

Factoring Accounts Receivable

Composition of Short-Term Financing

Figure 2: Short Term Finance (Sourced from Pearson Education, p.3)

Spontaneous Financing

Accounts Payable (Trade Credit from Suppliers)

Open Accounts

Notes Payable

Trade Acceptances

Accrued Expenses

Wages

Tax

Negotiated Financing

Money Market Credit

Commercial Paper

Bankers’ Acceptances

Unsecured Loans

Line of Credit

Revolving Credit Agreement

Transaction Loan

Factoring Accounts Receivable

Factoring: The selling of receivables to financial institutions

Composition of Short-Term Financing

Mix of multiple short-term financing methods

Cost of the financing method

Availability of funds

Timing

Flexibility

Degree to which the assets are encumbered

Figure 2: Short Term Finance (Sourced from Pearson Education)

2.1.2 Medium Term Finance

Medium term finances are usually repaid within the timeframe of 5 to 7 years. There exist 3 sources of medium term financial sources as follows.

Medium Term Loans

Mid term Loan.PNGFigure 4: Medium Term Loans (Sourced from Truetobusiness.com)

Hire Purchase

Hire Purchase.PNG

Figure 5: Hire Purchase (Sourced from Truetobusiness.com)

Leasing

Leasing.PNG

Figure 6: Leasing (Sourced from Truetobusiness.com)

2.1.3 Long Term Finance

Usually, long term finance is used to acquire assets. These assets are projected to provide gain, not just fiscal and monetary gain but benefit the business in other aspects in the long term.

Long Term Loan

Long Term Loan.PNGFigure 7: Long Term Loan (Sourced from Truetobusiness.com)

Mortgage

Mortgage.PNGFigure 8: Mortgage (Sourced from Truetobusiness.com)

Debenture

Debenture.PNGFigure 9: Debenture (Sourced from Truetobusiness.com)

Retained Earnings

This is a form of finance in which the business ploughs back and retains its profits to fund itself. Retained earnings are highly favorable because it does not incur any form of interest charges.

Venture capital

This form of financing is prepared as to focus and specialize on business start-ups and investment in specific expansion projects.

2.2 Summary of the Sources of Finance

As seen throughout this section, the sources of finance play an important role. Firstly, it can be classified based on the source, either being internal funding or external financing. Another way of segregating and categorizing the sources of finance would by classifying them based on the length of the finance which would be in terms; short term, medium term and long term. A proper understanding about these factors is crucial because each source of finance differs from the other and each has a distinct benefit of its own. This would mean that the firm has to firstly, look at the available options and then evaluate these options, based on the situation and the nature of the business.

3.0 Financial Planning

Financial planning is the development of achieving desired goals via financial management. The process of financial planning will be as follows:

Financial Planning.PNG

Figure 10: Financial Planning (Sourced from Ykconsultancy.com)

The diagram above is actually the financial planning process used for individuals; however the basic structure of the process is applicable to corporate finance. The only difference will be the goals, an individual makes a personal financial plan probably because he wants to purchase a car, house and so on, however firms looks at a much bigger picture that involves procurement, management, raising capital and so on.

3.1 Significance and Impact of Financial Planning

Ashcourt Rowan, a fast growing wealth growing management organization made up of a group of companies simply and briefly explains the importance and the scope of financial planning as follows:

"Corporate financial planning is about far more than arranging pensions and employee benefits. It involves sharing your business goals and making sure you're in the best possible position to achieve them" (Sourced from Ashcourtrowan.com)

In terms of Melaleuca, the importance and impact that financial planning has on the company will be discussed and explained in explicit detail in the following section.

3.2 Financial Planning for Melaleuca

The financial managers of Melaleuca must exploit and utilize a wide range of relevant skills as to assess the achievability of the preset strategic objectives for Melaleuca.

The capital requirements of the company must be looked into because it is crucial to the achievability of the company objectives. The capital requirement greatly relies upon factors such as cost of fixed and current assets along with the promotional expenses which may result in a long series of planning. The financial planner must take into consideration aspects such as the requirements of short and long term as to fulfill and attain the firm’s objectives.

Another composition of capital that a manager must be familiar with is to determine the capital structure. In addition to that, the frame financial policies which involve cash control, lending, borrowings and so on must also be looked into by the management. With the use of financial tools such as these, a manager will be able to efficiently allocate the financial resource as to gain optimal returns on investments along with ensuring that the scarce financial resource is fully utilized.

The finance function makes up a key source that evaluates the viability of a strategic action plan of the company’s existing and prospective sources of funding. Financial planning is defined as the process of framing objectives, policies, procedures, programs and budget concerning the financial activities, thus ensuring effective and suitable capital and investment policies. An illustration to demonstrate this argument would be that financial planning is able to provide a reasonable balance between inflow and outflow of funds hence retaining stability. In addition to that, financial planning greatly reduces the uncertainty in terms of the changing market trends and barriers to growth of the business, which can be dealt with simply by obtaining adequate funds while ensuring stability and profitability.

Finance evidently plays a vital role of controlling the businesses function as to implement their strategies. Capital analysts prepare and update cash budget to make certain that firms do not slip into a liquidity crisis. Budget and also forecast are closely related to the business and also the stakeholders. In additional to that, companies with shareholders and external finances should have a standard external reporting requirement. An external report focuses on identifying the relationship between the firm and the banks, shareholders and the general public. On the other hand, stockholders will be depend on data forecasting and budgeting reports as to determine the best time to buy and sell stocks.

The main source of finance for the strategic plan involves risk management, which is a firm’s strategy to financing new investments such as penetrating a foreign market. The core purpose of financial planning is to manage such risks, as the firm bears those risks, the risk management will allow for contingencies which greatly help the firm. Finance is also utilized as to predict and identify potential problems that may arise in future.

Most companies seek future growth. One of the most fundamental and core requirements of organizational growth would be strong financial performance. Target growth rates are utilized because of its intuitive, computational and practical appeal.

A financial manager should be able to organize and create financial accounts such as trading, profit and loss account and the balance sheet as to calculate financial cost over a period of time while carrying and maintain the financial records of the firm’s sale figures and evidence of expenditure. Besides that, a financial manager should be able to prepare and plan internal financial information that would mainly be practiced in the budget. In addition to that, financial planning facilitates the firm in terms of repaying the firm’s creditor and also to pay for the employees’ wages and salaries. Thus, the finance department ensures that the bills are paid.

3.3 Financial Planning Reviewed

In a summary, the financial planning crucial because it facilitates the company as to figure out the means to achieve financial goals. The planner can also bring together all the needs such as budgeting and saving, taxes, insurance and retirement planning.

4.0 Accounting Ratios

Accounting Ratios are considered as tools used by financial analyst and accountants as to evaluate and assess the firm’s performance and also the financial situation of the firm, industry and also the economy. Most ratios are used to evaluate the trends and also to compare and analyze a firm’s financial performance against another firm’s financial performance.

Key elements of a firm’s financial performance would include its efficiency and profitability along with its liquidity. These aspects can be evaluated and analyzed by utilizing accounting ratios such as Profit margin on sales, Return on total Assets Return on common equity.

For this report, Melaleuca will be analyzed based on two aspects only which are:

Profitability

Liquidity

These accounting ratios facilitate the determining of the efficiency and the profitability of a company based on its financial report and ratio analysis which enables the firm and its management to predict the future performance and situations of the firm.

Accounting Ratio - Profitability.PNG

Accounting Ratio - Liquidity.PNG

Figure 11: Profitability and Liquidity ratios (ouwb.ohiou.edu)

4.1 Analysis of Melaleuca’s Profitability and Liquidity

4.1.1 Melaleuca’s Profitability

Ratio with formula

Ratio calculation for ended 20 June 2011

Ratio calculation for year ended 30 June 2012

1. Profit margin on

sales

Net income available to common stockholder x 100

Net sales value

755,436

x 100

3,538,040

= 21.35%

937,325

x 100

3,584,143

=26.15%

2. Return on total

Assets

Net income available to common stockholders x100

Total assets

755,436

x100

1,542,283

= 48.98%

937,325

x 100

2,572,861

= 36.43%

3. Return on

common equity

Net income available to common stockholder x100

Common equity

755,436

x 100

949,745

= 79.54%

937,325

x 100

1,887,070

= 49.67%

Table 1: Profitability of Melaleuca

4.1.2 Melaleuca’s Liquidity

Ratio with formula

Ratio calculation for year ended 30 June 2011

Ratio calculation for year ended 30 June 2012

1. Current ratio

Current assets

Current liabilities

1,516,902 x 100

592,538

= 2.56 : 1

2,568,059 x100

685,791

= 3.74 :1

2. Acid-test ratio

Liquid assets

Current liabilities

1,516,902 x 100

592,538

= 2.56 : 1

2,568,059 x100

685,791

= 3.74 :1

3. Debtor ratio

Debtor

Credit sales

648,449

3,538,040

= 0.18:1

741,110

3,584,143

= 0.21 :1

4. Day sale

outstanding

Debtor x365

Credit sales

0.18 x 365

= 65.78 days

0.21 x 365

= 76.65days

5. Creditor ratio

Creditor

Credit purchase

191,856

482,097

= 0.40 :1

206,062

393,394

= 0.52:1

6. Creditor payment

Creditor ratio x365

Credit purchase

0.40x365

= 146 days

0.52x365

= 189.8 days

Table 2: Liquidity of Melaleuca

4.2 Comparison between profitability and liquidity

4.2.1 Profitability:

As seen from table 1, the profit margin on sales of Melaleuca Refugee Centre, which all are derived from the computations above, shows an increase from of 4.8% in the years of 2011 and 2012, jumping from 21.35% to 26.15% respectively. The profit margin is utilized as to gauge the extent of profit generated from a firm’s sales. It also determines the efficiency of the company’s expenditure control and management.

In the case of Melaleuca Refugee Centre, the company is earning a much higher profit from the sales made in the fiscal year of 2012 as compared with its fiscal year of 2011. It is evident that Melaleuca possesses a suitable plan which facilitates and enables it to effectively control its expenditure and incurred interest cost. With efficient management, the firm is able to save money in terms incurring lower operating expenses and lower interest cost, which, as a result, increases the profit earned.

The return on total assets of Melaleuca, however, has seen slight decreased of 12.55%, declining from 48.98% in year 2011 to 36.43% in 2012. The return on common equity has also shrunk significantly by 29.87%, dropping from 79.54% to 49.67% in the years of 2011 and 2012 respectively; resulting in lower profits earned the ROE of the company. This indicates that there is an ineffective and inefficient use of assets and capital employed by Melaleuca in its business activities, which operates at a higher cost that causes a reduction in the production volume and sales volume which ultimately affects and compromises the overall profit earning.

4.2.2 Liquidity:

Liquidity can be defined as the ability of an asset or security to be bought or sold in the market. A slight increase can be seen in the current assets and aids-test ratio of Melaleuca. The ratio increased from 2.56:1 in 2011 to 3.74:1 in 2012. The financial status and liquidity of Melaleuca greatly enables the utilization of its current assets to manage can cover its current liabilities. Due to the increase of both these ratios, it shows that Melaleuca has a larger amount of current assets that can be used to manage its current liabilities, which points out that it is financially stable and is able to cover and finance its short-term liabilities.

An increase is seen in Melaleuca’s debtor ratio and its days sale outstanding by 0.03:1 and 10.87 days respectively between the years 2011 to 2012. This is to measure the amount of debts gathered from the credit sales along with the period of time required by the company to collect the money from its debtors. The higher debtor ratio and the longer debtor payment period shows that company has to extend the credit time allocated for their debtors, which may cause longer time required by the company to recollect its debts from its debtors. This could result in accumulated and tied up money which may cause a lack of money from the debtor balance that will cause a shortage of money for Melaleuca, compromising its ability to cover its liabilities which may cause the company to face short term financial problems.

Moreover, the creditor ratio and creditor payment of Melaleuca shows that there has been a slight increase from 0.42:1 to 0.52:1 and 146 days to 189.8 days in the years 2011 and 2012 respectively. The higher creditor ratio and the longer time creditor payment indicates that the company is able to hold the longer credit time for owing and repaying its creditor.

In addition to that, the longer credit time allows for Melaleuca to accumulate larger amounts of debts, hence, preventing of short-term financial problem.

4.3 Overview of Melaleuca’s Profitability and Liquidity

The increase in its Profit Margin on sales indicates that Melaleuca’s sales are more profitable. The results also show that it has an effective control over its expenditure and incurred interest cost. The company’s ROA and ROE however has both seen a slight decline in 2012, indicating inefficient use management of assets and capital employed by Melaleuca, which ultimately compromises the overall profit earning. In terms of liquidity, the current assets and acid-test ratios has increased in 2012, which shows an increase that means the company is rather liquid. This is beneficial for the firm as it enables it to utilize its current assets to cover its current liabilities, hence avoiding short term financial problems.

Delays in debtor collection periods however affects Melaleuca’s ability to cover short term liabilities however it also has an increase in its creditor repayment period that helps to solve this problem.

5.0 Business Environment

From the two financial statements; income statement and balance sheet of Melaleuca Refugee Centre, an increase in each of the item’s amount is seen in the comparison of years 2011 and 2012. This result supports the assumption that the company has build and fostered strong and good relationships with its internal stakeholders as well as external stakeholders. Melaleuca has often fostered good relations with its close stakeholders such as its suppliers, customers, employees, government agencies, financial institution and the public itself. These stakeholders are able to influence and affect the firm, either having a direct or indirect bearing on its performance.

5.1 Internal and External Stakeholder

Suppliers and Governmental Entities

As seen in Melaleuca’s website, "Our Patron & Supporters", Melaleuca’s suppliers includes the government of Australia, Northern and also the Honda Foundation. These companies and entities financially supports and funds Melaleuca’s activities. Melaleuca has correspondence with the Australian government, specifically with the Immigration and Citizenship Department. It also has strong ties with the Department of Health and Ageing along with the Department of Families, Housing, Community Services as well as the Department of Indigenous Affairs.

Customers

An analysis of Melaleuca’s financial statement shows an increase in the amount of contract service as compare with year 2011. The variety of contract services being operated by its company includes Counseling and Advocacy services which are included in the Program of Assistance to Survivors of Torture and Trauma (PASTT client referral), Newly Arrived Youth Support Services and Youth Program (YOUTH), Intensive Family Support Services (IFS) and Torture and Trauma Counseling (Detention) (T&T).

Based on Melaleuca’s website, Melaleuca Refugee Centre provides counseling and advocacy service to individual refugees and their family. This support is done as to understand and relate to the background and experiences that the refugees have gone through. This is done as to identify with the issues and behaviors of the refugees which are crucial for facilitating recovery as well as it significantly reduce the risk of re-traumatization. The trauma and torture suffered by an individual greatly disrupts one’s sense of safety and trust, which causes the individual to constantly feel vulnerable and perceive the world to be hostile and unsafe. Re-establishing trust in a condition of safe environment is crucial as it aids to build the individual’s sense of trust and security.

Employees

Melaleuca management and employees greatly values its legal and moral accountability which is to carry out activities and put in effort with the best interests of the community it serves. The Committee of Management and the employees play a significant and vital role of upholding the professional ethical behavior at all the times such as in their responsibilities to the organization itself, their professional relationships among each other as well as their professional service to the society and community they serve in.

According to Melaleuca’s website, the "Statement of main governance practices" states that this company has changed its organizational planning in 2011-2012, deriving four core groups and also a combination of its function with its organizational structure as to enable manages to manage end-to-end accountability.

The Client service group of Melaleuca is an example a group that has moved from a geographically support model to a global operating structure for managing the key visa caseloads and customer service activities.

Financial institution

The Honda Foundation is one of the key financiers of Melaleuca who generously sponsors vehicles and transportation Melaleuca. Honda’s contribution to Melaleuca is invaluable. It also makes up and contributes to Honda Foundation’s commitment as good corporate citizenship and community development support. Five small four-cylinder hatches, one 10-seater bus, one utility sedan and two larger sedans makes up the fleet of 9 vehicles that the Honda Foundation has sponsored to Melaleuca.

Publics and Community

The community development programs created and delivered by Melaleuca make up the key principles and standard of Community Development Melaleuca embraces. Its scope ranges from Education, Participation, Democracy, and Advocacy along with Community Empowerment as to build social capital and community capacity.

Melaleuca’s Community commitment is done via several activities such as World Refugee Week, Annual Deckchair Fundraiser, Harmony Day, International Women’s Day and also the Sea-Breeze Festival.

5.2 Review of Melaleuca’s Business Environment

It is a well evident fact that both the internal and external stakeholder of a firm are highly capable of impacting and influencing a firm’s Effectiveness, Efficiency, Profitability and Liquidity. Base on the evaluation of the services provided by Melaleuca as seen above under section 5.1 of this report, the efforts and services Melaleuca provides to serve and help the community as well as its strong ties with governments, financial institutions and also other corporations results in rather positive effect as indicated in ratio comparison and other analysis as seen in section 4.1 of this report.

6.0 Conclusion

As seen throughout this report, the sources of finance prove vital to an organization. The significance of financial planning also help and facilitates the company efforts of setting realistic and achievable financial goal by looking at the big picture which includes analyzing the financial conditions of the firm itself and the environment it is operating in. Financial planning also provides advice and recommendations which serves as a reliable guide for investments. In addition that, accounting ratios can be categorized into two basic types of ratios, which are; profitability ratio and liquidity ratio. These are selected numerical values obtained from a company’s financial statements as to evaluate its performance. Lastly, the business environment proves crucial in which it is highly recommended that a company should ensure the satisfaction of its key stakeholders. A perfect illustration of the effects of satisfied stakeholders to a company would be as seen in this report where Melaleuca Refugee Center is analyzed and the correlation of all these factors are explained in explicit detail.