Leading scholars in the field of micro and macro-economic detect several major types of the company financing. But before I delve into the details of this very case, I find it necessary to recapitulate for you the key elements of the corporate finance nature. Primarily, the business area of corporate finance covers those aspects connected with all pecuniary processes that accompany every business project and analytical tools applied to take proper managerial decisions. It widely assumed, that two types of corporate finance exist – long period finance (more than 5 years) and short period financial model (for the periods covering less than five years).
However, in the present case the narrow comprehension of this term is within our interest. In other words, for this report to become readable and understandable even for a layman, we need to explain from where the business owner may obtain funds to maintain the business activity and support present tempos of business development.
Generally, there are two major types of company finance. Namely, they are financing by various financial institutions including banks and credit funds, financing by shareholders (equity financing) and other forms of financing. In this section of the paper I will discuss the possible methods of business financial support with regard to the small size of the enterprise.
Bank financing (long term or short term loans)
Apart from aforementioned short term and long term loans, the bank financing can be classified into secured loans and unsecured loans. Considering the nature and scale of the business at hand, it can be hardly assumed that a bank or other institution agrees to procure an unsecured loan for this small-scale plumber business. Besides, the loan agreement specifies the type of the loan, i.e. whether it is payable on demand or in installments on a regular basis. As far the security measures are concerned, the overwhelming majority of credit and bank institutions require more than one method of security, irrespective of the fact that one type of security may easily overlap the other.
Personally I am strongly opined that bank financing is to be regarded as one of the most lucrative options for the small business owners’ community. Unfortunately, this option is not available for entrepreneurs at the early stages of the business development primarily owing to the facts that crediting institutions reluctantly extend credits, for the prospective debtors who cannot secure it. Naturally initially accrued revenues and current assets at the early stages are not sufficient to secure a bank loan.
This type of company financing provides a prompt access to cash and considerably improves fundraising of the firm. In contrast to the bank loan, which generally has to be discharged in installments, the factor pays the factoree in advance, and then, on the basis of the issued invoices receives the due payments from the customer base of the factored entity( Sangster, 2009). The main advantage of this system is that the risk of non-payment by the customer is assumed by the factor, while the factor conducts all required bookkeeping operations.
Lease-back of the equipment
The operational assets of the type of business at hand include comparatively expensive facilities. Therefore, another acceptable option is to sees an investor who contends to purchase this equipment for a lump payment and then enter into the lease agreement with the lessee. This operation is commonly known as sales-leaseback. The business runner is able to retain the equipment in his disposal, while infusing additional monetary resources into the project. The shortcoming of the method is that ownership over the facilities is shifted to the lessor and in order to get it back, the entire value of the one is to be paid out.
Payment Advance System
The third available option for the business owner is the so called payment advance system. The prospective creditor provides the credit, while he obtains the right to deduct the payments from the future revenues accrued by the credited business entity (Elliot,2004). And in contrast to conventional loans due dates do not exist, so the course of business is more flexible. In other words, the creditor accrues the debt when the profit is collected.
Conclusion on company finance issue
With regard to the above discussed options, personally I find that factoring and equipment lease-backs are the most favorable under the given business conditions. Overall, the most reasonable approach is the combination of these two strategies. Having taken this financing strategy, the business owner may easily get rid of auditing and bookkeeping expenses and diminish the costs which are necessary for the purchase and maintenance of the plumber equipment.
Several major conventions and concepts govern the sphere of accounting. And the entire system is based on the its founding pillar. The first pillar is the convention of relevance. In other words, in the balance sheet and financial statement of the company must be included only the information which is pertinent to the situation in question. Extra information, which does not reflect the financial environment of the firm must not be included therein (Sangstar, 2009).
The second stone is the principle of objectivism. Under this convention the data must be reflected objectively without any possible exaggeration of underestimations. To illustrate, if a banking interest is included into the statement, the actual, not the anticipated interest is to be specified (Holy,2010). Otherwise, the economic situation in the future may either get improved or deteriorate and therefore the interest may be affected. Ultimately, the entire balance sheet or income statement may be endangered.
Under the feasibility doctrine it is widely understood that the time and labor expenses are to be compared with the results achieved from the use of these constituents of accounting. Therefore, if the income statement at hand indicates that the gross income is substantially less than the costs of sales, the currently employed business strategy is to be considerably reconsidered, if not entirely abandoned.
As far as the accounting concepts are concerned, the first one is surely the accounting period concept, i.e. the income statement and other financial documents generally reflect the business course during the specific time period determined by the business owner in beforehand and in accordance with the applicable national law (tax peculiarities are to be take into consideration).
The second concept is the one called the material nature. It purports that special caution is to be expressed by the accountant while deciding whether a creation object or item is sufficiently material to be included into the balance sheet. This element of accounting concepts family is closely accompanied by the concept of realization which manifests that the profit accrued by the business owner after it has been collected (Ellitot,2004). In other words it is practically strongly inadvisable to complete a balance sheet before the actual amount of profit has been ascertained and calculated.
The concept of cost purports that the initial value of the item purchased for the business course is reflected with its initial value. This cost is widely regarded as the fundament for all accounting and bookkeeping calculation throughout the accounting period at hand. While the actual value of the items may significantly alter, the recordings in the income statements or balance sheets are never changed due to the fact that in this case they are to be continuously changed and it will be almost impossible to create a more or less accurate balance sheet without daily incorporated vacillations. Furthermore, it shall be mentioned that in the costs of sales section of the income statements the market price of the certain goods shall not serve as a basis for their market value, as it considerably differs due to the permanently occurring market vacillations. Therefore, in each individual case an independent assessment must be executed.
One of the most fundamental accounting concepts is the so-called Stable Monetary Unit. Under this principle, the calculations of certain item shall be executed in the same measurement unit throughout the entire accounting process. For instance if it has been decided to assume the value of shares in the United States of America Dollar per share, the same (i.e. US dollars) shall remain throughout the entire process.
The last but not the least concept is conservatism. It rationale is plain: profit shall not be taken into consideration until it has been collected. Under the conservatism doctrine the minimal profit or not at all shall be anticipated, whilst the highest possible expenditures are to be presumed.