Financial management Unit

Financialmanagement

Unit

Cashrequirements

Todevelop the proper cash estimates required, a research was conductedby gathering and comparing financial records of similar businesses inoperation in the particular industry. Three organizations that hadreported an initial capital startup of below $5 million performedpoorly. A capital estimate of $10 million was deemed fit afterfactoring in inflation and more advanced and costly equipment for thenew venture. Additionally, a stronger financial backing would securethe venture against unprecedented developments.

Assetequipment

Alist of all needed equipment was compiled and quotations for thesupply of the same from different suppliers sought. The quality andprice quotations were compared to attain the best value for money.Some equipment employed different technologies thereby calling forfurther studies on the best technology to employ.

Workingcapital

Workingcapital is determined by current assets less liabilities. Realisticincome estimation in the first 12 months of operation predicts a lossof $6,067,864.81meaning that working capital in the first one year is 5 million less$6,067,864.81 amounting to $-1,067,864.81 which makes the venture indebt. By pessimistic estimation, working capital after first 12months is 5 million less $4,564,847 amounting to $435,153. Workingthus range fall between the two estimates.

Timingof finance

Marketestimations indicate that the venture will be making profits in thesecond year of operations. With an estimated profit of over 4.2million in the second year, the venture provides a worthwhile returnon investment to investors.

Sourcesof finance

Founders’cash:there are threefounderseach contributing 700,000 which translates to a 12% shareholding.

Friends:Only six friends committed to the venture with lowest contributionbeing 120,000 and the highest 250,000. The total amount was1,200,000. The decision on repayments in form of shareholding or cashwas yet to be agreed (Allen, 2011).

Family:Each founder’s family contributed towards the venture. One familycontributed a $250,000 while the second contributed $350,000 and thethird $200,000.

Foolishinvestors/bank loan:The bank contributed half of all the total investment at 5 million.

Factoring

Theventure managed to sell its invoices to First Community Bankamounting to $900,000.

Assumptions

  • The population of senior citizens is growing and there are not enough specialized senior citizens living communities provided by the current players in the market.

Itis assumed that the venture only expenses will be as listed below.

EXPENSES

Rent

Business rate

Partners` drawings inc NIC

Employees` salaries inc NIC

Supplies (inc VAT)

Supplies (0% VAT)

Electricity (inc VAT)

Gas (inc VAT)

Telephone (inc VAT

Water (0% VAT)

Internet (inc VAT)

Professional fees (inc VAT)

Insurance (0% VAT)

Advertising (inc VAT)

Stationery (inc VAT)

Capital assets (inc VAT)

Interest charges

Loan repayments

Hire / leasing charges inc VAT

Vehicle (0% VAT)

Transport petrol (inc VAT)

Transport bus (0% VAT)

Postage (0% VAT)

Maintenance (inc VAT)

  • VAT prices for various products and services will remain as indicated over the first two years of operations.

VAT (17.5%) on sales

VAT (17.5%) on purchases

VAT (5%) on gas &amp elec

  • Staff turnover is not an issue

  • Equipment and asset depreciation in value over the two years will be insignificant

3.0Theoretical Framework 200 words

Ratios,risk management, funding,cash management, banking relationships

Riskmanagement

Extremevalue theory: This model will be critical in assessing the growthpattern of the venture in case it deviates from the realistic andpessimist estimations.

EnterpriseRisk Management- This theory assesses the viability of the venturemeeting its sales objectives.

Pure&nbspriskmanagement: this theory will identify the external risks thatface the venture.

Unified&nbsptheory&nbspofacceptance and social construction of technology predict theacceptance of the business venture in the market and the risksassociated.

Funding

Capitalmarket theory- informs the business that investors assume notaxes and transaction cost. This is likely to guide relations betweenthe bank and the venture.

Bankrelationship

Capital&nbspassetpricing model (CAPM):- it describes the connection between risk andexpected return and is thus useful in the pricing of funds sourcedelsewhere and varying perceived risk associated with the venture.

CompositeRisk Index: It assumes that the Impact of Risk event x Probability ofOccurrence. This theory will largely impact the relations between theventure and the insurance firms (Hampton2009).

Cashmanagement

Baumolmodel of cash management: To retain a healthy working capital, theventure will employ the model to reduce the cost of holding cash andcost of liquefying it to run operations (Gelderen,Thurik &amp Bosma 2006).

References

AllenK. (2011). LaunchingNew Ventures: An Entrepreneurial Approach.New York: Cengage.

Blank,S. &amp Dorf, B. 2012. TheStartup Owner`s Manual: The Step-by-Step Guide for Building a GreatCompany,Volume 1. New York: K&ampS Ranch

Burns,P. 2010. Entrepreneurshipand Small Business: Start-up, Growth and Maturity.New York: Palgrave Macmillan

Eliot,C. n.d. MakingYour Financial Assumptions.Retrieved online from,http://www.jian.com/software/business-plan/Financial-Assumptions.pdf

Gelderen,M., Thurik, R. &amp Bosma, N. 2006. Success and Risk Factors in thePre-Startup Phase. SmallBusiness Economics Vol. 26, No. 4, pp 319-335

Hampton,J. 2009. Fundamentalsof Enterprise Risk Management: How Top Companies Assess Risk, ManageExposure, and Seize Opportunity.New York: AMACOM.

Hatten,T. 2011. SmallBusiness Management: Entrepreneurship and Beyond.New York: Cengage Leaning.

Huyghebaert,N. &amp van de Gucht, L. 2007. The Determinants of FinancialStructure: New Insights from Business Start-ups. EuropeanFinancial ManagementVol. 13, No. 1, pp 101–133.

Kaplan&amp Warren, A. 2009. Patternsof Entrepreneurship Management.New York: John Wiley &amp Sons.