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Certificate IV Building &
Construction
© NSI TAFE CARPENTRY 2013
Financial structure is a statement showing assets of the business and their finance at a point in time
Attention needs to be given to the amount and type
of borrowings of your business This information should be found in the liabilities
section of your balance sheet OVERBORROWING is a significant reason for
small business failure
In periods of sudden downturn over borrowing will lead to the business have trouble meeting its repayments
Business borrowing is measured by the gearing or
borrowing ratio. The gearing ratio should not exceed 60% of its total
assets at any point in time Financial position of the business should be
reviewed regularly
There are Three ways to enter into a small business 1. Start a business 2. Buy a business 3. Obtain a franchise
Existing Businesses may require funds for: 1. Operating expenses
1. Materials or labour 2. Capital expenditure
1. Plant, equipment or property 3. Adjusting the existing financial mix (debt
consolidation) 1. Finding cheap / easier to repay loans
Undercapitalised businesses are just as doomed as over borrowing ones Undercapitalisation is not having enough funds to maintain a profitable business or not having invested the funds into appropriate plant and equipment to help the business make a profit. Eg: buying a new XR6 turbocharged ute before the purchasing the required tools of the trade would be a bad decision
The Financial Mix
Equity Funds: Are funds put into the business by the owners (capital)
Another source of equity funds is to reinvest the profit into the growth of the business (undistributed profit)
Debt Funds: Are funds that require repayment of the
money invested into the business. It can be via a commercial entity like a bank or credit union or from a private party like a family member
Sources Of Finance Trade Accounts : Trade accounts are a source of
short term loan, typically 30 or 60 days. The supplier lends you credit on the purchase of their products.
Most trade companies work on trade accounts, giving you time to complete the work and receive progress payments before account is due.
Bank Overdraft: A very common loan for small business, if used with a trade account it can extend your time for completion of works.
The bank lends you money to extend your existing cheque
accounts. Once the balance of your account reaches zero the bank will
allow you to extend drawings on the account the credit limit is reached
Once in debt, interest is charged on the outstanding balance. Repayments can be varied, eg: as you deposit money it is
deducted directly from the outstanding balance
Term Loans: Can have flexible repayment options but with set repayments over a period of time.
Typically between 1 to 10 years. Fees and Security are generally required for these
loans. Fees generally apply for early repayment. Usually used for plant and equipment purchases
Personal Loans: Similar to Term loans, long term customers of the lender with good credit can get unsecured personal loans
Home Equity Loan: The business owner uses the equity in
their home to borrow capital to run the business. Care should be taken here as the home is security the bank
could reposes the family home if the business fails Commercial Bill: Amounts of $100,000 or higher purchased
over a period of time. Eg: 30,60,90 or 180 days. Repaid in full plus interest at the end of term or can be
rolled over up to a period of five years
Credit Cards: Used by many businesses to pay day to day running expenses.
Care should be taken to repay the outstanding value before interest free period runs out.
Interest rates are typically very high Finance Lease: The lender purchases the asset and
gives it to the lendee for an agreed period of time 1 to 7 years at the end of that time the asset is give
back to the lender or the lendee pays a residual amount Typically 20-40% of original purchase price and the lendee then keeps the asset.
Small business is usually funded by a combination of Equity and Debt
Organisation Gearing. The extent of debt in a business is referred to as
gearing or leverage A highly geared business uses a high proportion of
debt in its total funding. The gearing ratio is: Total Liabilities X 100 = x% Total Assets
Cost of Funds: You need to consider how much funds costs when deciding
what's right for your business model Owners Equity: the cost of equity is the owners required rate
of return in the operation: Required rate of return % = Risk-free of interest % +
premium for risk % Risk – free of interest is the current interest offered by the
banks if the funds were deposited there (eg: term deposit) Premium for risk is an arbitrary rate allowing for the risks
involved with investing in the business, usually 5-15% - the more perceived the risk the higher the rate
Cost of Funds: Debt Funds: The main cost of debt funds is the
interest and fees charged by the lender for the funds, including setup or establishment fees.
Because interest payments are tax deductable, the
after tax cost of the debt must be calculated. After Tax cost of debt % = Interest x (1-tax)% PA
Loan Periods: Should match the asset that the loan is used for.
eg: overdrafts used for purchase of materials, term loans used for purchase of plant or equipment
Interest rate Basis: The appropriate interest rate
should be chosen to minimise financing costs eg: fixed loans when rates are rising, variable
when rates are falling Lender requirements: Lenders may require security
or place restrictions on use of funds this may influence your choice of funding
Risk and Control: Is the degree of risk or control in the business brought about by funding:
eg: if economic conditions worsen and repayments increase there is a degree of risk that the business cannot repay them.
While borrowing from funding from outsiders will lose you a degree of control in the business
Funds Availability: The amount of funds available from
lenders will fluctuate depending on economic circumstances.
Cash Flow and taxation: The cash flow position of the
business will affect decisions on the type of funding eg: new business will require funding with lower
repayments to minimise cash outflow
Impact of Gearing: Highly geared: High level of debt to asset Low Geared: Low level of debt to asset No gearing: No Debt Negatively Geared: Has a high level of debt so that interest
repayments mean the company makes a net loss over a period.
Positively geared: Have low levels of debt even after interest
considerations and make a net profit Negatively Gearing and having high levels of debt should only
be considered if the business has high profit level that are sustainable in a fluctuating market.
The Funding Plan: An Annual funding plan can be stand alone or part of
an operational Plan
Now head over to Studespace and have a go at test
and tasks week 3-1
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