Identify the sources of finance available to Viet Son Tours:
Every business needs finance to set up, operate and pays many bills. There are two ranges of sources of finance available to a business: long – term and short – term.
• Long – term sources: share capital, borrowing from banks (loan), retained earnings or third – party investment.
Share capital: A company can raise the finance by selling its shares to investors who will become shareholders of the company. The profits will be divided among all of them.
Bank loan: A business can also raise the finance by borrowing money from banks. It has to obligate to the bank’s repayment and interest rates.
Retained earnings or third-party investment: Organizations can generate revenue by providing goods or services and being paid for that provision by someone other than the primary recipient.
• Short – term sources: other ways of borrowing, working capital, stock (inventory) control, cash management, management of creditors/debtors,…
Other ways of borrowing: Payday loans, Bank overdrafts, Plastic cards, Hire purchase and conditional sale, Mortgages and secured loans
Stock (inventory) control: Stock control, or inventory control, is used to show how much stock you have at any one time, and how you keep track of it.
Cash management: Cash management is a set of strategies or techniques a company uses to collect, track and invest money. Although cash by definition refers only to paper or coin money, in cash management, companies usually also work with cash equivalents such as checks. This is becoming increasingly common as the money system becomes more abstract, using electronic methods.
Management of creditors/debtors: The more debtors you have, the higher the company’s liquidity position. However, you must appreciate that getting the balance right is important in determining what cash will be available to your business in the short term, and for identifying the cash, or working capital, needs of your business as it grows.
In the case of Viet Son Tours, we can see that the cash flow budgets are going to increase for next 3 years. To raise finance, Viet Son Tours can use many ways, however, it should use long – term financial source. Company can sell shares to investors because the aim of Viet Son is to be managed primarily by working owners/partners and develop of a functional organizational structure whereby people shall be focusing on their prime area of expertise. Each of them can own the company’s shares. It makes them be more responsible and loyal to the company. Besides, Viet Son can raise its capital for investment, purchasing equipment,… And there is a clue for that is Viet Son plans to grow their finance through cash flow and equity. The selling of shares creates the equity for the company.
Cash flow can be affected by selling shares, it can be raised. When the company issues shares, the investors buy them and become shareholders. And the company receives money from them to raise the capital and use that money as their own money. It is understood by cash flow from financing activities. It is one of ways to raise the capital of a business. In the fact, it usually happens, especially for joint – stock company.
Assess the implications of the different sources of finance to Viet Son Tours:
• All main types of financial sources are listed on the above part. Each type of financial source has a set of implications. Implications of choices include legal, financial and dilution of control implications, bankruptcy.
In this case, Viet Son should sell shares to raise their more capital. This company can issue common shares and preferred shares. Below are implications of common shares and preferred shares:
• Common shares – Implications:
Legal implications: Each stockholder has the right to vote in the Board election to manage the company.
Financial implications: Company is not obliged to pay stock holders dividends. Payment of invest is not obligatory.
Dilution of control implications: Diluted control
Bankruptcy implications: Last to be paid from the residua asset of the company.
• Preferred shares – Implications:
Legal implications: Stockholders do not have the right to vote the Board of the company.
Financial implications: Company is obligated to pay the stockholders’ dividends. Dividend is cumulative if not paid. Payment of investment is not obligatory.
Dilution of control implications: Control over the company is not diluted.
Bankruptcy implication: Among the first to be paid from the residua asset of the company.
Like many other companies, Viet Son can use two methods for funding a business, with debt or equity. It is very important to understand clearly the two options to choose the best financing method for the business.
• Debt: Viet Son can borrow money from a bank or another lender. The company can issue bonds as a method of borrowing money from investors. Financing with debt involves taking on the added costs of interest.
• Equity: The capital of Viet Son is funded by investors. Equity is increased when an owner makes an additional cash investment in the business or when other investors buy into the company. Viet Son can raise funds by issuing additional stock that gives equity in the company to new investors.
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