Managing Financial Resources and Decisions

Task 1

With the economic appreciation within Dubai region, Mr. Mohammad intends to start a computer trading business. Recent demands for globalization of businesses and institutions in the region have greatly increased the demand for computer units and tools, either for administration or operation. Mr. Mohammad sees this rich and not-yet-so-tapped market, which will eventually yield good investment returns for him.

Mr. Mohammad, however, does not have the necessary investment capital or fund source to start up the business. His lack of resources may lead to the defeat of the plan. So, Mr. Mohammad looks on the possible sources of finance that can be harvested for the realization of his computer trading business.

P1. Identify the sources of finance available to Mr. Mohammad’s business for the proposed costs.

Mr. Mohammad already identifies the start-up costs (license fee, economic department fee, labor department fee, civil defense fee, etc.), resources cost (office equipment, delivery van, furniture and fixture), and operating costs (salaries, insurance, advertisement fees, etc.) that must be addressed in his endeavor. These costs are part of the short-term, medium-term, and long-term demands of the business.

To pursue the business plan, Mr. Mohammad can possibly exploit the following resources that will be discussed below:

Capital Investment. At this point, Mr. Mohammad has not yet decided whether to maintain sole ownership of the trading business or to share it with other individuals. Should Mr. Mohammad intends to maintain sole ownership of the business, he has the option to invest his personal assets and resources on the business (McEachern, 2012). However, if Mr. Mohammad does not have enough personal assets to use, going for sole proprietorship is not recommended.

Far better, asking for a partner to join the business venture is a good advantage to Mr. Mohammad. The partner can invest additional resources and capital to the venture, plus, it will reduce the liability of Mr. Mohammad (Daily, 2012). Lastly, forming a corporation is another option to consider. It will invite investors to look at the profitability and feasibility of the plan, and it will make financing easier  (ibid, p. 81). In a corporation, more people can help finance the business venture and it will be an advantage to avoid unlimited liability on the part of Mr. Mohammad and the rest of the stockholders.

Business Speculators or Third-Party Investments. Mr. Mohammad can handle setting or starting up the business, however, his problem is how to acquire necessary resources for the business and the operating cost. Getting a loan from a bank is not likely to happen due to the high risk involved in starting a business. But Mr. Mohammad can seek the help of business speculators, venture capitalists or third-party investors (Chatfield, 2008). Even before the computer trading business kicks off, Mr. Mohammad can already receive funding from these investors, which can be used to set-up the office, but necessary fixtures, and so on.

Third-party investment is better than loan because the business does not need to run after the repayment of the debt. Funding from venture capitalist seeks interests only when the business is already stable and the operation is going well.

Trade Credit. The nature of the computer trading business allows Mr. Mohammad to stamp a deal with manufacturers and distributors for a trade credit. For some, consignment system is also considered to be same category. Basically, trade credit and consignment allow the business to sell products and goods without even actually paying them yet. Payment is made only in the future, either when products are sold or on a considerable period of time. In essence, trade credit allows low-capital businesses to operate without raising capitalization.

Leasing. To reduce high cost of acquiring new vehicles and buying offices or store area, leasing is an option to consider. The computer trading business does not need to purchase needed resources for the business operation, instead, the venture can lease these resources over a period of time.

These are the basic options that can be explored by Mr. Mohammad to finance the business start-up, resources and operations. There are other possible options that be explored as time and opportunities permit, these include: bank overdraft (for operation, especially for salaries), rent-to-own purchase (resources), and loans (for expansion).

P2. Assess the implications of the different sources of finance available to Mr. Mohammad’s business.

In the first question, we have recommended four major finance sources available for Mr. Mohammad. These are capital investment, venture capitalists or third-party investments, trade credit, and leasing, with the possible consideration of bank overdraft, rent-to-own purchase, and loans. Of course, these different sources of finance are subjected to opportunities and convenience, and as time tells.

For purposes of understanding the merits of each, below is an analysis of the possible implications of these different sources of finance.

Legal

Basically, it is easier for Mr. Mohammad to start a business if he will go for sole proprietorship. The simplicity of this type of ownership also offers relaxed government procedures. You don't have to file necessary documents as compared with a corporation or a partnership (Pakroo, 2010). That means you've got to comply only with the local requirements of the local government unit in the region. On the other hand, although, partnership is more complex than sole proprietorship, you can still take advantage of its relaxed procedures. In terms of taxation and other government regulations, partnership is easier to file and you don't have to suffer the large tax requirements. But with today's business arena, there are sub-types of partnership that will allow  customized control over the company and limitation on liability.

Of course, most companies or organizations today are in form of “corporation” because of its flexible arm to raise capitalization or funding. Mr. Mohammad looks forward to founding a corporation for his computer trading business with the involvement of other investors. However, a corporation is taxed higher compared to other forms of business, and there are several documents to be filed with the SEC (Pakroo, 2008; Emanuel & Emanuel, 2009). The business must be approved by the commission prior to its establishment both as de facto and de jure.

As per recommendation, Mr. Mohammad is encouraged to build a partnership, wherein he can have unlimited number of partners to raise funding. And as the company goes, he and the partners can reorganize to form a corporation.

With regards to third-party investments, the contract may be also subject to scrutiny as to level of involvement. It is necessary for Mr. Mohammad to ask the level of legal control of the venture capitalist. Of course, Mr. Mohammad looks for control and management of the company, but if legal terms demand him to relinquish control to third-party investors, he will become a sideline owner. This and the many aspects of the third-party investment contract is an important piece of legal document that should be studied by Mr. Mohammad.

Financial and Dilution

As mentioned above, the introduction of venture capitalist, partners, or stockholders may result to a convenient dilution of control. Should Mr. Mohammad raise financing capital of the business through partnership, corporation, or third-party investments, it would result to reduced control of the business (Chandra, 2008, p. 527). The intrusion of other entities reduces Mr. Mohammad's power over control, while it may raise other person's power over control.

Due to the fact that Mr. Mohammad does not have the necessary resources to support the business venture, he may resort to capitalization that will make him of less importance in a company he had conceived. And as the company goes on, such power over control and management may eventually reduced as new partners are admitted or new equities are issues to raise capitalization for the business. In essence, the desire to raise available finance for the business may lead to the dilution of power over control on the part of Mr. Mohammad, even if he does some mitigation against it. In fact, the only thing he can possibly do is to actively join in any issuance of equities or increased partner's investments to retain the biggest share of control.

As much as Mr. Mohammad's control dilutes, his financial interest may also dilute in the process. Of course, partnership and corporation follow a more specific method of dividing profits or retained earnings, and commonly it is done in pro-rata to investment. A diluted control is the same as a diluted financial value. Much more, any business activity, such as merger, issuance of new equities, may also result to financial dilution (Khan, 2004).

In any stage of financing, dilution happens, and it is the very concern that should be put into thought by Mr. Mohammad if he wants to retain management and financial clout on the computer trading business he started (Khan & Jain, 2008).

Bankruptcy and Dilution

During bankruptcy, Mr. Mohammad's and other partners' or stockholders' interests on the computer trading business are not central to the business. The fact that the business made use of the trade credit system of financing and leasing raises the business liability. And under the business bankruptcy rules, debtors' interest on the assets of the business is priority. Until these interests are met, stockholders do not have the right to ask for repayment and shares of the assets.

When the above-mentioned interests are met and the computer trading business assets are still available, stockholders can now start claims. However, it will come again to what form and what substance. In partnership or a corporation, if Mr. Mohammad is part of the ruling group, say preferred, he will get payment of his investment first. But if he did not take part of the ruling group, he have to wait until all other interests are met.

Generally, in the bankruptcy situation, if the asset of the business has already been dissolved to meet interest, owners are less likely to receive repayment of their capital. And under the sole proprietorship, debtors can go after personal assets of Mr. Mohammad to meet their interest. It is to this fact that Mr. Mohammad is encouraged to consider limited partnership and corporation to avoid this scenario.

P3. Evaluate the appropriate sources of finance for Mr. Mohammad’s business considering the following aspects.

With the following available sources of finance cited in the first part of this task, Mr. Mohammad's options are wide and tremendous. However, not all options will work just as fine. It is essential to evaluate at least three appropriate sources of finance based on suitability of purpose, advantages, and disadvantages.

A. Partnership.

Taken everything into account and consideration, Mr. Mohammad will fair well if he goes for a partnership than sole proprietorship or a corporation. A limited partnership brings the most investment possible for the business. Instead of being tied up with the demands and requirements of a corporation, a partnership offers an inexpensive and convenient way to start up a computer trading business (Bevans, 2006, p.72).

With an unlimited number of partners admitted, Mr. Mohammad can easily raise the needed capitalization for the venture. The income of the business will be divided in a pro-rata basis, which will be based on the amount of investment (Brigham & Houston, 2009, p.7). This also provides an exit out of the high corporate income taxes, as partners' income will be taxed individually and according to their earnings. And partners can invest to the extent of their capability, which will be of great advantage to attract more investors.

However, investors may get wary or may have some doubts over the liability extent of a partnership. An action of a partner may affect the capability and future of other partners. To avoid this situation and eliminate investors' fear, it is necessary to form limited partnership that will safeguard the personal assets of investors (Madura, 2007). Another disadvantage is when partners leave the business, it may place disruption to the smooth organization procedures. The dismissal or death of a partner requires the partnership to reorganize – and this may prove too inconvenient and difficult for the partnership.

Moreover, Mr. Mohammad can always retain management control being both an investment and managing partner. Without this leverage, Mr. Mohammad can maintain the way the business will move. It is a great advantage for any person who is looking forward to managing and planning for a business, but lacks the necessary resources to kick the business.

Nonetheless, the partnership can easily reorganize to form a corporation when deemed necessary. The forming of the corporation will be an advantage as the business grows and expansion is imminent.

B. Trade Credit.

As much as forming a partnership will raise finances to start the business, making much of trade credit is a big thing. Trade credit allows computer goods or products to be “purchased or delivered but payments are postponed to an agreed future date (Hussain, 1989).” This arrangement will allow the business to operate with less cost. Thus, it will allow Mr. Mohammad to work things out without the worry of loss of operating finances.

In the same respect, trade credit allows the business to engage in a credit (in form) without the interest. It is as if goods or products are purchased in cash. This advantage eliminates the high credit interest that are usually charged on loans. However, according to Bhabatosh, the supplier may add or hide the interest on the price of goods. As a result, the selling price of the computer trading business may be higher than the rest of the competitors.

The underlying premise behind the trade credit is for the business to sell the units before the agreed date of payment. In this scenario, the business can gain profit from the trade credit without exposing its available funds to finance the said operation. The opposite, however, requires the business to shell out some of its assets or available funds to finance the operation, which is not beneficial to the business, especially when goods are not sold in a short period of time. In such situation, available funds may be exhausted and operation may be halted.

C. Hire Purchase.

As much as the business needs necessary equipment and tools, such as vehicles, to operate, Mr. Mohammad needs to find a perfect source of finance, and the rescue is through hire purchase. Although, in the first assignment, leasing is recommended, but such would not be beneficial. Leasing will only the business to rent the resource for a time and lose ownership thereof. Not with hire purchase, this would allow the business to lease the resource and eventually own it on a proper time.

Mr. Mohammad can sign a hire-purchase agreement that will expire in a period of time. At the last installment, the computer trading business receives ownership of the property. Although the property by then is already used and may have depreciated in value, the computer trading business adds up a new asset to the balance sheet (Hussain, 1989). And as time permits, the business can re-sell the property to gain out of it. Whichever is the best way, hire-purchase would allow the business to operate without exposing its cash.

The essence of leasing is buying time for the business until it has the capacity to buy its own equipment. This still works with hire-purchase, the only difference is the ownership title to the property when terms of the agreements are met.

Mr. Mohammad's dilemma on finding appropriate sources of finance is now solved. It must be noted, however, that as the business grows and expands, new forms and sources of finances can be tapped to supply the needs and demands of the business. As always, business is about creativity and timing.

P4. Cost of the Different Sources of Finance

The recommended sources of finance that Mr. Mohammad should explore do not count much of a cost. Basically, the formation of a partnership is of convenience and simplicity. Without the demand and requirement of a corporation, partners can easily write the agreement between them to form the business partnership. This would reduce the cost of government and business compliance in almost a half – and this would gain enough assets to use for the business than to secure a corporation status.

The convenience of a trade credit is of great advantage, though only for a time. If the computer trading business can stamp a deal that will secure a credit for 90 days, the business needs to sell goods prior to that date. Otherwise, it would cost available funds to settle the credit after 90 days. But with the growing economic appreciation in Dubai region, it is easy for the business to gain clients or customers, and trade credit would not be a problem. On the other hand, the hire purchase will require the business to pay monthly or period installments. This would take available funds from the account of the business. But this can be met when the business operates well in the next coming months.

Task 2

For over the past years, Emirates Law Associates (ELA) has provided legal services to individuals, corporates, and other clienteles in the Dubai region, and the vastness of United Arab Emirates. In accordance with government regulations, the chairman of ELA, Mr. Ali hires the auditing services of Talal Abu Gazalah to keep the record straight and prepare the books of the law office. This audit report will also be used by Mr. Ali to improve the financial performance of the law office to the year 2013, and to formulate new approach to their financial sheets that will better their financial status at the moment.

P1. Importance of Financial Planning for Financial Performance and Position Improvement 500

Financial planning is defined as the future-oriented engagement of the financial status of the business to form a concrete prognosis of the future that will be the basis for the actions and activities of the business or organization (Cortes, 2009). It serves as the guidance of the business on how it will handle its finances to effectively adapt a cost-effective and profit-oriented plan. In layman's term, financial planning is the effective overview on the cash inflow and outflow of the business that will translate better understanding on how profit can be obtained. Financial planning supports the general principle that a business works on to acquire and generate profit.

According to Sheeba, financial planning “determines the direction for future growth of the business...which helps to establish future business plans for the firm like expansion, diversification or restructuring.” Central to financial planning is looking at past performances of the organization to make sound judgment on projecting expenses, monitoring revenues, and taking the right intervention action for the improvement of the performance.

To understand how financial planning improves financial performance, it is essential to review the steps that must be taken. Forecast plans are created to evaluate financial statements “under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios (Brigham & Ehrhardt, 2011).”  By looking at the different angles of the financial statement forecasts, Mr. Ali can test the right strategy that will translate better financial results.

The core of the financial plan is the cash flow of the organization (Honadle & Howitt, 1986, p.107). With Emirates Law Associates business projects and activities, it is necessary for Mr. Ali to review the capital that will be needed. Will the project use readily available resources? Or will investment on new resources be beneficial and financially feasible? With the evaluation of the investment and the projected return, Emirates Law Associates can raise its revenues while cutting unnecessary expenses. Moreover, with the projection, if the resources and funds of the law office cannot meet demands of the business activity, the question boils down to the capability of the law office to raise investments and finances, with the consideration as to how the law office can meet repayment in the future.

In this consideration, to position the company properly based on the financial term, it is very important to check how it fairs with the market. Emirates Law Associates must review its commitment to its clients by looking at internal factors. The performance of the law office depends on  the perception of clients which is focused on exception customer service. Internally, the law office must use the human resource to meet this goal of market positioning. In this instance, it is necessary to review the human resource planning of the law office, as the provision of services will be improved by a reward and compensation system.

Lastly, financial planning works on an effective monitoring and evaluation system that will keep the performance and financial position of the law office on check. Intervention or interference is a very important of the financial plan – and businesses should clearly outline how alternate routes of financial plans will work to avoid loses or any financial dilution.

P2. Financial Information Necessary for Effective Decisions.

As understood, financial planning is an essential part of a business strategic plan. It provides a quick overview of the entire business processes and how the organization should be directed to accomplish its financial goals and objectives. An  effective financial plan involves careful analysis of financial information that are relevant to the day to day activity of the business. Basically, the information can be obtained by understanding the rudiments or elements of financial statements. However, there are important financial information that can be obtained from the basic components of the following documents that will be discussed.

Sales Forecast

Although Emirates Law Associates is a service-oriented business, sales forecast can still be made which will be focused on the number of clients they received in a period and the revenue they accumulate from these said clients. According to John D. Luth, as cited by Vieceli & Valos, “a good sales forecast is undoubtedly the most important single planning tool.” From the overview of the sales forecast of Emirates Law Associates, Mr. Ali can easily assess promotion, management decisions, future needs, and the achievement of business goals.

Balance Sheet

Considered as the complete picture of the company, the balance sheet provides information as to what the business owns, what it owes, and the balance for owners or stockholders. Without clear understanding of how much the company owes may result to an excessive loan which may hurt the company in the process. Mr. Ali should consult the balance sheet to see the available assets for the business and its current obligations.

Cash Flow 150

Mr. Ali, as the executive of Emirates Law Associates, should know what and where the asset is spent, and in the same way, what and where the money is received. With the aid of the cash flow, managers get an overview over purchases of assets, payment to employees, and revenues received from rendering services. Getting a clear knowledge of the expenses and revenue of the business provides information as to how the business must be directed to ensure profitability.

Generally, there are other financial information or documents that can help Mr. Ali to make a financial plan for the business. These information should be regarded and evaluated from time to time to reflect a real-time and reliable knowledge for management decisions.

P3. The Impact of finance on the financial statement of Emirates Law Associates.

When the management gets a clear understanding of the business direction, it is easy for them to make decisions that are effective, positive, and timely. Of course, the implemented financial plan can only be fully evaluated based on its results, though performance monitor can be made during the process. In this regard, financial planning can be a two-way result. It can either provide growth and financial performance improvement or it can undo the progress of the business.

Imperatively, however, a financial plan that takes into account every single financial information available can always provide relevant and reliable strategies. In the end, the impact of financial on the financial statement of Emirates Law Associates is provide management an overview on how to increase revenue through massive expansion on market, reduction of unnecessary expenses, and positioning the law office in the market.

As an accountant for Talal Abu Gazalah, I don't have the position to dictate Mr. Ali on how to manage the law office. But I can provide him the necessary overview of the business that will help him decide issues. Simply, a financial plan or the business plan still resides on the business manager and not on accountants.

Task 3

P1. Potential financial problems Emirates Law Associates might experience in the business.

Based on the review of the financial information of Emirates Law Associates, there are possible problems that are already hindering the financial performance of the business. If not resolved, these problems may result to tremendous downgrade or dilution of the law office.

Expenses. Emirates Law Associates is a service-oriented business that provides legal services to clients. With this business nature, it is a big wonder why the law office is spending too much – and it is a wonder why the return of their expenditure is not remarkable.

Stand supreme of these expenses is the salary and wages. Of course, lawyers should be paid high as the job demands that. However, if you pro-rate the salaries against the revenue, you will find that not all lawyers are accumulating income for the business. A legal business as the ELA, it is very important that lawyers be paid according to the amount they bring to the business.

Moreover, other expenses seem to top the bill. Take into account the advertisement and supplies of the business. Of course, the business should see to it that they get enough promotion, but these advertisements are not returning well based on revenue numbers.

Insurance. As much as ELA spends big on salaries of lawyers and staffs, it spends less on insurance of employees, the office, or the firm. For a firm in a legal service industry which has tremendous risk, a 10, 000 AED is too low from the normal insurance allowance. Should something happen to one of its lawyers during a stint of legal services, the insurance may be able to cover the liability and ELA should take from its own savings.

Accounts Receivable. Looking at the balance sheet of ELA, we can find that the accounts receivable is too high at 1, 800, 000 AED. Roughly, ELA has a poor collection system. With such high ceiling for A/'C, ELA maintains high risk of floating and unused assets, and the transfer of these ACs into Allowance for Bad Debts. This is also a big problem if the business needs enough cash in hand for any unexpected expenses.

Loan. Nonetheless, it must be noted that the business has a very big loan of 1, 000, 000 AED. This perhaps stops the business from moving forward. In fact, the unappropriated retained earnings is too low due to the fact that there are lot of obligations and allocations that should be considered.

In summary, Emirates Law Associates has a very weak financial performance that it will not stand if something happens in the market. With a 700, 000 AED in hand after the year ended, unexpected turns of the economic behavior of the region may hurt the law office that much. Although this scenario is not likely to happen due to the economic appreciation in the region, Emirates Law Associates can still improve its financial status to ascertain stability.

P2.  Suggest actions Emirates Law Associates might tale when experiencing financial problems in the business.

With the following problems cited in the first part of this task, solutions can be implemented to resolve these issues and speed up the business and financial performance of ELA. These recommendations address each specific issues at hand.

Cost-Cutting. During the collapse of the US economy, businesses went to a radical cost-cutting approach. It was a drastic change due to the fact that they were not ready for such. Assuming that no economic downgrade will happen in the region, it is still necessary to reduce expenses to improve financial status.

Mainly, it is very important for Mr. Ali to check the salaries received by the law office's lawyers. Are they paid according to what they bring in? The fact the clients pay in hours billed by the lawyer makes it easier for the law office to check how much the lawyer brings in. It won't be difficult for the law office to assess the performance of each lawyer and how they work for ELA.

On the other hand, it is also essential to check how these advertisements are working for the company. The return and impact of these advertisements are too minimal while the business spends more for it. You cannot just spend on something with getting out of it. If the business is not receiving something from these advertisements, it is better to drop them, and work on the word-of-mouth marketing.

Future Risk-Reduction. Emirates Law Office works with people and by people. And humans are more risky than equipment. Closing the gap of future financial obligation can be done by raising insurance. It is something that ELA should work. There are group insurance plans, office insurance plans, and other financial insurance options available that can be explored by the law office to insurance everyone and everything to avoid financial obligations that may cripple the business.

Better Business Procedures. The AC problem can be traced back to the ELA terms and agreements. If Mr. Ali wants to raise its financial capacity and performance, the terms and agreements must be reviewed to effectively control collection from clients. The business cannot possibly survive with so much receivable.

Payment of Loans. In fact, if ELA will work on its AC problem, it is easier for them to offset the loan. This would provide financial freedom for the business, which will increase stability and can provide chances on expansion.

However, these recommendations are not standards. These can be changed as the time permits. Timely adjustments must be made by ELA. Monthly review of the performance is recommended to detail a real-time response on financial issues.

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