Introduction To Finance Assignment: Corporate Governance, Financial Analysis, And Funding Sources

Learning Outcomes

Corporate Governance can be stated to be a system with the help of which a business is controlled and directed (Arcand, Berkes and Panizza 2015). It is important for an organization to ensure that they engage in a good corporate governance practice which will ensure integrity as well as the efficiency of a company. If the corporate governance of a company is not good, it may lead to considerable financial difficulties for the firm at large and bring about a damage to the overall image of the firm.

Certain organizations are often unable to figure out which course of action are they supposed to follow in order to ensure a good corporate governance base at their workplace and hence, with respect to this, they will be required to work with respect to certain principles which guide the overall corporate governance which takes place at large. These principles have been given as follows:

Fairness

The principle of fairness refers to the equal treatment which must be provided to the different shareholders with respect to the amount of shares as held by them. This can be stated to be a part of the shareholder agreement (Armstrong et al. 2015).  In addition to this, there needs to be fairness of the treatment of different stakeholders with respect to the employees, communities as well as the public officials as they have a considerable stake in the party.

Accountability

The corporate accountability can be referred to as the obligation and the responsibility of the organization with respect to the actions of the company at large. This means that the board of the company is required to be a balanced one and with respect to this, they need to determine the risk which the organization will be exposed to at large. In addition to this, the board must maintain transparency at the workplace which shall ensure that the organization will be successfully able to present itself in front of the target base.

Responsibility

Another principle which needs to be abided by is the principle of responsibility. This means that the different board of directors are responsible for the management of the business affairs of the company as well as the monitoring of the effective performance of the firm at large (Arora and Sharma 2016). The accountability of the firm needs to go hand in hand with the responsibility.  In this aspect, if the board of directors are not responsible then they will fail to carry out the responsibilities.

Transparency

A last principle of good governance from the side of the firm is transparency. The board needs to ensure that the different members of the firm engage in practices which reflect transparency of the actions and also assess the future risks of the firm at large. For instance, the transparency can be stated to be the openness or the willingness which a firm shows to present the clear information in front of the stakeholders.

Part b

In practicing the corporate governance a firm is required to ensure that they are successfully able to engage in the different activities of corporate social responsibility as it can serve as an incentive in many cases and be beneficial for the overall purpose of the firm at large (Bogsnes 2016). The different benefits of the firm in practicing the Corporate Social responsibility are as follows:

1. It helps to access capital easily
2. It helps in fostering the competitive environment with the help of partnerships, mergers, reduction in the risk and other such activities.
3. It helps to generate a smoother transfer of wealth and ensure that there does not exist any conflict of interest (Baiocchi and Ganuza 2014).
4. In addition to this, it may also lead to a good corporate governance practice which may then lead to better profit margins.
5. It may also pave way for a good future growth.
6. Additionally, it may also ensure that the foundations of the firm are laid in the right place and in the right manner.

Question 1

In order to analyze the overall profitability of the organization, it becomes crucial for the firm to ensure that they are successfully able to engage in the analysis of their financial statements which will then go a long way in assisting the firm to understand the areas where the firm is required to improve and those areas where the firm has a strong base. The given section will take into consideration the financial analysis of the companies Primetime and Dimetime. The relative profitability ratios and the liquidity ratios will be analyzed at large.

The profitability ratios help in the assessment of the profitability of the organization and help in the understanding whether the ventures of the firm are bringing in profits to the firm or not. The different profitability ratios which can be used to analyze the performance of Prime time and dimetime are as follows:

1. Return on Assets: This ratio acts as a representation of earning per dollar of the assets which have been invested in the company. A higher ratio is considered to be better for the firm.
2. Net profit: The net profit ratio measures the overall profitability of the firm and a high ratio in this aspect represents a higher performance of the firm which helps in understanding the overall performance of the firm at large (Baiocchi and Ganuza 2014).
3. Gross profit: The particular ratio measures the marginal profit of the company. This is also used to measure the segment revenue.  A high ratio is generally taken to be good for the company.
4. Return on capital employed: The particular ratio measures the percentage return which the company earns on the investment made by the owners.  The higher the ratio, the better it is for the firm.

Primetime Ratios

Ratio	Formula	Calculation	Result	Comment
Return on Assets	=Net profit/Total assets	=180/2900	=6.2%	The return on assets of the company needs to improve
Net profit	=net profit/sales *100	=180/3000	6%	The net profit ratio of the restaurant can be stated to be fairly accurate.
Gross profit	Gross profit/sales *100	=600/3000	20%	The gross profit ratio of the
Return on capital employed	=Net operating profit/ capital employed *100	=200/1100	18%	The return on capital is considered to be very good.

Dimetime ratios

Ratio	Formula	Calculation	Result	Meaning
Return on Assets	=Net profit/Total assets	=250/2500	10%	The return on assets of the company can be considered to be fairly good.
Net profit	=net profit/sales *100	=250/2100	12%	The net profit ratio of the firm can be considered to be quite good,
Gross profit	Gross profit/sales *100	=1100/2100	52%	The gross profit of the firm is considered to be quite high.
Return on capital employed	=Net operating profit/ capital employed *100	=300/1800	16.6%	The return on capital achieved can be stated to be fairly accurate.

On the other hand, the liquidity ratios can be stated to be those ratios which determine the ability of the firm to pay off the current debt obligations without raising external capital as available. The different ratios as available have been given as follows:

1. Current ratio: The current ratio can be described as the ratio which measures the ability of the firm to meet the short term obligations as well as the long term obligations (Schaeck and Cihák 2014).
2. Quick ratio: The quick ratio on the other hand, is a measurement of the ability of the company to meet its short term obligations with its basic liquid assets.

Primetime ratios

Ratio	Formula	Calculation	Result	Meaning
Current Ratio	=current assets/ current liabilities	=1100/100	11	The current ratio of the firm is 11 which can be stated to be considerably high.
Quick Ratio	=current assets-inventory/ current liabilities	=1100/100	11	As there is no mention of an inventory, the quick ratio of the firm is equal to the current ratio.

Dime time Ratios

Ratio	Formula	Calculation	Result	Meaning
Current Ratio	=current assets/ current liabilities	=1100/290	3.8	The current ratio of the firm is 3.8
Quick Ratio	=current assets-inventory/ current liabilities	=1100/290	3.8	The quick ratio of the firm is 3.8

Hence, from the given analysis, it can be rightfully understood that, in terms of the liquidity of the firm, the Primetime restaurant has been performing considerably well. This is because the current ratio and the quick ratio of the firm is considered to be the primary reflection of the liquidity ratio and the ratio of the Primetime is better in this case.  In the second aspect, which is concerned with the profitability ratios, it can be reflected that the position of Dimetime is better than that of Primetime.

The funds which are required by a business in order to expand are considered to be very crucial and with respect to this, it becomes highly important for the business to ensure that it is successfully able to ensure that the expansion is able to bring about considerably objective fulfillment (Baiocchi and Ganuza 2014). For the chosen business, the expansion can be considered to be an integral part of the firm and in this aspect, in order to raise the capital, the following sources can be adopted by the organization.

1. Bootstrapping

The first considerable step which can be adopted by the organization needs to be the procedure of Bootstrapping. In this, the organization first needs to ensure that it is successfully able to make use of the ability of the current resources in order to expand the operations of the firm at large (Schaeck and Cihák 2014). This goes a long way in assisting the business to save considerable costs and in addition to this, also goes a long way in assisting the business to spend in a limited manner, use own funds and increase the client work.

1. Bank Loans

The banks often come up with various lending options which then go a long way in assisting the business to ensure that they are able to engage in lending of the short term or the long term. However, it is important for the business to have the adequate resources which will assist in ensuring whether the business will be successfully able to approve a loan for itself or not. However, if the business has been performing well and incurring regular profits, then it will be able to gain long term success (Schaeck and Cihák 2014).  This helps in increasing the creditworthiness of the business which then goes a long way in ensuring overall success.

1. Small business administration Loans

Part a

The Small Business Administration offers a large variety of loans for the business owners at competitive interest rates and at flexible terms which will assist the business to establish their expansion plans and to avoid the problems which the company faces during taking loan from the traditional banks. This procedure helps the different businesses to ensure that they are able to gather an adequate amount of money for their expansion plans at large.

1. Crowd funding

Another source of funds for the organization can be taken to be as crowdfunding. With respect to this, it can be stated that the organization will be able to ensure that it will be able to pool multiple investors for the purpose of the organization and ensure to achieve a certain goal. Various platforms like Kickstart and others have assisted various businesses to obtain the necessary funds as required (McCahery, Sautner and Starks 2016).

1. Angel investors

The angel investor’s option can be stated to be another option which can be taken up by the businesses as it will go a long way in assisting them by offering tax benefits as well as additional assistance. The primary angel investors are people like doctors, lawyers, businessmen and other women who have a considerable access to a considerable source of capital.

The budgeting is a useful method of understanding which funds are required to be invested for the purpose of the business and in addition to this, the manner with respect to which these funds will be explored are also stated down. The major differences between the Zero based budgeting and incremental budgeting are as follows:

1. In the zero based budgeting method, the budget is prepared from the scratch, whereas in the incremental budgeting method, any adjustments as possible are made to the existing budget only (Barr and McClellan 2018).
2. In the zero based budgeting method, the budgets are prepared in a manner such that, the maximum resources are allocated to those parties whose activities have a considerable benefit for the firm. On the other hand, the incremental budgeting is done in a way such that no priority is provided to any party as present.
3. In the zero based budgeting, the factors like risk reward ratio and the cost benefit analysis are considered at large before any allocation is made (Barr and McClellan 2018). However, in case of the incremental budgeting, this is not the case.
4. The zero based budgeting is rather understood to be a time consuming method, whereas the incremental based budgeting helps in saving time.

Year	0	1	2	3	4
Project A	(45000)	21250	24100	24100	41250
Project B	(45000)	28750	29050	27250	27500

Project A

=Cost of the project/ Annual cash flows

Year	0	1	2	3	4
Project A	(45000)	21250	24100	24100	41250
Cumulative cash flow	-45000	-23750	350	23750	17500

Hence payback= 1+23750.24100

=1.98 years

Approximately 2 years

Project B

Year	0	1	2	3	4
Project B	(45000)	28750	29050	27250	27500
Cumulative cash flow	-45000	-16250	12800	14450	13050

Hence payback=1+16250/29050

=1.55

Year	0		1	2	3	4
Project A	(45000)		21250	24100	24100	41250
Discounted Value	-45000		0.917*21250 =19486	0.842*24100 =20292	0.772*24100 =17419	0.708*41250 =29205
cumulative			-25514	-5222	12917	42122
Project B	(45000)		28750	29050	27250	27500
Discounted Value	-45000		0.917*28750 =26363	0.842*29050 =24460	0.772*27250 =21037	0.708*27500 =19470
cumulative			-18637	-5823	15214	34684

Project a

2 years +12917/17419

=2.74

Project B

2 years +15214/21037

=2.72

=Average profit/ Average investment

Project A

=19486+20292+17419+29205/45000(AVERAGE)

=21600/11250

=1.92%

Project B

=26363+24460+21037+19470/45000(AVERAGE)

=22832/11250

=2%

Project A

NPV=Present value of benefits-present value of costs

=86400-45000

=41400 £

Project B

NPV= Present value of benefits-present value of costs

=91328-45000

=46328 £

Hence, from the given analysis, it can be determined that, The Project B has a better return criteria. This is because, the NPV, ARR and the payback period as well as discounted payback period is better.

In order to compare the discounted and the non-discounted methods of investment appraisal it needs to be understood that the non-discounted method although serves as an easy method of analysis, it does not support the time value of money (Gitman, Juchau and Flanagan 2015). This is one of the biggest differences between the discounted and the non-discounted method. In addition to this, the discounted investment appraisal method takes into consideration the time value of money by using a pre-defined interest rate in order to ensure the correct estimation. This goes a long way in helping the business to ensure success and correctly estimate the designated decision. In addition to this, the discounted method can be taken to be more accurate (Bekaert and Hodrick 2017).

The reason why the discounted pay back method is rarely used is because it has several disadvantages. The disadvantages have been stated as follows:

1. It does not take the value of the cash flows after the break even is achieved.
2. It only shows the time which is required to recover the initial cost of money
3. Moreover, this method cannot be used for mutually exclusive projects

References

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Baiocchi, G. and Ganuza, E., 2014. Participatory budgeting as if emancipation mattered. Politics & Society, 42(1), pp.29-50.

Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher education. John Wiley & Sons.

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