Archive for September, 2011
Capital Budgeting
Capital budgeting is a process of planning expenditures incurred on assets whose cash flow is expected to range beyond one year. In other words, it is defined as a process that requires planning for setting up budgets on projects expected to have long-term implications. It can be used for processes such as the purchase of new equipment or launching of a new product in the market. Businesses prefer to intricately study a project before taking it on, as it has a great impact on the company’s financial performance.
Some of the projects that use capital budgeting are investments in property, plants, and equipment, large advertising campaigns, and research and development projects.
The success of a business depends on the capital budgeting decisions taken by the management. The management of a company should analyze various factors before taking on a large project. Firstly, management should always keep in mind that capital expenditures require large outlays of funds. Secondly, firms should find modes to ascertain the best way to raise and repay the funds. The management should also keep in mind that capital budgeting requires a long-term commitment.
The requirement for relevant information and analysis of capital budgeting has paved the way for a series of models to assist firms in amassing the best of the allocated resources. One of the oldest methods used is the payback model; the process determines the length of time required for a business to recover its cash outlay. Another model, known as return on investment, evaluates the project based on standard historical cost accounting estimates.
Popular methods of capital budgeting include net present value (NPV), discounted cash flow (DCF), internal rate of return (IRR), and payback period.
While working with capital budgeting, a firm is involved in valuation of its business. By valuation, cash flow is identified and discounted at the present market value. In capital budgeting, valuation techniques are undertaken to analyze the impact of assets instead of financial assets.
The importance of capital budgeting is not the mechanics used, such as NPV and IRR, but is the varying key involved in forecasting cash flow. The importance of capital budgeting is not only its mechanics, but also the parameters of forecasting the incurrence of cash in the business.
Working Capital Financing – Commercial Financing Solutions
Working Capital Financing is forever a major challenge for small and medium sized business in Canada. And that is certainly not to say that larger corporations don’t have that challenge, it’s simply a case of having more assets and resources to deal with the same challenge.
As a business owner or financial manager the level of funding that you need, and the method in which you achieve that financing is really what drives the solution to your challenge. It is important, in understanding your cash flow needs and solutions, to determine if your working capital financing is required due to the capital intensive nature of your business – or if you in fact simply need to ‘ monetize’, or ‘cash flow ‘ your assets in an effort to generate more working capital and faster turnover of those funds.
Your focus on cash and business financing becomes even greater if your sales and profits are increasing. However, at the same time the ability to obtain business credit in Canada remains a challenge.
Bank financing has become more difficult to acquire, and many firms are looking at non traditional or alternative sources of financing to secure the funds they need for working capital.
Another hard reality of working capital financing is that most small and mediums sized business are searching for more cash flow on an unsecured basis. This type of financing is very difficult to achieve in the Canadian marketplace, certainly in the Chartered bank environment.
So what are the sources of financial capital that Canadian business owners and financial managers can investigate and potentially utilize? Let’s cover off some of the basic options – These include:
Personal savings (not high on a business owner’s priority list!)
Business Credit Cards
Factoring
Government Working Capital Term Loans – Financing Business Loan (These are cash term loans with fixed payments and rates)
Factoring financing
Asset Based lines of credit
When you are looking for working capital financing one of the key areas you can start with is your own key financial metrics. You don’t need to be a seasoned financial analyst to determine at what rate your receivables are turning over. The bottom line if you haven’t realized it yet (we are sure you have) is that receivables and inventory ‘ eat ‘ cash.
One key point needs to be made here, if your sales are growing at 15% and your receivables are growing at 15% that’s not a bad thing. (To calculate simply measure the ratio of these two data points) However, if your sales are growing at 15% and receivables are growing at 30% your cash flow and working capital is being consumed by the investment you have made in A/R and inventory that is not turning over. Collections and inventory turnover are a key aspect of working capital financing.
Commercial financing from a bank is the optimal solution for small and medium sized business – as have noted that is difficult to achieve. Funding a business can be complex and we urge clients to seek the advice and guidance of a respected, trusted and experienced commercial financing expert to ensure they pick the right tools to solve working capital challenges.
The Benefits of Cash Flow and Working Capital Management
Trade finance is an important part of the business. It offers various aspects of managing finances for the company. Trade finance helps to generate, manage and establish various finance practices like working capital, factoring solutions, banking solutions, loans, guarantees, discounting, etc.
Various trade finance companies help to provide credit finance, export finance, credit protection, invoice collection services, etc. Trade finance companies help to reduce marketing cost and increase your trade profitability. They also help in increasing the sales by promoting the products, services or the website around the world. Trade finance companies also help in broadcasting the trade leads, generate new business and promote the company to new business groups or business ventures. Trade finance companies help in eliminating most of the commercial and political risk normally retained by the company or any small or medium business owner. These trade finance companies also provide 100% financing solutions. Some of these companies or agencies are factoring agencies also that help in facilitating international trade through factoring and other related trade finance techniques.
Export oriented trade finance companies provide finance support system for enhancing cash flow, reducing finance costs. Export trade finance companies or agencies also provide information and support for export working capital, Export Import Banks, financing, loans, loan forms, guarantees and forfaiting. It is important to know about some of the export trade financing companies, agencies, or financial institutions like AFIA, Export Express, Factors chain international, etc. Some agencies with their special trade finance programs and techniques help small and medium business owners to find needed capital to succeed. They also help in pre-order financing of labor, materials, goods, machinery, financing of receivables, issuing letters of credit, etc.
Apart from companies and agencies there are several government organizations that assist companies with their export venture. These federal governmental organizations offer services that range from export loan guarantees to loan assistance. They also serve as specialized associations that offer advice and counsel to interested small and medium business owners. Moreover, they also organize and provide seminars, lectures, convocations and publications on topical areas of trade finance techniques. They also server as a medium to exchange information between organizations, companies, agencies, that indulge in trade finance. Professional trade finance companies and institutions seek to promote good and moral trade practices amongst the trading parties.
Trade financing be it for the local market or the international market for exports, begins from the first stop at the banks. It is important to identify the source that provide trade finance or risk mitigation. Factoring, forfaiting, loans, bank guarantees, letters of credit, export financing are various trade finance practices.
Factoring allows the business owner to calculate the present value of future amount due or sale of a firm accounts receivable to a financial institution known as a factor. Invoice factoring helps the small and medium business owners to obtain immediate cash required for business without owning and debt or transferring business equity. These business owners sell their invoices in order to receive money today.
Forfaiting is a practice of trade finance, which is used as an alternative to the export credit or insurance cover. It allows exporters to obtain cash and eliminate their risks by selling their receivables on a ‘without recourse’ basis. These trade finance practice act as resources of fund management, credit management, loan elimination and increasing profitability by cutting administration and marketing costs along with the overheads.