Investment and Financing Strategies for Business Success
Investment and Financing
Investing and Financing Defined
Investing is the process of allocating financial resources to acquire, renovate, or improve assets like property and equipment. The goal is to enhance the productive or commercial activities of a company. Financing, on the other hand, involves obtaining the necessary financial resources to cover business expenses.
Budgeting
A budget is a numerical plan that outlines how resources will be allocated to specific activities. When making investment decisions, consider the following:
- Identify the most suitable funding sources.
- Estimate the potential profitability of the investment and compare it with other options.
- Develop a budget to assess the project’s feasibility.
Financing Options
Capital Contributions
This involves raising new capital through the issuance of new shares.
Self-Financing
This can originate from two sources:
- Profit or Loss: If a company is profitable, a portion of the profits can be reinvested back into the business.
- Repayments Made: At the end of a fiscal year, a company accounts for the depreciation of assets and records it as an expense. The sum of profit and depreciation is known as cash flow.
Long-Term Financing
- Bank Loan: A contract where a borrower receives a sum of money from a lender with the agreement to repay it under specified terms and conditions.
- Leasing Contract: A company acquires an asset and leases it to another company in exchange for regular payments.
- Issuing Bonds: When a large amount of capital is required, a company can issue bonds, which are essentially small loans from investors.
- Obligation: A fixed-income security that makes the holder a creditor, granting them the right to collect interest and receive the principal back at maturity.
Short-Term Financing
- Supplier Credit: Suppliers may offer extended payment terms, providing a form of short-term financing.
- Bank Credits: A lender provides a customer with access to funds, either as a lump sum or through partial withdrawals, with interest charged only on the amount used.
Investment Selection Methods
Payback Period Method
This method calculates the time it takes for the investment’s returns to equal the initial outlay.
Net Present Value (NPV) Method
This method discounts future cash flows back to their present value and subtracts the initial investment. A positive NPV indicates a profitable investment.
- NPV > 0: Net Benefit
- NPV = 0: Break-Even
- NPV < 0: Losses
Company Budgets
Budget Components
A comprehensive budget includes various components, such as sales projections, advertising costs, commission structures, and production expenses.
Types of Budgets
- Commercial Budget: Outlines sales targets, marketing expenses, and revenue projections.
- Production Budget: Specifies the quantity and cost of goods to be produced.
- Purchasing Budget: Determines the materials needed for production based on the production budget.
- Investment Budget: Facilitates project monitoring and ensures efficient allocation of investment funds.
- Financing Budget: Details the company’s financial forecasts and funding strategies.
- Treasury Budget: Tracks projected cash inflows and outflows, providing insights into the company’s cash position.
Sales and Payment Documents
Sales Documents
- Order: A document outlining the customer’s requested items and the terms of the purchase.
- Delivery Note: A document confirming the delivery of goods to the customer.
- Invoice: A legally binding document that provides proof of a sale or service rendered.
Payment Documents
- Check: A written order to a financial institution to pay a specified amount of money to a designated payee.
- Bill of Exchange: A written order from one party (drawer) to another (drawee) to pay a specific sum on a future date.
- Receipt: A document acknowledging the receipt of payment.