Current Ratio shows the liquidity of a business.
Current Ratio = Current Assets/ Current Liabilities
If the current ration is too low,the business may have difficulty in meeting its short-term obligations. However, the ratio should not be too high, there may be too many current assets lying idle. This means that these current assets are not efficiently used to generate revenues and profits for the business. Therefore, Daisy Limited should have funding. The followings is the sources of funding.
Task 1 (a) Review sources of funding available to business industries.
Sources can be divide as short-term and long-term funding.
Short-term loan provide an instant solution to short-term cash-flow problems. Lenders approve or deny loan applications in less than two hours, and funds are available within 24 hours. But it feature high finance fees. Extension of loan term will have to pay additional interest. Factoring
It is organizations that offer their clients a financing service to overcome difficulties in financing that own by customers. They are prepared to advance cash to the clients against the security of the clients 's debtors . The business will assign its debtors which the factor has purchased, usually up to 80% of the value. In Addition, the factor may provide a debtor management service, whereby it take over the control and collection of debts from the clients.
Company like Daisy Ltd that sales rapidly increase, its total debtors will rise quickly too. So selling more on credit will put a strain on the company's cash flow. Also, if Daisy Ltd credit to customers, it might run into cash flow difficulties for same reason.
Short- term Bank Loan
Bank Loan is offered by a bank for a specific amount that has a specific payment schedule and a floating or fixed interest rate. Short- term loan may be unsecured or secured by the company's property. For a SME like Daisy Ltd, It is more difficult to look for external investor to raise funds. Good credit management would help a lot to get short-term bank loan.
For trade suppliers, the company are required to have good internal control and good credit management. It is the supplier will allow the company a grace period before having to pay for the goods. A common phase is 15 days or 60 days after purchase to pay for the goods. Essentially, trade credit serves as a short-term, interest-free loan. Since Daisy Limited have good internal control and good credit management.
Some business might have difficulties in financing the amounts owed by customers, it is a organization that offer their clients a financing service to overcome these problems, they are prepared to advance cash to the client against the security of the client’s debtors. The business will assign its debtors to the factor and will typically ask for an advance of fund against the debts which the factor has purchased, usually up to 80% of the value of the debts.
Daisy Limited's sales are rising rapidly, its total debtors will rise quickly too. Selling more on credit will put a strain on the company's cash flow, the business although making profits, might find itself in difficulties because it has so many debtors and not enough cash.
Leasing ( Operating Leases)
it is an agreement between the lessor and lessee. It is therefore a form a rental. And there is two kinds of leasing. Operating leasing are agreement is fairly short, less than the useful life of the assets. Finance leasing , it lease for the main part of the asset's expected useful life or its entire useful life.
For two kinds of leasing, the lessor never has physical possession of the asset, even though he owes it. The lessee id responsible for the upkeep,servicing and maintenance of the asset. The lessor is not involved in this at all. Since Daisy Ltd is a rapidly growth company. Product are made to...
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