Reef Adventures is a business that developed a package of cruising holidays on sailing ships around the Great Barrier Reef. In the establishment phase Reef Adventures concentrated on marketing these cruising holidays within Australia and New Zealand. As the business has grown steadily, the management has decided to market its product to potential customer, with a particular focus on Europe and the USA. Initially, considerable funds were needed to acquire ships and other equipment. As a result, Reef Adventures is highly geared with a debt to equity ratio 3:1. Also, after each cruise, there is a need to carry out costly maintenance work on each vessel, with a result of heavy demands on the cash flow of then business. Overseas expansion will require the business to purchase additional ships. The management of the business:
Managing the problem of being highly geared
Managing its cash flow problems
Reef Adventures Ltd is a company which sells a holiday packages of cruises on ships around the Great Barrier Reef and are also planning to expand their services from just Australia and New Zealand to Europe and the USA. Recommendations
The financial objectives of a business are based on the goals of its strategic plan, which can be translated into both the short and long term objectives.
Short-term financial objectives are the tactical (one to two years) and operational (day-to-day) plans of a business. These would be reviewed regularly to see if targets are being met and if financial resources are being used to the best advantage to achieve the objectives. For example, if management has a goal to achieve a 15 per cent increase in profit for the next 10 years, the tactical plans might involve purchasing additional machinery, updating old equipment with new technologies, expanding into new markets and providing new services.
Long-term financial objectives are the strategic plans of a business. They are determined for a set period of time, generally more than five years. They tend to be broad goals such as increasing profit or market share, and each will require a series of short-term goals to assist in its achievement. The business would review their progress annually to determine if changes need to be implemented. Sources of finance
A business cannot establish itself and thrive without funds to enable it to pursue its activities. The range of activities in which a business is involved during its life cycle includes the initial set-up (whether establishing a new business or buying one that is already established) and might also include expanding its range of products, introducing a new product, expanding the number of outlets, upgrading its systems and technology, employing more staff, building a new warehouse, and so on. In the initial establishment of a business, owners usually contribute funds. When a business is considering growth and development in later years, a number of options can be considered regarding sources of funds and how those sources will be used. Sources of funds may be internal or external (see figure 10.2). Finding the appropriate source of funds for the business’s needs involves financial decision making, which means that relevant information must be identified, collected and analysed to determine an appropriate course of action. Therefore, a business can source money from inside the business itself (internal source of finance) as well as from outside the business (external source of finance).
3.2a: internal sources of finance – retained profits and owners’ equity •
Internal sources of finance are generated from within the business itself, and do not require the business to turn to outside individuals (shareholders) or institutions (such as banks). Internal finance is recorded under equity in the balance sheet. The internal sources of finance include:
Retained profits – i.e. reinvested profits.
Owners’ equity - the capital...
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