) What are the non-financial factors to be considered while evaluating investment projects?
Henry Irving, Head of Audit and Assurance Faculty at ICAW said: “As important as financial statements are, business accountability is not based entirely on the balance sheet. Investors, and others also want to know about c ompany’s corporate social responsibility, carbon emissions, diversity or ethics. ”
When evaluating Investment projects there are many factors that would affect the outcome. As part of capital budgeting before evaluating for a project, investment decisions cannot be based purely on the financial factors. There are many other non-financial factors of the investment projects that need to be thoroughly looked into as these non-financial factor plays an important role in project evaluation.
While reading up, I have found that there are many important factor affecting investment decision was generally the l egal factors based on geographics, followed by image of the company and environmental responsibility. Different projects give different weightage to different non-financial parameters. It all varies according to the s ector of the business, nature of the project, scale of investment involved, level of competition, global market operations etc.
Some prominent Non-financial factors to consider include:
? Abiding to the requirements of current and future law in placed.
? Matching the industry standards and setting good practice.
? Improving staff morale for projects thus making it easier to recruit and
retain employees and ensuring smooth operations.
? Improving relationships with suppliers and customers.
? Improving business reputation and relationships with the local community
where projects are being held
? Developing the capabilities of your business, such as building skills and
experience in new areas or strengthening management systems
? Anticipating and dealing with future threats, such as protecting intellectual
property against potential competition
? Non-information includes environmental effects, political situations and
? Backend profit and sales
? Market Trends
? Shelf life of equipments
Financial information is usually the mainly the most appealing factor in a project decision. Projects that are not financially feasible are usually overlooked. Generally it is argued that projects mainly happen to gain financial gains and all other intention that do not follow this purpose should be ignored, but there are more to that.
In conclusion, financial and non-financial factors are both essential when making a decision for investment projects. While financial information is often easy to quantify, have the most profits and saves businesses in short term, non-financial factors on the other hand which are rather difficult to quantify helps business for the future. Brushing off such non- financial factors in the long run could possibly exposed projects to financial danger that no one could foresee.
(2) Explain the different sources of short-term and long-term finance available for a Limited Company.
What defines a Limited Company is that it is a private company whose owners are legally responsible for its debts only to the extent of the amount of capital they have invested and the need for finance is one of the core reason for such companies. This ensures the operations and the growth of the company.
The need for finance may be for long-term or short-term. Financial requirements varies from one organisation to another. To meet out these requirements, funds need to be raised from various sources. Some sources such as issue of shares provide money for a longer period. These are therefore, known as sources of long-term finance. On the other hand sources like trade credit, cash credit, overdraft, bank loan etc which make money available for a shorter period of time are called sources of short-term finance. Financing is a vital part of every business. Firms often need financing to pay for their assets, equipment, and other important items. Financing can be either long-term or short-term. Long-term financing is pricier compared to short-term financing.
Long term financing is normally for a period of more than 5 years and is usually needed used for purchasing new equipment, cash flow, RnD, company expansion and etc. Some example of long term financing are
Issue of shares or equity is a method of raising capital by selling company stock to investors. In return for the investment, the shareholders receive ownership interests in the company.
Corporate Bonds which are used by companies to raise funds for variety of reasons. Some examples would be ongoing operations, M&A, or to expand business They are mostly sold to investors normally for money to be earn from future earnings. Some company use their physical asset as collateral for such bonds.
Capital Notes are convertible security that could be exchange for shares. They do not have any exercise price or any expiry date. Many times, capital notes are issued with a debt-for-equity swap restructuring.
Some Advantages Of Long-Term Finance are that the Debt is the cheapest source of long-term financing. It is the least costly because the interest on debt is tax-deductible. Shareholders or creditors consider debt as a relatively less risky investment and thus requires lower return. It also provides sufficient flexibility in the financial/capital structure of companies. In case of over funding, the company can redeem the debt to balance its capital. Such investors have no interference in business operations because they are not entitled to vote. Moreover the company can enjoy tax saving on interest on debt.
Disadvantages Of Long-Term Financing are that the Interest on debt is permanent burden to the company. Company has to pay the interest to creditors at fixed rate whether it earns profit or not. It is legally liable to pay interest on debt. Such debt usually has a fixed maturity date. Therefore, the financial officer must make provision for the repayment. Company must pay interest and principal at specified time. Non-payment of interest and principal on time take the company into bankruptcy. Moreover it the large scale, creditworthy firm, whose assets are good for collateral can raise capital from long-term financing.
Funds are required to meet its day to day expenses for all businesses. For example raw materials, stocks, food must be purchased at regular intervals. Such expenses like paying the workers wages regularly, water and power charges have to be paid on time. Thus the need of liquid cash to be available for meeting such expenses. The availability of short-term funds is essential. Inadequacy of short-term funds may even lead to closure of business.Short-term financing has a duration of up to one year and is used to help businesses to increase inventory orders, payrolls, and daily supplies.
Short-term finance purposes is to facilitates the smooth running of business operations by meeting day to day financial requirements. With the availability of short-term finance goods can be sold on credit. Sales are for a certain period and collection of money from debtors takes time. During this time gap, production continues and money will be needed to finance various operations of the business.
Some example of long term financing are
Trade credit which refers to credits that granted to manufacturers and also traders by the suppliers of raw material, finished goods, components, etc. Usually business enterprises buy supplies on a 30 to 120 days credit. This means that the goods are delivered but payments are not made until the expiry of period of credit. This type of credit does not make the funds available in cash but it facilitates purchases without making immediate payment. This is quite a popular practice of finance around the world.
Credit from Commercial banks. Such banks grant short-term finance to business firms which is known as bank credit. When the bank credit is granted, the borrower gets a right to draw the amount of credit at one time or in instalments as and when needed. Bank credit may be granted by way of loans, cash credit, overdraft and discounted bills.
Another source is known as L oans . When a certain amount is advanced by a bank repayable after a specified period, it is known as bank loan. Such advance is credited to a separate loan account and the borrower has to pay interest on the whole amount of loan irrespective of the amount of loan actually drawn during the burrowed period. Usually loans are granted against security of collateral.
Another arrangement whereby banks allow the borrower to withdraw money upto a specifiedlimitisknowasc ashcredit. Initiallythislimitisgrantedforoneyear.Thislimit can be extended after review for another year, however, if the desires to continue the limit, it must be renewed after three years. Rate of interest varies depending upon the amount of limit. Banks ask for collateral security for the grant of cash credit. In this arrangement, the borrower can draw, repay and again draw the amount within the sanctioned limit. Interest is charged only on the amount actually withdrawn and not on the amount of entire limit.
When a bank allows its depositors or account holders to withdraw money in excess of the balance in his account upto a specified limit, it is known as o verdraft facility. This limit is granted purely on the basis of credit-worthiness of the borrower. Interest is charged only on the overdrawn money. Rate of interest in case of overdraft is less than the rate charged under cash credit.
Banks also a dvance money by discounting bills of exchange, promissory notes and hundies. When these documents are presented before the bank for discounting, banks credit the amount to customer’s account after deducting discount. The amount of discount is equal to the amount of interest for the period of bill.
Instalment credit are a popular source of finance for consumer goods like television, refrigerators as well as for industrial goods. Only a small amount of money is paid at the time of delivery of such articles. The balance is paid in a number of instalments over a certain period of time. The supplier may or may not charge interest for extending credit. The amount of interest is included while deciding on the amount of instalment. Another comparable system is the hire purchase system under which the purchaser becomes owner of the goods after the payment of last instalment.
Short-term loans help business concerns to meet their temporary requirements of money. They do not create such a heavy burden of interest on the organisation. Some advantages are that Finance for short-term purposes can be arranged at a short notice and does not involve any cost of raising. The amount of interest payable is also affordable. It is, thus, relatively more economical to raise short-term finance. Such options are very flexible for companies.The management retains their freedom in decision making. Moreover, such loans could be extended for long term purposes.
Some disadvantages of such short term loans are that they are a fixed burden, meaning all borrowings interest has to be paid on short-term loans irrespective of profit or loss earned by the companies. For such loans, the companies cannot take up more loans till
the outstanding loan have been cleared. Moreover, when business firms suffer intermittent losses of huge amount or market demand is declining or industry is in recession. This affects their credit rating for such future needs. Lastly, there are many legal formalities need on such deals. This does take up alot of time and tends to lend to complications.
In conclusion, a limited company has to analyse the market and trend as well as its future plans before commiting to the abundance options of short and long term financing.