Introduction
Thai-Lay company is intending to establish a new venture in London, UK. The establishment of the new venture of Thai- Lay requires large amount of initial fund investment. Procurement of financial resources economically is a critical success factor for the new venture. There are two important source of finance for the new venture. First option is equity finance from the shareholders and the second option is debt fiancé from banks and other financial institutions. Thai- lay is intending to adopt both sources of finance by keeping an optimum balance of these sources. Thai-lay wants to provide maximum return to the shareholders together with meeting the obligations towards their creditors for repayment of debt in time with interest. Financial investors are always interested in getting both liquidity and profitability of their fund. Hence Thai-Lay wants to ensure the liquidity and profitability of the investors’ funds through following adequate finance strategy.
Business objectives of Thai-lay Company
Thai- Lay wants to maximise the shareholders fund through adequate operational strategy. In order to increase the shareholders fund along with operational strategy, Thai- Lay intends to adopt strategy of financial leverage. In this strategy, more external fund is accepted by the firm for limiting the number of shareholders. Through this the return per shares can be maximized. This is through financial leverage or trading on equity. “Trading on equity occurs when a corporation uses bonds, other debt, and preferred stock to increase its earnings on common stock. The earnings in excess of the interest expense on the new debt will increase the earnings of the corporation’s common stockholders.” (What is Trading Equity. 2008).
Cost requirements for the new venture
Thai –Lay Company requires huge initial fund investment for the new venture. They want to acquire the building premises for starting the business. Along with this procurement of plant and machinery and other fixed assets are also needed for the new business. The estimated cost requirements for the new business of Thai-lay are discussed below. (Amount in Pounds)
Fixed asset Investment
Investment in plant and premises 100,000
Purchasing of fixed assets 100,000
Procurement of technologies 10000
Total Fixed asset investment 210000
Long term expenses
Advertising Expenses 50000
Managerial Training 30000
Others 10000
Total long term expenses 90000
Short term expenses
Purchasing raw materials 20000
Salaries and wages 15000
Other expenses 5000
Total short term expenses 40000
The total fixed asset investment for the new venture is £ 210000, and the long term expenses are £ 90000. The estimated short term expenses for the business is £ 40000. Thus a total amount of £ 340000 is required as initial cost requirements for the new venture.
The Funding Plan for the new venture
Thai- lay is considering both equity and debt financing as the source of finance for its new venture creation in UK. This is mainly for providing maximum return to the shareholders and at the same time ensuring regular supply of finance for various operations of the business. Equity and debt finance have its own benefits and drawbacks. Thus Thai-Lay wants to keep optimum level of debt and equity in the total fund of the business for ensuring its financial strength.
The funding plan of Thai-Lay is described below
Debt Financing: Debt finance is adopted as a major financial source by Thai–Lay company due to the low interest rate expenses belonging to debt fiancé. Procurement of debt is subjected to certain limitations because it requires security of collateral assets. In case of Thai- Lay the value of collateral security is seems to be for an amount of £ 200,000 only. Thus they can expect debt of £ 200,000 only. Existing interest rate on the debt is 7%. Then the company wants to pay interest expenses for an amount of £ 14000 per year. The projected return on investment for the new venture is 21% in the initial year. (See pro- forma income statement). Thus the cost of interest on debt can be maintained through the business return.
Equity Financing
Estimated cost requirements for acquiring financial assets for the new venture are £ 210,000. The number of shares of the new venture is fixed at 2000 having the face value of £ 100 each. Thus the company can procure an amount of £ 200000 from equity finance. The total financial requirements at the initial stage of the business are £ 340000. The equity fund is for an amount of $ 200000. At the initial year, Thai-Lay plans to procure debt fiancé for an amount of £100000 only.
Loans and advances: For short term financial needs, loans from financial institutions are adopted by Thai –lay for the new venture. Estimated short term operational expenses for the new venture are £ 40000. This may be procured through long term loans from banks and financial institutions. For meeting the operational expenses, adequate funds can be maintained by the firm through loans and advances.
Fund Allocation of Thai-lay for the new venture
Equity capital £ 200,000
Debt Fund: £100,000
Loans and advances £ 40000
Importance of financial resource planning for the new venture
Thai – Lay have to realize the objectives of the firm by procuring the resources and unifying the resources in accurate manner. The projected financial plan of Thai –lay is ensuring economy fund raining through the adoption of more debt source i9n the total fund. “Any venture will be compelling and fundable if it offers relief to a well defined customer pain which will generate revenue when executed by a highly motivated team of entrepreneurs possessing a sustainable advantage.” (Lemberg 2006). For a new venture, investment from venture capitalists is very favourable. “Venture capitalists can bring valuable skills, contacts and experience, to your business and can assist with strategy and key decision making.” (Equity Finance: The Main Advantages of Equity Finance are).
Financial Plan for the new venture, for the first six months
Start Up Budget
Personnel costs: 25000
Legal Occupancy: 100000
Licenses/ permits: 35000
Total Cost 160000
Operating Budget
Legal Expenses 10000
Insurance 13000
Rent 15000
Depreciation 12000
Advertising/promotions 10000
Managerial training 20000
Miscellaneous expenses 2000
Supplies 6000
Payroll expenses 12000
Salaries / wages 25000
Total costs 125000
Sources of Finance:
Equity Capital 200,000
Debt fund 200000
Loans and Advances 40000
Estimated balance sheet of the new venture
Balance sheet preparation is helpful for identifying the financial position of the firm. In case of the new venture, estimated balance sheet will help to identify the sources and applications of fund in the operations of the business.
Estimated Balance Sheet for the first six months
Liabilities Assets
Equity Capital 200000 Plant and premises 100000
Debt fund 100000 Other Fixed Assets 100000 Loans and Advances 40000 Technology 10000
Cash in hand 30000
Total 340000 Total 340000
Pro-forma Income Statement for the first six month
Estimated Cash Flow statement
Conclusion
Optimum capital structure is a main component of the successful working of any new venture. “The properly constructed capital structure, where debt and equity are appropriately balanced, can have the same empowering result, permitting greater returns than would occur alone.” (Morton 2005).
The funding plan prepared for the new venture is showing a balanced combination of external and internal funds and it is optimum for the successful operation of the business. The firm can ensure maximum return to the shareholders through trading on equity. The proforma balance sheet and income statement shows better financial position of the new venture together with higher rate of profitability for the first year of the business.
Bibliography
Equity Finance: The Main Advantages of Equity Finance are. [online]. Business Links: Practical Advice for Business.
LEMBERG, Gerry. (2006). Planning, Funding, Executing and Exiting a New Venture: The Reality. [online]. Sacred Cow Dung.
MORTON, Chuck. (2005). Right Balance of Debt Equity Financing Key to Leveraging Your Deals. [online]. Baltimore Business Journal.
VALDEZ, Jose. (2005). What is Equity Financing vs Debt Financing: Advantages of Equity Financing. Article Alley.
What is Trading Equity. (2008). [online]. Accounting Coach.com.