Custom «Profitability and Financial Performance» Essay Paper

Sources of Finance for Cambridge Satchels Company

Before sourcing its finances into a business, it is important for managers to determine the amount that the business needs for the specific purposes. The forecast of the money need should be done within short and long terms. The accuracy of these forecasts figures should be maintained and well compared to the cash vs. profits of the business. Contingencies should also be allowed for in the forecast (Thomas, Duening, & Michael 2009).

The following are some of the sources that the business can obtain its finances.

• personal funds
• banks
• Overdrafts, loans, asset finances
• grants
• equity
• venture capitalists, business angels, equity market

Personal Funds

Personal funds are always among the preferred sources for investment. This is because, in case the business does not take off, there would be no one to payback (John & Dan 2002). However, they are risky because if the business fails, the entrepreneur suffers all loses that come along. This was the main reason for the founder of Cambridge Satchels Company to start off with savings of about 600 sterling pounds. Another shortcoming for this method of raising money is that people have limits and may not have enough money to expand a business in a large scale as compared to the rest of the methods.

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Grants

Furthermore, grants are better than personal funds because they may be more, hence provide a wider range of issues that they would cover (Knight 2002). However, like personal funding, the collapse of the business would not lead to the condemnation of the business owner by forces from the outside.

Banks

Banks are the other sources of finances for a business (Thomas, Duening, & Michael 2009). They provide a wide range of products such as loans, overdrafts or asset finances. Most large corporations use loans or asset finances. Banks are preferred because they can offer a huge amount of money that would lead to bigger and more profitable ventures (Manfred & Kets 2003). The company may decide to use this money in purchasing better machinery or improving technology which would enhance production. When this happens, the company would grow in stature and also increase their coverage of the market segment (Knight 2002). They may even become more competitive on their industry market and eventually increase their production, sales and eventual profits. Thus, this would be the best source for Cambridge Satchel Company. Currently, the company produces 900 satchels daily, leaving a backlog. In order to ensure that this backlog is beaten, the company should come up with better and less expensive strategies that would ensure that they increase their productivity and reduce the marginal cost. When this happens, the company would cement its position on the market as well as its profitability. The advantage of using this method as a source for finances in a business is that it does not risk the property of the business owner because the company is treated as a different entity from the owner. Loans and overdrafts would require security but, the previous performances of the company could be used to show the credibility of the company in terms of loan repayment. If the business does not have a borrowing history, books of accounts and use of their banking history could be used to determine their capability to repay the loan or overdraft. Furthermore, asset financing is a popular method that businesses use to acquire capital.

Each of the above methods of sourcing for capital possesses both risks and opportunities (Reynolds 2010). Therefore, it is important that the company weighs all the available options before making a decision. They should carefully determine the amount of money they need and how much returns are expected on the new investment. In this case, they would be able to determine whether the returns would be able to service the loan (if they decide to take a loan from a financial institution) including interest and period of time required to repay the loan. If the returns forecast suggest that there would be a problem, the management team should determine the other alternatives that are safe and sustainable (Reynolds 2010). An alternative is to take money from all available sources as long as the risks are fully minimized. 

Strategies to Minimize the International Risk of Cambridge Satchels Company

It is often occurring that some industries are affected by the external markets that are away from their home (Mohan 2009). International relations are crucial to organizations, with regard to the countries that the organization trades with. The import and export business are often hailed since it improves the relations between countries (Daniels, Radebaugh & Sullivan 2007). In such a business, there are events that can happen in one country and their effects felt in countries they trade with. A good example is the Libyan war that felt an increase in cost of living to all the countries that depend on oil from the country.

Since the organization does not have any control over the international risks, it is always advisable that the companies are ready to mitigate the risks that arise as a result of the international causes (McDonald & Burton 2002). Political issues are usually the main factor that affects two countries that work together. Further, calamities and financial stability affect the financial relationships between countries. Due to these inevitable occurrences, it is crucial that companies are well prepared to face unusual risks. There are different levels that different companies would be affected by international risks (McDonald & Burton 2002). Companies that operate in several countries would be more affected than those that are based and operate in one country.

Understanding the International Economic Depressions

Currently, Cambridge Satchels Company, which concentrates on making satchels for the United Kingdom population, may not have any major issues in their trade. This is because they rely on their home raw material, labor and even market. However, there are cases where the international risks would affect even the home based industries. A good example is the economic depressions that affect all the businesses (Mohan 2009). They affect the lending and borrowing processes for businesses because most of the financial institutions are international or are easily affected by international issues. These depressions increase the cost of living and limit the spending power of the people within a country, thus reduce sales. In such a case, Cambridge Satchels Company would require proper knowledge of the issue. After this, they would be required to concentrate o their home market to ensure that they provide the home population with the goods that they desire.

Increased Competition for Raw Materials

Increased industries in neighboring countries could affect the companies in a country. This is because they could be producing high quality goods at a better price, then importing them to the country (Daniels, Radebaugh & Sullivan 2007). This would lead to competition and reduced sales for the home companies. Furthermore, the other companies could be having very competitive prices for leather, hence invite more leather from the United Kingdom leaving the domestic companies like Cambridge Satchels in scarcity.

Competition from External Manufacturers

Cambridge Satchels Company overcomes the international risks by means of ensuring that they cement their state in the domestic market which is their main target. They should create a brand of their goods and ensure that any entry by another company would be very hard. This could be made through the use of corporate branding where the goods would be named as the company. When the market is faced with difficulties, their goods would still standout and remain appreciable by the targeted buyers. The company had also received a major boost when the owner was named among the 100 most influential people in fashion. This means that the brand she creates is quickly identified on the market, and a little marketing in the domestic market would give them a near-permanent place.

Scarcity of Raw Material

Also, since the main raw material that the company needs in their manufacturing of bags is leather, Cambridge Satchels should ensure that they develop a program that would provide leather to them no matter the prevailing issues around the country. They could sponsor farmers who would sell them the hides, and with collaboration with the tanning industries, they would never run into leather shortages.  

Methods for Financial Performance Measurements of Cambridge Satchels Company

Business financial measurements are important to determine the path that a firm is taking (Mejia, Luis, David & Cardy 2008). It helps the managers to determine what needs to be done in order to ensure that the business attains its objectives. Poor business financial performance would lead to a false statement to the management team which would eventually lead to a possible future failure of the business (Mejia, Luis, David & Cardy 2008). This is mainly because of a false depiction of the performance of an organization that causes poor strategic decisions, sinking the business further. This would happen if the business financial strength is overrated than it actually is. On the other hand, the managers may make a mistake and assume that the business performance is lower than it actually is. Eventually, this would lead to a scenario where it would underperform, and wrong strategic decisions would be made as well. Both of these errors are not healthy to an organization (Shane 2003).

There are five measures of financial performance to a business. They include:

• Profitability;
• Repayment capacity;
• Liquidity;
• Financial efficiency;
• Solvency.

In order to determine the performance, one should determine the adequacy of the returns, liquidity and the sources of finance to the business (Manfred & Kets 2003). One should also look into the efficiency of the business. Moreover, one can also compare the business they operate in their industry. As a result, they can create benchmarks that are placed during the past and projected performances. One also may use data from data from competitors.

It is used to measure the extent to which any business does to generate their profit as a result of using their factors of production that include labor, land, capital and management.

These tools determine the net revenues that are realized by a firm as a result of the normal operations. It excludes both the variable and fixed expenses. They are also calculated on an accrual basis. In the case of a sole proprietorship, the income may be used in order to compensate any labor obtained from non-employees such as friends and family (Jay & Johnson 2006).

It refers to the net income generated by all assets after labor compensation, but prior to payment of interest. It is often referred to as the profitability per dollar for the assets. It also allows the comparison between the sizes of businesses as well as their types.

This refers to the returns obtained after labor and interest are exempted. It measures the amount of returns to the owner for their investment. It is calculated as:

It refers to the proportion of earnings or revenues that are operating profit. It also reflects the ability to generate revenues and control costs. Further, it determines the revenue available to compensate debt and equity capital. 

This refers to the ability of a business to meet the financial obligations as they emerge, without affecting the daily running of the business. 

It shows the immediate debt by a business that services the cash flow capacity. It further shows the extent to which the current assets of a business can cater for the current obligations of the business after these assets are liquated.

It tries to determine the ability of a business to meet all its financial needs of the assets that are sold. It also looks to determine the ability of a business to continue with its operations after there is a financial diversity. It is measured using debt to asset ratio, debt to equity ratio and equity to asset ratio. Debt to asset ratio is the proportion of the business assets that are owned by the creditors. 

The measures discussed above are crucial in determining the financial performance of Cambridge Satchels Company. Being a small company that is in the development stage, the company needs to concentrate on the daily operations first in order to meet effectively their final objectives after the stipulated time. If the company management team followed the measures, they would discover their position on the market and be able to plan well with an ultimate aim of improving their production in a sustainable way.