TNA Investment in Vietnam - Case Study Example

TNA INVESTMENT IN VIETNUM. Name; Institution; Lecturer; Date; Table of Contents TNA INVESTMENT IN VIETNUM. 1 Introduction 3 Sources of capital for TNA 4 Loans from money lending institutions 4 Self-funding 4 Bartering 4 Forming Partnerships 5 Angel funding 5 Equity financing (EF) 5 Government funding 5 PART 2: BUDGET FOR TNA 6 a)Professional's advice 7 b)Adjust accordingly 7 TNA budget 8 Facts to help in creating the budget 8 The budget 8 References 13 Introduction Transactions involving a large amount of capital requires proper planning. Ample planning ensures there is proper allocation of funds and also good management that facilitates timely completion of the projects. Large companies and corporations require heavier sources of capital to support their wider scale of production. Such companies are like the TNA in our case that is set to handle a million dollar investment project. Capital is similar to bank savings as they give interest after some time. In business, capital is the tool with which profit gets made. In most industries, capital entails heavy machinery, facilities and equipment used in the production process. This equipment is subject to wear and tear. In our situation, we have a small local firm whose equipment is totally worn out and has become less productive. TNA needs $A10 million to transfer the ownership of this company to itself completely. By putting in new equipment, TNA will be in a position of increasing the profit margin by lowering production cost. There is a wide variety of capital sources that management of the TNA can choose to adopt. The sources include loans from money lending institutions, the sale of the old company property, sale of shares, self-funding, angel funding and many others. Among all that wide range of sources, loans are the most reliable and the most used. This essay describes the most suitable and most recommendable sources of income they should adopt. Keywords: angel loan, equity financing, profit margin. Sources of capital for TNA Loans from money lending institutions Commercial banks make enormous profits from giving loans to people and organizations. Upon approaching a suitable commercial bank, they cannot resist in giving TNA a loan. They only need trustworthy guarantors. Since TNA is a company in operation, they can use their equipment to guarantee these loans from commercial bags. Debt financing is advantageous in that the company has the high ability to have higher ROI (return on investment). Unlike angel funding and other types of financing that have strings attached. Debt financing ensures entrepreneurs keep much of the control of the board. Self-funding The debt is the most preferred type of funding if available. Self-funding (also called bootstrapping) is preferred because it doesn't have strings attached, unlike many others. In self-funding entails a situation where the company saves a lot of money enough to fund it through a forthcoming project. You need not abandon any control in your business. You don't waste time trying to convince investors to support you, unlike many other capital sources. Bartering The small Vietnamese company in question has a lot of old types of machinery, healthy workforce and is close to ports and transport routes. These resources among other factors are clear indication that it is a wealthy company. The wealth can get bartered to other firms for cash (Emerson &Levine, 2011). The cash in turn will add up to the capital. Two years before purchasing the company, TNA should negotiate with this company that it allows TNA to barter out her property, and they get a given fraction of the profits generated. For instance, it is a company that manufactures quality farm machinery, a clear indication that it has quality engineers. These engineers and other valuable staff (human labor) can be given contracts in the name of the company to other places and earn real cash for the company. Similarly, the company can barter out the ports space to companies that are involved in intensive importation and transport of goods. The company will in turn pay for that service to add to the capital of TNA. Forming Partnerships The TNA can form a partnership with other companies such as the Vietnamese company during bartering. During this partnership time, they will share the profits but immediately the partnership is over, the two companies should ultimately part to prevent any future complications. Angel funding Angels, in this case, refers to wealthy merchants or company executives who have retired, and they practice direct investments in small companies. Some of these are non-profit organizations whose aim is to help. Others are companies that help with an expectation of having smart deals with the companies in which they are given a certain fraction of the earnings (Larimore, Lindauer & EBouf, 2006). The company and these angels should have clear set agreements on the strings attached upon getting help from the angel in the initial stages. Failure to have fixed proper agreements could lead to hot quarrels between the angels and entrepreneurs since some of the angels would want more than their set fair share. Equity financing (EF) EF is a scenario where the party being financed gives up its voting rights to investors by selling commonly preferred stock to them. In most cases, EF is associated with institutional venture capital (VC) firms that are typically used to manage large amounts of money. The role of the VCs is to ensure that the company will carry out any available activity that may be available economically. The VC firms are independent groups that have the power to act anyhow regardless of contrary decisions by the board of directors (Gaylon & Philip, 2003). For instance, a decision made by a VC firm to fire particular stakeholder in a company. They cannot be stopped; provided that firing that worker will help the business economize. VCs were once tested in the past in some of the developing countries, and the results were an average of 20% annual increase in profit maximization. Government funding Federal government programs have previously been seen to start and run businesses (majorly small businesses). The government can easily give you a loan, especially if that investment will benefit the resident citizens directly. The Australian government will wish to be one of the shareholders in this million dollar investment by TNA in Vietnam. The Australian government can also give its support by hiring the best expertise (such as engineers and architects), best operation base and the best project management methods (Gaylon & Philip, 2003). Government funding, however, has various drawbacks that make it rather hard to rely on it solely. Disadvantages of government funding 1) Tiresome procedures in the application for government funds. The methods are usually so formal and tedious that most people prefer other simpler means that are probably not available. 2) A government loan entailing million dollars takes long to process. Dependence on this funding can delay the project. PART 2: BUDGET FOR TNA Running a company without a business budget is next to impossible. Regardless of how small or minor the business is. Every business has its financial goals, incomes, and expenses. These three are put down in numbers by the use of a budget. For proper planning of the future to happen efficiently, a budget is very crucial. In a budget, the financial consumptions for a given period are estimated starting from the smallest measurable period up to the time limit within which the financial goals will have been achieved. For example, a weekly budget can be formulated to lead us to a monthly budget; this monthly budget will be summed up for a given period to provide us with an annual budget. Where the business objectives and goals are achieved within half a decade, the annual project estimates will be calculated for five years to give us the total amount for the whole project. In a budget, the exact amount of cash to be spent is not known. Therefore, the amount of use is determined by estimation based on past expenses on the same commodity. Some expenses such as prepaid rent, constant loan repayment e.g. loans for university students or rent do not change. In the preparation of the budget, they will be put under the category "fixed expenses". Other costs such as supplies are expected to change depending on factors such as availability and demand. In this case, they are also grouped in their category: variable expenses. Having these categories, you should prepare columns where you feed the expected amount you are to spend in a given period. Probably one month. At the end of the month, an adjacent column should be created to show the actual expenditure, whether it was different from the expected or not. The table should appear as follows: Category Budgeted value Factual value Difference 1) Income 2) Expenses 3) Total (Table 1.1) There could be small differences between the budgeted values and the actual values. Larger disparities between the two values are an indicator that there is a problem in the business. The problem should get diagnosed and after identification, the following month's budget is revised to fit into what the budget requires. Here you have to make critical changes considering the following: a) Professional's advice Consulting a financial expert is the best thing you would do at such a time (Emerson &Levine, 2011). A banker, a financial engineer or any other person with proper experience in budgeting should get consulted here. Tell him everything including all individual needs you want to fit in there. Be frank even if you had made incredibly stupid decisions, and he will give you the way forward. b) Adjust accordingly You should take your time and check the reasons for the disparity. Try to ask yourself questions that land you to solutions: should expenditures get trimmed to increase cash flow? Which are the reducible nonessential business expenses that cannot be touched? TNA budget Facts to help in creating the budget The total value of the investment in the Vietnamese company is $A10 million. Of these, $A6 million are meant for purchasing the company while $A4million is for the capital to run the business after purchasing. The operations are scheduled to begin at the start of 2016, two months from now. The value of sales growth per annum for the first five years are taken as 20%, 30%, 30%, 20% and 10% respectively. Total costs get assumed to be 60% of revenue for year one and 50% for the following years. The budget The budget for the first month first gets estimated as follows (Table 1.2). The budget for the preceding months and years is filled as in the following table 1.3. (Table 1.2) TNA BUDGET. MONTH1 CATEGORY BUDGET AMOUNT($A) ACTUAL AMOUNT($A) DIFFERENCE ($A) INCOME Loans 5,000,000 Government source 2,000,000 Bartering Income 500,000 Property sale 1,400,000 Net revenue 66,667 Investment Income 1,050,000 Other Income 50,000 TOTAL INCOME 10,066,667 EXPENSES Equipment purchase 6,000,000 Advertising 25,000 Accounting services 20,000 Deposits for utilities 30,000 Credit Card Fees 10,000 Bank service charges 5,000 Estimated Taxes 200,000 Health Insurance 100,000 Interest on debt 55,000 Installation/Repair of Equipment 250,000 Hiring cost 400,000 Inventory Purchases 20,000 Loan repayments 120,000 Licenses/Permits 50,000 Legal expenses 250,000 Office Supplies 15,000 Rent/lease payments 75,000 Professional Fees 120,000 Printing 3,000 Vehicle expenses 1100,000 Utilities and Telephone 11,000 Other 1,231,000 TOTAL EXPENSES 10,000,000 TOTAL INCOME MINUS TOTAL EXPENSES 66,667 (Table 1.3) CATEGORY JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC INCOME Loans 5,000,000 Government source 2,000,000 Bartering Income 500,000 Property sale 1,400,000 Net revenue 66,667 Investment Income 1,050,000 Other Income 50,000 TOTAL INCOME 10,066,667 EXPENSES Equipment purchase 6,000,000 Advertising 25,000 Accounting services 20,000 Deposits for utilities 30,000 Credit Card Fees 10,000 Bank service charges 5,000 Estimated Taxes 200,000 Health Insurance 100,000 Interest on debt 55,000 Installation/Repair of Equipment 250,000 Hiring cost 400,000 Inventory Purchases 20,000 Loan repayments 120,000 Licenses/Permits 50,000 Legal expenses 250,000 Office Supplies 15,000 Rent/lease payments 75,000 Professional Fees 120,000 Printing 3,000 Vehicle expenses 1100,000 Utilities and Telephone 11,000 Other 1,231,000 TOTAL EXPENSES 10,000,000 TOTAL INCOME MINUS TOTAL EXPENSES 66,667 The values of estimates of the months following after January are dependent on the difference between budgeted value and actual value in the first month. They will be filled therefore upon calculation of preceding month’s disparities. There is an annual budget; however, that shows the condensed budget for the months and also the five years. It is as in the following table. (Table 1.4) CATEGORY YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Total income 10,066,667 2,000,000 2,500,000 2,400,000 3,000,000 Total expenses 10,000,000 1,913,290 2,387,277 2,264,800 2,851,280 Profit 66,667 86,710 112,723 135,200 148,720 The values are calculated using Australian dollar. To convert to the Vietnamese Dong;, the value is 16,155.20x (the value for the first year). Inflation is higher in Vietnam than in Australia. For the second year, the value of Vietnamese dong will be 3% lower than year one. Profit for year two, in Vietnamese dong will be: 86,710 x 16,155.2 x 1.03 = 1,442,841.9 Vietnamese Dong. As in Table 1.4, the value of profits has changed in a similar way as how the value of sales growth per annum in the Vietnamese market has changed. The takeover is a perfect investment for TNA since the profit margin continues increasing with progress. Considering that the drawbacks are not affecting the profit growth, TNA can be seen as having made the wisest decision of investing in the Vietnamese company. If the investment required was only $A7million as opposed to the current $A10 million, the profit margin would have been less. The amount of capital invested in any business is directly proportional to the quantity of profit. References Bourne, M. (2005). Six steps to improving your planning and budgeting system. Measuring Business Excellence, 9(1). Carlson, J. W. (1969). The status and next steps for planning, programming, and budgeting. The Anlayis and Evaluation of Public. Chavesc, M., Stephens, L., & Galaskiewicz, J. (2004). Does government funding suppress nonprofits' political activity? American Sociological Review, 69(2), 292-316. Coleman, S., & Carsky, M. (1999). 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Budgeting: Perspectives from the Real World: A Survey of Senior Accounting and Finance Managers Examines the Budgeting Process at For-Profit Companies, Including the Usefulness and Perceived Value of the Process, Users' Satisfaction with It, and the Impediments and Challenges to Budgeting. Management Accounting Quarterly, 10(1), 18. Read More