The paper "Finances of Nuplex Industries Limited and Johnsons P/L" is an outstanding example of a finance and accounting assignment. The options available to Johnsons P/L for financing the proposed expansion can be divided into two including internal sources of finance and external sources of finance. As the name suggests, internal sources of finance include finance that is generated from within the business and may include; Sale of assets where the company may decide to sell off the assets that are old and obsolete or those assets it does not need currently in its bid to raise additional finance.
The major advantage of this is that the company will have better use of its capital and that this source of finance does not attract interest neither does it dilute ownership. However, the business may not have obsolete assets currently and hence this option may be impractical in such circumstances. Retained profits- the company may use its ploughed back profits in case it is huge enough to fully finance the proposed expansion. The advantage of using retained assets is that it does not lead to additional liabilities as well as interest obligations.
In addition, the ownership of the company is not diluted. However, the company may not have enough retained profits to finance the proposed expansion and hence this may not be a practical source. Reduction in working capital that may include cutting down the level of stocks in a bid to raise additional finance. This option may lead to reduced storage costs while it is a cheap source of finance that does not lead to increased liabilities. In addition, this form of financing does not lead to diluted ownership by existing members.
However, this source of financing is not in line with the company’ s intention to expand the business. The option may also lead to a shortage of stock and hence loss of revenue. External sources of finance for the business may be divided into two including short-term financing and long-term finance. Forms of short term financing include the following; Bank overdraft – this is where the bank would allow the company to overdraw its account to a certain limited mainly for meeting short term liabilities obligations.
Bank overdrafts have the advantage in that no collaterals are required while the overdraft limit can be extended depending on the company’ s needs. However, this source of financing may not be available for such a big project owing to its being short-term in nature. In addition, its interest’ s rates vary and are bigger than those of bank loans. The company also risks entering into cash flow problems if the repayment is demanded at a short notice. Trade credit – the main advantage for trade credit is that no interests are required. However, this may not be an ideal source of finance for expansion purposes due to its size.
Furthermore, the company may not enjoy trade discounts and hence profits may be affected. Factoring debts implies selling bills or debt to a debt factoring company at a lower price. However, the company may not have any debts to factored while this is an expensive source of finance.
Nuplex, 2013, Annual Report, Retrieved on 23rd August 2014, from
Johansen, B2011, Financial accounting, London, Rutledge.