I.

Various sources of finance available to Phat Duc

For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important, therefore, that the owner of Phat Duc company understands the various sources of finance open to a business and are able to assess how appropriate these sources are in relation to the needs of the business.

A - Internal Sources
Traditionally, the major sources of finance for a limited company were internal sources: 1. Personal savings Quite simply, personal savings are amounts of money that a business person, partner or shareholder has at their disposal to do with as they wish. If that person uses their savings to invest in their own or another business, then the source of finance comes under the heading of personal savings. For instance, in the case of Phat Duc, when setting up Phat Duc Super Ices, he used personal savings of USD450 to cover the main cost for the van itself. 2. Retained profit When a business makes a profit and it does not spend it, it keeps it - and accountants call profits that are kept and not spent retained profits. The retained profit is then available to use within the business to help with buying new machinery, vehicles, computers and so on or developing the business in any other way. In the case, in the later stage of Phat Duc company, the owner used re-invested profits from the ice cream vans to set up the flats. 3. Working capital This is the short-term capital or finance that a business keeps. Working capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff

salaries and wages, rent, energy bills, payments for supplies and so on. Working capital is defined as: Working capital = current assets - current liabilities Where: current assets are short term sources of finance such as stocks, debtors and cash - the amount of cash and cash equivalents - the business has at any one time. current liabilities are are short term requirements for cash including trade creditors, expense creditors, tax owing, dividends owing - the amount of money the business owes to other people/groups/businesses at any one time that needs to be repaid within the next month or so. 4. Sale of assets Business balance sheets usually have several fixed assets on them. A fixed asset is anything that is not used up in the production of the good or service concerned - land, buildings, fixtures and fittings, machinery, vehicles and so on. At times, one or more of these fixed assets may be surplus to requirements and can be sold. Hence, by selling fixed assets, business can use them as a source of finance. Selling its fixed assets, therefore, has an effect on the potential capacity of the business - the amount it can produce.

For Phat Duc, thanks for the sales of the care homes chain, Phat Duc had USD46 million to invest in other fields such as health clubs, hotels and spas

B - External Sources
Ownership Capital In this context, 'owners' refers to those people/institutions who are shareholders. Sole traders and partnerships do not have shareholders - the individual or the partners are the owners of the

business but do not hold shares. Shares are units of investment in a limited company, whether it be a public or private limited company. Shares are generally broken down into two categories: 1. Ordinary shares Ordinary shares are also known as equity shares. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company.Since the profits of companies can vary wildly from year to year, so can the dividends paid to ordinary shareholders. 2. Preference shares Preference shares offer their owners preferences over ordinary shareholders. There are two major differences between ordinary and preference shares:

Preference shareholders are often entitled to a fixed dividend even when ordinary shareholders are not. Preference shareholders cannot normally vote at general meetings.

Non-Ownership Capital Whilst the following sources of finance are important, they are not classed as Ownership Capital - Debenture holders are not shareholders, nor are banks who lend money or creditors. 1. Debentures Debentures are loans that are usually secured and are said to have either fixed or floating charges with them. A secured debenture is one that is specifically tied to the financing of a particular asset such as a building or a machine. In the case of Phat Duc, the owner took a mortgage on his own home to buy the land for the first nursing home. 2. Other loans

The term debenture is a strictly legal term but there are other forms of loan or loan stock. A loan is for a fixed amount with a fixed repayment schedule and may appear on a balance sheet with a specific name telling the reader exactly what the loan is and its main details. 3. Overdraft facilities Many companies have the need for external finance but not necessarily on a long-term basis. Under these circumstances, a company will often go to its bank and arrange an overdraft. Bank overdrafts are given on current accounts and the good point is that the interest payable on them is calculated on a daily basis. 4. Hire purchase Hire Purchase is a method of acquiring assets without having to invest the full amount in buying them. 5. Factoring Factoring allows Duc Phat company to raise finance based on the value of your outstanding invoices. Factoring also gives the company the opportunity to outsource their sales ledger operations and to use more sophisticated credit rating systems 6. Leasing Leasing is a contract between the leasing company, the lessor, and the customer (the lessee). The leasing company buys and owns the asset that the lessee requires. The customer hires the asset from the leasing company and pays rental over a pre-determined period for the use of the asset. II. The implications of the different sources of finance to Phat Duc

Phan nay em lam not nhe. III. Select the appropriate sources of finance for Phat Duc and make recommendations on the best ways of raising finance.

From the scenario, it could be seen that Phat Duc could use different sources of finance at different times. 1. The stage of setting up business For the time of setting up the business, Phat Duc could use personal savings and sales of his own assetes to fund the new business. When using his own money to finance a business, he will feel more personally invested in the project, because it is basically his money on the line. Moreover, there is more flexibility in using his own money. For example, if his business is having a slow start, he does not need to worry about paying back a bank loan because he used his own money. On the other hand, because he used all of his saved money to finance this business, a lack of a salary has an obvious, negative economic impact.

Although using his personal savings and money from sales of personal assets to finance business is easier in the sense of paperwork and applications, it may cause him some financial burden. He has to think about it in terms of interest lost. If he uses his personal savings and money to finance a business, he is losing interest (that interest rate will differ depending on the prevailing rate at the time he use the money to finance the business) that could have been earned by keeping the money in a savings account. If the return on her business is less than the amount he would have received had he kept the money in a savings account, then he are essentially losing money.

Using his personal savings can also create another financial burden. Most people have a savings account for general purposes. In other words, the money is not saved for any particular purpose and is used whenever it is needed for whatever reason. As such, draining such an account may negatively affect his financial situation if he needs to dip into that savings account for an emergency. If his savings account was set up for the purpose of opening a business, this means that he planned ahead and reserved that savings account for that purpose only, and thus, will not feel the pinch in an emergency because he will have other funds available for that purpose.

2. The later stage of business expansion At this stage of expansion, he could use retained earnings and owners equity (get partnership from other investors) to fund the business.

Firstly, about the retained earnings as a source of finance, there are some advantages and disadvantages. Retained profits are the profits that are kept by Phat Duc rather than distributed as dividends to shareholders. Hence, the profits earned from trading activities are kept back in the organization and invested in new ventures. Although full evidence is not available, this probably represents the most common source of finance for the organizations strategies. However, strategies that demand a bold, new step like a major acquisition may need totally sources of finance. Advantages : The company does not have to ask any outside group or individual. There are no issue costs involved in raising the funds and the company does not need to reveal its plans to outsiders such as banks in order to gain agreement. Disadvantages : Profits that are retained and not distributed to shareholders represent dividends foregone to the owners. Owners may demand a regular dividend from the company. The company needs to be generating adequate profits, so this route is not suitable for those in financial difficulties.

Secondly, turning to owners equity, Phat Duc can issue shares and take money contributed to invest in land, building and equipments in the stage of expansion. If choosing this kind of source of finance, Phat Duc is likely to face a tough decision regarding the future of their firm; namely, whether they are prepared to give up an, often large, amount of the ownership and management of their firm, in order to give the business a greater chance for long-term success and growth. For entrepreneurs who have worked hard to build their business up from scratch, this decision can be extremely difficult; they may feel that their authority is undermined if they have to work for someone else. There is also the possibility that an influential investor will change aspects, such as the business culture, in a way that the original manager does not like.

However, it should not be overlooked that Phat Ducs owner may find a successful Venture Capitalist with whom he can have an effective partnership, and who will bring market knowledge, contacts, and experience to the firm. These benefits can prove invaluable for Phat Duc aiming for rapid expansion. Furthermore, he is more likely to gain future business contracts if Phat Duc is backed by a reputable investor, and so equity financing could enhance the firms reputation.

Another advantage to equity finance is a mutual interest in the long-term success of the business. The firm is not required to make repayments to the investor: the investor aims to sell their ownership of the business in the future for a (much) higher value than they initially paid.

It can be very difficult to find a private equity investor however: many will invest in only a few businesses each year. The agreement can also be expensive in the short-term, since it will usually be necessary to seek assistance from lawyers and financial advisers when drawing up an equity arrangement. 3. The stage of the businesss diversification In the stage of diversification with operation in many fields, from health clubs to spas, hotels then Phat Duc needs to have various sources of financing to fund the business with ambitious objectives. He can use additional sources as bank loan and mortgage, as well as issue more shares for investors to attract capital.

About bank loan, there are countless businesses that have been set up on bank loans, and Phat Duc is not an exception. Whether people take a loan for themselves or for their businesses, a bank loan is the most sought-after source of availing finance. However, there are both advantages and disadvantages to taking a bank loan, depending on the borrowers financial health. Its advantages can be listed out as below:

Interest rates: Banks that offer loans do so at competitive rates of interest and on mutually understood and accepted repayment terms, as compared to unconventional lenders.

Easy availability: Considering that lending institutions like banks must always keep their depositors money working for them and earning more money and interest than it pays out to depositors, bank loans should, in theory, always be available to anyone seeking one.

Good lending terms and relations with the bank: If a borrower meets the banks lending criteria to the letter, he could benefit with a lower rate of interest and relaxed and easy repayment terms. Add to this the bonus of having a good working relationship with the bank.

Speed: If the borrower has all the appropriate documentation, any bank can process his application within an hour.

Uses: A borrower can use a bank loan for a number of reasonseither for setting up a business, or to buy home improvement goods or to go on a holiday. In fact, a bank loan is a financial package which helps you tide over a difficult time or set up business or invest in stocks. Considering it is a loan, it means that eventually you will have to pay the bank back within a stipulated time at a predetermined rate of interest.

Turning to disvantages, there are some:

Borrowers over-borrow: People sometimes over borrow money and get caught in their own debt. Often, this can lead to a shortfall in cash flow and payments can take precedence over income. To prevent this, loan repayments are restricted to a set percentage of a borrowers income.

Prepayment penalty: Often, loans come with a prepayment penalty which prevents the borrower from paying the loan earlier than the stipulated date without incurring any extra costs.

Restrictions: Banks levy a number of restrictions on the transaction. This includes having a good credit history before applying for a loan, and there are often restrictions about how the money should be used.

Finally, the pros of taking a bank loan far outweigh the cons. Its best for an investment since it offers a hedge against any financial problem as a result of which Phat Ducs owner find he cannot pay back the bank. But if he has a solid investment, he can easily pay back his loan.

Another source of financing for Phat Duc at this stage is mortgage. Commercial mortgages do offer some important advantages over rental of property or land. However, before he takes this big step consider carefully the advantages and disadvantages of these loans. Advantages of commercial mortgages:

He can keep ownership of his business and his business premises. This investment options might involve his giving up some of his business ownership He can make substantial capital gain. This can be a great way of realizing capital growth over a long period Commercial mortgages are not subject to rental fluctuations of residential properties giving him a more stable business planning environment With typically lower interest rates than the unsecured loans/overdrafts, they offer lower monthly costs. Plus they can be fixed which can help he more accurately manage and forecast his finance

Tax deductible interest payments. Commercial mortgage interest payments are tax deductible. This can contribute to reducing his business' annual tax overheads Improved cash flow management. Commercial mortgage payment plans normally extend for a number of years letting a business focus on profit and loss and cash flow matters and

Providing the lender agrees, he can sub-let some of his business premises.

Disadvantages of commercial mortgages:

He needs a decent sized deposit. This represents money which could be used in his business operations It can be harder to move his business if he owns the premises. With property rental, he can often negotiate ending his rent agreement or find another business to take up his tenancy

if he have a variable rate mortgage, he can leave himself vulnerable to interest rate increases He is responsible for his property including maintenance, insurance and security If he loses value on the property, this will reduce his capital. Explain the importance of financial planning to Phat Duc

IV.

According to Wikipedia, the broad definition of personal financial planning can be stated as, "a process of determining an individual's financial goals, purpose in life and life's priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals."

Planning in business is very important. It provides a guide for the overall operation of the business. Likewise, financial planning provides a structure to the way finances are handled within the organization or company. Financial planning manages the flow of cash in and out of the business. Essentially, it's impossible for an organization to function and be financially stable without financial planning. Analysis of Financial Reports Financial planning entails the analysis of financial reports. Without analysis, it's difficult or impossible to make plans. When the business examines its financial records, it's able to see the growth and present condition of the business. Financial planning helps to compare different situations and allows for a thorough understanding of how cash is earned and expended in the

business. Eventually, it becomes an important factor in determining which areas the business needs to improve on in terms of finances. Assets In detail, the assets of the company or business are best monitored through financial planning. Since financial reports hold records of expended, earned and remaining assets, financial planning becomes crucial in keeping an up-to-date record of the company's resources. Financial planning analyzes the current assets, fixed assets and intangible assets of the business. Financial planning or financial projection considers these three factors before deciding how best to expend and gain resources. Liabilities Just as financial reports hold records for the assets of the business, they also state the different liabilities of the company. Financial planning also requires an analysis of the company's current liabilities, long-term debt and owner's equity. This helps the business keep track of liabilities due in the near future. It also helps the company plan out how to finance and devote resources to its debts before they create any trouble for the operation. Income and Profit Loss Financial planning requires the review of financial reports to encourage an understanding of income and profit loss. This is important because it helps the business identify its sales or revenue, cost of goods sold/cost of sales, gross profit, operating expenses and net income. Knowing these factors can help the business identify which ventures have been profitable and which need improvement. Pro-Activeness Following the examination of financial reports, the business and those involved in it become more proactive. Through financial planning, different conditions, problems, losses and gains are predicted. Financial planning allows managers and top management to think ahead of the current

situation and makes them more prepared. Different business opportunities can also be identified via financial planning.