Finance & Marketing..

SECTION 1

CAPITAL INVESTMENT

The main things you need to know when investing in a project is getting a picture of the return you will be receiving since the amount put as capital will be an expense extracted from the annual returns which will minimize the actual profit you make by the end of the year.

• Due to the price of machine and the operational cost you must know if the annual profit is large or small.
• Another factor that you MUST consider is the environmental impact to ensure that it costs no implications against financial rewards in capital decision.

Now to understand the above the first step will be to understand the Cash Flow.

By understanding the Cash Flow you will be able to figure if the investment is worth it or not. There is a method called “PAYBABCK” that will help financers determine the time it will take investors to get the initial outlay back.

However please keep in mind that this method is only good for short term goals.

The better option/method is called the “AVERAGE RATE OF RETURN” also known as ARR. This method is used to compare two different business or two different strategies and it will help you identify which has the best return for the investor against the capital put in.

If the capital invested for two businesses is not the same then you can still use ARR to find out the average rate of return and compare the highest percentage against the same year OR choose to see the “NET PRESENT VALUE (NPW) ratio.

NPV will also help you determine if the net profit received is large, therefore operational cost turns out to be low which makes it a good investment plan or if the net profit is low due to the high operational cost. Maybe it will be wise to consider leaving the money in the bank which might generate you a greater return.



SECTION 2

CAPITAL STRUCTURE

Keep in mind that money has a TIME VALUE, which means the money invested today is less then the same amount of money in three years from now. Investors always expect the initial return of the capital money considering the time value. An example, if I invest 100 rials on you today I will be expecting about 120 rials back in 10 years time because of the TIME VALUE resulted from the interest rate factor coming from central bank. Financers can calculate this and you must ensure they consider this in their proposal.

At this point the question you have to ask them is “What will the money we receive in the future really be worth in today’s terms?”

When deciding on how to get the capital you must remember that the capital amount is deducted as an expense which lowers the net profit figure.

The capital can be obtained through debentures
Once decided how the capital is structured/obtained you must remember that there are different types of Shareholders that consist of Company Owners and Outside Parties.

The “Outside Parties” can workout by taking a loan from banks against a certain interest rate or it can be from investors that are also split to three different groups:

1. Debentures
2. Preference shareholders
3. Ordinary shareholders

Debentures have advantages because they leave specific assets burden free, and thereby leaves the business opened for later financing. Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.

Preference shareholders are investors that will receive a fixed amount of profit (dividend) annually or depending on the agreement. The advantage here is that the business can buy/take its shares back once it has completed paying all dividends as per agreed in the contract. However these shareholders have no voting rites.

Note: Preference shareholders have a cumulative advantage which means that if the business could not pay them this year then the amount will be carried to next year.

Ordinary shareholders are investors promised a fixed percentage from the annual net profit. But these shareholders have the right to vote which gives them some level of decision making power within the company.

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When business get's this intense and you have to increase your sales revenue, Marketing is the remedy that decides how fast you break-even, what is your potential success and what you should do.