The cost of debt financing (loans) is interest. The cost of equity financing (investments) could include dividends or a share of the profits. Comparing the two may involve a cost of capital calculation and analysis. You would in effect compare the interest charges on a loan with the percentage of your company’s retained earnings or accumulated profits that really belong to the investor.
If you can obtain loans from different banks, compare the interest rates and payment terms they offer. You may want to determine the total interest cost over the life of each loan to have a comparable base. Small differences in the interest rate can add up to significant amounts over a long-term loan. Keep in mind that short-term unsecured loans, such as lines of credit, generally carry a higher interest rate than long-term secured loans, such as mortgages.
2.2 explain the importance of financial planning
To manage income more efficiently. The cash and need analysis and income expenditure budgeting will show the best way possible in managing income. Regardless of the amount of income earned, part of the earning will go for tax payment, expenditure and what’s left would be the saving. Thus, proper management of income is necessary in increasing cash flow.
To increase cash flow and monitor spending habits and expenses. Financial planning will help in determining what should be done to generate cash flow in order to make investing possible. Tax planning, careful budgeting and prudent spending are aspects that need to be paid attention to in generating cash flow. This will help as part of the cash can be preserved for long term use.
To build a long term capital-base and shape your financial future. Once there is an increase in cash flow, it means an increase in capital base too. This allows one to be able to venture into various portfolio investments. With a strong capital base, one can have a wider portfolio of investment.
To identify investment opportunities relevant to your financial situation. Financial planning can help in evaluating the best investment opportunities. A good investment planning can turn goals from dreams into realities. Apart from picking the `right` investment, it shows how to allocate money among different type of investment. This can have a greater effect on investment success.
To provide for your family’s financial security with proper coverage through right kind of policies. The good old days when a worker retired with a nice pension seem to be gone now. Today, one need to take charge and plan for the family’s future security. How much income should one plan in needing for the family’s financial security? In doing these projections, inflation effects must be considered too. This is where financial planning can be of help.
To get a whole new approach to budgeting and gain control over your financial lifestyle. One can evaluate the level of risk in an investment portfolio or adjust a retirement plan due to changing family circumstances for example. It becomes obvious that financial understanding has been attained when measurable financial goals are set, the effect of each financial decision is understood, the financial situation is periodically evaluated, financial planning is done as soon as possible with realistic expectations and ultimately when one realizes that only he or she is fully in charge of it.
Standard of living
To maintain your family’s present standard of living by maximizing the household insurance portfolio. One can create a personal and family financial plan so that there are clearly defined goals or targets and there is enough savings to get there. For example, one can make sure that there is enough disability coverage to replace any lost income. This can ensure that the family remains financially secure if the head of the family or the bread winner dies. Thus, the family’s standard of living doesn’t suffer and is maintained.
It used to be called saving for a rainy day. But sudden financial changes can still throw one off the track. An emergency fund for example might be ideal. It has to be always very liquid. It means that it should be very easy to convert that fund into cash. Savings bank or money market accounts are examples of investment with high liquidity. This way, a systematic and organized saving and investment plan can be provided to fund children’s education and secure a comfortable retirement and on top of that, be ready for any unexpected occurrences.
To insure assets accumulation and liability cancellation to leave the maximum amount of wealth to your heirs. In the process of accumulating assets, many fail to realize that it usually comes with a liability package. In order to determine the true worth of any asset, the liabilities need to be settled, or cancelled. Only then, the true value of the assets would be of use and help for the heirs. Otherwise, assets can easily mean unwanted or unexpected financial burden.
Financial security and mastery
To assist you and your family to attain the ultimate objective of financial security and mastery. Financial planning will provide directions and meaning to one’s financial decisions. It allows an understanding of how financial decisions made can affect other areas of finances. By viewing each financial decision as part of a whole, the short and the long term effects on one’s life goals can be considered. This will help in adapting more easily to life changes and feel more secure financially, knowing that financial mastery has been achieved.
2.3 Assess the information needs of different decision makers
Organizations face three types of decisions:
Operational decisions. These decisions are made by workers and their supervisors and are concerned with daily production.
Managerial decisions. These decisions are made by mid-level managers and are concerned with topics such as hiring, and motivating employees.
Strategic decisions. These are different from operational and managerial decisions. Strategic decisions are made by organizational leaders and are concerned about the mission and the re-organization of a firm. These decisions tend to be more unstructured, involve more searching of the environment and tend to occur less frequently than either operational or managerial decisions.
Strategic Information Systems help policymakers, executives, and planners decide on organization mission and strategies. Organizations make many different strategic decisions. Sometimes organizations make these decisions consciously, as when the firm engages in strategic planning. Other times decisions are made without being aware of the strategic importance of these decisions, as when the environment forces the organization to act in certain ways. It is difficult to know what issues will be strategically important for the organization.
One way to understand organization’s strategic issues is to look at data needed in previous planning efforts. Unfortunately, history is often not a good guide of future strategic issues. Because information systems help in articulating strategic issues, if the information system focuses on the wrong issue it could radically mislead the organization. How can we anticipate information needs of organizational leaders?
In thinking about Strategic information systems, we must also consider non-computerized sources of information, e.g. reports and commissioned studies, experts’ advice, and informal communication networks. One should also think through the timing of information. In particular, should the analyst collect and analyze the information hoping that it will be used or should the analyst wait for organizational leaders to articulate the need and then collect the information. . In addressing the question of timing, the following two tradeoffs should be considered:
Relevance versus timely availability. Data collected and analyzed after the need arises are more likely to be relevant to the decision-maker’s task, but because of delays in collecting information data may not be available when needed.
Periodic or continuous data gathering. Collecting data as the need arises allows analysts and decision-makers to define precisely what must be collected. Regular data collection often leads to data categories that are too narrow or too broad. Periodic collection – collecting data only when the need arises – allows us to assemble the most appropriate data but may not give us a basis for comparing trends.
By its very nature, building a strategic information system requires us to think through not only what is needed but when is it needed and how can information be organized. The analyst must specify the information needs, the data collection strategies and the analysis needed. At the same time, the temptation to collect data on every conceivable contingency must be tempered by recognition that collection is expensive. In practically every case, the minimum should be done.
2.4 explain the impact of finance on the financial statements
Finance on financial statement attracts different stakeholders of the business as the finance determines the liquidity and the acid test of the organisation.
The amount of debt a company takes on has an impact on its balance sheet. In particular, it affects the relationships between several components of the balance sheet. Analysts, investors and bankers all rely to a certain extent on the balance sheet to determine the risk profile of the business. An increase in debt could signal that a company is moving toward shakier financial ground.