23 Apr Capital Structures Financial Plan
You as the business manager need to be able to determine larger sources of funding by creating a financial plan to help reduce duplication of resources, identify requirements and risks, and determine various financing options. Completing this planning is an important step for all businesses to take if they want to succeed. Larger companies may delegate this process to financial managers, financial analysts, or operations managers.
You decide to create a financial plan for your company to help distinguish between sources, requirements, and risks associated with various types of long- and short-term financing capital structure that your company can potentially use in the future.
Assessment Deliverable
Draft a 3- to 4-page financial plan for your company. This plan should include sections for a business case and profit-and-loss statements. Include the following items:
A business case that includes a description, type of business, and sources of funding
Note: Use your Wk 5 Assessment Prep: Business Case Research assignment and feedback.
A profit-and-loss statement for a 3-year period
Project revenue. State realistic assumptions, such as growth per year, in your projections.
Estimate direct costs, including capital, marketing, labor, and supply costs.
A conclusion that includes an explanation of what working through a financial plan can do for a larger company
Cite references to support your assessment according to APA guidelines.
Business Case Research
Why Funding Is Needed for The Company
Funding is essential to drive the company’s operations and expenses. It extends to labor
costs, marketing and sales expenses, infrastructure and technology, and expansion. These are
prospects for growth and success, making funding a fundamental aspect of the company.
The Sources of Funding
The following are the available sources of capital for the company: self-funding, which
entails using owners’ capital to fund the company’s operations. Second, borrowing includes bank
loans and other funding sources at a specific interest. Third is equity funding, which involves
raising capital by selling ownership stakes to external investors (Ferran et al., 2023). Fourth,
venture capital, a form of equity funding entailing the sales of a company’s share in exchange for
capital and guidance from external stakeholders. Others include crowdfunding, which entails
campaigning for a business on a public forum to gain support from the public. Then grants. They
involve writing to the government and NGOs for funding for community-based projects.
The Requirements of Each Funding Source
The diverse sources of funding have their requirements. For instance, self-funding
requires financial stability to avoid enduring losses and instances of bankruptcy. Borrowing
requires strong credit and collateral naming to secure more funding. Equity and venture capital
as capital sources demand scalability and solid business ideas to convince investors and gain
their confidence (William, 2021). Crowdfunding and grants require good business ideas,
connection with the public, and confidence in convincing investors.
The Associated Risks of Each Funding Source
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The funding sources also have associated risks. Self-funding might lead to losses and
limited growth due to inadequate capital. It makes it ideal for small businesses and an unreliable
funding source for larger business-like companies. Borrowing poses a threat due to debt
obligation and default, and they might lead to further losses. It is, however, convenient for a
company because of the chance of securing a sizeable fund (William, 2021). Then, loss of
business ownership and flexibility with equity and venture capital as funding sources.
Crowdfunding and grants pose a threat due to limited capital and unpredictability.
The Best Sources of Funding for The Company
Venture capital and borrowing would be appropriate for the company. The former is ideal
as it strengthens a company and boosts its financial kit. The latter is more accessible to meet and
has fewer risks, considering it is easier to repay debt loans (Metrick & Yasuda, 2021). More so,
borrowing allows the owners to retain ownership and flexibility to make business decisions.
The Cost of Capital for Both Short-Term and Long-Term Funding Sources
Borrowing features as a short-term funding source. Its cost of capital counts as an
annualized interest rate, which depends on the lender’s policies, borrower’s creditworthiness, and
existing policies, among others. The value is also a factor of lower and high-risk borrowing,
which can lead to lower and higher interest rates. Venture capital would be the long-term funding
source for the business (Legal Information Institute, 2024). Its cost of capital counts as the return
rate demanded by investors, which varies depending on market risk premium and risk-free rate.
Current Estimated APRs For the Selected Sources of Funding
Source of Capital Current Estimated APRs
Venture Capital The APR for venture capital funding average
at 25%. It is the sum of investors’ demands,
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which can influence the annual return rate to
20-25% (Legal Information Institute, 2024).
Borrowing The APR for borrowing, particularly bank
loans, stands at 8.99% to 29.99%. It depends
on the financial institution and the amount of
borrowing (Legal Information Institute,
2024)
