Introduction
Jackson construction will be a building business offering plumbing services at a cost of $11,000 per project in the local town area at an affordable charge per project. The business will be offering plumbing works to newly constructed residential and commercial buildings. The company will also offer repair plumbing services to residential and commercial buildings in the area.
Tools and equipment
Most of the tools and equipment required for plumbing will be acquired through purchase since they form part of the end product to customers. Leasing will be used to acquire the tools and equipment that do not form part of the end product to the customers.
Small size trencher: The business will make a one time purchase of a trencher. This cost of hiring the trencher will be higher in the long run and this informs the decision to make the one time purchase.
Small size excavator: The business will make a direct purchase of the excavator to take advantage of the tax savings brought about by the purchase. The long term cost of hiring an excavator will be very high and it will be more cost effective to the business in the long run to make a direct purchase.
Pipes: The business will purchase the various types of pipes that are needed for successful completion of a project. Hiring pipes is not possible because they form part of the plumping to customers.
Motor van: The business will hire a van for transportation purposes. Purchasing the van is not possible because of the high initial cost of such an investment.
Pipe soldering equipment: The business will hire pipe soldering equipment. The equipment can be used in many projects and is returnable to the hirer. The high cost of purchasing the pipe soldering equipment has also influenced this decision.
Pipe cutting tools: The business will hire the pipe cutting tools required for successful project completion. This will enable the business to hire the appropriate pipe cutting tools and thus avoid the initial high cost of purchasing them.
Electronic metal locators: the business will hire electronic metal locators since it is more cost effective than purchasing.
Financing equipment and tools purchase
Water meters, water heaters, pumps, filters and pipes will be acquired through a direct one time purchase. This is the most viable method of acquisition for the equipment because hiring will be costly in the long run. The lack of availability of other financing options for these pieces of equipment also informs the decision for an outright direct purchase. The business will have title of the equipment that is directly purchased. Since it is a one time investment, the business will avoid paying out periodical finance costs. However, this option has one major shortcoming; it will require a high amount of initial capital outlay to finance the acquisition.
The motor van will be acquired through a contract hire of a period of one year. This is the most appropriate financing option for the motor van since it is more cost effective compared to a direct purchase of the motor vehicle. The business will also benefit from tax savings as a result of this financing arrangement. However, the title of the vehicle remains with the leasing company and its use may be restricted by the leasing contract.
Pipe soldering equipment, pipe cutting equipment and electronic metal detectors will be acquired through a hire purchase arrangement. This will give the business an opportunity to own the equipment after the completion of the payments while at the same time keeping the current financing costs low. The cost of the equipment will be ultimately higher than if the equipment was acquired in a one time direct purchase.
These financing decisions are most appropriate because they are the most cost effective both in the short run and long run and do not adversely affect the liquidity of the business.
The charge out rate is suitable since it covers both the fixed costs and the variable costs. The charge out incorporates a 10% profit provision which is reasonable. The provision for profit at10% of the project cost is reasonable and will enable the business sustain its operations. The project charge is lower relative to competitors’ should act as a means of attracting clients to the business.
Finance options
Personal financing will be one of the options that will be used to finance the business or the first three months. It would give $40,000 of the initial start up capital required. This is an appropriate means of financing because it will reduce the possible debt obligations that will arise from financing through debt.
Debt financing is the most easily available external source of start up funds for the business. The legal requirements for obtaining debt financing are few compared to the statutory requirements of obtaining equity financing. To obtain equity financing, stringent rules governing stock issue have to be met; this is one of the reasons that equity financing will not be used as a source of funds for the business. The cost of obtaining debt financing is low compared to financing through equity. Floatation costs may be too high for the business thus the choice to use debt financing. The amount that needs to be raised is relatively low and it would be unrealistic to raise such an amount through a stock issue. The business will therefore seek a debt financing of $136,000.
Cash flow
The cash flow statement makes an assumption of one project for the first three months and six projects every moth thereafter.
Review and evaluation
The cash flow statement will be reviewed by the sole proprietor of the business. The evaluation will be carried out every three months to compare the cash expenses incurred by the business against the projected cash expenses. Actual cash inflows from projects will be compared to the projected cash inflows from the statement. Adjustments will be made accordingly at the end of each month to reflect the changes on the cash flow statement. The cash flow review will be documented through the use of comparative spreadsheets.
