Section 2: Costs Involved in Employing New Staff
- Cost Involved in Employing Staff
The costs incurred on the recruitment of new staff can be quantified as the opportunity costs. The human resources is the most valued assets of the business. Salaries and bonuses are not comparable to the value of a particular employee. The true cost of turnover includes easy-to-quantify, out-of-pocket expenses and intangible opportunity costs associated with lost productivity.
Th total cost of hiring not only includes the cost of recruitment, but it also includes the cost of training, salary, benefits and the cost of workplace integration. It also the cost of need assessment, cost of advertisement for the particular position in newspaper or any other media, the opportunitiy cost of time used by internal recruiters, interviewing and material costs, screening and background costs and the pre-assessment costs.
In case of small businesses like in my business, most of these costs can be avoided. During the start of the business only few employees will be recruited. There is no need of carry out the whole process of recruitment for these small number of employees as they can easily be recruited through staff members from referrals, friends, and family.
Training Cost
After new staff is recruited, they must be trained in order to be 100% predictive.
During the early stages of the businesses, few staff members will be recruited and they would be responsible for various tasks. In some cases, new materials have to be bought for this training. In case of big organizations, trainers are inducted and training is more intense than other organizations. This training would cost much to the organization However, in case of small organization, most of the costs are avoidable but opportunity costs cannot be avoided. I will take time to train the new employees, understanding their responsibilities and tasks.
Wages and Benefits
Wages and benefits are unavoidable costs to the business. It has to be paid during the first of every month to the employee upon successful completion of the tasks assigned. In to to improve the internal environment of the organization and motivation among the employees, there are various rewards including bonuses and expense. It is also the responsibility of the organization to offer and tea and other snacks during the working hours to the employees so this also raises business costs.
Cost of Workplace Integration
In most cases, every additional staff member means an additional office and office equipment. In some cases, modifications and additional purchases will be necessary depending on the job description and the status of the new staff member. Some of the expenses go into furniture and fittings, mobile phone, computers and software among others.
Most other costs related to hiring new staff members are avoidable for small businesses like in our case. As the business grows, most of these costs become significant and unavoidable, accounting for a big portion of expenses on the income statement.
Labor Costs for Employees
Budgeting See Worksheet 2
- Monthly and Annual Budgeted Profit & Loss Account and Cash flow Statement (Worksheet 2)
Minimum Revenue to Break Even
- The Break Even Analysis
BEQ=Minimum Revenue to Break Even
The Break Even Revenue =Fixed CostsAverage Price per Unit-Average Cost per Unit
Fixed Cost per Month
wage=$250*12=3,000
Overheads=$250*12=3,000
Total Fixed Costs=Wages+Overheads=$6,000
Average Price Per Unit=The average price of per pair of socks
Regular Size Socks$ 15 (a package of 5 pairs)
Baby Socks$ 8 (a package of 3 pairs)
Leggings$ 20 (a package of 4 pairs)
Ankle Socks$ 12 (a package of 4 pairs)
Average Price= $15+$20+$8+$124=14
Average Cost per Unit (Variable Cost)
The Variable Costs
Wages=5% of the sales price
Supplies =10% of the sales price
Overheads = 10% of the sales price
The Cost of the Product= 45%
Total Variable cost =70% of the selling price
Variable Cost per unit =14×0. 7=$9.8
The Break Even Revenue =600014-9.8=$1429
- The Revenue Required to Achieve Net Profit Equal to 8% of gross sales
Gross Sales= 199280
8% of Gross Sales = 0.08×199280=15942
Revenue Required =6000+1594214-9.8=$5,224
Section 3: Financial Analysis
The Financial Performance for the Socks Business
Financial Growth of Business
The calculation show that during the first month of business, it experienced loss of $1,016. However, it managed to earn profit in the following months at steady rising rates. The same trend continued till the end of the year. The cash flow also showed good results and forecast the bright future of the organization in the coming years. The profit margin of the organization is calculated as under:
profit margin=Net IncomeSales=44,078376,000=0.1172
It shows that during the first year of business, it made profit of 11.72% which is quite impressive. This profit margin can greatly help the organization to apply for loan to expand business.
Section 4: Forecasting Revenue
- Forecasting revenue (UTS Online Worksheet 3)
Adjusted R2 =n-1R2 -kn-k-1
- Reliability of Adjusted Regression Analysis Technique in Forecasting
Adjusted R square is used to forecast the future events. It relies mainly upon the past data and thus forecast the most probable analysis of future. Considering the case of businesses, the future predicted values depend on the economic cycles, political conditions, and other uncertainties. It means that the future forecasted through this adjusted R square is not 100 percent true.
Section 5: Financial Data Analysis: Obtaining Finance
Different Sources of Financing: Their Advantages and Disadvantages
Source of Financing - Bank Loan
There are various sources of finance that any business can take from but bank loan is considered as the most reliable and easy way of getting finances in short time. However, besides the good points of bank finances, there are certain frightening policies and laws of banks too. Banks require collateral upon getting the loan. This is usually a big challenge for small businesses because, profitability is uncertain in case new small businesses. Moreover, it is also difficult for the small businesses to get these loans as per the policy of most banks, they require long track of profitability records. Second, in case of failing to pay off monthly installment, the interest is raised on the loan. If the business is unable to return the amount the given time frame, then bank can also seal business property.
Bank Loan Advantages
- No stake of bank in business ownership, i.e. no profit sharing or role in decision making
- Interest payment comes with tax advantage; income is taxed after payment of interest, meaning that the percentage of profit used to pay the loan is tax exempted.
- Once loan is cleared then there are no other engagement of business with the bank
- Multiple loans to choose from.
Bank Loan Disadvantages
- It is difficult for small businesses to obtain loans, as they do not have any record of accomplishment and collateral.
- For small business, due to small loan amount, bank charges high interest rate to earn their profit
- The entire amount is not guaranteed.
- The risk of losing the collateral; this could be business, personal or even friends assets pledged as collateral
- Lengthy application process.
In case of Socks Business, getting loans from banks is not easy. They would require record of profitability and since it is a new business so there are no set records. Moreover, even if gets the bank loan then, it would not be easy for the business to pay off collaterals. Therefore, overall the socks business will have to face more disadvantages than advantages in case of getting loan from banks.
Grants
Grant is one of the best sources of finances for any small business who has lack of resources. The government of Australia gives several grants to small businesses. However, there are set standards for getting the grants that one has to fulfill to get the grants. Following can be eligible for getting the grants:
- Business
- Entrepreneur
- Government
- Entity, etc
.
Advantages
- No requirement of repayment.
- No part of ownership is lost.
- Information is readily available online
Disadvantages
- Tough competition with other business owners.
- Justification for the need of grants is often very difficult and time consuming.
- Very strict eligibility criteria.
- Follow-up by an officer of the company that issued the grant.
Venture Capital
Venture capital is another kind of a loan or funding which is obtained through venture capitalist. Venture capitalist can be a firm or an individual who invests in the business with a thought that it will mature and provide profitability to the investor. The venture capitalist recovers his initial investment in the new business after it starts earning profit.
There are two types of venture capitalist, i.e. angel investor and capital firm. The advantages and disadvantages of the venture capitalist are discussed as under:
Advantages
- The investment by venture capitalist helps in growth of the business.
- A high profile investor helps give the business credibility.
- The investor may bring various resources for the organization like assets, network (contacts), assets, market insight, and information.
- Venture capitalist invest in different businesses and thus with their experience, they can also help in improving the decision-making process of the organization and thus increasing the chances of growth.
- No need for regular payment of interest, although they parts with part of the equity.
Disadvantages
Accepting venture capital comes with several restrictions.
- The entrepreneur has to consult the venture capitalist on issues regarding investment policies periodically.
- Venture capitalist can impose certain limitations and contracts on the entrepreneur like borrowing or dealings with any other organization.
- It is not easy to find a venture capitalist as like bank loans.
- Venture capitalist choose selective businesses; therefore, most entrepreneurs are turned down.
Leasing
Advantages of short-term leasing
- Short term leasing let the organization plan for long term horizons and resource stewardship
- May increase borrowing capacity one the leased asset is used as a security (long term leases).
- Short-term leasing costs cheap as compared to purchasing.
- Enjoys tax deductions for leasing costs
- Rights to terminate (short term/ operating lease)
- Allows savings or investment in short-term capital needs
Disadvantages of short-term leasing
- If lease is terminated then there are chances that investments that have been made in land and infrastructure are lost.
- Even if income is reduced, still wealth cannot be accumulated by means of long-term contribution plans.
- High legal costs and complicated legal processes.
Section 6: Financial Data Analysis: Obtaining Finance Part 2
- Financial Data Analysis: Obtaining Finance (The Finance Proposal Report)
As discussed earlier, the cash flow and the income statement of the business shows prospective results in the future. These cash flow and income statement can be used to build impression infront of banks to gain the loan. business will be in a position to accommodate another loan of up to $100,000. This will go into financing the business expansion project, particularly in financing the concept stores that are to be opened in other cities within Australia. It will also go into financing the establishment of the online store and increasing the stock.
After research and reviewing the policies and laws of loan financing from banks and other sources, it is decided to get the loan from Bank of Queensland. As compared to other banks, the interest rates, time of payments, and the security policies offered by the Bank of Queensland is most suitable for the Socks Business. It has been decided that loan will be taken from the Bank at the variable rate of 4.98% with residential security base rate and residential security type. The interest on the loan is decided for the period of 8 years (4.98% per annum) and it will be paid monthly.
PMT=PV-FV×rate1-1+rate-nPMT=100,000-0×0.04981-1+0.0498-8=$15,459.67PMT per month=$15,46012=$1288
With this amount, it would not be too difficult for the business to provide security. The business stock and assets are enough to pay off security for whole life of loan.
Finance Proposal
- The Analysis of Funds Required
Benefits of Acquiring the Loan
- The organization can easily payoff the amounts of loan each month.
- With amount of loan, organization will focus on business expansion. It will set up three new concept stores and increase online marketing for both traditional and an online store. This will increase business revenue and profitability.
The structure of business positions is given below:
The managing director is solely responsible for entering contractual agreements with other entities like the bank for loan purposes.
Work Cited
Brigham, E. & Daves, P., 2012. Intermediate Financial Management. 11th ed. Mason, Ohio: South-Western.
Jackson, S., Schuler, R. & Werner, S., 2012. Managing Human Resources. 11th ed. Ohio: Mason.
Stafford, P., Tuesday, 20 August 2013. The best federal government grants for small business. [Online] Available at: http://www.smartcompany.com.au/finance/33233-the-best-federal-government-grants-for-small-business.html [Accessed 14 May 2014].
Thomas, M.J., 25 Feb, 2013. The Advantages and Disadvantages of Bootstrapped Funding vs. Venture Capital Funding. [Online] Appian Partners LLC Available at: http://appianpartnersblog4.quora.com/The-Advantages-and-Disadvantages-of-Bootstrapped-Funding-vs-Venture-Capital-Funding [Accessed 15 May 2014].
