Financial Assessment and Analysis Essay
Financial Assessment and Analysis
Investment is something that is important in the life of any human being and should therefore be taken very seriously (Downes, & Goodman, 2003). To make an investment means that one is looking for a better future and also to receive returns form that particular investment. It is important when an individual wants to make any form of investment that they consider a lot of factors which will affect the full operation and conducting of the investment (Downes, & Goodman, 2003). It is also important that an individual who wants to make an investment must ensure that they have sufficient information that will help in making the relevant decisions with regard to the investment that they have in mind.
Without prior and clear information, making decisions about an investment is difficult and may result in disaster where one may lose all the amount of cash or funds and waste efforts put up in the business investment (Downes, & Goodman, 2003). In the case of Pierre, having a clear financial assessment of the investment that he wants to engage in will help him in making the relevant decisions which will ensure that he does not operate the business at a loss in the long run. This financial assessment will make use of assumptions in the establishment of whether the investment Pierre is interested in is relevant and will be profitable.
In making an appropriate investment decision, there are various issues to be considered by Pierre which involves the analysis of the financial situation which the investment will require as well as the returns on investment which will be achieved by the business (Gibson, 2012). The first step that Pierre will need to do is to make a consideration of the financial investment which will be need to make the business fully functional. Financial appraisal of projects or investments is important since it helps in making the relevant decisions on what to invest in or not to invest in.
When conducting a financial analysis, there are various methods which can be used in appraising a project which involves finances (Gibson, 2012). The method that would be used in apprai8sing the investment by Pierre is the Discounted Cash flow analysis which will help to establish whether the investment which Pierre is interested in is worth the efforts or it should be abandoned (Larrabee, Voss, & John Wiley & Sons, 2013). Financial appraisal is also important to any individual or organization which wants to make an investment since it helps in establishing the amount of returns to expect. This is done through the analysis of the expenses which the investment will incur and the revenues which the investment will be able to raise within a certain period of time (Larrabee, Voss & John Wiley & Sons, 2013).
Factors affecting the success of an investment
When wanting to make an investment decision, there are various factors which need to be considered so that the decision to be made can be considered to viable. The various factors which Pierre will need to consider will include issues such as:
Availability of finances
Any investment that an individual or even an organization wants to get involved in always requires finances. The finances which will be put up in the business must be readily available so that one can be able to know whether they can take up the investment or not (Shim, & Siegel, 2007). There must e enough finances which will cater for every put of the start up of the investment since every operation in the investment or business will require sufficient funds (Downes, & Goodman, 2003).
In the case of Pierre, he is retired and has an amount of CAD 500,000, whereby he has already paid all the taxes which are involved in the retirement benefits. This is quite a good amount which needs to be invested considering that he is no longer in active employment hence he will need something to generate finances for him, in terms of investment (Shim, & Siegel, 2007). Considering the amount which Pierre has available for investment, it can be considered that he is ready to take up any investment of his choice since he already has available funds which he can put up in business (Cherunilam, 2010).
There is no business investment which can take place if there is no available human capital which will operate the whole investment and make it bring good returns. Human capital is necessary and its availability is important for the success of any investment (Cherunilam, 2010). It is important to ensure that there is readily available human capital which will be able to handle the whole operations of the investment to be undertaken. The cost of human capital should also be considered when wanting to make an investment since human capital that is not affordable will mean that the investment will incur large amounts of costs in terms of the salaries which will be paid out to the employees of the business (Horiguchi, & International Monetary Fund, 1992).
In the case of Pierre, he will run the business on his own which is quite good since he will be able to set an affordable amount of cash for the remuneration which he will pay himself. As a sole owner and operator of the business makes it more convenient for him to make the relevant decisions concerning human capital since he does not have to consult anyone on any matter concerning the number of people to have working in the business (Reilly, & Brown, 2012).
In addition, Pierre will only have one assistant in the business that will assist in conducting and carrying out the operations of the business. This means that he will not have a lot of expenses with regard to the human capital that he will employ in the business (Downes, & Goodman, 2003). In addition, the human capital is readily available and can be considered affordable hence this is an encouraging factor towards the establishment of the business investment which Pierre is interested in (Kruschwitz, 2006).
Government regulations and policies
In every country, there are always regulations and policies which are laid down concerning the operation of business and investments. These policies range from the taxes which businesses need to pay, the regulation policies which each business needs to follow as a way of conducting the business within that country among many other policies (Kruschwitz, 2006). The government policies and regulations gives the direction which business investments needs to follow and every business must be able to comply with those regulations and policies within the countries where they operate (Downes, & Goodman, 2003).
In the case of Pierre, government regulations that he needs to consider are the taxes which are charged on the kind of business that he wants to establish, the tariffs involved in the importation, especially of chocolate from Switzerland (Horiguchi, & International Monetary Fund, 1992). It will be important that Pierre ensures that he complies with all the government regulations and polices if he wants the investment that he has in mind to succeed. In some instances, the government regulations may prohibit the prosperity of a business investment due to the stringent rules that the business investment is required to accomplish in the long run and the tax rates also may have a negative effect on the business (Downes, & Goodman, 2003).
Availability of market
Every business investment needs a market where it can be able to operate in and earn good returns. Without there being a ready market available for the products to be sold by the investor will mean that the business will not be able to progress in any way (Horiguchi, & International Monetary Fund, 1992).
To know whether there is an available market which the business can be able to obtain good returns, conducting a market research is necessary. Market research is important because it helps in various ways. One, when an investor conducts a market research, they are able to establish the kind of customers available and their purchasing behaviors. This helps in formulating the operations of the business in such a way that it is able to meet the exact needs of the customers and hence obtain a greater market share (Cherunilam, 2010). Market research is important because it also helps the business investor to establish whether there is sufficient demand for the products that he/she wants to offer to the market.
From the case study of Pierre, it can be noted that Pierre has taken the initiative to conduct a market research for the business that he wants to establish (Cherunilam, 2010). This has given him the information regarding the kind of revenue that he will be able to make for a certain period. For example, from the market research results, Pierre knows that he will have a demand of 600kg per month while for the first month he knows that he will have a demand of 100kg per month. This information obtained from market research helps in making a sound investment decision, whereby Pierre can choose whether to continue with the investment idea or simply drop it depending on this information obtained from the market research conducted (Cherunilam, 2010).
The market research is also important since it helps in establishing the demand and the supply of the product the investor wants to offer in the market. In addition, market research also helps in establishing the kind of competition the business investment is likely to face. Knowing the kind of competition to be faced helps an investor to formulate a strategic plan that will be applied in overcoming the competition when the business investment is established (Shim, & Siegel, 2007).
Returns on investment
The main reason that influences business investors to engage in any form of business investment is simply to obtain good returns on the finances that they have invested. An investment that is not capable of bring any form of good returns to the business investor cannot be considered to be viable in the long run and hence should not be considered (Shim, & Siegel, 2007).
The main objective that business investors have is to make profits and also to expand their businesses. The returns which an investor is able to obtain from his/her investment must be able to provide the investor with profits and also leave him/her with funds that can be used in the expansion of the business (Downes, & Goodman, 2003). In carrying out this investment of importing chocolate from Switzerland and selling in North America, Pierre needs to know what amount of returns will he be able to obtain after all the deductions from the business have been made (Shim, & Siegel, 2007).
If the business will not be able to bring god returns, then there will be no need of Pierre getting involved in this kind of investment since he will just be wasting his resources. This can only be determined through the financial analysis of the whole investment that Pierre wants to undertake, which will enable him to make well informed decisions concerning the investment (Gibson, 2012).
Costs of investment
Business investments always involve a lot of costs which an investor must be able to cater for so that the business can be fully operational. Considering the costs to be incurred when undertaking any business investment is of great importance and any investor must be able to do so (Gibson, 2012). Determining and considering the costs will enable the investor to know whether the finances that the investor has are sufficient to cater for all the costs which the business investment will incur (Downes, & Goodman, 2003).
When the cost of investment is too high, the investor will not be able to realize higher returns hence the investment cannot be considered to be viable to be undertaken. A viable investment must have low cost of operation involved so that the business investor can be able to remain with some finances which can be considered as profits (Gibson, 2012). Therefore, in making this investment decision, Pierre must be able to determine and consider the costs involved in the whole business through a financial analysis so as to ascertain whether the investment is viable or worth the risk or it is something that should be abandoned.
The above analyzed factors are important to be considered by any business investor who wants to put up their money or finances and efforts into a certain business investment. Pierre needs to make a consideration of all the above mentioned and discussed factors if at all he wants to establish a well operating business investment (Gibson, 2012). As mentioned above, most of those factors can only be determined using real time data and information generated through a financial analysis and assessment of the kind of investment that Pierre wants to undertake. By conducting the financial analysis, it will be possible to identify the returns that the investment is likely to attract, the costs which the investor, Mr. Pierre is likely to incur in the process of opening and operating the business (Manufacturing and investment around the world: An international survey of factors affecting growth and performance, 2002).
The financial analysis that will be conducted in the case of Pierre will involve the formulation of a monthly cash flow for the whole business investment, and the formulation of an annual cash flow for the whole year. The best method of conducting this financial analysis is through the method of discounted cash flow (Kruschwitz, 2006).
Discounted cash flow method is simply used to make a valuation and an estimation of the attractiveness of a certain investment opportunity that is available. This method of discounted cash flow (DCF) always makes use of the future free cash flow which has been projected and is discounted at a certain rate but mostly the weighted average cost of capital is used in this method (Damodaran, 2012). This is done so as to obtain the present value which is in turn is used in the evaluation of a particular investment to find out if it is viable. After the calculation of the discounted cash flow, if the value obtained through this method is found to be higher than that of the current value or cost of investment, then the investment opportunity can be said to be a viable one (Schön, 2007).
Monthly Cash Flow
The monthly cash flow that Pierre is expecting or will experience from the first, month of the investment is that, in the first month, he will be able to have a net cash flow of about CAD 29,193 while for the subsequent months starting from the second month, it is assumed that he will have a constant cash flow of about CAD 102,243.
This is expected to occur throughout the year until the end of the first year. The cash flow in the first month is expected to be less because from the market research conducted, it was observed that the amount of stock that he will be able to sell will be about 100kg which is the reason why the cash flow for the first month is lower as compared to the subsequent months. In the second month and the ones that follow, the unit sales increase due to the increase in the stock from 100kg for the first month to about 600kg from the second month. It is also assumed from the calculation of the monthly cash flow that the interest rates will be uniform throughout the year and no inflation will affect the interest rates. Furthermore, it is assumed that the demand for the products will be constant from the second month and there will be no any form of decline or an increase in the demand throughout the first year.
Yearly Cash flow
The yearly cash flow that Pierre will experience when he starts the investment of selling the chocolates in Americas, the first year is expected to have a cash flow of about CAD 1,204,866 in total. This is the same amount which is expected to be the cash flow for the company or the investment that Pierre is expecting to start. This net yearly cash flow from the first year for a period of five years is assumed to be constant just as the case of the monthly cash flow in the second month of operation. The assumptions made in this case are that:
- The interest rates will remain constant throughout the five years and there will be no inflation that will take place throughout that period of time.
- The demand for the products will remain the same throughout the five year period with no change in the prices which will be charged for the products.
- It is also assumed that the costs involved in the running of the business will remain constant throughout the five years with no increase or decrease on the expenses of the business investment which Pierre is expecting to undertake.
- The other assumptions which have been made in the calculation of both the monthly cash flow of the business investment and the yearly cash flow of the business is that the investment or business with luxurygifts.com will be undertaken and also Pierre will employ an assistant for the job.
- It is the assumption of this report and the calculations made that the exchange rate that is to be used to convert the CHF to CAD is taken to be at the rate of 1 CAD is equivalent to about CHF 0.83. This is the rate which has been used to make a conversion of the purchasing price and air transport costs which Pierre is to incur when importing the products from Switzerland.
The amount of cash that Pierre could be able to offer to EigerChoc SA as the upfront payment for the exclusive rights of having to sell the products for the period of five years and still leave him no better off or worse if he made the investment decision of engaging EigerChoc in this kind of business would be a total of about CAD 200,000. The reason why he will be able to offer this amount in an easy way is that within a period of half a year, he will be able to obtain good returns which will help bring back his money and make the business fully operational on its own. This amount of about CAD 200,000 will leave Mr. Pierre with an amount of CAD 300,000, assuming that he used his total lump sum amount to start the business. Considering the expenses which he will incur, the amount of CAD 300,000 will leave him more capable of handling all the expenses even if he offers a sum of CAD 200,000 to EigerChoc as an upfront fee.
Business decision making, especially with regard to making an investment decision sometimes is quite challenging and to some extent a task that requires a lot of information and keenness. It is important that a business investor must be able to obtain all the relevant information that will enable in making the most appropriate decision of investment.
Pierre provided sufficient information about the business investment that he wants to get involved in and from the financial analysis on the annual and the monthly cash flow of the business venture, it can be said that the business investment looks attractive for MR. Pierre to undertake. Pierre is in a better position to make this investment because he has all the resources which are needed for the business. The only thing that may inhibit him from undertaking this kind of business is the regulations and government policies which may make it more expensive in terms of the licenses and may be the trade relations between North America and Switzerland.
The recommendations which Pierre should consider are that:
- Conduct further research on government policies and regulations regarding the kind of business investment that he wants to undertake
- He should make use of the lump sum funds that he has instead of borrowing a loon of about CAD 100,000 at an interest rate of 8%. This will increase the expenses of the business hence should not be undertaken at the start of the business.
- Do not engage luxurygifts.com at the moment. This should be done when the business is fully established to ensure that the expenses involved are not increased.
- Offer an amount of about CAD 200,000 to EigerChoc as an upfront payment for the business investment. This will leave him with sufficient amount to operate the business.
From the analysis of the factors that affecting or determine whether to undertake a business or not and from the calculations of the cash flow that is expected in the business for the period of five years, it would be more advisable for Pierre to undertake the business considering that he already has the knowledge about the market and the kind of demand that his products will command. In addition, through the help of his wife, the business is expected to perform well in the long run and hence it is a viable investment to undertake.
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