Venture Debt Financing Assignment Sample

Subject Name : Accounting and Finance

Determinants of The Lending Decision - Question 1

Cash budget of XYZ Pty Ltd for July to December

Cash Budget (Amounts in $)
Particulars	July	August	September	October	November	December
Opening balance	10000	4500	-4800	-32300	-79300	40900
Cash from sales in the same month	42000	60000	80000	100000	68000	40000
Cash from sales in month after sale	88000	115500	165000	220000	275000	187000
Cash from sales in second month after sale	37500	40000	52500	75000	100000	125000
Total cash from sales	167500	215500	297500	395000	443000	352000
Total cash available for use	177500	220000	292700	362700	363700	392900
Expenses: Labour and materials
Expenses in the same month	88200	126000	168000	210000	142800	84000
Expenses in the following month	44800	58800	84000	112000	140000	95200
Total labour and material expenses	133000	184800	252000	322000	282800	179200

Other budgeted expenses:
Selling, general and administration expenses	30000	30000	30000	30000	30000	30000
Rent	10000	10000	10000	10000	10000	10000
Taxation payments			33000			33000
Payment for motor vehicles				80000
Total cash disbursements	173000	224800	325000	442000	322800	252200
Ending cash balance	4500	-4800	-32300	-79300	40900	140700

Debt financing will help the firm in achieving required amount of funds for day to day functioning of the business processes and also help in avoiding cash shortfalls. By using debt financing, the ownership interest of the owner would not get diluted in the company. The company only has to repay the amount of principal at the time of maturity along with interest at the regular intervals of time (De Ressenfosse & Fischer, 2016). Also, the lender would not have any direct claim with regard to future profits of the business. The amount of interest can be effectively deducted from the tax return of the company and thus, lower down the actual cost of the loan acquired by the corporation. Moreover, it is considered that raising of funds with the help of debt is less complex as the corporation is not required to duly comply with federal and state securities laws and regulations (Dempsey, 2017). Therefore, it is highly recommended for XYZ Pty Ltd to acquire funds with the help of debt financing as this the company would be requiring to send mails on periodic basis to large number of investors and don’t have to seek their votes before undertaking any particular action.

Determinants of The Lending Decision - Question 2

Variance analysis for ABC Pty Ltd.

Variance analysis (Amounts in $)
Particulars	Budgeted	Actual	Variance	Favourable or unfavourable	Variance (%)
Sales (WCDs)	800	760	-40	Unfavourable	-5%
Sales revenue	32000	30400	-1600	Unfavourable	-5%

Expenses:
Supplies	1600	2000	-400	Unfavourable	-25%
Labour	16000	16000	0	Favourable	0%
Variable utilities	1600	1520	80	Favourable	5%
Fixed overheads	9000	9000	0	Favourable	0%
Total expenses:	28200	28520	-320	Unfavourable	-1%
Profit/ (loss)	3800	1880	-1920	Unfavourable	-51%

To assist the Managing Director of ABC Pty Ltd in controlling the business, briefly interpret and provide possible explanations for the variances. This part will be a maximum of 200 words.

Variance analysis helps in evaluating the difference between actual and budgeted results through which overall performance of a company can be analysed for a particular reporting period (Marzlin & Ismail, 2019). For ABC Pty Ltd., the sales revenue has indicated an unfavourable variance of $1600 as there is less units of the product sold by the firm in comparison to budgeted units of 800. With regard to expenses, supplies have indicated an unfavourable variance of $400 as only amount of $1600 were budgeted with regard to supplies expense and in actual, $2000 has been incurred. Overall profits have indicated an unfavourable variance of $1920 as it has been projected that the company will earn a profit of $3800 and in actual, it earned profit of only $1880. The company is required to undertake suitable measures to boost up its sales in order to raise its revenue. For that, it can opt for effective advertising activities and formulate various discount offers and schemes in order to attract large number of customers. Moreover, it also requires to minimise its expenses in order to raise its profitability and overall performance.

Determinants of The Lending Decision - Question 3

A company requires funds to carry out its day to day operations in a smoothly manner. With regard to debt, the company would be liable to pay off interest expenses at regular intervals of time along with the repayment of principal amount at the time of maturity. Whereas, in case of equity, the corporations have to pay dividends to the shareholders out of the earned profits for their ownership stake in the company (Milewska, 2020). Being a start up company, LMN Pty Ltd. can opt for a mix of both debt financing and equity financing as this would help in achieving better control of its business operations. Debt is considered as the less risky source of finance and its payments are usually tax deductible. Cost of debt is generally lower than cost of equity. However, there are some disadvantages of debt financing. The company is liable to pay the interest expense irrespective of the amount of revenue and profits. On the other hand, there is no such obligation in case of equity financing. The firm is liable to pay dividends only in case of adequate amount of profits (Magnanelli & Izzo, 2017). However, in order to keep the shareholders intact to the company’s ownership, the company must generate consistent amount of profits to provide the shareholders with the expected returns. Therefore, it can be claimed that the adequate proportion of both debt and equity will help LMN Pty Ltd. in raising funds for the start-up business.

References for Venture Debt Financing

De Rassenfosse, G., & Fischer, T. (2016). Venture debt financing: Determinants of the lending decision. Strategic Entrepreneurship Journal, 10(3), 235-256.

Dempsey, M. J. (2017). Stock markets and corporate finance. World Scientific Publishing Company.

Magnanelli, B. S., & Izzo, M. F. (2017). Corporate social performance and cost of debt: the relationship. Social Responsibility Journal.

Marzlin Marzuki, N. A. R., & Ismail, J. (2019). Benefits and limitations of variance analysis in management accounting. ACCOUNTING BULLETIN, 15.

Milewska, A. (2020). Entities Performing Self-Government Public Tasks-Specificity of Acting and Funding. Zeszyty Naukowe SGGW w Warszawie. Polityki Europejskie, Finanse i Marketing, (23 (72)), 146-155.

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