Utopia:Finance Emma, Chris and Alex

Utopia: Finance

Internal source of finance

“100% of shares are owned by john Ariki”

Full control/ownership.

No need to give dividends.

A lot of money in the business if the event of an issue.

-Personal Funds/Personal savings - When the owner a business uses their personal funds/savings into their business as a source of finance.

Benefits and costs of using personal funds.

Pro: You Will Run a Better Business

If you’ve got your own money on the line, you’re going to look at your business very differently,You’re going to want to really do your due diligence to make sure you can minimize the risk of losing your money. You’re going to plan differently. You will run a smarter and better company as a result. And all the rewards will be yours, not the bank’s.

Con: The Risk of Personal Debt and Bankruptcy

many entrepreneurs get in trouble. A lot of small business owners are taking on debt on the personal side. Let’s say they’re taking on a line of credit for their business with the bank. They have to then personally guarantee that money. if the business goes under, then the entrepreneur will either spend the next decade paying it off on the personal side, or need to file for personal bankruptcy. Using personal funds makes you financially liable, using only your personal funds to invest your in your company can be drastic if the business doesn't work out

Pro: Your Business, Your Way

You have complete control. You’re not beholden to anybody but yourself. You don’t have investors looking over your shoulders asking for specific returns. You decide how the money is being used. You decide how fast you’re looking for a return.

Con: Your Money Might Not Be Enough

If you’re going to be successful, you’re going to need a lot of capital. The whole dilemma of cash flow comes up real quick. A bank loan can give you more financial room for potential success. A dip into your savings could see your quick start meet a quick dead end. Smith drives that point home very clearly: “You could have the world’s best business idea, you can be smart, you can be a serious hustler, but if you run out of cash? Your business is gone. No cash, no business.”

Not always financially stable

"in 2015 Utopia recorded its first financial loss in 16 years"

Business is at a loss since the Cost of production > revenue, caused by lack of bookings as a result of a recent natural disaster that struck the island.

Calculate Margin of safety = Level of demand and - Break even quantity.

In a break even analysis, margin of safety is how much output or sales level can fall before a business reaches its break even point.

The costs of rebuilding and/or repairing are high due the significant proportion of damage taken, 7 villas are damaged and 17 are destroyed. Because all villas have suffered some sort of damage making them unavailable for service without repair.

Utopia's financial stability can be heavily influenced by the environment. As natural disasters can occur, pacific islands are at risks of those natural disasters as they often brew in the pacific islands. Therefore, Utopia is at risk of an unfortunate event, which could heavily damage it's assets thus limiting its availability to clients, limiting its bookings and it's revenue.

Expanding globally

The potential of expanding globally

“Liza is looking for new ways to expand the business”

This process could be expensive as there would be high initial costs of building up the business in other countries

Lose Unique selling point of the business, what makes it special

Expanding globally does have its benefits

It could increase cash flow as more customers are reached

Increase brand loyalty

Revenue made could help develop the original business in the Pacific Islands

Revenue streams

“John realized that he has to consider new revenue streams”

Sponsorship

Not as applicable since the likelihood of being sponsored by an organisation is low (although not impossible). Items used at Utopia like umbrellas, cups, towels, other inhouse products can be sponsored by external organizations.

Subventions

Subsidy for business that positively affects society

Local craftsmanship

Souvenirs

Tourists are likely to buy souvenirs if they come to the resort, can help support other local businesses too

Advertising revenue

Advantages

Increases cash flow

Awareness of product/service

Customized souvenirs

“Gross profit margin would be high” = good

Gross profit margin is value of gross profit as a percentage of sales revenue

Gross profit / Sales revenue * 100

Have to take into account the fixed costs

Cash flow forecast, pay back period average rate of return

“Capital expenditure of $10 000 required to set up” - high risk

To find out how risky:

Use cash flow forecast

Use payback period

Use average rate of return

Cash flow problems

Due to damaged and destroyed villas

Lack of customers

How to deal with cash flow problems

Reduce cash outflow

Better credit terms

Seek alternative supplies

Better stock control

Reduce expenses

Improve cash inflows

Tighter credit control

Cash payments only

Improved product portfolio

Which ones apply to Utopia the most? Give reasons.

Expansion of JAC

Expanding to other markets

Conduct investment appraisal

Cost of expanding

Questions/Potential Questions:

With reference to Utopia and its finance, what is the impact of change on innovation?

Evaluate the advantages and disadvantages of external sources of finance?

How could Utopia increase its revenue?

Create a cash-flow forecast for Utopia.

What are the costs and benefits of expanding Utopia and JAC?

Why is it important for Utopia to budget?

Links

Questions: https://play.kahoot.it/#/k/312f15af-3695-4045-9719-63aa98a38fd6

Finance terms: https://quizlet.com/75313726/ib-business-finance-terms-flash-cards/

How to create a cash flow forecast: https://www.youtube.com/watch?v=uUIZfRqeGKc

Advantages/Disadvantages of sources of finance: https://quizlet.com/64955642/sources-of-finance-advantages-and-disadvantages-flash-cards/

Investment appraisal: https://quizlet.com/114262625/38-investment-appraisal-ib-business-management-flash-cards/

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