A number of areas pose funding challenges for the company’s future investments. These funding gaps include a loss of $29355.99 as depicted from the statement of comprehensive income. With the company making losses funding of the future investment projects becomes doubtful. The company has also zero retained earning which depicts that profits are not likely to be ploughed back as the company is making losses. High debt financing through long term loan facility also pose a financing loophole, creditors form fifty percent of the firm’s financing capability and as result creditors will able to influence future investment decision in the firm.
The company has also high spending on advertising, interest expenses and as well as travel expenses, this will as a result reduce the available funds for investment purposes due to the adverse effects of profits and retained earnings.
|Priority for Funding||Gap in Funding||Amount of Gap||Cause|
|1||Initial inventory||Unsure||Have not fully identified the amount of initial inventory needed. Have not calculated break-even point for sales.|
|2||Equipment||$9,400||Does not have a clear cost of evaluating whether to buy or lease equipment|
|3||Advertising||$26580||High costs compared to the initial purchases invested and the resultant sales.|
|4||Dividends||$49688||Despite the company making losses it also pays dividends from unknown source.|
|5||Retained earnings||$0||The firm doesn’t have retained earnings.|
|6||Long term loan||$17000||It represents 50% of the company’s funding, which is costly.|
|7||Land and building||$8200||The company still pays higher rent|
|8||Owners equity||$3400||Equity is decreasing|
Funding is one of the key determinants of how a company will be able to actualize its future projects. Live the impossible LLC has a number of funding gaps as evident from the analysis of the entity’s balance sheet, income statement and cash flow statement. These gaps include one lack of the company attributing part of its profits as retained earnings, live the impossible llc has zero retained earnings. Retained earnings are funds usually set aside by the company for the purpose of expansion. The company thus would cut costs incurred in financing other sources of finances as retained earnings are free source of capital as the company just ploughs back its profits.
The initial inventory is also unclear on how it was funded and how the company intends to handle it in order to break even. Inventory forms an integral part of the company as the company sells inventory to realize its revenues. Models for efficient inventory handling and cutting inventory related costs are important.
Purchase of new equipment at the price of $9400 instead of leasing, for ailing company leasing would be a better option as this will minimize the cost of raising enough capital to finance capital investments. Leasing will have a positive impact to the company as the lease charges are tax deductible and the company can be able to get sophisticated equipment at the lessor’s cost in the event of change of technology. Thus increased expenditure of capital nature will inhibit the company from future expansion.
Advertising forms a proportionate part of the company’s expenses thus adversely affecting the resultant net profit thereof. Advertising is very integral in growing the company sales as it creates awareness of the company products. However, the advertising costs for the year are higher the resultant purchases, yet the resultant sales are not pretty high. It is uncertain whether the advertising expenses matches the resultant sales and thus resulting to funding gap.
Payment of dividends by the company of $49,688 to its shareholders also poses a funding gap. Dividend’s proceedings paid could be ploughed back to the company investments as the company has not yet broken even. The amount of dividends paid is almost three times the initial capital outlay by the shareholders and thus it can be viewed as wrong decision. The company having made a loss spends a substantial amount to pay to its stockholders. As a result the entity is likely to the spend the borrowed capital to distribute to its shareholders.
The company has also spent a high proportion of its earnings to amounting to a total of $22330 finance for its long term debt. These poses a funding gap as the bank loan is equivalent to its paid up capital. As a result, this poses a huge risk of control by creditors in the organization as a result of the high gearing ratio. The company as a result can opt to raise more capital by either issuing new shares to the potential investors or by issuing rights to the existing stockholders to raise more capital and avoid dilution of shareholding.
The amount of stockholders’ equity seems to be decreasing from the initial capital outlay. These may depict that investors might be withdrawing their initial capital as a result of either loss of confidence in the venture or for any other reason and thus a funding gap.
Medina, R. G. (2007). Sources of Capital. In R. G. Medina, Business Finance’ 2007 Ed. Rex Bookstore, Inc., 2007.