BBPW3203 Financial Management ll Behard Intermediate Financing

Introduction

Berjaya Food Berhad

Berjaya Food Berhad was established on 21^st October 2009.  The company underwent a significant change in the year 2009 by transforming the status to a public limited company and on 8 March 2011 the company was included and given a place in the Bursa Malaysia Securities Berhad.  The Berjaya Roasters Sdn Bhd was reformed as a fully owned subsidiary of the BFood section in January 2011. This happened as the company was previously included in the main market list of Malaysia.

The Kenny Rogers Roasters chain of restaurants in Malaysia is dependent on the BRoasters in terms of management work and to carry out important activities. In the year 2011, when the BFood company went under a compromise agreement with the PT Mitra Samaya, Indonesia, PT Harapan Swasti Sentosa and PT Boga Lestari Sentosa to enhance the existing branches of the KRR company and to widen it by developing it in Java Island and Bali and also in Indonesia under the supervision of PT Boga. Due to such changes the Malaysian management successfully recorded an increase of 4.2% in the economy in the starting of the year 2016 (Berjaya Food Behard, 2016). All this happened despite facing tough and rigid competition from the market due to the conditions. The company made a significant profit and the consumption witnessed an increment at a medium pace because the customers took the time to familiarize with the price rise. Further, the company undertook an effort to set up branches in the areas where the economic uncertainties happened. It is estimated that there will be an increase in the boundaries of the company with the help of the brand that has a respect and covers the main market (Berjaya Food Behard, 2016).

Unimech Group Berhad (UGB)

Unimech group was established in the year 1996 as a private limited company. It contained limited no of shares due to the Companies Act, 1965 as Unimech Group Sdn Bhd. The company was soon transformed into a public company with the same name as previously on 8 November 1996.

 The major activities of the company include designing, fabrication, and installation, testing of different parts which are used for steam generation, heating, combustion, fluid works and also for piping. The company also looks after the overall management of the equipment parts and its services (Unimech Group Behard, 2016).

UGB offers advice on different pollution controls, designs on exhaust stocks and also provides monitoring and recording systems. The company is at present busy in setting up manufacturing plants and distribution centers in China as per their budget and competition in the market. The company’s management is laying full stress on the topic of better production may it be design or creating something new (Unimech Group Behard, 2016). The group is accelerating at a good speed to introduce more value-added products in the market.

Intermediate & Long-term financing

The long-term, as well as intermediate financing, have its own importance. The long term finance is generally needed by the organization when the company needs to fund its capital assets which would ultimately help in earning profits for the company (Guerard, 2013). It needs to be noted that a part of the working capital of the organization is extracted from long-term finance only. The capital assets generally purchased from long term finance are plant and machinery, land and building, etc. However, it is not easy for an organization to always go for the long term finance, in such cases organization resort for intermediate finance (Choi & Meek, 2011). The payback period of loans for intermediate finance ranges generally for 3-5 years and has a higher rate of interest as compared with long-term finance. However, it is easy for an organization to avail intermediate finance. In case the organization plans to purchase any assets n hire purchase scheme or lease financing, one resorts to intermediate financing. There are a number of formalities associated with the long-term financing whereas it is easier to procure funds through intermediate financing (Gibson, 2012). Intermediate financing is generally considered as long term finance and hence it does not disturb the working capital ratio of the organization.

Berjaya Food Behard Intermediate Financing

The intermediate term finance ranges from a period of 1 to 15 years. In short, the obligations that become due on 15 years or more are termed as long-term debt. The intermediate finance majorly comprises of term loans, lease financing, sales contract that are conditional.

Lease financing

Lease financing constitutes an important item when it comes to intermediate financing. The advantages or disadvantages accrue from the taxation structure and the access of funds by the firm. Leasing can be defined as an alternate method of financing (Parrino et. al, 2012).

From the annual report of Berjaya Food Behard it can be seen that the lease financing consists of the financial and operating lease. As per the annual report, lease financing constitutes the major form of intermediate financing. Financial lease transfers to the group any risk and reward that is connected to the ownership of the item that is leased and capitalized at the lease inception at the fair value. The payment of lease is apportioned between the charges of finance and lease liability reduction.  A finance lease is alike as the hire purchase. On the other hand, the retail stores are leased under operating leases. It helps the business to flourish and being a business that needs vast chains of restaurants, the concept of operating and financial lease helps the business (Berjaya Food Behard, 2016). The financial lease helps the business to conduct the business at a given place. As Berjaya Food Behard is spreading the restaurant chain, therefore, the emphasis is majorly in the finance and the operating lease.  The only difference is that under an operating lease, the equipment is required for a shorter span of time (Needles & Powers, 2013).

Term Loans

Under the intermediate-term borrowing method, Berjaya Food Behard has raised finance through secured term loans.  The major benefit that the company is availing through this method is that the required fund is raised for a shorter time span. On the other hand, the term loan is backed up by fixed deposits or monies that are kept by debt service reserve.  The short term loan enhanced in 2016 indicating that the organization looked forward to enhancing its base (Berjaya Food Behard, 2016).  On the other hand, the unsecured loan comprises of the revolving credit. Hence, the intermediate method comprised mainly of the lease and the term loan.

Berjaya Food Behard Long-term finance

Term loan

The company uses term loan to extract money from the market.  The term loan concept is used both in the short term and the long term.  The secured term loan of the company can be witnessed in the annual report where the loan exceeds 5 years.  Since it is engaged in the business of restaurants it uses the long-term loans to operate the business.  The secured term loan is secured by having a fixed charge on the subsidiary company (Berjaya Food Beard, 2016). Since it is an established concern, therefore; the term loan helps the business to flourish. As per the nature of the company it can be commented that long-term finance would help in the achievement of the mission and the vision. For a restaurant chain division, the presence of tenure ranging up to 25 years can help the company in getting a better prospect. The charges or the interest are deferred over a number of years and hence, this option is one of the best that helps the business to expand (Leo, 2011). The conditions that back up the usage of the long-term debt for Berjaya Food Behard includes good profit margin and expected an increment in the level of profit.

(Berjaya Food Behard, 2016)

Hire Purchase

It is an alternative that is used by the company that ranges for a longer time frame. In this scenario, Berjaya Food Behard uses the assets on hire for continuous installments. After all the installments are paid, it can be purchased by the company (Melville, 2013).  It even contains a component of interest that needs to be paid towards the utilization of the asset apart from the asset price. Therefore, going by the nature of the business that is the restaurants, this option can be considered apt because it will help the business to utilize the asset and the end of the period the asset can be purchased with ease and flexibility (Horngren, 2013). Therefore, both the option can be availed that is to avail the benefits by using it and the end of the stipulated time frame, it can be purchased.

(Berjaya Food Behard, 2016)

Unimech Group Berhad (UGB) Intermediate source of finance

Lease

As per the balance sheet of the company and the information contained in the annual report, it can be said that the company utilizes the concept of the lease to finance its activities in the intermediate course of action. Hence, the company bears all the risks and rewards in tune to it.  After the process of initial recognition, the accounting of the asset is done as per the accounting policy into practice. The company is engaged in various practices such as steam generation, heating, combustion, fluid works, and piping. Therefore, going by the nature of the company the lease of assets can be highly beneficial.  There are various assets that the company has held under lease finances that are furniture, plant and machinery and heavy equipment (Unimech Group Behard, 2016). However, it needs to be noted that the leased assets are pledged as security for the financial lease liabilities that is payable.

(Unimech Group Behard, 2016)

Term Loans

The term loan is an essential component of the company because of several reasons. Capital is a strong requirement for the company owing to a huge investment in the assets and the new projects (Brigs, 2013). Hence, the term loan is used by the company and is clearly indicated in the annual report.  The term loans are secured meaning they are backed by the assets. Terms loan can be commented as a perfect example when it comes to long term time span.  Term loans reduce the time spent and the costs are offset (Deegan, 2011).  Since ample assets need to be managed and financed therefore the company has selected the correct option of intermediate and long-term loans. Term loans will help the business to keep the momentum and the cash flow can be maintained (Davies & Crawford, 2012). Further Unimech even uses bank overdraft and revolving credit that helps the business to perform and keep the course of conduct stable (Unimech Group Behard, 2016).

(Unimech Group Behard, 2016)

Long term sources of finance

Hire Purchase

As per the annual report, Unimech uses the concept of hire purchase. However, it needs to be noted that the company uses the process of hire purchase in a segregated manner.  The hire purchase payments are broken down into three parts that are after one year, one to five year and after five years (Unimech Group Behard, 2016).  Hence, going by the profile of the company it can be said that the company requires huge assets on a continuous basis and going by the competition in the market it needs to expand. Hire purchase is a strong option for the company and has rightly used the method to procure the assets. After the installments are paid the same assets can be purchased by the company leading to the ownership. Therefore, the use and ownership both can be attained (Davies & Crawford, 2012).

Bank Borrowings

Bank borrowings are another alternative that is used by the company. Bank borrowings involve payment of regular interest to the bank. This option helps the company to utilize the funds and ensure a steady cash flow. It is a secure way of obtaining a loan.  The major benefit is that the loan is taken for a longer time span and hence, the interest is evenly spread over a number of years (Albrecht et. al, 2011).

Comparison

Going by the comparison of both the companies that is Berjaya and Unimech, it can be stated that both the companies perform in the area of consumer goods.  Going by the evaluation of both the companies, it can be said that the companies have a strong reliance on the intermediate and long-term funds because they are performing at an optimum level. The intermediate source of finance of Berjaya is backed up by term loans and lease financing while the concentration of Unimech is even on the term loan and lease. However, a noteworthy difference is that the concentration of Unimech is more on the lease as it needs to finance heavy equipment and machineries. On the other hand, the concentration of Berjaya is majorly on the term loans and less on the lease counterpart. Moreover, Unimech even uses bank overdraft and revolving credit to fund its short-term finance needs.

The long-term financing of Berjaya is done by way of hire purchase and term loans of longer tenure. Hire purchase is the standard option for the long term is majorly utilized by the companies (Albrecht et. al, 2011). On the other hand, long-term loans of higher tenure are another added advantage for the company.  Unimech uses the process of bank borrowings of long-term nature and hires purchase to inject long-term funding requirements.  Both the companies being in the same division that is the consumer goods have hardly any differences. The only difference lies in the concept of percentage utilization of the finance.

Conclusion

As per the report and discussion, it can be commented that a company can flourish when the sources of finance can be easily procured.  However, the companies need to have a strong stability or credit worthiness so that finance can be easily availed. Moreover, going by the entire discussion it can be commented that a blend of intermediate and long-term finance will enable the business to ensure stability in the market.  The sources of intermediate and long-term finance remain the same for all companies to a greater extent, however, the only point of difference is the manner or the extent in which they use the funds. The same has been highlighted through the study on Berjaya Food Behard and Unimech Group Behard.

References

Albrecht, W, Stice, E. & Stice, J. (2011).  Financial accounting. Mason, OH: Thomson/South-Western.

Berjaya Food Behard. (2016). Berjaya Food Behard Annual report & accounts 2016. Retrieved June 15, 2016 from https://www.malaysiastock.biz/GetReport.aspx?file=AR/2016/8/18/5196%20-%201718591702105.pdf&name=BFood%20Annual%20Report%202016%20-%201.pdf

Brigs, A.  (2013). Financial reporting & analysis. Mason, Ohio: South-Western.

Choi, R.D. & Meek, G.K. (2011). International accounting. Pearson.

Davies, T. & Crawford, I. (2012).  Financial accounting. Harlow, England: Pearson.

Deegan, C. M., (2011).  In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

Gibson, C. (2012). Financial statement analysis. Mason, Ohio: South-Western.

Graham, J. & Smart, S. (2012).   Introduction to corporate finance. Australia: South-Western Cengage Learning.

Guerard, J. (2013). Introduction to financial forecasting in investment analysis. New York, NY: Springer.

Horngren, C. (2013) Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group.

Leo, K. J. (2011). Company Accounting, Boston:McGraw Hill

Libby, R., Libby, P. and Short, D. (2011)   Financial accounting. New York: McGraw-Hill/Irwin.

Melville, A (2013).  International Financial Reporting – A Practical Guide. Pearson, Education Limited, UK

Needles, B.E & Powers, M. (2013). Principles of Financial Accounting. Financial Accounting Series, Cengage Learning.

Parrino, R., Kidwell, D. & Bates, T. (2012).  Fundamentals of corporate finance. Hoboken, NJ: Wiley

Unimech Group Behard. (2016). Unimech Group Behard  2016 annual report and accounts. Retrieved June 15. 2017 from https://www.unimechgroup.com/image/data/UNIMECH-AR2016.pdf