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Importance of Limited Leverage to a Business - Paper Example

Date:  2021-05-26 03:03:53
4 pages  (850 words)
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Limited leverage help owners of businesses to acquire wealth with other peoples money. Projects set in business generate income which is the payment for an entrepreneur and the capital used to in the investment. In a case where there is insufficient capital, Leverage helps a business person run a project and pay part of the earnings as interest for the borrowed money. The surplus is left to the borrower as their income. Leverage helps in boosting returns and expanding a business that would have otherwise stalled because of lack of capital. It ensures that business people do not understand quite their investments as a result of insufficient capital. At times of financial crisis caused by low cash flows, leverage helps investors avoid having bad debts that may lead to the liquidation of the enterprises especially during temporary difficulties. The temporary problems may result because of a delayed payment from a client or emergencies not anticipated like a breakdown of a plant in a manufacturing firm. Also, leverage helps business save on taxes because interest paid is usually an allowable expense. Reduction in tax expense is a cost-minimizing strategy and helps ibn achieving a business objective.

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Why it is Inappropriate to Approach Bank Manager of his Wife

Bank managers are employees of the institution and have duties they must fulfill including remaining ethical. Contacting them personally when one needs to receive services of the bank puts them into a dilemma and makes their work hard in looking for ways of offering the best service and remain professional. For one to give a friend who is a manager in a bank peaceful time to work, they should not ensure that they follow the right channels to get services and follow the proper procedures. When one uses the correct procedures, they protect the jobs of their friends as well as ensuring they would not do something that is unlawful and they remain ethical. Also, bank managers are employees who can become transferred to another branch and work that was in progress during the period of transfer should be completed in their initial workplace before changes took place. Making services offered by a person as an individual but not as per their position usually is affected by such changes. Therefore, it is ethical from Frank to follow the right procedure to get a loan and remain ethical in all his processes.

Profitability of the Investment

Investment in the truck is profitable because the earning it would have are less than the returns that it would generate. The truck is replacing an existing one that has been operating, and the incremental cost that would rise from the investment would be the interest arising from paying the loan. On the other hand, already the business has market and popularity showing that the possibility of the truck remaining idle after investment would be low. The investment will attract some tax saving if the vehicle is acquired on loan. The lower taxes paid would increase the amount of profits generated because of low profits.

Should Frank Close the Business

It is more beneficial for Frank to remain in the business rather than looking for employment. As a self-employed, he has freedom and independence in his working time. Also, he has already established a good market with many customers who returns to his businesses. Quieting business for employment would hurt his reputation for future operation of business. His passion would not be achieved when in job something that reduces his personal fulfillment and affects his lifestyle because of the lack of control that arises when one is employed. Employment would further reduce Franks ability to serves more people as would wish because he would have restrictions on what he would do. His lifestyle would have to change to suit the employers objectives and demands, something that he is not used and therefore to keep it; he needs to remain in business and avoid employed. On top, while operating a business, he has a higher chance of earning more depending on the performance of the enterprise and the efforts he puts in the business. When employed, the income one gets is well defined and limited as per the employment contract signed by the employer. Therefore, being in business is more beneficial than employment regarding personal satisfaction as well as possible financial gain.

How to Handle the Situation

In this situation, I would work hard to convince Frank to remain in business and continue serving his customers for personal fulfillment. I would ensure he understands the benefits of operating a business with a loan to up to a specified amount and how there is a high possibility to grow and develop the enterprise with a combination of debt and equity capital. On the process of taking a loan, I would ensure Elena see the risk involved in using other channels other than the stipulated one in acquiring a loan and other financial services. I would ensure that she understands the importance of holding ethics in all activities involving a business because it would help avoid consequences that may arise such as litigation and poor reputation.

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