Finance Paper on Financial and Legal Aspect of Procurement

Financial and Legal Aspect of Procurement

Introduction

The legal framework upon which a business is allowed to operate has very significant impact on the daily acquisitions done in the firm. Before doing any business operation with any firm it of utmost essence that one understands the contract laws so as to be able to access any future risks or pitfalls that the enterprise deal might land them into risky deals. The legal aspect of procurement would help individuals or businesses to hire the necessary expertise advice that would help to mitigate such. On the other hand, all businesses always come up with ways of controlling procurement decisions. This is because the growth of the businesses relies wholly on purchase decisions made by such companies (Akintoye et. al 461-464). This assignment studies all the financial and legal aspects of procurement with an aim of having a smooth running of any business.

Financial Statements

Financial statements are considered in business as approved record of the financial undertakings in business. These records are usually presented to the relevant persons in forms that can be easily comprehended. In all situations, they are usually structured for ease of making conclusions. The financial reports include statements such as balance sheet and various cash flow statements (Akintoye et. al 464-467).

The financial statements aim to give a clear picture of the monetary status of the business entity. It also provides critical for making business information especially those about the business viability and changes in the financial status of the firm. It is therefore of utmost importance for the financial statements to be of absolute relevance. Moreover, the statements should be so much reliable and easily fathomable. The statements should in brief and concise manner give the report of the assets, incomes, liabilities, equity and expenses incurred in a business organization (Bajari, Patrick and Steven 387-401).

Balance Sheets and Cash Flow Statements

The balance sheets are prepared at the end of every fiscal year. Before the presentation of the balance sheets, the business will have to prepare cash flow statements which evaluate the levels of losses and profits made with every transaction. Moreover, the cash flow statements provide information on investments and financing received for a particular period (Bajari, Patrick, and Steven 401-407).

Table I: Sample balance sheet for the previous year

Assets Liabilities
Fixed assets                                        500 Creditors                                                 200
Stock                                                  100 Loans                                                        650
Debtors                                               300 Shares                                                        100
Banks                                                  300
Total                                                  1200 Reserves                                                    250
 

Total                                                         1200

 

Table II: Sample balance sheet for the current year

Assets Liabilities
Fixed assets                                            700

Stock                                                       130

Creditors                                                 300

Loans                                                      230

Debtors                                                    250 Shares                                                     150
 

Total                                                      1080

Reserves                                                  400
Total                                                       1080

 

All changes that would occur in the above balance sheets would be indicated by the cash flow statements. Apart from showing the above mentioned, the cash flow statements would also split down the analysis of a business operation into either activity of investment or the activities that bring in finances. In a nutshell, one would conclude that the main aim of the cash flow statements is to look into the movement of money into or out of the business. While doing this, the statements would give considerations to the outcomes of the current operations and any changes that might come in with such operations and affect the balance sheets. To make it clear, cash flow statements are used in business so as to determine the sustainability of a particular business within a short period of particular interest to its ability to pay its bills (Caldwell et.al 178-182).

These statements are of major interest to a particular group of people in every business setting. These people may include shareholders of the ventures who keeps on monitoring the net worth of their shares so as to avoid making future losses that might arise due to the depreciation of their shares net worth. Moreover, the information is valuable to potential suppliers as they always need an assurance as to whether the business would be in a position to pay for all the goods supplied in time so as to avoid inconveniencing them. Also, this information would be useful to personnel in charge of accounts. These are the people involved in the procurement of all goods in the business. For this reason, therefore, they need to have a critical analysis of the flow of money in the firm so as to be to make an informed decision when making the purchase of any particular good or services. When they make a wrong decision the business would risk rubbing shoulders with its suppliers especially at the point of payment since it might have made losses (Caldwell et.al 182-186).

Breakeven Point

Break-even is the point at which the business statements balance resulting in neither a profit nor a loss. At this point of break-even, the revenues and expenses are believed to be equal. Despite the fact that opportunity cost was paid and risk-adjusted on capital has been received, no profit or loss is made. Graphically this would be presented as the point where total costs curve and total revenue curves intersect. In the field of financing, the cost implication would not be included in the calculation of the break-even points. The best way to determine the break-even point would be by the use of the formula of value added breakeven analysis. This formula is of great essence in a determination of the feasibility of projects undertaken (Akintoye et. al 465-467).

A sample breakeven point for the previous and current year would consist of a chart with output on the x-axis and revenues would be indicated on the vertical axis. Using this information, a variable cost line is then constructed. The line drawn would indicate the total cost. It is important to understand that the total cost would be determined by summation of the variable cost and the total cost (Caldwell et.al 182-186).

Marginal Costing

The change in total cost that arises due to increment on quantity usually produced per unit. In simple terms, it would be defined as the cost incurred in producing one extra unit. Any extra cost needed so as to make the extra unit. For instance, if in a company to produce a certain product there would need to purchase new machinery, therefore in the company, the marginal cost of that product would incorporate the cost of acquiring the new machinery. The analysis of marginal cost is usually broken down into short term, and long term cases but the overall marginal cost would be the long term calculations (Bajari, Patrick, and Steven 404-407).

Marginal cost would also be considered as the variable value that comprises both the prices of materials used and the labor employed to have the work done. In large companies, it is not a surprise to learn that the marginal cost would be almost equal to the average cost of production. This difference would, however, vary depending on the amount of capital invested so as to start the business. During the resource allocation in the businesses, it would be of utmost significance to employ the concept of marginal cost. The management is always advised to channel much of the resources to those areas in which the marginal revenues exceed the marginal cost with the widest margins. This kind of a decision is in all situations referred to as differential cost or the choice cost (Caldwell et.al 182-186).

Marginal cost is well understood by looking at the balance between output volumes and the cost of every unit. The cost per unit is considered to be directly proportional to the output of such quantities. The marginal cost has to be ascertained by considering both the fixed and variable costs that are incurred in the business. The following example would explain the minimal cost: if a company produces ‘A’ unit at a cost of $450 and ‘A+1′ units at a price of $500, then the marginal cost would be the difference between the two costs which is $50. In simple terms, marginal costing is the process of presenting both fixed and expenses in a data sheet. It is so much essential in examining the costs of products or services in a particular business (Akintoye et. al 465-467).

Cost Models

To determine the cost of goods, numerical parameters are used, and these parameters give rise to cost models. The outcome of such models has to be factored into the plan of the business. In modern business, the algorithms for factoring out the business models are already computerized as opposed to old day’s business in which the calculations were being done manually. Based on the nature of the firm, these models can either be proprietary or standardized. Parameters included in the cost model must indicate the products attributes. These models would, in the long run, provide the resources needed for estimating cost and time (Akintoye et. al 465-467).

The cost models help buyers make important decisions when doing purchase since; they provide information on the prices paid and amount thought to be the fair price. Customers understand so well that cost of a product is the most important part of any business deal. The cost models would clearly show the possible changes in pricing of goods for any business deal. Cost model would help estimate the overall financial benefit, and it can be determined as follows: first cost models can be developed by using cost methodology selection. This method would focus on parameter estimation. Cost models would also be created through cost breakdown structures development. According to this approach, there should be no overlap in the cost of products to be sold (Caldwell et. al 182-186).

So as to develop a cost model it wise to recommend a top to down methodology using and by employing five basic principles of cost modeling. The key objective of these cost models is to pass information throughout the organization about the value so as to ensure every employee understands the significance of improving the costs (Caldwell et. al 182-186).

 

Primary cost driver

Based on the information provided in exercise eight, the primary cost driver of the business is the recruitment of staffs which consumes up to about 33% of annual income though it is estimated at 20% per year. To determine the cost levels of the recruited employees, it is of utmost importance to understand their job groups and levels of expertise. This would aid in the determination of the cost of each of employee and avoid blanket payment of staff. The cost spent on suppliers is also key though it was expended in the previous fiscal year (Akintoye et. al 461-464).

To know the information on job levels of employees their work experience and levels of expertise is being evaluated. This information must be provided by every personnel recruited. The information is of an essence in making critical business decisions especially those related to payment and job description in the business premises. If the information on employment level is obtained, the business owners would be able to control cost paid to the employees, and they would similarly be able to reduce the cost spent on the recruited staff (Caldwell et.al 182-186).

Competition is a healthy thing in any business dealing. It is however considered unethical to invite a few suppliers to give their quotations and consider such a scenario a competition. To best improve game there is a need for the business owners to be highly unpredictable. This would help the business to identify the best supplier as both the potential suppliers are not aware of the expectations of their client, and thus they all strive to deliver nothing less than the best. Moreover, if so many providers are invited to give their quotation, the business would have a broad range of choice. On the other hand, the potential suppliers would view the competition as being healthy since they are many, and each one of them is given an equal chance to secure the business deal (Akintoye et. al 461-464).

There are various approaches to improving the competitive levels of the suppliers. To survive the competitive environment, the potential suppliers would use the following strategies: first, they would employ the cost leadership strategy method. In this approach, they strive to produce products or their services at lower costs as compared to those competing with them. They, however, fight to maintain the quality of their provision or even to make it better than the quality of those competing them. Doing this would enrich them with the advantage of receiving higher profits which would be positive implications on the growth of the business. Their competitors, however, would be experiencing lower profits which result in a low growth rate of their companies (Caldwell et. al 182-186).

Another approach that would be useful in ensuring successful competition among suppliers would be that of adopting a generic strategy of the game. This would involve a clear view of the cost leadership with a differential focus. This approach is so useful in gaining and improving the competitive advantage that would, at last, be enjoyed by the business in question. The path leads to a comparison of the benefits to be enjoyed by the various businesses. The differences in the advantages the company would enjoy makes one supplier or business to be placed in a better position than the others. Thus such a company would be favored by competition; however, stiff the competition might be (Akintoye et. al 461-464).

On the other hand, an approach of differential advantage would also be useful in the business. According to this approach, the products supplied by the firm look different to similar competitors. For a company to make the best informative decision they will have to do an intensive research and serious critical thinking. The best decision would give the company best profit making a choice that would later lead to high levels of profit to the firm. The consumers would be more than willing to pay an extra cost for any kind they realize different from the rest in the market (Bajari, Patrick and Steven 404-407).

The final approach is that referred to as the focus strategy. This method involves the business putting their aims at a few known potential markets instead of looking for every supplier in the market. The approach is practical for firms that are starting in the market. This is because such companies lack a broad range of resources that would enable them to target all the potential suppliers that are available in the environment. They would also employ this method since they are limited by both geographic and demographic factors due to their small size. The ultimate aim of this approach is to ensure that the business meets the urgent need of the consumers available in the market (Akintoye et. al 461-464).

The primary objective of any business is to get a perfect balance between the quality of services or goods they produce and the cost of providing the services or the cost of producing goods. Their products and services must focus so much on offering high value through quality or the price with which it is tagged. The most successful businesses are those that are capable of providing high values for their services and goods in the competitive business setting without compromising on the quality or the profit to be received by the firm. The company managements, therefore, have the obligation of making the most profitable decision to ensure the growth of the company always with an increase in profit margins and the size of the enterprise. (Bajari, Patrick and Steven 404-407). The success of the business relies heavily on the choice of supplier settled on.

Standard T and C of Purchase of Major Middle East Organization

The intention of the buying company in this clause is to attract potential suppliers of the product needed. However, the clause provides information on the conditions of the tender as far as the bond is concerned. The tender relationship in this paragraph is considered to be the security against the withdrawal in case of failure to comply with the terms of the offer. Defining the provisions of the offer as done by the buying company in this clause is of utmost significance (Bajari, Patrick and Steven 404-407).

This kind of a mandate of a bid advertisement has both its merits and demerits. Some potential suppliers would see this name as a pre-qualification notice. This is highly disadvantageous as it would scare some of the vendors who might have provided the services or goods of the highest quality while at the same time offering lower prices. The supplier would fear to acquire a tender with such a clause because of fear of defaulting to comply with the terms and conditions of the offer (Akintoye et. al 461-464).

The suppliers are also not able to predict any accidents that might occur to their businesses and thus having such stern statements as part of tender advertisements seriously scare those suppliers since accidents are inevitable in a business setting. Due to these disadvantages, most businesses would scare to acquire such tender contracts and so only a few companies would enroll for such bids. With few suppliers, there would be reduced levels of competition and so the quality of the goods or services provided might be highly compromised in such a situation. On the contrary, such a clause is of utmost importance to the business looking for suppliers since the best business deals involve in most cases a clearly written agreement. With such an agreement, the company will not risk anything and stands to be compensated in case their contract does not come to maturity. The compensation is for time and energy wasted while entering into such deals. Moreover, this would be a good way of earning profits (Bajari, Patrick and Steven 404-407).

 

Conclusion

To be able to have a smooth running of any particular business and later have maximized profits it is essential for the business owners to understand both the legal and financial aspects of the firm. The legal dimensions of the business define the rules with which the company uses so as to have a smooth operation with its suppliers and customers. The financial aspects, however, project the business does the cost implications of any sales or purchases for the given period. To evaluate the cost implications, a business venture has to have clear book keeping records and statements that evaluate the probable profits or losses. This information is useful in making most of the purchase or sales decisions in the business. These aspects of the firm must also be well understood by shareholders or business owners since the company runs due to the investment of their share capital.

 

Bibliography

Akintoye, Akintola et al. “Achieving best value in private finance initiative project procurement.” Construction Management and Economics 21.5 (2003): 461-470.

Bajari, Patrick, and Steven Tadelis. “Incentives versus transaction costs: A theory of procurement contracts.” RAND Journal of Economics (2001): 387-407.

Caldwell, Nigel D., Jens K. Roehrich and Andrew C. Davies. “Procuring complex performance in construction: London Heathrow Terminal 5 and a Private Finance Initiative hospital.” Journal of Purchasing and Supply Management 15.3 (2009): 178-186.