Identify how firms raise funds through the use of debt, equity, and retained earnings.

Summary of Client Needs: SmartClean, Inc. is a cleaning service for office and industrial locations that has been in business for five years. The company has shown steady revenue growth each year and the owner is now looking to expand the business into three new territories. In order to make this expansion, the owner is seeking an additional $50,000 in capital. The expected fixed costs for the current business and expansion is $75,000, while the average charge per job is $250.00 and variable costs per job is $35.00.

Advantages and Disadvantages of Debt Financing: Debt financing refers to borrowing money that must be paid back with interest. One of the major advantages of debt financing is that it allows a business to maintain control and ownership. Additionally, the interest paid on debt financing is tax-deductible, which can lower the overall cost of borrowing. Additionally, debt financing can provide a fixed payment schedule, which can be beneficial for budgeting and forecasting. However, one of the major disadvantages of debt financing is that if the business is not able to make payments on the debt, it can lead to default and potentially bankruptcy. Additionally, if the business takes on too much debt, it can become financially overextended and struggle to meet its financial obligations.

Advantages and Disadvantages of Equity Financing: Equity financing refers to the sale of ownership in the business in exchange for capital. One of the major advantages of equity financing is that the business does not have to make fixed payments and is not at risk of default. Additionally, equity investors can provide valuable connections and expertise to the business. However, one of the major disadvantages of equity financing is that the business must give up a portion of ownership and control. Additionally, equity investors may have conflicting goals and priorities with the business, which can lead to tension and disagreements.

Recommendation for a Financing Strategy for SmartClean: Based on the information provided, it would be recommend for SmartClean to consider a combination of debt and equity financing. By using a combination of financing methods, the company can take advantage of the benefits of both debt and equity financing while mitigating some of the disadvantages. SmartClean could obtain a loan of $50,000 from a lender or bank based on the owner’s good credit history and remaining $10,000 on the current loan. Additionally, the company could also raise $50,000 through the sale of equity to investors. This way, the company would have access to the capital needed for expansion without giving up complete control and ownership of the business.

Complete breakeven analysis: A breakeven analysis is the point at which a company’s revenue is equal to its costs. In order to determine SmartClean’s breakeven point, we need to consider the fixed costs and variable costs associated with the business.

Fixed costs: $75,000 Variable costs per job: $35.00 Average charge per job: $250.00

To calculate the breakeven point we divide the fixed costs by the difference between the average charge per job and the variable costs per job:

$75,000 / ($250 – $35) = $75,000 / $215 = 351 jobs

Based on this analysis, SmartClean would need to complete 351 jobs in order to cover its fixed costs and reach the breakeven point. This means that if the company completes more than 351 jobs, it will be generating a profit.

In conclusion, we have highlighted the advantages and disadvantages of debt and equity financing, and recommended a combination of both for SmartClean.