LITERACY OF FINANCIAL AND ECONOMIC MATHEMATICS

Outsourcing for Small Business Enterprises (SME) is critical whether the company has to focus on its core operations. As a result, non-strategic core areas are assigned to specialized organizations with the necessary know-how and expertise. Outsourced enterprise functions such as information management and other interrelated activities are among the corporate facets that are best used. Globalization has resulted in the integration of world economies on different stages, which are interdependent and function in tandem to achieve economies of scale. Companies in the United States and Europe, for example, outsource their contact centers to Indian businesses (Forey, 2013). India has readily available labor that is cheaper in contrast to creating an in-house call center or contracting local firms (Forey, 2013). Through outsourcing, the company gains access to low cost labor while the Indian employment rate and foreign exchange income increase (Forey, 2013). Outsourcing results in a significant economies of scale through transference of functions that would cost the company in terms of time and resource allocation; hence reducing overall profitability. It is relatively easier to find more qualified specialists at lower costs outside the firm (Vagadia 2012, p.78). This can be achieved through advertising the enterprises requirements and inviting bid offers.

Meanwhile, outsourcing save the enterprise a significant amount of time which would have been used up by employees trying to execute tasks which they may not be fully qualified for; furthermore, outsourcing frees up critical time for employees to concentrate on essential duties. In so doing, the businesses are able to acquire knowledge and resources that are not readily available in the enterprise; moreover, the outsourced function could be a periodic function. Therefore, outsourcing ensures that the businesses retains human resources that are critical to its core operations while avoiding additional costs in employing more people, whose jobs may arise periodically; therefore, wasting resources in periods when their services are not required (Vagadia 2012, p.78).

Outsourcing enables businesses to access the most updated, high-end and world class services; thus, the businesses operations remain relevant to changes in the market and industry. Outsourcing enables an enterprise to remain relevant while being innovative through the creation of optimal environments for its core employees who are provided with up-to-date services. This improves the firm’s competitive advantage since its functions and operations adapt to changes when and where they occur through development, training or information technology.

In some instances, businesses are overwhelmed in executing its operations significantly in fast growth environments. In light of this, Outsourcing offers the optimal solution by taking over overwhelming sections of the enterprise. In so doing, businesses are able to handle overflow situations as they continue to grow their businesses. As such, outsourcing helps these firms to meet market demands through expedited service delivery and meeting deadlines. Moreover, Outsourcing companies and businesses inherently share operations risks; therefore, the risk burden is significantly reduced for the businesses (Vagadia 2012, p.84).

Businesses are constantly expanding their operations as a result of incremental demand for their products and services in the market. As such, it is critical that their core competencies are not left to lag behind as a consequence of significant attention being given to non-core competencies. Therefore, outsourcing offers a solution to the management of non-essential functions in a cost effective arrangement between the outsourcing enterprise and the businesses. Additionally, in the event that an enterprise is overwhelmed with its operations, outsourcing some functions make business management and expansion processes to be easily manageable. As such, while some enterprises may not recognize the impacts of outsourcing, its contributions towards the progression of businesses are critical.

Question 2

An increase in the rate of inflation from 1.8% in January to 2.3% in February 2017 is an indicator that the government’s monetary and fiscal authorities are failing in executing their policies effectively. Inflation is essentially a variable that raises concern of economic underperformance. Though each economic policy has one or more trade-off, it is prudent to determine whether the benefits of decreasing the inflation rate exceeds associated costs. Most countries have experienced varying levels of inflation (Hall and Lieberman 2012, pp. 468); however, a significant number of suffered relatively low inflation rates. In situations where the inflation is moderate or low, attempt to minimize it further may result in fewer benefits and more costs especially in cases where traditional monetary policies are only instruments applicable in mitigating its impacts.

Moderate inflation may not have any significant implications on an economy’s growth. High inflation and hyperinflation have been directly linked to low economic growth. In some instances, moderate inflation is often complemented by a rapidly growing economy. However, the macroeconomic impacts of inflation varies from country to country. The increase in inflation from 1.8% in January to 2.3% in February is unexpectedly high considering the period of one month gap. These National Statistics’ Consumer Index (CPI) figures suggest a volatile inflationary trend. An economic environment characterized by high inflation results in a commensurate cost of capital for businesses. Consequently, the occurrence of high interest rates may present significant challenges in economies especially if there have been extensive borrowing (Hall and Lieberman 2012, pp. 471).

An increase in interest rates may result in firms filing for bankruptcy since they may be carrying large amounts of short term debt that requires refinancing at extremely high costs of debt. Creditors and individuals holding nominal financial instruments including loans and bonds are affected by such an increase in inflation rates. In the periods that inflation is rife, financial assets are held considering that their distribution among the population is less equitable in contrast to income. Therefore, inflation affects both the wealthy and poor; however, the degree and scope of its impacts varies significantly. The high inflation rates have made it significantly difficult for ordinary citizens to meet their normal subsidy requirements. The combination of low wages and inflated food prices has contributed to the increasing poverty levels. Among the factors that contribute to inflation include rising global oil and food prices, depreciation of the local currency and local supply bottlenecks. These can cause the occurrence of intensive inflationary pressures.

A country’s economic policies must ensure that the benefits of sustaining a lower inflation rate are offset against the costs. While the costs associated with inflation vary depending in the methods employed in fighting it; however, in spite of the strategies employed in fighting inflation, it often results in an increase in unemployment in the short term or a risk of low growth rate in the medium term.

A rapidly increasing inflation rate as indicated by the CPI may impair economic efficiency. In addition, the use of stringent monetary policy may be equally damaging if used to fight such a high inflation. The implementation of high interest rates as a basis for mitigating the impacts of inflation may result in widespread bankruptcies considering the large amounts that are leveraged (Hall and Lieberman 2012, pp. 363). Dependence on monetary policies to solve inflation problems and stabilize the economy may result in a high variability of interest rates. Excessively variable and high interest rates result in expensive funds; hence, firms may opt to look for other sources of financing while avoiding debt. Governments must ensure that economic policies are fairly balanced to prevent a situation where they solve one issue and exacerbate others. Among the measures that can be taken to mitigate inflation problems include a focus on the currency and management of exchange rates.

Question 3

In order to satisfy the demand for a product or service, businesses must be able to supply their goods or services on demand. Consequently, they must be in a position to supply essential products and services in order to meet all the demand (Becker 2011, pp. 5). As such, the unavailability of various services or goods leads to unsatisfied demand; hence the elasticity of demand and supply is affected. Consumers of various products and services are influenced by existing market dynamics and trends. Businesses including supermarkets such as Sainsbury, train services such as London Underground and restaurants such as McDonalds are highly influenced by the forces of demand and supply.

Demand and supply can be either elastic or inelastic (Becker 2011, pp. 73). Elasticity refers to the degree in which price influences change in demand or supply. For instance, if the price of a product in Sainsbury supermarket influences a corresponding change in its demand, then it can be described as elastic. However, if the change in price of a product does not result in a corresponding change in demand, then it can be described as inelastic. For instance, a change in the price of tickets for the London Underground train will not affect the demand for train services. The demand for such services is inelastic since commuters must reach their destination and there may be no alternative train services that act as substitutes.

In any given free market economy, there are diverse products and services that compliment or substitute each other. The availability of substitutes in the market influences demand and supply of a given product (Becker 2011, pp. 31). If the price of a product or service that has a substitute increases, then the demand for the product may be affected significantly. For instance, restaurants such as McDonalds sell burgers that can be substituted by those sold by competing restaurants such as Burger King, KFC and Taco Bell among others. Since there are readily available substitutes in the market, an increase in the price of a food product at McDonalds will result in a decline in demand. However, substituting or similar products sold be competitors will experience an increase in demand.

Various factors contribute significantly in the determination for demand and supply of health care services or products and have the potential to influence the market. The demand for product and services is gradually increasing as a consequence of the public perceptions, expectations and experiences. The economic reality of increasing demand for essential products or services and declining supply has created a viable market for substitutes.

Economic factors such as the cost of supply and access to services have a direct impact on the prevalent demand. In the case of specialized services such as healthcare, policy issues such as the availability or lack thereof of insurance have a direct impact on client’s ability to services. Therefore, the unavailability of insurance lowers a client’s chance of accessing coordinated, specialty or referral services (Becker 20110. As such, demand becomes quantitative leading to reduced pricing for certain services and products. Significant changes on value-based systems and payment systems are essential in facilitating a comprehensive understanding of the dynamics inherent in demand and supply; therefore, alleviating the capacity of businesses to meet their customers’ needs. A business can increase the price depending on market demand and supply conditions. In the event that the demand increases, the price will gradually increase in the long run and enable the firm to reach equilibrium and make profits (Becker 2011, pp. 89). On the other hand, market demand may decrease leading to a decrease in prices. This will result in the firm making more losses and force an exit from the market.

Question 4

Accounting and finance concepts of planning and control, financial statements and capital budgeting have a significant impact on the ability of managers to make financial decisions that impact the firms survival. Finance as a function establishes and monitors an organization’s strategic goals that are comprehensively integrated and coordinated. As such, the firm is able to operate effectively and optimally (Peterson and Fabozzi 2004). Financial statements aid managers in determining whether the firm is performing as per expectations. They are used to determine whether a company’s finances are sound and demonstrates the efficiency of available financial resources and their application in generating cash for operations and investing. For instance, the income statement demonstrates whether the business generating profits or underperforming resulting in losses. Meanwhile, the cash flow statement aids the management by presenting the net cash available after the deduction of investments (Peterson and Fabozzi 2004). Financial statements provide critical metrics that contribute in making decisions such as capital expenditure and implementation of business projects.

Financial planning and control contributes through assessment of data and information for efficient management of financial resources. These functions also allow managers to manage assets adequately such as current assets that include inventory, receivables and cash, and current liabilities comprising of payables and accruals. In addition, planning and control enables management to effectively manage the cash conversion cycle and working capital (Peterson and Fabozzi 2004). Asset management is vital especially in situations where operating performance lags behind benchmarked firms in the industry.

Accounting processes are critical in the management in making finance based decisions that contribute in adding economic value to the organization’s assets. Accounting identifies optimal strategies that are applicable in reduction of business risk and enhancing the organization’s bottom-line. Managers are able to make decisions towards the expansion of business operations that enhance the organization’s economic value and deploying mitigating strategies that off-set issues that affect the firm’s value (Peterson and Fabozzi 2004). Economic-valued added objectives are integrated in management practices to ensure that business value contributions are effectively assessed and enhance resource allocation processes.

Capital budgeting has a significant role in managerial decisions especially in making financing and capital-based decisions. Managers require comprehensive data and information for finance and capital decisions (Pandey 2015). For instance the determination of a firm’s capital structure requires capital budgeting; hence, the management can have critical information such as determination of cost of debt and capital. In addition, the determination of the optimal capital structure demonstrates a firm’s borrowing capacity and which source of debt or financing is suitable. Firms often are faced with investing decisions that require strategic assessment to determine their viability or profitability (Pandey 2015). Capital budgeting helps managers to make investing decisions through the determination of whether an investment is worthwhile or it may cause the firm to suffer losses. Managers are able to determine the present value and future value of potential investments while taking into consideration a number of factors such as cost of capital and taxation.

The survival of the firm is dependent on the ability to detect and identify potential risks that may impair specific or overall business functions. Therefore, accounting, financial planning and control, and capital budgeting are some of the functions that are used to identify and measure the impacts of financial decisions on business continuity (Finch 2010). It is prudent to deploy measures that identify and mitigate risks that are associated with issues such as regulatory compliance, corporate governance and economic related challenges in the industry. Managers must ensure that financial resources are adequately insulated against such risks through implementation of processes that mitigate the cause and impacts of such threats (Finch 2010). Identification and elimination of threats to the business can be achieved through comprehensive adoption of best practices in accounting and financial management.

Question 5

Business loan of $ 40, 000 to be repaid in 3 equal instalments at the end of each year for 3 years at an interest rate of 6%.

Loan payment –amount/ Discount factor

6% per annum; 3 years

Amortization Schedule

Year

Year 1

Year 2

Year 3

Total Payment

14,964

13655.56

12062.8

Principal

12564

12153.4

11380

Interest

2400

1502.16

682.8

Total Interest

2400

3902

4584.8

Loan Balance

25036

11380

Gary to pay himself $800 each year for the next three years. Interest rate per year is 6%.

Future value =present value* (1+i)^n

Present value = FV/ (1+i)^n

In the case of an annuity

Present value of an annuity = PMT x ((1 - (1 / (1 + r) ^ n)) / r)

Where P is the present value, PMT annuity amount, R the interest rate and n the number of years.

=$800*((1 - (1 / (1 + 0.06) ^3)) / 0.06)

Present value =2138.41

Gary should deposit $2,138.41 to accomplish his goal.

Net present value

Project A

Initial cash: 50, 000; discount rate =7.35%

Year 1-5, period cash flows 18, 000 each period.

NPV =18000* {(1 - (1 + R)-T) / R} – 50, 000

=NPV=23, 117.04

Present value of expected cash flows = initial cash+ NPV

=50000+23117.04

=$73,117.04

Project B

Initial cash=50,000

Cash flows year 1-4; 0. Cash flows year 5=99,500. Discount rate =7.35%

NPV =19793.16

Present value of expected cash flows = initial cash + NPV

=50,000+19793.16

=$69,793.16

The optimal project that should be chosen is project A because it has a higher present value of 23, 117.04 in contrast to project B which has a net present value of 19,793.16. Project A will generate additional $3,323.88. Hence, it should be implemented.

References

Becker, G. S. (2011). Economic theory. London: Transaction Publishers.

Finch, B. (2010). Effective financial management. Philadelphia: Kogan Page Publishers.

Forey, G. (2013). The impact of Call Centre employment on women in India. World Englishes, 32, pp. 503–520. doi:10.1111/weng.12058

Hall, R. E., and Lieberman, M. (2012). Macroeconomics: Principles and applications. Sixth Edition. Mason: Cengage Learning.

Pandey, I. M. (2015). Financial management. 11th ed. New Delhi: Vikas Publishing House.

Peterson, P., and Fabozzi, F. J. (2004). Capital budgeting: Theory and Practice. New York: John Wiley & Sons.

Vagadia, B (2012). Strategic Outsourcing: The Alchemy to Business Transformation in a Globally Converged World. London: Springer.