This is a HND Business MFRD Assignment in which we discuss management of financial resource and decision making in an organisation.
For an organisation to be successful in its business, it requires a number of resources which are the materials for the business processes, human resources, time, infrastructure resources and monetary resources. The most important of all the resources in an organisation is the monetary resource. There are several sources of finance for each of the organisation depending on its environment, type of process and the products or services provided by it.
LO1 1.1 Implications of different sources
Each and every financial resource has a set of implications that may cause an unfavourable situation to arise in the business processes. These implications associated with the finance sources of the telecommunication organisation are mentioned below.
The implications associated with this finance source are the interest to be paid through the tenure of the loan and the guarantee of personal assets in terms of mortgage and any other form. This means the telecommunication organisation has to pay a lot more than the principal amount it took from the bank as a loan (Manigart, 2000).
The implications associated with this finance source are the loss of control of the telecommunication organisation on several key business processes as the investors would have a major opinion about it which impacts the decision taken by the telecommunication organisation.
The implications of this financial resource are the additional interest amounts of the financing scheme provided by the government and the guidelines to be followed which are provided by the government.
Economic development organisations
These organisations also provide several guidelines and regulations under which the telecommunication organisation has to operate which sometimes cause adverse effect on the operation of the organisation (Mayer, 2005).
This source of finance has the implications of the loss of control of the telecommunication organisation. Some of the components of the assets leased to various organisations go out of control of the telecommunication organisation (Adler, 2000).
Family, friends and other private investors
The absence of any legal contract between the organisation and the investors of this type has a negative implication on the business of the telecommunication organisation. If the organisation falls short on his end of the deal, then the relationship between the friends and family members are affected in an adverse way (Will, 2001).
LO1 1.2 Evaluation of the appropriate sources of finance
There are several factors which help the telecommunication organisation to evaluate the appropriate sources of finance for the particular project. The factors which can act as the basis of evaluation of the finance sources of the organisation are mentioned below.
- Relative ease of using the finance resource to start cash flow into the organisation is the major factor that defines the usefulness of the finance source. In this case, the telecommunication organisation is planning for a project which aims to implement next generation communication media in the country. The most readily available finance source for the organisation is the loan from a bank which is followed by the government bond and economic development organisations (Mayer, 2005).
- The cost of accessing the source of finance is another factor that can define the usefulness of a finance source. In this case, the telecommunication organisation is a start-up organisation which can’t sell its assets due to lack in credibility. This causes the organisation not to use the angel equity source of finance.
- The control of the assets and dilution of equity are the factors that define the inability of the telecommunication organisation to lose control of its assets. The telecommunication organisation basically can’t afford to lose any control over its assets as it is a start-up organisation. This helps the organisation to evaluate angel equity and smart leases sources of finance as weak sources (Will, 2001).
- For a start-up organisation like the provided telecommunication organisation, uses of personal guarantees are necessary. This in turn helps the organisation to increase the confidence of the customers on it.
LO2 2.1 Costs of the sources of finance
There are several costs associated with a particular source of finance for an organisation. The costs associated with the sources of finance for the telecommunication organisation are mentioned in this section.
The cost of equity is determined by the usage of dividend valuation model. This model assumes that there is a direct relationship between the future dividends and the market value of the shares. The capital asset pricing model is also used to evaluate the cost and associated risks of equity. This model focuses on the determination of the risks associated in the sale of equity (Hallman, 2003).
Cost of debt
The costs associated with the finance sources based on the concept of debt are the amount that the telecommunication organisation has to pay back to its lenders as the interest of the specific period and the guarantee of the personal assets. This is the cost that the organisation has to pay in terms of interest and mortgage (Will, 2001).
The cost of these sources of finance is the minimum amount to be paid by the telecommunication at the time of signing the bond and the compliance to the guidelines provided by the government.
The cost of this source of finance is the start-up and installation costs of the assets and infrastructure of the telecommunication organisation which are leased to various other organisations (Mayer, 2005).
2.2 Importance of financial planning
Financial planning is the process in which the organisation develops a strategy in which the detailed steps are mentioned to determine the appropriate finance sources for the particular project of the organisation, evaluate those finance sources as per some factors, determine the cost of those finance sources, determine the implications associated in the usage of those finance sources and determine the effect of usage of those sources in the organisation (Adler, 2000). The financial planning process ensures the most efficient use of the appropriate finance sources available to the organisation. So the process of financial planning has a lot of importance in the business procedures of the organisation. The process of finance planning also has a lot of importance for an individual. The importances of the financial planning in the telecommunication organisation are mentioned below (Hallman, 2003).
Managing the profit
The efficient financial planning of the telecommunication organisation ensures that the profits of the organisation from its business processes are utilised in the best possible way to increase its business and maximise its profits.
Increase capital base
The implementation of an effective and efficient financial planning process in the telecommunication organisation ensures increase in the profits of the organisation, which in turn strengthens the capital base of the organisation. This allows the organisation to be ready for any of the future risks and adverse situations (Will, 2001). This also makes the organisation capable enough to venture into unfamiliar markets to increase its business.
Determining investment options
Efficient financial planning allows the telecommunication organisation to identify the possible options available to it for investing monetary resources. The efficient investment of the monetary resources in appropriate options allows the organisation to obtain a confident and secure position (Walters, 2002).
Some of the other importance of the financial planning involves increasing the cash flow into the organisation, increasing the savings of the organisation, securing the financial status and understanding the financial situation properly.
LO2 2.3 Information needs of the decision makers
The decision makers in the organisation require different types of information to be able to take the business decisions. In the provided telecommunication organisation the decision makers take a lot of information into consideration before reaching a final decision. The type of the information required by the decision makers depend on the type of environment of the issue, the type of the issue, the size of the market and the priority of the decision. The information needed by a decision maker is mentioned below (Oliner, 1992).
The decision maker requires the information about the environment of the issue or event for which the decision is being taken. This allows the decision makers to analyse the environment of the organisation to determine the effects of a particular decision on the business processes of the organisation.
The decision maker should have the knowledge of various challenges of taking a decision. These challenges in the environment of the organisation affect the choice of the decision to a great extent (Xu, 2006).
The decision maker should be aware of the methods applicable to the current situation, which helps him or her while taking the decision.
The decision maker needs the information about all the alternatives available to the organisation as a solution to current situation or issue. This helps the decision maker to analyse, evaluate and chose one of the alternatives as the final decision for the situation (Kalamova, 2011).
The decision maker should know about the implications of using any of the identified alternatives which helps him or her to a great extent.
LO3 3.1 Budget analysis
Budget of an organisation is an assumed value of the total finance available to the organisation in which the organisation is required to complete activities of a certain project. Budget for a particular project or a particular tenure is the tool that is used by the managers of the organisation to plan and take decisions regarding the financial issues of the organisation.
The decision makers of the telecommunication organisation need the extensive knowledge of the budgets of the organisation for various processes to take effective decisions. This provides the decision makers of the organisation to take the budget of the organisation as the most important factor in deciding the solution of a particular issue (Kalamova, 2011).
The most common perception of the budget of an organisation is that the decision makers don’t take any decision that requires more funds than the available budget of the organisation.
If the people working in the organisations have financially quantifiable responsibilities, then they can be efficiently managed by referring to the budget of the organisation.
The financial decision making process of the organisation can be improved by using the budget of the organisation and focusing on some of the components of the entire budget instead of the entire budget. This allows the decision makers to take efficient decisions that are based on the budget and the financial resources available to the organisation (Manigart, 2000).
LO3 3.2 Making pricing decisions using relevant information
This is defined as the cost to the organisation for the process of producing, storing and selling one unit of a particular product. This unit cost includes all the costs that are fixed in nature such as the cost of the equipment,infrastructure etc. and all the costs that are variable in nature such as the cost of labour and materials used in the production process (Gardner, 2000).
The steps to calculate the unit cost are mentioned below.
The period of the production is defined first as the time frame for which the unit cost has to be determined.Assume the time period to be three months.
Then all the fixed costs of the production process are added up for that time period. Assume the total fixed cost for three months is 60000 USD.
Then all the variable costs associated with the production are added up for the corresponding time frame. Assume this total cost to be 20000 USD.
Then the total number of units produced over that time frame is determined. Assume it to be 500 units in three months.
To calculate the unit cost of the product, all the fixed and variable costs are added and then divided by the number of units produced. So the unit cost is 60000 plus 20000 divided by 500 i.e. 160 USD.
Unit cost = (fixed cost + variable cost) / number of units produced in the particular time frame
The decision makers in the organisation utilize this information to take major business decisions that will be beneficial to the organisation.
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LO3 3.3 Investment appraisal techniques
The basic definition of an investment appraisal technique is the technique which is used to determine and analyse the effect of the investments of an n organisation on its cash flow. These techniques determine the expected returns of the investments and the future costs throughout the life of the project in the telecommunication organisation. Some of the investment appraisal techniques are described below.
The accounting rate of return
In this technique the expected return from the investment is compared with the actual amount of money to be invested.This technique generally compares the average profit made annually from the investment with the average amount of investment (Hung, 2000).
Investment risk analysis
This technique generally identifies, analyses and evaluates the risks and their sensitivities associated with the investments done by the organisation (Kalamova, 2011).
The period of payback
This technique assesses the investment according to the minimum amount of time required by the organisation to repay the amount back to the investor. This technique considers the time required to repay both the principal amount and the interest for a specific period.
These investment appraisal techniques are used to determine the viability of a project in terms of the investments to be done in the project.
LO4 4.1 Financial statements
Financial statements are the published reports of the organisation that describe all the financial transactions of the organisation for a particular amount of time period. These reports are published by the organisation over particular intervals of time (Addison, 2005).
There are generally four main types of financial statements, which are described below.
This report of the organisation describes the financial position of the organisation at that time. This report describes all the assets owned by the organisation, the equities of the organisation owned by the investors and the liabilities of the organisations.
Cash flow statement
This report contains all the cash flows within the organisation over a particular period of time.This report covers the cash flows generated due to all types of activities in the organisation. These organisational activities can be classified into three categories such as operational, investment and financial activities (Hung, 2000).
Income statement of the organisation describes the performance of the organisation over a particular time period in terms of the income and loss of the organisation. This statement shows the efficiency of the organisation in utilising its profits in the proper way.
Statement of equity
This statement describes the changes in the value of the equity owned by the investors of the organisation over a particular period of time. The statement describes the net profit and loss of the organisation over the particular period of time (Kalamova, 2011).
LO4 4.2 Formats of financial statements for different types of business
As discussed earlier the financial statements are formatted in four major ways such as balance sheets, income statements, equity statements and cash flow statements. These formats are suitable for different types of businesses depending on the type of the business, types of operation and the environment of the organisation (Chan, 2001).
Among all the formats of the financial statements only one refers to a single point in time i.e. the balance sheet. All the other formats refer to a time period and the changes to particular factors in that time period. The balance sheet generally defines the assets and the liabilities of the organisation. So this is very suitable for small and medium sized organisations.
Income statements generally show the performance of the organisation over a particular time period in terms of income and loss of the organisation. This type of statement is suitable for an organisation whose investors and managers need this report to maintain confidence in the operation of the organisation (Gardner, 2000).
Equity statement generally defines the changes in the value of the equity of the organisation over a particular time period. This type of statement is suitable for an organisation using angel equity as the main source of finance.
The cash flow statement of an organisation defines the net cash flow in the organisation due to the various activities in the organisation. This statement is useful to the bankers, investors and the accounting staff of the organisation.
LO4 4.3 Key ratios to interpret financial statements
There are several key ratios which are used to interpret and compare the financial statements of an organisation.Some of these ratios are mentioned and described below.
This is the ratio of the net income to the sales of the organisation. This generally defines how much an organisation keeps as profit out of a dollar of sale (Addison, 2005). Higher profit margin of an organisation suggests that the organisation has more control over its incomes and costs.
This is the ratio of operating profit to the net amount of sale of the organisation. This ratio is same as the profit margin of the organisation which refers to the income from the operating activities instead of the net income (Chan, 2001).
Price earnings ratio
This is the ratio of the market value of one share of the organisation to the earnings for that share.
There are several sources of finance available to an organisation. The appropriate sources are chosen by close identification and evaluation of the sources in terms of the size of the organisation, implications associated with the sources, risks associated with the sources and the positive effect of the usage of those sources on the business operations of the organisation.All of these finance sources include corresponding costs of using them and accessing them. These costs along with other factors are taken into consideration while taking the decision of using the source. The organisation plan and implement an efficient financial planning process which helps the decision makers of the organisation to take appropriate decisions regarding the financial issues of the organisation. All of these financial transactions and activities in the organisation are described in the financial statements of the organisation. Some investment appraisal techniques are used by the decision makers in an organisation to determine the viability of a project in the organisation.