Essay on Managing Financial Resources Assignment

Essay on Managing Financial Resources Assignment

Introduction

Finance is the act of providing money for business project. Financial resources are such places that where money is available to the business in the form of credit, securities and cash. Owner requires sufficient financial resources so that they are to operate efficiently and sufficiently in order to attain their success. Money is required for various purposes such as starting new business, running the business activities and for business expansion. With this financial plans are necessarily required for the purpose of managing finance. Some of the organisation prepare budgets to allocate their available financial resources and utilised them in effective manner. In the below essay on managing financial resources assignment all these terms get discussed effectively.

Task 1

AC1.1 Identify the sources of finance available to a business

Finance is the act of providing finance for business. And  financial resources are such places that provide finance in the form of liquid, credit and securities. Business require adequate sum of finance for the purpose of operating their activities in adequate manner (Bhattacharya & Londhe, 2014). Sources of finance get divided into two different forms such as:

• Short & long term: Short term sources are such sources in which finance needs to be repaid within a year. Long term sources are such sources in which finance need to be repaid more than one year.
• Internal & external: Internal sources are such sources in which business arrange their funds within their business only. External sources are such sources in which business arrange their funds from the external environment (Bhattacharya & Londhe, 2014).

There are various sources that get discussed below such as:

AC1.2 Assess the implications of the different sources

Implications vary from sources to sources such as: -

AC1.3 Evaluate appropriate sources of finance for a business project

The appropriate sources of finance for a business project are as follows such as: -

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Task 2

AC2.1 Analyse the costs of different sources of finance

There are different costs associated with the different sources of finance such as:

• Share capital: The cost of share capital is in the form of the amount paid to the shareholders in the form of dividends. There are few costs are there such as issuance fees, fees of registering under stock listing. Shareholders expect that the amount of dividends get increased over time and they get it on consistent basis (Serrasqueiro, et. al., 2011).
• Borrowed funds: The interest rate either it may be fixed or variable. Borrowed funds are generally debt to the business and the paid interest over debt amount is considered as the cost of source. Along with this there are few amounts in the form of administration fees to order to process the requirements of loan. Interest and fees are considered as the cost of source.
• Government grants: The amount paid in the form of the administration fees for the purpose of applying for grants and ensures that they are eligible for receiving grants (Serrasqueiro, et. al., 2011).
• Retained earnings: There are no such costs associated with the retained earnings as tax is already paid over it before putting it in their reserve funds. Utilising amount of retained profit decreases the share of dividend paid out of it (Serrasqueiro, et. al., 2011).

AC2.2 Explain the importance of financial planning

Financial planning is the process for framing policies, objectives, procedures and programmes in context to the financial activities. With the help of it organisation attain business objectives and manage their financial resources (Bird, et. al., 2014). The importance of financial planning is as follows such as: -

• With the help of it financial resources get managed effectively.
• Management monitors their cash flows (inflow and outflows).
• Management use it in their decision making in order to prepare effective decisions.
• They make forecasting related to the need of finance.
• With the use of it they attain growth and expand their business activities and support long term survival to their business.
• Management make ensure that they maintain adequate funds.
• It helps in getting adequate balance between their cash flows (inflow and outflow) and also provides stability.
• They prepare effective  marketing financial planning  that attract numerous investors towards their business projects.
• Management get prepared for the uncertainties with the use of it and easily deal with market changes (Croy, et. al., 2010).

AC2.3 Assess the information needs of different decision makers

The financial information is demanded by two types of users such as: -

• Internal users: These are such users that have direct link with the organisation such as managers, employees and owners.
• External users: These are the stakeholders or members of public such as investors, government, regulatory bodies, customers and many more (Tan, et. al., 2014).

Both users required information for their purpose that gets discussed below such as: -

There are different decision makers that require different information such as: -

• Investors: They assess the information to evaluate their financial planning’s so that they make investments in order to get attractive profits.
• Employees: They assess the information in order to know about organisational stability and profitability and for this purpose they extract information related to profitability and liquidity. They also assess information in order to evaluate the organisation ability related to remuneration, retirement benefits and growth opportunities (Tan, et. al., 2014).
• Banks: They assess the information in order to know about the liquidity and stability of organisation in order to evaluate whether they get their funds well on time or not.
• Supplier & creditors: They assess the information related to their liquidity and stability in order to evaluate whether they get their funds well on time or not.
• Government: They assess the financial statements in order to evaluate the tax policies followed by them. They make use of the profitability information of the organisation (Tan, et. al., 2014).
• Regulatory bodies: They assess the financial statements as they measure whether organisation is following their set rules and regulations and guidelines or not. If not then they took legal actions against them.

There are various features that denote the information as good information such as:

• Provided information should be relevant to the business activities.
• Information should be time specific as it is related to the current year that helps in making effective decisions.
• Information should be error free and accurate enough. This includes the disclosure of the assumptions or estimations recorded under it.
• Presented information should be completed as none of the part remains incomplete.
• Information should be presented in effective manner so that it can be understand and utilised easily.
• The presented information must be in such a form that meets the requirements of the users.
• The  information and knowledge  must worth the cost as some cost is associated with it.
• Information should be reliable so that it helps in making effective decisions (Puri, 2014).

AC2.4 Explain the impact of finance on the financial statements

The finance put adequate level of impact over the financial statements such as: -

Task 3 

AC3.1 Analyse budgets and make appropriate decisions        

Budget is a plan that prepared well in advance. With the help of budget report money get segregated as per the requirement. There are various reasons behind preparing budgets such as controlling and monitoring, effective planning, enhance coordination and communication, increase efficiency and motivation (Roper & Ruckes, 2012).  Cash budget is prepared as follows such as: -

Analysis: Above statement is the cash budget and by analysing it is observed that the flow of getting revenues is not constant as for three months it shows increment but after that there is huge downfall in revenues. Expenses also shows the same trend but the rate of increasing expenditure is much higher as compare to revenues. Due to the difference of increasing rate they attain deficit cash balance that affects their performance.

Below is the production budget: -

Analysis:  As per the analysis of the above production budget it is realised that there is inconsistency in the production department as it keeps on fluctuating. There is no consistency is noted down as every month production get increasing or decreasing. There is effective need to attain consistency (Grimm & Blazovich, 2016).

AC3.2 Explain the calculation of unit costs and make pricing decisions using relevant information

Cost: - It is such amount that gets paid against getting something. Cost is the monetary valuation of the material, time and many more.Unit cost: - When company produce same identical products. All the variable costs and fixed costs get added and get divided
by the total number of units. The cost attained is termed as unit cost (Roper & Ruckes, 2012).
Unit cost = Direct cost + indirect cost
Cost per unit = (Total variable costs + Total fixed costs) / total units produced.
As the number of units gets increases then the cost per unit get decreases and vice-versa. Due to this cost per unit is not constant 
Variable cost: These are such costs that having changing nature as they keep on fluctuating such as material cost, labour cost and many more.
Fixed cost: These are such costs that have fixed nature as they remain same for the whole production period or at every level such as rents, depreciation and many more (de Souza & Lunkes, 2016). There are two different costing methods are available that followed in order to calculate the cost: -

• Marginal costing: This costing makes inclusion of only variable cost for the purpose of calculating unit cost.
• Absorption costing: This costing method makes inclusion of variable cost as well as fixed costs for the calculation of unit cost (de Souza & Lunkes, 2016).

In the below table calculation of unit cost and pricing is shown such as: -

For pricing decision cost plus price method is utilised as per this all variable as well as fixed costs get included in order to calculate the unit cost and after that adequate profit margin is added to get revenues by make sales (de Souza & Lunkes, 2016).

AC3.3 Assess the viability of a project using investment appraisal techniques

Investment appraisal techniques are such techniques that get utilised for assessing the available project whether it is worthwhile or not. There are various methods are available such as: NPV, IRR, ARR and PBP. These techniques get discussed and utilised in effective manner such as: -

NPV: It is the discounted cash inflow which is attained by multiplying the cash inflows with discounted rates. It is utilised for evaluating the overall profitability of the project (Adkins & Paxson, 2014).
NPV = Discounted cash inflows – Initial investment

Total discounted cash inflows = 103,576
Initial investment = 100,000
NPV = 103,576 – 100,000
NPV = 3,576

Pay-back period:The length of time period taken to recover the initial investment made in project or investment (Adkins & Paxson, 2014).
Pay-back period = (Days/weeks/months * initial investment) / Total cash received
= (60 * 100,000) / 140,000
= 42.857 months
PBP = 3 years 6^3/4 months

IRR: It is such rate at which NPV becomes zero.

IRR = 10% + [(103576 – 100,000) / (103,576 – 90,620)] (15% - 10%)
= 10% + [(3576) / (12,956)] (5%)
= 10% + 1.38%
IRR = 11.38%

ARR: It shows the average return made by the investment. Project is favourable when ARR is equal to their rate or more than that rate.
ARR = average accounting investment/ average investment * 100
Average accounting investment = (24,000 + 20,000 + 28,000 + 32,000 + 36,000) – 100,000 /5 = 8,000
Average investment = 100,000
ARR = 8000/100,000 * 100 = 8%

Results:

Task 4

AC 4.1 Discuss the main financial statements

• Financial statements:- these statements are financial summaries of a business that renders financial performance and financial position at the end of the financial year. The three main financial statements get discussed below such as: -
• Profit and loss account: this statement is prepared for showing the flow of sales and costs for a period. It get utilised for evaluating profit and loss. It makes record of two things such as income and expenditure (Robinson, et. al., 2012).
• Balance sheet: It is a snapshot of firm’s position. It shows case the assets and liabilities of the company along with the equity capital. It helps in evaluating the working capital, gearing ratio and total value of firm effectively. There are three main things in balance sheet such as Assets, liabilities and equity capital.

Assets = Liabilities + Capital
Assets are segregated into two parts such as current assets and fixed assets or non-current assets.On the other hand liabilities are  also segregated into two parts such as current  contract liabilities  and long term liabilities (Robinson, et. al., 2012).

Cash flow statement: This statement is the summary of all cash inflows and cash outflows for a specific period of time. This statement helps in putting control over the use of the available liquid funds. This statement is segregated into three parts such as operating activities (cash sales, interest received, etc.), financing activities (sale or purchase of fixed assets) and investing activities (sale of shares, dividend paid and others) (Robinson, et. al., 2012).

AC 4.2 Compare appropriate formats of financial statements for different types of business

There are three different forms of business which get discussed below such as: -

AC 4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.

Below is the calculation of the ratios of Marriott hotel such as: -

Interpretation of ratios: -

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Conclusion

In the end it is concluded that appropriate sources are evaluated with the help of their implications and advantages and disadvantages. The finance get utilised in effective manner with the help of financial planning and budgeting as it get segregated into effective manner. Available projects or investment get evaluated with the help of investment appraisal techniques such as NPV, IRR, ARR and PBP. Ratio analysis is performed to evaluate the financial performance of the organisation.

References

Adkins, R. & Paxson, D. 2014, "Stochastic Equipment Capital Budgeting with Technological Progress", European Financial Management, vol. 20, no. 5, pp. 1031-1049.
Ahrendsen, B.L. & Katchova, A.L. 2012, "Financial ratio analysis using ARMS data", Agricultural Finance Review,vol. 72, no. 2, pp. 262-272.
Bhattacharya, S. & Londhe, B.R. 2014, "Micro Entrepreneurship: Sources of Finance & Related Constraints", Procedia Economics and Finance, vol. 11, pp. 775-783.
Bird, C.L., ?ener, A. & Co?kuner, S. 2014, "Visualizing financial success: planning is key", International Journal of Consumer Studies, vol. 38, no. 6, pp. 684-691.
Caglayan, M. & Demir, F. 2014, "Firm Productivity, Exchange Rate Movements, Sources of Finance, and Export Orientation", World Development, vol. 54, pp. 204-219.
Corsatea, T.D., Giaccaria, S. & Arántegui, R.L. 2014, "The role of sources of finance on the development of wind technology", Renewable Energy, vol. 66, pp. 140-149.
Croy, G., Gerrans, P. & Speelman, C. 2010, "The role and relevance of domain knowledge, perceptions of planning importance, and risk tolerance in predicting savings intentions", Journal of Economic Psychology, vol. 31, no. 6, pp. 860-871.
de Souza, P. & Lunkes, R.J. 2016, "Capital budgeting practices by large Brazilian companies", Contaduría y Administración, vol. 61, no. 3, pp. 514-534.
El-Dalabeeh, A.K. 2013, "The Role of Financial Analysis Ratio in Evaluating Performance: (Case Study: National Chlorine industry)", Interdisciplinary Journal of Contemporary Research In Business, vol. 5, no. 2, pp. 13.
Grimm, S.D. & Blazovich, J.L. 2016, "Developing student competencies: An integrated approach to a financial statement analysis project", Journal of Accounting Education, vol. 35, pp. 69.
Puri, A.K. 2014, "Financial Statement Analysis and Security Valuation", Abhigyan, vol. 32, no. 2, pp. 74.
Robinson, T.R., Broihahn, M.A., Henry, E. & Pirie, W.L. 2012, International Financial Statement Analysis Workbook (CFA Institute Investment Series), 2. Aufl.;2;2nd; edn, Wiley, Hoboken.
Roper, A.H. & Ruckes, M.E. 2012, "Intertemporal capital budgeting", Journal of Banking & Finance, vol. 36, no. 9, pp. 2543.