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Diploma in Business
Unit Number and Title
Unit 2 Managing Financial Resources and Decisions
This assignment discusses and gives in depth knowledge of financial management of business concern. It also explains Working capital management policies and treasury management policies which help in taking decisions regarding capital investment, corporation tax and effects of inflation. This also puts light on risk and uncertainty and its analysis, which an organisation may face due to regular changes in economic environment and what are the risk management techniques to cure the risk. It guides us in framing a sound capital structure so that we can able to take gearing and leasing decisions with reference to our business. The UK based company “A & W restaurants” having a chain of fast food restaurants has been analysed for the financial management objectives.
The common financial objectives of company A& W restaurants are concerned with arrange funds for the business, amount of money received from investors make arrangements of loan at a reasonable rate, implementation of working capital management policies, dividend decisions etc. There are many routes of arranging funds for business entity which includes internal sources and external sources. Internal source includes: - retained earnings, reserves and surpluses. External sources includes:- Business loan, small business grants, invoice finance and factoring, angel investors which is the key financial decision of business with regards to finance and capital markets. Retained earnings and reserves & surpluses are not enough to complete our business requirement. So, the company should have to go with long term and short term funding plans (Brott, 2012).
For a fast food restaurant business concern require large number of working capital. It can be managed by overdraft, short term bank loans and trade credits. For management of working capital managers can take a view of these three policies:-Conservative, Aggressive, Moderate.
There are three types of working capital policies available:-
While adopting these policies it should be kept in mind that there should be lower financial risk or inventory problems and negative effect on profitability are avoided. The firm should take into account the anticipated inflation and corporate taxes applicable on it. Through the market analysis company can get idea about prevailing inflation growth rate on the basis of which it can measure its investment returns. Corporation tax rate also affects the investment returns. UK tax system has two main features:
These features of the tax system prevalent in UK focus on the effective treasury management and working capital management practices followed by the businesses in the country. Thus the tax policies, inflation rates and other macro and micro economic factors contribute to the working capital management of the business and lay the emphasis on the treasury management through long term profitability and sustainability.
Risk and uncertainty relate with the future of business. It includes unknown event which have probability of negative outcomes. Rising in the price of food, major competitors or falling disposable income are some of the example of risk which may be faced by fast food restaurants. There are many types of risks which are likely to be faced by business concerns such as political risk, economic risk and industrial or market risk. It includes threats of substitute products or services, rivalry among the competitors, entrance of new concerns in the market, bargaining power of supplier, bargaining power of consumers etc. Political incidents may influence financial decisions (Madura & Fox, 2014).
These risk impact on the growth and economic development of business concern. So, while taking financial decisions managers have to assess economic environment, gather more information, analyse and expose more outcomes, exercising control over situations, draw advises from technical experts and sharing responsibility for taking decisions.
The financing decision of firm includes selecting the sources of capital investment which include equity investment, banks, financial institutions, venture capital and angel investors. Equity and preference share issuance is the common and most adoptable source of capital funding. Company may also go for debt capital issuance. Issuing debentures than share capital is more beneficial for a company. Apart from this loan from bank and financial institutions is an option available. Leasing is also an important decision for the financing of the assets of company. The firm is indulged in food and restaurant business therefore; it shall procure the assets on leasing rather than purchasing. Also the gearing shall be kept minimum and the capital structure shall include more of equity capital as compared to debt capital (Lumby, 2015).
Asset valuation - It is based on cash flows, comparable valuation metrics or transaction value. Asset can be valued at book value of asset and market value of asset. Generally assets are valued by comparing it to similar assets and identifying its cash flow potential. Liquid assets can easily trade in the market so they have market value.
Business valuation - It helps to locate real or perceived value. Valuation method depends on kinds of business whether it is running or liquidating. Valuation methods are based on significant tangible assets, price / earnings ratio, entry cost, discounted cash flow, established standard formula or trend for a particular sector.
The risk management techniques that are used in the business include those methods or tools which can be used to control, prevent or minimise the risks of the business. These are loss, prevention, loss reduction, separation of functions of business, double check on transactions or duplication to avoid the errors, diversification of the operations of business etc. These techniques can be applied in the operations of business at the initial stage so that the probable loss from the business risks can be mitigated. The firm A&W Restaurants shall apply the risk management techniques such as loss prevention and loss reduction in its inventory and assets so as to avoid the enlargement of threats arising out of such risks.
It can be concluded that for effective financial management outlines should be drawn before valuation of assets which includes need for valuation, factors affecting business value, methods which may use for valuation and calculate profit for the purpose of valuation. It reveals that what financial objectives should a business concern frame as per its nature of business environment considering the facts related with capital market and also observing the prevalent economic environment, so that a firm can opt a safer route. Besides all these things it explains the principals of business and asset valuation and their applications.
Abdullah, M., Shukor, Z.A., Mohamed, Z.M. & Ahmad, A. 2015, "Risk management disclosure: A study on the effect of voluntary risk management disclosure toward firm value", Journal of Applied Accounting Research, vol. 16, no. 3, pp. 400.
Brott, P.E. 2012, "A career story approach to management, business, and financial occupations", Journal of Employment Counseling, vol. 49, no. 4, pp. 172-184.
Journal of Risk Financea vailablefrom:http://www.emeraldgrouppublishing.com/pr oducts/journals/journals.htm?id=JRF
Kaplan Publishing UK. (2015). ACCA F9- Financial Management,Berkshire, UK: Author.
Lumby, S. (2015). Corporate finance Theor y and Practice, Retrieved from http://lib.myilibrary.com/ProductDetail.aspx?id=328516
Madura, R. & Fox, J. (2014). International Financial Management . Retrieved fromhttp://lib.myilibrary.com/ProductDetail.aspx?id=328480