Managing Financial Resources and Decisions Assignment

Managing Financial Resources and Decisions Assignment

Managing Financial Resources and Decisions Assignment

Unit 6

Introduction

Business organisation makes use of finance to support their activities or transactions on regular basis. Finance is such resource that is limited in nature and must get utilised in effective manner. Proper planning is required to make adequate and maximum utilisation of it. Different sources are available in order to gather the finance for business purpose but it raise debt ratio for organisation. Financial planning and budgets get discussed below for the purpose of using available finance in effective manner. The inflow of huge finance also affects the different financial statements that also get discussed in below report. Different techniques are available for evaluating the available projects and these get discussed below. Various measures are available in order to make evaluation of the organisational performance and with this effect ratio analysis will get utilised in this report.

Task 1

P1.1 Identify the sources of finance available to the new business you have chosen

There are various different sources are available for the purpose of getting adequate share of finance in order to start new business management. Below are some sources get discussed below such as: - 

External Sources

S. No.

Sources

Description

1.

Bank borrowings

The most effective way to raise funds is getting funds from bank against their securities. Bank charge adequate interest rate over it.

2.

Equity capital

For getting finance the foremost followed option is issuing equity shares as it make arrangement of adequate amount of finance. It dilutes the ownership but it make huge string base of finance to conduct operational activities.

3.

Debentures

For getting huge finance and having no intention to share the ownership they make issuance of the debentures. It didn’t create any dilution of control as it is a kind of debt that taken from the public.

4.

Factoring

Management discount the accounts receivable from the financial institutions in which small part get deducted from it and remaining balance get paid to them.

5.

Leasing

Management arrange the capital nature equipment with the help of the leasing and against it they pay small amount as rentals as a charge of using the equipment.

6.

Hire Purchase

Management go for the hire purchase as they took the required equipment and make payments in the small amount instalments. This is made on regular basis within the market as the equipment is not having capital investment.

Internal sources

S. No.

Sources

Description

1.

Retained profits

Owner makes use of the savings or reserve funds of their organisation for the business requirements. This amount gets saved by management to support the organisation in emergency situations.

2.

Sales

The regular sales also render adequate level of support in arranging required support to the business organisation.

3.

Sales of assets

The sale of assets is the temporary source of getting finance as it is not possible to make sales on regular basis.

4.

Debt collection

Organisation make sales on credit for a specific time period after that they make collection of their debt balances from market.

5.

Owner’s Investment

Owner of the business organisation make investment out of their savings or from taking personal credit.

P1.2 Assess the implications of the different sources of finance to your chosen business

Implication of the different sources is as follows such as: - 

Sources

Legal

Risk factor

Finance

Control

Bank borrowings

Bank put adequate legal implications to safe guard their money

Lots of legal implications shows high rate of risk

Desired amount get raised

Payment of interest removes the control dilution.

Equity capital

Government put effective legal implication in order to make legal issue of shares.

The rate of risk is low.

Huge finance is arranged.

Shares get issued against control and it lead towards control dilution.

Debentures

Government put effective legal implication in order to make legal issue of debentures.

The rate of risk is high.

Huge amount of finance is arranged with the help of it.

It is the one kind of debt and debt didn’t dilute the control.

Factoring

Legal processing followed implied by the financial institutions

The rate of risk is low

Adequate amount get arranged with it.

Ownership of accounts receivable get transferred there is no dilution takes place.

Leasing

Legal contract is made between lessor and lessee.

The rate of risk equals to zero.

Required equipment or items required capital investment get arranged at small rentals.

Equipment took on rentals basis so there is no dilution of control takes place.

Hire Purchase

Legal agreement is made between buyer and seller

There is moderate level of risk is present.

Required equipment or items required capital investment get arranged at small instalments.

Purchase` of required items and payment made on instalment basis. It didn’t dilute the control.

Retained profits

No legal implications are there.

There is no risk is associated with it.

Adequate share of finance get arranged.

Savings get utilised none of the control is diluted.

Sales

There are no legal implications presents.

The rate of risk is equals to zero.

Routinely expenditure get meet out with the help of it.

Sale is regular activity and it doesn’t lead to dilution of control.

Sales of assets

No legal formalities are followed.

There is no risk is associated with it.

Capital revenue can made only for once.

Controllership remains with the owner only asset get sold to others.

Debt collection

There are some legal restrictions in the form of collecting funds from debtors.

There is high rate of risk.

Moderate share of revenues get arranged through this source.

Owner attains the ownership and it didn’t get diluted with others.

Owner’s Investment

No legal implication is made over it.

There is no risk is associated with it.

Adequate share of amount get arranged.

Control remains with the owner only.

P1.3 Select appropriate sources of finance for a business project you have chosen

The sources that gets preferred for taking adequate level of finance for a business project chosen is as follows such as:

Sources

Description

Advantages

Disadvantages

Bank Loan

They took loan from the bank at the rate of 10% of amounting £80,000 to start their business.

  • It helps in getting tax relaxation benefit with the payment of interest amount.
  • Easy to get against the security.
  • Need to repay well on time.
  • Regular instalments need to be paid.
  • Failure of payment damages the image and lead towards bankruptcy.

Leasing

They arrange the required equipments such as machinery, furniture & fittings on lease instead of making capital expenditure over them.

  • Capital investment replaced with small rental amounts.
  • It helps in making diversified use of their available finance.
  • Failure of rent payments lead towards cessation of contract.
  • Payment failure damage the image in their respective market.

Owner’s investment

Owner makes investment of £50,000 out of his savings.

  • It didn’t create any liability over the business.
  • There is no specific time period to repay this amount as money is owned by owner itself.
  • In case of emergency there is no support is available internally.

Task 2

P2.1 Analyse the costs of different sources of finance

There are two different types of costs get associated with the different sources of finance that get discussed below such as: -

  • Cost of Debt (kd): - The amount paid against the use of the debt sources of finance get denoted as the cost of debt. This cost make inclusion of the amount paid in the form of interest or rentals related to different sources (Barth, et. al., 2013).
  • Cost of Equity (ke): - The amount paid over the invested amount in the form of share purchase get denote as the cost of equity. This cost makes inclusion of the amount that gets shared with the shareholders in the form of dividend.

The different sources that preferred for raising finance are the owner’s capital, leasing and bank loan. Owner’s capital is not attaining any cost as it is the savings of the owner. For leasing they pay rentals as per the set agreement terms and conditions on the other hand they pay interest at the 10% rate over the amount borrowed from the bank (Blanco, et. al., 2015).

P2.2 Explain the importance of financial planning to the business organisation you have chosen

Financial planning: It is the process of estimating the requirement of capital and also determines their available competition. It also get utilised for the purpose of framing financial policies for different purposes such as procurement, investment and administration of their available financial funds (Bird, et. al., 2014).

Objectives of financial planning: -

  • Determine capital requirements:  - It get utilised for the purpose of determining the capital requirements for the short term as well as long term.
  • Determine capital structure: - It get utilise for the purpose of determining adequate form of capital structure as it determine the proportion of capital required for the business activities.
  • Frame financial policies: It helps in building such policies that helps in putting adequate level of control over cash and cash equivalents, their borrowings and lending (Bird, et. al., 2014).
  • Make optimum utilisation of financial resources: - It helps in making diverse and effective use of available financial resources.

Importance of financial planning: -

  • It helps in making effective and adequate use of the available finance.
  • There is effective balance is made among the flows of cash (inflow & outflow)
  • It manages the available funds effectively and makes it attractive so that investors make investment in their organisation.
  • It set the growth and expansion plan so that company get run for a longer period of time.
  • Organisation becomes efficient to make maximum utilisation of their available financial resources.
  • It prepare for dealing with the emergency situations.
  • It provides stability to the business (Croy, et. al., 2010).

P2.3 Assess the information needs of different decision makers in your chosen business

There are various decision makers that demand for different types of information for their decision making process. These information’s get discussed below such as: -

Operational information: - The information that get utilised for the purpose of supporting or executing the operations in adequate manner. The operational level management utilise it in order to execute the activities so that they attain the set objectives of the business organisation. The information extracted from the financial planning or budgets get utilised effectively (Sekiguchi & Huber, 2011).

Tactical information: - The information that get utilised for the purpose of making effective plans for achieving their set targets. The middle level management get set targets from upper level management and to meet these targets they utilise this set of information. This set of information make inclusion of variance analysis and more.

Strategic information: - The information that utilised by the upper level management as they make use of it for the purpose of preparing policies, set rules and other effective measures for the betterment of the business organisation. There are different information get utilised for this purpose such as profitability, liquidity, financial performance and many more (Riedl & Srinivasan, 2010).

P2.4 Explain the impact of finance on the financial statements of your chosen business

The inflow of finance put direct impact over the various financial statements and that impact get discussed below in effective manner such as: -

  • Balance sheet: - There is huge inflow of finance from different sources that directly impacts the cash and bank balance as it get increased subsequently. With the inflow of finance only one head get impacted under assets i.e. “Cash & Bank Account”. On the other hand there are different heads get created under liabilities side such as owner’s capital, bank loan and leasing with different amount as it create debt for the organisation. In the end both sides get increased (V, B.I., et. al., 2013).
  • Income statement: - The inflow of finance from different sources create adequate amount of debt for them and they pay cost over these debts. The payment of cost of debts leads to increase in the operating payments that directly lower down the overall revenues. With the increase in payments it results into decrease in overall operating profits.

In this manner there is direct impact put over the statements as overall both side of balance sheet get increased with the same amount. On the other hand it increases the payment ratios that lower down the amount of operating profits (V, B.I., et. al., 2013).

Task 3

P3.1 Analyse budgets and make appropriate decisions

Cash budget: -

Cash Budget | Assignment Writing Service

Analysis:-

The above prepared cash budget shows that they attain surplus in their first three months such as July, August and September but after that they attain deficit in their next three months such as October, November and December. As per the analysis it is observed that in the month October they make capital expenditure out of their in hand liquid funds that result into deficit of liquid funds. There is effective increase in the cash payments of purchases that affect the availability of liquid funds. In order to attain the surplus or enhance their efficiency they need to control the unnecessary cash payments. Capital expenditures need to be made with the help of different financial resources in order to make effective use of their available finance (Simon Gervais, et. al., 2011).

P3.2 Explain the calculation of unit costs and make pricing decisions

Current per unit cost of product = cost of goods sold / number of units

= 18,878,000 / 650,036

= £29.04

Cost of per unit = £29.04

Decrease in sales price by 10% from current price of £55.12

= 55.12 * 10% = £5.512 (de Souza & Lunkes, 2016)

New selling price = £55.12 – £5.51 = £49.61

As per this reduction it is estimated that there is increase in total sales by 20% such as:

Current sales = 35,830,000

Increase in sales 20% = 35,830,000 * 20% = 7,166,000

Total sales as per reduction in cost = 35,830,000 + 7,166,000

= 42,996,000 (de Souza & Lunkes, 2016)

There is also increase in cost by 20% so new cost will be:

= 18,878,000 * 20% = 3,775,600

New cost = 18,878,000 + 3,775,600 = 22,653,600 (Adkins & Paxson, 2014)

Profit earned with the reduction in selling price, increase in sales and increase in overall cost such as:

New Profit = new sales – new cost

= 42,996,000 – 22,653,600

New profit = £20,342,400

Old profit = £16,952,000

Increase in total profit with the reduction in selling price, increase in sales and increase in total cost by £3,390,400

Pricing decision: - The pricing decision made by the management is considered as effective because there is adequate level of increase in the total revenue earned with the help of their sales. As per the old selling price the profit amount was £16,952,000 but with the reduction in selling price there is effective increase in their sales that increases their overall profits and there is difference of £3,390,400 that shows that decision of reducing selling price become effective for them (Adkins & Paxson, 2014).

With the change in selling prices it is clearly estimated that there is increase in their sales by 20% and along with this there is increase in cost by 20%. The factor of reducing selling price helps in increasing overall sales that increase the level of profit and this decision is considered as beneficial for them (Baker & English, 2013).

P3.3 Assess the viability of a project using at least two investment appraisal techniques

Calculation of NPV is made as follows such as:

Year

£’000

10%

P.V. of C.I.

0

-8,000

1

-8000

1

2,000

0.91

1818

2

2,800

0.83

2312.8

3

3,200

0.75

2403.2

4

1,200

0.68

819.6

5

800

0.62

496.8

6

500

0.56

282

6

400

0.56

225.6

 

 

 

358

(Last entry of “400” is scrape value at the end of the 6th year)

NPV = total of the present value of Cash inflow – Initial investment made

= 8,358 – 8,000

NPV = £358 (Baker & English, 2013)

Calculation of Pay-back period

= 3 + [(8000 – 8000) / 3,200]

=3 + 0

= 3 years

Pay-back period = 3 years

Discussion: According to the above made calculation with the use of the investment appraisal technique it get analysed that the available “Project A: Aluminium Housing” can be preferred by Easy Electronics Ltd. because firstly it provide effective level of profits at the end of 6th year and secondly, the project is less risky as invested amount get recovered at the end of 3rd year. It is beneficial to adopt this project A (de Motta & Ortega, 2013).

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Task 4

P4.1 Discuss the main financial statements (the discussion should focus on basic form and purpose of main financial statements)

The main financial statements that get prepared by the organisation get discussed below such as: - 

Financial statements

Description

Income statement

This statement make inclusion of the activities related to the operating and non-operating revenues and expenditure. this statement is get utilised further for the purpose of evaluating profitability of the business organisation for the financial year.

Cash flow statement

This statement records the activities related to the liquid funds and its equivalents to show he impact over it. These activities get recorded in three different forms of activities such as operating, investing and financing. This statement is utilised by the management to put effective control over the use of liquid funds.

Balance sheet

This statement is prepared in order to record all their assets and liabilities and provide summarised overview of all accounts. It get utilised for the purpose of evaluating the organisational performance. 

Notes

There are number of statements get prepared for the purpose of rendering detailed information related to the different accounts. These statements provide effective adjustments of the different accounts.

Statement of change in equity

This statement is get prepared by the organisations to make adequate record of change in their equity capital and also provide effective information related to changes occurred in it.

P4.2 Compare appropriate formats of financial statements for different types of business

Organisations are based on different formats as per their base and nature. These organisational formats are having their different formats of preparing their financial statements. These organisations and different formats of financial statements get discussed below such as: -

Basis of difference

Sole Proprietorship

Partnership

Company

Business owner

There is only single owner of the business and get termed as Sole proprietor.

The number of owners varies from 2 to 20 and all owners get termed as Partners.

The numbers of owners are huge as many of the investors make investment in their business. All owners get termed as shareholders.

Capital share

The capital is invested by the owner only and the amount is small.

Moderate capital amount is invested by the partners in the documented ratio.

Huge finance is invested by the shareholders as per their will.

Treatment of profit or loss

Owner is the single person that enjoys the profit or bears all losses.

Partner share their profit or loss in their profit sharing ratio among all partners.

Board of Directors issue the dividend for their shareholders to share their profits.

Income statement

Owner prepares this statement in horizontal format to measure their profits or losses of the financial year.

They prepare profit and loss appropriation account to measure their overall profits or losses in order to share them in their profit sharing ratio.

They prepare vertical format of this statement for the purpose of measuring their overall profitability in order to take effective decisions on the basis of their earned profits or losses.

Cash flow statement

Owner didn’t prepare this statement as there is no such need of preparing it.

Partners didn’t prepare this statement.

They focus over preparing this statement in vertical format as with the use of it they control over liquid funds and make effective use of it.

Balance sheet

Owner prepares the statement to record their assets and credits.

Partners prepare this statement to record the set of assets and show the share of their capital.

This statement is prepared by following IFRS guidelines and it is prepared for the purpose of evaluating financial Management  of the organisation.

P4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external using the data given below.

Ratio interpretation: - 

Ratios

WM Morrison Supermarkets Plc

J Sainsbury Plc

Interpretation

2011

2010

2011

2010

Gross margin

6.89%

6.97%

5.43%

5.50%

There is effective fall is noted down on the ratio as compare to the 2010 ratios. But then also Morrison’s are performing better than Sainsbury. This ratio shows the efficiency of earning revenues from sales.

Net profit

5.36%

5.30%

3.58%

3.92%

Morrison shows increase in their ratio whereas Sainsbury shows fall in ratio as compare to 2010. Morrison earns adequate level of profits as compare to Sainsbury. This ratio shows the profit earning capacity of the organisation.

ROCE

12.53%

12.44%

8.68%

9.78%

Morrison is attaining effective returns over their capital employed as compare to Sainsbury and their ratio also get increased whereas Sainsbury’s ratio has dipped down as compare to 2010 ratio. This ratio shows the efficiency of getting returns over employed capital.

Return on Total assets

9.61%

9.59%

6.47%

7.26%

There is increment is noted down in both organisation’s ratio as compare to the 2010 ratio. Morrison is having higher ratio as compare to Sainsbury. This ratio shows the efficiency of getting returns with the help of total assets.

Net asset turnover

2.34

2.35

2.42

2.50

For both organisations there is fall is noted down in the ratios as compare to 2010. But Sainsbury is having little bit higher ratio as compare to Morrison’s ratio. This ratio shows the efficiency of getting return with the use of net assets.

Current ratio

0.57

0.55

0.65

0.58

There is increment is noted down in the ratio for both organisation as compare to 2010 ratio. Sainsbury is having high ratio as compare to the Morrison. This ratio shows the availability of funds to meet long term liabilities.

Liquid ratio

0.24

0.24

0.35

0.31

There is increment is noted down in the ratio of Sainsbury whereas Morrison attain same ratio as compare to 2010 ratio. Sainsbury is having high ratio as compare to the Morrison. This ratio shows the availability of liquid funds to meet out short term liabilities.

Stock turnover

23.27

25.83

23.77

25.99

There is fall is noted down in the ratio of both organisation as compare to the ratios of 2010. Sainsbury is attaining little bit high ratio as compare to Morrison’s ratio.

Debtor Collection Days

3.95

4.36

1.80

1.61

There is fall in the ratio of Morrison whereas ratio gets increased for Sainsbury but then also Sainsbury is effective in collecting their debts from market.

Creditors Payment Days

29.12

31.01

31.16

31.76

There is fall in the ratio of both organisation but then also Morrison is effective in paying their debts to their creditors (Ahrendsen & Katchova, 2012).

Gearing %

42.02

29.61

66.18

57.28

There is effective increase in the ratio for both organisations as compare to the ratios of 2010. Sainsbury is more viable as compare to Morrison as they attain more debts with them.

Interest Cover (x)

6.09

21.33

6.79

8.13

In 2010 Morrison is much better than Sainsbury in getting effective revenues to cover their interest amount but there is huge fall in their ratio due to which Sainsbury become more effective.

Earnings per share (£)

0.27

0.24

0.32

0.34

The ratio of earning per share get increased for Morrison but Sainsbury face fall in it as compare to ratio of 2010 but then also Sainsbury is much effective as compare to Morrison.

Dividends per share( £)

0.12

0.08

0.15

0.14

There is effective increase in the dividend per share of the Morrison as compare to Sainsbury in the year 2011 but then also they are not effective as compare to Sainsbury.

Conclusion: -

As per the ratios interpretation it is concluded that Morrison is much effective as compare to the Sainsbury in earning revenues and returns. On the other hand Sainsbury shows effectiveness in their efficiency in utilising available funds in effective manner (El-Dalabeeh, 2013)

Conclusion

It get concluded that for the start-up of new business entity funds can be raised with the help of bank loan, retained profits and leasing options. These are effective sources that provide adequate support in gathering finance for business purpose. Financial planning is get utilised in effective manner that helps in managing available finance and make effective use of it for the growth and development of the business. Budget is also prepared by Easy Electronic ltd. in order to make diversified use of their available finance and by using investment appraisal techniques they evaluate the benefits of the available project. Different formats are followed for preparing different financial statements such as vertical format and horizontal format. In the end ratio analysis is made in order to make effective level of comparison among Morrison Supermarket plc and J Sainsbury Plc.

References

Adkins, R. & Paxson, D. 2014, "Stochastic Equipment Capital Budgeting with Technological Progress: 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.
Baker, H.K. & English, P. 2011;2013;, Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects, 1. Aufl.;1; edn, Wiley, Hoboken.
Barth, M.E., Konchitchki, Y. & Landsman, W.R. 2013, "Cost of capital and earnings transparency", Journal of Accounting and Economics, vol. 55, no. 2-3, pp. 206-224.
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.
Blanco, B., Garcia Lara, J.M. & Tribo, J.A. 2015, "Segment Disclosure and Cost of Capital", Journal of Business Finance & Accounting Management , vol. 42, no. 3-4, pp. 367-411.
Bradshaw, M., Callahan, C., Ciesielski, J., Gordon, E. & Kohlbeck, M. 2010, "The American Accounting Association's Financial Reporting Policy Committee's Response to the Preliminary Views on Financial Statement Presentation", Accounting Horizons, vol. 24, no. 2, pp. 279.