Managing Financial Resources and Decisions Assignment

Managing Financial Resources and Decisions Assignment

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: - 

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: - 

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:

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: -

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:

(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: - 

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: -

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

Ratio interpretation: - 

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.