Unit 2 Managing Financial Resources Assignment Copy

Unit 2 Managing Financial Resources Assignment Copy

Introduction

Management is indulge into managing the things within the organisation. Their prime responsibility is to manage the available finance. There are various tools and techniques that utilised for managing the finance and these tools & techniques are financial planning, budgeting and many more. For getting finance organisation having various sources some of them are internal and some are external. There are various stakeholders associated with the organisation having interest in their functioning. Organisation made use of the investment appraisal techniques in order to chose the most adequate investment option for their business purpose and also follows ratio analysis technique for the purpose of analysing their financial position internally and externally. In the below report all these terminologies get discussed briefly and effectively.

Task 1

A. Identify the appropriate sources of finance available for the selected business for its operations and assess the implication of different sources. [P1.1 and P1.2, M1]

Radisson Plc is looking for huge share of finance as they need to complete the long term contract of rendering bespoke software to different companies around UK. So there are various sources available that helps in raising funds such as: -

• Ordinary shares: Radisson Plc is listed within the stock exchange due to which they are able to issues ordinary shares in order to raise money for their new long term contract. The benefit of getting funds with this source is Radisson Plc need not to re-pay the share amount till their liquidation. But the demerit of this source is they need to pay adequate dividend amount which is are not tax efficient as they are not expense allowable against profits. It increases the cost of the Radisson Plc (Bernstein, 2015).
• Borrowings: Radisson Plc also arrange the funds with the help of the borrowings as they borrow the funds from different sources against their assets and if they fail to repay the borrowing funds then their assets get seized. The benefit of getting funds from this source is Radisson Plc didn't share their controllership with anyone and the amount paid as interest over borrowed funds are expense allowable against profits. But the major demerit is it has to be repaid within the agreed time duration and failure of payment results into bankruptcy of Radisson Plc (Bernstein, 2015).
• Finance lease: Radisson Plc took the desired equipment or machinery on lease and agreed to pay adequate sum on regular basis in the form of instalment or rentals. The benefit of this source is that Radisson Plc need not to pay whole payment in one go. But the demerit of this source is with the end of the lease the equipment get returned to his respective owner (Bernstein, 2015).
• Bank overdraft:  Radisson Plc also avail the facility of overdraft as they make payments from their current account more than they actually have for a limited period of time. The benefit of availing this source is Radisson Plc is able to arrange funds quickly and it renders them flexibility. But in the form of demerit they need to pay high rate of interest and quick repayment of the overdraft amount otherwise bank impose penalties over them (Corsatea, et. al., 2014).
• Hire Purchase: Radisson Plc purchase the asset and pay the amount in instalments. Initially they need to pay initial deposit amount and then they need to pay regular and small amount. The benefit of this source is avoid the capital payment. But the demerit is the payment process is complex and it create adequate set of liability over them (Corsatea, et. al., 2014).
• Retained profit:  Radisson Plc make use of their reserve funds or retained profits in their new  research project . The benefit of this source is that it doesn't create any significant liability over them and there is no such additional cost is implied. But the demerit is that it reduce the ratio of liquid funds they attained (Corsatea, et. al., 2014).

The implications of above discussed sources of finance are as follows such as: -

B. Evaluate the appropriate sources of finance for the expansion plan of the above company. [P1.3, D1]

The appropriate sources of finance for the expansion plan of Radisson plc are as follows such as: 

• Ordinary shares: Radisson Plc make issue of ordinary shares as it helps in getting a strong base of finance that need not to be repaid before liquidation. They are satisfied in sharing their overall profits with shareholders. The benefit of choosing this source is to get funds for life time and they need not to repay that amount. But the demerit of this source is they lose their controllership over the company and  decision making  goes in the hand of Board of Directors (Serrasqueiro, et. al., 2011).
• Borrowings: Radisson plc avail the borrowing option as they get funds from banks. The benefit of choosing this source is it doesn't dilute their ownership but the demerit is they need to repay the loan amount within the set time period (Serrasqueiro, et. al., 2011).
• Leasing: Radisson plc get the desired capital nature equipment with the help of this source. The benefit of choosing this source is they need not to pay whole capital funds for purchasing equipments but the demerit is at the completion of lease the asset get returned to the owner (Serrasqueiro, et. al., 2011).
• Retained profits: Radisson plc make use of their reserve funds. The benefit of using this option is it doesn't create additional liability but it lower down the liquidity of the company (Serrasqueiro, et. al., 2011).

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Task 2

A. Analyse the cost of funding the project using equity versus debt finance and recommend your choice. [P2.1]

There are three different types of costs are associated with the sources opted for sourcing the funds such as: -

Cost of equity capital: This cost is associated with the issue of shares in the form of dividend payment. Shareholder invest their money within company in order to get the dividend (Baginski& Hinson, 2016). The formula of calculating cost of equity capital is as followed such as: -

K_e = d/P₀

K_e = Cost of equity capital

d = annual dividend per share

P₀ = share price (Baginski& Hinson, 2016)

Cost of debt capital: This cost is associated with the amount get borrowed from the bank. They need to pay interest over the loan amount. They also took finance lease that also get utilised for calculating cost of debt capital (Baginski& Hinson, 2016). The formula of calculating cost of debt capital is as follows: -

K_d (1 - T)

K_d = Cost of debt capital

T = tax rate (Baginski& Hinson, 2016)

Opportunity cost = This cost is associated with the amount of retained profits that get utilised for business expansion plan. As they can invest their profits somewhere else where they get effective rate of return (Baginski& Hinson, 2016).

B. Explain the importance of financial planning and assess the information needs for financial decision making. [P2.2, P2.3]

Financial planning: The process of forecasting the future financial results and determining how they can utilise their company's  financial resources  in best way. It helps in attaining the short- term as well as long-term objectives of business. It involved high level of judgement as well as uncertainty. For financial planning there are different techniques get utilised such as ratio analysis, cash flows, budgeting and many more. There are three types of financial planning such as short-term, medium-term and long-term financial planning (Rehl, et. al., 2016). Short term refers to planning for one year and in this they look after company's need of working capital. Medium term planning duration among one year to five year as plans include replacement or maintenance of assets, R & D programs, etc. And long term planning is made for more than five years and it include business expansion plan, capital structure and many more.

Importance of financial planning are as follows: -

• It helps in cash flow determination
• It helps in determining the need of raising funds
• It helps in controlling their overall costs.
• It facilitate the profits forecasting
• It make sure about the resources availability
• It helps in attaining set organisational goals
• It helps in balancing the flow of funds within organisation (Rehl, et. al., 2016).

For the purpose of financial decision making there are three types of information needed that get discussed below such as: -

• Strategic information: This information set is utilised for setting objectives and also helps in assessing whether the set objectives get met or not. The information required get derived from internal as well as external sources and it get summarised at higher level. It is related to their long term and having concern with whole organisation (Brounen, et. al., 2016).
• Tactical information:  This information is extracted after the implementation of strategic decisions as with the help of it they took decisions related to the resources allocation within their business and monitor their activities. It include information related to internal as well as some part of external and get summarised at lower level. It having concern with the departmental activities and prepared in regular basis (Brounen, et. al., 2016).
• Operational information: This information is utilised for ensuring specified operational tasks get executed as per their planned manner. It helps in controlling their routinely activities and helps in decision making. The information that get included is task specific and related to immediate team and in detailed form. It get prepared frequently (Brounen, et. al., 2016).

C. Explain the impact of suggested financing option on the financial statement. [P2.4, M2]

There is adequate impact put by the suggested financing option over the financial statements of Radisson Plc and the impact get discussed below such as: -

• Income statement: Net income/loss = Revenue - Expenses. Radisson plc raise the funds from different sources such as ordinary shares, retained profit, leasing and borrowings. With the effect of this there is adequate increase in the share of expenses as they need to pay interest over loan amount and leasing and pay dividend to their shareholders. All these costs increases the expenses that lower down their overall profits (Alin-Eliodor, 2014).
• Statement of financial position: Total Assets = Total liabilities + Equity capital (Share capital + retained profits). The use of four different options put different impacts over liabilities side as with the issue of shares there is adequate increase in the equity share capital, and with the option of borrowings and leasing there is adequate increase in debt liability that increases their long term liability. And use of the retained profits lower down the share of equity capital as well as liquid funds (under assets side). There is single unit get affected with the effect of these options such as cash in hand under assets (Alin-Eliodor, 2014).
• Statement of cash flows:  Net cash flows = Operating  + investing + financing. All the inflow and outflow of funds due to the effect of four different options avail by the Radisson Plc put effective impact over their cash flow statement. There is adequate increase in the in-flow of funds as the liquid funds get raised from different sources that increase the overall in-flow of cash and cash equivalent balances (Alin-Eliodor, 2014).

Task 3

A. Analyse the importance of budgets for variation and make appropriate decisions for Radisson Plc. [P3.1]

Budget: An effective tool that get utilised for implementing organisational strategies. It is an proposed action plan by management for a specific time-period in order to coordinate what need to be done for implemented plan. There are different types of budgets get prepared such as sales budget, cash budget, master budget and many more (Roper &Ruckes, 2012).

The importance of preparing budgets are as follows: -

• It helps in measuring the overall actual performance of the  business organisation .
• It helps in comparing the periodic and departmental budgets
• It compare the actual performance with budgeted results.
• If the comparison renders adverse results than it helps in taking corrective actions for the purpose of effective improvement.
• It control the activities processed in order to attain the set objectives (Roper &Ruckes, 2012)

With the help of the budget Radisson Plc took appropriate decisions such as: -

• They can allocated their available resources in effective manner so that they get adequate returns.
• It helps in reducing the loss.
• It make efficient use of their cash and cash equivalent resources
• It reduces the chances of insolvency related problems.
• It helps in forecasting future performance by evaluating their past performance
• It helps in monitoring and controlling the activities that impact their growth (Gervais, et. al., 2011).

B. Explain how you would calculate unit cost and make pricing decisions based on appropriate information at the Radisson Plc. [P3.2]

Unit cost: It is that part of cost that get incurred by the manufacturing unit for producing single unit of product. It include variable cost, fixed cost and all other direct costs (de Souza, &Lunkes, 2016).

There is effective relationship between cost and pricing because if the prices of product are too high then customers didn't purchase their product and if the prices are too low then organisation is not able to recover their overall cost incurred over product manufacturing. There are some factors that influence pricing decisions such as customers, competitors and costs. For Radisson plc there are various pricing methods available for pricing decisions such cost plus pricing method, marginal cost plus pricing, marketing-based pricing, premium pricing, market skimming, penetration pricing, price differentiation, discount pricing, controlled pricing and many more (de Souza, &Lunkes, 2016).

For their decision making Radisson Plc make use of total cost plus pricing method. According to this method Radisson Plc add up an mark-up amount within the cost of their product that gives selling price of their product (de Souza, &Lunkes, 2016).

C. Assess the viability of the expansion project using investment appraisal techniques such as the NPV.. [P3.3, D2]

In order to assess the viability of the expansion project Radisson Plc make use of different investment appraisal technique such as: -

NPV: - NPV or Net Present Value: It is the difference amount between the present value of total cash inflows and initial investment amount. Positive balance referred as profitable investment and vice-versa (Adkins &Paxson, 2014).

Payback period: It is that time period in which cash inflows become equal to the cash outflows and it get expresses in years. But it neglects the profits rendered by the investment after pay-back period (Adkins &Paxson, 2014).

Below is the example of NPV and pay-back period such as: -

Depreciation calculation: -

Depreciation = (Initial investment - Scrap value) / number of years

= (46,000 - 4,000) / 4

= 10,500

New cash inflows: -

Calculation of NPV

NPV of project A: -

NPV of project B: -

Project B is higher NPV (9,445) as compare to Project A (7,169)

Payback period: -

Project A PBP: -

= 2 + [(46,000 - 31,000) / 23,000]

= 2 + 0.65

= 2.65 years

Project B PBP: -

= 3 + [(46,000 - 43,0000)/ 25,000]

= 3 + 0.12

= 3.12 years (Adkins &Paxson, 2014)

Project A is having lower PBP (2.65 years) as compare to Project B (3.12 years).

Task 4

A. Discuss the above mentioned financial statements of Radisson Plc. [P4.1, M3]

Radisson Plc maintain three major financial statements that get discussed below such as: -

• Statement of comprehensive income: - Net income/ loss = Net revenues - Net expenses: Radisson Plc record their routinely income and expenditure related transactions under this account that further get utilised for the purpose of determining the net profit or net loss for a time period. They follows vertical format for preparing their income statement as it helps in rendering detailed information as well as make the statement more and easily understandable (Puri, 2014).
• Statement of financial position:- Total assets = Total liabilities + Equity share capital (share capital + retained profits): Radisson Plc record their all assets, liabilities and equity share capital balance below this statement. They make use of this statement in evaluating their overall financial position. They prepare this statement by following vertical format as it helps in rendering detailed information related to their assets, liabilities and equity capital to the users. This format is easy to understand and utilised easily for evaluation purpose (Puri, 2014).
• Statement of cash flows: Net cash and cash equivalent balance = Operating + Investing + Financing: Radisson Plc prepare this statement to record and render detailed information related to the use of their cash and cash equivalent balance. Under this statement they segregate their statement within three parts in order to render more detailed and easily understandable information for teh purpose of decision making or planning (Puri, 2014).

B. Select two different types of companies (one could be Radisson Plc) and compare the formats of financial statements. [P4.2, M3]

Comparison among Radisson Plc and XYZ & Son's is made in the below table: -

C. Interpret the financial statements using appropriate ratios of a public limited company and compare with those of another company. [P4.3, D3]

There are various ratios are available some of them are as follows along with comparison such as:  -

Interpretation and analysis: -

• Gross profit: It helps in measuring the efficiency of getting revenues through their sales. As per the results it is analysed that  Radisson Plc . is attaining revenues at 42.51% which is lower than the ratio of ABC ltd. at they earn revenues at the rate of 44.89% (Uechi, et. al., 2015).
• Net profit:  It helps in measuring the organisational profitability after deducting all their expenses. As per the results it is analysed that Radisson Plc. is attaining profits at 2.37%% which  is lower than the ratio of ABC ltd. at they earn revenues at the rate of 3.64%.
• Current assets: It make use of all current assets and liabilities in order to measure the current position of the organisation. The ideal ratio is 2:1. As per the results it is analysed that Radisson Plc. is having ratio of 1.8: 1 but is lower than the ratio of ABC ltd. at their ratio is 1.92:1 (Uechi, et. al., 2015).
• Quick assets: This ratio is utilised for measuring the quick convertible assets into liquid funds. Due to which inventories and prepaid expenses are not included in calculation. As per the results it is analysed that Radisson Plc. is having ratio of 0.53:1 but is lower than the ratio of ABC ltd. as they attain ratio at 0.62:1. Both of them are not having sufficient funds as the ideal ratio is 1:1.
• Receivables turnover: This ratio is utilised in order to evaluate the time period in which accounts receivables get turned. As per the results it is analysed that Radisson Plc. is having ratio of 4.94 days but is higher than the ratio of ABC ltd. as they attain ratio at 4.91 days (Uechi, et. al., 2015).
• Inventory turnover ratio: This ratio is utilised in order to evaluate the frequency of consuming inventory within a year. Higher ratio shows that entity is at liquidating inventory. As per the results it is analysed that Radisson Plc. is having ratio of 81.72 days which is higher than the ratio of ABC ltd. as they attain ratio at 81.40 days.
• Conclusion: It is concluded that ABC Ltd. is effective enough as compare to Radisson plc as they need to put focus over improving their operational efficiency as well as decision making in order to get the favourable results and become more competitive and effective as compare to their respective competitors (Uechi, et. al., 2015).

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Conclusion

All the points get discussed in effective manner as there are various sources available for getting desired amount of funds along with analysing their implications. There are effective set of cost is associated with them in the form of interest, dividend etc. Budgeting is utilised for better allocation and controlling purpose. Ratio analysis is utilised for comparing their overall performance with others and investment appraisal techniques get utilised for evaluating the available projects or investments. All these techniques and tools get utilised by Radisson plc for their financial planning.

References

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