Unit 2 Managing Financial Resources and Decisions Assignment Sample

Unit 2 Managing Financial Resources and Decisions Assignment Sample

Introduction

Present business environment is based on the approach where finance plays important role which is treated as important source to run any organisation. All the activities in the business are executed with the use of finance which is used in different aspects by analysing different attributes. For the purpose to achieve effective use of finance and funds in the organisation there is required to have effective management of finance by adopting strategic management by taking strategic decisions in the organisation.

TASK 1

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

In a business to run all the activities in effective manner there is required to select most effective source of finance which proved as most effective tool for the organisation. To understand these sources in effective manner we can segregate these sources in internal and external sources of finance (Bach, et. al 2013).

Internal sources-

These are the sources which are available in organisation and can make impact on the overall effectiveness of the organisation. Following are the internal sources available in the organisation.

Profits- There is retained profits in every organisation which is generated from the operations of the business and treated as effective internal source of finance with low cost and for long term in organisation.

Revenue- Revenue of business is defined as the sales of the business conducted by its operations that can be sales of products in manufacturing company and in service company services provided by them.

Sale of assets- Finance can be collected in organisation by selling out assets and properties of the company and this is proved as effective source which help in liquidate blocked assets of the company.

Loan from Directors- Directors and members are key people in any business and organisation and organisation can take loan from them on a specified interest rate that is organisation is liable to pay them.

Retained dividends- Organisations can collect finance by stopping the dividends of the shareholders of the company and utilise it in the organisation (Bach, et. al 2013).

External sources-

Following are the external sources that can be used by organisations that can make impact on the overall effectiveness of the organisation.

Issue of shares and debentures- In present business environment issue of share capital is one of the most effective sources of finance which is for long term. In case of issue of shares there is transferred voting power and ownership of the company to the shareholders of the company. In case of issue of debentures there is increase in the creditors of the company and interest is provided to them on a predefined interest rate.

Loan from bank- organisations can take loan from banks which can be long term and short term on a defined interest rate. This is most effective source for finance for the Entrepreneurs.

Bank overdraft- Bank overdraft is a facility to providing by banks to its customers on their current accounts and based on their goodwill in which they can withdraw amount more than their balance in their account. There is charged interest on that amount which must be repaid in a specified time period and it is effective for short term (Cascio, 2013).

Venture capital- It is source of finance in which there are involved various equities who are investing their money in the organisations having effective ideas for investment for effective profits.

AC1.2 Assess the implications of the different sources.

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

There are various attributes and aspects which influences the selection of the sources of finance which selected by the company must be in accordance with the requirement of the organisation. Decision must be taken by analysing all the important aspects which can influence the decisions.

Loan from bank- For an entrepreneur there is required finance which can be arranged easily. Loan can be taken from bank by providing adequate security and agreed for the terms and conditions of banks (Akhbari, et. al 2015).

Loan from directors- Key people in any organisation can lend their money to the project for effective running and to achieve the objectives in effective manner. In a start-up project it will be effective to collect funds by using this source of finance.

Bank overdraft- There can be taken finance by utilising facility of bank overdraft in which the bank facilitates to collectextract funds more than the balance in the account of the customers. This is short term source of finance for any business which is effective (Akhbari, et. al 2015).

AC2.1 Analyse the costs of different sources of finance.

Following table is showing cost of different sources of finance which can help in analysing their effectiveness.

AC2.2 Explain the importance of financial planning.

In every organisation there is effective role of financial planning which is makes impact on other activities and their success which leads organisation to the success. Marketing planning is a process to identify various factors analysing them and making the most effective decision. There are included forecasting, comparing, analysing factors and their effective administration. Following are the points showing importance of financial planning in organisation.

• This helps in identifying various factors related to the requirement of finance in organisation. This also helps in analysing the adequacy of funds within organisation.
• This helps in identifying further requirement of funds in organisation to effectively execute all the activities and achieve effective results (Ahrendsen, et. al 2012).
• This financial planning enables to reduce the ratio of uncertainty within organisation and its activities.
• Making budget provides effective control over use of finance in organisation and effective utilisation can be achieved within organisation.

AC2.3 Assess the information needs of different decision makers.

In an organisation there are required participation and consideration of various parties who are treated as decision making and the following are the information required to be assess.

• Shareholders areimportant part of the organisation and must be considered in the decision making process as in they have voting power and they must be provided information related to financial position of the company like profits, revenue, liquidity and earning per share which make them able to take decisions (Ahrendsen, et. al 2012).
• Board of directors must be provided information related to the financial adequacy by which they can take decisions related to frame effective policies and regulations in the organisation.
• Investors of the company must be provided information related to the profitability, flexibility, debt equity ratio and future plans which can help in taking decision to invest or not.
• Government have effective role as in there is requirement to pay taxes and application for any kind of grant which can be done by providing effective information about the organisation (Akkoyun, 2012).

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

Following is the impact which is made by different sources of finance on the financial statements of any organisation.

Issue of share capital- In the organisation issue of share capital make impact on the balance sheet of the company which is a financial statement shows the liquidity and effectiveness of any organisation. Share capital is a liability if company as in it is collected from the general public and company is liable to pay dividend on it and repay it latter. So it increases liability of the company (Akkoyun, 2012).

Bank loan- Bank loan can be for long term or short term and this increases liability of the company in its financial statements as well as it increases bank balance which is current asset of the company.

Leasing- Lease will be recorded as long term liability in the financial statements of the company and the equipment will be recorded in the assets of the company. Interest on lease will be treated and recorded as expenses in the financial statements of the company (Grimm, et. al 2016).

AC3.1 Analyse budgets and make appropriate decisions.

A budget is a financial plan for a forthcoming accounting period for a defined purpose which estimates the costs, revenues and resources over a specified period reflecting a reading of future financial conditions and goals and is revaluated on periodic basis. A surplus budget means profits are anticipated while a balanced budget means that revenues are expected to equal expenses. A deficit budget means expenses will exceed revenues (Grimm, et. al 2016).

Objectives

1. It helps the management to make decisions in case of uncontrollable change in conditions.
2. It helps in finding the deviation from the budgeted and actual output, analysing and understanding the weak areas and taking corrective measures for improvement.
3. It helps in building co-ordination as the plans are made for future considering each of the possible factors.
4. It provides an estimate of income and expenses for that particular period and accessing the financial position at the end of the period.
5. It guides management in making day to day decisions by providing a basis forecasts (Grimm, et. al 2016).

Importance

• A budget enables you to know what you can afford, take advantage of buying and investing opportunities, and plan how to lower your debt.
• 2. It helps to allocate funds, to understand how the money is working, and how far one is towards reaching the financial goals (Hussain, et. al 2015).
• 3. It helps save unexpected costs.
• 4. If one has limited resources it helps in keeping the focus on spending with prudence and meeting the end needs and requirements.
• It helps identify and eliminate unnecessary expenses like penalties, late fees and interests.
• It provides a warning for potential problems.
• It helps making best use of money.
• Helps achieve a financial goal efficiently.
• It helps lighten the debt and solve debt problems.
• 10. Remedial actions can be taken without delay (Hussain, et. al 2015).

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

Unit cost: It is a summation of all the expenses incurred in the entire process of producing, storing and selling one unit of a product or service. It includes all fixed costs, variable costs, overhead costs, direct material and labour costs and all the other costs incurred in production.

Price: Price is the amount which is paid by one party for purchasing the given goods or services to the other party. In other words price is the cost of obtaining something.

Pricing methods can be broadly classified in two categories:

• Cost oriented pricing method
• Market oriented pricing method

Cost oriented pricing method- cost of production is considered as the base method to calculate price of final product or goods.

• Cost plus pricing
• Mark-up pricing
• Target return pricing

Market oriented pricing method – price is calculated on the basis of market conditions.

• Perceived value pricing
• Value pricing
• Going rate pricing
• Auction type pricing
• English auctions
• Dutch auctions
• Sealed- bid auctions

Differential pricing-

Differential pricing- It is the strategy of selling the same product at different prices to different customers. It is adopted to maximize the profit of the organization.  Differential pricing can be charged considering various basis:

• Customer segment – depending on the segmentation of customer’s different prices can be charged on the same product. For instance, fees in various colleges are different for Indians and NRI’s (Schneider, et. al 2012).
• Image pricing- the image that a product or good has in the market can be the factor for charging different prices. Cosmetics and clothing brand fall in this category.
• Product form pricing- slight variation leads to charging of different prices.For instance the price of iPhone in rose gold is higher than black.
• Location pricing- prices are determined considering the location. For instance, the same bottle of cold drink is sold at a higher price in theatres than usual.
• Time pricing- the same product is sold at a higher price depending upon the time such as off-season.For instance, woollens are sold at high price in winters than in summers (Schneider, et. al 2012).

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

Investment appraisal techniques

The techniques applied to evaluate the best proposal for an organization or company amongst the given set of proposals using methods for calculation like internal rate of return, average rate of return, payback period, net present value (Uechi, et. al 2015).

Net Present value- NPV is the technique of capital budgeting in which there are analysed invested amount with the returns generated in the present value.

The formula of NPV calculation is as follows: -

= Amount of total discounted cash flows - Amount of initially invested

Payback period- This is the period in which the total amount invested is recovered in a project. This time period defines the risk factor in a project. So there must be less payback period for effectiveness of the project (Uechi, et. al 2015).

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Task 2

AC 4.1 Discuss the main financial statements.

Financial statements are a formal record of the financial position of a business, entity or an enterprise.

Financial information is thus represented by :

1. Balance sheet – it represents the statement of assets, liabilities, and capital of a business at a given point of time,
2. Income statement- It provides a report of the company’s financial performance over a specific accounting period. It takes into consideration all the operating and non-operating activities thus helps in assessing the financial position of the company. It provides the details of incomes and expenses over the preceding period.

Income statement is divided into two parts; operating and no- operating. The operating portion discloses the incomes and expenses that are earned or incurred from regular business operations (Pompian, 2012).

Income statement is used to calculate ratios as return of equity, return on assets, gross profit, operating profit, earnings before interest and tax and earnings after interest and tax.

Therefore it provides two to three year data for historical comparison.

1. Cash flow statement- it is a financial statement that affects  cash and cash equivalents due to changes in balance sheet and income statement. Cash flow statement comprises of three parts:

• Operating activities- it includes activities that are conducted in the operations of the business (Johnson, 2014).
• Investing activities- it includes activities that are conducted for making investments.
• Financial activities- it includes a summary of financial activities such as inflow from banks, investors and customers and outflow in the form of distribution of dividends.

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

Comparison

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

Conclusion

This report is showing all the available sources of finance which can be used in organisations that can make impact on various activities. There are defined effectiveness of the sources with their different attributes and advantages and disadvantages. There are various tools and techniques which can manage financial resources in effective manner and can achieve most profitable results (Nilakant, et. al 2012). This report will explain various aspects related to the sources of finance, financial statements and their evaluation by analysing cost of sources of finance and selection of most effective source of finance.

References

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