An organization can manage, maintain and develop its economic condition with help of financial resources and information available to it. They help in making effective decisions within the company (Broadbent and Cullen, 2012). These resources are raised from different sources and used to take decisions regarding future planning of the organization. Funds are important in company as they facilitate business to maintain budgets and financial activities. Efficiently using these resources lead the company to take better decisions and maintain business as a whole (Correia and et.al, 2012).
In this report, the sources available to a company are analyzed with their implications decision making process. The second part of report consists of different costs associated with raising funds in the organization. Further it evaluates how financial decisions are taken in company with use of financial information. It also includes evaluation of different investment appraisal techniques and financial statements.
Funds From Different Sources
Funds are needed for companies to carry out various activities of a business; they have to raise these funds from different sources (Paramasivan, 2009). There are large numbers of sources available for a company to acquire funds. Pepsi co. will raise finance from internal and external sources of finance.
- Internal sources- Company can source its funds from internal resource; it includes retained earnings, sale of assets and reduction in working capital. This money is acquired by them from resources available to them inside the business only. Retained earnings are certain part of profit which is kept by company for business use (Ramachandran and Kakani, 2009). They can earn money by selling previous and outdated assets of their company; these assets are no longer used by them. To raise additional money they can reduce working capital to help business activities.
- External sources- Short term, medium term and long term funds acquired by company from outside sources to the business are external sources of financing (Brennan and Solomon, 2008).
- Long term finance- Finance for a company can be raised from issuing shares to the general public, issue of debentures and other modes such as long term bank loans.
- Medium term finance- Hire purchase and leasing are the activities which make funds for business. In hire purchase assets are used by the company but payment is paid over installments within a given period of time. Leasing is medium term source which involves using an asset but ownership is not transferred.
- Short term finance- Bank overdraft, loans and debt financing are short term finance available to a business.
Company wants to raise funds for its business activities but they have to pay some cost on these available resources. They can generate finance from equity, bank loans and debenture; but in process of acquiring those funds they have to pay legal expenses and subscription fees to issue shares (Ramachandran and Kakani, 2010.). When company obtains money from loans and debt finance there is possibility of bankruptcy; in this situation banks sell securities to repay their loans before any creditors. Another effect of generating fund from hire purchase and leasing is that company has to pay some amount of money as initial payment. This is necessary to pay by all firms while considering finance through hire purchase and leasing. If company generates finance from trade credit they have to pay penalties in case of nonpayment on time. Suppliers can also file case for first payment when company is bankrupt (Cowton, 2004).
Raising finance from different sources is not easy for a company, as they have to pay cost for generating funds from them. There are various cost associated with each type of source used by companies; they have to pay interest, taxes and dividends for acquiring money from certain sources. These resources are as follows-
- Interest on bank loans- When company raises funds from bank loans they have to pay interest on these loans. Different financial institutions also provide funds and charges interest on them. In case of bankruptcy they sell the property of company to repay their loans and it is done before any other creditors (Correia and et.al, 2012).
- Dividends on equity finance- In case of financing through equity, the business has to pay dividends to its shareholders. They have to pay taxes on amount of dividend they paid to shareholder (Argouslidis, 2008).
- Interest on hire purchase and leasing- Financing is when done on basis of hire purchase and leasing company has to pay interest with installments. And these installments are paid every month till the amount of asset is covered up. In case of lease, the customer can claim lease as a tax deduction (Ramachandran, and Kakani, 2009). But then also they have to pay huge interest on using these assets and in the end ownership of asset is transferred to original owner.
Financial planning in PepsiCo is very important as it manages activities of whole business and helps them to grow and expand (Shapiro, 2009). To attain the desired goals of organization they have to plan for financial activities; it includes managing financial resources, information and making effective decisions with them. The task of financial planning in PepsiCo involves this process-
- In first step they have to analyze the business environment including internal and external environment and then preparing different types of budget such as; cash budget, sales budget and other budgets which are necessary for an organization (Davison and Warren, 2009).
- They have to determine future opportunities in order to generate huge profits from them. They can also develop and expand their business with help of these opportunities.
- After analyzing the environments, they can establish goals and objectives. Also it will help to identify the way to accomplish these goals and how the costs and expenses of business can be reduced (Correia and et.al, 2012).
- Financial planning will help them to manage cash and financial activities of business that includes; maintaining financial statements, concluding revenues and expenditures of business.
- It also assists managers in conducting future planning, goals and aim of company. The risk associated with budgeting and decision making is identified by financial planning. Which then facilitate effective performance of business with using this budget (Cowton, 2004).
Effective management of business needs financial information, on the basis of these managers takes decisions that are necessary for working of an organization. The finance department requires different types of information for making decision about investment and operating activities of their business. They make decisions regarding effective allocation of these resources and maintaining them for future development of company. Also they can apply control measures to reduce wastage of these financial resources. Marketing department can use these information in order evaluate cost of production and then compare them with competitors. Marketing managers need this information for making decision about expenses to be made for marketing activities of the product. They require maintaining the cost of advertising and selling the products in to increase the sales of its goods (Correia and et.al, 2012). Human resource department of PepsiCo needs this information to effectively facilitate process of recruitment, selection and training. They have to make decisions regarding appraisal of employees, bonus, and other financial rewards on basis of their performance. For this they require information of financial resources.
PepsiCo has to prepare its financial statements according to the accounting principles and rules of accounting. They have to follow the rules and regulations made by International Accounting Standards (IAS) ( Shapiro, 2009). According to these rules and regulations every organization has to maintain financial statements and data in a proper format and then evaluate them to know the revenues earned by them in a financial year. The types of financial statements required to maintain by PepsiCo are-
- Income statement- They have to prepare profit and loss account, interest on loan and cash flow statements to know what business has charged in a financial year. It includes expenses and cost related to issue of equity and dividend paid to shareholders (Argouslidis, 2008). All the expenses are added in debit side of P&L account and incomes are written in credit side.
- Balance sheet- Another important financial statement which they have to prepare is balance sheet. It includes assets and liabilities owned by them in a given financial year. In asset side there is increase in cash and banks of company with assets owned by business. It contains current liabilities and current assets along with long term assets and liabilities (Brennan and Solomon, 2008).
There are 3 types of business types prevail, they are as follows:
- Sole trader: A sole trader is a one man company and all the functions will be operated by this man only. He do not partner with any other individual. The need of developing financial statement is not all necessary in this condition. All the profits and losses will be borne by this trader only. He does not prepare any kind of accounts or annual financial statement of affairs. The sole trader is also owns the right to keep the data confidential. He is also free to make decisions in his firm no outsider’s advice is necessary to address in this concern. The sole trader also enables them to retain the right in the company and posses all the assets and liabilities n his own consideration. But he is also liable for bringing down his own money and he cannot issue shares. He is also liable to pay taxes on the incomes and do not retain any corporate benefits (Vafeas, 1999).
- Partnership Firm: partnership firm is a entity where business partners co- join to achieve a single objective for temporary period. The partnership firm requires a minimum of 2 partner and maximum 20 in a company. The financial statements are prepared on a consolidated format, because all the operations and activities performed are very much individualised. Every partner prepares a single income and expense statement and profit appropriation account is prepared. A consolidated balance sheet is also prepared, where all the capital absorbed by each partner and fixed earned by the partners will add on one paper. The liability of each partner is born by the capital incurred by him same will be the profits too, higher capital incurred will receive higher profits.
- Public limited Company: A public limited company is an organisation where company is listed on a centralised and recognised stock exchange. Public limited company need to list their shares for buying and selling of shares over the standardised system. Public limited companies need to disclose their accounts too.
Financial Ratio Analysis
PepsiCo’s financial performance has been analysed and they have brought forward various kinds of information. The financial ratio analysis will tell how they progressing in this tough business environment and how they are maintaining pace with other competitive companies like Coca-cola, this will also illustrate on the effects of how well they are performing in accordance with Benchmark companies. The PepsiCo’s ratios are divided in various parameters i.e. liquidity, market measures, efficiency, Profitability and debt measures (White, Sondi and Fried, 2003).
The liquidity ratios show that, how efficiently they are managing the liquidity of company. In other words, how well they are maintaining the liquid performance and working capital efficiency. The current ratio is 1.09, means they owning very proficient use of liquid or cash in the firm. The quick ratio says about the much more liquid state than the current ratio, where they will arrange higher cash in less time. The cash ratio shows how much cash they own over the liabilities, 0.36 to payout liabilities (Mumford, Schultz and Osburn, 2002).
The next ratio constitutes the long term debt responsibility; the debt equity ratio is above 1, means they owe more debt over the available equity. They are bringing in more external liabilities. But debt ratio shows that, they have range of 0.69, they have 40% to payout on 60% assets. This improves the efficiency on the company’s performance. Times earned show that how much asset they need to procure to payout the interest earned on the loan borrowed. They have a lower percentage of interest expense to payout.
Profitability ratio illustrates the total profitability of company. The total income is valued on different parameters to brought useful information, net income to sales is very much low (0.09), this shows that they are incurring more cost to produce a reasonable amount of sales. The next ratio is net income to assets. It represents the reliability of assets used to bring such sales proceeds (0.08).
The efficiency ratio shows, operational capability of company, debtors has been realised over the period. The ratio explains that they have arranged a 9% Account receivables over turnover, means 91% is cash sales. They have allotted a lower percentage of account receivables. The total asset to turnover, where the ratio lies in 0.87, they have earned higher percentage of sales over available assets. It helps to provide economies of scale (Taylor, 2012).
Market measures shows the reliability of company over the borrowings, The P.E ratio has been a rate of 17.67, it is very positive because they are earning better market value on the invested capital. Both EPS and DPS are also improved very much.
Appropriateness of Capital budgeting Techniques:
From all the three techniques most favoured and useful technique is internal rate of return. In this technique, the tool reproduces more than one discounting factor and the factor is then computed against the lower rate to establish relational information on the appropriateness on the feasibility of the project. The comparative study is possible with IRR and not possible with any other tool (Murphy, 2000).
From the above report we can conclude that PepsiCo is doing very excellent in their industry, they are actually making up to the benchmark ratios. They are also conducting a series of investment appraisal techniques, to divest their capital and earn high returns. The report has also identified various patterns of financial statements used by different proprietor (John, 2013). The sources of funds and associated costs has also been explained which can be used by the organisation to meet the long term objectives.
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