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Managing Financial Resources and DecisionManaging Financial Resources and Decisions BTEC HND Level 5

Introduction

Finance is important asset of a business that needs to be enhanced with the passage of time in order to compete against the competitors in the external market. Clariton company has been selected for the current project report which is based on making decisions related to the financial performance of this enterprise. This report is all about defining and assessing various sources of finance ranges from internal and external. Financial planning is defined properly in relation with the various categories. The cash budget has prepared to analyze the current position of an entity. The capital budgeting abs ratio analysis is uses to assess the financial performance of the business entity.

Task 1

1.1 Sources of finance for unincorporated and incorporated business

Incorporated- This term is related with the legal identity as the firm registered in the law are recognized as the legal entity (Gupta and Rai, 2016). The business who will registered with the law of the country counted among registered entity which possess all rights and obligations.

Crowd funding- This is one of the important source of finance in which people are invited to take the equity shares of an entity. The external parties are attracted to invest their valuables in the existing firm by enjoying ownership in return

Debentures- The debenture holders who will support the corporation by providing the variety of debt for specific period. The Coupon rate will ensure the interest to be charged on the amount taken which is the obligation of an entity to payback the debenture-holders.

Unincorporated-These businesses are registered under the legal law who have same identity between their business and the owner.

Bank loan- The amount borrowed by the owner by approaching different financial institutions for getting small and higher amount of loan (Raikes and McBean, 2016). The small scale entity will take loan according to their current business requirements.

Owner's capital-The personal savings of the owner will be invested in uplifting their existing position in relation to the external market. The amount used by an individual will have full control over their money to be used in their business entity.

1.2 Assess the implication of internal and external sources of finance

 

Basis

Internal source of finance(Equity)

External source of finance(Debenture)

Financial

The financing of the business through this mode will increase the capital of an entity. The amount financed through this mode will keep in the business till the wound of business.

The debentures are offered by the venture by inviting external party to invest in the business. The capital will be increases by using the sources of finance. It raises the debt obligation of an entity by using this mode of finance.

Legal

The clariton are required to pass ordinary resolution in the board meeting followed by sending of application letter to the registrar of companies for issuing equity shares. The issuance of equity shares will require legal fee to provide legal identity to the source of finance.

The appointment of debenture trustee is essential for issuing debenture who prepare debenture register for recording all debenture holder name, amount and the interest accrued. The business entity will determine its interest rate in assistance of the legal authority.

Bankruptcy

The equity shareholder's will not affect in case of bankruptcy.

The business entity will get affected with the effect of bankruptcy in which business will need to pay the aggrieved party.

Dilution of control

The equity shareholder will have enough control in the business entity.

There is no control

 

1.3 Evaluate most appropriate sources of finance for clariton

There are different sources of finance selected by n entity owner in their business at different point of time whose efficiency is assessed by defining its pros and cons which is given below:

Equity

Advantages

  • It provides ownership to the holder
  • It accompanies with voting right according to the shares enjoyed by the users
  • It raises the capital of the business in achieving their current goals and the objectives
  • Dividend is provided to the users out of the total profit

Disadvantages

  • There is no dividend for the users in case of loss
  • The priority is given to preference shareholder in payment of dividend
  • The profits are distributed among the equity holders

Debentures

Advantages

  • It helps in enhances the long term fund of the business
  • The rate of interest on shares are less than compared to the dividend paid on shares
  • The interest paid on debenture is tax-deductible which reduces the burden of tax

Disadvantages

  • The imposition of fixed interest will reduce the profit of an entity

Bank loan

Advantages

  • Large amount of fund can be raised
  • It creates relationship with bank to take loan in the future

Disadvantages

  • The burden of interest imposed on the business
  • Collateral security need to be deposit before taking loan

Owner's capital

Advantages

  • Full possession on the money used in the business
  • No burden to repay the amount

Disadvantages

  • The less amount will not fulfill the demands of the business concern.

Task 2

2.1 Analyse costs of two sources of finance under various considerations

There are two sources of finance such as internal and external sources of finance which can be used by clariton in order to uplift their existing working conditions which is given as below:

Basis

Equity

Debenture

Dividends

The internal source of finance that is equity finance by inviting external entity to invest in the business. The equity holders who play an integral part in the business will demand dividend in return for the amount invested in the business. The primary obligations of an entity is to pay dividend out of the total earned revenue by the business entity. The cost involved in using this source of financing includes paying dividend as the compensation for investing money in supporting the aims an objective of an entity.

 

Interest

 

The debenture is another important source of fiance which comes under the category of external source of fiance. The external parties are invited to borrow fund to an entity in improving the existing condition of the business (France, 2016). The amount borrowed from the externalities will be re-payed their money for a specific period mutually decided by both the parties. The interest rate will be determine by the parties which need to be paid to the person who invest money in the business of clariton.

Tax

The burden of taxation will not affect the business while taking this form of financing.

The taxation pressure will be imposed on the business entity which seems to be external obligation which increases the cost of taking this source of finance.

 

2.2 Explain the importance of financial planning

Financial planning is important approach used by an entity in order to manage their existing financial resources by improving their existing efficiency (Raikes and McBean, 2016). The finance is important resource for an entity in supporting the current aim of the business entity. There are various key considerations of the financial planning are explained to reflect the importance of financial planning for clariton which is given below:

Budgeting- The current facts and figures are planned in the present in order to reduce the future threats imposed on the business. The financial resources are procured by developing a variety of budgets which enhances the effectiveness of all kinds of resources. The current facts and figures are analyzed properly in order to minimise the future impacts of all kinds of factors in the future.

Inadequate finance-The business analysts are appointed by an entity who will analyses the existing financial resources and all kinds or risks associated to reduce its pressure in the future. The priorities are set by an individual by setting threshold limits to control the expenditure incurred in the business (Yuan, Qian and Pangarkar, 2016). The expenditures are monitored to transform them into cash inflows rather than increasing the outflows.

Over trading- The financial statement analysis has given a terminology in which the growth done by the business by spontaneously expanding their business operations. This will bring lot of risks as the size of business increases frequently will lead an entity towards the loss. The financial plans prepared by an entity will define the short, medium and long term goals which guides an entity to move ahead in the business gradually.

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2.3 Assess the needs of information needs of users

The preparation of financial statement is essential in order to convey financial information related to the current financial conditions of an enterprise. The needs of different users of the business will get fulfilled which is mention below:

Partners- The partners will ensure the existing condition of an entity in order to ensure its future earnings in form of returns generated from this entity (Raikes and McBean, 2016). The partners invest money in the organization in exchange of returns obtained from this entity.

Venture capitalist-The investors will demand stake in return for investing money in the business of clariton in supporting their aims and objectives. The management decisions are intervened by these investors who will ensure the stable working conditions of this entity.

Finance broker- The finance broker will allow business entity to take loan from the financial institutions easily without facing any kind of complexities. The profitability of the clariton is essential for the finance broker who to ensure its higher rate of brokerage in the future.

2.4 Explain the impact finance on financial statements

Venture capitalist- Venturecapital is one of the internal sources of finance in which an entrepreneur will borrow some amount of money in order to fulfill their current needs and the expectations (Husted, Montiel and Christmann, 2016). The impact of venture capital will affect the balance sheet as it raises the capital of the business as the capital borrowed to invest in the business. The amount paid as the interest on the amount take from the investors are repaid to them. The interest paid to these investors will be recorded in the profit and loss account.

Table 1: Extract of balance sheet

Particulars

Amount

Capital

XXX

+ Venture capital

XXX

 

Table 2: Extract of profit and loss

Particulars

Amount

Profit

XXX

- Interest

(XXX)

 

Finance broker- The amount borrowed from the external parties that is the financial institution in form of bank loan through finance broker (Dekker, Ding and Groot, 2016). The loan taken by this entity will increase the capital but at the same time it increases liability for the business entity. The interest paid on the repayment of bank loan will affect the profit and loss account. The current sources of finance through this mode will involve the financial information from income statements and the balance sheet prepared by the clariton firm.

Table 3: Extract of Balance sheet

Particulars

Amount

Equity

 

Capital

XXX

+ Bank loan

XXX

Liabilities

 

Bank loan

XXX

 

Table 4: Extract of Profit and loss

Particulars

Amount

Profit

XXX

- Interest@2%

(XXX)

-Brokerage@1%

(XXX)

 

Task 3

3.1 Analyse the cash budget

Particulars

January

February

March

April

May

June

Receipts

           

Received in same month(W.N.1)

15000

22500

30000

15000

15000

3750

Received in one month(W.N.1)

120000

240000

360000

480000

240000

240000

Received in two month(W.N.1)

22500

22500

45000

67500

90000

45000

Total receipts

157500

285000

435000

562500

345000

288750

Payments

           

Payment to suppliers

807250

137250

119750

437250

227250

219750

Shortage/Surplus

-649750

147750

315250

125250

117750

69000

Opening cash balance

110000

-539750

-392000

-76750

48500

166250

Closing cash balance

-539750

-392000

-76750

48500

166250

235250

Table 5: Working notes

Months

November

December

January

February

March

April

May

June

July

Sales

150000

150000

300000

450000

600000

300000

300000

75000

150000

Received in same month

   

15000

22500

30000

15000

15000

3750

 

Received in one month

   

120000

240000

360000

480000

240000

240000

 

Received in two months

   

22500

22500

45000

67500

90000

45000

 

 

Interpretation

Cash budget prepared by an entity in order to know the movement of cash inflow and outflow in the business in relation with the receipts and payments (France, 2016). The income will be recorded from different sources to compensate the effect of all kinds of expenses incurred in the business of clariton. The above budget is fully based on considering all kinds of receipts such as trade receivables and the payment made to the supplier. The basic assumptions used in the preparation of the cash budget is that the sales are not considered as the credit sales are received into different categories of the receipt. The business performance of an entity is showing negative position in initial three months which further gets increases with the passage of month. The negative closing balance of the cash budget will carry forward to the next month which reduces the total receipts generated by the business enterprise (Stacchezzini, Melloni and Lai, 2016). The reducing cash balances of the current cash budget is due to the fluctuating position of all the cash receipts generated over the months. The payment to the suppliers are higher than compared with the receipts generated by an entity over the months in the overall cash budget of an entity.

3.2 Calculate cost per unit

Operating and running cost

Total cost

Units

Per unit

Depreciation

5000

2000

2.5

Fuel

2500

2000

1.25

Supervisor wages

500

2000

0.25

Repairs and Maintenance

     

Repairs

800

2000

0.4

Overhead

1000

2000

0.5

Petty expenses

250

2000

0.125

Standing charges

Salary of manager

1500

2000

 

Insurance

1200

2000

 

Rent of premises

2000

2000

 

Motor vehicle

5500

2000

 

General expenses

4000

2000

 

Interest

1200

2000

 

Total standing cost

15400

2000

7.7

Total Cost per unit

   

12.725

Add profit@20%

   

2.545

Selling price

   

15.27

 

On the basis of above calculation of unit cost the clariton has selected various pricing methods in order to develop their pricing of products which is given as below:

  • Cost plus pricing methods-The current approach is followed by several business entity in which the pricing of products are developed which will consider all kinds of cost along with profit element.
  • Differentiation- The prices are differently offered to the variety of customers on the basis of current negotiation power of the buyers. The competition can be created by facilitate variety of customers by offering lower price products as compared with the competitor of this entity.

 

3.3 Assess the viability of project

Years

Project A

Cumulative cash flows

0

8.6

-8.6

1

1.6

-7

2

2.8

-4.2

3

3.4

-0.8

4

3.6

2.8

5

4

6.8

6

4.2

11

 

Calculation of payback period

= 3+0.8/3.6

=3+0.22

=3.22 years

Years

Project B

Cumulative cash flows

0

4.4

-4.4

1

0.8

-3.6

2

1.4

-2.2

3

2

-0.2

4

2.4

2.2

5

2.3

4.5

6

2.6

7.1

 

Calculation of payback period

3+0.2/2.4

=3.08 years

It is regarded as one of the important tool of capital budgeting which is used to assess the time line generated by a project in relation to the generation of returns. The higher return produces over the period in less time are taken into account. In the above analysis of two projects the best suitable project which generated returns in less time period is Project B.

Years

Project A

Pv@14%

Present value

0

8.6

   

1

1.6

0.8771929825

1.4035087719

2

2.8

0.7694675285

2.1545090797

3

3.4

0.6749715162

2.2949031551

4

3.6

0.5920802774

2.1314889985

5

4

0.5193686644

2.0774746574

6

4.2

0.4555865477

1.9134635003

Total

   

11.975348163

NPV

   

3.375348163

 

Years

Project B

Pv@14%

Present value

0

4.4

   

1

0.8

0.8771929825

0.701754386

2

1.4

0.7694675285

1.0772545399

3

2

0.6749715162

1.3499430324

4

2.4

0.5920802774

1.4209926657

5

2.3

0.5193686644

1.194547928

6

2.6

0.4555865477

1.184525024

Total

   

6.9290175759

NPV

   

2.5290175759

NPV is an acronym which stands for net present value method that is another approach of investment appraisal (Gupta and Rai, 2016). The future profitability of the project are assessed over the years on the basis of discounting rate on which projects are analyzed. The higher returns generated by a project will be considered by an enterprise. In the above projects the best suitable project which is higher than the standard limit decided for the project is Project A.

ARR

Year

Project A

Project B

0

8.6

4.4

1

1.6

0.8

2

2.8

1.4

3

3.4

2

4

3.6

2.4

5

4

2.3

6

4.2

2.6

Total

19.6

11.5

Average

3.67

1.67

ARR

37.98%

43.56%

 

Interpretation

Accounting rate of return used to evaluate the financial condition of an entity on the basis of capital budgeting techniques (France, 2016). The current approach will assess the project on in relation to the net income generated by an individual while considering the business proposal. The current approach will not consider the effect of time value of money as it will determine the rate at which an entity will produce higher amount of profit.

Task 4

4.1 Discuss the components of financial statements

Income statements-The sales and the revenue are assessed by preparing this kind of statement in which trading and profit and loss account are merged together (Gupta and Rai, 2016). The generation of profit is the primary aim behind presentment of this kind of statement. The sales can be enhanced by using this approach in which expenses are minimized.

Statement of cash flow- The cash flow of an entity will be determined by monitoring the existing cash inflow and cash outflows in the business. The cash outflows are reduced by controlling on the expenditures in order to increase or enhance the cash flow from variety of sources.

Statement of changes in equity- The equity is regarded as one of the important factor of the business which increases the capital of an entity in order to fight against the competitor. The opening and closing equity shares are considered by including the amount of dividend.

Statement of financial position- The financial position of an entity will be estimated by assessing the essential factors such as assets and liabilities. This statement is reflector of internal performance of the business in relation with the estimation of value all kinds of resources and their financing.

Notes to financial statement- The notes to accounts are prepared in order to refer these notes in the future for the beneficial of an entity. The business owner may refer to these notes at which the changes takes places in the value of different components are recorded with the complete details. It also fulfills the legal requirement according to which the changes are presented over the years are included as part of these financial statements.

4.2 Comparison of financial statements with the business structure

  • Sole trader-The sole owners are under no obligation to prepare a financial statements in a particular year as they are free from this implication as they are registered under the laws. The sole owner follows the system of single entry system in which the business transactions will have only single effect in the business accounts (Oh, Chang and Cheng, 2016). The profit and loss accounts for these owners will be same for all other business but its presentation may get different. The balance sheet will determine the external position of the business entity. The cash flow will reflect the available cash balance held by an entity over the period in order to meet their obligations.
  • Partnership- The profit and loss statement is different for the partnership business as the total profit will be divided among all the partners in different ratios. This business prepares profit and loss appropriation account for distributing profits. The balance sheet will include the amount of capital brought and withdrawn by the partners from the business. The balance of closing capital will be divided in the capital ratio of the partners which is based on the investing ratio on the amount of capital brought by them.

 

4.3 Interpret the financial statements

Particulars

Formula

2015

2016

Profitability ratios

Revenue

 

1220

1255

GP

 

175

178

NP

 

33

23

Operating profit

 

46

57

GP ratio

Gross profit/Net sales*100

14.34%

14.18%

NP ratio

Net profit/Net sales*100

2.70%

1.83%

Operating profit ratio

Operating profit/Net sales*100

3.77%

4.54%

Liquidity ratios

Current assets

 

71

105

Current liabilities

 

161

167

Inventory

 

46

47

Quick asset

Current assets-inventory

25

58

Current ratio

Current assets/Current liabilities

0.4409937888

0.628742515

Quick ratio

Quick asset/Current liabilities

0.1552795031

0.3473053892

Efficiency ratio

COGS

 

1045

1077

Inventory

 

46

47

Receivables

 

13

12

Net sales

 

1220

1255

Receivables turnover

Credit sales/trade receivables

93.8461538462

104.5833333333

Inventory turnover

COGS/Inventory

22.7173913043

22.914893617

Solvency Ratios

Debt

 

161

167

Equity

 

276

301

Debt to equity ratio

Debt/Equity

0.5833333333

0.5548172757

 

Interpretation

Profitability ratios are calculated in an entity as the profit generation is the primary aim of an enterprise which need to be improved (Shanks, 2016). The clariton company will divide its profitability ratios into different segments which are given as below:

Gross profit ratio-The incomplete profit or raw amount of profit generated by an entity in a particular year. The cost of sales are deducted from the sales figure which will produces the gross profit of the business by assessing the income statement. The GP of 2016 is decreasing gradually due to higher cost of revenue incurred in the firm.

Operating profit- The gross profit becomes base for generating this profit as all the operating expenses are excluded from the gross profit (Archibald and Archibald, 2016). The burden of operating expenses are less than the owner has controlled all kinds of expenses which will resulted in the increasing amount of profit.

Net profit-The complete profit which is considered in the corporate world in assessing the financial performance of the business. The Net profit is decreasing over the years which showcases the inability of the firm due to external pressure of taxation.

Liquidity ratio determines the current status of an organization in order to meet short term obligations with the available cash held within an enterprise. The liquidity ratios are classified into two major segments which is given as below:

Current ratio-This ratio creates perfect alignment between the assets and liabilities which are regarded as major component of the business (Shanks, 2016). The current assets are assessed in order to meet the current liabilities held within the business entity. The current ratio is increasing over the years which is good sign of current liquidity position of an entity.

Quick ratio- the current assets are taken into consider after excluding the inventory as the inventory will not convert easily into cash. The Quick ratio is increasing which reflected the strong business position of an entity to curtail the liquidity trap faces by an entity in near future.

Efficiency ratios will determine the ability of an enterprise in relation to the existing financial performance in order top meet its obligations with the existing assets held by the firm. The efficiency of an entity can be measured through various kinds of ratios which is given below:

Receivables turnover-The current factor will form part of an entity as one of the asset which are utilized in the business of clariton (Brooke, 2016). The assets are contributed in the firm in order to generate good amount of sales and the revenue. The Higher turnover indicates that the current financial condition of this entity is efficient as the generation of cash is higher than compared with the credit held within the firm.

Inventory turnover- This ratio identifies the use of inventories in generating higher amount of sales and the revenue in the business. This measures the wide number of times the inventory are used or kept idle in the firm. The current level of inventory held in the business will indicates the higher turnover which is not beneficial for the business entity. The current level is alert situation for this entity as this will lead towards the occurrence of loss in the business.

Solvency ratios are that ratios calculated by an enterprise in order to determine the current ability of an enterprise in generating higher revenue from variety of sources. The capability of the firm are judged in relation to the equity and debt component of capital structure.

Debt to equity- The efficient capital structure of the business entity will include proportionate amount of debt and equity factor of the business of clariton (Pearlson, Saunders and Galletta, 2016). In the current situation the ratios is decreasing which is showcasing the deficiency of the corporation whose current firm is dominated by the imposition of debt obligations on the current business entity.

Conclusion

It can be articulated from the above assignment the financial conditions of the clariton firm are explained properly with the help of different tools and techniques. The decision will be simplified for expanding the business using variety of sources such as venture capital, finance broker and the partnerships. The best suitable approach among these sources is venture capitalist. The projects are also assessed by applying various techniques of capital budgeting such as payback, NPV and ARR method.

References

  • Archibald, R. D. and Archibald, S., 2016. Leading and Managing Innovation: What Every Executive Team Must Know about Project, Program, and Portfolio Management
  • Bartlett, S., Hart, R., Satterthwaite, D., de la Barra, X. and Missair, A., 2016.Cities for children: children's rights, poverty and urban management. Routledge.
  • Brooke, M. Z., 2016. Handbook of international financial management. Springer.
  • Dekker, H. C., Ding, R. and Groot, T., 2016. Collaborative Performance Management in Interfirm Relationships. Journal of Management Accounting Research.
  • France, R., 2016. Finance for Purchasing Managers: Understanding the Financial Impact of Buying Decisions. CRC Press.
  • Gupta, A. and Rai, S., 2016. Challenges Before Finance Professional in Ethical Decision Making. Global Journal For Research Analysis.

 

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