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Report on Managing Financial Resources and Decisions

Introduction

Finance is all about money management and it plays a crucial role in fabrication of a new business concern. It includes two aspects that are Procurement of funds and Effective Utilization of funds. This leads an organization to identify its opportunities and grow in the competitive market. This research report is based on evaluation of financing options for Trustlis Ltd. Further, financial performance for Dixons Plc is evaluated through the report. This report also includes the sources of finance available for any start up and what are its implications within the business. Evaluating the performance of the business and financial decisions which are to be taken are also discussed in this report.

TASK 1

1.1
The sources of finance available for expansion of business operation of Trustlis Ltd are listed underneath in detail.

  • Equity capital: The organisation can issue equity capital to raise funds for expansion of operations. Acquisition of funds by way of equity capital do provide voting rights. However, it does not set any fixed obligation for regular payments. The equity capital is always suitable to acquire funds for expansion of operations.
  • Issue of debentures: The organization can issue corporate bonds or debentures so as to raise capital for long term. It helps in acquisition of funds at reasonable cost of capital.
  • Bank Loans- The firm can take loan from the bank at a certain rate of interest. This is considered as one of the most flexible sources of finance but the applier need to agree upon certain terms and conditions of the bank (Rostamkalaei, and Freel, 2016).
  • Leasing- It is another option for acquiring capital asset, an agreement between the two parties that is lessor and lessee is done. Lessor is the possessor of the capital asset and permits the lessee to utilize it for the agreed period. The payment is made under the terms of the lease and for a specified period of time. The lessee is responsible for the upkeep and maintenance of the leased asset.
  • Angel investors- The persons which are retired and wealthy and are willing to invest in any other firm in which they are already specialized in the past act as angels. These angels give advice and contribute their experiences so the new set up can work efficiently (Source of finance, 2014).

Read more: Reflection assignment level 5

1.2
Implications of different source of financing are-

At the time of investing, one thing which should be kept in mind is that this money of family and friends should be used cautiously. They do not charge any interest and returns for it.
But it should be returned as early as possible so it does not affect the relations. For establishing the business as soon as possible, it needs to acquire assets more quickly. This can be done by acquiring assets from hire seller and then purchaser can earn profit by selling it at high cost to the other party by purchasing that asset in future (Quattrone, 2016). The only thing that he has to keep in mind is that, paying all the installments at their due dates else these assets can be ceased any time by the vendor. This will provide him assistance for making a systematic business plan. The angels are already experienced in this so they can even help in getting a good staff of trainees and employees. Although, the angels would charge a high amount of interest but it would help in earning higher profits in the future. This would act as a best source of finance and it would provide assistance for forming the new business in a well designed way which will result in reducing the complications.

1.3
Appropriate sources of finance suitable for a business project are-

  • Equity capital: The organisation is raising funds for expanding operations which demands capital for long run. Henceforth, the equity capital is considered to be suitable option. The financing option does not raise set a fixed obligation for interest payments. Further, no liability is set for re-payment of amount in long term. They share voting rights and proportion of profits into extended operations of the business.
  • Business angel financing- Being new in the market and least knowledge, Trustlis Ltd. should avail the option of angel financing as it will provide him a better assistance. Selecting this option will set him free from making payments of interest and installments on time. Also it will help him in reducing the complications in the future. Business Angels are free to make decisions quickly as there is no requirement of personal assets. It will also help in getting a trained staff for the salon (Miller, Steier and Breton‐Miller. 2016).

TASK 2

2.1
The costs of various sources of finance are to be incurred by the owner. There are sufficient funds available with the possessor for investing it personally. So Trustlis Ltd. does not required to bear any cost for this as these are his personal savings but needs to effectively utilize his money. Further, as he is purchasing assets from hire purchaser he needs to pay a fixed amount of interest on it along with installments for a specified time and he has to take care of discharging this responsibility. Along with that, he has to make a down payment at the time of agreement. As he is also using business angel source of finance they would demand higher returns on it. Trustlis Ltd. is going to take loan therefore he also needs to pay interest and installment for that loan also (Damodaran, 2016). So, the major responsibility of the Trustlis Ltd. is to manage the funds available with him along with completing his duties of making the payments for the limited time period and to pay taxes in additional as he is in the service sector and service tax is also required to be paid. Trustlis Ltd. will have to face some problems but once he creates goodwill of the firm by providing better services then it would result in higher returns and growth. Then later on, the firm will provide with the good earnings (Mahmoud, 2016).

2.2
Financial planning is important because it helps to determine the short term and long term financial goals which help in creating a balanced plan to meet this content.

  • Income-Through effective planning, it becomes easier to manage the income. Managing income helps in knowing that what amount should be used for paying taxes, meeting monthly expenditures and even it leads to savings.
  • Cash flow- Continuously checks on the expenses and spending leads to easier management of cash (Quattrone, 2016).
  • Capital- As there is inflow of cash in the firm, it leads to increase in capital.
  • Family security- It provides security to family as insurance policies and coverage also form a part of the financial planning process.
  • Investment- If the right investment is made then it would lead to more and more returns and thus result in profit increase. This helps in fulfilling all personal as well as business needs.
  • Standard of living- A good planning can prove to be beneficial at the difficult times.
  • Savings- This savings are very useful at the time of emergency. Some investments with high liquidity are even required to meet the day to day expenses.
  • Ongoing advices- Financial advisor by assessing the current financial situations can prepare a customized plan which helps in achieving the long term goals (McPherson. and Pincus.2016.).
  • Assets- Most of the assets come along with the liabilities attached to it so the relationship between the financial advisors should be maintained so that he helps in reducing the burden in the future.

2.3 
The important needs of the decision makers are as follows-

  • Size of the organisation- It is very important to know the size of the organization as it helps in further planning and the steps to be taken. Size of the company helps in deciding that what all sort of funds are available and how much more is required and what are the sources possible in case of extra needs.
  • Nature of the business- Nature of the business helps in deciding that what are its requirements relating to the staff, machines and whether it will be able to sustain in the market for long time (Miller, Steier and Breton‐Miller, 2016.).
  • Cost of capital – Owner of Trustlis Ltd. should be well in managing the expenditures of the company as well as have enough liquidity to meet out those expenditures and pay the instalment on due basis along with interest, taxes etc. He should take the advice from the angel who will guide him in managing the funds and get some savings for himself also.

2.4
There are many things that are to be taken into account while considering the impact of finance on financial statements such as the sales, collection of money, expenses cost, cost of borrowings, payment of principal instalments etc. When sales increase, it leads to increase in revenue in the income statement and affects the profit as well. Therefore, for making the sales good Trustlis Ltd. 's owner by hiring good trainees are required to provide better and better services. So the customers get satisfied with the services and avail the services next time also. It would affect the owner's fund as well as the performance of the business. Efficient performance will attract the new customers also as the existing customer will recommend others to go there and avail those services (Mahmoud, 2016.). Further, in future if there is a need of business loan then the financial statements would be analysed and checked by the lender if it creates a negative effect then it would impact the financial decisions of the company. Lenders usually are interested to invest in the business that has good financial numbers (Rostamkalaei and Freel, 2016).

TASK 3

3.1

Particulars

April 

May

Jun

Jul

Aug

Sept

Cash inflow 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue  

12600

14490

16663.5

19163.025

22037.47875

25343.1005625

Other income 

5000

5500

5800

6200

6900

7500

 

 

 

 

 

 

 

Total inflow 

17600

19990

22463.5

25363.025

28937.47875

32843.1005625

 

 

 

 

 

 

 

Cash outflow

 

 

 

 

 

 

Purchase of raw material 

5200

6000

6480

6998.4

7558.272

8162.93376

Salaries of personnel

2200

2200

2200

2200

2200

2200

Advertisement  cost and other service cost

1500

2100

3000

2900

3870

4000

other expenses

3000

3800

3800

3800

3970

3980

 

 

 

 

 

 

 

Total cash outflow 

11900

14100

15480

15898.4

17598.272

18342.93376

 

 

 

 

 

 

 

Cash deficit / surplus  

5700

5890

6983.5

9464.625

11339.20675

14500.1668025

opening cash balance 

12000

17700

23590

30573.5

40038.125

51377.33175

Closing cash balance 

17700

23590

30573.5

40038.125

51377.33175

65877.4985525

As per the budget, sales has increased year by year which means performance of business is good and its making profits yearly. Other incomes of the firm are also increasing representing better returns in future also. On the other hand, company is also able to manage the daily expenditures and paying the staff salaries on time. It has also been seen that firm is continuously advertising and providing schemes also to create a reputation among the customers (Hopper and Bui, 2016). Cash surplus is there may be the firm is providing better facilities to the customers which have resulted in increase in sales proportionately. It also reveals that firm is operating efficiently and is able to manage the expenses without incurring any extra cost.

3.2

Number of customers visiting the firm are 100
Unit Cost = Total cost / number of customers
= 10000/100
= £100
Selling price = cost + 30% mark up
= 100 + (100*30%)
= 100+30
= £130

3.3

As per the above analysis, Project B is much better than the project A as it is providing returns to the firm in 2.25 years and in Project A it gives at 2.5 years much later (Investment appraisal techniques, 2013). Also considering the accounting rate of return, it is higher in Project B which is 47.92% and internal rate of return is also higher in B which is 31.83% as compared to the project A. So the company should adopt the project B (Filip, 2016).

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TASK 4

4.1
The main types of financial statements are-
Balance Sheet- This statement discloses the financial position of any company on a particular date. It includes -

  • Assets- The things which are owned by the company are assets .It may be either tangible or intangible like plants and machinery, equipments, patent and copyright.
  • Liabilities-The thing which the company owes to the others are liabilities it may be either creditors, bank loans etc (Goel, 2016).
  • Equity- The things which remains in the business after the assets which are used to pay off of its outstanding liabilities. In other words, difference between assets and liabilities is called equity.

Income Statement- This shows the financial performance of the business in terms of profit or loss over a specified period of time. It is also known as a profit and loss statement. Further it includes the income and expenses which are earned and met by the company.
Cash flow statements- This statement reveals that what all types of activities resulted in the inflow and outflow of cash. So that the firm is able to meet out its working capital expenses and maintain the amount of liquidity (Crosby and Henneberry, 2016).
Statement of changes in equity- The amount of retained earnings can be revealed by this statement only that what is left after the payment of all liabilities, interests and dividends. It also derives the effects of change in any accounting policy or any corrections in the accounting error.

4.2
Different accounts are maintained by the different size of the firm. A sole trader maintains only the Profit and loss statement, Balance Sheet and mainly Cash book to reveal the performance of his firms. Though these statements are not mandatory to prepare but it helps in knowing the profit and loss at the end. This assists in decision making in the future (Bromwich and Scapens, 2016). On the other hand, partnership firm’s capital accounts are maintained along with a balance sheet to perceive the share of every partner in the firm as well as their drawings and additional capital introduced by them. Partnership Act 1932 applies in case of disputes and conflicts in the firm of partners (Culkin, Murzacheva and Davis, 2016). The companies are required to maintain all the financial statements and these statements are to be prepared by following all the rules and acts applicable to the company. Formats are specified by the Companies Act 2013 and rules of International Financial Reporting System and standards are to be followed (Damodaran. 2016). In case, if these guidelines are not followed than the company is required to specifically mention the reasons for not complying with that.

4.3

 

 

Dixons Plc

 

Darty Plc

 

Ratios

 

2014

2015

2014

2015

 

 

 

 

 

 

Net sales

 

2576

9738

3803

3512

Gross profit

 

664

2185

1240

1115

Net profit 

 

48

161

-30

-1

Gross profit ratio 

GP/ net sales * 100

25.78%

22.44%

32.61%

31.75%

Net profit ratio Net profit / net sales * 100

 

1.86%

1.65%

-0.79%

-0.03%

Current assets 

 

1355

2322

759

772

Current liabilities 

 

981

2491

906

866

Inventory 

 

240

958

478

457

Prepaid expenses 

 

nil

nil

35

39

Current ratio 

current assets / current liabilities 

1.38

0.93

0.84

0.89

Quick ratio

Current assets – (stock + prepaid expenses) / current liabilities

0.48

0.19

0.52

0.54

Debt

 

290

409

218

298

Shareholders’ equity 

 

880

2860

-249

-323

Debt- equity ratio 

Debt / shareholders equity 

0.33

0.14

-0.88

-0.92

Total asset

 

2307

6929

1231

1187

Inventory 

 

240

958

478

457

Total asset turnover ratio

Sales / total assets 

1.12

1.41

3.09

2.96

Inventory turnover ratio

Sales / inventory 

10.73

10.16

7.96

7.68

Above table reflects that the firms earning are decreasing yearly as the gross from (25.78% to 22.44%) and net profit from (1.86% to 1.655) are declining of Dixon and this is a negative sign for the company (Christopher, 2016). It needs to analyze the problems and implement the renewed plans and policies to maintain its position in the market. Dixon's current assets are although increasing at high velocity but at the same time its current liabilities are increasing more than its assets. It is an alarming situation for the Dixon otherwise soon it will be dissolved. Comparing with Dixon and Darty the performance of Darty is better than that as its profits (from 32.61% to 31.75%) and current assets (from 759 to 772) are decreasing but not at a higher rate (Burger, 2016).

CONCLUSION

From the above report it is concluded that for the smooth functioning of any business at its initial stage, proper planning is to be done This report includes availability of sources of finance for expansion of operations by Trustlis ltd. Moreover, report identified that project B is considered best because in this, there is a possibility of greater return in the future. Further, financial performance analysis concluded that Darty Plc is performing much well as compare to Dixons Carphone Plc.

REFERENCES

Books and Journals

  • Bromwich, M. and Scapens, R. W., 2016. Management Accounting Research: 25 years on. Management Accounting Research. 31(5). pp.1-9.
  • Burger, R. H., 2016. Financial Management of Libraries and Information Centers. ABC-CLIO.
  • Christopher, M., 2016. Logistics & supply chain management. Pearson Higher Ed.
  • Crosby, N. and Henneberry, J., 2016. Financialisation, the valuation of investment property and the urban built environment in the UK. Urban Studies. 53(7). pp. 1424-1441.
  • Culkin, N., Murzacheva, E. and Davis, A., 2016. Critical innovations in the UK peer-to-peer (P2P) and equity alternative finance markets for small firm growth. The International Journal of Entrepreneurship and Innovation. 17(3), pp.194-202.
  • Damodaran, A., 2016.Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
  • Filip, A., 2016. Discussion of “Do Reviews by External Auditors Improve the Information Content of Interim Financial Statements”.The International Journal of Accounting, 51(1), pp. 51-56.
  • Goel, S., 2016. Financial Management Practices in India. Routledge.
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