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Unit 2 Managing Financial Resources and Decisions Regent College HND Business Level 4

Introduction

Financial management can be explained as to the efficient and effective management of amount of funds in appropriate manner which helps in accomplish the objectives in the business. In this, the main objective of financial management in the organization to gain the funds due to set the business. In this report various aspect of managing financial resources will be studied in the context of ABC limited. It is a starting of the business with 20000 rupees capital. This report will provided the different types of financial resources and financial planning of the organization. It also include the budget and ratio analysis.

Task 1

1.1Identify the source of finance available to a business

Financing plays a major role to start a business. In other words, an organization has needed capital to fund its project which helps to generate revenue for the firm. Various types of resource to suit for the company these are described as below:

  • Working Capital- The first possible source of finance is from the internal sources. An organization can have to invest its own capital which helps in management for business operations and expansions (Altman and Hotchkiss, 2010).
  • Bank loan- Every business require the funds so bank and credit offered to a large and small organization. When a firm takes a loan from a bank so the company has access to set the amount of money to start to an organization. Moreover, the bank also identifies the business needs so the company how much take the loan and how long it takes So after then the bank has decided the loan amount and passes the lend (Brigham and Ehrhardt, 2013). The firm also pays the repayment as per including interest rate.
  • Investor-Investor groups or private investors seek out companies to need financial resources. The investor is more important for an organization, therefore, the capitalist can invest the money in the firm and they render ABC limited with a capital in exchange for partial ownership in the company so they charge the interest on the amount of money given to the firm. Further, investors want a share of the profit in the organization (Chandra, 2011).
  • Financial institution-It is an institution that renders financial service their company and clients which helps in increasing the number of required funds in the startup for the business. (Riley, 2015) There are three types like depository , contractual, investment. In this, the institution is providing loans, pension funds, etc.
  • Retained profit-Retained profit can be referred to as a generated net income of the company so it is maintained by the corporation. In this, it is distributed to their shareholder as dividends (Kalamova, 2011).
  • Sale of old assets-Sale of the old assets is generated as profit so the company can sell the old assets like land, building. This company can collect the amount for selling the buildings and lands then collect the amount for using the management of funds.

1.2Assess the implication of the different sources of finance identified

Bank loan help in finance the starting of the business and purchase the equipment. The company can simply apply in the bank so its is an easy producer. In this, it is the money of value-based of the business and repayment as per on time or in full time. Further, it also helps in interest in business so bank loans are tax-deductible. The disadvantage of a bank loan, a bank can provide the loan so that it collects the collateral security such as home register papers, etc. In this banks are provided the lend those businesses who can clearly repay their fully loan amount.

Sale of old is the good option for financing resource. In this it is making the profit of the business and if organization can sell the old assets they can take the amount of cash form so its benefits of the firm. Moreover, if company sale the assets take the looses due to many reason like incorrect the valuation of the land or building etc. Another disadvantage of selling the old assets that the firm can pay the tax as per assets valuation.

1.3Evaluate appropriate sources of finance for business projects

There are several appropriate sources of finance for a corporation. These are selected in accordance with cost and easy availability. Henceforth, gain the finance for an organization there are various ways which help in to select the sources. Moreover, saving is the best option for the ABC limited to put money such as the company can borrow the money to their families and friends.

An organization can take loan so it helps to gain the extra finance to their projects and the lend is rendering mainly from a bank or other financial business. In this, the bank has identified the business needs of money and risked involved with the loan so before the providing loan to the firm. A loan is the best option for starting the business and gains finance for management in business operations (Ellwood and Newberry, 2007). Further, the company can pay the repayment for the loan with interest rate as per the fixed time period. For example, the government is providing MUDRA loan to small enterprises. In this loan amount is 10,000,00 with no security.

The financial institution is a good option to collect the money due to the starting of the business. In this, the institution providing financial resources to an organization.

Bank also provides a bank overdraft facility to their business which helps to raise short term finance. In this, the borrower to take out the amount more from their account than they have deposited in (Götze, Northcott and Schuster, 2008). Bank has decided a fixed maximum limit so overdraft interest charged as per day. Overdraft is helping in maintaining the funds while required for the money in the emergency of the company.

Task 2

2.1Analyse the costs of each of sources of finance, you have identified

Cost of each source of finance these are described as below:

Bank loan- Loans are available at a fixed and flexible interest rates. However, the rate of bank loans is always lowered than equity (Haka, 2006). It can be said that it is a cheaper source of finance. ABC limited must take the loan at a static interest rate because if the same will increase then also firm finance cost will remain safe.

Retained earning- Opportunity cost is the finance cost of this source of finance. This cost comes in existence when a firm can not make the second-best use of specific assets.

2.2 Importance of financial planning and how this is undertaken

Financial planning can be defined as the formal process of the organization in which they plan how to arrange the capital according to the requirement of the organization. In financial planning, various types of policies are formed related to the finance of ABC Limited. Their importance is:

  1. Financial planning is managing the inflow and outflow fund of the organization.
  2. It also helps in reducing various types of uncertainties related to finance in the company.
  3. Financial planning is also very helpful for the organization in arranging finance for the company related to the requirement of the organization (Hayre, 2013).
  4. It increases the profit of the organization and enhances the growth of the organization.
  5. Financial planning is very helpful in the expansion and growth of the finance program of the company.
  6. All the income of the company is easily managed by financial planning.

Financial planning can be undertaken in the following steps:

  1. Identify the needs and goals: in this step in order to do the financial planning of business first all the goals and needs of the company should be determined.
  2. Determining the current situation: After identifying the needs and goals the current situation of the business should be determined. In this, all the positions of the business is undertaken.
  3. Determine an alternate course of action: in these various alternatives are made by looking at the financial condition off the business (Ismail and Mohsin, 2013).
  4. Recommend strategy: according to an alternative of the action plan, various kinds of the strategy were made in the organization and financial plans are made.
  5. Implement the financial plan: After forming the financial plan this will be implemented in the organization.
  6. Monitoring: When the financial plan is implemented in the organization this will be reviewed at a regular interval of time to see the success of this plan.

2.3 Identify the information need of the internal and external decision-makers

There are two types of users in the organist i.e. internal and external users. They both the needed financial information for a different purpose:

  1. Owners and investors: They needed the financial information for making the decision related to the investment. With this information, they decide how they can use their investment.
  2. Government: The purpose of the government in knowing the financial information for taxation. By this information, the government determines the taxpaying capability of the organization.
  3. Employees: They require the financial resources for making the decision related to the work. In this, they need the resources while starting the business (Peirson and et.al., 2014).
  4. Suppliers: Shareholder cash flow statement is assessed through the suppliers for determining the capability of the firm in relation to making credit purchases when it becomes due.

2.4Expalin the impact on finance on the financial statements

Financial resources are impacting on the financial statements. In this, if an organization takes debt from the market then its liability side will gain due to measuring in short or long term sources of finance. Moreover, the organization will pay interest on the loan and the same amount will be charged to the income statement of the firm (Pike and Neale, 2006). By interest, the amount of firm profit will reduce. Similarly, if business issue shares then it will receive cash. Hence, the assets side of the balance sheet will increase. Shareholder equity will increase which means the value of liability will also rose in the balance sheet. In this way, all sources of finance affect the financial statements of the organization.

Task 3

3.1Analyse budget and make an appropriate decision

Particulars

April

May

Jun

Jul

Aug

Sept

Cash inflow

Sales revenue

75000.00

86250.00

99187.50

114065.63

131175.47

150851.79

Other income

8000.00

8000.00

8000.00

8000.00

8000.00

8000.00

Total cash inflow

83000.00

94250.00

107187.50

122065.63

139175.47

158851.79

Cash outflow

Purchase of raw material

36000.00

38880.00

41990.40

45349.63

48977.60

52895.81

Salaries of personnel

12000.00

12000.00

12000.00

12000.00

12000.00

12000.00

Selling and distribution cost

6500.00

6500.00

7200.00

7400.00

7600.00

7800.00

other expenses

3000.00

3000.00

3000.00

3000.00

3000.00

3000.00

Total cash outflow

57500.00

60380.00

64190.40

67749.63

71577.60

75695.81

Cash deficit / surplus

25500.00

33870.00

42997.10

54315.99

67597.87

83155.98

Opening cash

25000.00

50500.00

84370.00

127367.10

181683.09

249280.96

Closing cash

50500.00

84370.00

127367.10

181683.09

249280.96

332436.94

From the illustration given, it can be seen that the sales revenue has been increasing on a continuous basis leading to an overall increase in the cash inflow. Also, the cash outflows have increased over months but the proportionate increase in cash inflows are more than cash outflows due to which the company has cash in surplus and that too continuously rising each month. Due to surplus cash position of company, it has been able to maintain a good amount of cash balance as its closing balance which is a sign that it has sufficient cash to maintain the liquidity and meet out the working capital requirements.

3.2Explain the calculation of unit costs and make a pricing decision

The total production cost for the company is £50,000 producing 4000 units. The production cost comprises fixed as well as variable costs i.e. material cost of £25,000, labor cost being £10,000 and fixed and variable overheads amounting to £10,000. The per-unit cost of production comes out to be £12.5. If the company is planning to earn a 20% margin then the calculation would be as follows:

20% of £12.5 = £2.5. This shows that in order to earn the required profit margin of 20% then the selling cost for the company should be £14.5 i.e. £12+£2.5. Hence, the pricing decision of a company should be that it should fix its selling price at £14.5.

Items

Cost

Material cost

£25000

Labor cost

£15000

Other fixed and variable overheads

£10000

Total cost

£50000

Number of units produced

4000 units

Unit cost/Cost per unit

(£50000/4000) = £12.5

3.3Assess the viability of a project using investment appraisal techniques

ABC Ltd can assess the viability of two proposed investment by taking into account the following techniques are:

Calculation of Payback period

Year

Project A

Cumulative cash inflow

Project B

Cumulative cash inflow

1

50000

50000

52000

52000

2

60000

110000

64000

116000

3

57000

167000

59500

175500

4

66500

233500

71000

246500

5

74000

307500

78500

325000

Payback period

Project A: 2 + 10000 / 57000

= 2.2 years

Project B:2 + 4000 / 59500

= 2.1 years

Calculation of NPV and IRR

Project A

Pv factor @12%

Present value

Project B

PV factor @10%

Present value

Initial investment

120000

120000

1

50000

0.893

44643

52000

0.893

46429

2

60000

0.797

47832

64000

0.797

51020

3

57000

0.712

40571

59500

0.712

42351

4

66500

0.636

42262

71000

0.636

45122

5

74000

0.567

41990

78500

0.567

44543

6

0

0.507

0

0.507

0

Total discounted cash inflow

217298

229465

NPV

97298

109465

IRR

39.15%

42.09%

On the basis of the above-mentioned analysis, it can be said that Abc Ltd should select project B which will offer higher benefits to it in terms of profitability. Along with this, the business unit will also get an opportunity in relation to recovering the initial amount earlier in project B. Thus, by taking into account all such aspects the company should invest money in project B.

Task 4

4.1Discuss the main financial statements

Financial Statements refer to various reports about the organist which helps in evaluating the current financial position of the organization. These reports are prepared in a structured format as per the guidelines. Basically, there are three types of financial statements namely: Income Statement, Balance Sheet and Cash Flow Statement.

Income Statement: It is also known as Profit and Loss Account. As the name suggests, it helps in determining the amount of profit earned or loss borne by a company for a specified time period (Sian and Roberts, 2009). The income and expenses are recorded and if the income earned is in excess of expenses incurred, it would result in profits. Similarly, if expenses exceed the income earned, the result will be a loss. So, this statement provides us information regarding the company's financial position in terms of sales made by it, profit or loss, etc.

Balance Sheet: It is one of the major financial statements of the company which shows the position of its assets, liabilities and owner's capital. There is a specific format for its preparation wherein Stock, Debtors, etc are clubbed under Current Assets and assets like Land, Building, etc come under Fixed Assets (Siano, Kitchen and Confetto, 2010). The assets total should always match the total of liabilities and owner's capital meaning that the company has to make payment for all the assets it owns either by taking loans that form part of liabilities or by issuing the owner's equity.

Cash Flow Statement:It is of high importance to the company as it provides information regarding the cash position of the company at the beginning of the year as well as at the end (Llias, 2010). This is necessary as it provides section-wise details about cash flow i.e. operating, investment and financing activities.

  • The operating activities include cash flow from the sale of goods or services.
  • Investment activities include cash flow arising on sale or purchase of any fixed assets.
  • Financing activities include proceeds from the issue of shares or borrowings, etc.

4.2 Compare appropriate formats of financial statements for different business

Sole Proprietorship: The income statement prepared for it is very simple as it shows clearly the sales or services provided. Also, its balance sheet mainly has stocks, debtors, plant and machinery, etc as its total assets and creditors, borrowings, etc forming part of the debt and the capital which the proprietor has put into the business will form part of the owner's equity (Sinha, 2012). Cash Flow Statement includes cash received from customers or cash payments to suppliers, investments made by the owner or repayment of bank loan.

Partnership:In a partnership firm the financial statements separately show the capital owned by each of the partners separately, drawings made by them and their liabilities (Paramasivan and Subramanian, 2010.). The overall profit or loss is shown in the income statements which is further distributed to partners in their capital sharing ratio.

Public Listed Company: In it, the financial statements are prepared as per the guidelines issued by Generally Accepted Accounting Principles and International Financial Reporting Requirements (Van Horne and Wachowicz, 2008). It is more complex to understand any public listed company's financial statements because they are more complex involving intangible assets and various equity accounts at the same time.

4.3Interpret financial statements using appropriate ratios and comparison

Ratios

Formula

2014

2015

Profitability ratios

Gross profit

1966

2123

Net profit

753

859

Sales revenue

13796

14486

Gross profit ratio

GP / net sales * 100

14.25%

14.66%

Net profit ratio

NP / net sales * 100

5.46%

5.93%

Liquidity ratios

Current ratio

Current assets / current liabilities

.63

.43

Quick ratio

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

.39

.37

Efficiency ratio

Asset turnover ratio

Sales / total assets

2.02

2.24

Receivable turnover ratio

12.65

13.15

Profitability Ratios :

Gross Profit Ratio:The increase in ratio from 14.25% to 14.66% is on account of rising in sales figures from 13796 to 14486 which is approximately 5% more from 2014 and an increase in gross profit from 1966 to 2123 which is 8% higher than in 2014.

Net Profit Ratio: The net profit earned in 2015 is 14% higher than that of 2014 i.e. an increase from 753 to 859. Also, the sales revenue has increased by 5% i.e. from 13796 to 14486 resulting in a net profit ratio of 5.93%. The ratio for 2014 is 5.46% so there is not much increase in the ratio which is on account of less increment in sales i.e. only 5%.

Current Ratio: The ratio for 2015 i.e. 0.43 represents poor liquidity position of the company from that of the previous year which was also not sufficient to meet the liquidity needs i.e. 0.63. So the situation is worse now where there is a shortage of cash to meet the financial requirements.

Quick Ratio: The ratio for 2015 has declined more from 2014 i.e. 0.39 to 0.37 indicating that the quick assets are falling short to meet the short term financial obligations.

Assets Turnover Ratio: As the ratio has increased from 2.02 to 2.24 in 2015, this represents that the company has been able to generate good revenues by selling assets as compared to the previous year.

Receivable Turnover Ratio: The increase in ratio from 12.65 in year 2014 to 13.15 in 2015 is a good indicator suggesting that the company has improved in its collection terms from debtors or it can be said that the collection time process has become faster than before or maybe the company has shortened the credit period or started dealing with customers on cash basis.

Conclusion

From the above report, it can be concluded that various types of financial resources which help to maintain the funds in the organization. It involves internal and external decision-makers which assist in collect the information for making a decision. Analyzing the financial planning in the organization. In this, examine of budget and calculation of unit costs while pricing decisions.

References

  • Lewison, D. M., and Balderson, W., 2013. Retailing. Scarborough, Ont.: Prentice-Hall Canada.
  • Liu, Y. L., Keeling, K. A. and Papamichail, K. N., 2015. Should retail trade companies avoid recruiting maximizers?. Management Decision.
  • Ratna, R. and Singh, P. P., 2013. SHRM Practices and Employee Satisfaction: Study and Relationship. Amity Management Review. Shackleton, V., 2015. Recruitment and selection. Elements of Applied Psychology,
  • Slocum, J., Lei, D. and Buller, P., 2014. Executing business strategies through human resource management practices. Organizational Dynamics.
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