Sample on managing financial resources and decision making

A Sample On

Managing Financial Resources and

Decision Making

By

TABLE OF CONTENTS

INTRODCUTION ...........................................................................................................................3

TASK 1 ............................................................................................................................................3

LO 1.1 Identify the sources of finance available to a business. ..................................................3

LO 1.2Assess the implications of the different sources. .............................................................4

Lo 1.3 Evaluate appropriate sources of finance for a business project. ......................................4

TASK 2 ............................................................................................................................................5

LO 2.1Analyse the cost of different sources of finance. ...........................................................5

LO 2.2 Explain the importance of financial planning. ................................................................5

LO 2.3 Assess the information needs of different decision makers. ...........................................6

LO 2.4Explain the impact of finance on the financial statements. .............................................6

TASK 3 ............................................................................................................................................7

LO 3.1 Analyse budgets and make appropriate decisions. .......................................................7

LO 3.2 Explain the calculation of unit costs and make pricing decisions using relevant

information. .................................................................................................................................8

LO 3.3 Assess the viability of a project using investment appraisal techniques. .....................10

TASK 4 ..........................................................................................................................................11

LO 4.1 Discuss the main financial statements . ........................................................................11

LO 4.2 Compare appropriate formats of financial statements for different types of business. 12

LO 4.3 Interpret financial statements using appropriate ratios and comparisons,both internal

and external. ..............................................................................................................................13

CONCLUSION ..............................................................................................................................14

REFERENCES ..............................................................................................................................15

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INTRODUCTION

One of the main aspects for operations of a business organization is that of arranging and

managing finances (Damodaran, 2012). The reason why it is so important for a company can

better be understood through fact that if a firm does not have access to proper and adequate

finances, then there are very less chances for the organization to survive. This report has been

prepared so as to identify the various sources of finances that a company can take use of; and

also evaluate their efficiency and effectiveness for the corporation along with their implications

of the company.

LO 1.1 Identify the sources of finance available to a business.

Recession is such a concept which has a great negative impact on operations of an

organization (Nikbakht and et. al, 2006). This was what happened in the company that I used to

work in. I got laid off by the management, and now after consulting family and friends, the plan

is to start a new business firm of my own. But to do so I would have to arrange finances, for

which there are numerous sources which can be considered and utilized. Some of them are as

follows:

Bank Loan: It is one of the most common sources of finances that I can consider for the

purpose of starting a new business. Today not only are the loans easily available to

people, but also that they can be availed at a reasonable interest rate (Vance, 2002). They

can be of either short term or long term depending upon my preference and need.

Personal Savings: This is another source of arranging finances that I can consider while

setting up my business. At present I have a savings of £50,000. While establishing the

business, this source of finance can prove to be of great use and help (Hansen, Mowen

and Guan, 2009).

As per the case scenario, a new business is going to be opened by a business

owner, hence, he will require the finance at least of Euro 10000- 1 million. There are

internal and external sources that can be used by a new business holder. Internal sources

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are personal capital of owner which will be the easier and less costly sources of finance.

The business owner can personal saving for the business purpose. On the other hand,

external sources are bank loan on which the owner has to pay interest. To purchase the

machinery and other assets of business, owner can use hire purchasing as a sources of

finance. The other business purpose are such for expansion and product development, in

with the existing firms can just retained earning as a internal sources of finance.

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LO 1.2 Assess the implications of the different sources.

It is a well known fact that to start a new business, there are a lot many sources through

which finances can be arranged (Murphy, 2013). But different sources have different

implications and impact. They have been discussed as follows:

Bank Loans: Though getting bank loans relatively is a simple and easy task, but the

person who avails them have to go through a lot, because of fact that they have to pay

interest rates along with monthly installments (Correia and et.al, 2012). Also the bank

loans are characterized as not flexible, because of reason that the banks do not offer any

kind of flexibility to the individuals. Additionally such rates also keep on fluctuating

from time to time.


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Personal Savings: It is also a very useful source through which finance for the business

can be arranged (Tauringana and Clarke, 2000). This method entails that I would have to

invest the savings of £50,000 into the business. Though it will help in reducing the

amount as well as interest for loan (if any) that I take for the same purpose. But this

would mean that I will lose all the savings which I posses and at the time of need, I might

not have enough money for personal needs.

Lo 1.3 Evaluate appropriate sources of finance for a business project.

It is a well known fact that there are a lot many sources for the purpose of arranging

money to start the new business. In this regard it may not be wrong to say that such sources can

be selected only when their thorough evaluation and assessment has been done (Anderson and

Coleman, 2000).

In respect with the present scenario, new business is going to be opened by a business

owner, hence, will require the finance at least of Euro 10000- 1 million. This business project is

sis suggested to use bank loan and personal capital as a sources of finance. Personal capitol of

owner is the appropriate sources of finance which is available with owner and he has not to pay

any cost for such. On the other hand, Bank loans are very effective and useful sources through

which required money for starting the business can be arranged (Gibson, 2012). Though they are

very easily available to the individuals, but there are some complications involved at the time of

paying them back. Major issues that I would have to face is that of high interest rates and their

continuous fluctuations. But arranging money through it would mean that I would be able to save

the personal savings and different assets that I possess. Operations of banks in this regard are

very strict, as they do not tend to provide any kind of flexibility to individuals (Prior, 2004).

Herein, through the above evaluation it can be said that to start up the new business I

should look at options of loan from banks and investing some amount from savings. This means

that I can use some amount from the personal savings, and take loan for rest of the amount.


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LO 2.1 Analyse the cost of different sources of finance.

Though there are numerous sources from which finances can be acquired which are easy

to be availed, but they have their own down sides as well (Gloy and LaDue, 2003). By taking a

loan from the bank, although I would get access to large sums of money, but a major portion of

the earnings from that business would go into paying the installments and interests charged on

loan amount. Also there are numerous legal formalities which have to be completed so as to

make sure that the loan is approved and the business can be set up. Apart from this, if personal

savings are invested in the business, there are chances that there would be no money left with me

at the time of need. Such a situation can prove to be very precarious and bad for the business as

well as individual (Friedlob and Schleifer, 2003).

LO 2.2 Explain the importance of financial planning.

For business organizations it is very much imperative that its management engages into

activities related to financial planning. This part is so important for companies because of reason

that it enables authorities in the firm to make plans through which they can manage their

financial resources and the money available to them in an effective way (The financial plan,

2013). Financial Planning basically is related to arranging, confining and defining monetary

goals of the company. Through such an outlook towards monetary aspect of business operations,

it can be ensured that the firm would be able to maintain or even look to improve its financial

position in the market.


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Importance and necessity of Financial Planning

Financial planning is helpful in managing funds as well as making effective use of it.

The importance of financial planning is to forecast the need to finance for the possible

operation and to use effective sources to raise funds

Budgeting is the most important tool of financial planning that enables company to

identify future income and expenses so that funds can be managed.

It would help the management in ensuring ability to manage financial sources and money

matters in such a manner that when the need for finances arises, they would be having

enough money with them (Dayananda, 2002).

This is important for taking major activities such as expansion, merger and acquisition

It also has an important role to play in processes related to making the right investments

and deliver valuable returns as well as results to the company.

It would also assist the management in determining the real value of assets that the

company possesses.

LO 2.3 Assess the information needs of different decision makers.

Information is such an aspect of business operations which is very critical to success of

the company. In this regard it may not be wrong to say that by gaining access to different kinds

of information and data, the management and decision makers can make accurate and effective

decisions (Weygandt and et. Al, 2009). There are various stakeholder of business who require

financial information for the purpose of decision making. These stakeholders and their purpose is

as follows:


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Stakeholders: Stakeholders need to have access to a variety of information related to

the organization, as through it they can base their decisions on. The information include return

on equity and divided provided to stakeholder. It supports their decision to invest funds in

business.

Employees: They are the spine of workplace, as a lot of matters are dependent on them.

The employees requires the information in respect with the profitability of organization (Sevic,

2008).

Fund Providers : Fund providers are external stakeholders of business who require

information regarding creditworthiness of business. Most of the financial institutes are interested

in knowing the creditworthiness of company so they can provide credit to such parties. This

information can raised from balance sheet.

Investors : The investors are decision maker who require information and their decision

making of investing funds is supported by the profitability information of business as they want

to invest funds which is earning good profits. They need to have information such as financial

performance of the company; profits earned interest that they must get, etc.

Government : Government is interested in the information related to tax payment and

financial statement are the major sources to known if company is meeting tax obligations at time

or not.


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LO 2.4 Explain the impact of finance on the financial statements.

Raising finance through several sources will affect the financial statements. Bank loan

will increase the liabilities as well as the assets in the balance sheet of the firm. Interest charged

on the loan amount will be placed in the profit & loss account (Sawady and Tescher, 2008).

The interest paid against the bank loan will deduct the profits of company and would directly

impact the net profits. The company has to pay interest to bank that will be known as expenses,

hence, will be shown in debit side. It will also affect the cash flow from operating activities and

the amount of case will be deducted under operating activities. Finance arranged from selling of

assets will increase the capital amount in the liabilities side. Further funds arising from engaging

group of investors will have impact on liabilities and asset side of the balance sheet. Profits and

losses arising will be charged in the income statement. Money coming from the personal savings

will increase the amount of capital in the balance sheet and there will no such negative impact on

financial statements. Along with this, it will have the impact on the cash flow from the investing

activities.

LO 4.1 Discuss the main financial statements .

For a business organization, financial statements are of great use and importance, because

of reason that they present monetary position of the company in market (Nikbakht and et. al,

2006). It discusses about financial transactions and events that take place during performance of

the organization. Primarily there are three types of financial statements:

Statement of Comprehensive Income: It shows earning per share of the company and

discusses about various events (business in nature) about the firm. It also displays the

revenues and expenses incurred during operations of various activities. The element


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included in income statement are : expenses, income, net profit net loss as so on. The

information of net profit and net loss of business can be identified from such

statement,

Statement of Cash Flow: It describes about the net cash inflow and outflow during

course of the business. The case flow statement provides the information regarding

operating m investing and financing activities. The net case available with business for a

particulate time span can be identified from this statement. Additionally, it also provides

information related to whether funds have increased or decreased.

Statement of Financial Position: It is also known as the Balance Sheet. It lists all

liabilities and assets which are owned by an organization. Key elements of valancesheet

are : Assets, Liabilities and Owner’s equity. This statement represents the actual position

of the company in market or industry, as it provides information about various assets

(including tangible and intangible) and liabilities of the organization for a specific time

period.

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

Every form of business uses different formats for constructing the financial statements. In

business like sole proprietorship, the owners usually do not prepare all the financial accounts

because they just have to show the profit & loss statement. This is because they are the only

owner and they can control the business alone (Gloy and LaDue, 2003).

Sole traders : Individual who operates business, do not follow guidelines of preparing

financial statements. They only prepare profit and loss statement to assess the expenses incurred

by business for a period of time. However, sole traders prepare cash flow to identify the inflows

and outflows.

Partnership Business : Statements related to the profits and income of the partners are

prepared which will contribute towards the capital. Further partner's capital account of each

partner will also be constructed individually. The amount of profit and loss will be divided in

their agreed ratio (Dayananda, 2002).


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Limited companies : It is essential for the public and private limited companies to

prepare all the documents on the basis of IFRS (International Financial Reporting Standard) and

GAAP ((Generally Accepted Accounting Principles). These two regulators offers the ethical

proof of trading done by the organizations.

Income statement for a service rendering firm is different from the retailing & producing

firms. Businesses which are of small size may have very simple balance sheet showing only the

major assets and liabilities (Murphy, 2013). Large size firms will maintain large size balance

sheet depicting all the assets & liabilities.


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Profitability

In terms of return on Shareholders’ funds, Morrison is much better and impressive than

that of Sainsbury. Reason behind it is that there has been an increase in the return on funds of

shareholders for Morrison. However, gross margin of Morrison and Sainsbury is decreased that

repress significant decrease in profitability.

Liquidity :

Current ratio represents the ability of firm to pay the short term obligations. It has been

witnessed that the the current ratio fort Morrison Supermarket is improved as compared to last

year but as a slow rate of Sainsbury Plc. For both the organizations, it shows good and


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interesting results, meaning that both of them have the capability to pay off their short term

obligations. The liquidity performance of company are good as they are able to pay short term

obligation in cash.

CONCLUSION

From the above study, it can be concluded that finance is one of the most important

aspects of business operations as it was seen in the case of Easy Electronics, where firm’s

expenses had increased considerably due to improper financial planning. Net Present Value is

very important and can provide management with important information related to present value

of money in the market. Furthermore, sole ownership businesses are not required to prepare

proper finical statements, rather they just have to show the profit and loss account. But public

and private companies have to make sure that they follow both national and international

accounting standards as well as principles.


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REFERENCES

Books & Journals

Anderson, L. and Coleman, M., 2000. Managing Finance and Resources in Education. SAGE.

Correia, C. and et.all., 2012. Financial Management. 6th

ed. Juta and Company Ltd.

Damodaran, A., 2012. Investment Valuation: Tools and Techniques for Determining the Value of

Any Asset, University Edition. John Wiley & Sons.

Dayananda, D., 2002. Capital Budgeting: Financial Appraisal of Investment Projects.

Cambridge University Press.

Friedlob, T. G. and Schleifer, F. L. L., 2003. Essentials of Financial Analysis. John Wiley &

Sons.

Gibson, G., 2012. Financial Reporting and Analysis. 13th

ed. Cengage Learning.

Gloy, A. B. and LaDue, L. E., 2003. Financial management practices and farm profitability.

Agricultural Finance Review. 63(2). pp.157 – 174.

The financial plan, 2013. [Online]. Available through: <http://www.agualtiplano.net/the-

financial-plan.php>. [Accessed on 25th

June 2014].


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