Managing Financial Resources

This document discusses the importance of financial management and sources of finance for a medium-sized firm. It explores the implications of different sources of finance and recommends the appropriate source for business expansion. The document also covers the cost of funding, the importance of financial planning, and the information required for making financial decisions. Additionally, it discusses the impact of financing options on accounting statements.

MANAGING FINANCIAL
RESOURCES

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INTRODUCTION
Financial management is one of the essential functional areas of business as it helps in
managing continuous flow of money. It is also the process which involves planning, controlling
and raising of funds in an entity. Objective of small and medium sized firms is to generate
maximum returns on investments so that entity can run its business in complex and competitive
market for longer period (Grob, 2013). Effective utilization of funds and safety of financial
resources to build up surplus as well as coordinate activities of business are the main key
purposes of financial management. Present report is based on Radisson plc which is a medium
sized software manufacturing company. Currently, cited firm has great opportunities to expand
its operations and to enhance its market share. Assignment will discuss appropriate sources of
finance available to organization. Cost of funding will be analyzed in this study. Calculation of
unit cost and pricing decisions will be done in this report.
TASK 1
1.1 Sources of finance available for medium-sized firm
Every organization needs money to run its business smoothly. Selection of appropriate
source of finance completely depends upon the type and nature of business. Before choosing the
funds, it is essential to look upon the cost attached with it so that optimistic results can come out
(Indounas and Avlonitis, 2005). Mainly, there are two types of sources available for Radisson
plc:
Internal sources:
This is the type of source in which existing internal capital is being Used by owner.
Retained earnings: It is company's own capital of net income which is not distributed
among stakeholders in the form of dividends. It is kept as reserves for reinvestment. It is shown
in the balance sheet of organization as stockholder’s equity (Kuntchev and et. al, 2012). The
major benefit of using this source in Radisson plc is to raise new funds at minimum cost.
Sales of fixed assets: It is another source of finance available for the small sized
organizations. By selling its fixed assets such as old machinery, buildings, etc., cited firm can
generate more funds in the organization. As these are company's own properties so, there is no
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need to pay any interest to anyone. Therefore, this is cheaper form of financial source (Lin and
et. al, 2015).
Personal saving: Aim of Radisson plc is to expand business to increase its market share
so that owner can use its own capital for further operations of organization. It will give benefit to
the firm and individual will be able to generate more funds by using his own money.
External sources:
These are the types of sources which are arranged by outside mediums. By selecting
these options, cited firm can collect a huge amount and accomplish its objectives: Bank loans: Borrowing money from financial institutions is very common but an
effective source of finance. Generally, banks lend money on the basis of financial
position and repay the capacity of owner. It charges interest on lending amounts and
borrower has an option to pay it as monthly installments (Valle and Gomes, 2014).
 Venture capital: It is another type of external source of finance in which cited firm can
approach to investors to invest their money in the firm. Investors invest their money in
small firm to get higher returns. But, many a times, they demand certain percentage of
stake in the business (Vij, 2012).
1.2 Implications of different sources of finance
Before selecting the source, it is essential to evaluate the available options so that no
further complication would take place. Implication of different sources of finance are stated as
below: Implication of retained earnings: Owner of Radisson plc will have to pay dividend to its
stakeholders and so, it can be termed as economic implication of cited source of finance.
As it is an internal source and company's own capital so, no legal inference is attached
with the same. Entrepreneur of Radisson plc will have full control over its firm and he
does not need to share the ownership with others in this type of source (Admati, 2014). Implication of sales of fixed assets: As it is own inventories of company so owner does
not have to pay interest to lender. Apart from this there is no need to follow legal
guidelines while selling it. So no economic and legal implications are attached with this
type of source. There is no dilution of ownership takes place.
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 Implication of personal savings: It is another internal source and very effective in which
owner of cited firm does not have to pay interest and legal charges to anyone. So, it is a
cost effective source for the organization. Ownership remains same which does not get
diluted. But if Radisson plc fails to get profit then it can harm the financial position of
owner. Implication of Bank loan: It is an appropriate source and monitory need of company that
can be fulfilled easily by opting this source of finance (Anzidei and et.al, 2014). But, in
this, cited firm will have to pay interest, documentation fees, etc. to financial institutions.
It will increase the liability of entity for longer period. Owner can take business decision
by own. If entrepreneur is unable to repay its borrowing amount then banks have an
authority to sell its assets to recover the entire amount.
 Implication on venture capital: Percentage of stake in business is the main economic
implication of choosing this type of source of finance. Whenever investor takes decision
of investment then a legal agreement is made between owner and capitalists and it is
compulsory to be followed by both of them (Benigno and et.al, 2013). Ownership gets
diluted when Radisson plc will have to involve investors in board meetings and will have
to consider their decisions.
1.3 Appropriate source of finance for expansion of entity
Radisson plc has an aim to expand its business and it has great opportunity of expansion.
If cited firm in-cash this opportunity then it can increase its market share and can gain
competitive advantage. For Radisson plc bank loan will be the best option because in this, it will
be able to gather huge amount easily. Financial institute charges minimum annual interest on it
which is easy to be paid by the organization. Apart from this, if cited firm opts this source of
finance then it will get tax benefit (Hyman, 2014). Apart from this, retained earnings will also be
a suitable option for company. As ownership remains same and owner will not have to pay
anything as an interest to anyone, it will be beneficial in making control over its liability and will
generate money to a great extent.
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TASK 2
2.1 Cost of funding
Several costs are attached with the above maintained sources of finance:
Opportunity cost:
It is the cost which is attached with personal saving source. If Radisson plc fails to get
profit or run business significantly then it may harm the financial position of owner. In retained
earnings also, company can face loss as if it goes wrong, financial position of organization may
get negatively affected (Prakash, 2014).
Fluctuation cost:
Such type of cost is attached with sales of fixed assets. To generate money, if owner of
Radisson plc sales its inventories at lower rates then it would be a loss for company and will
decrease its asset’s side in balance sheet (Strange, 2015).
Interest cost:
Whenever organization borrows money from financial institutions then it has to pay
interest to banks. Apart from this, bank charges some documentation fees, file charges, etc. with
the borrower. These are the expenses of the firm which enhances its liability for longer period.
Dividend cost:
In retained earnings, it is necessary for the entity to circulate dividend among all
stakeholders. So, actual reinvested amount gets down. In venture capital also, firm has to pay
dividend to investors by which overall profit of company gets reduced (Thakur and Chakraborty,
2015).
By identifying the cost, it can be recommended that debt financing is much better than
equity. Because; in this, the owner will not have to share his ownership with others and
individuals will be able to take their own decisions for the growth of organization. For instance:
if Radisson plc takes loan from financial institutions then it will have to pay interest only and
banks will not be liable to have control over the operations of business (Butlin, 2013).
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2.2 Importance of financial planning
Uncertainties can take place any time; for the same, economic forecasting is the ongoing
process through which financial managers can take appropriate decisions and can accomplish the
goal of company with reducing risks. Importance of financial planning is stated as below:
 With the help of this, Radisson plc can ensure adequacy of funds in business.
 It is important to make balance between cash inflow and outflow (Hopkin, 2014).
 Uncertainties can be identified easily so managers can formulate proper plans to reduce
the risks of organization.
 With the help of financial planning, expansion goal of entity can be fulfilled easily.
 Effective utilization of funds is only possible by economic forecasting.
 Financial planning helps to take proper investment decisions which can give monitory
benefits to the organization and can help to minimize the expenses of firm.
 Economic forecasting is important to make effective control over financial activities so
that gap between actual revenues and estimated profit will get reduced.
Financial planning influences the overall profit of company so, Radisson plc needs to
formulate effective planning so that the desired results can come out (Ali, Sharif and Jan, 2015).
2.3 Information required for making financial decisions
Business decisions can give optimistic result when manager has sufficient information. In
the absence of sufficient information, accurate judgment cannot be made by the firms. People at
different management levels need various information: Strategic level: Top management team comes under the strategic level. Higher authorities
need details about previous performance of company, trade regulations, tax policies,
competitor’s strategies and their market position, etc. With the help of this information,
Radisson plc can take effective financial decisions (Manneh and Naser, 2015). Tactical level: Managers of each department, senior authorities, etc. are involved at this
level. They all lead lower level employees and ensure that all put their best efforts so that
goal of the firm can be effectually accomplished. Tactical level people need information
about competitor’s position, current market requirements, incentive sheet of company,
sales performance of the cited firm, growth opportunities, financial performance of
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company, etc. These details support them in formulating effective strategies which can
help in the expansion of entity (Zameer and et.al, 2013).
 Operational level: Lower level of employees of Radisson plc are involved in operational
level. They need information about worthiness of company, customer perception, growth
opportunity, profit margin, dividend policy, etc. By this way, they will be able to know
about career opportunities for them in the organization.
2.4 Impact of financing options on accounting statements
Sources of finance Profit & Loss
account
Balance sheet Cash flow statement
Personal saving As it is owner's own
capital so, when
invested in business
then it gives return to
company so that
income side will be
stronger.
It will make the assets
side stronger.
It will enhance the
cash inflow in
company.
Retained earning It does not put an
impact on the income
statement.
It enhances the capital
side of balance sheet.
This amount is further
reinvested so, cash in
hand gets reduced.
Sales of fixed assets It impacts the capital
of company (Zameer
and et.al, 2013).
It increases capital
side but reduces assets
of organization.
It increases the cash
inflow.
Venture capital Entity has to pay
certain amount as
interest to investor so,
it increases
expenditures.
It makes the assets
side stronger.
It enhances the cash
inflow and reflect into
cash flow statement.
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Bank loan As firm has to pay
interest so, it increases
expenses on business.
It enhances the
liability of company
(Manneh and Naser,
2015).
As firm is able to
collect huge amount
by this source so, cash
inflow get increased.
From the above analysis, it can be said that bank loans majorly increase the liability of
company for longer period so it make a huge impact on the balance sheet of Radisson plc. On the
other hand, bank gives loan amount which enhances the cash inflow in cited firm. So, it will give
a positive impact on cash flow statement (Manneh and Naser, 2015). Venture capital is another
source of finance which affects the income statement of organization. As entity has to pay
interest to investors so, it will be the expenditure for organization. Apart from this, divided will
have to be paid so, profit of company will get reduced. Sales of fixed assets will put high impact
on the balance sheet that will decrease assets side of company but will positively impact on cash
flow statement.
TASK 3
3.1 Importance of budgets for variation and for making appropriate decisions
Investment decisions are the most important part of business. Company’s growth
completely depends upon its decisions related to investment. For the long term growth,
appropriate judgment is essential. Budget preparation and analysis plays a vital role in the
business. With the help of this, Radisson plc can identify variance between projected and actual
budget. It will help to improve the financial performance of organization. Main objective of
creating budget is to identify the future expenses and make effective strategies to have control
over it. Apart from this, with the help of this, managers can control over extra expenditures
(Basic investment appraisal techniques, 2012).
Table 1: Production budget
Budget ( £) Actual ( £) Variance Favorable or
unfavorable
Production (Unit) 10000 125000
Indirect materials 50000 60000 10000 Unfavorable
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labour cost 40000 45000 5000 Unfavorable
Salaries to
employees
100000 105000 5000 Unfavorable
Rent 80000 80000 0
Utility bills 40000 45000 5000 Unfavorable
Depreciation 20000 20000 0
Total 330000 355000 25000 Unfavorable
From the above projected budget of production, it can be said that if actual budget is
higher than projected budget then it would be unfavorable situation for the organization.
Radisson plc needs to have control over its production expenditures. It needs to give salaries to
employees as per their performance and efforts. It will help to reduce variance amount and thus,
it will be a favorable situation for the organization. There is no depreciation which means
company is maintaining its stock well and are utilizing them timely (Manneh and Naser, 2015).
3.2 Unit cost calculation and pricing decisions
Organizations have to look upon the total expenditures of business units because excess
spending decreases the revenue of company. In Radisson plc, there are two types of costs
attached in the production process; that is, fixed and variable. Fixed or direct expenditures are
those expenses which are necessary and cannot get influences by production units such as
salaries, rent, depreciation, etc. (Profitability Ratio Analysis, 2017). However, variable
expenditures are those spending which may get changed for instance: if there is high production
then amount of utility bills and material cost will also be higher.
Calculation of unit cost:
Total expenditures are associated with producing one unit of good is called as unit cost. It
can be calculated by adding all costs and subtracting it from number of produced units.
For instance: Several costs of Radisson plc are
Machinery costs - £25000
Salaries - £13000
Other variable spending - £10000
Total expenditures £48000
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If Radisson plc wants to produce 5000 units then calculation of unit cost will be done as
below:
Unit cost = £48000/ 5000
= £9.6
Pricing decisions
For instance: If desired profit percentage of Radisson plc is 20% then company can set its
prices of software by using below calculative techniques:
Selling price = Unit cost + cost* expected profit percentage
= £9.6+ £9.6*20%
= £11.52
So, it can be said that if Radisson plc sets its price 11.52 then it can get 20% easily. Cost
plus pricing method is beneficial for the organization. By using this, cited firm will be able to
take effective decisions regarding pricing.
3.3 Viability of investment appraisals techniques
Radisson plc can take appropriate decisions regarding investment with the use of NPV,
payback period, ARR calculations, etc. All these are investment appraisal techniques and help
the entity in taking effective decisions (Strange, 2015).
Net present Value (NPV):
It is the method which guides entities to invest in such project which gives higher returns.
Project A PV @10% Present value Project B PV @ 10% Present value
Initial
investment 25000 25000
1 18000 0.909 16364 20000 0.909 18182
2 20000 0.826 16529 32000 0.826 26446
3 25000 0.751 18783 34000 0.751 25545
4 32000 0.683 21856 38000 0.683 25955
5 37000 0.621 22974 40000 0.621 24837
6 0 0.564 0 0 0.564 0
Total 96506 120964
NPV 71506 95964
286.02% 383.86%
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From the above calculation, it has been found that NPV value of project B is higher than
project A and so, investment in B will be better for Radisson plc because in this, it will be able to
gain higher profit on its invested amount (Basic investment appraisal techniques, 2012).
ARR:
This technique is a popular investment appraisal method which helps to select the most
feasible project which can give higher returns on its investment.
Project A Project B
Initial
investment 25000 30000
1 20000 22000
2 27000 35000
3 32000 38000
4 37000 25000
5 42000 43000
6 0 0
Total 158000 163000
Average 31600 32600
ARR 126.40% 108.67%
From the above calculation, it can be concluded that if Radisson plc invests in project A
then it can get good returns and profit.
TASK 4
4.1 Financial statements
Mainly, Radisson plc has to prepare three accounting statements: Income statement: As per the international accounting standards, each organization has to
prepare income statement at the end of March. This has two key components, that is,
income and expenses (Manneh and Naser, 2015). Overall expenditures of Radisson plc
are included in the spending’s side such as salaries to employees, rent paid, depreciation
of computers, payment of utility bills, etc. Apart from this, income side includes
company are sale of software, revenue on investments, etc. (Hyman, 2014). By preparing
income statement, cited firm can compare its performance with the previous
performances and competitors.
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 Balance-sheet: It is another financial statement which has two key components, that is,
assets and liability. If Radisson plc sells its fixed assets then it will make the assets side
weak and if it takes loan then it will increase the liability of organization for longer
period (Hopkin, 2014).
 Cash flow statement: It is another important financial statement which has two main key
components; cash inflow and outflows. If sales of company is increasing then it will
make the inflow side stronger but if expenses are more than its expenditures then cash
outflow will get increased which will not be good for the entity (Manneh and Naser,
2015).
4.2 Comparison of two organization's financial statements
Radisson plc (Private Limited):
It is the medium-sized private firm for which it is compulsory to prepare all accounting
records like balance sheet as well as income and cash flow statement (Profitability Ratio
Analysis, 2017). It has to follow international accounting standards while preparing all these
records. Involvement of tax in the income statement is important in such type of entities.
Softwire Technology (Sole trader):
It is the small sized business which deals with software. For the sole trader, it is not
necessary to prepare balance sheet and cash flow statement (Manneh and Naser, 2015). It is on
the choice of owner whether to prepare it or not. Sole traders just have to prepare income
statements so that they can identify their profit and can compare it with previous performances. It
is not necessary for Softwire to follow international accounting standards.
4.3 Ratio comparison
For making the comparison, TESCO and Sainsbury have been chosen which is as
follows:
Profitability ratio
Ratio Formula TESCO Sainsbury
Gross Profit (GP/ Sales)* 100 2112/62284*100
= 3.39
1208/23775*100
=5.08
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Operating profit (OP/ Sales)* 100 5792/62284*100
=9.2
76/23775*100
=0.31
From the above ratios, it can be said that Sainsbury’s gross profit is higher than TESCO.
Sales of organization is good and thus, it should give trade discounts to enhance its sales volume.
Liquidity ratio
Ratio Formula TESCO Sainsbury
Current ratio Current assets / current
liabilities
11958/19810
= 0.60
4421/6923
= .63
Liability of TESCO is higher than its assets so, it must have control over its expenditure
or need to increase its assets (Profitability Ratio Analysis, 2017).
Gearing ratio
Ratio Formula TESCO Sainsbury
Gearing ratio Long term debt / (debt
+ equity)*100
10520/10520+7071*1
00
= 59.80
2337/2337+1108*100
=67.83
From the above comparison, it can be interpreted that TESCO is performing well and its
financial risk is in control whereas Sainsbury’s risk is much higher than TESCO.
CONCLUSION
From the above report, it can be concluded that medium sized organizations have a great
scope to grow in the corporate market. They have to select appropriate medium of sources which
can give benefits to the entities. Bank loans are quite easy and suitable source of finance and
thus, it is easy for the firms to repay it in monthly installment. Unit cost and pricing decisions are
two main aspects of finance so, managers of the business units need to look upon it and try to set
prices in such a manner that they can get profit on it. Controlling over expenditure helps to
enhance the revenues of entities to a great extent.
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