MANAGING FINANCIAL RESORCES AND DECISION INTRODUCTION

Unit 2 MANAGING FINANCIAL
RESORCES AND DECISION
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Identification of sources of finance available to a business.............................................3
1.2 Implication of different sources of finance......................................................................4
1.3 Evaluation of appropriate sources of finance for a business project................................7
TASK 2............................................................................................................................................8
2.1 Analysis of costs of different sources of finance identified in task 1.3............................8
2.2 Importance of financial planning......................................................................................8
2.3 Assessing information needs of different decision makers..............................................9
2.4 Impact of finance on financial statements........................................................................9
TASK 3..........................................................................................................................................11
3.1 Analyzing budget and making appropriate decision......................................................11
3.2 Calculation of unit costs and making pricing decisions.................................................13
3.3 Assessing the viability of a project using investment appraisal techniques...................14
TASK 4..........................................................................................................................................15
4.1 Explain the content of Financial statement....................................................................15
4.2 Comparison between different formats of financial statements for different types of
business.................................................................................................................................16
4.3 Interpretation of financial statements.............................................................................19
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................22
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INTRODUCTION
Management of financial resources means planning, organizing, controlling and directing
the financial activities of the organization. In simple words it means getting the most from the
resources available. It deals with procurement of financial resources from appropriate sources
and utilizing the same in an optimum manner. Effective and efficient management of financial
resources ensures long term growth and profitability of the organization and it will also ensure
adequate and regular supply of funds to the organization (Beck and Demirguc-Kunt, 2006).
Sweet menu restaurant ltd is a reputable restaurant and it was founded by three students
ten years ago. The owners of sweet menu want to open two new branches so as to take advantage
of this fast growing and dynamic food industry. According to its new business plan, it will
require £ 300000 to £ 500000 to open the proposed new branches. The present report
emphasizes on analyzing different sources of finance and their implications, costs of finance and
importance of financial planning for the sweet menu restaurant.
TASK 1
1.1 Identification of sources of finance available to a business.
Long Term Sources Of Finance Description
1. Issue of equity share capital
2. Retained earnings
3. Loans
A company can offer its shares to the general
public to raise huge amount of capital. Equity
shares are permanent in nature and equity
shareholders are considered as owners of the
company. Part of profits of the company is
distributed among equity shareholders (Baker and
Mukherjee, 2007).
These are earnings of the previous year’s which
were accumulated by the company instead of
distributing them as dividend.
Loans mean money borrowed by the company
from the financial institutions in exchange for
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4. Third party investment
future repayment of principle amount along with
interest (Nanda, 2008). Loans can be secured or
unsecured.
When an individual or entity lends its money to the
company. However, money lending is not
principle business of the entity (Duxbury, 2015).
Short Term Sources Of Finance Description
1. Hire purchase
2. Leasing
3. Factoring
4. Cash management
Hire purchase is a method where assets are
purchased and payment is made in installments
over a period of time. Under hire purchase
contract; ownership is not transferred to the buyer
until full amount of the contract is paid (Mayer,
Schoors and Yafeh, 2005).
Lease is an agreement under which one party
agrees to rent his property to another for regular
periodical payments.
It is a financial transaction in which company sells
its business invoices (accounts receivables) to the
third party (factor) at a discount.
Cash management is a process of collecting,
managing and investing cash. It will ensure
company's solvency and financial stability
(Grzegorz, 2010).
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1.2 Implication of different sources of finance
Sources of
finance
Legal implications Financial
implications
Dilution of
Control
Bankruptcy
implications
1.Equity Share
Capital
2.Retained
Earnings
3. Loans
Prior approval of
stock exchange is to
be obtained before
bringing initial public
offer in the market.
Moreover, the
company has to follow
all rules and
regulations formed by
governing body.
There are no legal
implications where a
company is utilizing
its free reserves.
Obtaining loans from
banks is very difficult
because banks lend to
only those companies
A company can
obtain huge funds
from the general
public by offering
them equity shares
and company has
to pay dividend to
its equity
shareholders
periodically.
If too much funds
are devoted from
the retained
earnings then it
will lower the
liquidity position.
Tax benefit can be
obtained on the
amount of interest
paid.
Ownership
control of the
company will
be diluted
among the
shareholders
(Lau and
Proimos, 2010).
No risk of
dilution of
control because
it is
reinvestment of
earnings of
past.
No risk of
dilution of
control because
lenders do not
There is no
risk of
bankruptcy in
case of
issuance of
equity shares
because it is
not liability of
the company
to repay the
funds to the
equity
shareholders.
This amount is
not added to
the debt
profile so there
is no risk of
bankruptcy.
There is high
risk of
bankruptcy
when company
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4.Third Party
Investment
5. Hire Purchase
6.Leasing
which are capable of
repaying their loans.
They also demand
valuable collateral as
security.
No legal implications.
Very easy to obtain
third party loan.
Contract between
vendor and purchaser
is to be properly
signed before
transaction.
Contract between both
the parties is to be
properly signed before
entering into lease
Usually they carry
low interest rates.
Purchaser has to
pay periodical
installments and
tax benefit can be
obtained on the
amount of interest
paid.
Lessee can use the
assets without
take ownership
position in the
company.
No risk of
dilution of
control.
No risk of
dilution of
control.
No risk of
dilution of
does not have
enough funds
for repayment
of loan
amount.
Usually fewer
amounts are
borrowed from
third parties so
no bankruptcy
implications
are involved.
Risk of
bankruptcy is
involved in
only those
cases where
large amount
of money is
involved in
hire purchase
transactions.
Repayment of
the principle
amount and
finance
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