Financial Ratio Analysis and Interpretation
Added on 2020-02-05
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Managing FinancialResources and decisions
Table of ContentsINTRODUCTION...........................................................................................................................3Task 1...............................................................................................................................................41.1Identification of various sources of finance...........................................................................41.2 Impact of different sources of finance .................................................................................51.3 Evaluation of appropriate sources of finance........................................................................52.1 Analysation of cost of different sources................................................................................62.2 Importance of financial planning..........................................................................................62.3 Assessment of the information required for making decisions.............................................72.4 Impact of finance on financial statements.............................................................................83.1 preparation of cash budget....................................................................................................83.2 Calculation of unit cost and making pricing decisions.......................................................103.3 Assess viability of project using appraisal techniques........................................................11TASK 2..........................................................................................................................................144.1 Major financial statement of a company.............................................................................144.2 Comparison between financial statement of types of business organization......................154.3 interpretation of financial statements using ratios..............................................................16CONCLUSION .............................................................................................................................20REFERENCES..............................................................................................................................21
INTRODUCTIONFinancial resources are cash, short term deposit and liquid financial investment that arenecessary in operation a business and doing long term investment. Efficient use of financialresources is necessary to make correct financial decision and make a strong foundation ofcompany (Arthur, Cheng and Czernkowski, 2010). Financial resources are considered as maincomponent in running a business successful and focus on running the business smoothly withoutany hindrance. Funds are needed for purchasing raw material, paying salary to employees,buying plants and equipment’s etc. Without money an organisation cannot work for even a shortperiod of time. Controlling budget and analysing it from time to time is important is order to usefinancial resources effectively. Some of the main financial sources for a company are issue ofshare, selling goods and services in market, bank loan and different bonds. Decisions related tolong term loans, issue of share, fund of owner etc. are considered in financial decision. There aremany factors that made a huge impact on financial decision like cost of financing, risk involvedin borrowing, position of company's cash flow, dividend decision if shares are issued etc(Bennouna, Meredith and Marchant, 2010). In the process of making a financial decision firsttask is to identify the source of fund than evaluate its merits and demerits after which companyhas to choose among the available option, implementation other decided plan will be next stepand its monitoring will last step. Task 1Identification of various sources of financeThere are many sources of finance available in the company and out of the company. Animportant thing that should be considered at the time of finding appropriate source of fund istime. There are three options available to a company first is short term loan which can be for aweek, day or may be month (Bodie, 2013). They are important in day to day operation ofbusiness. Time period of all the three loan varies from company to company as there is no fixeddefinition or time for these periods. Middle term loans is needed at the time of expansion ofbusiness and enhancing production of company so ultimately revenue can be increased. Venturecapital is an option in short term financing in which venture capitalist invest some money inbusiness and get some part in ownership. Another option can be investment by owner himself inwhich he uses his own funds for expansion of business, it is known as owner's equity. Another
way of looking at this option is that business has taken loan from the owner. Long term financingis done for at least more than one year, it cannot be done for days, weeks or for few months. Thistype of financing is done for fixed investments like purchase of land and building etc. Loan frombanks, private financing are some options in long term finance (Bradbury, 2011). These fundsare also used in case of new product or service launch which is part of company’s long termstrategy.1.2 Impact of different sources of finance It is essential for a company to analyses and evaluate its all financial resources which can help toincrease the efficiency and business performance. According to the above discussion there arevarious sources of finance which can be related with the internal and external sources. Eachcapital resources having its own advantages and disadvantages (Carballo-Penela and Doménech,2010). Therefore, it is the responsibility of the cited firm, is to evaluate all these resources in anappropriate manner so that they can meet its long term goals and objectives in an effectivemanner. the first resources of the company are related with the equity which played a significantrole in the fund arrangement of a small business enterprises. For example, if an equity investorprovide finance to the company as a return or share in the profit. It can increase the cost offinance in the near future which is not good for the company. apart from that, the potentialinvestor can charge higher share which can influenced the future business performance of theentity. On the other hand, bank loan is the external source which can leads to increase the cost offinance. There are various institutions such as bank charges more interest on the capital for thecompany.1.3 Evaluation of appropriate sources of finance.In a company there are various financial resources that are available and are required tobe used in an appropriate manner so that the earnings of XYZ foods will be increased. It will berequired by the company to prepare the financial statements in a correct and an attractive manneras by this only more number of investors will be attracted (Collier and et. al., 2010). This isbecause investors will be taking their decision on the basis of the data presented in the accounts.For choosing which source is to be considered it will be needed that risk in relation to eachshould be evaluated. Various ratios will be calculated that will show the financial position of thecompany and on that basis bank will decided that whether the loan will be sanctioned to thecompany or not. There are various sources which are available and have been discussed above
but as XYZ foods is a small business so for it the most appropriate will be bank loan. The bankwill give loan to the company on the basis of the security that will be provided and will also tellthat repayment of loan will be done by schedule that have been provided which will includemonthly or yearly instalments. As the payment will made in parts so the burden will not be muchfor the company to bear. The rate of bank will be best for it as the private lenders charge moreinterest than banks so this will be the best source for XYZ foods.2.1 Analysation of cost of different sources.There are various costs that are required to be incurred in relation to the source that willbe chosen by the company. It will be the duty of the manager that to take the decision in thisaspect and for that he will be required to analyse these costs (Collins, Hribar and Tian, 2014).Some of them are :Bank loan : it is the source in which funds are provided by bank to the company on the basis ofsecurity that will be provided by it. There will be various costs that will be associated with it andthey are bank charges that are charged by bank in return of the services provided by it to thecustomers. In addition to it interest will also be charged by bank from client at a fixed rate. Owner's capital : this is that source in which funds are brought in business in form of equity andthe owner himself brings that finance in the company (Cui and Ryan, 2011). This is that amountthat will be brought to start the business on the first hand. In this cost will be the opportunity costwhich will be the loss that the owner will have as otherwise he would have invested that amountin some other place. So the return which he would have earned will be treated as his cost.2.2 Importance of financial planning.Finance is important for every business and it is all the more important to know therequirement in relation to it (Drivelos and Georgiou, 2012). For this purpose various plans willbe made which will help in knowing the sources from which funds can be procured and also howthey will be invested in order to earn the maximum amount of return. This whole process thatwill be undertaken will be known as financial planning. It is very important to have anappropriate plan so that the success of the business can be ensured. There are certain reasons due to which financial planning is considered to be important and thoseare discussed below :the major importance of it is that XYZ foods will be able to know that whether it ishaving appropriate amount of funds available with it in order to fulfil the day to day
needs. It will also facilitate the coordination among company in respect of variousactivities.With the help of this it will be possible to know the sources that are available from whichthe funds can be raised.The wastage of resources that occurs in organisation will be reduced with it as there willbe a manner that will be specified in relation to how the funds should be utilised so theywill be used in that manner and will provide the maximum earnings to the company.Capital structure can be formulated with the help of financial planning as in any businessthere will be need of both the funds that are short term as well as long term so it will bedecided that who all will be the persons contributing to the capital and the ratio in whichit will be made.2.3 Assessment of the information required for making decisions.For the making of the decisions there will be requirement of various kinds of informationby the persons who are responsible in this respect (Gervais, 2010). Decisions are taken onvarious aspects and by different users and will need data for that which is mentioned below :manager are those who are responsible to know the performance of the company togetherwith ascertainment of the liquidity position it and for this purpose the information thatthey will require can be collected from the financial statements which will includeincome statements and balance sheets.Government will also be requiring information for many things as it will want to knowthat whether proper taxes are paid by company or not and also it will want to increase theopportunities in respect of employment generation and for this it will requires the incomestatement of business. Investors take there decision of investment on the basis of the statements provided tothem as they will analyse them and decide whether they should invest in the company ornot and will the organisation be able to pay them the required rate of return.Suppliers will use the cash flow statement of the company to decide that will thecompany be possible to make the payment in relation to purchases on time or not and onthat basis they will take their decisions that they should make sales to the company ornot.
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