Managing Financial Resources: An Examination of Theories and Practices

The provided content consists of academic journals and online resources related to financial management and sustainability. The sources include articles and books on topics such as managing financial resources, carbon footprint, functional analysis, crisis communication, and corporate reputation. Additionally, there are online resources on investment appraisal and sources of finance. This diverse collection of materials can be used for research and study purposes in the fields of business, finance, and sustainability.

MFRD
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Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
1.1 And 1.2........................................................................................................................................3
1.3.....................................................................................................................................................5
TASK 2.................................................................................................................................................6
2.1.....................................................................................................................................................6
2.2 and 2.3........................................................................................................................................7
2.4.....................................................................................................................................................8
TASK 3.............................................................................................................................................9
3.1.....................................................................................................................................................9
3.2...................................................................................................................................................10
3.3...................................................................................................................................................11
TASK 4...............................................................................................................................................13
4.1...................................................................................................................................................13
4.2...................................................................................................................................................14
CONCLUSION..................................................................................................................................15
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INTRODUCTION
Every start-up and existing establishments need sufficient funds to start and run their corporation. Entities require money to pay daily
expenses, spending, investment in fixed assets, new technology, expansion and growth plans. The present assignment aims to identify both the
internal and external sources by which Radisson Plc can generate long-term capital to support its expansion programme. Moreover, various cost
and management accounting tools and techniques like cost calculation, pricing method, project evaluation technique and cash budgets will be
applied and evaluated for better and strong decisions to reach goals.
TASK 1
1.1 And 1.2
Radisson Plc is a medium-sized computer software manufacturing company operating in London. Recently, it acquired a long-term contract
to provide bespoke software to different companies around United Kingdom. Operational manager of the company believed that there are lots of
market opportunities available to the business to expand their operations and enhance industrial market share. In order to financing its new
project, Radisson can generate funds from any of the following sources, described underneath:
Internal sources:
Retained Earning: Raddison Plc is already conducting its business activities and operations in the existing market, henceforth, company
will have surplus available in the business which can be use to fulfil their financial requirement (Broadbent and Cullen, 2012).
Owner investment: Owner of the business can invest own personal saving to meet their capital requirement for the expansion project. It is
considered as a cheaper financial source because Radisson plc does not need to pay financial cost like interest and dividend on owner’s money.
External source:
Bank loan: company’s executive or director can submit their financial plan to the bank manager so as to raise money through loan. It will
provide extensive support to the business to collect funds for long-term period and thereby meet their monetary requirement ( Sources of finance,
2016).
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Share capital: Issuing more additional shares in the market enable Radisson Plc to gather enough or sufficient amount of money in the
form of share capital.
Hire purchase: Radisson plc can buy new equipments, machinery and tools without the requirement of making higher payment at the
point of purchase. It is because, vendor allow buyer to make some initial payments as down payment while remainder is spread out over a fixed
period, so that, company can arrange cash accordingly.
Source Financial Legal Dilution Bankruptcy
Retained profit  No financial cost will be
incurred if money raised
from this source than, but
still, opportunity cost exists.
 Company is not liable to
create any legal contract to
reinvest business net
earnings.
 It is unchanged as
no new owners
and shareholders
are added.
Henceforth,
privacy can be
maintained.
 If insolvency
incurs than it is
totally the
liability of
owners to pay
their outsiders as
they are in
charge.
Owner
investment
 Helps to meet long-term
financial need without any
financial obligations
No legal restriction exists on owner
to put own funds.
 Existing owner invest
further amount hence,
transfer is not diluted.
 Money can be
invested to the
available extent and
no need to repay.
Bank loan  On long-term period loans,
bank charge a changeable and
variable interest rate.
 Repayment can be made in
 Collateral security
 Debt covenants and legal
regulations
 Kept assets as charge for securing
 Lenders cannot alter
or change
 Radisson Plc need to
met all the terms and
conditions
mentioned under
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instalments over a
predetermined period (Conway,
2013).
loan repayment debt covenants.
 If business fails than
still it is the liability
of owners to repay
borrowed money.
Share capital  Distribution of dividend out
of profit.
 Administrative cost like
merchant banking fees,.
Printing, distribution and
listing fees under stock
exchange and compliance
with SEC.
 Required changes in
memorandum and article of
association
 Registrar’s approval is essential
for issue of additional shares
 Control is diversified
to ordinary
shareholders.
At the time of
dissolution, preference
share capital will be paid
earlier to equity.
Hire purchase  It might be possible that
Radisson Plc paid higher
amount that original cost of
the assets.
 It offers tax benefits.
 Repayment is made in
affordable small amount
helps to manager cash
accordingly.
 Ownership is transferred,
when final instalment due.
 If instalments are not paid on
time, than owner has legal
right to repossess the asset.
 Vendors do not
put any kind of
restriction on
business practices
(Rockey and
Collins, 2010).
 Not exists but
assets can recoup
back by the
vendor.
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1.3
Out of above presented financial source, bank loan and equity share capital are considered highly suitable for Radisson Plc. The reason
behind this is if company select only debt than it will increase debt burden towards the organization results in less profit. However, on the other
hand, if business chose only equity resources, than it will transfer control to the new shareholders who have authority and right to change the
decisions and control operations. The main reason for suggesting debt is that cost of debt is comparatively lower as compare to equity capital,
because it gives tax advantage to Radisson Plc. Moreover, no control dilution or diversification to the lenders is also an advantage to the firm.
Contrary to this, equity capital has been suggested because of absence of fixed rate of dividend that company has to pay to their ordinary
investors. Thus, by choosing a combination of debt and equity, Radisson Plc will be able to manage their capital structure up to their affordability
to bear financial risk.
TASK 2
2.1
Cost of equity
Cost of financial sources is regarded as monetary reward that Radisson Plc need to pay to finance its long-term contract agreement for
bespoke software. With reference to equity capital, it will need to pay dividend to the shareholders, but still, it must be kept in mind that the rate
of dividend on ordinary shares is not fixed. It may fluctuate accordingly to the varying amount of profitability ( Siano, Kitchen and Giovanna
Confetto, 2010). In order to satisfy shareholders so that they can sale their holdings, company is require to make some return to the investors for
delivering their risky fund. Apart from this, administrative fees and charges for listing the shares in LSE and compliance with Security Exchange
Commission (SEC) also considers as a financial cost. In addition to this, expenditures that firm will incur to print and distribute ordinary shares
are also included in cost and minimize overall profit.
Cost of debt
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Varying or floating rate of interest on long-term debts is the financial cost which will be incur by Radisson Plc. Higher the interest rate
maximizes financial burden on company, however, decrease in rate is considered good as it reduces expenditures and increase return. Moreover,
expenditures to arrange and prepare debt covenant and fees to compliance with the loan conditions and getting professional advices also are the
part of cost of borrowings.
2.2 and 2.3
Prediction of Radisson Plc’s potential financial results such as cash flows, value of assets and withdrawal plans through using existing
know variables is called monetary or financial plan. It is importance because of following reasons:
 It helps to estimate precisely the amount of future capital requirement, so that, financial plan can be made accordingly for the collection of
optimum level of funds. It helps to eliminate the situation of under-capitalisation or over-capitalisation.
 It ensures smooth operations and daily functioning by gathering enough amount of capital, which in turn, Radisson Plc can run business
activities without any problem (Epstein and Buhovac, 2014).
 It establishes strong and effective financial control by measuring deviations between actual results and set targets and also identifies the
reasons for such occurrence. Through this, Radisson Plc’s executives, directors and departmental managers can put better control over
resource utilization and minimize cost.
 It enable firm to avoid shocks and surprises due to volatile and uncertain market situations by making business financial strong.
 One of the critical importance of monetary plan is it helps in making optimum capital structure decisions by determine ideal ratio between
debt and equity sources (Farmer and et.al., 2012).
 Financial plan helps business to coordinate their organizational functions and action among all the departments.
 It helps to support business growth and progress programmes by effective utilization of resources and having surplus of funds every time.
Information need of variety of stakeholders
Shareholders: They analyze inherent risk associated with their potential investment to make decisions that whether they should buy, hold
or sell Radisson Plc’s shares. In order to fulfil that objective, they targets firm’s profit, cash flows, capital structure, and dividend policy and
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growth rate as well.
Suppliers: They just identify that whether company has enough resources or not such as debtors, receivables and stock to make their
deferral payments to the suppliers. It provide help to the creditors to decide that whether they should supply credit or not to the company.
Employees: They desire to make sure themselves about organization continuance, stability and profitability. Workers examine Radisson
Plc’s ability to pay remuneration, rewards, appraisal, post-retirement benefits, welfare activities and other employment opportunities.
Banks: They only provide fund after gathering information about debt to equity ratio, leverage, liquidity, profitability, debt coverage and
interest bearing capability (Bennett, Lutz and Jayaram, 2012). Banks use all the information to assess that whether Radisson Plc is able or not to
meet the criteria of debt covenant, if yes, then bank sanction loan.
Government: Regulatory governmental authorities and its agencies need company’s information to make tax policies and other regulatory
framework. The target of such evaluation is to assure optimum and effective allocation of resources to all the entities to carry out their regular
functions.
2.4
Source of finance Income statement Balance sheet Cash flow statement
Retained profit It just reduces the profit proportion that will be
distributed as dividend to the investors.
Reserve and surplus are the part
of shareholder’s equity, higher
the use of retained profit decrease
gearing level.
No impact on SOCF
Owner’s
investment
No financial cost It is the part of owner’s equity. Cash flow from financing
activities.
Loan Interest obligations will be disclosed as financial
cost, which in turn, reduces profit (Remund, 2010).
Long-term loan from bank shows
under the head non-current
liability and increase gearing
It will be the part of cash inflow
from financing activities.
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ratio.
Share capital Dividend payment is reduced from the earning after
interest and tax and declines retained profit.
Collected share capital is the part
of proprietor’s fund, hence,
reported as shareholder’s equity.
Similar to loan treatment.
Hire purchase Amount of interest appears as spending in P&L
account.
It reflects in the short-term and
long-term liabilities according to
the time of it.
Hire purchase’s instalments are
the part of cash outflow from
financial activities (Wätzold
and et.al., 2010).
TASK 3
3.1
Summary of projection or forecasting about cash inflows and its utilization in future course of actions or activities called cash
budget, constructed hereunder:
Items April May June July August September
Revenue 50000 51000 52020 53580.6 55188 57395.5
Total 50000 51000 52020 53580.6 55188 57395.5
Expenditures
Software design 20000 20400 20808 21224.2 21648.6 22081.6
Development 5000 5200 5350 5500 5600 5800
R&D 1200 1250 1300 1350 1450 1600
Administration 1800 1900 2200 2500 2800 3200
Other 1000 1200 1400 1500 1800 1900
Total 29000 29950 31058 32074.2 33298.6 34581.6
Net cash flow 21000 21050 20962 21506.4 21889.4 22813.9
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Initial cash 2000 23000 44050 65012 86518.4 108408
Closing cash 23000 44050 65012 86518.4 108408 131222
Interpretation
Presented budget reflecting continuous increasing trend of revenues, but still, in the initial period, it is increasing at less rate 2%, but after
May, it is rising at 3%, 3% and 4% respectively. Contrary to this, software design cost is increasing at a constant rate of 2% each month.
However, development cost is increasing at volatile trend, as in the initial years, it goes increase from £5000 to £5600 till August, while, in
September, it goes increase to £5800. Apart from this, cost of R&D, administration and other also shows a continuous increase over budgeted
period. As a result, total cash outflow gives rises from £29000 to £34581.6. Due to volatile and fluctuating trend, net cash flow indicates
declining trend to £20962 in June.
Ways to maximize positive cash balance
 Effective monitoring
 Control of expenditures such as administrative expenses and others (Stone, 2013).
 Available cash balance can be reinvested in profitable purpose to get some return
3.2
In simple words, cost is the sum of money that Radisson Plc need to paid or give-up to the others to get something in return. Companies
adopt various cost accounting practices to know the cost of production, manufacturing and distribution of goods and services in the market.
Usually, companies incur two type of cost, either direct or indirect (Wätzold and et.al., 2010). Expenditures that can be associated directly
towards a cost element is called direct i.e. direct material, direct labour and direct overheads, whereas, spending that cannot be allocated towards
any of the element is called indirect i.e office and marketing expenditures.
Unit cost = Total cost / Units produced
TC = TFC + TVC, alternatively AC = AVC + AFC
TFC = Total fixed cost
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TVC = Total variable cost
For instance = TFC = £12,000
TVC = £28000
TC = £12,000+£28,000
TC = £40,000
Number of software = 100
AC/CPU = £40000/100
CPU = £400
Pricing decisions: Radisson Plc can identify their product prices by adding an required or desired profit percentage on total cost, presented
below:
Cost oriented method of product price = Cost + Mark-up
= £400 + (£400*30%)
= £400 + £120
= £520
3.3
Payback period
Lag or length of time, in which, company can recoup initial investment required to accept the expansion project is called PP.
Investors want to get back quickly their initial cash outlay to mitigate risk (Coombs, 2014).
Year Cash flow Cumulative cash flow Cash flow Cumulative cash flow
0 -250,000 -200,000 -250,000 -250,000
1 50,000 -150,000 57,000 -193,000
2 72,000 -78,000 78,000 -115,000
3 93,000 15,000 99,000 -16,000
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4 154,000 169,000 162,000 146,000
A= 3 year + (£78,000/£93,000)
= 3.84 year
B = 4 year + (£16,000/ £162,000)
= 4.10 year
Accounting rate of return
Amount of return that Radisson Plc can expect to get on their initial cash outlay is called ARR, expressed as %. Radisson Plc must go for
capital proposal that indicates higher ARR (Investment appraisal, 2016).
A = average annual profit/initial cash outlay*100
A = (£369,000/4)/ £250,000*100 = 36.9%
B = (£396,000/4)/ £250,000*100 = 39.6%
Net present value (NPV) compares their present value of all the forecasted cash flows with the project cost to measure their net potential
return. Higher NPV always gains preferences over the project that indicates lower return (Shim and et.al., 2010).
Internal rate of return (IRR) is a rate of interest that equals both the present value of associated future year’s cash inflows with the
initial cash outlay.
Year Cash flow (A) Cash flow (B) Discounted values PV (A) PV (B)
0 -250,000 -250,000 1 -250000 -250000
1 50,000 57,000 0.909091 45454.55 51818.18
2 72,000 78,000 0.826446 59504.13 64462.81
3 93,000 99,000 0.751315 69872.28 74380.17
4 154,000 162,000 0.683013 105184.1 110648.2
NPV 15% 18% 30015.03 51309.34
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Recommendation:
Radisson Plc’s directors must go for project B because of greater NPV, IRR and ARR of £51,309.34, 18% and 39.6% respectively.
However, it payback period is longer to 4.10, but still, decision is not taken on PBP base because of avoiding monetary time value and post-pay
back profit.
TASK 4
4.1
Financial statements are the structured or formal records of the monetary transactions or activities which aim at to represent performance,
financial strength and liquidity position as well.
Profit and loss account: This statement consists of two elements that are income (revenue) and expenditures (payments). Objective of P&L
account is to identify that how much amount of profit or loss, Radisson Plc made though carrying out their regular business practices.
Gross profit/loss = Surplus of total revenue over cost of sale
Net profit/loss = Surplus of total revenue over total business expenditures
Balance sheet: Summarized records of corporate assets as well as liabilities are called balance sheet. Firms prepare this statement to measure
their financial or monetary strength at the end of ever financial year (Boiral, 2011). It comprises three elements that are assets, liabilities and
equity capital. In such regards, equity refers to owner’s investment and represent that how much assets are financed through entrepreneur’s own
capital. However, fixed or long-term assets include property, plant and machinery, land and building whilst current assets comprise debtors,
inventory, cash etc. On the contrary, long-term liability includes bank loan, debentures, financial lease whereas current liability encompasses
bank overdraft and accounts payable.
Assets = Owner’s capital + liabilities
Statement of Cash flow (SOCF): This statement records actual cash incoming and its disposal or utilization in business over a given period
helps Radisson Plc to measure cash earning ability.
Operating: Disposal and purchase of goods and services and results of routine functioning
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Investing: Purchase and sale of fixed or long-term assets like property, building and equipment
Financing: Monetary inflow through borrowings as well as share capital and cash utilization to repay debt and equity
4.2
Differences Sole trader Partnership Company
Statement  Statement of financial position
(SOFP)
 Statement of comprehensive income
(SOCI).
Similarly, partnership firms also
resemble same statement with an
additional statement to track
capital contribution and its
withdrawal by all the partners
from their capital account (Trisha,
2016).
 SOCI
 SOFP
 SOCF
 Statement of changes in
retained earnings
Mandatory
compliance
No Needs to follow partnership act. It is mandatory for Radisson Plc to
construct their financial
statements.
GAAP It is not subjected to follow GAAP (Carballo-
Penela and Doménech, 2010).
Same as earlier. Liable to follow GAAP, rules and
regulatory framework for
accounting purpose
Statutory audit Not necessary Not necessary Radisson Plc needs to audit their
financial statement as per
Company Act, 2006 to make sure
that correct and authentic
information is recorded in the
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financial statement.
Equity Equity consist only owner’s contribution
besides retained profit.
All partner’s capital contribution
is the part of equity (George Jr
and et.al., 2010).
Proprietor’s fund includes
ordinary and preference share
capital, premium and reserve and
surplus.
Profit sharing All the profits are available to sole trader. Profits are distributed among all
the partners in decided ratio.
Profits represent ownership of
equity shareholders.
IFRS and IAS Not liable to follow. Not liable Radisson Plc has obligation to
prepare and present their financial
statement by complying with
IFRS and IAS.
CONCLUSION
In order to make long-term contract for bespoke software, Radisson Plc needs to use combination of both debt and equity resources.
Moreover, cash budgeting analysis concluded that company needs to put effective control and formulate some strict policies regards to resources
utilization, so that, targets can be achieved. Analysis of two mutually-exclusive projects analyzed project B more superior because of greater
return. At the end, it concluded that Radisson Plc have to follow CA, 2006, UK GAAP, IAS and IFRS to present their financial position and
operational performance in annual accounts.
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