Importance of Financial Management for Businesses
Added on 2020-02-17
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MANAGING FINANCIALRESOURCES AND DECISIONS1
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3TASK 1............................................................................................................................................31.1 Finance sources for business firms........................................................................................31.2 Implications of finance sources.............................................................................................41.3 Appropriate source of finance................................................................................................5TASK 2 ...........................................................................................................................................52.1 Cost of source of finance.......................................................................................................52.2 Importance of financial planning for firms............................................................................52.3 Information needs of decision makers...................................................................................62.4 Impact of finance on the financial statements........................................................................6TASK 3............................................................................................................................................73.1 Cash budget for Clariton........................................................................................................73.2 Computation of unit cost.......................................................................................................83.3 Project evaluation method .....................................................................................................9TASK 4..........................................................................................................................................104.1 Financial statements.............................................................................................................104.2 Format of financial statements ............................................................................................114.3 Ratio analysis.......................................................................................................................11CONCLUSION..............................................................................................................................12REFERENCES..............................................................................................................................13INDEX OF TABLESTable 1 Preparation of cash budget..................................................................................................7Table 2 Per unit cost calculation......................................................................................................8Table 3: Calculation of payback period...........................................................................................9Table 4: Calculation of ARR...........................................................................................................9Table 5: Calculation of NPV..........................................................................................................10Table 6: Ratio analysis...................................................................................................................112
INTRODUCTIONFinance is the one of the important factor that heavily influence business performance ofany firm. In the current report, varied finance sources and there implications on business arediscussed in detail. Along with this, budget is prepare and and interpretation about same is made.Project evaluation methods are applied on cash flows and best one is selected for the firm. In endsection ratio analysis is done and comments are made on performance.TASK 11.1 Finance sources for business firmsThere are two sort of business firms namely unincorporated and incorporated business.There is difference between both sort of business firms. Unincorporated business refers to thesole trader and partnership business. Whereas, incorporated business refers to the company.Sources of finance for both are given below.Unincorporated business Bank loan: Bank loan is the source of finance which comes in debt category (Rahemanand et.al., 2010). In order to meet long and short term finance need bank loan is usuallytaken by the business firms.Retained earning: It is a portion of sales value which remain as residual amount afterpaying all expenses out of cash inflow amount.Incorporated businessVenture capital: It is a long term source of finance in which VC company buy shares ofany other firm and in return latter entity receive cash in its business. Thus, it is attractivesource of finance. Equity: Similar to VC equity is also long term source of finance. Firm need to obtainprior approval from stock exchange in order to issue shares in the market (Wilmott,2013). Debenture: Debenture is similar to bank loan and only difference between both is thatin case of former one assets are not mortgaged but in latter case specific asset ismortgaged. Interest is paid to creditor on debt amount. 3
1.2 Implications of finance sourcesSource of financeLegal FinanceDilutionofcontrol BankruptcyVenture capital It is mandatory toink a agreementwith other firm inwhich investmentwill be made(Tirole, 2010).Higher financecost relative toother source offinance.Control remainunstable in caseof VC.Amount is paid tothe creditors andthen capital ispaid back toshareholders.EquityInevitabletofurnish statementof income andfinancial positionto the stockmarket regulator.Same as aboveexcept venturecapital.Same of VC.Same of VC.DebentureNecessary tomake availablerelevantdocuments to themarket regulator.Lower financecost relative toequity and VC(Embrechts,Klüppelberg andMikosch, 2013).Control remainunchanged.Same of VC.Bank loan Mortgage of assetis required to takeloan from bank.Sameofdebenture.Sameofdebenture.Same of VC.Retained earningThere are no legalimplications forretained earning.There is nofinance cost ofretained earningSameofdebenture.Same of VC.4
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