Financial Management Theory & Practice

This assignment focuses on financial management theory and practice. It examines key concepts such as open firm decisions in innovation, stakeholder management, and the impact of global financial crises on managing employees. It also explores resources in small firms, family ownership and internationalization, and financial decision-making within supply networks. The provided references support understanding these complex aspects of financial management.

MANAGING FINANCIAL
RESOURCES AND
DECISIONS
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TABLE OF CONTENTS
INTROUCTION...................................................................................................................................3
1.1 Available source for financing the business...............................................................................3
1.2 Assessing various implications of financing sources on firm....................................................4
1.3 Selection of the most appropriate retail store.............................................................................4
TASK 2.................................................................................................................................................5
2.1 Cost of various sources of finances............................................................................................5
2.2 Significance of financial planning in a business........................................................................5
2.3 Informations needed for financing decision makers..................................................................6
2.4 Impact of finance sources on the financial statements...............................................................6
TASK 3.................................................................................................................................................7
3.1 Preparing budgets and its analysis for the best decisions...........................................................7
3.2 Unit cost and pricing decisions..................................................................................................7
3.3 Investment appraisal techniques applications............................................................................8
TASK 4...............................................................................................................................................10
4.1 Types of financial statements...................................................................................................10
4.2 Final accounts differences in different organizations...............................................................11
4.3 Analysis financial statements using financial ratios.................................................................11
CONCLUSION..................................................................................................................................12
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INTROUCTION
Now-a-days, financial decisions becomes the key or central element of the business success
which assist entrepreneurs to generate sufficient amount of capital and utilize it optimally for
accomplishing the goals. In UK, small and medium sized enterprises make substantial contribution
to the growth and success of the country. Therefore, the assignment is prepared here to examine the
financial requirement of a small sized retail store named ABC Ltd to deliver excellent retailing
services to the people. The report will emphasize on identifying distinguish sources of capital to
meet corporate funding needs. Furthermore, it will present the various key decisions like costing,
pricing, long-term investment decisions etc. for the proper functionality. Lastly, a well-established
and leading hotelier, Hilton Hotel & Group’s financial performance will be examined and compared
with the rivalry Marriott.
TASK 1
1.1 Available source for financing the business
In the corporate world, finance takes very important place and the corporations needs the
respective resources in proper and adequate manner. When the ABC Ltd. has not adequate finance
then there are various kinds of sources are available which provide such kind of services to it. In
context to this, various types of sources of finance which are available are such as follows:
Sale of assets: It is an internal source of finance where the company raise fund using
internal condition of the firm (Brigham and Ehrhardt, 2013). As per the source the ABC Ltd. sale
it's those assets and equipments which are unused and unproductive for the firm. After selling the
assets whatever sum of money comes is to be use in business expansion.
Equity financing: Another source of finance is equity which is mostly used external
financing source by the firms. In this the company issues it's shares in the stock market which are
purchased by the shareholders. Further, investment which is made by the investors is to be used by
the business entity for expanding the firm.
Bank loan: It is also external financing source which provides financial resources and
services to the company for expanding the firm in another market. Here the management has to
fulfil all the process of applying loan and then bank determine valuation of it. After that the ABC
Ltd. able to raise fund easily in the market. It is little costly and risky as compare to equity
financing.
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1.2 Assessing various implications of financing sources on firm
Financing sources Legal implications Financial Implications Dilution of control
Sales assets Being an internal
source for raising
finance there are any
kind of legal rules are
not implement there.
Using an internal
source it leads to
reduce total assets of
the firm. While helps to
increase sales and
turnover at the end of
year (Nickel, Saldanha-
da-Gama and Ziegler,
2012).
There is no dilution of
control.
Equity financing Here the company
needs to listing in the
stock market because
without this it not able
to issue shares in
market.
In this case, equity
capital will be improve
in the business which is
beneficial for it. Apart
from this financial
leverage of the
company will also
improve.
In this control is diluted
with new shareholders.
Bank loan The ABC Ltd. has to
complete all the
documentation process
and show its liquidity
position to the bank.
In this the company has
to give interest amount
to the bank in terms of
cost of finance which
lead to reduce net
profit.
Control will not dilute
with bank loans.
1.3 Selection of the most appropriate source of finance
From the above mentioned different source of finance equity financing is the most widely
used and effectual source in order to raising fund. Moreover, it can be said that equity financing is
appropriate and suitable for the enterprise. Benefits and disadvantages of respective sources are as
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below:
Advantages: Very main benefit of the equity is that the company able to raise fund whenever
it wants without valuing firm in the retail industry of UK. Further, the ABC Ltd. Company is able to
increase market presence and enhance level of capital in the business. Along with this cost of
finance is very low as compare to another financing sources (Brigham and Ehrhardt, 2013).
Limitations: When the company going to issue shares then it needs to listing in the stock
market. Because without listing it cannot issue shares in the market which lead to reduce capital
raising. In addition to this, it has to provide dividend amount to the potential stockholders on yearly
basis by which profit level get affected.
TASK 2
2.1 Cost of various sources of finances
There are variety of sources that can be used by the business, every sources has some
financial cost towards the business. With reference to the selected retail business, it will incur
following financial cost on various financial sources, mentioned hereunder:
Bank borrowings: Getting loans from banks bring obligations to ABC ltd to pay a fixed
interest charge inclusive installment as the cost. It has one benefit that is tax benefit which offer
opportunity to ABC Ltd to minimize taxation burden.
Share capital: It bring dividend obligations to the business which is required to be paid by
ABC Ltd to investors for the risk undertaken by investing their capital. Unlike debt, it does not offer
any tax benefits to the ABC Ltd (Drechsler and Natter, 2012).
Hire purchase: Vendor provide flexible payment facilities to the buyer through deciding
periodical installments which includes some interest charges.
Leasing: On leasing, ABC Ltd needs to make interest payment to the lessor for the services
provided and it is the financial cost of leasing.
2.2 Significance of financial planning in a business
Financial planning is a process of devising plans, policies and financial strategies for
accomplishing financial targets. The significance of financial plan is provided here as under:
 ABC Ltd managers can create the best capital structure through making a right combination
of fixed and fluctuating source of capital for the cost management and profit enhancement.
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 Not only the collection of funds, but its effective and efficient utilization is too important,
therefore, through making an excellent plan, ABC Ltd can use their funds in an optimal
manner and minimize cost.
 Budgetary planning is the part of it that enable ABC Ltd to get standard revenue & control
operations for the effective cost management (Greene, Brush and Brown, 2015).
 It provide financial safety and security through maintaining surplus funds at each and every
point of time to meet urgencies.
 It provide an assurance against dramatically and drastic change in market environment like
sudden market volatility, shortage of material, high cost of transportation and so on.
2.3 Informations needed for financing decision makers
When the ABC limited company raising fund from internal as well as external sources then
the respective sources needs different kinds of information data. Various decision makers require
several kinds of informations are such as related to company’s financial performance, valuation,
reputation etc. When performance of the firm is higher and better in the retail industry then decision
makers attract to invest more money in that firm which helps to expand organisation up to greater
extent. In regarding to this, external decision makers are needs to take data and informations
regarding financial conditions. Because higher the level of profit provide more return to the
investors (Healy and Palepu, 2012).
Key decision makers are such as partners, venture capitalists, banks, share or stock market
and those financials who provide finance and fund to the company. They require very basic and key
information of the company is such as its profitability and credibility in the industry. Further, the
bank seeks towards business valuation in the overall market and industry where it operates. In
addition to this, venture capitalist require information related to the return on investment ratio as
well as profit of the firm. Moreover, stock market need information which are related to the profit
and investor ratios. Because higher the profit and investor ratio provide more amount of return on
the investment made by shareholders.
2.4 Impact of finance sources on the financial statements
Every financial source is reported and properly disclosed in the financial statements,
therefore, it will impact the financial statements of the business in following manner:
Interest cost is shown under the income statement which in turn decrease net return of the
firm. ABC Ltd will need to disclose interest payment before deduction of tax liabilities, therefore, it
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minimizes the taxation burden and maximize net profitability. In balance sheet, it will reduce cash
& its equivalent as under the cash flow statement, it is shown as cash outflow from financing
activities because it is related to long-term fund collection like debt, lease, hire purchase and others.
On the other hand, debt collection is reported under long-term/non-current obligations and in assets,
cash balance improved.
In contrast, dividend payment is shown under the P&L account from the net profitability and
remainder is called retained profits. However, in the B/S, it is subtracted from the cash balance as it
reports as cash outflow from financing activities (Cambra-Fierro, Melero and Sese, 2015). In
against to this, share capital is reported under the head total equities which indicates excess of total
assets over liabilities.
Due to equity financing capital raises which lead to reduce gearing and debt to equity ratio
withing the company. On the basis of more finance financial stability of the business entity will be
imporve in the industry up to greater extent. Hence, it can be said that through equity financing firm
will be able to recover and fulfil amount of debt and create psoitive impact on the balance sheet.
Bank loan affects on the balance sheet in negative as well as positive both ways of the
company. When firm raise fund through the bank loan then long term debt will increase in the
balance sheet of the entity which lead to enhance total liabilities. On the other side capital will be
raise due to which total assets and financial stability improves and impact positively on the balance
sheet.
TASK 3
3.1 Preparing budgets and its analysis for the best decisions
Particulars April May June July August September
Opening cash position 900 1220 1765 2465 3119 3737
Cash inflow
cash sales 2050 2500 2850 3040 3230 3600
Total 2950 3720 4615 5505 6349 7337
cash outflow
Purchase 820 1000 1140 1216 1292 1440
Labor 350 375 420 570 630 670
variable overheads 260 280 290 300 340 360
Fixed payment 300 300 300 300 350 350
Total 1730 1955 2150 2386 2612 2820
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Net cash position 1220 1765 2465 3119 3737 4517
Above cash budget analyzed that ABC Ltd’s cash inflow shows a rising trend as it goes from
2050 to 3600 in the last month. It happens because of high availability of disposable income to the
public, growing lifestyle and larger demand. In contrast, under the cash outflow, purchase remains
constant to 40% of turnover, it goes increased from 820 to 1440. However, labor’s wages shows a
sudden and drastic increase in July to 570 whereas variable shows increasing trend with the increase
in sales and fixed payments gone up in last two months to 350. Total cash outflow goes up from
1730 to 2820, and net cash position depicts a surplus plus growing trend throughout the years from
1220 to 4517.
Surplus cash indicates that expected revenue will exceed the total expenditures and enable
firm to meet their urgent financial requirement. ABC Ltd can utilize such cash availability in
prodcutive purpose like it can invest the capital in profitable investment opportunity to get favorable
return on it.
3.2 Unit cost and pricing decisions
In business, companies incur different types of expenditures which is categorized into two
parts on the basis behavior that are fixed versus variable. Fixed, as name implies, it remains
constant at various production level and do not change accordingly i.e. insurance, building rent,
manager’s salary, depreciation and so on (DRURY, 2013). In contrast, variable cost changes
accordingly with the variability in total output i.e. material requirement, labor’s wages and so on.
Total cost is founded adding both the fixed cost as well as variable cost, as follows:
Total cost (TC) – Total Fixed Cost (TFC) + Total variable cost (TVC)
Items Amount in GBP
Material consumed 60000
Wages paid to workers 30000
Variable manufacturing overheads 10000
Total variable cost (TVC) 100,000
Total Fixed cost (TFC) 20,000
Total cost (TC) 120,000
Number of units manufactured = 4,000
Unit cost = Total cost of production/Units manufactured
= 120,000/4,000
= 30
Pricing decision: Unit cost + 40% desired profit
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= 30 + (30*40%)
= 30 + 12
= 42
Justification behind using 40% mark-up
Here, 40% desired target return has been taken using various components such as profit-
maximization objectives, customers willingness to pay, their economic situation, market trend,
growth in demand and competitors product pricing also. With the stated case, consumers are ready
to pay high prices for the quality offerings and has strong financail position. In addition, managers
are targeted to gain maximum return therefore, 40% desired profit mark-up is founded suitable.
At 40% mark-up on the total cost, retailer will have to charge 42 GBP for each unit. If entity
wish to earn greater return then he needs to charge higher rate than 40% or vice-versa for getting
adequate return and high success.
3.3 Investment appraisal techniques applications
Capital budgeting is one of the key technique that is used by the financial managers for the
financial planning & success. This tools will help retailer, ABC Ltd to determine that whether a firm
must invest or deny available investment opportunity for the business growth, expansion and
success.
Payback period:
This technique is the simplest method that find out the recovery period of beginning cost of
investment in a project. While dealing with mutually-exclusive projects, an investor must prefers a
project with shorter payback period or vice-versa (Greene, Brush and Brown, 2015).
Accounting rate of return;
This method just computes or quantifies the return percentage on the total initial investment.
Company always needs high return, therefore, prefers greater ARR.
Net present value:
It is the modern and also the best way of investment appraisal which discounts the cash flow
to address the impact of market uncertainties. Total of discounted cash flows over the beginning
cost of capital is called net present value.
Internal rate of return:
This method just find out the rate at where NPV does not exists, henceforth, there is neither
any return nor loss exists at that rate.
Year Investment 1
Investment
2 CCF (1st) CCF (2nd)
Discounted
factor @
Cumula
tive
Cumulat
ive cash
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10%
cash
flows flows
Beginning
outlay -85000 -100000 -85000 -100000 1 -85000 -100000
2017 14000 12500 -71000 -87500 0.909
12727.2
7 11362.5
2018 29000 27600 -42000 -59900 0.826
23966.9
4 22797.6
2019 37500 40800 -4500 -19100 0.751
28174.3
1 30640.8
2020 45000 47600 40500 28500 0.683
30735.6
1 32510.8
2021 58000 60200 98500 88700 0.621
36013.4
4 37384.2
Internal rate
of return 25.64% 20.12%
Net present
value
46617.5
7 34695.9
Payback period:
Investment 1 = 3 years + (4500/45000) = 3.10 year Or 3 year 1 month
Investment 2 = 3 years + (19100/47600) = 3.40 year Or 3 year 5 month
Year Investment 1 Investment 2
Beginning outlay -85000 -100000
2017 14000 12500
2018 29000 27600
2019 37500 40800
2020 45000 47600
2021 58000 60200
Total profit 183500 188700
Number of years 5 5
Initial investment
183500/5 years
= 36700
(188700/5 years)
= 37740
Accounting rate of return (ARR) (36,700/183,500)*100 (37,740/100,000)*100
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= 43.18% = 37.74%
Recommendations
Investment 1 has shorter payback duration to 3 year 1 month hence, it is clear that recovery
period of this project is smaller. Moreover, this project has greater ARR to 43.18% whilst in another
one, it is derived to 37.74% hence, project A will give higher accounting period. However, under the
discounting techniques, both the IRR & NPV gives favorable esults for the first project. Project A's
NPV & IRR are comparatively greater to 25.64% & 46,617.57, in contrast, in the second one, it is
derived to 20.12% and 34,695.9 which is comparatively lower. Thus, the results favors investment
in first project and consider it more viable and should be undertaken by the management (Altenburg
and Pegels, 2012).
TASK 4
4.1 Types of financial statements
All the corporations or establishments needs to prepare their financial accounts adhering
with the accounting standards, UK GAAP. It is important to construct final accounts on a regular
period incorporating the results of all the monetary business transactions and activities. The
important annual accounts that an organization needs to prepare are stated here as under:
Income Statement
This statements provides an overview of organizational revenues and incurred payments in
connection with the regular transactions. The main target of making income statement is to
determine the profitability performance by subtracting total expenditures from the generated
revenues (Julian and Ofori‐dankwa, 2013). Income comprises sales, however, payments includes
purchase, rent, salary, wages, insurance and others.
Balance sheet
It provides a snapshot of liabilities, assets and shareholder’s equity and mainly targeted at
identifying the financial status of the firm. Analysts mainly use it to determine capital structure &
working capital for assessing solvency & liquidity and managerial efficiency too to evaluable
business performance.
Cash Flow Statement
This statement reconciles cash inflow and its disposal in operating, investing and financing
activities to keep track of cash position of the firm over the period. It enables a business to identify
the closing cash balance with the reasons behind change in cash balances at two different balance
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sheet dates (Fassin, 2012).
4.2 Final accounts differences in different organizations
Sole trader prepares income statement by reporting their revenues through trading activities
like supply of goods and services, purchase, wages, salaries and other payments. As per this, excess
of income over expenditures is called net profit or net loss which is totally available for the
proprietor. However, partnership construct profit and loss account and net profit is being distributed
among all the partners in their profit/loss sharing ratio. It also prepares partner's current account for
the distribution of interest on capital, interest on loan, partner’s commission and so on. In contrast,
companies and sole proprietor do not construct such type of account for the distribution of profit.
On the other hand, companies prepare income statement as per the rules of company act and
international accounting standards as well. It is prepared in decided format and every item is
recorded in structure manner to know gross profit, operational return and net profitability (Keupp,
Palmié and Gassmann, 2012). Unlike sole proprietor and partnership, they distribute a part of net
return to the investors which is known as dividend, therefore, it is reported as earning per share and
remainder as retained profits.
On the other side, sole proprietor’s balance sheet reported owner’s capital as investment, in
partnership, every partner’s capital contribution is clearly disclosed in the B/S whilst in company, it
comprises equity shareholder investment, share premium and retained profits. It also needs to
prepare it as per the schedules for the harmonization accounting practices. In addition, sole trader &
partnership do not require to construct statement of cash flow whilst companies are legally obliged
to prepare it for knowing the reasons for change in cash. Partnership construct partner capital
account to determine their total investment whereas companies prepare statement of change in
equity for the same.
4.3 Analysis financial statements using financial ratios
Name of ratio Formula Hotel Marriott Hotel Hilton
2014 2015 2014 2015
Profitability ratios
Gross income 1966 2123 6483 7207
Net income 753 859 673 1404
Revenue 13796 14486 10502 11272
Gross profit
(GP) ratio
Gross
income/sales*100
14.25% 14.66% 61.70% 63.90%
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Net profit
(NP) ratio
Net income/sales*100 5.46% 5.93% 6.40% 12.46%
Liquidity ratios
Current ratio
(CR)
Current assets (CA) /
current liabilities (CL)
0.63:1 0.43:1 1.11:1 1.05:1
Quick ratio
(QR)
CA – (Closing stock +
prepaid expenses) /
CL
0.39:1 0.37:1 0.74:1 0.69:1
Efficiency ratio
Asset turnover
ratio
Sales / total assets 2.02 times 2.24 times 0.4
times
0.43
Times
Return on
asset %
11.03 13.27 2.55 5.42
Interpretation
From the above mentioned table of ratio analysis it can be assessed that gross as well as net
profit both ratios are higher in the Hilton hotel in FY 2015 which are such as 63.90% and 12.46%
respectively. It shows that Hilton's performance in this year is comparatively betterr than Marriott
hotel. It may be because of effective pricing decisions, attractive marketing and promotional plan,
exceeding demand, online reservation facilities and better control over the cost which brought good
return to the hotel in this year. Apart from this according to current ratio the later hotel is able to
perform well in the industry and recover debt obligations in efficient way as compare to Marriott
hotel. Current ratio of Hilton and Marriott in accounting year 2015 are such as 1.05:1 and o.43:1
which clearly indicates that Hilton hotel has better liquidity position and it is financially sound in
the hospitality industry (Lin, 2012). It indicates that Hilton hotel maintains good working capital in
the business so that short-term liabilities, more importantly, suppliers can be repayed with the
outstanding obligations on time. However, target CR and QR of the retail industry is derived to 2:1
and 1:1 which make it essential for the Hilton's managers to put their attention on maximizing their
working capital in order to strengthen liquidity position. In terms of different efficiency ratios the
Marriott hotel is better in the year 2015 as compare to Hilton hotel. The Marriott hotel is highly able
to utilize its assets in proper way which lead to increase assets turnover ratio which is 2.24 times in
the FY 2015. Optimum use of assets helps tio drive in greater revenues as in the year 2015, Hilton's
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total revenues exceeded by 11.16%.
CONCLUSION
After completing the above report, it becomes clear that every source has a different
implication, therefore, ABC Ltd must choose a right combination of source for meeting out their
financial need. Budgeting analysis founded that ABC Ltd needs to put stronger control over cash
disposal and make policies in relation with increase in revenues for having a successful growth.
Lastly, investment appraisal technique founded 2nd proposal highly suitable due to maximum NPV.
Further, ratio analysis techniques founded that appropriate and right pricing mechanism, cost
controlling measures, capital structure and working capital decisions helps to strengthen the
financial performance for a successful business.
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REFERENCES
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