The Different Sources of Finance and Implications : Report
Added on 2020-02-05
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MANAGING FINANCIALRESOURCE DECISIONS
Table of ContentsINTRODUCTION......................................................................................................................1TASK 1......................................................................................................................................1AC 1.1 Various kind of finance sources to mitigate financial requirements....................1AC 1.2 Implication of different identified financial sources............................................2AC 1.3 Evaluation of most appropriate finance sources for small business.....................2TASK 2......................................................................................................................................3AC 2.1 Cost of identified finance source for the business................................................3AC 2.2 financial planning: importance.............................................................................3AC 2.3 Internal and external stakeholders need...............................................................3AC 2.4 Impact of identified finance sources on firm's account........................................4TASK 3 .....................................................................................................................................4AC 3.1 Projected cash budget for coffee shop and its analysis to take strategic decisions4AC 3.2 Determination of cost per unit and taking price decisions...................................6AC 3.3 Uses of capital budgeting techniques to take investment decisions.....................6TASK 4......................................................................................................................................8AC 4.1 Important financial statements.............................................................................8AC 4.2 Formats of financial statements............................................................................9AC 4.3 Analysis of financial statements of Sainsbury...................................................15CONCLUSION........................................................................................................................15REFERENCES.........................................................................................................................16APPENDIX..............................................................................................................................18
Index of TablesTable 1: Projected cash budget for the period of 6 months .......................................................4Table 2: Computation of cost per unit........................................................................................6Table 3: Computation of PP and ARR.......................................................................................7Table 4: Computation of NPV and IRR.....................................................................................7Table 5: Ratio analysis of Sainsbury for 2015 and 2014.........................................................18Illustration IndexIllustration 1: P&L account for sole proprietor........................................................................10Illustration 2: Balance sheet of sole trader...............................................................................11Illustration 3: Profit and loss account of partnership...............................................................11Illustration 4: Balance sheet of partnership..............................................................................12Illustration 5: Sainsbury's profitability statement.....................................................................13Illustration 6: Sainsbury's balance sheet ..................................................................................14
INTRODUCTIONEvery enterprise needs to collect required funds and manage it efficiently to runsuccessfully in the market. Financial need can be arisen for its daily routine functions,purchase equipment, plant and machinery, construct building, business expansion andinvestment in new establishment etc. The present project report will determine availablefinance sources, its costs and its implications for small coffee shop business to mitigate theirdifferent financial needs. Moreover, it helps to discuss various managerial tools andtechniques that assist corporation to manage their operational functions. The report will makeuse of budgetary techniques, unit costing and capital budgeting analysis to take strategicdecisions. In last, it will present various financial statements and its need in the organization.Along with it, Sainsbury's financial statement will be analysed to assess company's marketperformance. TASK 1AC 1.1 Various kind of finance sources to mitigate financial requirementsAs per the present scenario, UK government makes some strategic planning toprovide funding facilities to the small firms. In the year 2013-2014, it spend £11.4 billionwith small and medium-sized organizations equivalent to the 26% of total governmentspending. However, by the year 2020, government has planned that £1 at every £3 ofspending will be for small corporations. Thus, decided ratio of 1:3 will provide great hugeopportunities to the businesses which is employing 250 employees or less. It will make firmsable to meet their individual set targets and objectives to a great manner. A small businessorganization, coffee shop is taken here for the present study. Its number of employees is lessthan 250 workers hence, it is able to get benefit of financial assistance and funding itself. For the lease contract, entrepreneur has available funds of £20000 while he needs£300000 to bid for the contract. Henceforth, additional funds requirement can be resolvedthrough following sources:Loans: In UK, bank provides loans to all the small as well as large scaleorganizations. Furthermore, government provides guarantee of the loans which will makecoffee shop entrepreneur able to generate funds to a great extent (Demiroglu and James,2015). They can take loans by fulfilling all the legal formalities with the bank.Bank overdraft: Along with the loans, banks also provide facility to withdraw someextent amount than available balance. It helps to eliminate financial urgencies and immediate1 | P a g e
funds requirement (Williams, 2016). Therefore, coffee shop can acquire funds from suchsource also.Cash squeezing operations: Firm can negotiate their payments and receive earlierfrom their debtors so that they can avail greater funds availability and remove operationaldifficulties. Lease: Coffee shop can take building on the basis of lease financing and mitigate theneed of building acquisition (Wong and Joshi, 2015). The reason behind this is that lease isthe right of using assets without having its ownership at some hiring charges.AC 1.2 Implication of different identified financial sourcesEvery source has some kind of legal and operational implications on the coffee shop.Generating funds from loans will impose obligations to pay timely interest plus instalment.Further, there is some legal formalities which must be comply with the banks for gatheringfunds. For instance, collateral security and guarantee may be demanded by the banks forsecuring loans (Allen and Paligorova, 2015). In case of any default in payments, banks havelegal right to collect their funds through dispose of the security. On contrary, its advantage isthat it does not transfer the ownership and interest is considered as deductible expenses fortax computation. Hence, it reduces tax liabilities and enhances profits. Further, bank chargesinterest rate on overdrafts which is comparatively higher than loan interest rate. Moreover, itcannot be used for long-term financial requirements. However, cash squeezing operation isnot a permanent source of finance. It can be successful if suppliers are ready to provide long-term credit to the coffee shop. Good liquidity position and profitability make firm able toextent their credit period. In addition, lease financing imposes obligations to pay periodicalrental charges (Gillispie and Hawkins, 2015). Otherwise, lessor has legal right to get backtheir assets again. AC 1.3 Evaluation of most appropriate finance sources for small businessThrough analysing the implications of various identified sources, it can be concludedthat bank loans are comparatively an easier source of finance for establishing the coffee shop.The reason behind this is that it mitigates financial need for different time duration.Furthermore, government guarantee and lending schemes increase unsecured loans on thebehalf of government guarantee (SME Access to finance Schemes, n.d.). Thus, it assists coffeeshop to collect adequate funds without providing any security. Further, loan guaranteeschemes, funding for lending schemes and start up loans help to collect funds at cheaper2 | P a g e
rates. Thus, it will reduce their fixed financial burdens and improve profitability. However,due to considering interest as an allowable expenditure, business tax obligations can bereduced. This in turn, it will enhance business profits and operational performance. Anotherthe most important benefit is that it does not diversify business control to the lenders(Tirumalaiah, Sony and Kumar, 2015). Henceforth, all the controlling rights will be availablein the hand of coffee shop owners.TASK 2AC 2.1 Cost of identified finance source for the businessInterest obligations is the cost of borrowed funds thus, coffee shop owner has toensure timely payment of their interest charged by the banks. Further, financial risk is existedwith varying the interest rates and amount of loan. For instance, higher amount of loans andhigh interest rate will increase business financial obligations and contribute high risk.Moreover, bank overdraft also imposes cost of interest payment to the organisation (Melzerand Morgan, 2015). However, the cost of lease financing is rental charges involved someinterest rate which coffee shop owner has to pay timely. AC 2.2 Financial planning: importanceIt is a planning for the collection of required funds and ensuring optimum utilizationof it. Financial manager of Coffee shop has to assess their financial need and generate fundsto support its operations and other capital expenditures. Short-term funds may be needed fordaily functions such as purchase material, pay rent, provide salaries and other payments(Huang, Leung and Qu, 2015). However, long term funds will be required for purchasingequipment, building and machinery. Financial planning helps to gather funds from the mostappropriate source. Moreover, it administrates funds efficiently by adopting various tools andtechniques. For instance, budget is a monetary tool that determines potential earnings andpayments to ensure adequate surplus availability in the business. It ensures maximumutilization of business resources and maximizes revenues (Poynton, Lapan and Marcotte,2015). Furthermore, it assists managers to control spending through continuous monitoring ofoperational activities. It also manages cash inflows and outflows so that firm can maintaineffective cash balance and run successfully. AC 2.3 Internal and external stakeholders needThere are number of internal stakeholders available in the organization such asemployees and managers, while outsiders who are not an integral part of organization but3 | P a g e
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