Importance of Financial Resources- Manage & Decide
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Added on 2020-01-07
Importance of Financial Resources- Manage & Decide
Added on 2020-01-07
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MANAGING FINANCIALRESOURCES AND DECISIONMAKING
TABLE OF CONTENTSIntroduction......................................................................................................................................3Carry Out an Investment Appraisal Part 1.......................................................................................31.1 & 2.1 Identify sources and analyzing its costs.......................................................................31.2 Implications of varied sources...............................................................................................4Carry Out an Investment Appraisal Part 2.......................................................................................52.2 & 2.3 Importance of Financial Planning and assessing the information needs of differentdecision makers............................................................................................................................51.3 Evaluating appropriate source of finance for business project..............................................62.4 Impact of finance on the financial statements........................................................................64.2 & 4.2 Discussing the main financial statements ad comparing their formats........................7......................................................................................................................................................9....................................................................................................................................................104.3 Ratio analysis.......................................................................................................................153.1 &3.2 Budget and analysis of its trends as well calculation of unit cost...............................164.3 Project evaluation techniques..............................................................................................17CONCLUSION..............................................................................................................................19REFERENCES..............................................................................................................................20ILLUSTRATION INDEXIllustration 1: Income statement of the company.............................................................................9Illustration 2: Balance sheet of the company.................................................................................10Illustration 3: Cash flow statement of the company......................................................................11Illustration 4: Income statement of sole trader..............................................................................12Illustration 5: Balance sheet of sole trader.....................................................................................13Illustration 6: Cash flow statement of sole trader..........................................................................14Illustration 7: Balance sheet of the partnership..............................................................................15INDEX OF TABLES
Table 1: Ratio analysis of Sainsbury.............................................................................................16Table 2: Budget of Sainsbury........................................................................................................17Table 3: Calculation of unit cost....................................................................................................17Table 4: Calculation of payback period ........................................................................................18Table 5: Calculation of ARR.........................................................................................................18Table 6: Calculation of NPV..........................................................................................................19Table 7: Calculation of IRR...........................................................................................................19
INTRODUCTIONResources for business enterprises are important because they are the reason behindbetter execution of their operational activities. In particular, financial resources play significantrole as company without adequate funds cannot survive in the current competitive market. Theseare the basic amenities that help management in carrying out operations of business in effectiveand appropriate way. In the present study, researcher focuses on evaluating the importance offinancial resources within a business. Further, it takes into consideration different sources thatare available and their implications to Sainsbury. Operating in retail sector of UK, company hasto face major competition which indeed enforces the management to maintain financial positionto attain long term sustainability. Herein, senior authority of cited firm plans to expand businessthus; it becomes essential to make optimum utilization of available financial resources. Lastly,through the help of different appraisal techniques, viability of available expansion proposal hasbeen evaluated so that the best possible decision can be made. CARRY OUT AN INVESTMENT APPRAISAL PART 11.1 & 2.1 Identify sources and analysing its costsVaried sources of finance are available for top level management of Sainsbury with thehelp of which they can easily carry out their expansion process. In general terms, sources offunds are important for a business as it helps in satisfying their financial needs. These sources arefurther bifurcated into two internal and external aspects. Following are the sources of financewhich are available to Sainsbury as follows:Bank Loan: By operating at large level, there are several financial needs that affect theworking of Sainsbury. Thus, borrowing from financial institution is one of the majorexternal sources that fulfil different prospects. The main advantage of this source is that itassists in raising huge amount for capital by completing mere formalities (Embrechts,Klüppelberg and Mikosch, 2013). Further, by considering the brand image of Sainsburyin target market, there are various financial institutions which are present to providemoney in terms of loan to the company. But negative implication of this source is thatSainsbury has incurred costs of interest and collateral security in raising the funds. Issue of shares: Being a leading organisation in UK retail industry, it is one of theprominent sources of raising funds. However, there are two methods through
management of cited firm can issue shares i.e. IPO and FPO. As already listed, Sainsburycan use FPO (Follow up Public Offer) to issue shares within the market and raise largeamount. Further, the costs of issuing shares and paying dividends to the shareholders areassociated with the source. But the advantage of issuing shares is that Sainsbury is notliable to repay the generated amount. Along with this, for expansion of its business, thisis the best available source for cited company. Retained earnings: It is defined as the money kept reserved for the future use in differentcontingency of business (Kotz, Kozubowski and Podgorski, 2012). This is feasible sourcebecause; company does not create any liability by using this source. Further, drawback ofthis source is that it is unable to raise large amount if not used in proper manner. It isconsidered as loss for the business. Sale of fixed assets: It is another internal source which helps in raising large amount. Toplevel management of Sainsbury can sell company’s old machinery or assets in order toraise funds (Minsky, 2015). However, it is prominent source in terms of overcomingshort term financial needs. Further, the cost associated with this source is that once assetis sold, Sainsbury cannot make use of it again. 1.2 Implications of varied sourcesThere are several implications associated with different source of finance. However, it isthe duty of finance manager of Sainsbury to evaluate each and every available source in effectiveway so that associated positive and negative implications can be identified. Herein, implicationsassociated with above defined sources are as follows:Sources AccessibilityOwnership andDilutionofControlGearing and taxeffectBankruptcy Issue of sharesFunds are raisedfor long term timeperiod therefore;quick access tothe same isdifficulty. But inOwnership doesnot transfer toindividualinvestor orshareholder in themarket. No tax benefit forthe firm as wellas huge impactcan be seen on thegearing ratio ofSainsbury. Company unableto pay return to itsshareholders.
caseofexpansion, it isthe best source(Föllmer andSchied, 2011). Bank loanFixed interest rateprovides access tothe borrowings,but Sainsbury hasto submitcollateralsecurity.No control istransferred to thefinancialinstitution. Provide taxbenefits. Defaults inpayment ofinstallments. Retained earningsEasy accessibilityNo transfer toownership(Mandelbrot,2013)There are no taxeffects.Categorized asloss for the firm.CARRY OUT AN INVESTMENT APPRAISAL PART 22.2 & 2.3 Importance of Financial Planning and assessing the information needs of differentdecision makersFinancial planning has a great importance for Sainsbury because by using financialplanning as a tool; firm can make the best use of available funds. In the financial plan, firm willdetermine a budgeted amount to meet the specific needs of the business. Latter, budgeted amountwill be divided among different business activities like sales, company internal operations andinvestment operations. Under the financial plan, Sainsbury will further allocate divided amountin each and every sub activity (Gitman, Juchau and Flanagan, 2010). It signifies that amountallocated for the internal operations will be divided among all sub activities of the mentionedoperations. In this way, same thing will be done in case of investment in securities and sales etc.By doing this, fund will be utilized among all the business activities in proper manner. Sainsburyneeds to carefully determine the way in which itbest uses of funds. The informationneeds of different decision makers are as follows.
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