Cost Analysis and Break-Even Point Calculation
Added on 2020-01-15
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MANAGING FINANCIALRESOURCES ANDDECISIONS
Table of ContentsINTRODUCTION...........................................................................................................................1TASK 1: UNDERSTANDING SOURCES OF FINANCE AVAILABLE TO BUSINESS..........11.1 Identifying sources of finance...............................................................................................11.2 Implication of each and every source....................................................................................21.3 Three case study examples for business................................................................................2TASK 2: UNDERSTANDING IMPLICATIONS OF FINANCE AS A RESOURCE..................4Event 1: Cost of different sources of finance..............................................................................4Event 2: Key aspects of financial planning.................................................................................4Event 3: Financial decision making.............................................................................................4Event 4: Sample of profit and loss account and balance sheet....................................................5TASK 3: MAKING FINANCIAL DECISIONS.............................................................................6Scenario 1....................................................................................................................................6Scenario 2....................................................................................................................................9Scenario 3..................................................................................................................................10Scenario 4..................................................................................................................................12TASK 4 ABILITY TO EVALUATE FINANCIAL PERFORMANCE OF BUSINESS.............12Scenario 1 Accounting terminology & financial statements.....................................................12Scenario 2..................................................................................................................................14Scenario 3..................................................................................................................................15CONCLUSION..............................................................................................................................15REFERENCES..............................................................................................................................16APPENDIX....................................................................................................................................18
INTRODUCTION Managing financial resources plays most important role in business as through this itbecomes easy for management to accomplish desired goals and objectives. Further, it is wellknown fact that finance is regarded as one of the main resource of business without which nobusiness can survive in the market (Broadbent and Cullen, 2012). Therefore, large numbers ofefforts are applied by company so that all its major resources can be utilized in efficient manner.Apart from this, different sources of finance are present which business considers for satisfyingits financial needs. Further, each source has its own implications which management of everyenterprise has to consider as it is associated with growth and overall development. The presentstudy is associated with different case where different tasks have been covered in the studywhich takes into consideration implications of sources of finance, cost of different sources offinance, importance of financial planning etc. TASK 1: UNDERSTANDING SOURCES OF FINANCE AVAILABLE TO BUSINESS 1.1 Identifying sources of finance Different sources of finance are available with business which can be considered for carryingout operations in effective manner (Cox and Fardon, 2003). Further, they are present for largesized companies, entrepreneur or in case of any company which is interested in taking expansiondecision. Following are the sources of finance available for new and old, large and small, fornew business start up and those who are planning to expand in the market. Owner’s capital: This source can be considered by businesses in case of setting up newventure. Main reason behind selection of this source is that entrepreneur already owncapital and cost of acquisition is very minimum. Considering the present case this sourcecan be adopted by entrepreneurs who are planning to open up new venture. Retained earnings: It is the amount kept by business to meet any unforeseencontingency. This source can be adopted by existing businesses and through this it ispossible to satisfy financial needs in efficient manner (Cunningham, 2006). Further, it isappropriate for large and medium sized businesses who can carry out operations ineffective manner.1
Third party investment: This source can be considered by small or large sized businessesor entrepreneur who is start up new business. Through this source it is possible forbusiness to gather adequate amount for carrying out overall operations in the market.Sale of fixed assets: It is considered as short term source of finance which smallbusinesses can use for expanding their overall operations. Through this source it ispossible to satisfy overall financial needs of the business entity. 1.2 Implication of each and every source Source Legal implicationDilution of ownershipBankruptcy Sale of fixed assetsThis source of financehas no legal implication(Dada, Azim and Ullah,2014) No change inownershipIt will reduce valueof business and inturn solvency willbe affectedOwner’s capitalNo such legalimplication of owner’scapital as a source ispresent It will affectcontrolling power ofthe business (Pour,2011)No such financialobligation on thebusiness is present Retained earningShareholders have rightto impose restriction oninvestors as it canreduce amount ofinvestment It does not affectscontrolling power ofthe businessFinancialobligations are notinfluenced byretained earnings asthey are consideredas part of reserveand surplus (Demirand Caglayan,2012). So these are the legal implication of each and every source of finance which isundertaken. Further, such implications are required to be considered by business so that it caneasily survive in the market. 1.3 Three case study examples for business Different sources of finance are available for business which can be easily considered forthe growth and development of the business. Further, top management of the firm are required tounderstand the implications of sources of finance. As per the given case appropriate source offinance for small business start up, large business expansion and small group of people foracquiring medium sized company are discussed below: Case 1: Appropriate source of finance for small business start up2
For new business operating on smaller basis it is necessarily required to consider theappropriate source of finance for its benefit. For setting up small business two sources areeffective which are bank loan and personal savings. Obtaining bank loan can be appropriate forbusiness through which long term needs of business can be satisfied easily (Dransfield, 2004).Further, its repayment is based on monthly installment which small business can easily do. Apartfrom this, owner’s capital is also effective source of finance for small business which is newlyestablished. Further, there is no such liability on the part of company but in case if investmentamount is not utilized properly then it can have adverse impact on business. Case 2: Sources of finance for large business expansionIn the present scenario case of existing firm has been taken into consideration who wantsto expand operations in the market. For instance business has taken registration for initial publicoffering. Different internal along with external sources of finance are available for business.Issuing shares in the market is one of the main source through which funds can be acquired forthe expansion purpose. Main reason behind recommending this source is that business canacquire large funds at an minimum cost (Flynn, Uliana and Wormald, 2012). On the other handdividend has to be paid to investors. Second appropriate source for business is retained earnings as usually large businesseshave high savings and the amount can be utilized for expansion purpose. Therefore, this is alsoone of the most appropriate sources for business and can support in accomplishment of long termobjectives. Main advantage of this source is that it saves cost associated with acquiring funds buton the other hand it reduces overall savings of the company.Case 3: Sources of finance for small group of peopleFor small group of people carrying out operations in the market main effective source offinance is venture capital and government grant. Main benefit of considering government grantas an appropriate source of finance is that government of UK promotes investment forexpansion. Apart from this venture capitalist is also appropriate source through which group ofpeople can buy existing firm. But this source enhances duty of management to provide up to dateinformation to investors so that they can identify business risk. 3
TASK 2: UNDERSTANDING IMPLICATIONS OF FINANCE AS A RESOURCE Event 1: Cost of different sources of finance Different sources of finance are present which business can consider for satisfying itsfinancial needs. Further, every source has cost associated with it which company can consider. Incase if firm issues equity shares in the market then dividend cost has to be bear by firm. Further,it is required to share business ownership (Kawai, Mayes, and Morgan, 2012). Considering debt as a source imposes interest cost where business has to pay interest todebenture holders. Therefore, it enhances overall cost of the business and in turn reducesprofitability of company. Retained earnings as a source leads to rise in cost of loss associatedwith investment in any other project which is called opportunity cost. So, these are some of themajor costs of different sources of finance. Event 2: Key aspects of financial planningFinancial planning plays most important role in the business and is directly associatedwith the growth of business in the market. Key aspects of financial planning takes intoconsideration identifying future expenses and income, preparing budgets, financial forecasting,making fruitful investment decisions and determining the available source of finance (Kunc andBhandari, 2011). Therefore, this shows the real importance of financial planning and consideringthis type of planning allows business to gain competitive advantage and in turn acts asdevelopment tool. Event 3: Financial decision makingIn order to take effective decisions within the workplace different financial statements areconsidered such as balance sheet, cash flow, income statement etc. Data is used by differentbusinesses. Types of financial informationDecision making purposesLiquidityThis type of information allows business to knowthe cash available which is effective enough incarrying out day to day operations of the business.Profitability Profitability information of the business supportsin taking investment decision. 4
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