Analyzing Various Tools and Techniques for Viable Investment Decisions

The assignment content focuses on the analysis of various tools and techniques used by investors to make viable investment decisions. Financial statements prepared by management serve as a vital source of information for internal and external stakeholders.

Managing Financial Resources and
Decision

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1...........................................................................................................................................1
1.2...........................................................................................................................................2
1.3...........................................................................................................................................4
TASK 2............................................................................................................................................4
2.1...........................................................................................................................................4
2.2...........................................................................................................................................5
2.3...........................................................................................................................................5
2.4...........................................................................................................................................6
TASK 3............................................................................................................................................7
3.1...........................................................................................................................................7
3.2...........................................................................................................................................9
3.3...........................................................................................................................................9
TASK 4..........................................................................................................................................11
4.1.........................................................................................................................................11
4.2.........................................................................................................................................12
4.3.........................................................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Managing Financial Resources is a specialized function that deals with optimum
procurement and utilisation of funds to attain goals and objectives of the organisation effectively
and efficiently. It is based on the case study of an entrepreneur, who wants to launch the proposal
to seek government project. The present report depicts about different sources of finance
required to infuse the funds in the project and discusses about their implication. It explains about
the importance of financial planning and assesses the information needs of internal and external
different stakeholders. The present report evaluates different budgets and calculation of unit cost.
It analysis about the tools and techniques of investment appraisal. It demonstrates about the
different financial statement and their interpretation in the form of ratio analysis.
TASK 1
1.1
An entrepreneur wants to launch an ambitious project of the amount not exceeding
£300,000 out of which he already has £20,000 to invest in the business. The remaining amount
needs to be raised from the internal and external sources as given below:
1. Shares: It is one of the common source of finance through which company can raise
funds. Business Organisation issues share in the market, in return recieves application to
purchase the share. If the company fulfils the minimum subscription criteria, then only
can allot shares. The shareholder invest in the projects of the business, in return expect
high dividend and market value from the company. They are considered as the owner of
the company thus dilutes ownership.
2. Debentures: It is a long term loan raised by the company to finance its project. Company
needs to pay fixed rate of interest to the debenture holder irrespective of profit earned.
They have to create floating charge on the assets of the company against the loan taken
(Samiksha 2013).
3. Angel investors: It is an affluent individual that provides financial assistance to the
business in exchange of convertible debt or Equity shares. It is generally preferable for
starting up any business and invest the funds up to the limit of $500000. They do not give
importance to the monetary return, but expect certain percentage of stake in the company.
4. Government Grants: The government of the country provides financial help to the
company to encourage their business operation. But, it is not at all easy to raise funds
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from government, they have fixed criteria that is required to be fulfilled for the financial
help.
5. Venture capital: They are the venture capitalist who provides financial assistance to the
person who have innovative and profitable project, but do not have finance to bring that
project in the market. They expect high rate of earning profit from the entrepreneur
(Dileep. 2010).
6. Bank loan: It is the most common source of finance, in which bank provides loan to the
business organisation on reviewing the profitability and liquidity condition of the
company. In return, company needs to pay fixed rate of interest to the bank and keeping
any property as security against the loan amount.
1.2
Sources Legal
Implication
Ownership Bankruptcy Financials
Shares Company needs
to comply with
stringent rules
and regulation on
issuing shares to
the public such as
prospectus,
Minimum
Subscription
Requirement
It dilutes the
ownership of the
business
organisation, thus
participate in the
decision-making
process.
In case of
bankruptcy, left
over amount is
distributed among
the shareholders.
Company pays
dividend to the
shareholder on
the basis of profit
earned by the
company
Debentures The entrepreneur
need not to follow
stringent rules,
but have to
appoint
debentures trustee
before issuing
They do not
dilute the
ownership
It creates paripasu
charge on the
asset secured by
the company and
crystallisation of
charge on the
asset.
Business
organisation pays
fixed rate of
interest to the
debenture holder
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debentures.
Angel investors The company
needs not to
comply with
lengthy legal
procedures and
have to
accomplish
certain
formalities.
Certain % of
ownership is
transferred to the
Angel investors
The left over
amount is
distributed among
the angel
investors.
They are not
greedy of fixed
rate of interest.
Government
Grants
It has to comply
with the legal
conditions as
prescribed by
government
No dilution of
ownership(Source
s of finance.,
2013)
This source of
finance do not
have any role in
bankruptcy.
They don't need
to pay any
financial return to
the government.
Venture Capital It need not to
comply with the
lengthy
procedures as
compared to E-
shares.
It does not dilute
the ownership of
the company
No role in
Bankruptcy
They expect good
financials return
from the
company.
Bank loan It has to fulfil
bank policies and
regulation.
It does not affect
the control of
business
organisation.
The bank will
possess the
property secured
and derive its lost
funds by selling
the property.
Company needs
to pay fixed rate
of interest to the
bank.
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1.3
On evaluating the above pros and cons of different source of finance, it can be illustrated
that entrepreneur can opt shares, bank loan and angel investors (Serrasqueiro, Maçãs Nunes and
Leitão, 2011). As per the current scenario, Angel investors proved out to be great helping hand
as the required amount is within the limit and does not expect the return in monetary terms, but
seeks to dilute the ownership of the company. They will also provide their expertise and
knowledge with regards to the project. The company can raise funds from the public by issuing
shares as they are not required to be paid fixed rate of dividend, but they participate in the
decision-making process of the company. The entrepreneur can easily get loan from bank,
without complying the lengthy procedure. Company can any of the above source of funds to
finance its project.
TASK 2
2.1
Company incurs the cost to raise the funds and invest the funds in the project. Thus, the
cost of raising funds through following sources: Shares: In order to raise funds through shares, company needs to issue prospectus and
comply with all the lengthy rules and regulation prescribed by law. Business
Organisation need not to pay fixed dividend to the shareholder, but they dilute the
ownership of the company (Caglayan and Demir, 2014). They participate in the decision-
making process. Bank loan: Business Organisation needs to comply with the policies of the bank to raise
funds. Financial institution consider the profitability and liquidity position on providing
financial assistance (Chavan and Birajdar, 2009). Business organisation needs to pay
fixed rate of interest to the bank and keep any assets as a security against the loan. They
do not dilute the ownership of the company and do not participate in the decision-making
process.
 Angel Investors: They are not greedy of earning high rate of interest, but they are willing
to take stake in the ownership of the company. In the near future, firm have to share good
portion of their earnings with the angel investors. They share their expertise and
knowledge and participate in the decision making process.
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2.2
In the present case scenario, The finance department needs to design effective financial
plan to attain the goals and objective of the organisation as discussed below: Forecast of cash flows: In the financial planning, Company forecast the future cash
inflows and outflow and helps the company to grab future opportunities (Christoffersen,
2012). It assists the company to prepare themselves for the future uncertainties. Raising finances: Company estimate the future fund requirement and raise the funds
accordingly so that timely funds are available to meet the requirement of business.
 Managing internal funds: It helps to keep a track record of the surplus funds available to
the business. The management of the business organisation ensures that finance is
utilized optimally to meet the operational requirement of the business (Brealey and et.al,
2012). It aids the company in maintaining the liquidity position so that they don't need to
rely on borrowings.
Financial planning follows the below given steps to attain satisfactory outcome. Determine the current financial situation: The entrepreneur evaluates the financial
statements to determine the financial soundness of the business on considering the
savings, income, debt, etc. Developing financial goals: The management tries to identify the funds required to attain
the goals and objective and out of which the amount of funds available to the
entrepreneur. Identifying alternative courses of action: They identify the courses of action to execute
the plan successfully (Hillier, Grinblatt and Titman, 2011). It includes identifying the
source to finance the project and allocation of funds.
 Monitoring a financial action plan: The finance department regularly monitor and
control the flow of funds and determine whether implementation is as per the financial
plan and take immediate corrective measures.
2.3
Company prepares financial statements regularly to meet the information needs of
internal and external stakeholders as given below:
Internal stakeholder
5

Managers and
owners
Manager analyse the financial statement to design future strategic plan and
measure the last years plan on evaluating its outcome.
Employees The Employees are curious to know about the impact of their hard work in the
profitability of the company (Hillier, Grinblatt and Titman, 2011).
The workforce relies on the profitability of the company for their bonuses and
incentives. It also helps them to make collective bargaining for promotions,
salary increment, etc.
External Stakeholder
Shareholders Shareholders are considered as the owner of the company so they have the right
to know the area where their funds are invested and the profitability of the
company.
Financial
institution
Banks and financial institution evaluates the solvency position of the company
before granting loan to the company.
Suppliers They analyse the credit worthiness of the company and determine whether
company can repay the funds on time or not (Besley and Brigham, 2008).
Government Government have designed policies to regulate the activities of the company, so
make it sure that the company is complying with the set rules and regulation.
Business organisation pays tax with regards to earning of the company so ensure
that the tax paid is apt or not.
2.4
Sources of finance places direct effect on the financial records of firm in the following
manner:
Income statement
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Particulars Amount (£) Particulars Amount (£)
To interest on bank
loan
xxx
To dividend xxx
Statement of financial position
Liabilities Amount (£) Assets Amount (£)
Bank loan xxx Cash
Add: bank loan
xxx
E. Share Capital xxx
TASK 3
3.1
Particulars April May June July August September
Cash inflow
Sales Revenue 79000 85000 95000 105000 117000 120000
Other Income 12000 12000 12000 12000 12000 12000
Total cash inflow 91000 97000 107000 117000 129000 132000
Cash outflow
Purchase of raw material 32000 40000 45000 51500 60000 60150
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selling and distribution expenses 5900 6500 7100 7600 8000 7900
salaries of personnel 13000 13000 13000 13000 13000 13000
Other expenses 6000 6000 6000 6000 6000 6000
Total cash outflow 56900 65500 71100 78100 87000 87050
Cash deficit/surplus 34100 31500 35900 38900 42000 44950
Opening Cash balance 29000 49000 81000 121000 152000 1985000
Closing Cash balance 63100 80500 116900 159900 194000 2029950
Interpretation
The entrepreneur estimates the future inflows and outflows of funds and prepares cash
budget as given above (Brigham and Houston, 2012). The above cash budget depicts that the
sales revenue of the company is increasing over the year. But in the month of September, the
increase in sales revenue is at decreasing rate due to recession in the market, the unfavourable
government policies, off season in the market, high cost of raw material, etc. Due to this, the
company is forecasting that the raw material consumption will also decline and will spend extra
funds on promotional activities. The company is estimating that there will be constant inflow and
outflow of funds in the other income and expenses.
Recommendation
 It can be recommended that company should counterbalance its cash flows when there is
boom in the demands of their product.
 They should control its raw material cost by purchasing the goods at EOQ level that is the
quantity of raw material purchase where cost is minimum.
 Company should adopt innovative and attractive promotional activities to enhance the
sales revenue.
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3.2
Pricing policy plays integral role in attaining the competitive advantage in the market.
The company decides the price of the product on considering the cost and profit margin of the
firm. They also review the prices of the substitute and competitive product in the market
(Westerfield and Jordan, 2008). It is the most important factors that is considered by customer in
making purchasing decision. For instance, the manufacturing unit is producing 50 mobile cases,
so the price can be calculated as shown below:
 Indirect expenses: £65000
 Direct expenses: £130000
 Total expenses: £195000
Unit cost = Total cost / number of units manufactured
= 195000 / 50
= £3900
Price = Unit cost + (cost per unit * profit%)
= 3900 + (3900 * 20%)
= £4680
3.3
Investors use different tools and techniques to make viable investment decision as given
below:
Pay Back Period technique
Year Project A
Cumulative
cash inflow Project B
Cumulative cash
inflow
Initial investment 80000 80000
1 21000 21000 20500 20500
2 22500 43500 24000 44500
3 25000 68500 23500 68000
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4 26000 94500 25000 93000
5 27200 121700 26500 119500
Project A: 3 + 11500/26000
= 3.44 years
Project B: 3 + 12000/25000
= 3.48 years
NPV and IRR
Year
Project A
(cash inflow)
PV factor
@10%
Present
value
Project B
(cash inflow)
PV factor
@10%
Present
value
Initial
investment 80000 80000
1 21000 0.909 19089 20500 0.909 18634.5
2 22500 0.826 18585 24000 0.826 19824
3 25000 0.751 18775 23500 0.751 17648.5
4 26000 0.683 17758 25000 0.683 17075
5 27200 0.621 16891.2 26500 0.621 16456.5
Total 91098.2 89638.5
NPV 11098.2 9638.5
IRR 4.58% 4.03%%
Interpretation
On reviewing the above investment tools and techniques, it has been found that investor
should choose Project A. In accordance with the pay back period, the project A will yield the
initial investment at the earlier time duration as compared to project B. The NPV and IRR tool
considers the time value of money and forecast the future cash inflows in the projects and have
illustrated that Project A is earning 4.58% return on its initial investment which is high as
compared to project B.
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TASK 4
4.1
Company records the monetary and non monetary activities and present them in the form
of financial statements. They prepare financial records to analyse the profitability, solvency and
liquidity position of the company. Thus, the Sainsbury prepares following financial statements as
given below: Balance Sheet: This financial statement includes assets, liability and equity capital of the
Sainsbury. Asset side depicts about the fixed, current and intangible property that the
business organisation owns and possess such as Debtor, building and goodwill, etc.
Liability side demonstrate about the transactions that other people owe from company
such as creditors, bank loan, etc and Equity capital shows about the retained earnings and
funds invested by the investors and owner and forms the part of the capital of the
company (Brigham and Ehrhardt, 2013). The investor analyses this statement to examine
the financial soundness of the company and makes viable investment decision. Cash flow statement: This statement records the mentions the inflows and outflows of
funds in the business activities. Further, the monetary transactions are divided into
investing activities, financing activities and operating activities. Operating activities
states about the day to day transaction of the firm (Shapiro, 2008). The financing head
depicts about the transactions related to financing, dividend payment, interest payment
whereas investing activities depicts about the procurement and investment activities of
the business organisation like shares, debentures. The statement is reviewed by the
creditors and banks to determine the liquidity position of the company and determine
whether company is able to repay the due amount within the set time limit.
 Profit and loss account: It is one of the integral part of the financial statements as depicts
about the profitability of the company. This statement is divided into income and
expenditure. Income side depicts about the earning of the company such as dividend
earned, and the expense side shows the direct and indirect cost incurred by the company
such as tax paid, advertisement expense (Chandra, 2011). This statement is analysed by
the government to determine whether the tax paid by the company is apt or not and also
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reviewed by the employees to oversee their contribution in the profits so that they can
demand bonus, salary increment.
4.2
Difference Sole trader Partnership Listed companies
Owner Single entrepreneur All the partners All the equity shareholders
Financial
statement
It is not compulsory for
the sole proprietor to
prepare financial
statement as they are not
responsible and
accountable to anyone.
But still they prepare the
financial statement to
determine the
performance of the
business (Nissim and
Penman, 2011).
Partners are required to
comply with the norms
prescribed in the
partnership act under
which they are required
to prepare
 Partner's capital
account
 P&L
appropriation
 Balance Sheet
The management needs to
comply with Company Act,
2006, so need to prepares
following statements
 Profitability
statement.
 Balance sheet
 Cash flow statements
 Fund flow statements
 Statement of changes
in Equity.
Basis of
account
preparation
They are accustomed to
recording their financial
transaction with regards
to UK GAAP,
accounting principles and
conventions.
Partner needs to take
into account UK
GAAP, partnership act
etc. while preparing
accounts.
UK GAAP, International
accounting standard (IAS),
International Financial
Reporting Standard (IFRS)
and Company Act, 2006
(Siano And Et.Al. 2010)
Auditing Not obliged. Not Required Compulsory as per CA, 2006.
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4.3
Ratios Formula Sainsbury
2014
Sainsbury
2015
Morrison
2014
Morrison
2015
GP ratio
(GPR)
Gross Profit /
net sales *
100
5.79 5.08 6.07 4.53
NP ratio
(NPR)
Net profit /
net sales *
100
4.21 0.34 -0.54 -4.14
Current ratio CA / CL 0.64 0.65 0.50 0.50
Quick ratio Current assets
–(stock +
prepaid
expenses) /
current
liabilities
0.49 0.48 0.16 0.18
Debt/equity
ratio
Long term
debt/equity
0.37 0.45 0.53 0.70
Interpretation
From the above information, It has been found that both the company’s profitability ratio
are moving towards declining stage as they are not able to utilize their direct and indirect
expenses but the net profit ratio of Morrison is going in negative, its condition is more worse. So
the firm needs to control its expenses in order to enhance revenue generation.
The Sainsbury have better current ratio than Morrison result although its current assets
are not able to meet its current liability but its improving over the years. The Morrison have the
same current ratio with no change in the proportion of current asset and current liabilities but the
quick ratio has grown from 0.16 to 0.18.
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The Sainsbury and Morrison prefer more of equity than debt to invest in the project and is
increasing their ratio of equity in the future projects from 2014 to 2015.
CONCLUSION
It can be concluded that the company needs to manage its financial resource to sustain
longer in the competitive market. The entrepreneur is willing to launch the business proposal, but
does not have sufficient funds. So can raise the finance through shares, bank loan and Angel
Investors. They need to perform proper financial planning for the procurement and utilisation of
the financial resource to attain the goals and objectives effeciently and effectively. Company
needs to make pricing decision on considering various aspects as helps the firm to attract wide
range of customers. The investor needs to analyse various tools and techniques to make viable
investment decision. The management prepares financials statements to satisfy the information
needs of internal and external stakeholders.
14

REFERENCES
Books and Journal
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Brealey, R. A. and et.al, 2012. Principles of corporate finance. Tata McGraw-Hill
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Learning.
Brigham, E. F. and Houston, J. F., 2012.Fundamentals of financial management. Cengage
Learning.Ross, S. A., Westerfield, R. and Jordan, B. D., 2008. Fundamentals of
corporate finance. Tata McGraw-Hill Education.
Caglayan, M. and Demir, F., 2014. Firm productivity, exchange rate movements, sources of
finance, and export orientation. World Development. 54. pp.204-219.
Chandra, P., 2011.Financial management. Tata McGraw-Hill Education.
Chavan, P. and Birajdar, B., 2009. Micro finance and financial inclusion of women: An
evaluation. Reserve Bank of India Occasional Papers. 30(2). pp.109-129.
Christoffersen, P. F., 2012.Elements of financial risk management. Academic Press.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy.
McGraw Hill.
Nissim, D. and Penman, S. H., 2011. Ratio Analysis and Equity Valuation: From Research to
Practice. Review of Accounting Studies. 6(1). pp.109-154.
Serrasqueiro, Z., Maçãs Nunes, P. and Leitão, J., 2011. Sources of finance for R&D investment:
Empirical evidence from Portuguese SMEs using dynamic estimators.Innovation.13(2).
pp.187-206.
Shapiro, A. C., 2008. Multinational financial management. John Wiley & Sons.
Siano, A., And Et.Al. 2010. Financial Resources And Corporate Reputation: Towards Common
Management Principles For Managing Corporate Reputation. Corporate Communication:
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Online
Dileep R.. 2010. The 12 Best Sources Of Business Financing. [Online]. Available through:
<http://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-
entrepreneurs-finance-dileep-rao.html>. [Accessed on 27th September 2016].
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[Online]. Available through: <http://www.yourarticlelibrary.com/planning/the-objectives-
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