Financial Decision Making and Analysis for Business Firms

The assignment content provides an overview of financial statements and ratio analysis. The cash flow statement is a tool used to record inflows and outflows of money in a business, helping to develop tactics for increasing cash and its equivalent. Financial statements, including the balance sheet and income statement, differ slightly between companies and sole traders/partnerships. Ratio analysis, specifically current ratio, gross profit ratio, net profit ratio, and debt equity ratio, is used to measure a firm's performance and identify areas for improvement. The analysis suggests that EasyJet performs better than Ryanair in terms of cost control and capital structure. Ultimately, the assignment emphasizes the importance of reviewing financial sources, using relevant tools and methods to measure project viability, and employing ratio analysis to identify areas for business improvement.

MANAGING FINANCIAL
RESOURCES AND DECISIONS

INTRODUCTION
Finance is one of the most important resource that every human being needed in its
business. Varied information’s related to the finance are covered in the current research report.
Implications of the varied sources like venture capital and lease as well as bank loan are also
discussed in detail. Budget cash flows are interpreted in the report in systematic way. Apart from
this in the report on the basis of results of project appraisal approach best proposal is chosen on
the basis of obtained results. In order to measure the company performance ratio analysis
technique is used and weak points of same are identified.
TASK 1
1.1
Excel analytic is one business firm that recently commenced its business operations. Several
alternatives that are available to the mentioned company are described below.
Exterior bases of funds Private equity- It is the source of finance which is similar to equity and in current time
period it is used by most of business firms which cannot raised capital from the stock
market. PE firm purchase shares of the company as per terms and conditions of
agreement and due to this reason it get a right to participate in the board meetings of the
firm that happened at end of each quarter. Thus, it can be said that firm existing owners
to some extent lost their decision making power in the firm. Equity- It is another finance source which is widely used by the small, medium and large
size business firms across the globe. Those who wants to launch IPO in the market take
help of the investment banker and by taking guidance from same make all decisions in
respect to IPO and determining share price (Helleiner, 2010). There are some paper
formalities that firm who intends to launch IPO have to complete with the stock
exchange. After completion of formalities shares are listed in the primary market. Taking asset on rent- Usually in the business there is less availability of cash. Due to this
reason it is not possible for firm to purchase capital asset. In order to solve this problem
usually firms take asset on lease. Contract for lease of asset is signed by the property
owner and entity that wants to take asset on lease. By taking asset on lease firm finance
its business operations at limited cost.

 Finance from financial institutes- Bank loan is usually taken by the firms to finance
their business projects at large scale. There are two sort of bank loans that are available to
the business firm namely static and non-static finance cost. Managers after considering
macroeconomic factors and current condition determine whether they must take loan at
fixed or non-static interest rate.
Interior basis of funds
 Retained earnings- In current time period most of companies are using retained earnings
to finance their internal operations or acquiring other company. There are many firms that
fund majority of amount of investment by using retained earning amount
1.2
Financial
sources
Legal Financial Bankruptcy Reduction in
control
Private equity Inevitable to sign
on the contract
with the PE firm
for getting fund
from same.
Dividend and
setting fee
together
constitute high
finance cost in
respect to relevant
source of finance.
Creditors are paid
first relative to
shareholders.
Control reduced
when shares are
issued to PE firm.
Trade credit Other company
and business firm
relations
determine
whether firm will
sign any paper
document with
bank in order to
get trade credit.
Medium rate of
interest is charged
on the trade credit
(Hong and
Kostovetsky,
2012).
Similar to PE. No change
happened in
control of existing
shareholders.
Lease It is mandatory to
ink paper
Contract to
contract cost also
Similar to PE. No change
happened in

document or
contract with
lessor
get changed.
Whatever terms
are decided in the
negotiation
constitute cost of
lease.
control of existing
shareholders.
Bank loan Interest that is
paid to the
financial institute
form a cost of
bank loan.
Cost of funding
business
operations is less
relative to equity.
Similar to PE. Similar to trade
credit.
Retained
earnings
It is the part of
profit and due to
this reason there
are no legal
implications.
There is no cost
of retained
earnings.
Used to pay back
debt amount to
creditors.
Similar to trade
credit.
1.3
There are positive and negative points of all sources of finance and it is very important
for the managers to select appropriate one. Any source of finance cannot become perfect for the
business firm. This is because every alternative source of finance have some merits and demerits.
Hence, any source of finance that is selected by the firm will certainly too some extent will
negatively affect it. Thus, firm have to evaluate its current condition and change that may happen
in the business environment and on basis of results must select source of finance that less affect
it negatively. Private equity cannot be choose by the firm because if same will be selected to
raise fund then it will need to sale its huge portion of shareholding to the PE firm. Decision
making power of business owner’s will reduce. Trade credit seems best alternative because in
case of same by taking advantage of old relationship can outflow can be delayed to some extent
(Kocherlakota, 2010). In every condition trade credit should be selected by the relevant
company. This is because in business always face problem of lack of funds. In trade credit by
using personal relations delay can be made in payment of debt amount. Thus, by using trade

credit cash can be easily managed in the business. Hence, it is best financial source for the
company in comparison to other. Bank loan is another alternative which firm can consider to
raise fund from the market. Cost is low and control of the business owners also remain same. On
this ground it is considered appropriate source of finance for the firm. Lease can be used by the
company to finance internal operations when it is not possible for it to purchase capital asset
from the market. Cost of capital of retained earnings is zero which is not observed in case of
other sources of finance. Thus, retained earnings is assumed best for the company.
TASK 2
2.1
 Private equity- Company give a dividend to the venture capital firm. Because cash
outflow is taken place in the business it is assumed cost of equity. VC Company invest
cash in the firm equity and due to this reason it is considered shareholder of the firm.
Directors of the of the private equity company become shareholder of the specific
company when they make investment in the company. Thus, by using right they give
guidance to the firm in respect to taking core business decisions. Hence, they also charge
seating fee on the firm. Dividend and seating fee are the two major components of the
overall cost of equity. Trade credit- Trade credit is the variant of the bank loan and due to this reason like debt
in case of same also payment of interest is made by the business firm (Platen and Bruti-
Liberati, 2010). Often it is observed that in case of discussed source of finance interest
rate remain low and it can be said in comparison to alternatives mentioned source of
finance is better. Lease – Rent amount that is paid by the tenant to the owner of property for getting
control on specific asset is assumed finance cost of lease. In the starting stage property
owner and lessee carry out various round of negotiation and on basis of same determine
term and conditions of contract. It can be said that it is contract which determine size of
cost of finance of lease. Bank loan- Debt is taken by the most of the business firm in their business because every
time it cannot issue equity shares in the market. Debt must be taken at stable interest rate

relative to other one. In case surge will takes place in the relevant rates then burden of
interest on the company will become cumbersome.
 Retained earnings- There is zero cost of retained earnings as it refers to the cash flow
that happened in the firm due to its own business operations. There is a common
assumption among the finance experts that retained earnings have an opportunity cost
because full benefit of same cannot be reaped by the business firm. It refers to the other
uses of the asset which company cannot make in its business.
2.2
Financial plan is prepared by almost all sort of the business firms because in it same many
things are determined like sources from which sources of finance funds will be raised and way in
which cash that is available in the business will be divided in various firm operations. In the
business different activities are executed time to time and to perform all of them funds are
required. It is very important to allocate funds prudently among these activities so that best use
of same can be done in the business (Visser, 2013). 80% portion of the total amount of cash that
is available in the business will be kept aside for the overall business activities of the firm
because funds are required on daily basis for performance of same. 20% amount will be invested
in financial securities like shares, bonds and mutual funds etc. This is the best strategy that Excel
analytic can used in its business. By following this strategy firm can elevate return on investment
in its business. As mentioned above 80% portion of the fund will be kept aside for performing
business operations will be further divided between varieties of business operations. 70% will be
allotted for the core business tasks and 30% will be used to meet working capital needs of the
business firm. By following this approach optimum use of cash can be done by the firm in its
business. There is a great significance of the financial planning because it help finance managers
in making optimum allocation and use of fund in the business. Hence, every type of firm must
prepare financial plan for its business.
2.3  Shareholders- Shareholders make large amount of investment in the company shares in
lieu they get shareholding in the company. By evaluating financial statements investors
make their investment decisions in respect to purchase or sale of shares. It is the ratio
analysis results that help one in identifying the areas where firm is not performing well
and need improvement (Frieden, 2015). If investor identified that company is not

performing well consistently then they abstain from making investment in such kind of
company. Creditor's- Usually in the business company need a short and long term finance in order
to meet its short and long term finance needs. Creditors usually make use of the firm
income statement and balance sheet in order to measure firm performance from different
sides. On the basis of results of ratios they make their debt allocation related decisions. Employees- These are one of the part of the firm and play important role in its growth
during life time. Employees usually evaluate firm earning over a specific time period
along with expenditures. Mentioned entity can leave its job in the case they find out on
analysis of financial statements that fundamental of company are not strong. In many
nations of the world it is identified that business firm when run in loss consistently stop
paying salary to the employees (Baker, Singleton and Veit, 2011). Thus, by evaluating
income statement and Balance Sheet Company condition can be appraised in best way
and prudent move can be taken by the employees on time.
 Government- Firm pay income tax statutory body at end of the year. Latter entity require
relevant facts and figures to confirm the latter entity is paying tax on time.
2.4
Finance which is raised from the market create liability for the business and also affects
its profitability. Thus, it is very important to select any source of finance after considering the
likely impact that it can put on the firm income statement and balance sheet. Suppose if firm
issue shares in the market and investors purchase same. In such kind of case cash inflow will
takes place in the business. Received corpus value is entered in to the asset because cash is
received which is inflow in the business. It is obligation of the business firm to pay dividend to
the relevant entity. It can be said that due to increase in liability shareholder equity section of the
balance sheet is increase by the capital amount that is raised from the market. Because dividend
is the expenditure for the business firm it is deducted in the income statement. This lead to
deduction in the profit that firm earned before adjusting dividend in the income statement. Other
alternative of equity is bank loan and when this alternative is used cash inflow takes place in the
business. Cash is received and it is the asset for the firm. Thus, in right side of the statement of
financial position cash amount is increased which lead to increase in assets of business.it is the
obligation of the company to pay interest on debt to the bank and due to this reason by bank loan

amount liability of the business firm will also increase (Cronqvist, Makhija and Yonker, 2012).
Thus, it can be said that in case of both debt and equity equal amount is added in the both sides
of balance sheet. Due to this reason even balance sheet altered it remain balanced. Finance cost
whether it is dividend or interest is added in the income statement. By finance cost amount profit
amount in the business get reduced. Earned amount of profit is added liability section in to the
capital amount. On other hand, by same value cash also get increased in the business. These are
the ways in which with small change in sources of finance bring big variation in the financial
statements.
TASK 3
3.1
Figure 1Cash budget for Excel analytic
Interpretation
Mentioned statement is prepared to project cash receipt and expenditure for the relevant
time period. Image which directly above demonstrate that cash flow in the company business is
elevating consistently from the month of July to month of September. But after these months
cash inflow in business reduced sharply. Expenses are increasing at rapid rate which revealed

that form is making huge expenditures in its business. The big mistake the firm do in its business
is that sales reduced in the last three months then also expenses in the business are not curtailed
However, in last month sign of some improvements are observed and sales as well as
expenditures are reduced. Thus, it is recommended that company must evaluate its budget and
make improvement in same.
Figure 2Production budget
Explanation
Manufactured units in the business elevate in first three months after that negative trend
is observed in case of the business firms production units. Thus, it can be said that same changes
comes in the above given two budgets.

Figure 3Sales budget
Interpretation
Like trends that were seen in case of the production budget are observed in case of the
sales budget. From the month of July to September sales value is increasing from 34800 to
42600. Due to change in sales value discount on sales also get altered. In the month of July to
September discount increased from 200 to 400. After that its value reduced from 350 to 200.
Thus, equal change is observed in case of all above prepared budget in same time period.
3.2 Calculation of unit cost
Figure 4Calculation of unit cost
Interpretation
Per unit cost is computed by dividing cost by number of units produced. Per unit cost is
simply calculated by the management accountant in their day to day practice. Under this by
following specific cost approach cost of all type is computed by the management accountant like

fixed, variable, direct and indirect. In the above case it is observed that there are two sort of
expenses namely fixed and variable (Anandarajan, Anandarajan and Srinivasan, 2012). In order
to calculate overall cost both sort of expenses are summed up. Thereafter same is divided by
units that are manufactured by the firm at workplace. Fixed cost is the expense which remain
same at all level of the manufactured units. On other hand, variable expenses are those which
change with production of new unit. Approach that is followed to calculate cost per unit cost
given below. By using below given formula per unit cost is calculated which is 10.
3.3
Figure 5Calculation of payback period method
Interpretation
Payback-period is the method that is at large scale managers use to evaluate a business
project in proper manner. Table that is given above clearly reflects that profit can be earned after
in two years on project A. whereas, in case of other one same can be gained after two years.
Thus, by considering results of the payback period results no proposal is selected.
Table 1: Calculation of ARR
Project A Project B

Initial
investment 200000 250000
1 80000 90000
2 100000 95000
3 120000 100000
4 80000 105000
4 100000 110000
6 135000 115000
Total 615000 615000
Average 102500 102500
ARR 51.25% 41.00%
Interpretation
ARR is the method which apart from the payback period is widely used by the managers
to evaluate a project (Pilbeam, 2010). This is because what amount of return can be earned on
average basis is revealed by the average rate of return method. On average basis gain of 5125%
can be made on first proposal and same of 41% can be earned on second alternative. Mean return
is greater in case of first alternative. Thus, by considering this same is assumed profitable for the
company.

Figure 6Calculation of NPV
Interpretation
Net present value is the tool that is used to identify the net profit that project can give to
the business firm on the invested corpus. Usually, higher value of NPV is used as benchmark to
select any project. On this ground project B is considered profitable for the company.

Figure 7 Calculation of IRR
Interpretation
IRR apart from NPV is the tool to which managers give due importance while making
investment related decions (Bäuerle and Rieder, 2011). Like NPV in case of IRR also same rule
is applied. Greater the IRR more viable project is assumed by the project managers. By
following this rule project A is considered profitable for the company. In case of all above
applied method it is find out that return of higher percentage can be earned on first alternative.
Hence, it is assumed profitable for the company.
TASK 4
4.1
Some of the major financial statements that are prepared by the business firms are as
follows. Income statement- This statement is prepared by each and every type of firm irrespective
of its size. This is because it depict the gain that is made by the company during specific
financial year. In the income statement always only two sort of items are covered namely
income and expenses. P&L account is prepared by the entity to gather more and more
information about the overall value of expenditure that is made by the firm in its

business. On year on year basis comparison is made by using income statement in order
to measure firm performance in better way in terms of revenue and operating as well as
non-operating expenses (Antras and Foley, 2011). Comparison of the firm performance
in respect to different years help managers in finding out negative trends that are
originating in the business in most of analyzed years. Thus, it can be said that income
statement help managers in taking sound business decisions. Balance sheet- It is the sort of statement which depict the capital structure and liquidity
position of the business firm at end of the year. Usually ratio analysis method of financial
accounting is employed to measure performance of the company for specific duration.
Thus, it can be said that balance sheet have a significant importance for the managers.
 Cash flow statement- There are varied sort of activities that are performed by the
business firm. All these activities can be classified in to three categories namely
operating, investing and financing activities (Philippon, 2015). Cash inflow and outflow
happened in case of all these three type of activities. Record of same is kept in cash flow
statement. This statement revealed the places from which money comes in the business
and domain where same is invested by the company. Thus use of mentioned statement
help relevant entity developing tactics for increasing cash and its equivalent for upcoming
year.

4.2
Figure 8Statement of balance sheet
(Source: McLeish, 2011)

Figure 9P&l account
(Source: Venardos, 2012)

Sole trader
Figure 10Income statement
(Source: Chan, 2011)
Figure 11Balance sheet
(Source: Helleiner, 2010)

Company
Figure 12 Statement of balance sheet
(Source: Hong and Kostovetsky, 2012)

Figure 13P&L of company
(Source:Kocherlakota, 2010)
(Source: )

Financial statement of relevant sort of business to some extent differ from each other. In
case of company IFRS rules are followed to prepare statement but same is not happened in case
of sole trader and partnership. In case of partnership residual cash flow is shared among partners
and capital amount is revealed separately but same is not observed in case of company and sole
trader. Hence, there is a little difference in financial statement of company, partner and sole
trader.
4.3
Figure 14Ratio analysis of Airplane firms of UK
Interpretation

 Current ratio- Firm is capable to pay its liability in the concerned time period is
determining by using mentioned ratio. 2:1 is the benchmark for the relevant ratio and
used to measure performance. Value of the mentioned tool in case of Ryan-air is 1.72
relative to 0.72 of Easy-jet. Thus, it is inferred that Ryanair is in better condition than
rival firm. Gross profit ratio- This ratio is used to judge the effectiveness of the company cost
control strategy at the workplace (Financial ratio analysis, 2015). On this front, Easy jet
perform better then rival company. Hence, it is assumed that relevant company
successfully maintain curb its expenditures. Net profit ratio- Apart from direct expenses other expenditures are also made by the firm
in its business. Relevant expenses are classified in category of indirect expenditure. The
extent to which firm successfully control indirect expense is measured by using net profit
ratio. Easy jet ratio value is higher than other one and due to this reason it is interpreted
that it perform better then analyzed competitor firm.
 Debt equity ratio- In order to evaluate capital structure of the company mentioned ratio is
used. On analysis of facts it is find out that capital structure of Ryanair is not balanced in
comparison to other one. Thus, it is concluded that Easy-jet is at good position then
Ryanair.
CONCLUSION
It is inferred that alternatives of financial sources are available to the business firms and
lots of things must be reviewed before selecting specific one. Managers can set some parameters
which must be considered for selecting any source of finance. Viability of any project must be
measured by using relevant tools and methods. Instead of this only by viewing cash inflow
decisions must not be made by the managers. Ratio analysis is another important approach that
should be employed to identify domain where firm is weak and require to improve level of
business performance.