Managing Financial Resources and Decisions

This assignment focuses on understanding the sources of finance available to a business, evaluating the implications of finance as a resource, making financial decisions based on financial information, and evaluating the financial performance of a business. It also discusses the cost of different sources of finance, the importance of financial planning, and the information needs of different decision makers.

ASSIGNMENT TITLE: MANAGING FINANCIAL
RESOURCES AND DECISIONS
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Table of contents
INTRODUCTION
TASK 1
LO1- UNDERSTAND THE SOURCES OF FINANCE AVAILABLE TO A BUSINESS
1.1 Identify the sources of finance available to a business……………………………………3
1.2 Asses the implications of different sources……………………………………………….4
1.3 Evaluate appropriate sources of finance…………………………………………………..4
LO2- UNDERSTAND THE IMPLICATIONS OF FINANCE AS A RESOURCE
WITHIN A BUSINESS
2.1 Analyse the cost of different sources of finance…………………………………………..5
2.2 Explain the importance of financial planning……………………………………………..5
2.3 Asses the information needs of different decision makers………………………………...6
2.4 Explaining how the selected source of fund influences the financial statements……...….7
LO3- BE ABLE TO MAKE FINANCIAL DECISIONS BASED ON FINANCIAL
INFORMATION
3.1 Explain the impact of finance on the financial statements………………………………...7
3.2 Analyse budgets and make appropriate decisions………………………………………....9
3.3 Explain the calculation of unit costs and make pricing decisions………………………. 10
TASK 2
LO4- BE ABLE TO EVALUATE THE FINANCIAL PERFORMANCE OF A
BUSINESS
4.1 Discuss the main financial statements…………………………………………………....10
4.2 Compare appropriate formats of financial statements…………………………………....11
4.3 Interpret financial statements using ratios and comparisons, internal and external……...19
CONCLUSION…………………………………………………………………………...…21
REFERENCES……………………………………………………………………………...22
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Introduction
A business manages both its internal and external finance to execute the business plan
properly. A business needs funds for many purposes, thus utilizes funds accordingly. In case
if adequate funds are not available in the business, it can raise finance either from internal or
external source. Raising funds from external source becomes complicated sometimes, thus it
requires proper understanding of its implication, risk and cost. The thesis of the assignment is
to evaluate the factors of finance (Smith, 2014). In addition, it is also aimed to project
budgets and compute certain ratios to make a comparison and to measure future viability.
The study also aims to measure the financial performance of the recognized company
and evaluate the components of its financial statements in comparison with other types of
business.
TASK 1
LO1- UNDERSTAND THE SOURCES OF FINANCE AVAILABLE TO A BUSINESS
1.1 Identifying the availability of the sources of funds for the business
In general, internal and external sources of finance are available to a business.
Internal sources of finance are those finance that are available inside the business in the form
of personal savings, retained earnings, profits, reserves and surpluses, assets held for sales,
etc. A business can utilizes these resources according to the need of the business projects or
other purposes like meeting its short-term liabilities, etc.
However, if a business makes an investment decision or carries out a business project,
it requires huge funds and in this case, the internal source of funds sometimes becomes
inadequate (Corsatea et al. 2014). Thus, a business goes for external sources of finance,
which includes, raising funds from, bank (in terms of loan), by issuing debentures and bonds,
raising funds from the public by issuing shares and securities, etc. Funds raised from the
external sources carries certain risks and cost to the company. However, making the decision
for raising funds from either of the sources is differs from business to business (based on the
nature and capital structure of the business).
A large business generally raises funds from external sources (especially borrowing
money from a financial institution or by raising funds from the public). On the other hand, a
small business generally raises funds from internal sources (especially personal savings and
business profit).
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1.2 Assessing the implication of the various identified sources of funds
Both internal and external sources of finance provide financial support to a
business for different purposes. Use of finance from inside the business contains less risk and
contributes to the growth of the business, but it does not help in making investment
opportunities apart from meeting its short term or medium term liabilities. Assets held for
sale will reduce the total asset of the business, but it will increase the liquid cash or cash
equivalent that a business can utilize in liquidating its debts. Using personal savings and
profit of the business will only help in the business expansion, but it will not create enough
goodwill for the business to make investment opportunities (Odell, 2014).
However, use of finance from outside the business carries huge risk but contributes to
the performance, expansion, and development of the business. It also helps in creating
investment opportunities and meeting its long-term debts. Funds rose from banks and
debentures carry huge risk to the business and funds raised from shares and securities carry
less risk.
However, these funds will reflect the financial stability of the business, indicating its
ability to bear the risk and cost of raising funds from external sources.
1.3: Evaluating and selecting the appropriate sources of fund for the business project
Based on the nature and size of the business, appropriate sources of fund is identified
and evaluated. For a large entity, funds raised from external sources are considered suitable.
However, the factors concerning risk and cost differ from one source of fund to another
source of fund. Funds borrowed from any bank or financial institution carries huge risks to
the business because it carries fixed rate of interest and the business cannot evade the
payment of interest, whether the business earns profit or loss. Since it is a fixed debt-bearing
fund, the cost to the company is low.
Funds raised from the public by issuing shares carries low risk to the business, also
the payment of dividend is not compulsory in case of equity shares. Since shares are not a
fixed debt bearing securities, the cost to the company is high.
If the company utilizes its internal source of finance like retained earnings, profits,
reserves and surpluses, it will not carry huge risk to the business, but it will certainly reduce
the financial stability of the business. Since the company can only invest £ 20,000 and cannot
exceed the borrowing amount of £ 300,000, raising funds from both the financial institution
and the public is the good option, because it will balance the risk and cost to the company
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largely (Odell, 2014). A business can raise 60% of £ 280,000 from the bank (in terms of loan)
and rest by issuing shares.
LO2- UNDERSTAND THE IMPLICATIONS OF FINANCE AS A RESOURCE
WITHIN A BUSINESS
2.1: Analysing the cost of each identified sources of funds
The cost of each sources of finance is different. Funds raised by issuing debentures or
borrowing money from any financial institution carries fixed rate of interest and the company
must bear the fixed debt periodically, whether it earns profit or incur losses. For instance a
loan (£ 200000) carries 10% interests to be payable annually. If the company earns profit or
incur losses, it must pay £ 20000 annually as interest to the bank. If the company fails to pay
the interest, bank can sue the company as a defaulter of payment (Jiang and Jiranyakul,
2013).
A fund raised by issuing preference share does not carry any fixed debt, but if the
company earns profit, it must pay dividend to the preference shareholders. For instance, 20%
preference dividend is announced at the end of the year and found that the company has
incurred losses. Thus, payment of dividend does not become compulsory. Hence, the cost to
company is moderate.
Funds raised by issuing equity share do not carry any fixed debt. Payment of equity
dividend is not compulsory. For instance, 38% equity dividend is announced at the end of the
financial year, and the company earned profit. In this case, if the company finds the payment
of equity dividend is relevant, it can pay the dividend, but it is not compulsory (Jiang and
Jiranyakul, 2013).
2.2 Role and objectives of financial planning
Financial planning simply means the management of the funds available. In other
words, it helps in deciding the nature and amount of funds to be spent for the specific
purpose. In simpler words, it means deciding in advance that how, when and where to spend
the funds in accordance to the need of the business. In the context of the needs of the
business, financial planning becomes very important (Lusardi and Mitchell, 2014). The
importance of financial planning is described below:
1 Collection of optimum funds is ensured
It helps in estimating the precise requirements of finance by avoiding wastage and reducing
the occurrence of over-capitalization situation.
2 Assists in fixing an appropriate capital structure
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Funds raised from different sources are to be utilized appropriately. Financial planning helps
in allocating the funds to be utilized in the appropriate place like, contributing long-term
funds to the shareholders and debenture holders and medium-term funds to the financial
institutions.
3 Facilitates investing decision in the right projects
It gives suggestions regarding the allocation of funds for different purposes by comparing
different investment proposals.
4 Facilitates operational activities
It also helps in smooth functioning of production and distribution function of business.
5 Ensure strong base for financial control
It facilitates the comparison of financial activities between the actual and estimated revenue
and cost.
6 Helps in utilizing the funds properly
Since, finance is the blood of the business, all the business function is carried out by the flow
of finance. Thus, financial planning helps in utilizing the finance properly, so that it cannot be
misused (Lusardi and Mitchell, 2014).
7 Helps in the coordination
Healthy coordination among various business functions like, production, distribution, sales,
etc are organized by the financial planning.
The following steps undertake the process of financial planning.
 Determining current financial situation
 Developing financial goals
 Identifying alternative courses of action
 Evaluating the alternatives
 Creating and implementing the action of financial plan
 Re analysing and revising the plan
2.3 Describing the information required by both the internal and external users for
making their business decision
The information needs of internal and external decision makers are different from one
another. Internal decision makers include management, employee and owner, whereas
external decision makers include Creditors, government, investors, customers and regulatory
authorities.
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The external decision makers communicate financial information generally in the form
of annual report or the financial statements of the company. Profit and loss statement and
balance sheet show the financial performance and financial position of the business, whereas,
the cash flow statement shows the capability of the company to operate its various activities
(Shepherd et al. 2014).
The external users always show their keen interest in these statements to make any
investment decision in the business. However, the internal users especially employees shows
keen interest in the annual report of the business to anticipate their growth in the company. If
the company shows good financial stability and the operation of its business are flawless,
employees expect growth in their career in the business.
2.4 Explaining how the selected source of fund influence the financial statements
Funds arranged from external or internal sources of funds, no doubt, put some impact
on the financial statement of the company. Funds raised from the banks will contribute the
increment in non-current liability in the balance sheet and the payment of interest on loan will
increase the finance cost in the income statement.
Funds raised by issuing shares will increase the capital in Owner’s equity, also the
dividend on the shares will increase the finance cost in the income statement.
LO3- BE ABLE TO MAKE FINANCIAL DECISIONS BASED ON FINANCIAL
INFORMATION
3.1: Projecting cash and other relevant budgets and analysing them to make
appropriate business decision
Cash budget
Cash budget
Month Not
e
March April May June
281600 309760 352000 394240
Collections from Trade Debtors
40 % In month of sale 112640 123904 140800 157696
55% in month following sale Nil 154880 170368 193600
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Subtotal 123904 278784 311168 351296
GST collected (on purchase) 3 21120 2112 3168 3168
TOTAL RECEIPTS 433664 619520 698368 784960
Payments:
To trade creditors for purchases [100%] 1 211200 21120 31680 31680
Direct labour 2 63360 6336 9504 9504
Factory overhead (100% on Direct labour) 63360 6336 9504 9504
Expenses:
Fixed 8000 8000 8000 8000
Variable (15% of sales value per month) 42240 46464 52800 59136
GST paid 28160 30976 35200 39424
TOTAL PAYMENTS 416320 119232 146688 157248
SURPLUS 17344 500288 551680 627712
Bank balance opening Nil 17344 517632 1069312
Bank balance closing 17344 517632 106931
2
1697024
Sales budget
Sales budget
Month Not
e
March April May June
Forecast sales units 1 22000 24200 27500 30800
Selling price per unit 2 12.8 12.8 12.8 12.8
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Total sales $ 281600 309760 352000 394240
Production budget
Production budget
Month Not
e
April May June March
Forecast unit sales 24200 27500 30800 22000
Plus: Finished goods stock closing 4840 5500 6160 4400
Total units required 29040 33000 36960 26400
less: Finished goods stock opening 26400 29040 33000 nil
Equals production units required 1 2640 3960 3960 26400
Cost per unit in $ 8 8 8 8
Cost of production in $ 21120 31680 31680 211200
ONLY BUDGETS ARE PREPARED. YOU HAVE NOT DONE
ANY ANALYSIS OR DECISION MAKING AS PER
REQUIREMENT
3.2 Explaining the calculation of cost per unit and making pricing decision with the
help of relevant information
Computation of cost per unit
Total production unit = 30000
Total cost = total fixed cost + total variable cost
Total cost = £ 50000 + £ 250000
Total cost = £ 300000
Cost per unit = total cost / total production units
Cost per unit = 300000 / 30000
Cost per unit = £ 10
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Based on the cost per unit, pricing decision or profit margin decision is made. In cost plus
pricing method, the management on the cost price of the commodity adds profit margin.
Average fixed cost = total fixed cost / total production unit
Average fixed cost = 50000 / 30000
Average fixed cost = £ 1.67
Average variable cost = total variable cost / total production unit
Average variable cost = 250000 / 30000
Average variable cost = £ 8.33
Total unit costs= £1.67 +£8.33=£10
Selling price = total cost + (desired profit margin)
Selling price = £10 + £ 2.5 (25%)
Selling price = £ 12.5
3.3 Assessing the viability of the chosen contract using different investment appraisal
techniques
Year
s
Cash inflow Cumulative cash flow Payback
period
Discounting
factor
PV
0 -8.6 -8.6 1 -8.6
1 1.6 -7 0.877192982 1.403509
2 2.8 -4.2 0.769467528 2.154509
3 3.4 -0.8 0.674971516 2.294903
4 3.6 2.8 0.592080277 2.131489
5 4 6.8 0.519368664 2.077475
6 4.2 11 0.455586548 1.913464
3.222222222 3.2 years 3.375348
Average rate of return = 38%
Payback period = 3 years
Net present value = £ 3.38 million
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YOU NEED TO ASSESS THE DIFFERENT METHODS
AND RESULTS AND MAKE YOUR
RECOMMENDATION
Task 2
LO4- BE ABLE TO EVALUATE THE FINANCIAL PERFORMANCE OF A
BUSINESS
4.1 Evaluating and interpreting the financial statement, its components and explaining
their purposes
A financial statement is an integral part of the annual report of the business. A
financial statement in simple terms is a record of the accounting activities and the financial
stability of the business. The financial information is described the structured manner and in
accordance with the GAAP or IFRS. The components of financial statements are income
statement, cash flow statement, statement of changes in equity and statement of financial
position. The income statement shows the financial performance of the business. Net profit or
loss of the business can be identified by preparing profit and loss statement and it is the main
purpose of preparing an income statement.
However, the sales or revenues, other income, expenses and finance cost are recorded
in the income statement (Ball et al. 2015). After computing net profit or profit available to the
equity shareholders, EPS is then calculated.
Both internal and external users show their interest in the performance of the business by
looking at the income statement.
Cash Flow statement shows the inflow and outflow of cash and cash equivalent or
generating and using cash through the activities of the business, namely, operating activity,
investing activity and financing activity. From operating activities, the information related to
the operation of current assets and current liabilities can be gathered. From investing
activities, information related to the operation of investment or fixed assets can be gathered.
From the financing activities, information related to the operation of long-term liabilities like
payment and receipt of loans, etc. can be gathered. Both internal and external users show
their interest in the capability of the company to use and generate its liquid cash by looking at
the cash flow statement.
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The balance sheet shows the financial position of the business. Balance sheet
comprises of assets, liabilities and owner’s equity. If the total asset is greater than the total
liabilities, except total equity, it shows the good position of the business. Both internal and
external users show their interest in the financial position of the business by looking at the
statement of financial position, to make their investment decision (Boland et al. 2015).
4.2 Demonstrating and making comparison of the formats of the financial statements
The preparation of financial statements is compulsory for a registered business. A
registered business includes a public or large private company operating in the large area in a
public interest. The unregistered company, on the other hand, includes, partnership business,
joint ventures business, sole trader or sole proprietor, etc, which only sets objectives of
earning the profit. An unregistered business can prepare the financial statement in accordance
with the GAAP or IFRS, but it is not compulsory.
They can simply make an annual report containing income statement, cash flow
statement and balance sheet, for their own understanding, since the external users except
taxation authority do not have any potential interest in their financial statement. A registered
company must prepare an annual report in accordance with the GAAP or IFRS because it
should be understandable by its users. A registered company like J Sainsbury Plc must follow
certain accounting standards and policies while preparing the financial statement, in order to
maintain the concept of relevancy and reliability (www.j-sainsbury.co.uk, 2017). Both
internal and external users have their potential interest in the annual report of the company
because based on the understanding of the financial information provided in the annual
report, they will make the further business decision.
The annual report of the registered company contains comprehensive income
statement, cash flow statement, statement of changes in equity, statement financial position,
Auditors report, directors’ report, management report, etc. The Income statement is prepared
vertically, where, Sales, cost of goods sold, administrative expenses, other income and
expenses are illustrated along with the finance cost. Net profit or loss of the business can be
identified by preparing profit and loss statement and it is the main purpose of preparing an
income statement.
Moreover, the earnings per share on the profit available for equity shareholders are
also calculated in the income statement. However, on the balance sheet, assets, liabilities and
owner’s equity are shown to demonstrate the financial position of the company. Net profit or
loss generated in the income statement is transferred to the owner’s equity. Both internal and
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external users make use of the financial statements to anticipate the return and viability of
their investment in the business (Boland et al. 2015). In addition, the auditor’s report
contributes to the acceptability and actuality of the annual report prepared by the company for
its users.
The users of the financial statement certainly look for the unqualified auditor’s report
to believe the actuality of the financial statement. In addition to these, the remuneration report
present in the annual report is helpful for the internal users (employees) to anticipate their
growth in the company.
YOU CAN ALSO ADD HOW EQUITY, TAX AND
WITHDRAWAL OF PROFIT IS SHOWN DIFFERENTLY IN
SOLE TRADER, PARTNERSHIP AND COMPANY
FINANCIAL STATEMENTS
4.3 Interpreting the financial statements of J Sainsbury Plc with the help of
appropriate ratios
2016 £ 000 2015 £ 000
Return on assets Profit / average total assets (548 / 16973) * 100
= 3.2%
( -72 / 16537) * 100
= -0.4 %
Return on equity Profit / average equity (548 / 6365) * 100
= 8.60%
(-72 / 5539) * 100
= -1.30%
Net profit
margin
Net profit / sales or revenue (548 / 23506) *100
= 2.33%
(-72 / 23775) *100
= -0.30%
Efficiency ratios
2016 £ 000 2015 £ 000
Asset turnover Net sales / average total assets 23506 /
16973
= 1.3 times
23775 /
16537
= 1.4 times
Inventory turnover ratio COGS / Average inventory 22050 / 968 22567 / 997
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= 22.78 times = 22.63 times
Fixed-asset turnover
ratio
Net sales / total noncurrent
assets
23506 /
12529
= 1.87 times
23775 /
12032
= 1.97 times
Liquidity ratios
2016 £ 000 2015 £ 000
Current ratio Current assets / current liabilities 4413 / 6720
= 0.66:1
4505 / 6923
= 0.65:1
Quick ratio (total current assets - inventories) /
total current liabilities
(4413 - 968) /
6720
= 0.51:1
(4505 - 997) /
6923
= 0.50:1
Average collection
period
(Average receivables * 365 days)
Sales
(508 / 23506)
* 365
= 8 days
(approx)
(471 / 23775)
* 365
= 7 days
(approx)
Gearing ratios
2016 £ 000 2015 £ 000
Debt ratio Total liabilities / total
assets
(484 / 785) * 100
= 61.6%
(470 / 746) * 100
= 63%
Equity ratio Total equity / total assets (6365 / 16973) *
100
= 37.50%
(5539 / 16537) *
100
= 33.49%
Debt to equity
ratio
Total liabilities / total
equity
(3884 / 6365) * 100
= 61%
(4075 / 5539) * 100
= 73%
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YOU ALSO NEED TO SHOW FINANCIAL RATIOS OF ANOTHER
SIMILAR COMPANY OR INDUSTRY AVERAGE FOR EXTERNAL
COMPARISION. YOU NEED TO ANALYSE AND INTERPRET AT
LEAST FIVE RATIOS BOTH INTERNALLY AND EXTERNALLY
Conclusion
In the study, efforts have been made to evaluate the factors of finance and to measure the
financial performance of the recognized company and to evaluate the components of its
financial statements in comparison with other types of business. By the exhaustive research
on the topic “managing financial resources and decisions”, various sources of finance
available to the business is understood and the implication of these resources ascertained.
Based on the available and relevant financial information, financial decision was made, with
the help of various types of budgets and investment appraisal techniques. Finally, with the
help of accounting ratios, internal and external analysis of J Sainsbury Plc has been done.
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Reference list
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Controls, and Financial Statement Quality: The Case of Originating
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Corsatea, T.D., Giaccaria, S. and Arántegui, R.L. (2014). The role of sources of finance on
the development of wind technology. Renewable Energy, 66, pp.140-149.
Jiang, J. and Jiranyakul, K. (2013). Capital structure, cost of debt and dividend payout of
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Odell, J.S. (2014). US international monetary policy: Markets, power, and ideas as sources
of change. Princeton University Press.
Shepherd, D.A., Williams, T.A. and Patzelt, H. (2015). Thinking about entrepreneurial
decision making: Review and research agenda. Journal of management, 41(1), pp.11-
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Smith, W.K. (2014). Dynamic decision making: A model of senior leaders managing
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www.j-sainsbury.co.uk, (2017). Available from:
https://www.j-sainsbury.co.uk/media/3169495/sainsburys_ar_2016_2005.pdf
[Accessed on 8 Mar. 2017].
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