Managing Financial Resources and Decisions

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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