Report on Sources of Finance in Firm

MANAGING FINANCIAL
RESOURCES AND DECISON
MANKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Sources of finance.................................................................................................................4
1.2 Implications of source of finance..........................................................................................5
1.3 Suitability of source of finance.............................................................................................7
TASK 2............................................................................................................................................7
2.1 Cost of different source of finance........................................................................................7
2.2 Importance of financial planning for the firm’s....................................................................8
2.3 Information needs to different decision makers....................................................................8
2.4 Impact of finance on financial statements.............................................................................9
TASK 3............................................................................................................................................9
3.1 Analysis of budget.................................................................................................................9
3.2 Calculation of unit cost.......................................................................................................10
3.3 Project evaluation techniques..............................................................................................10
TASK 4..........................................................................................................................................13
4.1 Main financial statements...................................................................................................13
4.2 Format of financial statements for different organizations.................................................14
...................................................................................................................................................15
...................................................................................................................................................16
4.3 Ratio analysis......................................................................................................................22
CONCLUSION..............................................................................................................................23
REFERENCES..............................................................................................................................24
INDEX OF TABLES
Table 1: Cash budget for Hardwood ltd...........................................................................................9
Table 2: Calculation of unit cost....................................................................................................10
Table 3: Calcification of payback period method..........................................................................10
Table 4: Calculation of ARR.........................................................................................................11
Table 5: Calculation of NPV..........................................................................................................11
Table 6: Calculation of IRR...........................................................................................................12
Table 7: Ratio analysis...................................................................................................................22

ILLUSTRATION INDEX
Illustration 1: Income statement of the company...........................................................................14
Illustration 2: Balance sheet of the company.................................................................................15
Illustration 3: Cash flow statement of the company......................................................................16
Illustration 4: Income statement of sole trader..............................................................................17
Illustration 5: Balance sheet of sole trader.....................................................................................18
Illustration 6: Cash flow statement of sole trader..........................................................................19
Illustration 7: Income statement of partnership.............................................................................20
Illustration 8: Balance sheet of the partnership..............................................................................21
Illustration 9: Cash flow statement of partnership.........................................................................21

INTRODUCTION
Finance is life blood of an organization and due to this reason firms needs to utilize
financial resources in a proper manner. In this report, sources of finance are described in detail
by the firm. Along with this, appropriate source of finance is also selected for the firm. After
that, in the report budget is prepared and its trends are analyzed and necessary comment
regarding same is made in the report. Along with this, project evaluation is also done in order to
select most viable project for the firm. At the end of the report, ratio analysis technique is applied
and comments regarding the same are made in the report.
TASK 1
1.1 Sources of finance
Finance plays a very important role in growth of an organization. Without it, no
organization can survive in the competitive business environment. Some sources of finance that
an organization can use are given below.
Internal source of finance Retained earnings- It is a portion of the revenue that remains with the company after
deducting all expenses from the revenue earned by the firm. The main point is that no
cost is attached in this source of finance. Sales of asset- Firm can sale its asset in order to finance company operations
(Dell'Ariccia, Detragiache and Rajan, 2008). If company has some assets which is ideal
or not giving sufficient return then it can use this source of finance.
External source of finance Equity- Under this source of finance, a firm raised a capital from the general public by
bringing IPO or FPO. For this, it needs to fulfill some criteria that are determined by the
regulatory authority. Due to flexibility feature in finance cost, this source of finance is
popular among business firms. Debentures- It is a written acknowledgment of debt taken by the company from the
general public. Under this, source of finance is required by the firm to pay interest to the
debenture holders on time. In case of default in payment they have the right to sue firm
(Hill, Leitch and Harrison, 2006).

 Bank loan – Firm can take a bank loan in order to finance its operations. Loan will be
available at fixed or floating interest rate. Companies must abstain from taking loan at
floating interest rate because with change in interest rate firm finance cost may increase.
Whereas, in case of fixed cost such problem does not come into existence. Hence, taking
loan at fixed interest rate is more profitable for the firm then flexible interest rate.
 Hire purchase – It is an agreement in which business firm take an asset on lease and it
pays a rent for same to the owner. This source of finance is used when price of capital
asset is very high and technology changes are taken place at the fast pace. In this source
of finance, if rent paid till the date becomes equal to asset value then it is assumed to be
purchased by the lessee (Davies and Crawford, 2011). So, by making payment in
installments asset can be purchased by a business firm under this source of finance.
1.2 Implications of source of finance
Following are the implications of sources of finance.
Sources of finance Legal Bankruptcy Dilution of control
Retained earnings There are no legal
implications regarding
use of retained
earnings
In case of bankruptcy,
amount of retained
earnings can be used
to make payment to
the creditors.
There is no dilution of
control in this source
of finance
Sale of asset If asset that a firm
intend to sell is
mortgaged then it
cannot sell that asset in
the market (Bowen,
2011)
In case of default in
payment, assets are
sold to make payment
to the creditors.
No dilution takes
place.
Equity Firm needs to fulfill
certain criteria in order
to bring IPO or FPO in
the market.
If firm is bankrupt then
after making payment
to the creditor’s equity
shareholders will get
back capital invested by

them in the company.
Control gets diluted
with issue of shares
through IPO or FPO.
Debentures In order to issue
debentures certain
parameters that are
determined by the
regulatory authorities
needs to be fulfilled.
In case of bankruptcy
of the firm debenture
holders are paid by the
firm before equity
shareholders.
Control does not get
diluted in case of this
source of finance.
Hire purchase The company needs to
enter in to agreement
with the lessor in hire
purchase agreement.
Means that firm needs
is required follow all
rules and regulations
determined in the
agreement.
In case of bankruptcy
of the firm, asset will
be returned back to the
owner and payment of
lease amount to lessor
will be stopped by the
firm (Love, Preve, and
Sarria-Allende, 2007).
No dilution of control
takes place.
Bank loan In order to take bank
loan, organization
need to make
projection of revenue
and that revenue will
be certified by the
chartered accountant.
Further, firm will also
need to enter into
agreement with bank
for getting loan from
If firm gets bankrupt
then its assets are used
to pay principle
amount to the bank.
Control does not get
diluted on this source
of finance.