Identifying sources of finance available to business 4

Managing financial
resources
and Decisions
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Table of Contents
INTRODUCTION................................................................................................................................4
2.0 Identifying sources of finance available to business............................................................4
2.1 Types of business..................................................................................................................4
2.2 Sources of finance available to business...............................................................................4
The table consists of following sources of finance along with advantages and disadvantages-.4
2.3 Compare and contrast right issue of share and loan notes....................................................6
2.3.3 Implication of right issues and loan stock..........................................................................7
2.4 Appropriateness of source of finance for buildings and NCA............................................7
2.5 Working capital- Advising board of directors on a source of finance..................................8
2.5.1 Definition...........................................................................................................................8
2.5.2 Importance of working capital...........................................................................................8
2.5.3 Sources available for WC...................................................................................................9
3.1 Statement of profit and loss................................................................................................10
3.2 Statement of financial position...........................................................................................10
3.3 Statement of cash flow........................................................................................................10
3.4.1 WACC for each three options..........................................................................................10
3.4.2 Gearing for each three option...........................................................................................11
3.4.3 How did it impact financial statements............................................................................11
3.5 Earning per share................................................................................................................12
3.5.1 what information does this provides................................................................................12
3.5.2 Earning per share calculation..........................................................................................12
3.5.3 Explaining the answer......................................................................................................12
4 Investment appraisal..............................................................................................................13
4.1 Why it is important to appraise potential investment..........................................................13
4.2 What are the risks to future cash flow?...............................................................................13
4.3 Different type of techniques................................................................................................13
4.3.2 Calculating pay back period.............................................................................................13
4.3.3 net present value method of appraisal.............................................................................14
4.3.4 Calculation of net present value.......................................................................................14
4.4 Recommending board of directors......................................................................................15
4.5 Unit cost..............................................................................................................................16
5.0 Cash flow vs profit..............................................................................................................17
5.1 Main trends and messages contained within cash flow......................................................17
5.2 Importance of financial planning........................................................................................17
5.3 Explain why company may be profitable but run into liquidity problem..........................17
5.4 Users of financial statements and their needs....................................................................17
5.4.2 What information they need.............................................................................................18
6.0 Interpretation of the financial statements.....................................................................................18
6.1 Ratio Analysis.....................................................................................................................18
6.1.1 Profitability ratios............................................................................................................18
6.1.2 Liquidity ratio..................................................................................................................19
6.2 Overall opinion on the company’s current performance.....................................................19
7.0 Main difference in financial statements........................................................................................19
CONCLUSION..................................................................................................................................19
REFERENCES...................................................................................................................................21
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INTRODUCTION
Finance is regarded as one of the most crucial resource of the enterprise as it is directly
associated with the aims and objectives of organization. Further, initiatives are taken by
management of every company so that it is possible to deal with unfavourable situations such as
inadequacy of finance etc. Proper management of financial resources provides base to organization
in gaining competitive advantage and in turn acts as development tool. Moreover, different sources
of finance are available to business with the help of which company can satisfy its requirement. IT
is the first and foremost duty of management to decide which source to adopt for raising funds such
as internal or external one (Wahlen and et.al., 2011).
Apart from this to judge the feasibility of project investment appraisal techniques are
effective which involves net present value, internal rate of return etc. Such methods helps in
selecting the appropriate proposal and in turn funds can be allocated accordingly. For carrying out
the present study organization chosen is Taste which is a medium sized company and at present
management wants to expand its catering business which has been growing over the past six years.
Apart from this, the local authority has granted business planning permission to extend its current
premises. Various tasks have been covered in the report which involves sources of finance,
importance of financial planning, investment appraisal techniques etc.
2.0 Identifying sources of finance available to business
2.1 Types of business
There are different types of businesses such as public, private and partnership etc. which
carry out their businesses effectively in order to produce good quality of products and services. All
of these businesses have different requirement in conducting their business and completing all
business activities. However, it is highly depend on management that what kind of sources are
preferred to satisfy their business purpose.
2.2 Sources of finance available to business
The table consists of following sources of finance along with advantages and disadvantages-
Sources Feature Advantage Disadvantage
Trade credit
(Short term)
It is considered as one of the
most effective practice of
vendors which allows
business to place and receive
orders without giving
immediate payment.
Main advantage of adopting
this source is minimal cash
outlay through which
shelves of business can be
stocked. Discount received
on the payment made within
Main disadvantage of
adopting this source is
fess and penalties when
supplier has right to
impose penalty on the late
payment made by
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certain number of days is
also another benefit
(Mumford, Schultz and
Osburn, 2001)
company.
Bank
overdraft
(Short term)
It is the facility granted by
bank to withdraw more
amount than those lying in the
account
Main advantage of using this
source is that it is flexible in
nature where one can take it
for whatever amount it is
required.
Main disadvantage of
using this source is that
high rate of interest is
charged by bank and in
turn it is costly for
company (Wahlen and
et.al., 2011).
Retain
Earnings
(Short Term)
Retain earnings are the part of
profit which is saved by the
organization to meet any
future contingency.
Using of retain earnings
does not required to incurred
any expenses related to
interest or even organization
does not have to repay this
amount.
Accessing of all the
financial source of fund
from retain earnings may
become disadvantage for
the business to meet any
uncertain or imperative
need of finance during
daily course
Bank loan
(Long term)
Taste Plc can take loan from
financial institutions present
in the market. Firm can take
loan from bank at an cheaper
rate of interest.
Main advantage of adopting
bank loan as a source of
finance is that it enhances
liquidity position of
company
Major disadvantage of
using this source is that it
increases expenses of the
company as firm has to
pay large amount in the
form of interest.
Issuing
shares
(Long term)
Taste plc can issue equity
shares in the market to general
public and can obtain funds
from investors (Wildavsky,
2006).
Main advantage of using this
source is that they are liquid
and can be easily sold in the
market. Further, company do
not have any obligation
regarding payment of
dividend.
Main disadvantage of
using this source is that
payment of dividend on
equity shares is not tax
deductible expenditure
and cost of equity is
highest among all the
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