Economic Analysis of Investment Projects and Budgeting Practices

The provided content consists of various academic papers and online resources that discuss capital budgeting, participatory budgeting, and budgeting practices in different fields. The papers explore the importance of economic analysis in investment projects, the role of management accounting in budgeting decisions, and the potential benefits and challenges of participatory budgeting approaches. The online resources provide further insights into the concept of budgeting and its link to financial statements. Overall, this content aims to provide a comprehensive understanding of the capital budgeting decision-making process and the importance of effective budgeting practices in various contexts.

Managing Financial
Resources

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
AC1.1 Various sources of finance .............................................................................................3
AC 1.2 Implications of various sources......................................................................................4
1.3 Evaluating the proper sources of finance in business...........................................................5
TASK 2............................................................................................................................................6
A.C 2.1 Analysis the cost of different sources of finance...........................................................6
AC 2.2 Importance of financial planning....................................................................................7
A.C 2.3 Assessing the information needed for the decision making.........................................7
A.C 2.4 Impact of finance on financial statements.....................................................................8
TASK 3............................................................................................................................................9
AC 3.1 Analysis of Budgets and appropriate decisions..............................................................9
A.C 3.2 Calculation of unit cost and relevant pricing decisions...............................................10
AC 3.3 Financial appraisal........................................................................................................11
TASK 4..........................................................................................................................................11
A.C 4.1 Financial statements and their purpose and content....................................................11
AC 4.2 Formats of financial statements of different types of business ..................................14
A.C 4.3 Comparison of ratios of Dixons carphone plc and Vodafone.....................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Financial resources are the essential element of business which is required for its
operations. These are available in the form of cash, securities and credits. An entrepreneur
manages his financial resources before setting up a business so that he can manage his business
smoothly and efficiently (Ezzamel, Robson and Stapleton, 2012). Finance is known as the
science of managing money. Managing of finance is done to achieve the objectives of business
efficiently. In this resource management various financial strategies are made to maximise the
profits and for the objective of wealth maximisation. The other objective of financial
management is to minimise the cost of capital. In the currently report the need for managing the
financial resources is discussed and various sources of finance and its implications is assessed.
Analysis of budgets and the impact of finance on financial statements and the comparison of
internal and external ratios.
TASK 1
AC1.1 Various sources of finance
In accordance with the current scenario, ABC co. is about to launch a business plan.
Business are involved with high risks. Greater the risk , higher is the rewards. There are various
resources that can be available to a business and that can help in the funding of the business. As
they only have £ 20,000 with them as capital and the plan is for £ 300,000 so they are
considering for alternative sources of finance so that they can borrow from
the market. The various sources of finance that could help ABC co. are:
External sources of finance
 Capital market: Company can finance from the market by issuing
either new shares or right shares. New shares can be issued in the
market and lot of money can be raised from there (Joyce, 2011). Right
shares can be issued to existing shareholders at a considerably low
price.
 Debentures : These are the written acknowledgement that a company
has taken loan from the lender and it includes the repayment of
capital and interest.

 Bank overdraft: Company can also use this type of finance for funding
their business plan as this will give them access to withdraw money
even if their bank balance is zero but with higher interest rate.
 Bank borrowings: The company can borrow funds from banks for the
reamining amount of £ 280,000
 Franchising: By franchising the company can lead to the investment in
less money. The franchisor gives the operating right to the franchisee
and can expand the business under his own name.
Internal sources of finance :
 Retained earnings: these are the earnings that are reinvested in the
business and these are used for the business and usually for new
business investments.
AC 1.2 Implications of various sources
The financial sources that are required by the ABC co. to flourish its business plan has
direct implication on the business. As if the company chooses wrong source of finance it will
not be able to get success. So the sources of finance needed to be critically evaluate beforehand.
As the company need £280,000 for the business plan so they can raise funds
from either equity, loan or securities (Kilfoyle and Richardson, 2011). These
all have their certain advantages and disadvantages. If the company raises
from loans then they get into the agreement in which they have to pay in
fixed intervals and the amount to be paid back is repayable on their
demand. The disadvantages that it carries is the legal cost , insurance and
commitment fees. In case of equity the fund that is raised from that
contains maximum risk but with maximum returns
the implications are on the basis of financial, Legal, dilution of control and
bankruptcy.
Sources of
finance
Financial
implication
Legal implication Dilution of
control
Bankruptcy
Loans Amortisation
payment should
If the party
defaults in
N.A. If the borrower
goes bankrupt

be funded on
periodic basis like
monthly,
annually.
making payment
then the bank has
the right to seize
the asset.
then the collateral
security is used to
repay the bank
first , and other
creditors are paid
afterwards.
Overdraft facility Company has to
pay repayment
charges no matter
what. And with
this penalties are
additional which
has to be paid.
Documentation is
done for
repayment
Companies
control is not
diluted
Company has to
pay first to the
overdraft
Preference Shares Though payment
of investment is
not obligatory,
they are obliged
for dividend
payment.
They do not have
voting rights
Not diluted They are paid first
with the
remaining assets
of the company.
Franchising Franchisee has
the implications
Franchisee takes
over the
implications
Not diluted The amount left
must be paid top
the franchisor
1.3 Evaluating the proper sources of finance in business.
Sources Advantage Disadvantages
Capital Market It help doing the saving and it have
the liquidity in nature. It is the income
sources for the business. It will help
in in improving the wealth and capital
growth.
It have risks because it always
fluctuate. Financial currency value
always fluctuates. But India is not
getting more development like UK,
USA and Japan.

Debentures It well provide long term found to the
company. The rate of interest of
debentures web be lower then the rate
of dividend. Debenture holder dose
not having the voting rights.
Repayment of principle are legal
obligation of company. Uses of debt-
finance increase the risk perception of
investor in company. Cost always
raises through high stamp duty.
Bank Overdraft It help in taking good tracking record.
In this we have to do timely payment.
It need less paper work and it is
flexible. It well benefit in interest
cost.
It have higher interest rate. The risk of
reduction is limited. The debaters
collection become the lethargic.
Bank Borrowing It can be use for short term and mid
term finance help. It well help in
getting the tax benefits.
Some bank carry the prepayment
penalty. Borrowing too much cash
fund that do discharge of cash flow
Franchises There is no need of experience for this
. Business will provide the training . It
have higher rate of success. It will
take some benefits in buying it rather
then starting the business.
There have a formal agreement
between both the party. Yo cant do
more creativity there . Profit have to
bee shred to them.
TASK 2
A.C 2.1 Analysis the cost of different sources of finance
Capital market: selecting the this sources can give profit or may loss it depend on the market.
This have the higher rate of risk. But for taking the big amount this is the best sources to select.
But when taking this they have to do study on market (Truong, Partington and Peat,
2008). We have analyse the area where they have to invest the market.
Debentures : In the the coupon rate is 9.75% so it well not affect most but it depends on the
value of the company. You purchase the debutantes and there company value gone to decrease
then you well be in big problem. So for purchasing the debentures they have to analysis the
market. The face value is going 1,000 per bond .

Bank overdraft : It means that taking the money from the money which we will pay them latter.
So the of HSBC bank overdraft is providing the over draft ate the rate of 8.10% but we spread
the time to 2 years the it well be the 8.45%. it have very small risk to take.
Bank borrowing: It means that taking of loan. This can be taken by the company and decide the
time period according to that company well be gating the EMI and interest on that amount
(Brown, Evans III and Moser, 2009). The current interest rate of HSBC of personnel
loan is 13% to 18.6%. you well get tax benefits through that.
Franchise: In this person have to do the agreement with a organisation for opening there out-
late. By there brand name they well give the financial support and provide a place to open a
franchise.
Company cant take the debentures because it need high network so they have to take the
bank loan for the financial need. Company can not take the bank over draft and for the credit
market there is high risk.
AC 2.2 Importance of financial planning
 In the organisation financial planning well help in dicing the optimum fund. With that
they can not do the work
 In the organisation or business the capital very much starting fund (Miller and
O’leary, 2007). This should be analysis and the fixed by the financial planing
 A business have to see that where they have to invest in the market. By this company can
generate profit.
 Financial planning have to see the need of raw material. And it should maintain
performance of the organisation so they get the knowledge about need operate work
 Financial statement show the wastage of then organisation work so it well provide the
result. On that result they have to reduce the wastage.
 It well help in making the proper utilization of the finance in the organisation
 It help in making the proper and effective coordination in the organisation
 Financial statement show the present position of company and according to that company
make financial pan for the feature

A.C 2.3 Assessing the information needed for the decision making
In the organisation there are three person who have to make the decision there are Team
leader, Managers, Board of directors. But they cant take the decision without have the proper
information (Gervais, Heaton and Odean, 2011). So the information that have to needed
to take different decision by decision makers are as follows:-
Team Leadership: in the organisation there too much small department and groups for that they
have leaders so for taking the proper decision they need these information.
 Information about performance of every group member.
 information abut the objectives of group.
 information about group members skill.
 information about the need to every one in group.
Manager: In the organisation there is person how have to mange the organisation that person
have to take decision abut the performance of the organisation (Libby and Lindsay, 2010).
So they need these information.
 Information about the raw materials.
 information of size of organization.
 information about the need of organization.
 information about finance of the organisation.
Board of directors: The person how start the business and invest the money in the business to
start up that persons are top level person they are also known as the board of directors. They also
need the information these are .
 Information about the market.
 information about the competitor.
 information about the costumer satisfaction and need.
 information about own business performance.

A.C 2.4 Impact of finance on financial statements.
In the financial statement there are so many things which affect it. Like have the loan
from any company well impact the financial statement. Creditors and debaters well affect the
financial statement (Sintomer, Herzberg and Röcke, 2008). Capital of the organisation
well affect the financial statement. Interest rate of any loan well affect the financial statement
these have to be manges properly in the statement.
The differenced sources and there impact on financial statement is are as fallows:-
Capital market: when in the business the work of issuing the equity and the debt are don then
they well affect the statement in every change id there price it well directly affect the finical
statement. It well come in the liability side of the balance sheet.
Debentures: If company and the debentures are don have been issued then they have to to be
manage time to time because its price always fluctuate in the market so it well affect the market.
Bank overdraft: when the company have taken the bank overdraft then he have also to see how
will they pay for it. And creditors are the important issue of the financial statement. Then the
interest rate do impact. It well come in the liability side of the the balance sheet.
Bank borrowings : It like lone taken from the bank so for that the company have to pay the EMI
time to time with interest rate which have been decided further (Phillips and e Costa,
2007). So it well be impacting the financial statement. It comes in long term liability in balance
sheet.
Franchisee: The dealers of franchise have to be maintain the accounting report or financial report
from that they have to give half of the prof company home they have done the agreement. This
well impact the financial statement
For instance: If business entity takes decision in relation to raising funds from the issuance of
share and bank loan then it will place following impact on financial statement:
 Income statement: In the case of equity share, firm requires to give dividend to
shareholders when it earns enough profit. Besides this, bank loan also imposes fixed
monetary burden in front of firm in the form of interest. Thus, under profitability
statement, amount of dividend and interest on bank loan will be included on debit side.

Moreover, both are the expenses for company and have direct impact on the profitability
aspect of firm.
 Balance sheet: Both such selected sources will also affect statement of financial position
to a great extent. In shares and bank loan, liabilities side will increase significant because
both the sources impose obligation of repayment on firm. Besides this, cash side of
current assets will also increase with the similar amount according to dual concept.
By taking into account all the above mentioned aspects, it can be said that selected sources of
finance closely influences financial statements.
TASK 3
AC 3.1 Analysis of Budgets and appropriate decisions
The forecasted cash budget of ABC LTD. (Amounts in £)
April May June July August
Cash Inflow
Sales 25500.00 26137.50 26790.94 28130.48 29537.01
Other income 4600.00 5200.00 6400.00 6800.00 7200.00
Total cash inflow 30100.00 31337.50 33190.94 34930.48 36737.01
Cash outflow
Operating expenses 3825.00 3920.63 4018.64 4219.57 4430.55
Rent 4000.00 4000.00 5000.00 5000.00 5000.00
Utilities & maintenance 637.50 653.44 669.77 703.26 738.43
Miscellaneous expenditure 1275.00 1306.88 1339.55 1406.52 1476.85
Total cash outflow 9737.50 9880.94 11027.96 11329.36 11645.83
Net cash flow 20362.50 21456.56 22162.98 23601.13 25091.18
Opening balance 0.00 20362.50 41819.06 63982.04 87583.16
Closing balance 20362.50 41819.06 63982.04 87583.16 112674.35
The underlying assumptions of this cash budget are:
 Sales increase at the rate of 2.5% and then from third year increase at the rate of 5%
 Operating expenses are 15% of the revenue
 Rent remain same for initial two years at 4000 and then increase to 5000 for remaining
years

 Utilities and maintenance increase at 25% of sales for every year.
 Miscellaneous expenditure occurs at the rate of 5%
 Opening balance remains zero for the first year then closing balance of first year
becomes the opening balance of next year.
According to the analysis of the six months projected budget, the net cash flow is increasing at a
growing rate and the closing balance is increasing it clearly indicates that it is a profitable
venture.
A.C 3.2 Calculation of unit cost and relevant pricing decisions
This is the Cost plus pricing method and the illustration for the calculation of same is shown
below:
Particulars
Amount in
£
Total variable cost 225000
Total fixed cost 200000
Total cost 425000
Number of units 50000
Cost per unit 8.5
Gross profit margin 35%
Seling price 11.48
Gross profit margin is 35% and by adding gross profit margin to cost per unit selling price is
calculated an it is £11.48

AC 3.3 Financial appraisal
For the financial appraisal and viability of project, capital budgeting techniques are used
and for this net present value and internal rate of return is calculated.
Years Cash Flows (in £'s)
2016 65000
2017 1,12,000
2018 1,65,000
2019 1,98,000
2020 2,30,000
Initial Investment 4,20,000
Years Cash Flows (in £'s) PV factor @ 12% Present value
2016 65000 0.89 58035.7142857143
2017 112000 0.80 89285.7142857143
2018 165000 0.71 117443.740889213
2019 198000 0.64 125832.579524157
2020 230000 0.57 130508.1768
Total present value 521105.925800076
Less: Initial investment 4,20,000
Net present value 1,01,106
Years Cash Flows (in £'s)
Initial investment -4,20,000
2016 65000
2017 112000
2018 165000
2019 198000
2020 230000
Internal Rate of Return (IRR) 19.59%

In the illustration above the NPV of the project is positive so the project will be accepted and the
IRR is coming 19% . hence, the project is financially viable and hence approved.
TASK 4
A.C 4.1 Financial statements and their purpose and content
Financial statements are the written reports of the financial position of the company and
these indicates the quantifiable performance of the company (Lee Jr, Johnson and Joyce,
2012). The financial statements consists of balance sheets, income statement, statement of cash
flows and statement of change in equity.
Balance sheet
It shows the financial position of the business and is also known as statement of financial
positions. It consists of assets, liabilities and equity.
Assets: These are the things that the owner of the business owns. this could be current assets as
well as fixed assets. Current assets include cash, inventory,etc. Fixed assets includes plant and
machinery, building etc.
Liabilities: these are the things business owes to someone , it includes creditors, loans account
payables etc.
Equity: It is the owners capital. This is the amount which the owners get after all the adjustments
and payments (Hope and Fraser, 2013). It is the difference between the assets and the
liabilities.
Income Statements
These are the statements which describe the profit and loss of the business for a particular
period. Elements of profit and loss statements are income and expense.
Income: all the earnings during a specific period comes under this head, for e.g. dividend income
Expense: the expenses incurred during the specific period. For e.g. salaries,rent, depreciation,
wages etc.
Cash Flow Statements
It keeps the record of inflow and outflow of cash by comprising of three activities
namely: operating activities, investment activities, financial activities.
Operating activities: these consists of day to day activities of the business.

Investing activities: it consists of the activities and cash generation from the purchase and sale
of the assets apart from stock. For e.g. sale of building. Purchase of machinery.
Financing activities: it generates income from the repaying and raising of the shares debentures
etc. from the capital market.
Statements of changes in equity
It shows the details of the owners earnings. Usually consists of details of retained
earnings. these can be extracted from: income statement, payments of dividends, issue of share
capital and repayment in the specific period, etc.

Link between the financial statements

Users of financial statements
 Company management : The management of the business need financial statements for
understanding the profitability and cash flows of the business. It helps them in taking the
financial decisions.
 Competitors: They take use of the financial statements to get the knowledge about the
competitors business and to take decisions accordingly.
 Customers: They use these to check the credibility of the business
 Employees: This helps the employees to understand the business even better. It is
important for them to know the company's financial position in which they are working.
 Lenders: The bank or any person who is lending money to business needs to know the
credibility of business, whether it will pay them back or not, financial statements are
needed to check their credibility.
AC 4.2 Formats of financial statements of different types of business
There are various types of business structures and these are sole proprietorship,
partnership, non profit organisations , etc.
a sole proprietorship is the business is the business run and owned by the individual. They have
flexibility in their business operations; partnership is form when two or more then two persons
came together for doing business (Wampler, 2010). This can be limited liability and
unlimited liability.; non profit organisation are made for the purpose of social welfare and its not
based on the principle of profit maximisation.
Further, sole trader firm only prepares profitability statement with the aim to get
information about income earned during a period over expenses. On the other side, PLC such
Dixon prepares wide range of statements for recording and evaluating financial position as well
as performance. Such statements include profitability, balance sheet, cash flow and equity
framework. However, partnership firm prepares one additional account such as partner’s capital
in comparison to PLC. In addition to this, auditing aspect is must for PLC and partnership firm.
However, it is not necessary for sole trading firm to conduct audit and follow specific accounting
rules as well as regulations.
A.C 4.3 Comparison of ratios of Dixons carphone plc and Vodafone
Ratio analysis of Dixon Carphone Plc in against to its rival firm namely British Telecom is as
follow:

 Profitability analysis: The above depicted ratio analysis table shows that GP ratio of
Dixon Carphone Plc decreased from 25.78% to 22.44% at the end of 2015. On the other
side, in 2015, gross profitability of British telecom accounts for 91.25% respectively.
Further, in the year of 2016, net profit margin of Dixon Carphone Plc and British
Telecom implies for 1.65% and 11.87%. Thus, it can be said that profitability aspect of

competitor firm such as British telecom (BT) was sound in 2014 and 2015 as compared
to Dixon Carphone Plc. Thus, Dixon Carphone Plc is required to control the level of
expenses and lays emphasis on promotional aspect. By this, firm would become able to
maximize profitability and enhancing sales revenue to a great extent.
 Liquidity analysis: By doing assessment of financial statement, it has been identified that
current ratio of Dixon and BT was .93 and .97. Hence, both the firms are not highly
capable in relation to meeting their current obligations according to ideal ratio such as
2:1. Further, current ratio of Dixon also decreased from 1.38 to .93 at the end of 2015.
Further, quick ratio of Dixon and BT accounts for .55 & .76 which in line with ideal ratio
such as .5:1. It shows that company has enough assets that can easily be converted into
cash.
 Efficiency ratio analysis: In the financial year 2015, ROE of Dixon and BT was 5.63%
& 22.25%. It clearly reflects that BT has made effectual use of shareholders equity. On
the other side, tabular presentation shows that asset turnover ratio of Dixon was higher as
compared to BT. This aspect shows that Dixon has made effectual use of assets while
performing business activities.
CONCLUSION
The above contains the financial sources to raise capital and assess the implications of it. This
report includes the cost of various sources of finance and the information that the decision
makers need. It holds the impact of finance on financial statements. The assessment of cost of
capital per unit and the capital budgeting techniques are used in this. And the analysis of cash
budget is prepared to understand the requirements of the business. For knowing the financial
position of Dixon and vodafone their ratios are compared.

REFERENCES
BOOKS AND JOURNALS
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investment projects. Routledge.
Wampler, B., 2010. Participatory budgeting in Brazil: Contestation, cooperation, and
accountability. Penn State Press.
Hope, J. and Fraser, R., 2013. Beyond budgeting: how managers can break free from the annual
performance trap. Harvard Business Press.
Lee Jr, R.D., Johnson, R.W. and Joyce, P.G., 2012. Public budgeting systems. Jones & Bartlett
Publishers.
Phillips, L.D. and e Costa, C.A.B., 2007. Transparent prioritisation, budgeting and resource
allocation with multi-criteria decision analysis and decision conferencing. Annals of
Operations Research. 154(1). pp.51-68.
Sintomer, Y., Herzberg, C. and Röcke, A., 2008. Participatory budgeting in Europe: potentials
and challenges. International Journal of Urban and Regional Research. 32(1). pp.164-178.
Libby, T. and Lindsay, R.M., 2010. Beyond budgeting or budgeting reconsidered? A survey of
North-American budgeting practice. Management Accounting Research. 21(1). pp.56-75.
Gervais, S., Heaton, J.B. and Odean, T., 2011. Overconfidence, compensation contracts, and
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Miller, P. and O’leary, T., 2007. Mediating instruments and making markets: Capital budgeting,
science and the economy. Accounting, organizations and society. 32(7). pp.701-734.
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experiments. Journal of Management Accounting Research. 21(1). pp.317-345.
Truong, G., Partington, G. and Peat, M., 2008. Cost-of-capital estimation and capital-budgeting
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Joyce, P.G., 2011. The Obama Administration and PBB: Building on the Legacy of Federal
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Ezzamel, M., Robson, K. and Stapleton, P., 2012. The logics of budgeting: Theorization and
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