Analysis of Financial Performance of XYZ Ltd
Added on 2019-12-03
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MANAGING FINANCIALRESOURCES1
TABLE OF CONTENTSINTRODUCTION ...............................................................................................................................3TASK 1 UNDERSTANDING SOURCES OF FINANCE AVAILABLE TO BUSINESS .................3Scenario 1.............................................................................................................................................3Information pack for new and existing businesses which Identifies the sources of finance available to business....................................................................................................................3Implications of source of finance along with its advantage and disadvantage...........................5Evaluating appropriate source of finance for business project...................................................7M2: Appropriate source of finance for small business................................................................8TASK 2 UNDERSTADING IMPLICATIONS OF FINANCE AS A RESOURCE.............................8Scenario 1 ............................................................................................................................................82.1 Cost of different sources of finance......................................................................................82.2 Importance of financial planning..........................................................................................92.3 Types of information required for decision making..............................................................92.4 Sample profit and loss account and balance sheet with explanatory notes...........................9TASK 3 MAKING FINANCIAL DECISIONS ................................................................................10Scenario 1...........................................................................................................................................103.1 Findings and recommendations in formal written report ...................................................13Scenario 2 .................................................................................................................................143.3 Written report to Directors..................................................................................................16Scenario 3 ..........................................................................................................................................16Scenario 4 ..........................................................................................................................................21LO4 EVALUATING FINANCIAL PERFORMANCE OF BUSINESS ...........................................22Scenario 1...........................................................................................................................................22Scenario 2 ..........................................................................................................................................234.1 Books of prime entry...........................................................................................................23Scenario 3...........................................................................................................................................24CONCLUSION..................................................................................................................................24REFERENCES...................................................................................................................................262
INTRODUCTION Management of financial resources is necessary in every organization and it is required forsmooth functioning of the enterprise. Further, every organization prepares different plans throughwhich finance can be managed in an appropriate manner. This allows business to focus on its keyactivities and in turn boosts overall efficiency of the firm (Reid, 2003). Different sources of financeare present which businesses can consider for satisfying its financial needs but it depends on everyorganization which source to adopt so as to gain long term benefits with the help of this. Toconsider implications of sources of finance is also necessary as through this appropriate decisioncan be taken easily. The present study is being carried out by focusing on the range of financeavailable to business along with its implications such as advantage, disadvantage etc. Apart fromthis, three case study examples have been discussed in the report which involves small businessstart up, large expansion etc. TASK 1: UNDERSTANDING SOURCES OF FINANCE AVAILABLE TO BUSINESS SCENARIO 1Information pack for new and existing businesses which Identifies the sources of finance available to businessDifferent sources of finance are present in business with the help of which enterprise caneasily satisfy its financial needs. Selecting most appropriate financial source depends on the natureof business, its size and type of operations being carried out in the company (Vereker, 2002).Further, to avoid unfavourable situations appropriate sources are adopted by the management whichenhances organizational performance in the market. Long and short/ medium term sources arepresent in business but decision has to be taken which source has to adopt which is cheap and canenhance profitability level. Different sources of finance present are as follows: Share capital: It is regarded as one of the most effective source of finance which usuallyevery organization considers. In order to satisfy financial needs business can issue equityshares in the market through which large number of investors can be attracted. This sourceof finance is generally suitable for businesses which are old and large. Companies which areoperating on wider platform can issue shares in the market and can easily raise additionalfunds with the help of this (Weaver, 2012). By adopting this source it is possible for thebusiness to avoid unfavourable situations such as inadequacy of finance which can furtherenhance overall reputation in the market which is one of the main objectives of firm behind3
carrying out operations in the market. Retained earnings: It is the next effective source of finance which business can easilyconsider. Retained earnings are the amount saved by company in order to meet anyunforeseen contingency. This type of source can be easily considered by large sizedorganizations that are having strong financial base and in turn this can easily satisfyfinancial needs of the entity in the most efficient manner. This source is not applicable incase of businesses that have been newly established in the market as their financial positionis regarded to be weak. Apart from this, one of the key attribute of using this source is that itis cheap and amount can be easily obtained as per requirement of the firm (Norton andKelly, 2014). Bank loan: Taking loan from financial institutions also supports organization in satisfyingits financial needs and in turn acts as a development tool. Further, various banks are presentin the market who can provide loan to company at a cheaper rate of interest. In order tosatisfy financial needs, company can compare interest rate of different banks and can obtainfunds from specific financial institution present in the market. It is considered as an effectiveexternal source of finance and through these financial needs of entity can be satisfied easily.This source is especially beneficial when organization takes expansion decision and it assistin carrying out operations in an effective manner (Burgess, 2007). So these are some of the long term sources of finance which business can easily consider asper requirement of the management. Further, short term sources of finance are also present whichare as follows: Cash management: It is considered as an effective short term source of finance whereorganization can manage its cash through proper planning (Mohsin, 2013). Through thissource organization can easily deal with the situation of inadequacy of finance and this canbe favourable for business in every possible manner. This source is beneficial for newbusiness start ups as through effective management of cash they can easily manage fundswhich are necessary for the organization. Hire purchase and leasing: Hire purchase is regarded as the agreement in which owner ofassets lets them on hire for regular instalments paid by the hirer. This short term source offinance can be easily considered by small and large businesses. When leasing as a source offinance is adopted then assets can be financed without actually having to buy them outright.On the other hand, with the help of hire purchase firm can use an asset for fixed period inreturn for regular payment (Shahrokhi, 2008). Therefore, this source of finance is alsoconsidered to be effective for small and start up businesses in the market. 4
Implications of source of finance along with its advantage and disadvantageBefore considering any source of finance, it is necessarily required for business to know itsimplications as it is also associated with growth and development of business enterprise.Implications of different sources of finance are as follows: Sources Legal DilutionofOwnership controlBankruptcyShare capitalRestriction onauthorized capitalYesNoRetained earning NoNoNoBank loan BankruptcyNoYesCash management NoNoYes Due to poor cashmanagement business willnot be able to pay outtheir obligations in timelymanner due to this aspectsolvency and liquidity ofbusiness will be adverselyaffected consequently andthis will lead to thesituation of insolvency(Butters, 2004).Hire purchase andleasingyesNo Asset transfer Yes Share capital: Main advantage of using this source in business is that it is permanent sourceof capital which allows business enterprise to satisfy its financial requirement. Further, in case ofordinary shares business enterprise has to pay dividend if there is a profit. On the other hand, maindisadvantage of using this source is that dividends have to be paid to be shareholders in relationwith the shares purchased by them (Shaoul, Stafford and Stapleton, 2010). One of the major legalimplications of this source of finance is that there is restriction on authorized capital where it is notpossible for the company to issue more shares than authorized capital. This source has dilution ofownership where some rights are transferred to the investors of company along with right to takedecisions. 5
Retained earnings: Main advantage of using this source is that it is not required for businessto increase liability and there is no need to pay interest. But on the other hand, main disadvantage ofusing this source is that it is not applicable in case of small businesses. Retained earnings as asource of finance has no legal implication as it is type of internal source. Apart from this, conditionof bankruptcy is not applicable in case of retained earnings as source of finance (Danso andAdomako, 2014). Bank loan: Main advantage of using bank loan as a source of finance is that loan taken canbe easily procured; interest paid on bank loan is tax deductible expenditure. On the other hand, maindisadvantage of using this source is that excess borrowing can lead to decreased cash flow and somefinancial institutions carry prepayment penalty. Legal implication of taking bank loan is that it leadsto bankruptcy as sometime it is possible that organization may not be able to repay the amount ofloan taken which has adverse impact on the enterprise. Further, dilution of ownership does not takeplace in case of bank loan (Bokpin, 2010). Cash management: It is one of the most effective internal sources of finance whose mainadvantage is that it saves major expenses of the business and cash can be managed with the supportof management. On the other hand, main disadvantage of this source is that it becomes difficult todetermine the most effective way to manage cash within the organization. There are no legalimplications and dilution of ownership control issues associated with this source. Apart from this, incase of bankruptcy due to poor cash management business will not be able to pay its obligations anddue to this aspect liquidity position of enterprise can be badly affected (Dittenhofer, 2001). Hire purchase and leasing: Main advantage of adopting hire purchase and leasing as sourceof finance is that business can take benefit by utilizing assets without purchasing it. Further, all theresponsibility linked with maintenance of assets is done by the leasing company. On the other hand,main disadvantage of using this source is that total cost of leasing may exceed and it can be higherthan the purchase of asset. In case if organization is not able to make payment for the assetsacquired then it leads to bankruptcy. Further, the legal implication of this source is that ownership isnot transferred and organization is having right to use the assets (Ezeoha, 2011). So, these are some of the advantage along with disadvantage of source of finance whichevery organization has to consider so that its operations can be carried out in an effective manner.Further, every source has some implications in the form of legal, bankruptcy and dilution ofownership control. By considering all these implications, it is possible for business to satisfy itsfinancial needs in an efficient manner and it can act as development tool for the entity. Moreover,selection of source of finance directly depends on the size, operations and overall nature of the6
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