Managing Financial Resources - Assignment

Added on - 03 Dec 2019

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MANAGING FINANCIALRESOURCES
Table of ContentsIntroduction.....................................................................................................................................3TASK 1...........................................................................................................................................3Task 2...............................................................................................................................................5Task 3..............................................................................................................................................9Task 4............................................................................................................................................17Conclusion....................................................................................................................................21References......................................................................................................................................23
IntroductionManagement of financial resources is very essential in the process of decision making. It isrequired at all levels as finance is the major element to be imposed in the business. In thefollowing report, the different sources of finance available to the firm will be presented.Discussion of ratio analysis will be presented to elaborate the financial records of the business.TASK 1Sources of finance available to businessFinance is the key element which is required for every kind of business that is irrespective of itsnature. It is essential at every level of operation. Considering the different types of business suchas new and old, large and small business entities for the purpose of new business set-up andexpansions, the sources of finance are available to them which are as follows:Retained earnings –For old business firms who are operating since a long period, thebest source of funding that is available to them is retained earnings. It is the amountwhich is kept as reserve out from the profits and is accumulated every year in a particularproportion (Fridson and Alvarez, 2002). This amount could be used for the purpose ofexpansion or for setting up the new venture of similar business.Share capital –The other source of finance which is available to the newly establishingfirm is raising fund through share capital. Under this method, company allot shares in themarket to the public and accumulate funds from them. It is available to new as well as oldfirms in the form of liabilities which they have to pay back to their shareholders aftercertain period with dividend (Funke, 2007).Bank loan –It is the most common source of finance for new firms who are planning towork at small level in the initial stage. Bank loan is the form of complete debts whichcould be raised from the banks and other financial lending institutions (Helfert, 2004).This source of finance could be raised even for the purpose of setting large business firmsafter observing the repaying capacity of organization by financial lenders.
Implication of sources of finance with consideration of different factorsBy adopting the sources of finance that are available to different types of business firms,there are various benefits and disadvantages to business and legal aspects. Also, there are certaincosts which are available to them which companies have to bear. All the relative factors forsources of finance are described as under:Retained earningsAdvantage -The fund raised through retained earnings is available in the form of assets.Company does not have to pay any kind of debts to the third party (McMenamin, 2002).Disadvantage –It eventually leads to reduction in the profitability of business which is tobe disclosed among stakeholders of the firm.Cost –There may be chances of opportunity loss to the firm. This could directly impactthe working capital of organization (Neftci, 2004).Share capitalAdvantage –By the means of raising share capital, company could raise huge amount offund through public.Disadvantage –Liability of the firm increases which could negatively affect the financialstatements of company.Cost –It includes payment to the shareholders in form of dividend which reduces theprofitability of organization (Beck, Levine and Loayza, 2000).Bank loanAdvantage –It is a very easy process of borrowing fund and raising capital which isprovided by all kinds of financial institutions.Disadvantage –Loan taken for longer period leads to accumulation of interest whichincreases the amount that is to be repaid by firm.
Cost –The capital raised from bank loan involves huge cost in the form of interest whichleads to reduction in the profitability of company (Bhowmik and Saha, 2013).Evaluating the appropriate sources of finance for business projectsFor every form of business, finance is required at the initial stage. There are differentsources of finance which are available to different types of business which are as follows:Small business start-up –Loan taken from bank is the best source of finance that isavailable to small business firms while starting up the business. The advantage availablein obtaining loan is that they can easily obtain loan from financial institution by fulfillingthe required formalities (Brigham and Ehrhardt, 2011). The cost which is to be bear bythe firm includes payment of interest over principle amount which has been taken.At the initial stage, company have opted for bank loan to initiate their business from the primarylevel. When they were at the level of small business start up, company have raised amountthrough bank loans.Large business expansions –For the purpose of expansion by large operating firm, thebest source of raising capital is generating through share capital. Company has anadvantage of their past business performance and goodwill. Hence, by disclosing theirplan to public, companies could easily raise funds. They have to pay dividend toshareholders which will be treated as cost to company.Considering the company which has adopted all the sources of finance in different phase ofbusiness, SONY could be considered. As they grew bigger, SONY became able to collectamount out of their own earnings. The amount accumulated through retained earning have beenutilized for the purpose of large business expansion.Acquiring medium sized company –When there are plans to acquire some other firms, theideal source of capital is retained earnings by individual person or organization(Broadbent and Cullen, 2012). Although, it might affect the profitability of every firm,but they will not get bounded under any kind of liabilities or debts.
They increased their scope of business and acquired a musical medium sized company and tookthem into their name. For the purpose of performing acquisition, SONY have generated revenuethrough share capital from public and increased their level of business.Task 2Raising finance for businessFinance for business can be raised by many sources as discussed earlier in the report.Considering the different types of business such as new and old, large and small business entitiesfor the purpose of new business set-up and expansions, the sources of finance available areinternal and external sources. Internal sources includes retained earnings, personal savings, sharecapital, selling of assets etc (Ittelson, 2009). Retained earnings are the part of last year revenuewhich can be used for financing existing operations. Sale of assets is another option under whichthey can sell old assets or assets which are available in spare (Siano, Kitchen and Confetto,2010). Personal savings and funds from friends & relatives can also be poured into the newbusiness.External sources of finance include debt, equity, bank loan, hire purchase etc. Debtfinancing is related with issue of debenture capital in the market and let general public to investin business. It act as loan for the company. Equity financing is concerned with issue of equityand preference share (Sources of finance. 2012). Bank loan can also be adopted for funding atthe confined rate of interest and after fulfillment of certain legal obligations. Hire purchasing isanother good option under which company can acquire the necessary asset at a particular time bypaying the price in installments.Financial planning for new businessStarting of a new business requires lot of research and development activities to beperformed. It is also important to identify and evaluate the risk associated with every businessdecision. The factors which are to be taken into consideration includes sources of funds,resources, and location and legal aspects (Fridso and Alvarez, 2002). Financial planning helps ineliminating the uncertainties related with the business. It helps in estimating the needed fundsand establishing the financial policies related with management of finances. It is needed toperform budgeting activities and then objectives, programs, policies, budgets etc are placed.
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