Comparison of Financial Performance between Wholesale and Retail Businesses

The assignment content discusses the different types of business structures, including sole proprietorship, partnership, and limited company. It also explores ratio analysis to evaluate the financial performance of wholesale and retail businesses. The ratios used include net profit margin, gross profit margin, current ratio, quick ratio, and debt-to-equity ratio. The results show that retail businesses have a higher net profit margin than wholesale businesses, while wholesale businesses have a better gross profit margin. The current ratio and quick ratio also indicate that retail businesses are more liquid than wholesale businesses. Finally, the debt-to-equity ratio shows that wholesale businesses rely more on debt financing than retail businesses.

MFRD

TABLE OF CONTENTS
Introduction..........................................................................................................................................
Task 1: Sources of finance...................................................................................................................
A) Sources of finance..................................................................................................................1
b) Implications of different source of financing..........................................................................2
c) Appropriate source of finance.................................................................................................3
D) Cost of sources of finance......................................................................................................5
Task 2...................................................................................................................................................
A) Importance of financial planning............................................................................................5
b) Information need of each decision makers of an organization................................................5
Task 3...................................................................................................................................................
3a)................................................................................................................................................6
Interpretation................................................................................................................................7
3b)................................................................................................................................................7
Task 3 c.................................................................................................................................................
Appraisal Techniques..................................................................................................................8
Task 4.................................................................................................................................................
a) Main financial statements of business...................................................................................10
b) Compare appropriate formats of financial statements...........................................................11
Conclusion..........................................................................................................................................
References..........................................................................................................................................

INTRODUCTION
The business owner spends their majority of time to make funds available for expanding
their business. It is responsibility of the management to effectively manage all the funds in the
business for the development of the business without facing major problems. This report provide
a deep understanding of sources of finance that can be managed effectively (Mohsin, 2013).
Different type of sources of finance are available for raising funds through expansion of business
this include internal and external sources. In this case all the different sources of finance through
which an organization can raise funds are involved.
TASK 1: SOURCES OF FINANCE
A) Sources of finance
Different types of sources of finance are available for the expansion of business. They are as
follows:
Those sources through which money can be raised from the within the organization are
internal sources of financing and those through which money can be raised outside of the
organization are external sources of financing (Siano, Kitchen and Confetto, 2010).
Retained profits
It is suitable to meet short term requirements of the funds. It is internal source of
financing used by a business corporation to increase the funds of the business for expanding their
business.
Sale of assets
In order to deal with short term requirement of business objectives, funds can be raised
through selling of the asset of the business. Cost of raising funds through selling of asset is zero
that means no cost of selling the assets of the business (Santos and spring, 2013).
Funds through equity shares
The business planners can raise funds through issue of equity shares. It is an external
source of financing available for the organization to raise money. Large amount of money can be
raised through issuing the equity shares in the market. This method takes more time because
issuing equities in public usually takes longer time than any other.
Bank loans
Bank loans are also a source of external financing for the organizations that they can
easily raise loans from the bank or any other financial institution over a fixed rate of interest. All
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kind of financial goals can be achieved from raising money through bank loans (Ellinger and
Ellinger, 2014).
Issue of bonds and debentures
Company can issue debenture and bonds into public to raise fund for the organization.
This method takes more time and cost because issuing debenture in the public is not an easy task,
it has some procedure that the company have to follow. It is suitable for achieve long term
financial needs.
b) Implications of different source of financing
Different sources of financing are available to meet different financial goals. Raising
money from equity is a good option available to the organization to raise funds if they need the
money for long term requirement in the business (Bokpin, 2010). Raising money from bank is a
suitable option for the organization to adopt because it works on both short term and long term
financial needs. For meeting the requirement with low leveraged option the organization can go
with the debt option to raise the funds. Organization with short term financial goals can should
go for selling of assets of the company, this option do not need as type of cost to raise money
(Broadbent and Cullen, 2012). Issue of bonds and debentures is also a good option to raise
money if the money is needed for short term goals.
Legal, financial and dilution of control
Equity shares
In case of raising money from equity shares they are certain legal factors that should be
kept in mind while issuing equity. A legal procedure is there for issue of equity in the public it
takes the longer time than usual because the company have to go with the legal procedure but the
company has the right to vote and equity holder are said to be the owner of the company
(Hisrich, 2010). Company have the control over their shares. To meet with the long term
financial goals company should go for issue of equities in the public. Risk of bankruptcy is there
in case of equity.
Debentures
In case of rising money from debenture company has to follow with a legal procedure,
without this a company cannot issue debenture issuing this company should have the profits in
their balance sheet for last immediate five year, in absence of this company cannot go for the
issuing the debentures in the public (Vernimmen and et.al, 2014). It is good source of financing if
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the company has to go for long term needs and do not want the interference of shareholders in
making decision because debenture holder has not been given the right to vote in making
decisions for the company.
Bank loans
It is the great option for the company to raise money from the bank loans. Bank loans
fulfill both the long term and short term needs of the business over a period of time. Fund can be
raised immediately from bank loans. No such legal procedure are their like in equity and
debentures. A fixed amount of interest is payable to the bank as the interest of the bank which is
charged over the loan (Zhu, 2012). No interference of bank is there for investing the money. Risk
of bankruptcy can be happened in case of this if the project not get succeed in the market.
Retained earnings
It is an internal source of financing for the company if they want to raise the money for
the meeting in the short term goals of the business over a period of time. No legal procedure is
there for using retained money of the company to raise money for expanding the business.
Sale of assets
It is an good option and internal source of financing if the company wants to raise funds
for meeting short term financial goals but this option is not good because it losses the assets of
the company (Allen, Hemming and Potter, 2013). Company has the full control over the asset so
they can raise money any time through tis source of financing. Bankruptcy can be happened with
continues selling of the assets.
c) Appropriate source of finance
Equities
Since the company Green Supplies Ltd want to grow in UK and globally that means long
term financial goals are there for the company to deal with. Through equities they can raise loans
as well as they have the right to vote and control over the organization.
Advantages
The money doesn't have to be repaid to the public and no interest is payable on issuing of
equities in the public. No guarantee is given to the shareholder to always give them return if
there is loss in the business, the return is only shred between the shareholders if there is profits in
the financial year (Rigbuy, 2011).
Disadvantages
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Profits will be paid out as dividends to more shareholders, more number of shareholders
are there that the profits should be distributed among them (Ismail and Mohsin, 2013).
Ownership of the company changes new shareholders also have the right to vote for the
decisions of the company.
Debentures
For achieving long term financial goals the company can raise money from issue of the
debentures.
Money can be raised for both short and long term needs.
Advantages
Money can be raised easily as a loan from the debenture holders. The debenture holder
doesn't have the right to vote in the decision of the business operation. A fixed amount of money
is given to the debenture holders as thee interest over the loan.
Disadvantages
A fixed proportion of money has to be given to the debenture hollers over a period of
time. debentures has to be redeem after a period of time no condition if there is profit or loss the
interest have to be paid to the debenture holder.
Bank loans
Bank loans are another source of finance through which the company can raise their
funds directly from the bank (Gudov, 2013). Money can be raised immediately without any legal
procedure that have to be followed. Money can be raised both for short term and long term needs
of the business.
Advantages
The main advantages of this source is that money can be raised immediately without
following any legal procedure for that which should be adopted in case of issuing equities and
debentures of the company (Assibey, Bokpin and Twerefou, 2012). A fixed amount of money is
repaid over a period of time which is good for the budgeting.
Disadvantages
Security is required for granting the loan from the bank. A fixed amount of money has to
be given every time over a fixed period of time, this amount of interest is costly for the company
because higher interest is charged generally on the bank loans (Assibey, 2013).
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D) Cost of sources of finance
To raise funds from the public or from any other source different types of costs are there
with every issue. This cost are the expense for the business that should be counted in the balance
sheet and deducted from the income of the organization every year and are counted as losses of
the company (Sources of business finance, n.d). Cost of issuing equities carries many legal
expenses with it that are loss for the company and a long procedure is there for issuing the
equities. If the company raises the funds from debentures the cost of issuing is lesser than
equities, bank loans are the easily available source that the company can go for because the rate
of interest is fixed over a particular period of time.
Effect on income statement and balance sheet: if the funds are raised through bank loans it will
raise the liabilities of the organization, raising money through equities would result in higher
dividend that should be paid to shareholder at the end of the year and in the case of debentures it
would result in loss of income on payment of interest on debt (Sources of finance, n.d).
TASK 2
A) Importance of financial planning
It is important for a business organization to raise money for the expansion of their
business. Raising money needs proper planning because very big amount is raised, for such a big
amount proper planning is needed, it will help the organization to analysis the total cost and
expenses of the business during raising funds (Funds, Venture capitalists, n.d). It is important for
the green field because they wants to grow globally for this they need money and handling this
big amount of money is a difficult task so financial planning would be helpful for analyzing the
total cost and expenses of the business.
b) Information need of each decision makers of an organization
In an organization different types of decision makers are there who needs the information
of business for analyzing what is the actual situation of the business in the current market.
 Management: Management needs the information of the business to analyze the annual
profits or losses of the business over a period of time, they observe the current scenario of
the business to find the total gains and losses.
 Customer: Customer needs the information to find the quality and taste of the product.
They analyze the price and quality of the product (Santos and spring, 2013).
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 Employees: Employees of the company need the information to find out the profits, on
base of which they can find out their salaries and incentives over the period.
 Suppliers: Supplier needs the information to find out the credit worthiness of the
company. They find the information to check the demand of the product in the market to
find out the profits which can be earned by him (Ellinger and Ellinger, 2014).
c) Impact of loan and equity on balance sheet and income statement
Loan payment is the expense to the company that affect the income statement of the
company. Net income of the business is affected by the loans repayment. It will affect the net
income of the company and it will increase the liabilities of the business (Bokpin, 2010). On the
other side equities increases the capital of the business and also raises the dividends which have
to be payable on the end of the year, which decreases the cash account of the company.
TASK 3
3a)
June July August September
Cash revenue
Credit sales nil 550000 630000 770000
Cash sales 60000 70000 75000 85000
Total cash revenue 60000 620000 705000 855000
Cash expenditure
Cash purchases 310000 450000 500000 520000
Credit purchase - 55000 65000 60000
rent 30000 30000
other 75000 80000 90000 95000
Loan repayment 15000 15000 15000 15000
Total cash
expenses
430000 590000 670000 620000
Net cash flow -370000 30000 35000 235000
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Add-opening
balance
75000 -295000 -265000 -230000
Closing balance -295000 -265000 -230000 5000
Interpretation
Total cash revenue is continuously increasing due to increase in credit and cash sale both,
this would increase the cash revenues of the company. Total cash expenses were continuously
increases due to increase in cash purchases that increase the expenses of the company. Net cash
flow is negative in the June because total cash revenue is less than cash expenses. In July, august
and September it is positive because total revenues of the company are more than total
expenditure due to increase in credit sales. Closing balance of the first three months are negative
due to net cash flow is less. In this situation company should make less cash purchases over a
month because this increases the cash expenses, company should go for credit purchases.
3b)
SELLING PRICES
Variable cost 150
Fixed cost 100
Total cost per unit 250
(1)selling price per unit
with mark up 30% 75 325
profits on 550 units 75*550
41250 profit @ 550
units
(2) Total units to be sold
with mark up 25%
Upto 550 units profit
= 75
After 550 units profit
= 150*25%
= 37.5
Profit on 1500 units sold
(75*550) + (950 *
37.5) = 78375
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TASK 3 C
Appraisal Techniques
Year Project A Project B Project C
Initial Investment -£130,000.00 -£150,000.00 -£190,000.00
1 £35,000 £50,000 £40,000
2 £45,000 £50,000 £50,000
3 £55,000 £50,000 £55,000
4 £65,000 £50,000 £65,000
£0
Total £200,000 £200,000 £210,000
Net present value:
This is one of the most important appraisal techniques used by the managers to analyze
the feasibility and reliability of the project. The main aim behind using this approach is that it
considers time value for money (Broadbent, M. and Cullen, 2012). Major advantage of using
NPV is that it helps in maximizing the firm’s value as well as profitability and risks are given the
highest priority. While drawback of this approach is that it is difficult to compute the appropriate
discount rate.
Project A:
Year Inflow PV Factor Inflow by considering pv factor
1 £35,000 0.909 £31,815
2 £45,000 0.826 £37,170
3 £55,000 0.751 £41,305
4 £65,000 0.683 £44,395
Total inflow £200,000 £154,685
Less: Initial investment £130,000
Net present value £24,685
Project B:
Year Inflow PV Factor Inflow by considering pv factor
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1 £50,000 0.909 £45,450
2 £50,000 0.826 £41,300
3 £50,000 0.751 £37,550
4 £50,000 0.683 £34,150
Total inflow £200,000.00 £158,450
Less: Initial investment £150,000
Net present value £8,450.00
Project C:
Year Inflow PV Factor Inflow by considering pv factor
1 £40,000 0.909 £36,360
2 £50,000 0.826 £41,300
3 £55,000 0.751 £41,305
4 £65,000 0.683 £44,395
Total inflow £163,360
Less: Initial investment £190,000
Net present value -£26,640.00
Payback Period:
This in general can be defined as the time required by the project to regain its initial cash
outflow. It helps in showing the feasibility of the project in terms of time. The main advantage of
payback period is that is simple and easy to understand and compute (Allen, Hemming and
Potter, 2013). Along with this, it gives more importance to liquidity for making decision about
the proposals. On the other hand, payback method does not consider time value for money and
ignore profitability.
Project A:
year Inflow Cumulative inflow
0 -£130,000 -£130,000
1 £35,000 -£95,000
2 £45,000 -£50,000
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3 £55,000 £5,000
4 £65,000 £70,000
2.9 Years
Project B:
year Inflow Cumulative inflow
0 -£150,000 -£150,000
1 £50,000 -£100,000
2 £50,000 -£50,000
3 £50,000 £0
4 £50,000 £50,000
3 Years
Project C:
year inflow Cumulative inflow
0 -£190,000 -£190,000
1 £40,000 -£150,000
2 £50,000 -£100,000
3 £55,000 -£45,000
4 £65,000 £20,000
3.6 Years
On the basis of above computation, Project A is recommended to the cited because it
shows high NPV of £24,685 and low payback period of 2.9 years as compared to the other
options.
TASK 4
a) Main financial statements of business
There are several financial statements that company operating has to prepare on the basis
of standards and policies framed by the IFRS and GAAP. Following are the statements that
companies prepares:
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 Income statement: It is also define as the profit and loss statement which assist in
providing the financial performance of business in terms of net profit or loss over a
certain period. Further, it shows all the income and expenditure incurred by the firm
during the reporting period (Ismail and Mohsin, 2013).
 Cash flow statement: This statement assist in providing the movement of cash and bank
balance over a period of time. Further, it is categorized under three different subsets cash
flow from operating, financing and investing activities.
 Balance sheet: This is the major statement of business which assist in showing the
financial position of business at a given date. However, balance sheet is prepared on the
basis of Assets = Equity + liabilities (Assibey, Bokpin and Twerefou, 2012).
b) Compare appropriate formats of financial statements
There are various business operating at different level requires to prepare financial
statements as per the standards and policies. However, these organizations are categorized in
three different segments: sole traders, partnership and limited companies.
 Sole proprietorship: This type of business is owned and managed by the individual which
is responsible for making decisions (Zhu, 2012). However, entrepreneur only prepares
profit and loss statement on the basis of which they make decision regarding future
contingency.
 Partnership: In partnership firm, there are two or more owners which are responsible for
making all the decisions (Assibey, 2013). However, management have to prepare all the
major statements along with the partners’ capital account in order to analyse the
performance of each partner individually.
 Limited company: These are the firms which operates at large level and are associated
with wide range of stakeholders (Hisrich, 2010). Company has to prepare all the major
statements such as cash flow statement, income statement, balance sheet and equity
shareholder’s account to provide accurate and reliable information to stakeholders for
making feasible decisions.
c) Ratio Analysis
Ratios Formula Wholesales Business Retail Business
Profitability
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Net Profit margin Net profit/sales 15% 16.66%
Gross Profit margin Gross profit/sales 27.27% 26.66%
Liquidity
Current Ratio
Current assets/ current
liabilities 0.63 0.82
Quick Ratio
Current assets –
Inventory/ current
liabilities 0.27 0.44
Solvency ratio
Debt/equity ratio Debt/Equity 0.8 0.57
On the basis of above computation, comparison between wholesale and retail business on
the basis of their financial performance. In this regard, ratio analysis has been used to for the
analysis which determines the profitability, liquidity and solvency position of the business.
Herein, net profit margin of retail business is high 16.66% as compared to the wholesale business
i.e. 15%. While on the other hand, gross profit margin indicates that wholesale business have
better position as compared to retail businesses in UK. Thereafter, looking at the liquidity
position of the business, current ratio of retail business with 0.82 is higher than 0.62 of wholesale
business. Similarly, higher quick ratio of 0.44 in comparison to wholesale business business’s
0.27. Lastly, debt to equity indicates that in wholesale business entrepreneur’s raises capital with
the use of debt in comparison to the retail businesses.
CONCLUSION
From the above it has been concluded that, managing financial resources is one of the
major tasks for the management of business. However, there are several tools and techniques
which assist the course of managers in making effective and smart decisions so as to generate
desired results and outcomes. Further, through application of investment appraisal techniques
feasibility and reliability of projects has been evaluated. Lastly, ratio analysis assist in
understanding the financial position of wholesale and retail business.
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