Impact of Financial Resources on Business Performance

This assignment analyzes the significance of financial resources in a business context. It examines how liquidity, measured by the current ratio, and gearing, reflected in the debt-to-equity ratio, impact an entity's ability to compete and perform effectively. The analysis considers real-world examples and demonstrates the importance of financial management for success.

MANAGING FINANCIAL
RESOURCES
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INTRODUCTION
Finance plays an integral role in the business in uplifting the current business condition of an
entity. This project is al about selecting various sources of finance and then assess all the sources of
finance to be considered it for the future purpose. The cost of all the sources of finance will be
assessed by an individual. Budget will be prepared to analyse all the resources in the business along
with capital budgeting technique will be used to assess all the projects.
TASK 1
1.1 Identify the sources of finance available to a business
Internal source of finance
Retained earning- It is regarded as the internal source of finance in which surplus generated by an
entity will be retained by the owner of the business after paying off all kinds of dividends and
further expenses out of the generated profit (Coronel and Morris, 2016). The profit after paying
dividend will be held by an entity to be invested in their own business as source of investment.
Equity- This is another important source of finance in which finance will be remain in an entity on
which dividend will be paid by entity to all the shareholders who have given share in the business in
form of finance as their capital will be locked in with the firm.
External source
Bank loan- It is kind of finance in which an entity will raise large amount of finance from the
banks by depositing collateral security and this approach also requires interest to b paid on the
amount of loan.
Debentures- Coupon rate of interest will be charged by the lender from the borrower as the lender
will get debentures in exchange of the money given to the business.
1.2 Assess the implications of the different sources of finance identified
Basis Retained earning Equity Bank loan Debentures
Financial It increases
investment in the
business without
spending extra
cost
It raises fund for
the business in
order to
accomplish all the
tasks.
Fund will be
raised but it
required to pay
additional cost in
form of interest on
the amount taken
Coupon interest
rate will be paid
on the amount of
loan taken.
Legal It is personal Requires Legal agreement Debenture trustee
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property of an
individual
permissions of
central
government and
registrar of
companies
will be appointed
Control Full possession of
owner
Shareholders rule Bank have
authority
Ownership lies
with the business
1.3 Evaluate appropriate sources of finance for your business project
Internal sources- Retained earning and equity as sources of finance will be highly used by an
entity owner as these posses lots of opportunities for an entity with less amount of costs incurred in
a enterprise.
External sources- Bank loan and debentures are regarded as external debt imposed on an entity in
which interest will be paid by an entity owner to the external environment which decreases the
overall sales and the revenue of an entity in particular year.
Internal source of finance is regarded as the best suitable source of finance for the small
scale entity chosen for the given project who intends to open their business by taking help of
government relief. Internal source is regarded as the est as it incur fewer costs such as only in form
of dividend to all the shareholders.
TASK 2
2.1 Analyse the costs of each of sources of finance you have identified
Internal source- There is less imposition of cost incurred on the business which includes paying of
dividend to all the shareholders as retained earning is the personal property of an individual. Cost of
equity will be determined by an entity using CAPM approach.
Equity-Dividend is the basic costs incurred in an entity while using equity as source of finance.
External source-This kind of approach will include paying of interest in both the approach that in
bank loan and in debenture interest which is monthly obligation imposed on an entity (DaDalt and
Coughlin, 2016). The external obligation imposed on an entity will need to be decreases by
choosing another option.
Bank loan- Interest charged by the financial institutions on the amount lend by them to the
borrowers.
Debentures- Coupon rate of interest charged on the amount lend by the debenture holders to the
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business for specific time.
Hence, after evaluating the above sources of finance on the basis of all the costs incurred in all these
projects it can be said that an entity would take Internal sources of finance that is equity as source of
finance.
2.2 Explain the importance of financial planning and give details of how this financial planning
undertaken
Financial planning is regarded as one of the important approach used by an entity owner in
order to plan about all the financial resources in the business organisation. The desired aim of an
entity is to analyse the needs and the expectations of an entity in order plan about the future of an
entity. There are various ways in which financial planning would be helpful for an entity which is
given as below:
Financial priorities will be prepared by classifying the overall aims and targets into short, medium
and long term goals.
Financial plans will be created by an individual after analysing overall performance of an entity.
Financial planning is regarded as one of the important aspects as it enhances the overall
quality of current conditions of the business in order to improve their future performance. This can
be said that financial future maps chalk out by an entity on the basis of present financial resources
held by an entity. The efficiency and effectiveness of the present resources are used to predict the
future performance.
2.3 Identify and assess the information needs of decision makers
Owners- Knowing current performance of an entity will be helpful for an owner in order to
determine its existing cost incurred in the business as their primary aim is to minimise all the
current costs.
Employees- The good ability of an entity and financial stability of the firm is essential for an
employee to determine in order to ensure its survival for long time in the business as they will get
higher salaries and wages in the near future.
Suppliers- raw materials purchased by an entity from all the suppliers who have power to negotiate
more with the business earn their desired share. So, stable business conditions will be helpful for all
the suppliers to maintain their share in the business.
Customers- Business produces products for the customer's which will be manufactured by the
business according to the tastes and preferences of all of them.
2.4 Explain the impact of finance on the financial statements
Income statements- Dividend paid by an individual will affect the profitability of the business as
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this is regarded as the essential expenses (Davies and Drexler, 2010). This kind of expenses is
excluded from the sales incurred in the business. Retained earning used by an entity will not affect
the profitability of an entity in a particular year.
Balance sheet- Equity sources of finance used by an entity will be recorded in the balance sheet
under the head equity. The retained earning used by an entity will be recorded in the reserves and
surplus.
TASK 3
3.1 Project cash and other budgets and analyse these projected budgets and make appropriate
decision towards the chosen contract
Particulars Jan Feb March April May June July Aug Sept Oct Nov Dec
Initial cash 50000
Bank loan 55000
Income from
online sales 32000 40000 35000
3800
0
4100
0
4200
0
3600
0
2800
0
2700
0
2750
0
2800
0 33000
Income from
in-store sales 22400 56400 56800
5710
0
5880
0
6200
0
6640
0
6870
0
6540
0
6000
0
6080
0 64400
Sales income
from fashion
clothing 10000 10000 10000
1000
0
1000
0
1000
0
1000
0
1000
0
1000
0
1000
0
1000
0 10000
Sales income
from hair
and beauty
products 12000 12000 12000
1200
0
1200
0
1200
0
1200
0
1200
0
1200
0
1200
0
1200
0 12000
Receipts
from
disposal of
old store
building
3000
00
Total interest
receivables
3000
0 30000
Total cash
income
18140
0 118400
11380
0
1171
00
1218
00
4560
00
1244
00
1187
00
1144
00
1095
00
1108
00
14940
0
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Cash
disbursement
Store and
warehouse
building
lease rental
14400
0
Purchase of
office and
fire
Equipment 80000
Purchase of
delivery van
and cars
15000
0
Shelves and
store
furniture 50000
Purchase of
fork lift for
warehouse 70000
Store
worker’s
wages 11000 11000 11000
1100
0
1100
0
1100
0
1100
0
1100
0
1400
0
1400
0
1400
0 14000
Heating and
lighting 2000 2000 2000 2000 2000 2000 2000 2000 2700 2700 2700 2700
Council
taxes 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
Purchase of
cloths 40000 40000
4000
0
4000
0
5500
0
5500
0
Insurance 5000
Fuel and
maintenance 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800
Total cash
outflow
55030
0 21300 56300
1630
0
5630
0
1630
0
5630
0
1630
0
7500
0
2000
0
7500
0 20000
Net cash - 97100 57500 1008 6550 4397 6810 1024 3940 8950 3580 12940
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balance
36890
0 00 0 00 0 00 0 0 0 0
Opening
cash balance 0
-
368900
-
27180
0
-
2143
00
-
1135
00
-
4800
0
3917
00
4598
00
5622
00
6016
00
6911
00
72690
0
Closing cash
balance
-
36890
0
-
271800
-
21430
0
-
1135
00
-
4800
0
3917
00
4598
00
5622
00
6016
00
6911
00
7269
00
85630
0
Cash budget is regarded as one of the important budget prepared by an individual in order to
ascertain true position of cash in the organisation. The movement of cash flow in the business will
be determined by an entity in order to grab higher market advantage in the near future. The desired
aim of the business is to increase all the cash incurred in the business as they held responsible for
enhancing the current cash available in an entity which will be increases with the passage of time as
the basic objective of an entity (Ehrhardt and Brigham, 2016). Cash budgets prepared by an entity
to determine all the deficits or surplus generated by an entity in cash in order to help an entity in
order to grab higher competitive advantage over variety of customers who depends on the actual
business performance as all the business results will reflect true performance of an entity in the
external business environment. The above mentioned cash budget reflect the actual performance of
an entity that first five months of the organisation an entity is suffering with cash deficits that needs
to be removed with the passage of time by decreasing cash outflows and increasing the overall cash
inflow in the business. On the other hand, the rectification made by an entity in the later years that
an entity has earned higher cash flows by generating higher amount of cash inflow from the month
of June to December is reflecting good ability of an entity (Fletcher, 2016). Higher cash surplus is
god but at the same it is not suitable for an entity as it creates higher market risks which will be
balanced by investing all the higher amount of cash surplus by taking investments in bonds or
another business in order to generate higher returns in the near future.
3.2 Explain the calculation of unit costs for the chosen contract and make pricing decisions using
relevant information
Particulars Cost (£)
Variable cost
Direct material 15000
Direct labor 10000
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Direct expenses 5000
Total variable cost (TVC) 30000
Fixed overhead cost
Labor 4000
Other production overhead 3000
Total fixed cost (TFC) 7000
Total cost (TC) 37000
Cost per unit (CPU) Selling price (SP)
Marginal costing = TVC/ number of units
= £30000/4000 units
= £7.5
= £7.5 + (£7.5*20%)
= £7.5 + £1.5
= £9
Absorption costing = TC/ number of units
= £37000/4000 units
= £9.25
= £9.25+ (£9.25*20%)
= £925 + (£1.85)
= £11.1
Marginal costing- It is that kind of costing in which only variable is considered by an entity while
devising al the prices set by an individual for all the products or services offered by an entity to
satisfy all the needs and expectations of variety of customers located in the external business
environment. The selling price of the current technique is less than this particular approach doesn't
consider the fixed cost in the prices of an entity in order to achieve all the needs and higher
expectations of an entity owners which will get fulfilled with the passage of time.
Absorption costing- This kind of approach emphasises on considering both fixed and variable
costs while designing all the products or services offered to the variety of customers located in the
external environment (Evans and Porter, 2010). This is also regarded as the complete costing in
which both kinds of costs will be considered by an entity such as fixed as well as variable costing as
all the cost incurred in the business will be considered by an entity while designing all the prices of
products which is essential in order to attract variety of customers. The ultimate aim of the business
is to consider all kids of costs along with the specific percentage of profit in developing the
products or services.
3.3 Assess the viability of the chosen contract
Table 1: Calculation of cash inflow of project A
Year Machine 1 Depreciation Sale of New Cash inflow
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(profits) machine
Machine
purchase
2016 £40000 £33000 £73000
2017 £40000 £33000 £73000
2018 £40000 £33000 £21000 (£50000) £44000
2019 £30000 £10000 £40000
2020 £30000 £10000 £40000
2021 £20000 £10000 £30000
Total £200000
Working note:
Depreciation on Machine 1:
= (Initial investment – Residual value)/Estimated lifetime
= (£120000-£21000)/3 year
= £33000
Depreciation on Machine 2:
= (£50000-Nil)/5 Year
= £10000
Table 2: Calculation of cash inflow of project B
Year Machine 2 (profits) Depreciation Cash inflow
2016 10000 20000 30000
2017 20000 20000 40000
2018 30000 20000 50000
2019 60000 20000 80000
2020 70000 20000 90000
2021 55000 20000 75000
Total 245000
Working note for depreciation
= (£120000-0)/6 year
= £20000
Payback period:
Table 3: Calculation of payback period
Year Project A
Cumulative
cash flow Project B
Cumulative
cash flow
Initial investment -120000 -120000
2016 73000 -47000 30000 -90000
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2017 73000 26000 40000 -50000
2018 44000 70000 50000 0
2019 40000 110000 80000 80000
2020 40000 150000 90000 170000
2021 30000 180000 75000 245000
Project A: 1 year + (£47000/£73000)
= 1.64 year
Project B: 3 year
Interpretation
Payback is traditional form of capital budgeting which is used to determine the time period
in which future returns will be generated by an entity in order to select or reject a particular project
in the particular financial year (Hosain, 2016). Desired aim of the business is to select the best
suitable project according to the desired aims and the objectives of the business as initial investment
applied by an entity owner in relation to all the returns they get in exchange of the returns in less
period. Hence, project A will be selected by an entity owner as this generates higher amount of
returns in the near future in less period as compared to the other project analysed by an entity by
applying this particular techniques.
Accounting rate of return (ARR)
Table 4: Calculation of accounting rate of return
Year Machine 1 (profits) Machine 2 (profits)
2016 £40000 10000
2017 £40000 20000
2018 £40000 30000
2019 £30000 60000
2020 £30000 70000
2021 £20000 55000
Total £200000 245000
ARR: Average profit/Initial investment*100
Project A: (£200000/6 year)/£120000*100
= 27.78%
Project B: (£245000/6 year)/£120000*100
= 34.03%
Interpretation
Average rate of return is that modernised technique of capital budgeting or investment
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appraisal technique whose major aim is to test the ability of a particular project by evaluating its
overall profitability. The higher profitability generated by a business project will be taken into
consideration for the future purpose as this is the desired aim of an entity. Projects are categorised y
this particular approach in order to consider the best suitable project which generate higher returns
in the near future (Jorgensen and Rotter, 2016). According to the results of the above evaluation
table, it can be said that project B will be considered for the future purpose as the ARR rate is
higher as compared to the above result generated by Project B as compared to the results produces
by the project A. This particular rate is higher as compared to the internal cost of capital of an entity.
Net present value (NPV)
Table 5: Calculation of Net present value
Year
Project A (In
£)
Discounted
value of £1
@20% DCF (In £)
Project B
(In £) DCF (In £)
2016 73000 0.833 60809 30000 24990
2017 73000 0.694 50662 40000 27760
2018 44000 0.579 25476 50000 28950
2019 40000 0.482 19280 80000 38560
2020 40000 0.402 16080 90000 36180
2021 30000 0.335 10050 75000 25125
Total future value 182357 181565
Less: Initial
investment (120000) (120000)
NPV 62357 61565
Interpretation
Net present value is the modern approach of the capital appraisal technique whose major
aim is to determine the future profitability generated by a particular project in the near future. The
basic aim of the business is to select the best suitable project for the future purpose as this kind of
technique uses the time value of concept by applying the best appropriate discounting rate in order
to test the viability of the business project. Projects will be evaluated on this particular technique in
order to provide ultimate advantage to an entity. Project A will be selected by an entity on the basis
of higher results generated by this particular project (Kostova and Nell, 2016). So, This project will
be considered by an entity for the future in order to accomplish desired aims and the objectives
within a given period.
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TASK 4
4.1 Discuss the main financial statements by explaining what they contain, their purposes
There are various kinds of standard forms of financial statements prepared by an individual
in the business which is given as below:
Income statements- It is prepared y an entity in order to determine the income produced by an
entity as this will include all the sales and the revenue generated by an entity in a particular
financial year after excluding all kinds of expenditures from the sales of an entity.
Balance sheet- This kind of financial statements shows the external position of an entity in the
external business environment (Hosain, 2016). It will include all the assets and liabilities which
needs to be balanced in the best possible manner in order to maintain good position of an entity in
the external business environment.
Cash flow statements- Cash is essential components for an entity as it helps in meeting short
obligations imposed on an entity. These statements are prepared by an entity in order to determine
the position of cash in the business.
4.2 Describe and compare the formats of main financial statements for different types of businesses
Sole trader- There is no kind of obligation for sole owner while preparing any kind of financial
statements as they can prepare various financial statements according to their choice in determining
its financial performance in a particular year. Income statements prepared by sole trader simply
includes all income less all the expenditures incurred in the business as their desired aim is to
determine the available profit earned by an entity in a particular financial year. On the other hand,
balance sheet prepared by an entity includes both assets and liabilities in order to strengthen the
current business performance of an entity in the near future after analysing all the present resources
held in an entity.
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XYZ Enterprises
Income Statement for the year Ended 31 December 2015
£ £
Sales/Revenue XXXX
Cost of goods sold
Opening inventory xx
Add: Purchases xxx
Cost of goods xxx
Less: closing inventory xx
Cost of goods sold XXX
Gross Profit XXXX
Operating Expenses xxx
Rent and rates xxx
Loan interest xxx
xxx
Operating Profit xxxx
XYZ Enterprises: Balance Sheet as at 31 December 2015
£ £ £
Non-Current Assets Cost Depreciation Net Book Value
Plant & Equipment xxx xxx xxx
Current Assets
Cash & Bank xxx
xxx
Total Assets xxx
Equity and Total Liabilities
Share Capital plus retained xxxc
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profit
Less: Drawings xxx
xxxx
Non-Current Liabilities
Long term Loan xxx
Current Liabilities
Trade Payables xxx
Total Liabilities and Capital xxxx
Partnership-Income statements prepared by the partnership will distribute all the profit equally
among all the partners in their specific ratio of their particular investment (Tsai, 2016). The balance
sheet will be prepared on the name of the whole partnership firm in which capital brought by all the
partners will be included in the balance sheet.
ABC & XYZ Partnership: Balance Sheet as at 31 December 2015
£ £ £
Non-Current Assets Cost Depreciation Net Book Value
Plant & Equipment xxx xxx xxxx
Current Assets
Inventories xxx
Receivables xxx
Cash & Bank xxx
xxx
Total Assets xxxx
Equity and Total Liabilities
Capital Accounts
ABC xxx
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XYZ xxx
Current Accounts:
ABC xxx
XYZ xxx
xxxx
Non-Current Liabilities
Loan xxx
Current Liabilities
Trade Payables xxx
xxxx
Equity and Total Liabilities xxxx
XYZ Limited: Income Statement for the year Ended 31 December 2015
£ £
Sales/Revenue XXX
Cost of goods sold
Opening inventory xx
Add: Purchases xxx
Cost of goods xxx
Less: closing inventory xx
Cost of goods sold XXX
Gross Profit XXXX
Operating Expenses
Rent and rates xxx
Wages and salaries xxx
Printing and stationery xxx
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Electricity and Heating xxx
Depreciation xxx
xxx
Operating Profit on ordinary activities xxx
Taxation xx
Operating Profit after Tax xxx
XYZ Limited: Balance Sheet as at 31 December 2015
£ £ £
Non-Current Assets Cost Depreciation Net Book Value
Plant & Equipment xxx xxx xxx
Current Assets
Inventories xxx
Receivables xxx
Cash & Bank xxx
xxx
Total Assets xxx
Equity and Total Liabilities
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Share Capital xxx
Retained Profit xxx
General Reserves xxx
xxxx
Non-Current Liabilities
Long term Loan xxx
Current Liabilities
Trade Payables xxx
Accruals xxx
xxx
xxx
Equity and Total Liabilities xxxx
4.3 Interpret financial statements of your chosen organisation by using appropriate ratios and
comparisons
Profitability ratios FY 2015 FY 2016
Gross profit or margin (GP) 1208 1456
Net profit or margin (NP) -166 `471
Revenue and sales 23775 23506
GP ratio 5% 6%
NP ratio -1% 2%
Interpretation
Gross profit- This is the basic amount of profit earned by an entity after excluding cost of goods
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sold from the sales ad the revenue achieved by an entity in a particular financial year. The
performance of an entity is increases with the passage of time. This shows that an entity has
regulated its current cost good sold as this is the basic reason behind increasing performance of an
entity.
Net profit- The corporate business world estimates this kind of profit in reflecting the true business
capabilities of an entity in order to grab higher market advantage in the near future which is
regarded as the final profit for an entity (Parker and Swanson, 2016). An entity has improved its
overall performance by transforming its negative performance into the positive one as this particular
profits signifies the burden of taxation imposed on an entity as increasing or decreasing level of
profit is totally depends on the basic ability of an individual in order to stand freely in the
competitive area.
Liquidity ratio FY 2015 FY 2016
Current assets (CA) 4421 4444
Current liabilities (CL) 6923 6724
Current ratio (CR) 0.64:1 0.66:1
Current ratio-It is regarded as the basic approach used to depict the overall liquidity of an
enterprise as higher liquidity is important in order to create basic advantage over its variety of
competitors takes places in the external business environment. Trade obligation can be pay off by an
entity with the existing cash available with an entity in order to strengthen its current business by
maintaining enough source of cash in order to meet all the external short term market complexities
imposed on an entity. Current ratio is that approach which reflects the proportion between current
assets and current liabilities incurred in the business environment (Kostova and Nell, 2016). The
current ratio reflects the overall performance of an entity from one period to another which is
increasing that shows the business enterprise's ability. Current ratio sows the higher business
performance in the external business in order to get higher competitive market advantage in the
external environment.
Gearing ratio FY 2015 FY 2016
Debt or loan 2337 2053
Equity capital 5539 6365
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Debt to equity ratio (D/E) 0.42:1 0.32:1
Debt to equity- The important source of capital structure includes debt and equity which are
regarded as the essential components in order to create a balanced capital structure of an entity.
Debt is regarded as the cheapest sources of finance required to be included in the business for
enhancing overall skills and the capabilities of an entity in the external business environment.
Equity on other hand is that component of finance in which dividend will be paid by an individual
in order to retain all the shareholders with the existing business (Jorgensen and Rotter, 2016). Debt
to equity ratio reflects the relationship among both the factors that how much equity available in the
business which is essential in order to handle the overall pressure of the external market. The
performance of an entity is decreasing which shows the higher imposition of burden of debt
incurred on an entity.
CONCLUSION
It can be concluded from the above assignment that financial resources is regarded as one of
the important component in an entity. This project also states that project A will be consider by an
entity after evaluating the projects by applying capital appraisal technique. Selection of appropriate
sources of finance will be helpful for an entity in order to accomplish all the desired aims and the
objectives within a given period. This report also emphasises on showing impact of financial
resources on the financial statements prepared by an entity within a give period which is essential
for an entity in order to grab higher market advantage in the external business environment.
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