Financial Planning & Analysis for Businesses

This assignment delves into the realm of financial planning and analysis within a business context. It examines various concepts including financial statements, corporate finance strategies, hire purchase financing, sources of finance, and personal financial planning attitudes. Students are tasked with understanding how these elements contribute to effective decision-making and the overall financial health of organizations.

MANAGING FINANCIAL RESOURCES
AND DECISION

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Assessing the sources of finance available to Hardwood ltd................................................1
1.2 Assessing the implications of different sources of finance ..................................................2
1.3 Recommending and evaluating appropriate sources for obtaining the finance ...................2
TASK 2............................................................................................................................................2
2.1 Analyzing the cost of different source of finance ................................................................2
2.2 Explaining the importance of financial planning to Hardwood ltd.......................................3
2.3 Assessing the information need of varied decision maker ...................................................4
2.4 Impact of finance on the financial statement.......................................................................4
TASK 4............................................................................................................................................5
4.1 Discussing the main financial statement...............................................................................5
4.2 Comparing the different format of financial statement ........................................................5
4.3 Interpreting the financial statement of Hardwood ltd...........................................................6
CONCLUSION ...............................................................................................................................7

INTRODUCTION
Finance is lifeblood of any business, hence its proper management is effective for the
manager of firm (Schobel and Scholey, 2012). This is because, through an effective financial
management practices only the tactical goals and objectives as being formulated by firm will be
met. The given report is based on the case study of Hardwood ltd. It is the medium sized private
limited firm which produces furniture for the retail sector. The given report will give description
regarding the number of sources can be opt by Hardwood ltd with an aim to fulfill the need of
finance. Furthermore, the report will also evaluate the financial performance of the cited
corporation.
TASK 1
1.1 Assessing the sources of finance available to Hardwood ltd
From the given case, it is assessed that Hardwood ltd is planning for expanding its
operation. However, in order to comply with the given plan firm need to increase its production
capacity and functionality. Thus, with an aim to perform the same manager of Hardwood ltd has
taken the decision to purchase additional machinery and tools. In order to do the same,
corporation will require sufficient amount of finance. In this context, following sources identified
which can be used by the manager of cited company. Taking loan from bank: The need relating to the finance can be fulfilled by cited
corporation by taking loan from the bank. It is an effective source. This is because, with
the help of this, company can fulfil its need relating to huge funds (Siano and et.al,
2010). Hire purchase: It is the another source of finance which manager of cited firm can use. It
is the method of purchasing good by making instalment payment over the period. Here,
the purchaser can get the possession of good on making last instalment payment (Hire
purchase, 2016). Lease financing: It involves using the asset for the specified period of time. In this mean,
ownership of assets does not pass on to the other person. Here, the payment of the
purchased goods will be made by Hardwood ltd in the form of rent. This mean will be
proved as beneficial when firm is running out of money.
 Sale of old assets: In this context, Hardwood ltd has the opportunity to sale used asset
which creating burden upon it. Through this way, firm can raise its funds immediately.
1

1.2 Assessing the implications of different sources of finance
The sources of finance which are identified for the Hardwood ltd has some implications.
For example, cited firm can have legal implication in the form of bankruptcy if it will obtain its
need relating to funds through bank loan. Here, Hardwood ltd can be declared as bankrupt if it
does not pay the obtained loan to the respective bank within the given specified time period. This
thing will also hamper the credibility of enterprise in market (Sources of finance, 2016). In
addition to this, Hardwood ltd will dilute its control over the assets if it will sale its old asset to
some other person. Furthermore, varied legal actions will be taken upon the firm if it will not pay
the instalment or rent to the respective party within the specified time frame. The given thing
will lead to hamper the brand image of firm in market. Furthermore, in future it becomes very
difficult for the cited enterprise with regard to obtain the funds by using the source such as hire
purchase and leasing (Lampe and Hofmann, 2013). Hence, it is essential for the corporation that
it should assess different implication of varied sources of obtaining finance.
1.3 Recommending and evaluating appropriate sources for obtaining the finance
Among all the given sources it is suggested to the Hardwood ltd it should raise its funds
by taking loan from the bank. The given mean is effective as by using this corporation can fulfil
its need relating to large amount of funds. Furthermore, it also provides opportunity to the firm
with regard to make the payment of their obtained loan on instalment basis. Hence, with the help
of respective mean, firm can reduce the burden of making whole obtained payment within
particular time frame (Brocke, Recker and Mendling, 2010). Thereby, through this way cited
firm can pursue its expansion plan. However, the given mean can be used by corporation if it has
something which it can give to the bank as the security. Furthermore, it is also suggested to the
firm that it should obtain its need relating to finance by selling its unused assets. However, the
given mean will be proved as effective when firm will require funds immediately.
TASK 2
2.1 Analyzing the cost of different source of finance
There are certain costs associated with the different sources of finance. For instance, in
order to assist the expansion plan of Hardwood ltd, it is suggested to the firm that it should use
the sources like taking loan from bank and selling unused assets. In accordance with the given
context, two different type of costs identified which are related with given sources:
2

 Financial cost: Hardwood ltd will incur the given cost when it will obtain its funds
through bank loan. Here, in return of using the money of bank corporation have to pay an
interest which will be proved as cost to firm.
 Opportunity cost: It is the cost of an alternative that an individual should relinquish with
an aim to pursue certain action (Bhowmik and Saha, 2013). This cost occur when
Hardwood ltd will obtain its need relating to money by selling the old assets. This assets
could be used by firm for some other purposes. Hence, these two are being regraded as
the major cost which will be incurred by the manager of cited firm in an effectual way.
2.2 Explaining the importance of financial planning to Hardwood ltd
Financial planning is the continuous process which enable the finance manager of
enterprise with regard to make the sensible decision about the money (Financial planning,
2016). The given approach has its importance for all enterprise irrespective of their industry. It is
due to the fact that, with the help of proper financial plan, corporations like Hardwood ltd can
fulfil their need relating to the money in an effectual manner. In this regard, number of
importance identified which Hardwood ltd can gain by preparing the financial plan. The detailed
explanation of the same is depicted in below: It assists in managing the income of firm effectively: It is being regarded as one of the
most significant advantage which will be incur by Hardwood ltd by making the financial
plans. Here, managing the income will help firm in understanding that how much money
will be required by them for tax payment and other monthly saving and expenditures etc. It helps in gaining the information about the cost: Here, by using the financial plan
corporation can carry out the comparison between standard and actual costs. Thus, by
complying with the given type of activity Hardwood ltd can establish control over its cost
in an effectual manner (Drake and Fabozzi, 2012).
 It assists in the investment plans: An effective financial plan assist corporation in making
right investment decision on considering the personal circumstances, objectives and risk
tolerance capacity of firm. Overall, it is right to said that there are several benefits
attached with the concept such as financial planning.
3

2.3 Assessing the information need of varied decision maker
Decision maker are the person who make decision about the enterprises and guide them
towards the tactical and strategic goal. In this regard, the information need of different decision
maker of Hardwood ltd identified whose detailed description is depicted in below: Managing director: For the expansion plan of Hardwood ltd, John is appointed who is
placed at the managing director position. The main responsibility of John is to suggest the
proper sources of obtaining the funds to the corporation. Hence, in order to fulfil the
given purpose, they will require cash flow statement of company. This is needed with an
aim to see the availability of cash (Wiley and SonsKieso, 2010). Owner: It is an individual who owns business entity with an aim to earn high profits. The
owner of Hardwood ltd requires the financial information about the company. This
information is needed by it, in order to make the decision about investment. Here,
through financial information only owner can make the decision that whether it is
beneficial for it with regard to perform further investment for the firm or not.
 Supplier, government and bank: Supplier and bank require financial information of the
company with an aim to see its financial capability for the payment of their services. In
the similar way, government is more interested in knowing about the financial health of
company. This is because, with the help of given information government can assess that
whether the firm will be able to make the payment of the taxes within specified time
schedule or not.
2.4 Impact of finance on the financial statement
The selection of different sources of obtaining the finance will lead to cause the direct
impact upon the financial statement of company such as Hardwood ltd. The financial statement
of cited company includes balance sheet and income statement. For example, profit and loss
statement of the company will be impacted if it will take loan from the bank. Here, while taking
loan from the bank, Hardwood ltd will have to pay the interest in return of the same. Hence, in
p&l statement expense figure of the company will be increases (Lampe and Hofmann, 2013).
However, in balance sheet effect will be seen upon the liability side. In the similar way, the asset
side of balance sheet will be impacted if firm raises money by selling its unused asset. However,
the impact of given source of finance will also being seen in the profit and loss statement of
4

Hardwood ltd. Here, income of the firm will be increases if it will gain profit on the selling of its
old asset. But, in case of loss the expenses of the company will be increases.
TASK 4
4.1 Discussing the main financial statement
The purpose, structure and main sections of financial statement are identified which are
being used by the cited company. The detailed explanation of the same is depicted in below: Income statement: The main purpose of given statement is to analyse the profit and loss
position of the company. The respective statement has two sections such as expenses and
incomes. Here, with the help of income, statement management and owner of Hardwood
ltd can make different financial decisions. Balance sheet: It has two main sections such as assets and liabilities. With the help of
given statement, financial strength of the company will be analysed. In the statement,
firm should equal its assets with the liabilities. The supplier, owner, managers and
government makes use of respective statement with an aim to make the varied type of
decisions in an effective manner (Murphy and Yetmar, 2010).
 Cash flow statement: It has three main sections such as operating, investing and financing
activities. The purpose of given statement is to give the information about cash receipt
and payment of company. This enable the person like financial analyst and internal
management in order to make the appropriate decision about the company.
4.2 Comparing the different format of financial statement
The type of financial statement used by the manager of firm totally depends upon the
form of business. The detailed explanation about the same is depicted in below: Sole trader: It is the person who exclusively owns the business as well as it also keep all
the profits which it has earned during the year. In the given business format such as
balance sheet and income statement will be prepared. However, balance sheet will be
prepared on both vertical and horizontal form. Limited company: Hardwood ltd tends to be counted under given category. Hence, the
company will have to prepare all type of financial statements such as cash flow, balance
sheet and income statement.
5

 Partnership: It is the entity which is run by two or more person. This form of business is
also liable for preparing all type of financial statement as stated for the limited company.
However, along with all the financial statements, these entities will have to prepare an
additional statement which is of partners capital account (Moore, Ratneshwar and Moore,
2012).
4.3 Interpreting the financial statement of Hardwood ltd
Ratio Formula 2014 2013 Industry average
Return on capital
employed
Earning before
interest and tax/
capital employed
(Fixed
assets+current
assets – current
liability)
379/(1735+675-
410)*100 =
18.95%
284/ (1635+845-
427) *100=
13.83%
35.00%
Operating profit
ratio
(Operating Profit/
Net Sales) *100
379/2590*100
=14.63%
284/2217*100 =
12.81%
13.60%
Gross profit (Gross Profit/ Net
Sales) *100
1280/2590*100 =
49.4%
1016/2217*100 =
45.9%
40.00%
Operating asset
turnover ratio
Net sales/ net
property, plan and
equipment
2590
/(1170+1015) =
1.18
2217/ (1170+675)
= 1.20
1.5
Current ratio Current Assets /
current Liabilities
675/410 = 1.64 845/427 =1.97 2
Quick asset ratio (Current assets -
Inventory) /
Current
Liabilities
(675-390) /410
=0.69
(845-375)/ 427
=1.10
1.5
Stock days (Inventory/cost of 390/1310*365 = 375/1201 *365 = 75
6

sales) *365 days 108 days 114 days
Debtor days (Trade
receivables/ annul
credit sales)*365
(225/2590)*365 =
32 days
(190/2217)*365 =
31 days
30
Gearing ratio (Long term
debt+short term
debt+ bank
overdraft )/
shareholder
equity
(798+10)/ 420 =
1.9
(1025+106) /420
= 2.6
1
Return on capital employed depict that how much profit that each dollar of capital
generate. Herein, it is analysed that ROCE of cited company has increased from 13.83% to 18.95
%. It is the favourable situation for the company. But, still it does not meet the set industry
standard. With the help of operating profit ratio, favourableness of the company will be analysed.
This ratio provides description that whether company is earning enough money from its daily
operation or not. The operating profit ratio of Hardwood ltd has increased in 2014. Furthermore,
the ratio is also more than the industry standard. Hence, from this it can be interpreted that the
corporation is earning enough money from its daily operation. The gross profits of company also
shows the increasing trend as well as it is more than the industry average. Hence, it is correct to
said that Hardwood ltd is working well in market. Current ratio helps in knowing firm ability to
pay its debts.
The current ratio of company is 2 in the year 2013. This indicate that firm is able to make
the payment of its debt, but it has reduced up to certain extent in 2014. Quick asset ratio measure
the liquidity of company. The quick asset ratio of company has decline from 1.10 to .69 which
mean that firm liquidity position is better in 2013. Stock days depict that the firm tenure to move
the stock from the company (Damodaran, 2010). In both the year, the stock days is more than the
average. This mean that firm faces major difficulty in the task of moving its stock. Debtor day is
the day during which firm receives payment from its customers. In this regard, the statistics of
2014 indicate that firm receive payment from its debtors within specified time frame. Gearing
ratio depicts the financial risk which company is subjected too. The gearing ratio of company
7

should be low. This has been seen in the given case also. This is because, high gearing ratio
indicate that company is using debt in order to continue the daily operation.
CONCLUSION
From the above report, it can be concluded that for the firm it is essential that it should
analyse the costs which are related with the different sources of finance. This is because, lack of
consideration of the same will affect the financial decision of the company. Hence, in the given
circumstance it will become difficult for the enterprise with regard to pursue upon its objective
of expansion in an effective manner.
8

REFERENCES
Books and journals
Bhowmik, K. S. and Saha, D., 2013. Sources Of Finance. Financial Institution Of The
Marginalized India Studies In Business And Economics. pp. 61-71.
Brocke, J. V., Recker, J. and Mendling, J., 2010. Value-oriented process modeling: integrating
financial perspectives into business process re-design. Business Process Management
Journal. 16(2). pp. 333–356.
Damodaran, A., 2010. Applied Corporate Finance. 3rd ed. John Wiley & Sons.
Drake, P. P. and Fabozzi, J. F., 2012. Analysis of Financial Statements. 3rd ed.
John.
Lampe, K. And Hofmann, E., 2013. Financial Statement Analysis Of Logistics Service
Providers: Ways Of Enhancing Performance. International Journal Of Physical Distribution
& Logistics Management. 43(4). pp. 321-342.
Lampe, K. and Hofmann, E., 2013. Financial Statement Analysis Of Logistics Service
Providers: Ways Of Enhancing Performance. International Journal Of Physical Distribution
& Logistics Management. 43(4). Pp.321-342.
Moore, M. L., Ratneshwar, S. and Moore, R. S., 2012. Understanding loyalty bonds and their
impact on relationship strength: a service firm perspective. Journal of Services Marketing.
26(4). pp. 253–264.
Murphy, D. S. And Yetmar, S., 2010. Personal Financial Planning Attitudes: A Preliminary
Study Of Graduate Students. Management Research Review. 33(8). pp. 811-817.
Schobel, K. and Scholey, C., 2012. Balanced Scorecards in education: focusing on financial
strategies. Measuring Business Excellence. 16(3). pp. 17–28.
Siano, A., and et.al. 2010. Financial Resources And Corporate Reputation: Towards Common
Management Principles For Managing Corporate Reputation. Corporate Communication: An
International Journal. 15(1). Pp. 68-82.
Wiley & SonsKieso, E. D., 2010. Financial Accounting: Tools for Business Decision Making. 6th
ed. John Wiley & Sons.
Online
Hire purchase. 2016. [Online]. Availabile through:
<http://www.yourarticlelibrary.com/financial-management/sources-of-finance/hire-purchase-
meaning-features-advantages-and-disadvantages/43841/>. [Accessed on 9th March 2016].
9

Sources of finance. 2016. [Online]. Availabile through: <http://www.business.gov.au/business-
topics/tax-finance-insurance/business-finances/Pages/sources-of-finance.asp>. [Accessed on
9th March 2016].
Financial planning. 2016. [Online]. Availabile through:
<http://www.franklintempletonindia.com/en_IN/investor/investor-education/financial-
planning>. [Accessed on 9th March 2016].
10