Managing Financial Risks in Organizations

This assignment delves into the crucial topic of managing financial risks within various organizational contexts. It examines diverse risk management approaches, encompassing credit risk, investment risk, operational risk, and more. Students will analyze real-world examples and scholarly sources to understand how organizations effectively mitigate financial vulnerabilities and promote sustainable growth.

MANAGING FINANCIAL
RESOURCES

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
AC 1.1 Available sources of finance...........................................................................................1
AC 1.2 Implication of different sources of finance.....................................................................2
AC 1.3 Appropriate sources of finance for Restaurant...............................................................3
AC 2.1 Cost of selected sources of finance.................................................................................4
AC 2.2 Importance and uses of financial planning.....................................................................4
AC 2.3 Information needed to different decision makers...........................................................5
AC 2.4 Effect of finance on the financial statements..................................................................6
AC 3.1 Cash budget for making appropriate decision................................................................7
AC 3.2 Calculation of unit cost and pricing decision.................................................................8
AC 3.3 Analysing the viability of investment project by using financial tools and techniques. 8
TASK 2..........................................................................................................................................11
AC 4.1 Financial statements, their purpose and use.................................................................11
AC 4.2 Comparison between different types of businesses......................................................11
AC 4.3 Interpretation of financial statements through ratios analysis......................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
Finance is the life blood for every business either it is small, medium or large.
Establishment of any new business requires funds to start. The person who wants to setup his
own firm he needs to manage the appropriate financial resources. He will put his own investment
and remaining part will borrow. In this context, central government is promoting and providing
funds to the small business firms in UK. So, there is big opportunity for them who want to start
their business at the small level. The present report is based on the restaurant business in UK.
The requirement of fund is £300000 and the owner is having £20000 to invest into this business.
The rest amount he has to arrange by loan. The report will provide information about sources of
funds, implication of finance as a resource in the business, basis of financial decisions and
evaluation of financial performance of the business.
TASK 1
AC 1.1 Available sources of finance
There are two sources available for small business like restaurant which are as given
below:
Internal sources: Personal savings – First of all owners uses his personal savings for the new start-up. This
is the safest source of finance because on this amount there is no obligation of
repayment.. It is one of the easiest ways of finance. Investment through personal savings
maintain the control over the business.. Sale of asset – By selling own asset, finance can be arranged if possible. This option is
suitable when there is surety that the business will successful.
 Family and friends – The second option which is available to the owner is borrow from
friends and family. They will lend money for the business. The obligation of repay the
borrow amount only. Generally, they do not charge interest on it. This option is on
second priority to the owner.
External sources:
 Bank loans – Most of the banks provide loan to the small businesses. The bank first
ensures that the business is able to repay the loan amount(Sources of finance for a Startup
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or Small Business. 2015). If the business is satisfied with the business plan then they will
lend money.
 Government grants – It is also safest way to borrow money. Like UK government will be
promoting small businesses and providing grants to them. This is helpful in starting a
new business like restaurant.
AC 1.2 Implication of different sources of finance
Sources of
finance
Financial
implications
Legal
implications
Bankruptcy
implications
Dilution of
control
Personal savings There is no
financial risk
because it is own
funds. But the
opportunity cost
will affect.
There is no legal
implications.
No chances of
bankruptcy in this
source of finance.
The control will
remain in the
hands of owner.
Sale of assets The cost occurs at
the time of
registry.
The right of
possession and
ownership both
have transferred.
There is no
bankruptcy
implications.
There is no
dilution of control
over business.
Family and
friends
There is no
financial cost,
unless they ask.
There is no legal
implications.
There is no
bankruptcy
implications.
The dilution of
control may take
place, if they
want.
Bank loan The cost of
interest on loan
amount has to
bear.
It is require to
submit the copy
of financial
statements and
documents of
collaterals, when
apply for loan
In case of
bankruptcy of the
business the
priority is given
to outsiders over
investors.
There is no
dilution of control
over the business.
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from the
bank(Elsom,
2014).
Government
grant
The cost of
interest incurs
though it is less
but has to pay.
It is require to use
the grant amount
in the same
business for
which it has
provided.
There is no
bankruptcy
implications.
No dilution of
control.
AC 1.3 Appropriate sources of finance for Restaurant
Some of the factors which have to be considered for selecting the source of finance are
risk factor, cost factor, long term, short term.
Risk factor – It is important to identify the risk factor of the available sources of finance The
owner must analyse that what will happen if he is unable to meet the financial commitments
related to particular source of finance(Kane, 2011). It also taken into consideration for decision
making that what if the business go fail.
Cost factor – The effect of cost of finance on income must be identified because it plays a
fundamental role in financing decision. So, it is necessary to evaluate the implications of
choosing one source over another source of finance. Access borrowings can lead to bankruptcy if
there will be not sufficient amount to repay.
For starting the restaurant business at small level, the appropriate sources of fund are as
follows: Personal savings – This is the most appropriate source which is risky but bearable. There
is no obligation of repayment and no involvement of cost in it. It can be easily managed.
 Government grant – Grants provided by the government to small business is an
opportunity for them. So, it is better to take advantage from this. It is not risky but, the
government continuously monitors that the funds are properly using or not. And ensures
that there should not be misuse of grants.
3

 Bank loan – After both of the above options if there is some amount left then apply for
bank loan. It can be short term or long term depends on the requirement of business.
There are risks and cost both the factor present. And there are obligation to repay the
amount along with interest otherwise bank will take over the assets.
AC 2.1 Cost of selected sources of finance
Personal savings – There is no cost for personal savings but there is an opportunity cost which is
associated with it(Winch, 2010). For example, if the savings are not used in the business and
invest in somewhere like in mutual fund. Then the income from the investment is the opportunity
cost for the owner.
There is financial cost involved in the government grants and bank loan.
Grants – Government grants are less costly then bank loans. As the interest rate is very less or
negligible. The interest on grant is comparatively less than bank lending rates. But in the
meanwhile, if government find there is misuse of funds then it can cancel the grant amount
immediately after the warning.
Bank loan – The cost in this source is the loan amount and its interest. The owner takes loan after
giving some collateral securities to the bank. It is compulsory to repay the borrowed amount with
interest otherwise bank ceases the security and the assets.
AC 2.2 Importance and uses of financial planning
Importance of financial planning: Financial planning helps to identify short term and long term financial goals. It develop a
balanced plan to achieve those goals. Cash management – The management and proper use of cash is very important. There
should not be shortage or excess of cash, because both the situation is not good for the
business(Rule and Ambady, 2011). So, financial planning helps to manage cash by
preparing cash budget in advance. Prioritizing expenditures – Financial planning helps to prioritize the expenditures on the
basis of which business utilizes the available funds. There will be less chances of
spending on unnecessary activities.
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 Measuring progress – The measurement of progress is importance to know the position
of the firm. So, it helps in analysing the progress level which states that the business is in
profit or loss.
Uses of financial planning:
 Funds allocation – The use of financial planning in the allocation of funds for each
activity. So that it can be used appropriately.
 It is a framework which gives direction for the optimum utilization of fund into the
business. It uses in formulating policies and strategies for the next accounting period.
 It uses in preparing financial budgets for the better performance and improvement. It also
uses in the savings for the business which can be used in the future plans.
AC 2.3 Information needed to different decision makers
Internal users – This refers to owners, managers and employees who uses the information
regarding financial statements.
 Owners and investors – The stockholders of the company require financial information
for taking decisions regarding their shares (stock) and investments whether to hold, sell
or buy more(Abdulkareem and Oyeniran, 2011). Potential investors need the financial
information for evaluating the potential success and profitability of company.
 Management – In case of small businesses, owners and management are the same. They
need to have information about the financial condition of the business on the basis of
which they take decisions for the future plans and strategies.
 Employees – The employees are also interested in the stability and profitability of the
business. They seek to know about their career opportunities with the possibility of
expansion. And they want to know that the ability of business to pay salaries and provide
employee benefits.
External user – On the other side, those who are not engaged in the operations of the business
but hold some financial interest. This includes government, financial institutions, lenders and the
others.
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 Government – Governing authorities like income tax department specially, are interested
in the financial statements of the company. Also verify that the tax has been calculated
correctly and paid on time.
 Lenders - Business takes loan from banks and financial institutions if there is
requirement of short and long term finance. They are more interested in the solvency
ratio of the business(Massingham, 2014). Then they check the liquidity condition of the
business and assess the credibility. This helps in taking the decisions regarding giving the
loan.
AC 2.4 Effect of finance on the financial statements
The financial statements i.e. profit and loss account and balance sheet get affected by the
increase or decrease in sources of finance.
Dr Profit and Loss account Cr
Particulars Amount Particulars Amount
To Interest on loan a/c
To Interest on grant a/c
To Net profit
XX
XX
XXX
Balance Sheet
Liabilities Amount Assets Amount
Owner's capital
Bank loan
Government grant
XXX
XXX
XXX
Cash (owner's capital+bank
loan+government grant)
XXX
The interest amount on the identified sources of finance (bank loan and grant) will affect
the debit side of profit and loss account(Westphal, Thoben and Seifert, 2010). This reduces the
net profit of the business because it is a kind of expense which has to pay.
6

The owner's fund (personal savings) and principle amount will be shown at the liabilities
side of the balance sheet which increase the repayment obligations. On maturity date the amount
of principle has to pay(Coombs, 2014). And on the assets side the cash balance will be increased
by capital, loan amount and government grant. The cash inflow increases the balance of cash.
This is also fulfil the condition of accounting equation (Assets = Capital + Liabilities).
AC 3.1 Cash budget for making appropriate decision
Cash budget of restaurant for the period of six months are as given below:
The above cash budget stated that the outflow of cash is lower than the inflow of cash.
This shows the position of cash surplus in the business. For increasing the revenue, business
need to focus on the promotional activities by adopting both the methods i.e. traditional and
modern. This will help in generating awareness among the potential customers. Along with this,
business also require to have focus on the supply chain management. From the above cash
7

budget, it is clear that cost of purchasing the raw material is increasing continuously. In the
month of April, it was 8000 while at the end of September month, it was about 10210. Therefore,
to improve this condition, the owner must make arrangement for getting the raw materials at
lower cost. In addition to this, some good strategies to reduce cost of selling and distribution
must be applied by focussing on the various direct and indirect labour, packaging and utilities
which form this entire costs. This will support in controlling the cost of selling and
distribution(Caouette and et.al., 2011). Therefore, by considering all these aspects business can
manage its position of cash with the significant level.
AC 3.2 Calculation of unit cost and pricing decision
Unit cost computation:-
In the restaurant the expenses are as follows:
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As per the above table of unit cost calculation, it is evident that the fixed cost is spent on
use of various equipments and the salary given to staff which are £35000 and £ 20000
respectively. The fixed expenses can be understood as those types of expenses that does not use
to change as per the alterations coming in the units produced. Thus, they remain static. While the
variable expenses are those which keeps on changing as per the changes coming in unit
production. Thus, the variable cost is composed of overhead prices which is £15000 and £ 10000
for labour cost which amounts to £25000. The total expenses incurred by the mentioned
restaurant is £80000 , while the output is given in 900 units. Thus, as per the calculation, per unit
cost is determined by dividing the total cost with units produced that is about £90. As per this
price, the said firm wants to earn a profit of atleast 24% for which the selling p[rice has been
determined by adding the profit margin and per unit cost (90+ 24% of 90= 111.6). Thus, the
selling price of per unit will be done at £111.6 so as to earn the profit of 24%.
AC 3.3 Analysing the viability of investment project by using financial tools and techniques
The feasibility of project can to be identified by applying payback period method, net
present value method and internal rate of return(Altenburg and Pegels, 2012).
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The payback period method is applied for investment appraisals as it states the time
period till which investments can be held by a company before receiving entire amount of
investment in cash. This method is important to consider while having investment appraisal as it
aids in identifying the potential of short term revenues and rate of returns through the project that
can be earned by the company.
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Computation of Net Present Value (NPV) and Internal Rate of Return (IRR)
The NPV method uses the internal rate of returns in capital budgeting through which the
profitability of the investments can be calculated. This method is important as it takes into
account, the time value of money. Besides this, at the time of calculation, this method considers
both before and after cash flow of the project till the entire life of project.
This is to be recommended that selection of project B is better option rather than project
A. The payback period of project B is lower than project A which is 2 years. While, The NPV of
project A is £117648 and IRR is 40.69% which are lower than project B. But the higher value of
IRR is better. The best method to chose a project for investment must be based on calculation
done through NPV and IRR method as they include the time value of money that use to change a
11

after a particular time period. While the payback period method doe not consider the time value
of money and it does not takes in account, the cash inflows that may occur after recovery of
initial investments. Therefore, it is suggested to the business that they should go with project B
and invest in it that will beneficial for the future.
TASK 2
AC 4.1 Financial statements, their purpose and use
The main financial statements that are followed by Marriott International. These are as
given below:
 Income statement – This is one of the major element of financial statement that shows
the net profit or net loss. The purpose of maintaining this statement is to record sales,
operating expenses and non-operating expenses i.e. it covers all the expenses and
incomes(Mohammad and et.al., 2011). This provide the information about the
profitability of Marriott International. It uses by the management of the business.
 Balance sheet – The basic element of financial statement is balance sheet which shows
the financial position of the business. It includes assets, liabilities and owner's capital.
Assets side covers which is owned by the business. And liabilities side includes that is
owed by the business. This shows the financial position of Marriott International. It is
mainly uses by the management, investors and lenders.
 Statement of Cash flow – This statement shows the inflow or outflow of the cash in the
business. It includes three activities which are: operating, investing and financing. It
specifies that, whether the business is spending more or earning more(Den Heijer, 2011).
It is also uses by the management and the lenders.
 Statement of Owner's Equity – There are any changes made in the owner's equity
during the financial year, that is to be covered under this statement. It considers opening
equity balance, additions and subtractions in the meanwhile and the closing balance of
equity. This is mainly utilize by the owner.
AC 4.2 Comparison between different types of businesses
Basis Marriott international R.L. Maynard
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Type The Marriott international is a
public listed company that
works as an artificial person
created by the law, with
perpetual succession and a
common seal.
It is a sole proprietorship
restaurant business where the
business has been started by a
single person.
Financial statements It is mandatory to publish
balance sheet, income
statement and cash flow
statement
No requirement of publishing
the statements while for
monitoring, the owner takes
the help of income statements.
Liability Limited liabilities of members
in the public listed companies
as per the investments made by
each shareholder.
The single owner of the entire
firm has unlimited liabilities in
case of sole proprietorship.
Format Structured format No particular format.
Auditing The auditing of all the
financial statements are done
compulsorily on internal and
external basis.
No requirement of external
audit.
Legal entity It has separate legal entity
from its members and
directors.
No separate legal entity.
AC 4.3 Interpretation of financial statements through ratios analysis
Ratios Formula 2014 2015
Profitability ratios
Gross profit 1966 2123
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Net profit 753 859
Sales revenue 13796 14486
Gross profit ratio GP / net sales * 100 14.25% 14.66%
Net profit ratio NP / net sales * 100 5.46% 5.93%
Liquidity ratios
Current ratio Current assets /
current liabilities
.63 .43
Quick ratio Current assets –
(Closing stock +
prepaid expenses) /
current liabilities
.39 .37
Efficiency ratio
Asset turnover ratio Sales / total assets 2.02 2.24
Receivable turnover
ratio
12.65 13.15
Ratio analysis is used for knowing the financial performance with a quick indication in
several key areas of the business(van Ryn and et.al., 2011). It helps in comparative study of
financial stability by the company itself and its stakeholders.
Interpretation of ratio analysis of Marriott International (MI):
The gross profit ratio of Marriott has increased from 14.25% to 14.66% in 2015. along
with this, net profit ratio has also inclined from 5.46% to 5.93% in comparison with previous
year. This states that customers are highly satisfied by the services which are offered by Marriott.
It makes its profitability ratio more sound and improved. On the other side, in 2015 the financial
capability of the company has declined(Foerstl and et.al., 2010). Its current ratio and quick ratios
14

indicates that business does not having enough cash liquidity to meet out its financial
obligations. Both has decreased in 2015 which shows the less investment opportunities. Its asset
turnover ratio is good enough which states that business is using its asset optimally while
generating sales. And the overall financial performance and position of Marriott is better than
last year. But it requires improvement in cash liquidity position for meeting the obligations.
Interpretation of ratio analysis of Hilton:
Ratios Formula 2014 2015
Profitability ratios
Gross profit 6483 7207
Net profit 673 1404
Sales revenue 10502 11272
Gross profit ratio GP / net sales * 100 61.73% 63.93%
Net profit ratio NP / net sales * 100 6.40% 12.45%
Liquidity ratios
Current ratio Current assets /
current liabilities
1.11 1.05
Quick ratio Current assets –
(Closing stock +
prepaid expenses) /
current liabilities
0.74 0.69
Efficiency ratio
Asset turnover ratio Sales / total assets 0.4 0.43
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Receivable turnover
ratio
13.34 13.1
As per the above ratios calculated of Hilton hotel, it is evident that the gross profit ratio
of both years are higher than Marriott hotel which is 61.73 and 63.93% respectively. As per this,
the Hilton hotel is performing better than that of Marriott. Similarly, the net profit ration also
shows the increasing pattern in Hilton which states that company is making good revenues based
on its services which are satisfying the clients. Apart from this, both companies liquidity ratios
have decreased in year 2015 which demonstrate that both have less opportunities of investments.
While the Hiltom have somewhat more opportunities as that of Marriott as its current ratio in
2015 is 1.05 which is more than Marriott which is .43. The assets turnover ratio of Marriott is
better than Hilton which shows that former one is using its assets in ideal way while generation
of sales. The overall performance of both companies are good but both have to look upon the
liquidity ratios so as to make their liquidity positions better.
CONCLUSION
It is to be concluded from the above report the proposed business of restaurant is require
to chose appropriate source of finance by considering the financial structure of it. By this,
business can improve its profitability areas with an effective way. By presenting financial
statements it can fulfil the needs of internal and external decision makers. With the preparation
of financial budgets it can utilize money in a better way and reducing the wastage of finance. The
report discloses that investment appraisal method helps in taking decisions for choosing the
profitable project. Further, it can be summarized that financial performance of Marriott
International has improved from the last year's performance.
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