Sources of Finance for Businesses

This assignment delves into the diverse world of financing available to businesses. It examines both conventional sources like bank loans and equity financing, as well as alternative funding methods such as venture capital, crowdfunding, and angel investors. The analysis considers factors influencing financing choices, including business stage, industry, and risk appetite. Additionally, it explores the implications of different financing options on a company's financial structure and future growth.

MANAGING FINANCE
RESOURCE DECISION

TABLE OF CONTENTS
1. INTRODUCTION..................................................................................................................1
2. Sources of finance..................................................................................................................1
AC 2.1 Type of businesses................................................................................................1
AC 2.2 sources available to business................................................................................1
AC 2.3 Comparison between rights issue and loan stocks...............................................3
AC 2.3.1 Rights Issue.......................................................................................................3
AC 2.3.2 Loan Stock.........................................................................................................3
AC 2.3.3 Comparison.......................................................................................................3
AC 2.4 Beneficial source of finance for the Buildings and noncurrent assets.................3
AC 2.5 Advice to the Board of Directors on finance source for working capital.............4
AC 2.5.1 Definition of working capital ...........................................................................4
AC 2.5.2 Importance of working capital..........................................................................4
AC 2.5.3 Sources available for working capital...............................................................4
3. Financial statements...............................................................................................................5
AC 3.1 Statement of profits or loss...................................................................................5
AC 3.2 Statement of financial position.............................................................................5
AC 3.3 statement of cash flow..........................................................................................5
AC 3.4 Impact on financial statements.............................................................................5
AC 3.4.2 Gearing ratio......................................................................................................7
AC 3.4.3 Impact of the financial plans on the financial statements.................................7
AC 3.5 Calculation of EPS...............................................................................................7
AC 3.5.1 Information........................................................................................................7
AC 3.5.2 Calculation of EPS............................................................................................7
AC 3.5.3 Explanation........................................................................................................8
TasK 4 INVEstment Appraisal...................................................................................................8
AC 4.1 Investment appraisal importance..........................................................................8
AC 4.2 Risk to future cash flows and future values vs. present value..............................8
AC 4.3 Types of techniques..............................................................................................9
AC 4.3.1 Pay back period.................................................................................................9
AC 4.3.2 Calculation and explanation of pay back period...............................................9
AC 4.3.3 Net present value...............................................................................................9
AC 4.3.4 Calculation and explanation of net present value...........................................10

AC 4.4 Recommendation for the investment opportunity..............................................10
AC 4.5 Unit cost.............................................................................................................11
AC 4.5.1 Importance of cost per unit and its calculation................................................11
AC 4.6 Factors to be considered while deciding the selling prices................................11
TASK 5 CASH FLOW VS. Profits..........................................................................................12
AC 5.1 Need of cash budget and trends of the Taste business budget...........................12
AC 5.2 Importance of financial planning.......................................................................13
AC 5.3 Liquidity problems with having proper availability of profits...........................13
AC 5.4 Users of the accounts..........................................................................................14
AC 5.4.1 Users................................................................................................................14
AC 5.4.2 Information need and importance....................................................................14
TASK 6 Interpretation of financial statements.........................................................................14
AC 6.1 Ratio Analysis....................................................................................................14
AC 6.1.1 Profitability ratio.............................................................................................15
AC 6.1.2 Liquidity ratio..................................................................................................15
AC 6.2 Advice to the Taste Business..............................................................................16
TASK 7 Financial statements of sole trader, partnership and limited companies...................16
Conclusion................................................................................................................................17
REFERENCES.........................................................................................................................18

INDEX OF TABLES
Table 1: Calculation of enterprise value for computing WACC of 5, 00,000 shares................4
Table 2: Computation of WACC...............................................................................................4
Table 3: Calculation of enterprise value for computing WACC for loan stocks.......................5
Table 4: Calculation of WACC..................................................................................................5
Table 5: Calculation of enterprise value for computing WACC for stocks and loan................5
Table 6: Calculation of WACC.................................................................................................6
Table 7: Calculation of EPS.......................................................................................................6
Table 8: Calculation of cash flows.............................................................................................8
Table 9: Calculation of payback period.....................................................................................8
Table 10: Calculation of net present value.................................................................................8

1. INTRODUCTION
Managing financial resources is very important activity for the organization success.
Adequate availability and efficient management of finance resources helps business to
operate successfully. There are different sources available to the organizations for fulfilling
its finance requirement. Taste is a medium size company that want to expand its catering
business therefore business need finance requirement. Present report will helps us in
identifying the available short term as well as long term fund sources for the businesses. In
addition to it, organization needs to take decisions for pricing, investment and budgeting.
Therefore, the report describes the decision making process so as to take efficient and
strategic decisions. Investment appraisal techniques help the businesses to take effective
investment decisions that yield higher the profits. On contrary, the importance of financial
planning will have been discussed for achieving the organization objectives. Furthermore, the
preparation of financial statements helps companies to determine their operating and financial
performance. Business corporations can take better decisions by analysing and interpreting
their financial statements.
2. SOURCES OF FINANCE
AC 2.1 Type of businesses
Sole proprietorship: It is the most common form of business. Under this business
organization, only a single entrepreneur establishes the business hence, all the business
profits as well as losses are available for themselves.
Partnership: Under this form of business organization, two or more individual can
start the business operations. Therefore, all the business profits and losses are share in their
decided profit loss sharing ratio.
Company: It is a legal body that came into existence by following the companies act.
Shareholders are the owners of the company who make investment in the business and get the
return.
AC 2.2 sources available to business
In order to operate successfully business need to have adequate availability of
working capital. There are distinct sources available for fulfilling short term as well as long
term finance requirement that are explained below:
Sources Feature Advantage Disadvantage
Short term Bank Overdraft: It is a The advantage of this The disadvantage of
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facility that bank provided
to all the businesses. Taste
company can take bank
overdraft and withdrawal
higher the amount from the
Bank deposits (Sources of
finance. 2010).
method is that it
mitigates the urgent
and immediate
finance requirements.
this method is that
bank charges a high
rate of interest on
overdraft. Further, the
overdraft facility is
provided up to a
certain limit.
Short term Lease: It is a hiring process
through which Taste can use
the assets without having its
ownership.
The advantage is that
through paying only
the hiring charges,
company can use the
assets. It does not
require purchasing the
assets.
However, the main
disadvantage is that
Taste requires paying
instalment plus the
interest charges it.
Thus, it create
financial burden to
the company.
Long term Share capital: Taste
company can issue both
equity and preference shares
in the market to fulfil its
long term financial need.
The advantage is that
Taste company do not
need to pay regularly
dividend to the
shareholders. Thus, it
does not create
financial risk to the
business.
The disadvantage is
that shareholders have
voting rights through
which they can
control and manage
the business
operations.
Long term Bank loan: It is the major
source of finance. Thus.
Taste company can take
long term loans from bank.
The advantage is that
this is comparatively
a linent finance
sources than equity
because the interest is
allowable expenditure
for tax purpose
(Arffa, 2001)
Disadvantage is that
Taste business
requires paying
timely the instalment
and the interest
charges on browed
funds.
Long term Debentures: Along with the The advantage is that Disadvantage is that it
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share capital, Taste
company can also issue
debentures for getting funds.
it fulfils the financial
requirement to a great
extent. Therefore,
Taste can use this
source to acquire
larger the funds.
create fixed financial
burden to the
company. The reason
behind that is Taste
business requires to
pay timely interest to
the debenture holders.
AC 2.3 Comparison between rights issue and loan stocks
AC 2.3.1 Rights Issue
Right issue: It is a way of raising the equity capital of the business. It is an offer and
invitation to the existing shareholders to purchase new shares proportionate to their holdings.
Equity is an instrument for issuing rights to the shareholders.
AC 2.3.2 Loan Stock
Loan stock: Debenture is the instrument for acquiring loan stock which is an
acknowledgement of company's debt capital. It is a long term debt capital on which
businesses requires paying interest.
AC 2.3.3 Comparison
There are many advantages and disadvantages of issuing rights to the shareholders. In
context to Taste business, one of the main advantages for the company is that it does not
require making any payments as it is not the borrowings. Further, it can increase the business
credit rating therefore; company can take borrowings easier in future period. However, the
disadvantage is that it provides ownership to the shareholders (Baum and Crosby, 2014).
Thus, they have rights to take part in business decisions. Further, they invest their funds with
the purpose of getting higher the return. Therefore Taste company need to pay dividend
payments. Further, in case of any default it can hurt the business reputation and share prices
in an adverse manner. However, The advantage of the loan stock is that bondholders have not
any controlling rights hence; they cannot take part in the business management. Moreover,
the interest payment is deducted for computing tax (Burton, 2007). On contrary, the
disadvantage is that Taste company need to pay fixed interest payment periodically.
Therefore, it brings fixed financial burden to the company. Thus, it may create cash flow
problems and reduce profitability.
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AC 2.4 Beneficial source of finance for the Buildings and noncurrent assets
As per the scenario, Taste wants to expand its business in market therefore the
company require to invest £1000000 in building and other noncurrent assets. On the basis of
above mentioned benefits and disadvantages, it can be advised to Taste business that issuing
loan stocks will be more beneficial finance source. Company can issue debt capital and invest
acquired funds in the building and its noncurrent assets (Cowton, 2004). The reason for such
decision is that scenario indicate that Taste business have good track record and growing
continuously over the past six years. Thus, it is clear that company is financially strong and
having adequate availability of profits. Therefore, Taste business can bear fixed financial
burden for making timely interest payments. Further, by doing that, business do not require
diversifying its controlling rights and managing its operations on its own basis. Moreover,
Taste can acquire funds at easier the rate helps to minimize the finance cost and increase the
business profits (Fridson and Alvarez, 2011). Another benefit will be that the interest
payments made by Taste will be deducted so as to calculate business tax liability and reduce
the tax payments.
AC 2.5 Advice to the Board of Directors on finance source for working capital
AC 2.5.1 Definition of working capital
The type of capital that is needed to run business operating functions is known as
working capital. The need for working capital arises for operational purpose.
AC 2.5.2 Importance of working capital
The need for working capital arises for operational purpose. Every business
organization needs adequate availability of working capital to run business operations in an
effective manner.
AC 2.5.3 Sources available for working capital
As disused earlier, it is clear that both short term and long term finance sources are
available for fulfil Taste business working capital need. Under the short term finance sources,
bank overdraft and lease sources are available to the company. However, loan capital,
debentures and share capital are available as long term sources (Gonenc, 2005). On the basis
of above information it can be concluded that share capital will be the best finance source for
Taste Company. Company can issue shares in the market and get the required funds. The
reason for such decision is that company do not require paying regular payment of dividend
to the shareholders. Further, company is growing continuously in the market therefore it can
easily attract the investors due to higher the profitability (Gotze, Northcott and Schuster,
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2007). Moreover, through providing regular return, Taste business can enhance its share
prices and credit rating. This in turn, business can enjoy long term success and sustainability.
3. FINANCIAL STATEMENTS
AC 3.1 Statement of profits or loss
Profit or loss is a profitability statement that helps to determine the operational result
of the business. All the business expenditures and incomes are shown in profit or loss
account. It determines the business operational performance through determining profits or
loss.
AC 3.2 Statement of financial position
Balance sheet is known as statement of financial position. It combines all the business
assets and liabilities so as to determine the financial position. Assets include all the fixed,
current and noncurrent assets. However, balance sheet involves the current liabilities, long
term debt and equity capital. Financial performance can be determined through the balance
sheet.
AC 3.3 statement of cash flow
Cash flow statement: It combines all the cash incomes and cash expenditures. Cash
incomes are the cash sources whereas cash expenditures indicate the application of cash
funds. The purpose of the statement is to determine the cash changes between two balance
sheet dates. Cash flow from operating activities determined so as to identify the cash earning
capacity. Cash flow from investing activities indicate the acquisition and selling of business
assets. In addition to it, cash flow from financing activities identifies the sources through
which funds are generated and payment made to them.
AC 3.4 Impact on financial statements
AC 3.4.1 Weighted average cost of capital
Table 1: Calculation of enterprise value for computing WACC of 5, 00,000 shares
Enterprise Value (EV)
Current Market Price 2
Diluted Shares 35,00,000
Market Capitalisation 70,00,000
Long Term Liabilities 1,100
Less: Cash & Cash Equivalents 1,800
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Enterprise Value (in lacks) 69,99,300
Table 2: Computation of WACC
Debt Equity Weight age
E/(D+E) @ Enterprise Value 99.98%
D/(D+E) @ Enterprise Value 0.02%
Interest Rate (%) 0%
Tax Rate (@) 30%
WACC Calculation
WACC 3.88%
Table 3: Calculation of enterprise value for computing WACC for loan stocks
Enterprise Value (EV)
Current Market Price 2
Diluted Shares 31,00,000
Market Capitalisation 62,00,000
Long Term Liabilities 1,100
Less: Cash & Cash Equivalents 1,800
Enterprise Value (in lacks) 61,99,300
Table 4: Calculation of WACC
Debt Equity Weight age
E/(D+E) @ Enterprise Value 99.98%
D/(D+E) @ Enterprise Value 0.02%
Interest Rate (%) 6%
Tax Rate (@) 30%
WACC Calculation
WACC 0.92%
Table 5: Calculation of enterprise value for computing WACC for stocks and loan
Enterprise Value (EV)
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Current Market Price 2
Diluted Shares 32,50,000
Market Capitalisation 65,00,000
Long Term Liabilities 5,01,100
Less: Cash & Cash Equivalents 1,800
Enterprise Value (in lacks) 69,99,300
Table 6: Calculation of WACC
Debt Equity Weight age
E/(D+E) @ Enterprise Value 92.84%
D/(D+E) @ Enterprise Value 7.16%
Interest Rate (%) 6%
Tax Rate (@) 30%
WACC Calculation
WACC 0.30%
AC 3.4.2 Gearing ratio
Gearing ratio: It measures the proportion of debt capital and owner's equity in the
organization, also known as leverage ratio.
Calculation of gearing ratio
Particular 1st Option 2nd Option 3rd Option
Debt - 1000 500
Equity 8200 7200 7700
Gearing ratio Nil 0.14 0.64
AC 3.4.3 Impact of the financial plans on the financial statements
It is advisable to the Board of directors that third option is best for the firm because in
this option WACC is very low in comparison to other two alternatives. In this alternative
corpus is arranged by issuing shares and loan stocks. This leads to reduction in aggregate cost
of raising capital (Greenwood, 2002). This also leads to less dilution of the control of owners
on the firm. Hence, third option is best for the firm. By following this option cost of capital
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will reduced which will lead to less reduction in profitability. Hence, this will benefit to the
shareholders in terms of dividend receipt from the company.
These financial plans to large extent will affect firm financial statements. If shares are
issued alone then shareholder equity will increase. In other words, it can be said that liability
side will increase in the balance sheet. If loan stocks and ordinary shares are issued then long
term loan amount will increase in balance sheet and shareholder equity will also increase in
same (Ho, Liu and Tsay, 2008). If loan shares are issued then ordinary shares and loan
amount will increase in the liability side of balance sheet.
AC 3.5 Calculation of EPS
AC 3.5.1 Information
Earning per share indicate the shareholders return on each share. All the business
shareholders have the objective of getting larger the return on their invested funds. Thus, it is
important for the companies to provide increased return to the shareholders.
AC 3.5.2 Calculation of EPS
Table 7: Calculation of EPS
PBIT 720000
Outstanding shares 3000000
EPS 0.24
AC 3.5.3 Explanation
EPS refers to the part of earning that is coming on each and every unit of share
(Langdon, 2002). Dividend is paid to the shareholders from the EPS on per unit basis. EPS of
the shares is 0.24 and it indicates that there is a very low earning on per unit of share. This
happens because there is large number of outstanding shares. Hence, it can be said that firm is
giving poor performance to its shareholders.
4. INVESTMENT APPRAISAL
AC 4.1 Investment appraisal importance
As per the scenario, Taste has a branch in Cattibbean that providing food, leisure and
accommodation facility to large number of tourists from all over the world. Company's Board
of Directors wants to acquire other similar organization that operates in other parts of the
world. The Chief Executive Officer (CEO) of the company considers a possible takeover of
hotel chain in Europe and Asia.
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Investment appraisal techniques: This is the techniques that are available to the
organization for selecting an appropriate investment proposal that provide higher the return
(Baker and Mukherjee, 2007). All the organizations need to invest the funds for different
purposes. Distinct methods are available for identifying the appropriate investment appraisal.
The technique helps the businesses to take effective investment decisions. The scenario states
that investment will be required amounted to £7,500,000 and £8,000,000 for takeover a hotel
chain in Asia and Europe.
AC 4.2 Risk to future cash flows and future values vs. present value
The future cash flows associated with the investment proposal have different type of
risk. For instance, the discount rate may be fluctuating implied risk to the cash flows.
Moreover, the uncertainty with the market changes also brings risk to the business. This in
turn, profitability will be affects. Higher the risk contributes to lower the investment profits
and vice versa.
Future values vs. Present value: Future value of a given amount of money indicates
the values that the organization will get at a specified date in future. The process of finding
the future value of an amount at implied interest rate is known as capitalization. However,
present value is the amount required to be invest currently for getting a fixed amount in future
period. The process of discounting the future value at a discount rate is called discounting. It
reflects the current value of a future amount.
AC 4.3 Types of techniques
Investment appraisal techniques includes payback period, net present value,
accounting rate of return and internal rate of return that helps to determine most appropriate
investment.
AC 4.3.1 Payback period
Pay back period: The payback period of the investment proposal is the time period
required to get its initial investment back. The decision rule of the method is that company
has to invest the funds in that proposal that have lower the payback period.
AC 4.3.2 Calculation and explanation of payback period
Cash flows: As per the scenario, cash flows are calculated by determining revenues
and profits. Thereafter, depreciation is added back into the profits so as to calculate cash
flows. The reason behind that is depreciation is non cash expenditure hence; it cannot be
subtracted for computing cash flows.
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Table 8: Calculation of cash flows
Year Revenue Net profit Depreciation Cash flow
1 25000000 2500000 95000 2595000
2 27500000 2750000 95000 2845000
3 30800000 3080000 95000 3175000
4 34188000 3418800 95000 3513800
Table 9: Calculation of payback period
Year Cash flow Cumulative cash flow
0 -8000000 -8000000
1 2595000 -5405000
2 2845000 -2560000
3 3175000 615000
4 3513800 4128800
Payback period = 2 year + 256000£/3175000£
= 2 Year + 0.806
= 2.806 Year
Thus, it became clear that this investment proposal will require 2.806 years to get its
initial investment of 800000£ back.
AC 4.3.3 Net present value
Net present value: It is the difference between firm's discounted cash inflows and its
initial cash outlay. It is the most appropriate method as it considers the time value of money.
The method states that the value of money does not remain same over the period hence get
changed over the time period. Therefore, for taking effective investment decision, business
needs to identify the appropriate rate of cost of capital (Ahmed, 2010). The rate is therefore
used to determine the return of different available investment proposals. The method tells that
all the cash flows associated with the investment proposal will be discounted using a discount
rate. The decision rule of this method is that company has to make investment in such
proposal that have positive net present value.
AC 4.3.4 Calculation and explanation of net present value
Net present value: The net present value of the European investment proposal is
calculated by discounting it’s all the cash flows at 8% cost of capital. The net present value is
the difference between total of discounted cash inflows and cash outflow calculated as under:
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Table 10: Calculation of net present value
Year Cash flow
Discounted value of
1£ @ 8%
Discounted cash
flows
0 -8000000 1 -8000000
1 2595000 0.926 2402970
2 2845000 0.857 2438165
3 3175000 0.794 2520950
4 3513800 0.735 2582643
Net present value 1944728
As per the scenario, by making investment of 8000000£, Taste business can earn net
present value amounted to 1,944,728£.
AC 4.4 Recommendation for the investment opportunity
On the basis of above calculation, it can be recommended to Taste's Board of
Directors that Company should invest the funds for acquiring the hotel chain in Europe. In
context to given scenario, the net present value and payback period in regards to hotel chain
in Asia is given that are 2 years and £1,875,000 respectively. However, European Hotel
chain's payback period and net present value are 2.806 year and £1,944,728 respectively. On
the basis of the net present value method, European investment opportunity indicates higher
the return to £1,944,728. The method concluded that Taste has to invest amount of
£8,000,000 in European Hotel chain. By doing that, company can get higher the profits
amounted by 69728£ as compared to Asian Hotel Chain. However, according to the payback
period method, Asian Hotel chain investment will need lower the time period to get back its
initial investment of 7,500,000£. While, the decision cannot be taken on the basis of that
method as the method do not consider the time value of money. Further, it does not evaluate
the overall potential of the investment opportunity. Thus, it becomes clear that Board of
directors should take over Hotel chain that is operating in Europe due to higher the return.
AC 4.5 Unit cost
Unit cost: It is per unit cost incurred by the business to produce its products and
services. It includes all the business expenses that are incurred for production, store and
selling the products in market. Therefore, both the fixed as well as variable cost is included in
the total cost. It includes material, labour and overhead expenditures (DIAW, 2015).
Overhead may be of different types such as production overhead, administration overhead
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and selling and distribution overheads. The total of all the expenditures are known as total
cost. However, per unit cost is calculated through dividing total cost by the number of unit
produce.
AC 4.5.1 Importance of cost per unit and its calculation
Importance: It is very important for every business organization to determine cost per
unit in a correct manner. It is also used for deciding the selling price of the products and
services offered. Therefore, through determining the cost, business will be able to earn
required rate of return.
Calculation of total cost and cost per unit: Total cost can be computed through adding
all the fixed and variable cost (Duxbury, 2015). However, cost per unit is computed through
dividing total cost to total number of production. For instance, XYZ Ltd. is producing 5000
units of a product. The incurred expenditures are given here. Thus, total cost and Unit cost
can be computed as follows:
Particular Amount
Material cost 120000
Labour cost 60000
Direct overhead 10000
Production overhead 35000
Administration overhead 40000
Selling and Marketing overhead 15000
Fixed cost 70000
Total cost 350000
Unit cost = Total cost/ Number of units produce
= (3, 50,000£)/5000 Units
= 70£
AC 4.6 Factors to be considered while deciding the selling prices
Appropriate pricing decisions helps companies to increase their revenues and also the
profitability. Taste business is providing distinct services include food, leisure and
accommodation mainly (English and Guthrie, 2003). Thus, different factors are available that
affect the pricing decisions of Taste business organization that are described here as under:
Cost: Price is decided by adding certain percentage of profit into the cost. Therefore,
it is one of the most important factors that influenced the pricing decisions to a great extent.
Increasing the cost will lead to higher the product and service prices and vice versa. For
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instance, Taste food, accommodation and leisure product prices get increased than business
will charge higher the prices and affects the revenue in an adverse manner.
Competitors: In the present competitive environment, competitors also play a major
role in the company's pricing decisions. For instance, lower the competitors prices will reduce
Taste business revenues as higher the number of customers will consume the competitors
products (Kayed, 2012). However, when the Taste business charges lower the prices than it
can reduce the revenues and profitability. Therefore, pricing must be decided efficiently.
Buying behaviour: Customers are the sources of income thus, their buying behaviour
must be analysed by the company (Lau and Proimos, 2010). For instance, price sensitive
customers will demand the products at lower the prices. However, if the customers are quality
demanded without considering the prices than Taste business can charge higher the prices.
5. CASH FLOW VS. PROFITS
AC 5.1 Need of cash budget and trends of the Taste business budget
Cash Budget: Cash budget can be prepare through combining all the forecasted
business incomes and expenditures for a given period. Every business organization need to
estimate its expenses and incomes that can be arise in future period. Business can generate
cash incomes through selling the products and services into the market (Michelson and
Smith, 2008). However, cash expenditures may include production expenses, advertising
expenses and other overheads.
In context to Taste Business, the scenario states the cash budget for the last six
months. The budget includes all the business cash receipts and cash payments. Business is
generating cash revenues through selling the food, accommodation and leisure services to
their customers. However, cash payments include wages and salaries, supplies payments, rent
and rates, advertising payment and other miscellaneous charges (Mohsin, 2013). The
difference between the total cash receipts and expenses indicate the net receipts or net
payments. However, cash balance at the end of the month is determined through adding the
net difference to the opening cash balance.
As per the scenario, cash inflow in terms of business sales get increased till the month
of May. The sales get increased from 3000£ to 6800£ in the month of May. However, in the
month of June, it shows a decreasing trend as it gets declined to 4900£. It adversely impacts
the business profitability. However, under the cash outflow, wages and salaries payments
remain constant till the month of March to 1800£. After that, it get inclined to 3200£ till the
month of June. Supplies shows an upward trend continuously as it get increased from 1040£
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to 3990£ in the month of June. However, the rent and rates expenses remain unchanged over
the period as it is fixed amounted to 175£ in all the subsequent years. Moreover, the
advertising and miscellaneous payments also remain fixed to 150£ and 30£. On contrary, in
the month of June, business do not incurred any advertising expenses resulted in declining the
business sales. Therefore, total cash outflows shows an increasing trend as it get increased
from 3195£ to 7395£ respectively. This in turn, in the month of January, February and
March, the net cash flow indicate negative balance to (195£), (275£) and (225£) respectively.
However, in the month of April and May, the cash balance get improved to 385£ and 515£
due to significantly increase the business sales. On contrary, in the month of June, net cash
balance is (2495£) affects business in an adverse manner. This in turn, the closing cash
balance of the company shows both upward and downward trend.
On the basis of above information, it can be reported that Taste business has to
increase its business sales and reduce its business expenses. By doing that, company can
eliminate its negative balance. Further, previous year month cash balance can be invested
further to earn extra return on it.
AC 5.2 Importance of financial planning
Financial planning helps the organization to manage the business funds in an effective
manner. It determines the busyness financial requirement and acquires the funds from
appropriate finance sources. Further, it manages the business incomes and ensures optimum
allocation of resources. Thus, it is clear that it helps to maintain proper administration of
funds. This in turn, cost can be minimised and profits will be increase.
Financial planning is an appropriate tool that mitigate the business financial
difficulties in terms of liquidity (Su and Sun, 2011). By making effective financial planning,
company can proper manage the funds and having adequate liquid availability. By doing that,
business can run its operation successfully and ensure long term business sustainability.
AC 5.3 Liquidity problems with having proper availability of profits
It may be possible that business may have adequate availability of profits but may
face liquidity problems. The reason behind that is all the cash as well as non cash
expenditures are deducted while calculating business profits. For instance, non cash
expenditures such as depreciation, loss on sales of assets are deducted for determining the
profits. Moreover, profits on sales of assets will be included in total business incomes (Rouse,
and Jayawarna, 2006). Another reason behind that is transactions are recorded on the basis of
accrual concept. The concept states that all the business expenses and incomes will be shown
at the time of their occurrences. It not be shown at the time of when the revenues are
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received in cash and expenditures are paid. Therefore, profits will be increased without
increasing the business cash availability (Shahrokhi, 2008). Thus, it can be concluded that it
might be possible that companies that have higher the profits available but run into financial
difficulties. It may face liquidity problem to pay its short term obligations. This in turn,
company cannot operate successfully in the market.
AC 5.4 Users of the accounts
Cash flow statement and profitability statements gives necessary information to
different persons who use them to take efficient decisions. Number of users uses the
information about the cash flows and profitability and takes necessary decisions.
AC 5.4.1 Users
Cash flow statements are used by the business managers and the owners. However,
both the internal and external users want to know the business profitability. Employees,
managers and owners are the internal users. However, competitors, government and public
are the external users.
AC 5.4.2 Information need and importance
Business managers analyse the cash incomes and cash expenditures to analyse the
cash sources and its applications. They analyse the business cash earning capacity and ensure
optimum allocation of funds. They need this information so as to take qualified decisions and
manage the cash sources efficiently and effectively. However, owners determine the
operational result through determining the profits. Competitors use this information for
making comparative analysis. Government use these information so as to identifying the tax
obligations. Employees objectives of getting higher the monetary payments is highly depends
upon the business profitability. Therefore, they also want information about business profits.
6. INTERPRETATION OF FINANCIAL STATEMENTS
AC 6.1 Ratio Analysis
Financial statement of the company helps to determine the business profitability and
the financial performance. As per the scenario, Taste business intends to take over the
business of Drin Plc. Thus, it is very necessary for company to analyse Drink Plc company's
financial statements. Ratio analysis is a best method that employs distinct type of ratios to
analyse the business performance (Wilson, 2010). Ratio indicates the relationship between
two factors. Drink plc profitability and liquidity can be measured through computing
different ratios that are described here as under:
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AC 6.1.1 Profitability ratio
Profitability analysis: Profitability statements help to analyse the business operating
performance and its earning capacity. The statement can be used for analysing the business
profitability. Gross profit and net profit ratio can be computed for analysing Drink Plc
Company’s profitability (Lewellen, 2004). Higher the profitability ratios indicate better
performance and vice versa.
Profitability ratio Formula 2015 2014
Gross profit 2210 2245
Net profit 1241 1393
Revenue 2920 2930
Gross profit ratio
(Gross
profit)/(sales)*100 75.6849315068 76.6211604096
net profit ratio
(Net
profit)/(sales)*100 42.5 47.542662116
Interpretation: Gross profit ratio is computed through dividing the gross profit to the
total revenues while net profit ratio can be computed through diviiding net profit to the total
revenues. As per the stated scenario, in the year 2014, Drink Plc gross profit ratio was
76.62% get declined to 75.68% in the year 2015. The reason behind such decreases is that
both the revenues and gross profit tend to decrease in the year 2015. In the year 2014, the
total revenue was 2930£ got decreased to 2920£. However, the gross profit get declined from
2245£ to 2210£. Another reason for such decrease is that cost of sales get inclined from 685£
to 710£. This in turn, gross margin also tends to declined over the period. However, the net
profit ratio of the company was 47.54% and 42.5% in both the years. Thus, it also shows a
decreasing trend as the business net profit get declined from 1393£ to 1241£ respectively.
Therefore, it can be concluded that Drink plc Company’s profitability is declining. Thus, it
can be said that business is not performing better as compared to the year 2014.
AC 6.1.2 Liquidity ratio
Liquidity analysis: Balance sheet measure the liquidity position of the business.
Adequate availability of liquid funds requires discharging business short term liabilities. It
can be determined through computing current ratio and quick ratio (Maxymuk, 2000). Higher
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the liquidity ratio indicates that business is more able to paying its short term obligations and
vice versa.
Liquidity ratio
Current assets 110 87
Current liability 117 119
Inventory 60 50
Quick assets
(Current assets-
Inventory) 50 37
Current ratio
(Current
assets)/(Current
liability) 0.9401709402 0.731092437
Quick ratio
(Quick
assets)/(Current
liability) 0.4273504274 0.3109243697
Interpretations: Current ratio is calculated through dividing Drink plc total current
assets to the total current liabilities. In the year 2014, Drink Plc Current ratio was 0.73 get
increased to 0.94 in the year 2015. The ratio gets increased due to increasing the current
assets and decreasing the current liability. Drink Plc current assets get inclined from £87 to
£110. However, current liability gets decreased from £119 to £117. The ratio shows an
upward trend indicate that business is not more able to pay its short term liability. Quick ratio
is determined through dividing the business quick assets to its total current liabilities. In the
year 2014, Drink Plc Company’s quick ratio was 0.31 get increased to 0.427 in the year 2015.
Company's quick ratio also moving in upward direction thus, it can be said that in the current
year, company's liquidity performance is improved.
AC 6.2 Advice to the Taste Business
Company's current performance is good as the business is performing better in the
market. Thus, it can be advised that Taste business do not takeover Drink plc Company’s
business. The reason for this decision is that Drink plc Company’s revenue gets declined
while its cost of sales gets increased. Therefore, business profitability tends to decrease over
the period. Therefore, it will not beneficial for Taste business to acquire that company due to
lower the profits.
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TASK 7 FINANCIAL STATEMENTS OF SOLE TRADER,
PARTNERSHIP AND LIMITED COMPANIES
Tesco is a medium sized company prepare its financial statement in order to assess its
profits and its financial position. The financial statements of sole trader, partnership and
company in order to determine their operational result and financial status are discussed here:
Sole trader: In this form of organization, only an Individual establishes the business.
All the money invested by himself therefore, all the profits as well as loss are available for
them. They are mainly involved in trading activities hence, they purchases the goods and sell
it to customers. They do not manufacture the products in business. The sole trader prepares
trading, profit and loss so as tom determine their operating function results (Nicholson and
Aman, 2012). Gross profit can be determined through preparing trading account however, net
profit can be determined through profit and loss account. On contrary, balance sheet prepares
in order to determine financial position of the business.
Partnership: Another form of organization is partnership in which two or more
persons start the business ventures. Therefore, all the business profits and losses are
distributed among them in their decided profit and loss sharing ratio. This form of
organization can be established by making a partnership agreement between partners. It
prepares its financial statements according to the partnership act. It prepares profit and loss
account, profit and loss appropriation account, partner's capital account, partner's current
account and balance sheet (Obst Graham and Christie, 2007). There are two methods
available for preparing partners capital account that are fixed and fluctuating capital account.
However, statement of financial position that is balance sheet indicates the business financial
status.
Limited companies: Company is a legal and separate body that came into existence by
company act. Therefore, they have to prepare all the financial statement that is required by
the act. It prepares profit and loss account, balance sheet, cash flow statement, and fund flow
statement, statement of changes in equity and statement of changes in retained earnings.
Gross profit, net operating profit and net profit can be identified through the profitability
statement. However, balance sheet helps to determine the business financial position (Ogayar
and Vidal, 2009). Further, cash flow and fund flow statement helps to identify the changes in
business cash balance and total funds between two balance sheet dates. Through analysing
and interpreting the financial statements companies can take effective financial decisions.
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CONCLUSION
On the basis of above discussion it is concluded that finance is a life blood of any
organization. Hence, companies needs to look after several factors that affects firm finance
related operations. It is also concluded that firms must select an appropriate source of finance
. In this regard they can consider several factors. Firms must prepare a financial plan in order
to make best use of the available amount among the various business operations. In this
regard they must review business environment consistency so that on time expenses can be
adjusted. By doing this expenses can be kept within determined boundary.
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REFERENCES
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