Financial Management and Decision Making

The assignment delves into the realm of financial management, examining key concepts like investment appraisal techniques (including Net Present Value and Internal Rate of Return) and their application in decision-making. It analyzes the influence of factors such as market conditions and regulatory frameworks on financial performance. Students are tasked with understanding how these principles guide organizations in making informed financial decisions.

Managing Financial
Resources and
Decisions

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1................................................................................................................................................1
1.2................................................................................................................................................2
1.3................................................................................................................................................3
2.1................................................................................................................................................4
2.2................................................................................................................................................4
2.3................................................................................................................................................5
2.4................................................................................................................................................6
3.1................................................................................................................................................6
3.2................................................................................................................................................7
3.3................................................................................................................................................8
TASK 2............................................................................................................................................9
4.1................................................................................................................................................9
4.2..............................................................................................................................................10
4.3..............................................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INDEX OF TABLES
Table 1: Pros and Cons of Carious sources of finance....................................................................2
Table 2: Cash budget analysis ( in £)...............................................................................................8
Table 3: Sales Budget......................................................................................................................8
Table 4: Calculation of Unit Cost....................................................................................................9
Table 5: Net Present Value..............................................................................................................9
Table 6: IRR...................................................................................................................................10
Table 7: Payback Period................................................................................................................11
Table 8: Ratio Analysis of Sainsburry...........................................................................................12

INTRODUCTION
Financial management is concerned with the concept of managing and arranging funds to
carry out the different activities of new business concern. It assist in effective allocation of
money to all the sectors of the company. The present research report is about a new business
entity facing issues to adapt the best and the most appropriate sources of finance to start-up the
operations (Booker, 2006). Main aim of this study is to present readers with an insight of where
and how to access sources of finance for the enterprise and also the skills needed to utilize the
information for making various decisions. Learners will be able to identify the sources of funds
and their pros and cons. Based on this the appropriate source shall be chosen by the entrepreneur
and along with that the cost of the sources of finance shall also be identified. Furthermore, in the
report, cash budget, Unit cost of product and ratio analysis of another company has also been
presented. On this basis various decisions are made by the entrepreneur that assist in expanding
its business activities (Broadbent and Cullen, 2012).
TASK 1
1.1
The first and foremost task involved in starting up a new business unit is identification of
various sources of finance. An organization requires finance to purchase, stock, and assets as
well as for several other activities. Therefore, enlisted below are few sources of finance which
the entrepreneur feels that can be adapted by it: Crowd funding: In this type of finance, an owner of the company can raise funds through
various social networking sites such as Facebook and twitter. Hereby, the entrepreneur
aims to provide best services, goods and equity to people in return for the money
generated through these sites. It is the best method where the owner wants to build the
goodwill of the company before starting up its business activities. Business Angels: These are the institutes which invest in new projects or businesses by
providing funds for development or either by giving contacts and skills that may be
beneficial of the entrepreneur (Bull, 2007). Australian business angels and Angels pvt Ltd
are the examples of such institutes. They take risk by investing in it and also involve
themselves in the business either as a mentor or as a financier. Venture capital: It is a kind of source in which the new businesses receives various types
of knowledge regarding the operations along with the initial investment of fund. They
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provide advice on how to manage skills and time and what all decisions are required to be
made in the development, expansion and later stages of business life cycle. Government programmes: Herein, the government of UK arranges programmes to
provide loan to a new business venture. Funds are being provided to the needed
enterprise who are having low investment in regard to this and it demands certain
documents that can be kept as guarantee (Komissarov, 2014). Loans: Banks loans are the most effective means of source of finance wherein they
provide the respective amount to the person in need on the basis of certain guarantee kept
in form of collateral money with the bank owners.
 Family and Relatives: The entrepreneur can undertake loans from the person that are
close to them. They can provide the loans on the basis of some security or interest
provided by the owner.
1.2
The above discussed sources of finance may be best but the entrepreneur needs to select
the best source of finance. Therefore, it is essential to identify its pros and cons of all the
suggested sources of finance in the new business enterprise.
Table 1: Pros and Cons of Carious sources of finance
Kinds of finance Implications
Crowd funding  The legal implication of the said sources of finance is that the
entrepreneur needs to take prior permission from the government
authorities before applying.
 The profit that is earned needs to be shown in the books of account
at the accurate amount and the same needs to paid back to the
public in form of high quality products (Ojha and et.al., 2013).
 At times of dilution, the crowd funding need not to refund any
amount to the public.
Business Angels  Complete formality needs to be completed by the owner in order to
ascertain the funds from these investors.
 This kind of source is not suitable where the amount of investment
is less that £10000 and more that £500000. Moreover, the owner
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needs to give up a part of share to the Business Angels in regards
with the initial investment (Anderson and et. al., 2015).
 At times of dilution of the company no amount is to be paid by the
entrepreneur to the investors.
Venture Capital  Quite typical procedure of availing venture capital. Additionally,
the time taken by the Vcs in making the investment decision is
much more than 6 months.
 Major loophole of investing in a venture capital is that the return on
investment is quite high. It means that entrepreneur has to repay the
amount with almost 50 percent high rate than the initial.
 The remaining amount needs to paid back at time of dilution after
all the creditors have been paid.
Government
Programmes
 It is the best method whereby the money can be raised through
underwriting programmes (Drake and Fabozzi, 2012).
 Financial implication is that the amount cannot be invested in any
other programs.
 No money needs to paid back at time of dilution of the
organization.
Bank Loans  The banks are likely to seize the assets on the non payment of
instalment amount.
 The amortization money needs to paid monthly, yearly or as per the
agreements of bank.
 All the assets of the organization can be seized on the non payment
of loan amount.
Loan from friends
and family
 They can case against the entrepreneur if the amount is not paid
back on prescribed time.
 Interest needs to be paid along with the loan amount.
 Likely to seize the assets on termination of contract.
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1.3
The entrepreneur has various choices available with it in order to cater finance for its
business. It can arrange funds from venture capital, Business angels, crowdfunding, government
programmes, etc. All these sources are best and efficient in own place but the owner needs to
evaluate the cost effective and reasonable source which best suits the enterprise. Currently, the
entrepreneur has £20000 of personal money that it can invest in the firm and additionally it
requires £280000 to start-up its business (Griffin, 2013). For this purpose, the venture capital and
Business angel is appropriate for the enterprise because no amount of interest is to be repaid to
both the investors. Additionally, the cost of implementing this tool is quite low as compared to
the government programmes because the amount of interest they take is quite high which
overtakes the cost of investment.
Contrary, arrangement of funds through crowdfunding requires huge risk in terms of
losing the business confidential information if it has not been secured with the patent or
copyright. Apart from, it is necessary to evaluate and select the one best method from the
Business angels and Venture capital for the company (Avlonitis and Indounas, 2005). It has been
recommended that the entrepreneur shall opt for angel financing because it is the most cost
efficient and effective source of finance as compared to the venture capital. This is due to the
high rate of return charged by the Vcs for the amount of investment.
2.1
Before making any decisions regarding selection of one of the best source it is essential
to evaluate the actual cost of implementing the same. The same have been highlighted below: Cost of Crowdfunding: Although, it is the most efficient method of raising funds from
the public but the amount of fees required to be paid for the campaign constitutes of 3 to
5% of total amount generated from these sites which is quite high amount to be repaid. In
order to avail the respective source of fund the entrepreneur needs to incur the
opportunity cost of losing the other sources. This can be termed as the amount of
dissatisfaction ascertained from losing the equally important things in order to get the one
which is best meets the requirements of the owner (Driouchi and Bennett, 2012). Cost of Business angels: The cost of investing in the Business angel is quite low as it
does not require interest amount to be paid. Moreover, the company need not to keep any
assets as collateral with the investor. The only cost involve herein is that the entrepreneur
4

needs to give some investment bonds or a part of share of the company to the angel
brokers in order to avail the funds. Cost of venture Capital: Alike the angel financiers, venture capitalist also demands some
share in the company in the form of becoming part of management. Although the
expected rate of return on the investment is quite high that nearly constitutes 50 percent
return. Cost of government Programmes: Lastly, the cost involved in taking loan from
government results in high rate of interest. Likewise the SBA loans, the government
funding programmes involves the high amount of risk in terms of collateral kept as
securities (Magni, 2010).
 Loan from relatives and banks: The cost incurred in availing one amongst the two can
be the amount of interest that needs to be paid in each of the cases. Thereafter, as
discussed above, only the best source can be selected by the entrepreneur and this means
sacrificing the other. Therefore, opportunity cost of relatives loans also needs to be
ascertained to avail the bank loan.
2.2
For each business enterprise to be successful, it requires proper financial plan which will
assist in giving directions to the managers in proper utilization of available funds. Some of the
benefits of financial planning have been enlisted herein:
 It is essential to ensure that adequate amount of funds are available by the company.
 Financial planning assist in ensuring timely investment of funds by the investors in the
business which will further aids in continuity of the enterprise (Polasky and et. al., 2011).
 Likewise, with effective financial plan an entrepreneur can ensure that funds are being
allocated to all the departments and it does not hampers the productivity of the
organization.
 Furthermore, it assist in managing the uncertain events that are likely to occur in the
organization and enables a business to grow and attain its long term and short term
objectives (Baker and Powell, 2009).
 With the proper financial plan an entrepreneur knows where to invest and where not to. It
aids in knowing the current position of the firm and also helps in to manage and
incorporate changes according to the current market trends.
5

The said organization also needs to undertake financial planning so as to allocate the resources in
the most efficient manner that renders best result for the company. Currently, the entrepreneur is
facing issues regarding the best source of finance to be incorporated. This issue can be easily
solved through effective financial plan. Moreover, the entrepreneur must hire a finance manager
in order to look after the funds of business entity (Bennouna and et.al., 2010).
2.3
The financial information produced by the company are used by all its stakeholders.
These data's are used for the purpose of decision making process and analysing the current
position of the business enterprise in the market. The list of different users of financial
information of the concerned organization have been highlighted below:
Internal Users: Entrepreneur: They need to asses to these information for the purpose of assessing the
profitability and viability of the enterprise. Based on it further decisions are made for
expansion and investment. Management: The managers of the company require data's to determine the present
position of the company in the market and based on it decisions are made to improve and
enhance the performance of the enterprise. They also require data's regarding the current
liquidity position of the firm so as to manage its operations accordingly. If the firm assets
are quite liquid then they need to make investment in varied other activities (Brigham and
Ehrhardt, 2013). Workers: The financial information and stability of the firm has a direct and consequent
impact on the employees remuneration and job security. They periodically assess these
information to check the future impact of it on their compensation.
External Users: Regulatory authorities: Their main purpose of reviewing the the information of the
company is to analyse that the data's provided to its stakeholders are in compliant with
the rules and regulations of the company. This will provide an understanding of the
current revenue generated in the particular period and then determining the amount of
taxes that the entrepreneur needs to pay. Creditors and Investors: These comprises of the suppliers, bands and investors of the
company. They determine and assess the credit worthiness of the firm and on the basis of
6

it the terms and conditions of lending money is being devised (Gaskell and Ashton,
2008).
 Tax authorities: They need various informations for the company to determine whether
the said firm is in the position to pay the taxes to the government. The profitability and
liquidity of the firm will become a basis for determination of taxes need to be paid by the
owner.
2.4
Financial statement of a company constitutes of the profit and loss account, balance
sheet, income statement and cash flow statement. The various source identified by the
entrepreneur has an equal and consequent impact on the financial statement. All of the illustrated
sources of funds increased the owners capital, therefore it can be said that the business angel,
crowd funding, venture capital and government programme funds will be shown in the liability
side of balance sheet (Habib and et.al., 2013).
Likewise the entrepreneur needs to pay in return the interest, shares or definite amount of
money for the same. In case of crowd funding the owner needs to pay a certain amount of its
profit or revenue generated through the social networking sites. Therefore, it will affect the
liability side of the balance sheet. Likewise, in case of the government programmes, the
company is obliged to pay the interest along with the initial amount. Therefore, the it will be
shown in the liability side of under secured loans and the profit and loss will be affected by the
amount of interest (Mishra and et.al., 2009). Similarly, the angel financing and the venture
capital have a similar impact on the balance sheet as investment. And the same amount shall be
credited in the share capital account as the owners allow the investors to take part in management
by providing some amount of shares in the company. Along with that, the loans taken by the
owner shall have a consequent impact on the income statement of the firm as more amount of
investment result in increase operations and sales thereby causing a similar impact on the said
statements.
3.1
The budgetary report of the said organization for the following six months has been
presented below. It provides a clear picture of the current expenses and income of the firm and
based on it certain decisions regarding inventory management and expansion can be made. It
7

also aids the finance manager of the company to properly allocate the resources and save the
same for future course of action.
Table 2: Cash budget analysis ( in £)
January February March April May June
Opening Balance £20000 £24300 £38600 £43850 £51950 £55100
Incomes
Sales 15000 24000 15750 20500 16750 19200
Total Income 35000 48300 54350 64350 68700 74300
Expenditures
Purchase 5000 4000 3500 5000 7000 2500
Salary 3000 3000 3000 3000 3000 3000
Expenses 1500 1200 1000 2500 2000 1800
Creditors 1200 1500 3000 1900 1600 1100
Total Expenditure 10700 9700 10500 12400 13600 8400
Closing Balance 24300 38600 43850 51950 55100 65900
Table 3: Sales Budget
Particulars January February March April May June
Units 1200 1500 1600 1800 2000 2200
Selling price 10 10 10 10 10 10
Total sales 12000 15000 16000 18000 20000 22000
(-)discounts 0 2500 5300 4700 5800 6600
Net sales 12000 12500 10700 13300 14200 15400
From the above analysis of the cash and sales budget it is clear that the company is
continuously making an average rate of growth in its sales and thereby raising the overall
profitability of the firm. In order to make the higher returns the company needs to focus on
reducing the overall expenses of it (Peslak, 2006). The revenue can be raised by decreasing the
8

number of creditors and thereby increasing the sales of the company. It can also provide greater
discounts to increase its net sales. The finance manager of the said organization can keep aside
certain amount of funds to raise the amount of stock which will lead to more earnings of the
company.
3.2
Cost of the product plays a crucial role in making various pricing decisions for the firm.
It also affects the overall profitability of the company therefore the entrepreneur ask to prepare a
unit cost analysis of the firm (Rasid, 2014). The same has been highlighted below:
Table 4: Calculation of Unit Cost
Unit cost Amount in £
Total cost 70000
Unit manufactured 350
Variable Cost 45000
Fixed cost 25000
Total amount 70000
Formula for unit cost Total cost divided by
unit manufactured
Cost per Unit 200
Margin on cost 25%
Selling Price of Product 250
From the above analysis of unit cost of each unit it can be said that the firm needs to
focus on the total cost and unit produced by the firm. It can increase its funds and start producing
more which will result in raising the overall productivity of the company. Moreover, the
company shall maintain its variable cost by reducing the amount of wastage caused in production
process (Sivakumar, 2011). This will increase the number of overall units and produced and
leading to decrease in cost per unit. The said enterprise can also increase its profit margin leading
to rise in the selling price of the product.
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3.3
It is essential to assess the viability and profitability of a project in which the
entrepreneur is thinking to invest. There are various methods such as Pay Back period and Net
Present Value Method to know about the average return on a particular project (Wang and et.al.,
2011). For this purpose the entrepreneur feels the NPV is the best and the most viable technique
that can be used. The same has been illustrated below:
Table 5: Net Present Value
Year Cash Inflow(£000) PV Factor @ 8% Present Value of Cash Flow @
8%
First 400 0.9433962264 377.35
Second 450 0.88999644 400.49
Third 500 0.839619283 419.80
Fourth 550 0.7920936632 435.65
Present Value of Cash Inflow (1) 1633.29
Present Value of Cash Outflow (2) 1100
Net Present Value (1-2) 533.29
So, it can be said that the entrepreneur can effectively invest in the new project as the
positive value determines that the project is profitable. Contrastingly, if the result would have
been negative than it is suggested not to invest in the particular project as it will lead to negative
returns. In the initial stages of the development, the organization will earn a slow revenue and at
the end of the period it can earn high yield on investment (Basic investment appraisal
techniques. 2012).
Table 6: IRR
Year cash flow PV @6%
Present
value Cash flow Pv @ 8%
Present
value
1 400 0.94339622 377.35 400 0.92592592 370.37
10

64 59
2 450 0.88999644 400.49 450
0.85733882
03 385.80
3 500
0.83961928
3 419.80 500
0.79383224
1 396.91
4 550
0.79209366
32 435.65 550
0.73502985
28 404.26
Total 1633.29 1557.34
NPV 533.29 457.34
Table 7: Payback Period
Year Cash flow(000) Cumulative cash flows
0 800 400
1 400 850
2 450 1300
3 500 1800
4 550 2350
Calculation:
1+800/1000
1+0.8
1.8 years
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From the above calculation of IRR and Payback period it is been clear that the company
will receive the reasonable return on investment after approximately 1.8 years of time.
TASK 2
4.1
Sainsburry is a vast organization which carries its business worldwide and in order to
maintain transparency in its operations, the company needs to maintain all the three financial
statements. This will provide a clear and fair overview of all its transaction to the government of
the said country. Balance sheet: It provides a picture of the present position of the firm in the market.
Balance sheet is used by the internals as well as external stakeholders to review the
profitability of the firm and how Sainsburry is managing its current assets and liabilities.
It also provides various data's to calculate ratios on the profitability of the company and
based on it enormous decisions of the firm can be undertaken (Booker, 2006). Cash flow statements: This statement provides an overview of the liquidity position of
the company and also demonstrates about the inflow and outflow of the cash. The various
users of cash flow statement are the finance manager, cashier, employees, banks and
lenders. They review these informations in order to gain knowledge about the company
expenses and how well it is forecasting and managing its cash budget.
 Profit and loss account: An analysis of this statement reflects the current revenue the
firm is generating through effective sales. It also presents the operating expenses and
incomes of the firm. The said enterprise can raise its net profit by reducing its operating
expenditures (Broadbent and Cullen, 2012). The main users of Profit and loss accounts
are the auditors, employees, stakeholders, owners and mangers. They need to know the
profit generate by the firm as their salary and dividends are based upon the profit made
by the firm.
4.2
There are several kinds of business enterprise and each can be handled and dealt in a
different manner. The same has been highlighted below: Limited liability company: A large organization needs to develop all the financial
statement of the company so as to provide a clear picture of its operations to the
government and the world. It describes transparency in its operations. All the financial
12

statement will help the company in knowing the current position in the market and the
profit it has made will present the amount of dividend that shall be paid to its
shareholders (Bull, 2007). Partnership: In this kind of organization. The management needs to prepare the balance
sheet and profit and loss account of the company so as to present the equal distribution of
the same to both the partners. It also provides a clear overview of the amount of
investment that needs to be made by each partner. Profits are also distributed on the basis
of the Profit and loss account of the firm (Komissarov, 2014).
 Sole trader: In this kind of business, the owner is the whole and sole of the business.
Therefore, the need for preparing all the financial statements does not arise. It just need to
make the profit and loss account of the company to ascertain the amount of revenue
generated in the particular period.
4.3
Table 8: Ratio Analysis of Sainsburry
Ratios Formula 2013 2014
Liquidity ratios
Current ratio Current asset/ current
Liabilities
0.61 0.64
Quick ratio (current asset- closing
stock)/ Current
Liabilities
0.28 0.49
Debt equity ratio Debt/ equity 0.46 0.37
Profitability Ratio
Gross Profit Ratio (Gross Profit/ Net
Sales) *100
5.48% 5.79%
Operating Profit Ratio (Operating Profit/ Net
Sales) *100
3.78% 4.21%
Net Profit Ratio (Net profit/ Net Sales) 2.63 2.99
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*100
Efficiency Ratio
Asset turnover ratio Net Sales/total assets 1.86 1.64
Inventory turnover
ratio
COGS/ Inventory 22.88 22.65
The above illustrated table demonstrates the profitability the firm has made in the year
2013 and 2014. from the liquidity ratio of current asset it can be ascertained that the company
has made investment in its current asset therefore it has increased by the year 2014. Likewise the
profitability ratio demonstrates the Sainsburry gross, net and operating profit has gradually
increased by the year 2014. Additionally, it can be concluded that the company's operating profit
is increasing day by day causing a consequent effect on the firms profitability. In addition to the
above, the ratios can also be compared with those of its competitors such as ASDA, marks and
Spencer and other rivalry firm. It has been determined that the other firms are nowhere in
comparison to the current organization as it profitability for the current period is quite high.
Moreover, the liquidity of ASDA is quite more which means that it has huge expenditure for the
said period (Ojha and et.al., 2013).
CONCLUSION
The above report depicts the importance of various sources of finance and its
implications in the company. The entrepreneur has many choices available in terms of the
selecting the funds but the most appropriate source found was business angels. The implication
of the same in the business enterprise and its cost has been evaluated in this study. Furthermore,
various ratios and cost budget prepared, presents an insight about the funds spent in different
activities. All these becomes the basis of decision making for the firm (Anderson and et. al.,
2015).
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<http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Basic%20investment
%20appraisal%20techniques.aspx?mode=none>. [Accessed on 30th September 2016].
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