Business Finance and Resource Allocation

This assignment delves into the various sources of financing available to businesses, emphasizing the importance of selecting suitable options based on specific needs. It explores budgeting techniques for efficient resource allocation across diverse business activities. The report concludes by highlighting the significance of strategic financial planning for successful business operations.

MFRD

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
TASK 1 ...........................................................................................................................................3
1.1.................................................................................................................................................3
1.2.................................................................................................................................................4
1.3.................................................................................................................................................4
TASK 2 ...........................................................................................................................................5
2.1.................................................................................................................................................5
2.2.................................................................................................................................................5
2.3.................................................................................................................................................6
2.4 ................................................................................................................................................7
TASK 3 ...........................................................................................................................................7
3.1.................................................................................................................................................7
3.2...............................................................................................................................................10
3.3...............................................................................................................................................11
TASK 4 .........................................................................................................................................13
4.1...............................................................................................................................................13
4.2 ..............................................................................................................................................14
4.3...............................................................................................................................................14
CONCLUSION .............................................................................................................................16
REFERENCES..............................................................................................................................17
REFERENCES..............................................................................................................................18
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INTRODUCTION
Globalization has increased competition for business organizations that are working in
different sectors (Johnson, 2014). It has become important that management of financial
resources should be done effectively so that high profitability and revenues that are earned by the
organization. Present report mentioned about different sources of finance that are available for a
business. With this, implication for various sources of finance has also been mentioned. In the
same way evaluation of appropriate sources of finance has been done and evaluation of
appropriate sources of finance for the business have been done. Along with this, identification
and importance of financial planning for the business has been done. Moreover, impact of
finance on the financial statements have been performed. Furthermore, assessment of
information needs of external and internal decision makers have been carried out.
TASK 1
1.1
AS per the case study there are big opportunities that are available for the business firms.
Government is planing for enhancing their spending to benefit small businesses that are working
in different sectors. Major plans have been formed for small businesses that are working on
central government contracts. It reflects that there are diverse range of opportunities that are
available for businesses. In year 2013 to 2014 government has made increment in existing
spending and small and medium sized business having 250 or less employees have been
benefited through it.
Government is planning for enhancing their existing spending so that better opportunities
can be offered for the organizations that are working in this sector. A new business can be
launched and a restaurant can be opened in which fast food can be offered for the business
consumers. It is required that funding for the new restaurant should be collected so that required
operational activities can be performed successfully. There are different sources of finance that
are available for the entrepreneur (Bodie, 2013).
Entrepreneur has option for collecting the funds from family friends and family members
and it is an effective approach as in this method there is no need for giving interest on money
that has been taken taken from friends and family members. Existing assets can also be sold and
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financial needs of business can be fulfilled through this. By selling the assets required funds can
be collected for the business. It is the most effective source that could be used for the performing
the business activities. Other than this Bank loan can also be taken and when loan are taken from
banks than there is need for paying specific amount of interest on periodic time interval (Turner,
2016). Entrepreneur can also go for leasing in which funds can be collected by taking fixed
assets on the lease basis. Rent needs to be paid to the real owner of the company and by paying
rent assets can be used and in this approach entrepreneur does not need to pay huge investments
for starting operations for the business. Shares can also be issued by the firm and thees shares
can be issued for the general public and money can be raised for the business. Government is
also taking initiatives for supporting small medium enterprises and sole proprietor or
entrepreneur who is planning for opening a new restaurant has option for taking support from the
government so that money can be raised for the business (Carroll, 2011).
1.2
It is imperative that funds should be collected for starting new restaurant and there are
diverse range of options that are available for the business. There are implications for different
source of finance that are used. If funds are collected from friends and family members than
there is no need for paying interest to them. If bank loan will be taken than periodic interest
needs to be paid. Bank loan need to be paid in small investments and id money is not paid on due
time than banking authorities deserves the power for ceasing the asset of the bank (Darroch,
2005). If funds are raised through leasing than it is required that assets should be returned back to
the owner of the firm. If shares are been issued to the general public than they need be paid
return on the money that is being invested by them. If assistance is taken from government than
than it is vital that interest should be paid to the other financial institution. It reflects that
different sources of finance gives implication.
1.3
Entrepreneur has various option for arranging funds for performing the business
operations. The best option for the entrepreneur is to raise funds through bank loans. It is the
most reliable and authentic option. It is required that specific documents that are required by the
bank should be submitted so that processing of loan should be done. It is the source which is
easily available and requires less amount of time (Bontis, Dragonetti and Roos, 2009).
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Advantage for choosing this source is that it provides a method for the company to repaying the
money in monthly and periodic instalments. Concession is also received in taxation when funds
are raised through bank loans. Periodic instalments and monthly repayments are needs to be done
so that all the money that has been taken can be repay. One more option with the company is to
take funds from friends and family members so that less financial burden should be felt by the
entrepreneurs. It is an economical source that could be used by the business so that funds can be
raised for starting a new restaurant.
TASK 2
2.1
Entrepreneur has option for selecting the sources of finance through banks and collecting
money from friends and family members. Above sources of finance can create cost for the firm.
If entrepreneur will plan for taking loan from banks than it is required that monthly of periodic
repayments should be made so that amount taken can be repaid. It is also required that specific
amount of interest should be paid on the money that has been taken from the bank. It creates cost
on the firm and financial burden is created on the organization (Ulrich, Brockbank and Lake,
2005).
If funds are generated through shareholders than it is required that they should be given
return on the money that is being invested in the firm. It also creates financial burden on the
company and due to that impact is being observed on the overall profitability and financial
revenues that are earned by the entity. Sources of finance that has been selected by the
entrepreneur creates opportunity cost for the business. Influence is given by these sources on the
overall financial revenues earned by the business (Brown, 2016).
2.2
It is essential that management of an organization should make effective plans so that all
the operational activities should be performed effectively. Making effective financial plan
provides a framework on which all the business activities can be performed successfully. Blue
print is provided and on the basis of that actions can be taken for allocating resources and funds
so that required activities could be performed successfully. Financial planning supports an
organization for identifying money that is being needed for performing the activities of the
restaurant. Budgetary plan can be made and actual performance of the business can be compared
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with the plans (Ben‐Daya, Kumar and Murthy, 2016). It will be helping for identifying
deviations in actual performances of the business and on the basis of that measures can be taken
for enhancing the performance of the new restaurant. Financial plans made in the company helps
for performing the business functions in successful way. Goals and objectives that have been set
by the management of the firm could be achieved successfully by making use of this approach
(Filip, 2016).
2.3
Appropriate data and information is required for taking effective and strategic decisions
for the business. Information needs for internal and external decision makers is as mentioned :-
Internal users :-
Internal users :- Top management people makes use of internal and external informations for
making strategies and action plans for the business. Financial statements are used by board of
directors for determining goals, objectives, mission, vision and objectives for the company.
Along with this staff members of the company makes use of these statements for assessing their
career growth in the company. They can also identify and evaluate advancements in terms of
bonus and incentives (Jiao, Yan and Pang, 2016).
External users :- Various external users makes use of financial statements for taking various
types of decisions. Investors of the company evaluate profitability of the firm and with this they
also evaluate solvency related aspects of the venture. They take decisions for further making
investments in the shares of the company or not. With this suppliers of the company also takes
decisions for analysing the financial capabilities of the firm (Vyas and et.al., 2016).
They can assess cash flow statements through this they can make assessment for
evaluating the financial capability of the organization. With this financial institutions also
evaluates financial statements for analysing the capability of the firm for repaying the money that
has been taken by them. Financial position of the company can be evaluated and on the basis of
decisions can be taken for evaluating the financial position of the business. Proper and detailed
analysis of assets and liabilities can be done so that so that it can be identified that whether
company is in the position of return back the money or not.
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2.4
Different types of financial resources can gives impact on the financial statements that
are prepared in the firm. There are various aspects of financial resources comprising cost and
other elements that gives impact on the financial statements that are prepared in the company.
Income statement of the firm gets affected if business id arranging funds through bank loans and
by issuing shares and debentures. It gives impact on the financial statements that are being
prepared in the business. Balance sheet of the firm will also be affected and due to that financial
statements of the organization will be affected. Impact on the income statement and balance
sheet is as mentioned :-
Details of income statements
Details of particulars Total amount Details of particular Total amount
Interest paid on bank
loan A/C
xxxxxxxxxxxx xxxxxxx
Details of balance sheet
Details about liabilities Total amount Details of assets Total amount
Bank loan XXXXXXXXXX XXXXXXXXX
TASK 3
3.1
Budgets are prepared in an organization for estimating about expenses that are likely to
be incurred in the organization in coming time. It aids in making approximate estimation about
financial expenditures that are likely to be made in the company. Estimation are also made under
it for identifying about the revenues and profitability that is likely to be gained in the business.
Other than this, revenues that will be earned by business will be identified and on the basis of
that overall business activities will be performed. In the same way, cash budget is being prepared
in the company for next period of six months. Details about cash budget is as described :-
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From the above mentioned cash flow statement it has been observed that there is sharp increment
that has been observed in the sales revenues earned by the firm. Positive improvements have
been observed in sales and profitability that has been earned by the venture. Besides this
increments in expenditures such as price of raw materials and different administrative expenses
have been increased and due to which rise has been observed on cash outflow generated in the
company. It is required that efforts should be made by the firm for reducing the cost of cash
outflows so that profitability of the firm can be enhanced. It is also required that increments
should be made in the existing promotional aspects that are being used by business. Al the
measures will support for making positive improvements in cash position of the firm to large
extent.
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3.2
Unit cost is total cost that is being incurred in the firm for manufacturing and producing
one unit of products. An ample of fixed along with variable expenses have to be incurred in order
to manufacture the products or services associated to particular business entity. Based upon the
gradually changing scenario, numerous fixed as well as variable expenses need to be dealt with.
So, in order for determination of unit costs associated with particular product or service, the total
cost involved is divided from the number of units produced. This unit costs involve fixed,
overhead as well as variable costings. So, in order for better understanding, for an instance
consider the following example : In order for production of nearly 50 designer wears, following
fixed & variable costs are incurred by XYZ.
The fixed costs involved is : £10000
The variable costings involved are : £18000
Amount of designer wears for production : 50
Therefore, unit costs = (£10000 + £18000) / 50
= £560 per designer wear
As per this, the business units get aid from unit pricing. This further assists in building up
of appropriate structure with respect to business. This structure building is done on the basis of
desired levels profit margins which are earned by selling of clothes per unit. Consider the
following example : If each unit involves earning a profit margin of 20 % from XYZ Ltd. Then,
the prices involved are :
Price involved = unit cost + (Unit cost * profit %)
= 560 + (560 * 20%)
= 560 = 112
= £612 per designer wear
Henceforth, on the basis of above calculations, in order for attaining 20 % profit margin
upon each & every dress by the XYZ boutique, a price of £612 needs to be set for each desgner
wear.
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3.3
Investment appraisal techniques are used in the business for evaluating the most
successful project for the business. It aids in assessing which project is likely to yield better
outcomes from a project. Two projects that are compared are as mentioned :-
From the above table it has been estimated that for both the projects viability of the
projects have been calculated. It is as described :-
Calculation for payback period :-
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For project 1 Proposal A :-
= 2+ 36000/ 58000
= 2.6 Years
For project 2 Proposal B :-
=2+ 27000/65000
= 2.42 Years
From the above calculation it has been estimated that venture needs to select project as it
is giving more feasible and effective results. After 5 years project B is likely to give more results
and it will also provide opportunity for the business to make high improvements in profitability
and financial revenues that are earned by the firm. It has been estimated that project B is likely to
give more returns for the firm and so they should go for achieving it.
TASK 4
4.1
Financial statements of a company are of three types i.e. balance sheets, income
statement and the cash flow statement. The balance sheet depicts information related with assets,
liabilities and overall net worth. As the name suggests, income statement and cash flow
statement depicts the net monetary income which is acquired by the company and inflow and
outflow of cash is described in the cash flow statement. Hilton aims to evaluate the effectiveness
of deployed financial strategies. Hence, the financial statements are produced annually by the
company for fulfilling this purpose.
Income statement or Profitability statement: As mentioned before, Hilton has to prepare
an income statement which is also known as profitability statement so that a glimpse of overall
profit acquired by company can be achieved (Jiao, Yan and Pang, 2016). On the basis of
findings of this particular statement is manager of Hilton will further produce a budget and
appropriate financial framework. The decisions regarding expenditures and investments are also
based on this statement.
Cash flow statement: The information acquired from cash flow statement is useful in
rendering the operations, investments and financial activities of organisation. Hilton's finance
manager shall be able to provide respective information to the senior management with clear
conscience about business expansion possibilities and cash flow processes. Project management
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in financial terms is possible through the use of data that depicts whether Hilton has more
inbound cash flow or outbound (Filip, 2016).
Balance sheet: The knowledge of liabilities and asset is required by company whenever
respective decision has to be formulated for making an investment. Balance sheet helps in
catering this knowledge for Hilton. Board of directors are responsible for undertaking this
statement so that they can evaluate whether company is in need of financial obligation (Ben‐
Daya, Kumar and Murthy, 2016).
4.2
There are various formats that are being used by business organizations for the purpose of
preparing the financial statements; however all such statements are being used to depict the
economic conditions of the business entity. As per the type of business, financial statements are
being prepared. For instance – sole trader prepares single financial statement in which all the
business transactions are being recorded. However, at the same time, preparing such financial
statements aids the business entity to keep records of each and every transaction that took place
in the business (Brown, 2016). Apart from this, it is also ascertained that preparation of such
account helps sole trader to keep balance between inflow and outflow of business resources.
Nonetheless, public and private limited firms are engaged in preparing income statement,
profit and loss account and balance sheet so that all the important decisions of the business can
be taken suitably. Moreover, in this context it can also be said that preparing such account aids
the business entity to include all the expenses and income that have been derived in a particular
time period. This gives the business appropriate information about economic and financial
aspects that keeps on changing according to market trends (Ulrich, Brockbank and Lake, 2005).
Apart from this, non- profit organizations are entitled to prepare proper database so that
receipts and expense of the business can be specified. For instance- NGO has to make proper
receipt regarding the cash that comes from any of the funding party as that aids the business
entity to get suitable information about financial resources. Non- profit organizations are also
required to develop suitable accounts of the parties to keep track records of each and every
transaction that takes place in business entity. Hence, from the discussion it is clear that different
statements have different values in financial aspects of the business.
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4.3
Ratio analysis is essential aspect of financial statement analysis which is typically used
for the purpose of ascertaining financial performance of business entity. Ratio analysis is a tool
processes that helps in preparing financial statements and that also changes the economic facets
of the business entity. This is the most important part of financial accounting in which resources
are allocated according to the defined budgets. At the same time, with the help of ratio analysis,
comparison can be made regarding different business entities that have similar financial values.
Moreover, articulating the financial facets of the existing business entity, it can be said that
profitability aspects is getting increased.
Considering, performance of previous years, it is evident that the rate of profit has
amended from 61.7% to 63.9% in the subsequent years 2015 and 2014. This has also enhanced
the ratio of gross profit margin which improves overall business performance and productivity
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facets. Apart from this, the profit margin has also increased; therefore value and sustainability
aspects are also encouraged accordingly. Net profit ratio has also reached up to 12.46% which is
quite feasible for the business entity.
Besides this, it is also crucial for the business entity to focus on developing effective and
competent strategies so that liquidity of the business can be enhanced (Bontis, Dragonetti and
Roos, 2009). Liquidity states that business must have the capability to bear the financial
expenses; hence new strategies are required to be developed for the same prospect. Apart from
this, it can also be said that the organization needs to make use of current assets so that business
activities can be carried out in effectual way. Henceforth, according to the financial analysis, all
the resources should be used optimally in diverse areas.
CONCLUSION
From the above report it can be concluded that there are various sources of finance that
could be used by a business for arranging funds for their business operations. Loan can be taken
from banks or money can be taken from friends and family members. It is essential that suitable
source of finance should be selected by business firm for funding their business operations.
Budget needs to be prepared so that a effective framework can be prepared about how the money
will be allocated on different activities.
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REFERENCES
Books and journals
Ben‐Daya, M., Kumar, U. and Murthy, D.N., 2016. Maintenance Outsourcing and Leasing.
Introduction to Maintenance Engineering: Modeling, Optimization, and Management.
pp.421-450.
Bodie, Z., 2013. Investments. McGraw-Hill.
Bontis, N., Dragonetti, N.C. and Roos, G., 2009. The knowledge toolbox:: A review of the tools
available to measure and manage intangible resources. European management journal, 17(4),
pp.391-402.
Brown, P.J., 2016. Calculation of Environmentally Sustainable Residual Income (eSRI) from
IFRS Financial Statements: An Extension of Richard (2012). In IFRS in a Global World (pp.
141-157). Springer International Publishing.
Carroll, A.B., 2011. The pyramid of corporate social responsibility: Toward the moral
management of organizational stakeholders. Business horizons, 34(4), pp.39-48.
Darroch, J., 2005. Knowledge management, innovation and firm performance. Journal of
knowledge management, 9(3), pp.101-115.
Filip, A., 2016. Discussion of “Do Reviews by External Auditors Improve the Information
Content of Interim Financial Statements”. The International Journal of Accounting. 51(1).
pp.51-56.
Jiao, W., Yan, H. and Pang, K.W., 2016. Nonlinear pricing for stochastic container leasing
system. Transportation Research Part B: Methodological. 89. pp.1-18.
Johnson, P., 2014. Fundamentals of collection development and management. American Library
Association.
Turner, R., 2016. Gower handbook of project management. Routledge.
Ulrich, D., Brockbank, W. and Lake, D.G., 2005. Human resource competencies: An empirical
assessment. Human resource management, 34(4), pp.473-495.
Vyas, K.S. and et.al., 2016. Financial Planning for the Plastic Surgery Residency Applicant.
Plastic and reconstructive surgery. 137(2). pp.497e-499e.
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