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Study On Hardwood Ltd - Sources Of Finance & Its Implication

   

Added on  2020-02-14

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MANAGING FINANCIALRESOURCES ANDDECISIONS

Table of ContentsINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................11.1 Sources of finance available to Hardwood Ltd......................................................................11.2 Implications of sources of finance.........................................................................................21.3 Appropriate source of finance...............................................................................................3TASK 2............................................................................................................................................42.1 Cost of different sources of finance.......................................................................................42.2 Importance of financial planning...........................................................................................42.3 Information need of decision makers....................................................................................52.4 Impact of finance on financial statements.............................................................................5TASK 3............................................................................................................................................63.1 Analyzing cash budget...........................................................................................................63.2 Calculation of unit cost..........................................................................................................63.3 Investment appraisal technique..............................................................................................7TASK 4............................................................................................................................................94.1 Main financial statements of company..................................................................................94.2 Appropriate format of financial statement...........................................................................114.3 Ratio analysis.......................................................................................................................11CONCLUSION..............................................................................................................................14REFERENCES..............................................................................................................................15

INTRODUCTION Managing financial resources plays important role in the business as without propermanagement of funds it is not possible for management to accomplish desired objectives.Further, finance is one of the key resource without which no business can survive in the marketand is associated with growth along with overall performance of company in the market.Moreover, at the time of taking expansion decision different sources of finance are considered bycompany through which it becomes easy to carry out overall operations in effective manner(Malina and Selto, 2006). Apart from this to assess financial viability of the project investmentappraisal techniques are used which involves net present value, internal rate of return etc.Through all these methods it is possible to allocate funds in right project. Considering the presentscenario Hardwood Ltd is a medium sized private company which produces furniture for retailsector along with private homes for last 6 years. At present business is planning to expand itsoperations for which management of financial resources is must. Various tasks have beencovered in the study which involves sources of finance and its implication, information need fordecision makers etc. TASK 1 1.1 Sources of finance available to Hardwood LtdDifferent sources of finance are available to Hardwood Ltd which company can considerfor expanding its operations. Such sources are for short, long and medium term. Short Term Sources(<1year)Medium Term Sources ( 2 ~ 5 years)Long Term Sources ( > ~5years)Trade credit It is considered as anappropriate short termsource of finance whereHardwood Ltd canpurchase goods from itssuppliers without makingimmediate payment forthe same (Mohsin, 2013). DebentureHardwood Ltd can issue debentureand can obtain expansion amountthrough this source. Further, it isrequired for firm to pay interest to thedebenture holder. Retained earning It is one of the most appropriateinternal and long term sources offinance which Hardwood Ltd canconsider. Firm can use the amountkept as saving in order to meetunforeseen contingency. Hire purchaseIt is an agreement inwhich owner of the assetlets them hire on forLeasing It is an agreement between lessor andlessee where lessor owns capital assetbut allows lessee to use it. ThroughShare capitalHardwood Ltd can issue equityshares in the market and amountcan be easily obtained through this1

regular instalment paid bythe hirer.this company can obtain amount forexpansion purpose. (Mumford, Schultz and Osburn,2001). OverdraftIt is considered as anappropriate short termsource of finance whereHardwood Ltd canwithdraw more amountthat those lying in thebankBank loanCompany can take loan for longperiod of time and satisfying itsfinancial needs such as forexpansion etc. 1.2 Implications of sources of finance Source ofFinance DescriptionAdvantagesDisadvantagesBank loanFor satisfying financialneeds Hardwood Ltd cantake loan from bank(Murphy, 2001) Main advantage of usingthis source is that itenhances liquidityposition of the firm One of the main disadvantage ofconsidering this source is thatcompany has to pay interest tobank for the amount obtained.OverdraftIt is the facility grantedby bank to withdrawmore amount than thoselying in the accountMain advantage of thissource is that it supportsin satisfying financialneeds of the company(Parmenter, 2010) Company has to pay high rate ofinterest to bank for the amountobtainedTradecredit It is the facility grantedby supplier of firm to payfor the goods or servicesat later date Main advantage of thissource is that it reducescapital requirement.Further, it focuses on coreactivities of businessIt is considered as very expensivein case if payment is not made atdue date (Pew Tan, Plowman andHancock, 2007)HireIt is considered as a formMain advantage of thisIts main disadvantage is that long2

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