Financial Management & Decision Making

This assignment delves into the critical aspects of financial management and decision-making. It examines various theoretical frameworks and practical applications related to managing financial resources effectively. Students are expected to analyze case studies, evaluate different financial instruments, and demonstrate their understanding of financial planning and control. The content covers topics such as corporate finance, investment decisions, risk management, and the role of financial statements in decision-making.

MFRD

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
(a) Different Source of Finance...................................................................................................3
(b) Implication of different source of Finance.............................................................................4
(c) Source of finance for Green suppliers Ltd. And their advantage and disadvantage ............4
(d) Analyses of cost of selected source of finance for Green suppliers Ltd. And their impact
on Balance sheet and Income statement......................................................................................5
Task 2...............................................................................................................................................5
(a) Importance of financial planning ...........................................................................................5
(b) Assessing different information need of each decision makers of an organization...............6
(c) Explaining the impact of loan and equity finances or investment on the balance sheet and
income statement.........................................................................................................................7
task 3................................................................................................................................................7
(a) Prepare the Cash budget for four months ending September 2015........................................7
(b) Calculating the selling price and the targeted profit of the business......................................8
C. Calculation of NPV and pay back period................................................................................9
Task 4.............................................................................................................................................11
(a) Financial statement produced by business...........................................................................11
(b) Comparing appropriate formats of financial statements......................................................11
(c) Interpretation of Ratios between Wholesale and Retail Business........................................12
conclusion......................................................................................................................................13
References......................................................................................................................................14
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Index of Tables
Table 1: Information need of different decision makers..................................................................7
Table 2: Cash budget......................................................................................................................8
Table 3: Calculations of selling price with 33% mark up................................................................9
Table 4: Calculations of selling price with 30% mark up................................................................9
Table 5: Net present value of Project A.........................................................................................10
Table 6: Net present value of Project B.........................................................................................10
Table 7: Net present value of Project C.........................................................................................10
Table 8: Pay back period of Project A..........................................................................................11
Table 9: Pay back period of Project B..........................................................................................11
Table 10: Pay back period of Project C........................................................................................11
Table 11: Ratios.............................................................................................................................13
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INTRODUCTION
Finance is the main source of every company. It include cash and its equivalent. The
company has to manage its finance which is managed by financial manager . Manager will look
out the three things to manage the finance. Three things are Investment, Dividend and Finance.
There are different source of finance from which the company can rise its capital. The main
objective of financial management is wealth maximization which redefined the value
maximization. It is concerned with efficient procurement and utilization of funds. Different
companies are using different finance policy to manage their finance. This report contains about
how the company rises his funds and which type of sources of finance is used by company. The
company is using internal and external sources to rise the capital. It also show the advantages
and disadvantages of sources. It carries out the impact of sources on balance sheet and income
statement (Mohsih, 2013).
TASK 1
(a) Different Source of Finance
There are two source of finance internal and external through which the Green suppliers
can raise the capital.
Internal sources- Through the internal sources the company can rise the capital some of the
internal sources are-
 Retained Profits- The company can rise the capital from their profit which is retained by
them in past year. The use of retained profit is one of the way to rise the capital of the
company( Ahmed, 2010).
 Sale of old asset – The other way to rise the capital is to sale the old asset of the
company. By selling the old asset the company can use that amount in rising their funds.
External sources- It is also the way through which the company can raise their capital. Some of
the external sources which the Green suppliers can use for rising the capital.
 Bank Loan- The company can rises the capital by taking loan from the bank. It can be
taken from any financial institution which is favorable for the company. It will look out
the interest rate, terms and condition of bank from which the company is taking loan.
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 Leasing- It is one of the source of fiance in which the lessor transfer the interest of
specific immovable property to the lessee in regards with secure of loan amount without
transfer of ownership of property. This is the way through which the finance can be grant
to the organization (Tsai, H. 2011). There are different form of leasing through which the
company can get the finance for their institution. Some of the forms are hire purchasing,
finance, operating and contact hire. The Green supplier having many source of
economics through which it can raise a funds.
 Bank Overdraft- Green supplier can rise the capital through bank overdraft. It is also the
way to raise the capital. It is just a short term cash flow which can fulfill the needs of the
company.
Replace the issue of shares with leasing
(b) Implication of different source of Finance
Discuss the legal and financial implications of your chosen sources of finance
When the company is using different source of finance. Each and every source of finance
has positive and negative impact. When the share are issued to the public they become
shareholder of the company. Every shareholder of the company has right in the company to give
advice, help in decision making. The company cannot dilute the control of shareholder because
they are main part of company. They having stack in the company. When company is holding
more than 51% of shares in another company the company has to ask each and every thing from
the other company also. It create a holding and subsidiary relation between 2company
(Massingham, 2014).
The loan provided by bank to company then also the bank will look out the credit rating
of the company, the goodwill of the company and it will give the loan. It is also an impact over
the company. If in case bank is insolvent or at the stage of winding up then also there is a risk to
the company regarding the loan amount if he has already taken from that bank. Every source of
company having an impact over the company.
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The Green supplier having many source of finance either internal or external through
which the funds can be raise by company. The main source through which the company can raise
monetary fund is leasing (Ahmed, 2010).Through different form of leasing the Green supplier
can raises its capital such as operating, financing, hire purchase. The different source having
different legal implication over the company. Operating leasing is different from finance leasing
but for green supplier finance leasing is better option to raise their capital.
(c) Source of finance for Green suppliers Ltd. And their advantage and disadvantage
Green supplier can raise the capital mainly from three sources which become favorable
and unfavorable some time. Source of finance are-
Sources Advantages Disadvantage
Leasing
Change it with leasing
It is the external source of
finance through which the
company can raise its fund for
expansion of business by
putting its asset on lease for
some specific period (Drury,
2013).
Under this source of funds the
ownership of the property is
not transferred. It is only kept
for specific period of time.
Bank loan The company can expand
larger number of sums and
invest which help the company
to raise the capital.
It may create an effect on the
company if the interest rate is
changing again and again.
Bank overdraft It is a short term way which
help the company to rise the
capital. There is no security
needed(Nickel,Saldanha-da-
Gama,and Ziegler, 2012).
It has to repayable on demand
and charges high rate of
interest which is not favorable
for company.
(d) Analyses of cost of selected source of finance for Green suppliers Ltd. And their impact on
Balance sheet and Income statement
Issue of shares are not relevant
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Green supplier has chosen a three source of management to raise a assets in the company
which are leasing, bank loan and bank overdraft. Different source having different impact over
balance sheet and income statement. Leasing is shown as under the heading of liabilities side
which means the company has to repayment of loan amount. The impact over the income
statement shows as the expenditure for the company and it is an outflow for the organization.
Other way to rise the capital is bank loan. Its effect on liability side in balance sheet which
increases the liability of the company. The cost incurred under bank loan is to pay interest rate,
other charges to follow the procedure that is shown under the income statement. The company is
rising the capital through short term loan that is bank overdraft which is shown under the current
liability in balance sheet and it can be used for short term rising of capital. Cost incurred for
rising the capital from bank overdraft shown in income statement. Such cost are to pay interest,
costing of preparation of bank overdraft shown under the income statement under the head of
expenses. These cost may decreases the profitability of the company( Greene, Brush, and Brown,
2015).
You must demonstrate the impact of cost on the income statement and balance sheet
TASK 2
(a) Importance of financial planning
Financial planning is very important for every business. It helps the business to determine
the short and long term goals. Planning create a balance to meet out with the goals of business.
Without the planning of management the company cannot reaches to there goals. The financial
planning helps the Green supplies Ltd. In taking decision and making appropriate actions for
achieving the business goals and objectives. Financial planning help in providing direction to
achieve the goals as success is based on the planning( Smith, 2014).
Through planning, cited company can manage the income more effectively. Along with
this it also helps in controlling the income more effectively. To control the expenses and increase
the cash flow, financial planning is important in the business. As it helps in generating the cash
flow which results in making the best investments. With an increase in the cash flow, there is
increase in the capital too. This results in helps in constructing strong capital formation. In
addition to this, it helps the mentioned company in measuring the alternative plans for the
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company. It also helps in selecting the best alternatives for the investment plans. Financial
planning is important, as it helps in choosing the better investment policy, after considering the
income and expense of the business. Hence, financial planing plays an important role in the
Green supplies Ltd(Bedard, Hoitash, and Yezegel, 2013).
(b) Assessing different information need of each decision makers of an organization
Each decision maker of an organization is need of different information related to the
business. The different decision maker of an organization are financial institution, shareholders,
government, investors and mangers.
Table 1: Information need of different decision makers
Decision makers Information needs
Financial institution The information required by the financial institution is the
creditworthiness and performance of the cited company. This
information is needed so that they can decide whether to grant loan or
not to the company(Remund, 2010).
Shareholders Shareholders are the owner of the company. Before purchasing the
shares they need information related to the profitability and performance
of the company. As this information helps in making decision whether
to buy the share of the Green supplies Ltd. or not (Drury, 2013). The
information can be assessed from the income statement and profit and
loss a/c. Of the cited company.
Government They need information, so to determine the correctness of tax declared
to the company or not. Also, to check whether the company is paying
tax regularly or not. The information related to the tax can be assessed
from the cash flow statements.
Mangers The information which is required for making business decision are
financial performance and position of the company in the market. From
this information they can manage the affairs of the company( Kaplan.
and Atkinson, 2015).
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(c) Explaining the impact of loan and equity finances or investment on the balance sheet and
income statement
The loan and equity finance have a great impact on the balance sheet and income
statements. Bank loan and issue of shares are appropriate for the mentioned company but they
have also impacted on the company's balance sheet and income statements. For issuing shares,
they have to sell their shares to public. After, issuing of shares, they have to pay dividend to the
shareholder in a form of profit. Dividend paid is a form of expenses for the company. As it
shows on the expenses side of income statement and hence, reduces the profit of the company. In
contradictory it increases the capital of the company of the balance sheet liabilities(Drury, 2013).
At the time of borrowing loan from the bank, timely payment of interest is to be made by
the cited company. Impact of interest paid affects the expenses of the company. Hence, it
increases the expense and reduces the profit of the company in the income statement. Borrowing
of bank loan also impacted the liabilities side of the balance sheet. As, it increases the liabilities
of the company.
TASK 3
(a) Prepare the Cash budget for four months ending September 2015
Cash budget for Heath limited has been prepared as follows. It reflects that in first four
months corporation is facing loss whereas in last month it has been recovered. However,
organization should focus on effective credit collection policies and development of workforce.
It leads to determine growth of company in term of high rate of return.
Cash and credit sales must be shown separately
Credit purchases are not given
Table 2: Cash budget
Months June (£) July August September
Opening balance 90000 -392000 -246000 -92000
Income
Cash sales 35000 55000 60000 76000
Credit sales - 750000 800000 950000
total sales 35000 805000 860000 1026000
Total income 125000 413000 614000 934000
Expenditure
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Rent 5000 5000
Other expenses 82000 83000 94000 110000
Bank loan 20000 20000 20000 20000
Cash purchase 410000 480000 510000 550000
Credit purchase - 76000 82000 86000
Purchase 410000 556000 592000 636000
Total expenditure 517000 659000 706000 771000
Surplus/ Deficit(Total
income -total expenditure) -392000 -246000 -92000 163000
(b) Calculating the selling price and the targeted profit of the business
(i) Calculating the selling price per unit with 33% mark up on cost
Table 3: Calculations of selling price with 33% mark up
Per Unit Costs
Unit per costing
(£)
Costing
(£)
No. of units 500
Variable cost per unit 100 50000
Fixed cost per unit 200 100000
Total cost per unit 300 150000
33% markup on cost 99 49500
Selling price 399 199500
After adding 33% mark up cost on the total cost, the sales increase to (£)399. The
changes in the variable cost result in changes in the total cost and selling price and the fixed cost
remain same. Therefore, if we consider 33% mark up cost on the total cost then the profit per
unit which the company is earning is £99 per unit. Along with this the total profit will be £49500.
(ii) Calculating the selling price per unit with 30% mark up
Table 4: Calculations of selling price with 30% mark up
Per Unit Costs
Unit per costing Costing
No. of units 1000
Variable cost per unit 100 100000
Fixed cost per unit 200 200000
Total cost per unit 300 300000
30% markup on cost 90 90000
Selling price 390 390000
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The next case is calculating the profit on the additional 1000 unit sold. The fixed cost
remain same and the variable cost will remain same with the increase in the unit sold. The sales
per unit increase to £300 per unit. Hence, if we consider 30% mark up then the estimated profit
will be 90 per unit and the total profit of the company will be £90000.
C. Calculation of NPV and pay back period
Net present value
Table 5: Net present value of Project A
Project A
Year cash flow 10% Present value
1 30000 0.909 27270
2 48500 0.826 40061
3 56000 0.751 42056
4 70500 0.683 48151.5
Total present value 157539
Initial investment 160000
Net present value -2462
Table 6: Net present value of Project B
Project B
Year cash flow 10% Present value
1 55000 0.909 49995
2 55000 0.826 45430
3 55000 0.751 41305
4 55000 0.683 37565
Total present value 174295
Initial investment 160000
Net present value 14295
Table 7: Net present value of Project C
Project C
year cash flow 10% Present value
1 33000 0.909 29997
2 40000 0.826 33040
3 55000 0.751 41305
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4 58000 0.683 39614
Total present value 143956
Initial investment 160000
Net present value -16044
In Project B the Net Present Value is £14295, which is more than Project A and C, net
present Value. Therefore, Project B is more desirable.
Pay back period
Table 8: Pay back period of Project A
Project A
year cumulative frequency
0 -160000 -160000
1 30000 -130000
2 48500 -81500
3 56000 -25500
4 70500 45000
Pay Back Period 3.4
Table 9: Pay back period of Project B
Project B
year cumulative frequency
0 -185000 -185000
1 55000 -130000
2 55000 -75000
3 55000 -20000
4 55000 35000
Pay Back Period 3.3
Table 10: Pay back period of Project C
Project C
year cumulative frequency
0 -150000 -150000
1 33000 -117000
2 40000 -77000
3 55000 -22000
4 58000 36000
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Pay Back Period 3.4
Years
Investment with the shortest period is more advantageous for a company. Therefore,
Project B for 3.3 years is more advantageous for a company compared to Project A and C.
TASK 4
(a) Financial statement produced by business need more explanation
Financial statement is the main part of every business. There are three main financial
statement produced by business. The statements are as follows under (Users of Financial
Statements. 2015).
 Balance sheet- Balance sheet is one of the financial statement which is to be prepared
by the business. It contain the whole asset and liabilities of the business. Asset of the
business include current asset and fixed asset. Further, the liabilities are also broken
into two part one is short term and the second is long term. If the business has followed
the correct accounting policies then the balance sheet of the business should be equal
(Kennon, 2014). Balance sheet should be prepare on the basis of double accounting
system. This statement shows the current position of the company and through this
statement company comes to know about their assets and liabilities.
 Profit and loss statement- It is an income statement, which is covers with sales and
expenses of few month to a year. This statement shows about the profit and loss of the
business. It shows the current position of the business that the business is in profit or
loss (McKinney, 2015). This statements of company shows the position about their
profit or loss. It indicates about the current situation of the company whether the
institution is in stable position or not. It is one of the important statement for the
establishment.
 Cash flow Statement- This statement gives the knowledge that how much cash has
been inflow and how much cash is outflow from the business. Cash inflow include
such as cash sales, account receivable, loans etc. Cash outflow includes purchase of
machines, expenses paid, stocks etc (Pike,Neale, 2015). Cash flow statement indicates
about the inflow and outflow of cash and its equivalents. This statement is only prepare
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to meet out with short term requirement. This kind of financial statement is prepare
from year to year.
(b) Comparing appropriate formats of financial statements need more explanation
Different companies prepare different format of financial statements. Such as:
Type of Business Formats
Sole trader Sole trader is the owner of the business, they mainly focus on
preparing income statements. This is because, to know the expenses
and revenues of the business. The first line of the income statement is
for revenue or gross income, this is followed by subtraction of cost of
manufactured. As sole trader do not follow any guidelines of
preparing financial statements(Hayre, 2015). In the income statement
all expenses classified by function are deducted from total income to
give income before tax.
Public limited company Limited company have to follow all the format of financial
statements. The public limited company prepare cash flow, income
statement and balance sheet. This is prepared so to know the financial
condition of the business(Klonowski, 2014). There are accounting
standards such as IFRS (International Financial Reporting Standards)
and GAAP (Generally Accepted Accounting Principles) which are
practices that are accepted globally by the public limited companies.
To compare with the other organization, financial statements are
prepared by the companies.
(c) Interpretation of Ratios between Wholesale and Retail Business
Table 11: Ratios
Ratios Wholesale business Retail business
Gross profit 150000 101000
Sales 580000 426000
Gross profit margin (Gross profit
/Sales*100) 25.8 % 23%
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Net profit 85000 61000
Sales 580000 426000
Net profit margin (Net
profit/Sales*100) 14% 14%
Current Asset 2510 5070
Current Liabilities 1550 2950
Current ratio (Current asset/
Current liabiltes) 1.6 1.7
Current Asset 2510 5070
Inventory 1420 2370
Current Liabilities 1550 2950
Quick Ratio ( Current asset-
Inventory/Current liabilites)
0.7 0.91
Long term Liability 2400 3170
Capital employed 3000 5500
Gearing ratio (Long term
liability/Capital employed *100) 44% 36%
Analysis of financial statements of whole sale and retail business in accordance with
following ratios which are as under-
 Gross profit ratio- The gross profit ratio of whole sale business is 25.86% and the ratio
of retail business is 23.70%. Hence, the gross profit of wholesale business is greater than
retail business. The profitability of whole sale is more than retail.
 Net profit Margin- Net profit of the whole sale business is 14.65% and 14.31 % is of
retail business. The net profit of the whole sale business is more than retail business. It is
to be considered that the profit of the whole is more in last year.
 Current Ratio- The ideal current ratio of company is 2:1. And in above table of ratio the
current ratio of the whole sale business is 1.61 and retail business is 1.71 in this the
current ratio of the retail is more than the wholesale.
 Quick Ratio- The company quick ratio is <1 cannot pay its current liabilities. Quick ratio
of whole sale is 0.70 and retail is 0.91, hence higher the quick ratio is likely for the
business to pay its short term bills.
 Gearing Ratio- The gearing ratio will look at the financial leverage of the business.
Gearing ratio of both whole sale and retail business is 80% and 57.64% . The high quick
ratio is a good indicate for the company because high quick ratio says that the business is
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having a aggressive finance growth through debt. In this whole sale business having good
quick ratio (Damodaran, 2010).
CONCLUSION
The report contains about how Green suppliers Ltd. has use the different sources of
fiance to rise the capital of their business. The different sources has their different impact over
the business. It has cash budget which shows the income and expenditure of the company. It
deals with different financial statement which is to be produced by business. Different
companies are using different format to present the financial statement. Overall the whole report
is dealing with financial management of a business and how the manager of the company
manages the fiance.
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