TOP15 - Unit 2: Comprehensive Report on Financial Resource Management

This report, addressing the TOP15 Unit 2 module on Managing Financial Resources, provides a comprehensive overview of financial management principles. It begins by identifying various sources of finance available to a business, differentiating between unincorporated and incorporated sources, and evaluating the implications of using internal versus external funding. The report then delves into the analysis of the costs associated with different financing options, such as dividends and interest, and emphasizes the critical role of financial planning, including budgeting, in ensuring organizational stability and growth. It assesses the necessary information for making informed financial decisions and examines the impact of financial statements on business operations. Furthermore, the report explores cash budgeting, methods for determining unit costs, and the application of capital budgeting techniques to assess project viability. Finally, it analyzes the major components of key financial statements, compares different statements, and interprets financial performance using financial ratios, providing valuable insights for effective financial management.

TOP15-UNIT 2
MANAGING
FINANCIAL
RESOURCES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance available for the business .......................................................................3
1.2 Implication for using external and internal sources of finance .............................................4
1.3 Most appropriate sources of finance .....................................................................................5
TASK 2............................................................................................................................................6
2.1 Analysis of cost of two source of finance .............................................................................6
2.2 Importance of financial planning for the organization .........................................................7
2.3 Assessment of information that is needed for making decisions ..........................................7
2.4 Impact of financial statements ..............................................................................................8
TASK 3..........................................................................................................................................10
3.1 Cash budget .........................................................................................................................10
3.2 Methods for determine unit cost of products ......................................................................12
3.3 Assessment for viability of projects with the help of capital budgeting ............................14
TASK 4 .........................................................................................................................................17
4.1 major components of key financial statements ...................................................................17
4.2 Comparison of financial statements ....................................................................................17
4.3 Interpretation of financial statement using financial ratios .................................................18
CONCLUSION .............................................................................................................................21
REFERENCES .............................................................................................................................22
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INTRODUCTION
Fast changing global business environment requires business organizations to be more
structured and effective. Financial planning need to be done in the entity so that required
operations can be carried out in effective way (Adler, 2013). Financial planning done in a
systematic and organized way supports for carrying out required business functions in effective
way. Moreover, expansion and other operations of business can be performed in effective and
advanced way and it also helps for accomplishing desired functions and activities of entity in
effective and advanced manner. Present report describes about different types of sources of
finance that are available for the business. In addition to that implication of sources on firm's
financial performance have been mentioned. Moreover, most benefited source of finance for
Clariton organization has been described.
TASK 1
1.1 Sources of finance avilable for the business
Clariton organization has options for funding their operational activities by making use
of unincorporated and corporated sources of finance. It is vital that all the sources should be
selected by conducting proper analysis and it will also help for raising funds for financing
operational activities of the enterprise (Bierman and Smidt, 2012). Different sources of finance
that are available for business are as mentioned :-
Unincorporated business :- This type of business organizations are free from any kind of
legal regulations. Owner of the organization holds liability for complete ownership and liability
of the business is with rest with the owner. All the decisions for running the functional activities
of the enterprise are carried out by joint decisions taken by owners of the entity. Fewer
interference are made by any external party (Altman and Hotchkiss, 2010). There are various
methods on the basis of which funds can be raided by business organizations. The sources are as
mentioned :-
Sale of assets :- By making use of this source organizations can sale their current assets
and it will support for raising funds to carry out business activities (Brigham and Ehrhardt,
2013). There is no need to pay any kind of interest and profitability of entity does not get
hampered when these sources are used for funding the operational activities of Clariton
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organization. Role of external party is negligible and there is no need to take assistance from any
external broker for executing business functions.
Investment made by owners :- earnings and past profits of the entity can be used for making
investments in operational activities that are carried out in the entity (Malmi and Granlund, M.,
2009). Own investments can be used by the owners for raising funds to carry out the business
activities. There is no need to pay any kind of interest on own investments that are used by
owners for funding the business activities.
Disposal of assets :- company can adopt these methods for funding the operations of the
entity. Existing assets of the entity can be sold and it will help for gaining large sales and
revenues for executing business functions (Romano, Tanewski and Smyrnios, 2001). This
method provide internal financing for executing functions of business.
Incorporated business :- it is vital that functional activities of incorporated business
organizations should be carried out in systematic and structured manner.
Venture capital :- It is the most effective and mostly used source of finance that can be
used by Clariton for raising funds to carry out business activities. When this source of finance is
used than profitability and revenues earned by the company gets influenced and burden is
imposed on the enterprise (Fadare, 2011). Finance can be generated for expanding the existing
operations of the entity and it will help for accomplishing the desired goals and targets of the
enterprise.
Bank loans :- it is also an effective medium that is used by organizations for funding the
operational activities of the enterprise. It is required that specific amount of interest should be
paid for executing desired business in effective way.
1.2 Implication for using external and internal sources of finance
There are some implications of sources of finance and these need to be considered for
executing business functions in better manner. Different sources of finance and there
implications are as described :-
Sale of stock :- financial implication of these sources are observed and company sale
inventory for raising funds for executing required business activities. Asset side of the financial
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document reduces and due to that implications are observed on the financial statements of the
enterprise (Shepherd, 2015).
Owner's investment :- When owners use their own investments than profitability of the
entity does not get affected. No financial impact is observed on the performance of the
organization.
Disposal of assets :- when this method is used for raising funds for business activities
than impacts are observed on financial statements that are used in the enterprise. Cash balance
sheet gets affected and company faces difficulty in fulfilling their short term obligations. When
funds are raised through assets than no legal implications are observed on the business (Gumbo,
2010). Total control of operational activities of the enterprise remains with the owner of the
entity.
Venture capital :- It is required that company should pay its financing cost in terms of
stake. When this method is used for raising funds than it is also needed that dividends should be
paid to the stakeholders of the enterprise (Pike and Neale, 2006). In this method company has to
provide return on investment. Company meet criteria to meet ROI. Sometimes owner loose
control on activities of firm and due to that overall performance of the enterprise gets affected.
Hire purchase :- Implications are observed when this method is used for carrying out
business activities and in this technique owner gives some part of assets to external party due to
which total assets of the entity gets affected (Gassen and Schwedler, 2010). Impact is also
observed on balance sheet and financial documents prepared by the enterprise. It is required that
documents should be prepared and terms and conditions should be mentioned. Dilution of
control remains at hire purchase and not with the entrepreneur.
1.3 Most appropriate sources of finance
It is required that funds should be raised for executing business functions of Clariton and
many options are available with the enterprise for carrying out required business activities.
Various medium through which funds can be collected are as follows :-
Venture capital :- It is the most effective and appropriate source of finance that can be used in
Clariton organization for raising funds for executing business functions. Better financial services
are provided with this medium and it also helps for executing the operational functions of the
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enterprise in sequential manner (Manyard, 2013). It is required that higher dividends should be
paid to shareholders as compared to money invested by them. Shareholders of Clariton will
increase and it will support for accomplishing required goals of Clariton organizations.
Bank loans :- Company has option for funding their operations from taking loans from banks and
it will support for funding the required operations of entity in effective way. There is need that
specific interest rates should be paid to banks on the loans that have been taken and due to that
overall profitability and financial revenues of the company gets affected (Shenming and et.al.,
2011). It is easy method and it is also required that proper documents should be submitted while
taking bank loans and due to that sometimes difficulties are faced in taking loans.
TASK 2
2.1 Analysis of cost of two source of finance
There are different cost of sources of finance which are as follows-
 Dividends- It is one of the cost of sources of finance that helps Clariton company to raise
funds with the help of venture capitalist that imposes cost of finance within firm. It
increases the cost of firm because firm needs to pay dividends to their stakeholders and
therefore, it is considered as one of the expenses to firm (Bierman and Smidt, 2012).
Company is supposed to give dividends to its stakeholders that is increasing the cost of
business. However, venture capitalist takes cost which is around 20% of the whole
business of Clariton.
 Interest- Moreover, it is another cost to source of finance in which firm is required to
give interest to the amount taken as loan from bank. Thus, Clariton takes charge in terms
of providing interest to the bank and minimizes the profit generated by them. It involves
different types of interest i.e. fixed and flexible and thus helps in obtaining finance from
firm (Chandra, 2011). Fixed interest rate can be stated that it remains fixed for certain
time period and does not change constantly. While, flexible interest rate is that in which
interest rate changes as per the period of time and does not remain constant. Thus, due to
such reason Clariton aims to take loan at fixed interest rate.
Tax- Such type of cost is only charged upon the dividend paid by business to the shareholders.
Clariton is required to give proper amount of tax and thus it affects the financial position of firm.
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2.2 Importance of financial planning for the organization
It is essential for firm to make effective decisions in relation to develop financial
planning so that best results can be attained. Financial planning is considered as one of the
crucial tool and thus helps in achieving higher productivity and efficiently (Gumbo, 2010).
Further, financial planning assists in allocating the cash between different business activities and
thus consider certain points so that best results can be attained-
 Budgeting- It is generally prepared by the finance manager and thus it is essential for
firm to take financial plan into account which is prepared in past. However, usually, 60%
of cash has been allocated in regard to operate the business activities while 20% in order
to financing activities in regard to improve the working capital finance. Hence, 20% of
cash amount has been allocated in order to make investment within shares (Overton,
2007). Through considering such type of data value up helps in identifying the expenses
and determine the budget. Also, financial planning helps in providing an appropriate
input so that budget could be prepare accordingly.
 Implication of failure to finance adequately- It assesses that financial planning helps in
improving the business activities so that business faces less risk due to taking minimum
loan. However, Clariton undertakes loan for specific requirement so that business
operations could be carried out in effective manner.
Overtrading- It can be stated that within firm when sale of goods increases the projected level.
However, at several times Clariton sells more amount of goods on credit basis and thus increases
over trading of firm (Pike and Neale, 2006). Hence, it is essential for firm to prepare financial
plan for which credit sale is appropriate within firm. Hence, making high sale on credit increases
the bad debt of firm.
2.3 Assessment of information that is needed for making decisions
Clariton organization requires information about different sources for taking better and
effective financial decisions for the entity. It is also required that all the sources should render
authentic and reliable information for carrying out required business functioning. Information is
required about business partners and it is required that information should be collected regarding
proposal of capital and due to that overall efficiency and financial performance of the enterprise
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gets influenced. Partners require information about proportion of capital and profit and loss
related information can be collected from them. In addition to that details about venture capitalist
is also required (Gassen and Schwedler, 2010). Clariton is planning for taking finance from WE
finance limited and it is required that proper data and facts should be collected.
Clariton needs to take information related to percentage of stake and methods of
payment are also needed to be found by them. Financial position of the organization also
required to be known and method of instalments that are needed to be paid are also needed to be
found out. Details regarding ROI and loan percentage also need to be identified and it will help
for Clariton to take proper and effective decisions. Company provide loans when firm becomes
capable for generating at least 50% ROI. Details are also required related to financial brokers and
it is required that information should be collected from finance brokers (Shenming and et.al.,
2011). This information is required to be collected from bank in terms of financing cost. It is also
required that firm should identify method of payments. In addition to that it is also required that
information should be collected from banks about loan and financial details.
2.4 Impact of financial statements
Various financial sources gives impact on the financial statements and due to that overall
performance of the enterprise gets affected. Positive and negative implications are observed on
different financial sources and overall financial statements of the entity gets affected due to that.
Clariton organization uses Venture capitalist as a source for executing required business
functions. It provides medium for raising funds to execute required business functions and it is
also required that better and effective decisions should be taken for carrying out required
business activities (Malmi and Granlund, 2009). We finance limited is taking charge in the terms
of stake and due to that financial burdens are getting created on the financial statements of the
organizations.
When more amount is paid to the shareholders in form of dividends than due to that
financial statements of the enterprise gets affected. Total and overall financial revenues of the
enterprise gets affected due to it. And profitability of the entity also gets influenced due to that.
In addition to that information related to financial broker also gets influenced and impacts are
observed on the financial statements of the enterprise (Fadare, 2011). It is required that brokers
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charge should be paid and specific amount of charge is taken by brokers sue to which
profitability and financial revenues of the enterprise gets influenced. It enhances expenses of the
organization due to which profitability of the organization decreases. Profit and loss statement of
the enterprise gets affected and overall financial performance of the business gets influenced due
to it. Total liabilities enhances in the financial statements of the enterprise and impacts are
observed on the total liabilities side of the profit and loss statements.
TASK 3
3.1 Cash budget
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It is vital for managers of Clariton to do interpretation of cash budget and financial
statements that are prepared in the enterprise. It is assertive that financial position of the entity
should be clearly evaluated so that better and effective decisions can be taken for carrying out
business functions. Cash budgets are prepared by financial department of the enterprise and
managers need to do interpretation of cash budget so that better and effective financial decisions
can be taken. Total cash flows and total cash inflows are calculated from the financial statements
and it provides medium for evaluating financial performance of the entity. Net cash balance is
evaluated and it helps in estimating net financial profit at the end of accounting year. Clariton
organization can take initiatives for preparing cash budget for the enterprise and managers will
become capable for estimating financial positions of the entity. Allocation of financial resources
is also becomes easier and it also helps for carrying out functional activities of the enterprise in
systematic and organized way.
Interpretation of cash budget :-
It can be observed from the cash budget that total cash balance from the month of January to
June is good and it is increasing at a higher growth rate. It can be observed from the table that net
cash balance for the month of January is 649540 and it reflects that inflows are lower and as
compared to overall cash outflows. Cash balance is increasing up-to two months and in the
month of march it reaches up to £315250. It is also observed from the table that cash inflows are
continually increasing whereas cash outflows are reducing. From the month of march to the
month of June. In the month of June net cash flows are £69000 and it reflects that net debts are
decreasing. Bank overdraft has also been taken by banks and it provides a method for reducing
cash inflows and cash balance also gets affected due to it.
Company can take some positive and effective steps for reducing shortfalls and making
improvements in them. With objective to increases cash balance it is required that marketing
department of the enterprise should prepare effective marketing strategies. It will help for
enhancing profitability of the enterprise by making enhancements in profitability ratios. In
addition to that cash control priorities can also be used by the enterprise which will help for
making control on the expenses that have been incurred in the entity. Cash control policies can
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be used by the enterprise and it will help for making reduction in expenses. Economies of scale
can also be used in the company it will help for reducing total production cost and enhancing the
sales of the enterprise.
3.2 Methods for determing unit cost of products
Unit cost is defined as cost incurred by the organization for manufacturing a single unit
of product. It is vital that unit cost should be calculated so that better decisions can be taken for
carrying out business functions (Manyard, 2013). Total cost that is being incurred by the
enterprise for manufacturing a single unit of product is defined as unit cost. There are two types
of cost which are fixed coat and variable cost.
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