Financial Planning and Sources of Finance Report Analysis

This report delves into the critical aspects of financial resources for businesses, covering sources of finance for startups and expansion, as well as their implications regarding legal aspects, costs, and suitability. It examines the importance of financial planning, the information required by decision-makers, and the impact of finance on financial statements. The report analyzes different sources of finance, including bank loans, equity capital, and retained earnings, evaluating their costs and benefits. Furthermore, it explores the utilization of investment appraisal techniques and ratio analysis to assess a company's financial health and performance. The report provides case studies and recommendations for budgeting, unit cost calculations, and investment decision-making, making it a comprehensive resource for understanding financial management principles.

MFRD

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1 ...........................................................................................................................................1
1.1 Sources of finance available to large and small as well as for the new start up and those
who wishes to expand.................................................................................................................1
1.2 Implications of the each source of finance in terms of legal aspects, cost and suitability....2
1.3 Three case study examples....................................................................................................3
Task 2...............................................................................................................................................4
2.1 Cost of different sources of finance......................................................................................4
2.2 Importance of financial planning..........................................................................................4
2.3 information need by the decision maker...............................................................................5
2.4 Explain the impact of finance on the financial statements....................................................5
Task 3 ..............................................................................................................................................6
3.1 Finding and recommendation for the budgets analyzed.......................................................6
3.2 Calculation of different types of unit cost. ...........................................................................6
3.3 Use of investment appraisal techniques in the decision making aspects of ABC
Engineering ltd............................................................................................................................8
TASK 4..........................................................................................................................................10
4.1 Concept of prime entry as well as purpose and use of trial balance and final accounts.....10
4.2 Difference between the financial statements of the different types of business organization
...................................................................................................................................................10
4.3 Calculation of different ration in order to find out the companies positions......................11
Conclusion.....................................................................................................................................12
REFERENCES..............................................................................................................................13
APPENDIX....................................................................................................................................15

INTRODUCTION
Financial resources are the crucial element of the business upon which the success of an
organization is highly depends. Financial resources refer to the fund which is available to the
business for performing the business functions and activities more effectively and efficiently. In
this, finance plays a vital role in making optimum utilization of the financial resources through
the sound strategies and policies. The present report will discuss the sources of finance available
to for new business start ups as well as those who wish to expand. It also depicts the cost and
implications of the different sources of finance. Besides this, it develops understanding about the
concept of contribution and break even analysis. This report will examine the capital budgeting
tools which help organization in making suitable investment decisions. Further, the present
report helps XYZ in assessing their financial health and performance through the ratio analysis.
TASK 1
1.1 Funding sources which are available to large or small and for the new start up or those who
wishes to expand
There are different sources of finance which are available to large and small as well as for
the new start up and those who wishes to expand their business operations are given below:
Big and small sized business organization: Large sized business enterprise can fulfill its
financial need by issuing equity shares to the investors. Whereas by approaching bank for the
financial assistance small sized organization become able to fulfill their financial requirements
(Post and Byron, 2015). These are the cost effective ways which helps organization in meeting
their financial needs.
Advantages:
 Tax deduction is one of the biggest advantages which attract small sized organization to
meet their financial needs through bank loan.
 In equity shares, company can save floating cost by offering shares to the existing
shareholders.
Disadvantages:
 In bank loan, organization requires make payment of high interest amount which closely
affects the profitability aspect of the organization.
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 Issuing of equity share increase the interruption of shareholders in the decision making
aspects. It imposes problem in front of the organization.
New business start up: Business entity is able to start up their new venture by taking into
consideration personalized fund. Besides this, by approaching friends and family members one
can meet their financial needs. Both these sources prove to be more fruitful for the individual.
 Advantages: If individual undertakes the fund which are gathered by him there is no
obligation in relation to the periodical interest amount. Disadvantages: Increase in the intervention of shareholders in the decision making
process in one of the main drawback when company make issue of equity capital (Zhou,
2015). Moreover, shareholders possess equity share and thereby have the right to take
participation in the decision making aspects.
Expansion of the business: Retained profit is the best source which enables company to expand
their business operations and functions. It is the part of the profit which every company kept it
with itself to fulfill their monetary requirements to meet contingent situation.
1.2 Implications of the each source of finance in terms of legal aspects, cost and suitability
All the above mentioned sources of finance place different impact on enterprise in the
following manner:
Funding sources Lawful aspects Monetary implications Suitability
Issue of equity shares If organization raises
their finance through
equity shares then they
give right to the
shareholders to take
participation in the
decision making
aspect of an
organization.
Company also has to
incur floating while
they issue equity
shares which impose
financial cost in front
of the corporation.
It is the most suitable
source through which
large sized
organization can meet
their needs. Moreover,
company does not
have need to make
expenses on issuing of
attractive prospects to
attract their existing
shareholders.
Bank loan Bank has the right to For the financial It is the most effective
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cease the security
which is given by an
organization if they
make default in the
payment of loan.
assistance bank
charges high interest
rate in comparison to
the other financial
institution which
imposes high financial
cost on the
organization.
source because it
reduces the financial
burden of an
organization in term
repayment of loan in
the form of periodical
or monthly
installments.
Friends and family
members
They are also the
owner of an
organization so they
have right to take
participation in the
decision making
aspect.
In return of the
financial assistance
organization requires
to issue the shares to
the friends and family
members.
Bu approaching the
loved one for the
financial assistance
individual can start
their new venture.
Retained earnings Each and every
organization needs to
keep the part of the
profit with itself as per
the laws and
legislation.
If organization use
retained profit to meet
their financial needs
they are unable to grab
the most profitable
opportunities which
will arise in the near
future.
It is best source which
prevents organization
to issue equity shares
and thereby reduce the
interference of the
shareholders in the
company affairs.
1.3 Three case study examples
There are several financial sources which are accessible to the various types of business
enterprise are as follows:
 Small business start up: ABC can commence its new venture by approaching commercial
enterprise for monetary help.
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 Large business expansion: Through leasing XYZ can easily expand their business
operations and functions in the desirable area (Shaikh and Peters, 2015).
 Small group of people who wishes to purchase an existing medium sized organization:
ABC can invest in existing and medium sized organization with the help of retained
profit.
Task 2
2.1 Cost of different sources of finance
 Bank loan: - It assists company to fulfill their short term monetary requirements by
approaching bank for the financial help. These loans are available for the period of 1
year. Company uses this source in order to e3xpand its business or to make payment to its
creditors and supplier. But at the same time it affects the cost of the business. On bank
Loan Company have to pay high interest amount and thereby increases the expenses of
the company at the same time by reducing the profitability of company.
 Issue of equity capital: - Company can meet up its long term monetary requirement by
issuing equity share capital to the existing and potential shareholders (Caglayan and
Demir, 2014). This is one of the common methods used by the business to raise their
capital for a long period of time. This source also assists the company to expand its
business. But at the same time cost of company increases. Company need to pay dividend
to the shareholders which in turn reduces their profit margin.
 Retained earnings: - It provides assistance to the organization by meeting their long
term monetary requirements. Retained earnings refer to the fund kept by the company in
advance in order to meet sudden requirement. When company makes use of their kept
profit then they are unable to give dividend to their shareholders. This aspect negatively
impacts the image of the firm in the mind of different shareholders.
2.2 Importance of financial planning
Financial planning refers the strategies and policies which are framed by the manager which
make contribution in the attainment of the organizational goals and objectives. Some of the
importance of financial planning is as follows:-
 It aid in making control upon the cash flow related activities: - Company can control
inflow and outflow of cash by preparing the suitable budget for the accounting year.
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Through this, organization can easily assess the deviations and thereby helps in making
effectual decision within the suitable timeframe.
 Creates link between future and present activity: - Effectual monetary plan provides
deeper insight to the manager about the cash which they require in near future to
implement their business strategies and policies. Thus, financial planning helps in making
coordination between the present and future activities.
 Helps in allocating the funds in the right projects/activities: - Monetary planning
facilitates effective allocation of the fund in the various kinds of projects of business
organization (Guariglia and Yang, 2016). So that no project or activities faces the lack
of funds or excess of the funds.
 Helps in achieving growth: - In financial planning company includes all business
activities which help in spending money more wisely. This aspect ensures high growth
rate which in turn aid the company to expand its business and easily achieve the
organization objectives.
2.3 Information need of different decision maker.
There are several stakeholders of an organization who undertake different financial
statements to identify the financial performance of the firm are enumerated below:
 Shareholders: they are the one who make investment in the shares of the firm to get high
income in the form of dividend. Thus, shareholders undertake all the financial statements
to analyze the liquidity, solvency and profitability ratio of the firm. It enables firm to
evaluate the financial health and performance of the firm which helps them in making
suitable investment decisions.
 Management: Owner or manager of the firm make use of income statement and balance
which provides deeper insight to them about the performance aspects (DaDalt and
Coughlin, 2016). Through this, manager is able to frame competent strategies and
policies which help in fulfilling the organizational goals and objectives.
 Financial institutions: Bank and other financial institutions make assessment of the
balance sheet which provide information assets and financial obligations of the firm.
Through this, financial institution can identify the capability of firm in relation to the
repayment of loan within the suitable timeframe.
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2.4 Explain the impact of finance on the financial statements
Every organization prepares profit & loss a/c to assess their profitability and expenses of
aspects which are made by them during the accounting year. In addition to this, balance sheet
contains information regarding assets and liabilities which help business unit in assessing their
financial health and performance. Therefore, different transaction made by the company is record
in different accounts like income & expenditure and balance sheet.
For instance- Business unit issues 10% ordinary shares of £300000 to their capital then the entry
of this transaction will appear in profit & loss and balance sheet in the following manner.
Profit and loss account
Particulars Amount( £) Particulars Amount
To dividend a/c 30000
Balance sheet
Liability Amount( £) Assets Amount
Share capital:
preference share
capital
300000
Cash 300000
Task 3
3.1 Finding and recommendation for the budgets analyzed
By taking into consideration the sales budget it can be analyzed that company’s financial
performance is not sound. Cash inflow of the business enterprise has been constantly decline and
outflow of the cash is increasing. Thus, in order to get over this problem company needs to frame
competent strategies and policies which in turn should aid the company to increase its rate of
income and reduces its expenses in order to improve its financial position. Along with it, budget
represents that cash aspect of the firm is constantly fluctuating (Abraham, 2006). In many
months it can be seen that company expenditure are more as compared to income generated. It is
also seen that company’s accumulative deficit is also increasing. Therefore, it is suggested to the
company that it should prepare cost effective financial plan cut down its expenditure and gain
high income by utilizing the available resources to the full extent.
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3.2 Calculation of different types of unit cost.
Particulars Calculation
Contribution per unit (CPU) = 21.55£
Contribution to sales ratio = 161625£/900000£*100
= 17.96%.
BEP ( In units)= Total Fixed Cost/CPU = 120000£/21.55£
= 5568.45 Units
BEP( In £) = 5568.45Units *120£
= 668213.46£
MOS ( In £)= Total sales - BEP Sales = 9000000£ - 668213.46£
= 231786.54£.
MOS per unit = 231786.54£/7500
=30.90£
Calculation of profit under two proposals from different customers
The given case says that the Southwod Electricals and Westbrook Engineering have
placed orders with the company in order to purchase the goods. In this situation, calculation of
the profit of an organization is as follows:
Southwood Electricals:
Selling price = 120£ - 120*15%
= 120£ - 18£ = 102£
Westbrook Engineering:
Selling price = 120£ - 120*25%
= 120£ - 30£ =90£
Calculation of total profit
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After analyzing the both the company market condition and discounted rate given by the
company it can be concluded that market position of Southward is better as compared to
Westbrook Engineering (Broadbent and Cullen, 2012). Therefore, ABC Engineering Company
should expect the proposal of Southwood Electrical. Because the profit margin of the Southwood
Electrical is more than that of Westbrook Engineering.
3.3 Use of investment appraisal techniques in the decision making aspects of ABC Engineering
ltd.
Capital budgeting tools and techniques includes payback period, net present value and
accounting rate of return etc. which helps in evaluating the profitability and suitability of the
investment.
Calculation of payback period (In £)
Payback period of project A
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= 2 year + 40000/280000
= 2 year + 0.143 year
= 2.143 year
Payback period for project B
= 3 year + 20000/250000
= 3 year + 0.08 year
= 3.08 year
Net present value:
Calculation of Net present value (In £)
Internal rate of return:
Calculation of internal rate of return
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On the basis of the above mentioned table it has been assessed that ABC Engineering will
get high revenue if they make invest in the project A. Pay period is 2.14 years in the project A
whereas organization takes 3.08 years to recover their initial investment. Thus, organization
requires opting project A over the project B which proves to be more fruitful for it. In addition to
this, net present value in also higher in the project A as compared to project B (Uechi, Akutsu,
Stanley, Marcus and Kenett, 2015) Along with it, in project rate of return is 29.20% where as in
project B it is 15.02%. Further, average return which organization will get in the near future is
also higher in the project in comparison to the project B. Thus, ABC Engineering should select
project A which helps them in maximize their profits.
TASK 4
4.1 Concept of prime entry as well as purpose and use of trial balance and final accounts
Primes entry: It consists of the day book in which all the daily transactions are recorded by an
organization which are incurred by them. Accounting books contains sales book, purchase book,
cash book etc.
Debt and credit terms: According to the double entry system one a/c is debited and another is
credited with the same amount.
Trial balance: It refers to the statement which summarizes all the business transaction made by
an organization during the financial year. It provides assistance to the firm in framing further
financial statements.
Final accounts Income statements: This account provides insight to an organization about the
income/expenses of an organization. It is the main purpose behind the preparation of
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