Finance Sources for British Airways

This report analyzes the financial sources available to British Airways, including internal and external options, implications of these sources, and the importance of financial planning. It also evaluates the company's budget, investment techniques, and financial statements to assess its overall fi...Read More

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Table of Contents
INTRODUCTION ..........................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Sources of finance available to the company........................................................................3
1.2 Implications of different sources of finance..........................................................................4
1.3 Appropriate sources of finance which can aid the company to raise its capital....................4
2.1 Cost of sources of finance identified.....................................................................................5
2.2 Importance of financial planning..........................................................................................5
2.3 Information needed by internal and external decision makers. ............................................6
2.4 Appearance of various sources identified in the profit and loss account and balance sheet.7
Task 2...............................................................................................................................................7
3.1 Analyze of companies budget...............................................................................................7
3.3 Calculation of various investment techniques in order to find out the best project..............8
Task 3.............................................................................................................................................10
4.1 The main purpose of financial statements and its uses. .....................................................10
4.2 Financial statements prepared by various business organization........................................11
4.3 Calculation of company various ratio.................................................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
Appendix........................................................................................................................................13

INTRODUCTION
Finance is the management of large amount of cash that take place both the inside and
outside of the organization. In order words, it can be said that finance is the science that defines
the management of banking and investment as well as assets and liabilities. British airways are
the airline company headquartered in Waterside, Harmondsworth, England. It is one of the
largest airline companies operating its business in UK. The present report depicts about the
various internal and external sources of finance and at the same time it shows how these sources
of finance are beneficial for company to raise its funds. In this report, importance of finance
planning is discussed and per unit cost of company will be identified in order to make various
pricing decisions. At last, various financial statements are studied in order to calculate the
various ratios.
Task 1
1.1 Sources of finance available to the company.
There are various types of sources of finance through which company is available to raise
its funds. Some of them are internal sources of finance and some are external sources of finance.
Internal sources of finance
Sales of assets: - Company can raise its funds by selling its own property or assets.
Company often sales its unwanted stock in order to meet its requirement of short term finance
(Ageba and Amha, 2006). This is one of the simplest methods through which company can
quickly meets its short term requirement of cash.
Retained profit: - Retained profit is an amount of profit which company earns at the end
of financial year. A small amount of profit is kept by company as a reserve in order to meet any
sudden requirement of short term finance.
External sources of finance
Issue of shares: - By issuing shares to the general public, company is able to meet its
long term requirement of funds. Equity shares are also is issued to the existing shareholders
(Beaver, McNichols and Rhie, 2005). This method is generally used by company to expand its
business or to purchase new machinery.
Hire purchase: - It is a method which aids company to purchase assets without paying the
completed amount. It is a method which is used by company to meet its long term requirement of

the fund. In this, company rents some of its required equipment or property for some year as
company can bear expenses in terms of hiring equipment instead of purchasing it.
1.2 Implications of different sources of finance.
Source Advantages Disadvantages Suitability
Sale of assets Rate of deprecation will be
reduced and at the same
time cost of the assets can
get back.
Reduces the assets of the
company.
To pay dividend
and interest to the
shareholders.
Retained profit Aid the company to meet
its short term requirement
without paying anything
(Cetorelli and Strahan,
2006).
Reserves of the company
are reduced and at the
same time shareholders
may not be happy to
forego its profit ratio.
To make payment
to the suppliers.
Issue of shares Funds collected from the
shareholders need not to be
paid back.
Dividend and the voting
rights need to be given.
For expanding its
business or
purchase of heavy
machinery.
Hire purchase Company can avail benefits
of using the assets without
purchasing it.
Total rental installment
cost became more as
compared to its original
cost.
For using assets for
some time period
without purchasing
it (Paramasivan and
Subramanian, n.d).
1.3 Appropriate sources of finance which can aid the company to raise its capital.
British airways want to expand its business to other countries in order to beat the sales
rate of Tesco and to become the number one leading retailer company in the UK as well as all
over the world. Therefore, in order to raise its capital for the achievement of its objectives,
company can sale its least usable asset to meet short term requirement and at the same time,

company can issue large number of shares in the market in order to meet long term requirement
of the fund.
Sale of assets: - Through selling its assets, British airways can able to meet its short term
requirement of cash that arises at the time of expansion of the business. This method can also be
used by company to pay interest and dividend to the existing and new shareholders (Chandra,
2011). This method can also be used by the company to pay its liabilities.
Issue of shares: - British airways can issue its shares to new and existing shareholders in
order to expand its business. Issue of shares will aid company to create more awareness about the
business. This method can also be used to purchase new assets.
2.1 Cost of sources of finance identified.
Sales of assets: - This method is used by company to meet its short term requirement of
the cash. This method is normally used to make payment to the suppliers or interest to the
shareholders. But at the same time, it reduces the cost of company’s assets. Many times,
company is not able to get the actual cost of assets at the time of sale. They need it to be sold at
loss which in turn reduces the profit margin of the company.
Retained profit: - This method is used by company to meet its short term requirement of
the funds. Normally, company uses retained profit to pay interest and dividend to its shareholders
at the time of loss when company is not left with funds to pay to its shareholders. This retained
profit is also used by business in order to expand its business at the small level.
Issue of shares: - This method is used by company to meet its long term requirement of
the funds. They issue shares to general public for which they need to pay dividend to them
(DRURY, 2013). This in turn increases the cost and expenses of the company. Management is
not able to avail any tax benefit on the dividend paid to the shareholders.
Hire purchase: - It is a method which is used by company to meet its requirement of
property, machinery and vehicles for some period of time without purchasing it (Sullivan, 2009).
But at the same time, this method increases the expenses of the company. Organization has to
provide payment through half-yearly and yearly installments to the owner of the assets which in
turn increases the cost of company. Normally, cost of total installment paid is more than the
actual cost of the asset.

2.2 Importance of financial planning.
Financial planning of all the activities assists company to easily achieve the desired target.
Therefore, some of the importance of financial planning is as follows:-
Maintain the flow of cash from within and outside the organization: - Planning of all
the financial activities in advance aids management to maintain the flow of funds properly in the
organization to achieve the desired target.
Fully utilize the available resources: - Planning of all the activities will also assist British
airways to fully utilize the available resources in an effective manner in order to achieve the
goals and objectives of the company (Alamosa, Kaminker and Johnstone, 2011).
Reduces uncertainty: - Financial planning of all the activities aids company to reduce the
level of uncertainty that may take place within the business unit. Reduce level of uncertainty
Helps Company to generate more profit by reducing its expenses.
Distribute the finance properly to each and every department: - Planning of all the
financial activities in advance assists company to know about that how much fund is required in
each and every department. This in turn aids company to distribute funds accordingly in order to
fully utilize the available finance.
2.3 Information needed by internal and external decision makers.
There are different types of information which decision maker requires taking decisions
on the various aspects. But the most important information which is needed by both internal and
external decision maker is as follows:-
Internal decision maker: - Internal decision makers are the persons who generally work
for the betterment of company. Internal decision maker can be employees, board members and
manager (Revsine and et.al, 2005). These all require income statements and different types of
financial statements (i.e. trading and profit & loss account, balance sheet, cash flow statements).
They need these statements to take various necessary decisions like preparing various strategies,
knowing the company growth rate, understanding the flow of funds and gaining knowledge
about the profit earned.
External decision maker: - These decision makers affect company from the outside.
External decision makers are shareholders, government, suppliers and many more. They require
both the financial statements of the company and its audit report (Lennard, 2007). Shareholders
want these statements to decide whether they should invest or not. Likewise government uses

financial statements and audit report in order to calculate the amount of tax that needs to be paid
by company and evaluate whether company is making any fraud or not. Similarly, suppliers use
these statements to decide whether company is able to pay for the raw material purchased by
them or not.
Therefore, main documents which are required by company to take various necessary decisions
are income statements, financial statements and company audit report.
2.4 Appearance of various sources identified in the profit and loss account and balance sheet.
Sale of assets: - Entry of this will be shown on the expenditure side of profit & loss
account and in balance it will be shown in asset side after reducing it from the actual cost of the
assets.
Retained profit: - Entry of Retained profit will be shown on the liability side of balance
sheet.
Issue of shares: - Entry of issue of shares will be shown on the liability side of balance
sheet and dividend paid on these shares will be shown in profit & loss account at expenditure
side (Mason, 2007).
Hire purchase: - Instalment paid on the assets leased will be shown on the expenditure
side of profit & loss account.
Profit and loss account
Particular Amount(Dr.) Particular Amount(Cr.)
To installment paid …...
To dividend paid …...
Balance sheet
Liabilities Amount Assets Amount
Issue of shares …... Asset
less: sale of assets …...
Retained profit …... Cash (+) ….

Task 2
3.1 Analyze of companies budget
Cash budget
July August September October November December
Opening bank
balance 6000 8300 12500 16300 19600 17300
Revenues
Cash sales 11000 15000 17000 20000 17000 20000
Total inflow 17000 23300 29500 36300 36600 37300
Expenditure
Cash purchases 3000 5000 7000 10000 12000 15000
Payment to
suppliers 1200 1500 1700 2000 2300 2500
Payment of rent 1500 1500 1500 1500 1500 1500
Other expense 1000 800 1000 1200 1500 1800
Repayment of loan 2000 2000 2000 2000 2000 2000
Total outflow 8700 10800 13200 16700 19300 22800
Closing cash
balance 8300 12500 16300 19600 17300 14500
As per the financial account of British airways Company, it could be concluded after
analysing the cash budget of the company that market position of the company is good. It is
continuously growing. It could be analysed that company inflow of cash is continuously
increasing every month as compared to its outflow. Reason behind this could be that company is
focusing on its strategy properly in order to achieve its desired objectives by increasing its sales.
Another reason could be that company has started planning all its financial activities in advance.
This in turn is helping company to maintain the flow of cash within the organisation. Therefore,

company should make efforts to increase the inflow of cash as compared to outflow by fully
utilizing the available resources.
3.3 Calculation of various investment techniques in order to find out the best project.
There are various techniques used by the company in order to decide which product
company need to choose. Therefore, some of the basic techniques are:-
Calculation of Payback period (initial investment = 100000)
Project A Project B
Year Cash flow Cumulative Cash flow Cumulative
1 30000 30000 45000 45000
2 40000 70000 30000 75000
3 20000 90000 20000 95000
4 25000 115000 50000 145000
Payback period= A+ (B/C)
Where,
A= last year negative cumulative cash flow.
B=abstract value of cash flow at end of the year
C= cash flow in next year
Payback period (A) =3+ (100000-90000)/25000
=3.4 years
(B)=3+ (100000-95000)/50000
=3.1 years
Payback period of project A is more as compared that of project B. Therefore, British
airways Company should move on with project B. Because the lower payback period aids the
company to gain the initial investment invested within a short period of time.
Calculation of NPV
Project A Project B
Year Amount Discounted
value@10%
Discounted
cash inflow
Amount Discounted
value
Discounted
cash inflow

@10%
1 30000 0.909 27270 45000 0.909 40905
2 40000 0.826 33040 30000 0.826 24780
3 20000 0.751 15020 20000 0.751 15020
4 25000 0.653 16325 50000 0.653 32650
Total 91655 113355
Less- Initial
Investment 100000 100000
Net Present
value -8345 13355
Net present value of project B is more as compared to project A. Thus, British Airways
Company should go with the project B in order to earn more profit.
Calculation of IRR
Year Project A Project B
0 -100000 -100000
1 30000 45000
2 40000 30000
3 20000 20000
4 25000 50000
IRR 6.23% 16.77%
IRR ratio of the project B is more as compared to project A. Therefore, British airways
Retail Company should go with project B. Because higher rate of return will assist the company
to get the invested amount quickly.
Calculation of ARR
Accounting rate of return (ARR) = Average profit/Initial Investment*100
Project A Average Profit = Total Profit/number of year
=115000/4=28750
ARR = 28750/100000*100
28.75%

Project B
Average Profit = 145000/4
=36250
ARR =36250/100000
=36.25%
Average rate of return of project B is more as compared to project A. Therefore, British
Airways Company should go with project B. Because higher average return of return will assist
the company to increase its level of profitability.
Therefore, at last it can be concluded that British Airways Company should go with project
B in order to gain the profit and quick recover the amount invested.
Task 3
4.1 The main purpose of financial statements and its uses.
Income statements: - Income statements are prepared by the company in order to find out
the income generated and expenses made by the company at the end of every financial year
(Mayer, Schoors and Yafeh, 2005). This statement also said the company to find out the profit
earned by the company at the end of the year. At the same time it assists the company to
conclude the amount of dividend and tax company need to pay to its shareholders and to the
government. These statements are normally considered by the finance manager in order to plan
various activities.
Balance Sheet: - Balance sheet is prepared by the company in order to calculate the assets
and liabilities available with the company at the end of every financial year. This statement is
used by the manager, shareholders and government in order to find out the growth rate of the
company.
Cash flow statements: - Cash flow statements are prepared by the company in order to
find out the amount of cash invested while performing various activities at the end of every
financial year (Melis, A., 2007). These statements are generally used by manager of the company
in order to fully utilize the available the finance. This statement is made up three activities (i.e.
operating, investing and financing activities).

4.2 Financial statements prepared by various business organizations.
Sole traders: - Sole traders are the one who invest this own capital in order to start its
business. These sole traders only prepare journals, ledger and receipt & payment accounts in
order to record all the transaction made by him.
Partnership: - Partnership firm is the firm which is operated by two or more partners.
These type of organization are only required to prepare the income and expenditure account in
order to calculate the amount of profit earned by them at the end of the financial year (Penman
and Penman, 2007).
Public and private ltd. Companies: - Public and private ltd. Company need to prepare all
type of financial statements (i.e. income statement, balance sheet, cash flow statements). This
helps the company to find out its growth rate and profit earned by them at the end of the year.
4.3 Calculation of company various ratio.
After analysing and calculating the various ratios it can be find out that company position
is good. Its profitability, liquidity and Activities ratio are increasing at the low rate. It is also
found out that its ratios have been declined in the year 2013 as compared to 2012. The reason
behind this could be that the number of competitors has been increased or company is not able to
maintain the balance between inflow and outflow of the cash properly (Persons, 2011). But on
the other hand it seen out that its growth rate has started increasing as compared to that of year
2013. But its liquidity ratio is continuously increasing every year. The reason behind this could
be that company has started focusing on formation of various strategies in order to maintain the
flow of funds and beat its competitors. Thus, at last it can be conclude that overall position of the
company is fairly good.
Conclusion
The following report emphasis on various sources of finance through which company can
raise its finance. In this report unit cost of the company is also calculated by considering the
fixed and variable cost. In this report cash budget is prepared and analyse in order to find out
companies position. At last financial accounts of the company are taken into consideration in
order to calculate various ratios of the British airways company.

References
Books and journals
Ageba, G. and Amha, W., 2006. Micro and small enterprises (MSEs) finance in Ethiopia:
Empirical evidence. Eastern Africa social science research review. 22(1). pp.63-86.
Beaver, W.H., McNichols, M.F. and Rhie, J.W., 2005. Have financial statements become less
informative? Evidence from the ability of financial ratios to predict bankruptcy. Review
of Accounting Studies. 10(1). pp.93-122.
Cetorelli, N. and Strahan, P.E., 2006. Finance as a barrier to entry: Bank competition and
industry structure in local US markets. The Journal of Finance. 61(1). pp.437-461.
Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Kalamova, M., Kaminker, C. and Johnstone, N., 2011. Sources of finance, investment policies
and plant entry in the renewable energy sector.
Lennard, A., 2007. Stewardship and the Objectives of Financial Statements: A Comment on
IASB's Preliminary Views on an Improved Conceptual Framework for Financial
Reporting: The Objective of Financial Reporting and Qualitative Characteristics of
Decision-Useful Financial Reporting Information 1. Accounting in Europe. 4(1). pp.51-
66.
Mason, C.M., 2007. Informal sources of venture finance. In The life cycle of entrepreneurial
ventures (pp. 259-299). Springer US.
Mayer, C., Schoors, K. and Yafeh, Y., 2005. Sources of funds and investment activities of
venture capital funds: evidence from Germany, Israel, Japan and the United Kingdom.
Journal of Corporate Finance. 11(3). pp.586-608.
Melis, A., 2007. Financial statements and positive accounting theory: The early contribution of
Aldo Amaduzzi. Accounting, Business & Financial History. 17(1). pp.53-62.
Penman, S.H. and Penman, S.H., 2007. Financial statement analysis and security valuation (p.
476). New York: McGraw-Hill.
Persons, O.S., 2011. Using financial statement data to identify factors associated with fraudulent
financial reporting. Journal of Applied Business Research (JABR). 11(3). pp.38-46.
Revsine, L. and et.al., 2005. Financial reporting and analysis. New York, NY: Pearson/Prentice
Hall.
Sullivan, D. T., 2009. Managing financial resources. Advanced Practice Nursing: Essential
Knowledge for the Profession. pp. 203.

Online
Paramasivan,C. and Subramanian,T., n.d. Financial Management [pdf]. Available
through:<http://vcmdrp.tums.ac.ir/files/financial/istgahe_mali/moton_english/
financial_management_%5Bwww.accfile.com%5D.pdf> [Assessed on 16th December
2015].

Appendix
Ratios Formula 2014 2013 2012
Profitabilit
y ratios
Gross profit 14010 13355 13054
Net profit 7137 6232 5910
Net Sales 90762 86623 81698
Gross Profit
Ratio (Gross Profit/ Net Sales) *100
15.43 15.417
15.97
Net Profit
Ratio (Net Profit/ Net Sales) *100
7.8634230
184
7.19439409
86
7.233959215
6
Liquidity
ratios
Current
Assets 67785 65074 57309
Current
Liabilities 56717 51486 44982
Closing
Stock 46756 42912 37751
Current
Ratio Current Assets / current Liabilities
1.1951443
13
1.26391640
45
1.274042950
5
Quick ratio Quick Assets/Current liability
67784.175
6263554
65073.1665
307074
57308.16075
31902
Activity
ratio

Net Sales 90762 86623 81698
Total
Assets 99198 92663 88896
Total
Assets
Turnover
Ratio Net Sales/ Total Assets
0.9149579
629
0.93481756
47
0.919028977
7
Inventory
turnover
ratio Net sales/ Inventory
1.9411840
192 1
2.164128102
6