Sources of Finance, Financial Planning and Analysis for ABC Company

This report provides a comprehensive financial analysis of ABC Company, focusing on various sources of finance, including equity, debentures, and loans, and their implications. It assesses the most appropriate financing options, considering factors like cost, control, and risk. The report delves into the cost of different financing sources and emphasizes the importance of financial planning for the company's success, including the use of cash budgeting to manage liquidity. It evaluates the information needs of different stakeholders, such as government, suppliers, employees, management, and customers. Furthermore, the report examines the impact of financial decisions on financial statements and includes a detailed cash budget. The report also covers per-unit cost calculations, pricing decisions, and the assessment of an investment project's viability. Finally, it discusses the main financial statements, compares financial performance, and analyzes financial ratios, using Sainsbury PLC as a benchmark.

MFRD

Table of Contents
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Sources of finance available for ABC Company.............................................................4
1.2 Implications of different sources of finance.....................................................................4
1.3 The most appropriate source of finance for ABC Company............................................5
2.1 The cost of different sources of finance...........................................................................6
2.2 Importance of financial planning to ABC Company.......................................................7
2.3 Assess the information needs of different decision makers of ABC Company...............7
2.4 Impact of finance of financial statements.........................................................................8
3.1 Cash Budget for ABC Company.....................................................................................8
3.2 Calculation of per unit cost and pricing decisions............................................................9
3.3 Viability of the investment project of ABC Company.....................................................9
TASK 2..........................................................................................................................................10
4.1 Discuss the main financial statements of ABC Company..............................................10
4.2 Comparison of financial statements ..............................................................................11
4.3 Financial Ratios of Sainsbury PLC................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

Index of Tables
Table 1: Cash Budget of ABC Company.........................................................................................8
Table 2: Sales Budget......................................................................................................................9
Table 3: Unit cost centre of ABC Company....................................................................................9
Table 4: NPV calculation...............................................................................................................10
Table 5: IRR and Payback table.....................................................................................................10
Table 6: Ratio comparison of Sainsbury PLC...............................................................................12

INTRODUCTION
Small and medium size businesses have grown significantly in UK. The government is
planning to spend more than £12 billion for the development of small scale business in the
country. This has provided an amazing opportunities for the nation's diverse and newly set up
businesses. The report is based on the process of assessment of available sources of finance, their
implications and decision making. The contract is for website hosting and development for ABC
Company (Website Hosting and Development, 2013). Apart form this, the evaluation of financial
performance of J Sainsbury Plc has also been included in the report.
TASK 1
1.1 Sources of finance available for ABC Company
Equity: ABC Company can generate £ 280,000 from equity share capital. It will dilute
the control of the company but it will help them to grow their business. The shareholders may
interfere in the in the day to day operations of the company which can be a problem (Kaplan and
Atkinson, 2015).
Debentures: The cost of raising funds from debentures is very low and ABC Company
can easily generate £ 280,000 through it. It will increase the debt obligation of the company and
they have to pay regular interest to debenture holders (Ledgerwood, 2014).
Loans: Bank loans provides longer term finance for the business. ABC Company has to
provide a collateral security and they have to pay regular interest even if there are no profits.
Hire purchase: Hire purchase is a contract in which the owner has to pay regular
instalments and he has an option to purchase the asset at the end of the term (Lusardi, 2011).
ABC Company can hire the assets required for the business. It will help them to grow their
business.
Reserved profits: ABC Company can accumulate their profits and use it for the growth
of the business. It won't affect the control of the company as there will be no external influence.
1.2 Implications of different sources of finance
The implications of different sources of finance for ABC Company is as follows:
Sources of
finance
Advantages Disadvantage
Equity  No interest payments  Dilution of control

 They can get help from the
shareholders and other investors
 Improved decision making
 Low debt equity ratio
 Low leverage
 High cost in raising capital
 Profits have to be shared in the
form of dividends.
 Legal complexities as it requires
listing, registration etc.
Debentures  Cheapest sources of finance
 Interest payments are tax
deductible
 No dilution of control
 Need credit ratings
 Interest have to be paid even in
losses
 Can lead to insolvency of the
business.
 High leverage
 Increased risk
Loans  No outside interference in the
company
 Less legal formalities
 No dilution of control
 Interest payment obligations
 Less flexibility
 Increases the liability
 Possibility of seizure of assets
Hire
purchase
 Hire purchase financing is very
easy
 No dilution of control
 Benefits of depreciation of
assets
 Tax benefits
 Ownership is transferred only at
the payment of last instalment
 Cost of financing is very high
 Only small assets fall under hire
purchase category
Reserved
profits
 Less legal implications
 No costs involved
 No dilution of ownership
 Restrictions on the use of
retained earnings.
 Increased opportunity cost
1.3 The most appropriate source of finance for ABC Company
ABC Company has to compare all the sources of finance and analyse their effects on the
business. The most appropriate and suitable sources of finance for the company is bank loan.
They can get long or medium term loan easily from any bank (Madura, 2011). There will be no

dilution of control of the business and banks do not interfere in the decision making of the
company. Equity shares are costly and the company may not get enough applications from the
public. Debentures have the similar problem because ABC is a new company. The cost of hire
purchase is high and it will be not possible for them to bid for the contract using this method. On
the other hand, retained earnings may take long time to accumulate £280,000 which can be used
for the contract. Equity, debentures, hire purchase and reserved profits are not suitable for ABC
Company. It would be better for them to fund their operations through a bank loan (Minichilli,
Corbetta. and MacMillan, 2010). They already have £20,000 and rest of the money can be
generated by a bank loan.
2.1 The cost of different sources of finance
There are different costs related to the available sources of finance:
Equity: The cost of raising funds funds through equity is very costly. It can be time
consuming and the management has to comply with many legal and regulatory issues before
funding (Molly, Laveren and Deloof, 2010). Furthermore, it increases the expenses of ABC
Company as they have to pay advertisement costs, underwriter' commission, book building fees
etc. Apart form this they have to pay dividends to their shareholders.
Debentures: Debentures increases the liability and debt obligation of the company. ABC
Company has to pay regular interest even if there are no profits. Debentures interest payments
are tax deductible but it has various expenses like stamp duty, listing fees, financing costs etc
(Anderson and et.al., 2015).
Loans: Banks requires collateral securities and there is risk of seizure of assets in case to
non payment. ABC Company has to pay interest at regular intervals. Loans increase the
liabilities and leverage of the company.
Hire purchase: The cost of financing of hire purchase is very high because it involves
many charges like legal fees, stamp duty, advisory charge etc (Bazerman and Moore, 2012). Hire
purchase can be risky for ABC Company. They have to pay money at regular instalments while
the ownership tends to be with the other party.
Reserved profits: Reserved provides affects the liquidity of the company and it increases
the opportunity cost (De Groot, Alkemade, Braat and Willemen, 2010).

2.2 Importance of financial planning to ABC Company
Financial planning is important for ABC Company because they have limited financial
resources in the company. It will help them to avoid shortage as well as surplus of funds. Both
the situations are harmful for the business as it can affect their performance (Broadbent and
Cullen, 2012). Cash budgeting can be helpful for them and it will allow them to manage their
cash efficiently. It is essential for the management to ensure the liquidity and solvency of the
business. Financial planning can be used to formulate strategies and in allocation of resources to
various business operations. They can set short and long term objectives which will provide
direction to the company (Epstein and Buhovac, 2014). Over trading can be harmful for any
business. So, they have to monitor their working capital and time of income and expenditure to
avoid financial trouble in future. It is a common problem in SME because many business try to
grow quickly and rapidly. Shortage or surplus of funds indicates that the business is not properly
managed. It can give rise to liquidity and solvency problems in the future. Financial planning is
very important for ABC Company.
2.3 Assess the information needs of different decision makers of ABC Company
The information of a company is required by all the people and groups which are
associated with it (Herman, 2011). It consists of shareholders, management, government,
customers, employees and suppliers. They information needs of these people are as follows:
Government: UK government needs financial statements of ABC Company to see
whether they have complied with all the rules and regulations of the government. It also check
other details of the company like tax payments, shareholders details, legal compliance etc
(Ingram, LaForge and Williams, 2012). UK government has been providing support to SME and
their information can help them to plan for the future.
Suppliers: Suppliers need information like liquidity, solvency and income statement of
the company (Bovée and Thill, 2014). It allows them to formulate credit strategies according to
the payback capacity of a firm.
Employees: Employees are dependent on the company for their salaries. They need
information of the company to analyses its profitability and future.
Management: Management of ABC Company should evaluate their financial and cash
flow statements of the company to create plans and make changes in it (Conway, 2013).

Customers: Customers need information about certain factors such as performance,
supply, environmental responsibilities and CSR of the company.
2.4 Impact of finance of financial statements
ABC Company has make sure that they follows the standards and guidelines of
International Accounting standards Board (IASB). It provides methods to record and present
financial information for the company (Brigham and Ehrhardt, 2013). Loans, hire purchase and
debentures increases the liability of the company. These are long term liabilities and appears on
the liability side of the Balance Sheet. ABC Company is required to pay interest at regular
intervals which reduces their profits annually in profit and loss statements. It appears as an
expense on the expenditure side of the statement. Equity shares appears in the share capital
column of the Balance Sheet (Coombs, 2014). Retained earnings reduces the share capital of the
company. Cash flow statement will show inflows of cash because the money is coming into the
business. On the other hand, dividend and interest payment is an expense and it shows cash
outflows.
3.1 Cash Budget for ABC Company
Cash budget is a part of financial planning and helps in managing the cash in the business
(Budgeting, 2013). It takes into account the inflows and outflows of the cash. It can be used to
estimate the future requirement and needs in the business. Cash budget is used to analyze the
liquidity position of a company. It can be seen from the table below that ABC Company has
ample of cash in their business. It is required from them to properly plan and use their cash in an
effective manner. They have surplus of funds and their most of the cash is lying idle.
Table 1: Cash Budget of ABC Company
January February March April May June
Opening balance 20 88 159 229 290 370
Sales 300 320 330 324 350 355
Total of income 320 408 489 553 640 725
Expense
Purchase 100 111 120 125 125 130
Salary 70 75 75 75 80 83
Fixed expenses 40 40 40 40 40 40
other expenses 22 23 25 23 25 27

Total 232 249 260 263 270 280
Net balance 88 159 229 290 370 445
Sales budget can be used to predict the sales of the future (Crilly and Ioannou, 2014). It
gives a pattern of the increase of sales in a year. It can be seen from the table that the sales of
ABC Company has increased in the six years.
Table 2: Sales Budget
Month Monthly Budget
('000)
Actual Figures ('000) Variance ('000)
January 350 400 50
February 420 420 0
March 440 420 -20
April 430 425 -5
May 430 450 20
June 450 470 20
3.2 Calculation of per unit cost and pricing decisions
Unit costing helps in the calculation of per unit cost of a product (Epstein and Buhovac,
2014). It can help ABC Company to decide their profit margin and manage their direct and
indirect costs. Indirect costs cannot be be assigned to any activity like fixed cost. While direct
cost can be assigned to any activity like labour cost, raw material costs etc.
Table 3: Unit cost centre of ABC Company
Cost 30000
Units produced 1000
Fixed cost 14000
Variable cost 16000
Total cost 30000
Unit cost formula Total cost / unit produced

Per unit cost 30
Margin on sales 20.00%
Sales price 36
3.3 Viability of the investment project of ABC Company
Net Present Value Method
NPV compares the present value of future inflows with the outflows. It takes into account
the Time value of money in deciding the best investment alternative (Head and O’Flynn, 2015).
It can be seen from the table below that NPV of project 1 is better than project. It is better for
ABC Company to choose project 1 for their investment.
Table 4: NPV calculation
Project 1 PV @10% Present value Project 2 PV @10%
Present
value
Initial
investment 1500 1500
Year 1 500 0.909 454.5 650 0.909 590.85
Year 2 500 0.826 413 510 0.826 421.26
Year 3 500 0.751 375.5 322 0.751 241.82
Year 4 500 0.683 341.5 421 0.683 287.54
Year 5 500 0.621 310.5 489 0.621 303.66
Total 1895 1845.14
NPV 395 345.1
Internal rate of Return (IRR) and Payback
IRR calculates the rate of return while payback period calculates the time period in which
the investment is recovered (Business Finance, 2014). IRR and payback period of project 1 is
better and it should be selected by the company.
Table 5: IRR and Payback table
Project 1 Project 2
Initial investment -1500 -1500
Year 1 500 650

Year 2 500 510
Year 3 500 322
Year 4 500 421
Year 5 500 489
IRR 19.86% 19.40%
Payback 3 Years 3.2 Years
TASK 2
4.1 Discuss the main financial statements of ABC Company
There are three main financial statements which are prescribed by International
Accounting Standards Board (IASB). It includes Balance Sheet, Profit and loss statement and
Cash flow statement (De Groot, Alkemade, Braat and Willemen, 2010). ABC Company has to
only prepare Profit and loss statement if it wants to work as a sole proprietorship. On the other
hand, they are required to prepare all the financial statement if they register themselves as public
limited company. The income statement of a company gives income and expenditure details. It
can be used to analyze the liquidity and profitability of the business. Balance sheet has two
categories namely, assets and liabilities. It is used to evaluate the financial position and
performance of the company. It is compulsory for all the public limited companies to prepare
financial statements (Bazerman and Moore, 2012). Cash flow statements is used to analyze the
inflow and outflow of the cash. It has three major segments:
 Operating activities
 Investing activities
 Financing activities
4.2 Comparison of financial statements
Partnership firm: A partnership firm is has to prepare Balance Sheet, Profit and loss
statement and statement of partner's capital (Anderson and et.al., 2015). Partnership firm
operates differently and all their rules are written in the agreement which is signed by all the
partners.
Sole proprietor: Usually small companies start their business with sole proprietorship
and when the business grows it is converted into public limited company (Madura, 2011). A sole

proprietor firm has to only prepare profit and loss statement. It gives the owner all the details
about the firm. But as the business grows it becomes difficult to manage all the information in
one statement.
Public Limited Company: According to International Accounting Standards Board
(IASB), it is mandatory for all the public limited companies to prepare all the financial
statements. It includes Balance Sheet, Profit and loss and cash flow statement. They have to
disclose all their policies and procedures in the financial statement every year (Kaplan and
Atkinson, 2015).
4.3 Financial Ratios of Sainsbury PLC
It can be seen from the ratio analysis of J Sainsbury Plc that their gross and operating
margin has reduced in 2015. It shows that the profitability of the company has reduced. They
have to cut down their expenditures in order to increase their profits. Liquidity ratio of the
company is also below 1. It means that they have liquidity problems and they lack investment in
marketable securities (Minichilli, Corbetta. and MacMillan, 2010). They have to invest more
money in liquid assets which will benefit them in the long run. Their solvency ratio is
satisfactory and they have kept in very low. It depicts that the company has less risk and leverage
in their business. High proportion of the money invested in the business has been equity and not
borrowed funds. It is essential for J Sainsbury Plc to improve their liquid position and effciency.
Table 6: Ratio comparison of Sainsbury PLC
Ratios 2015 2014 2013
Profitability ratios:
Gross Margin (%) 5.1 5.8 5.5
Operating margin (%) 0.3 4.2 3.8
EPS -0.08 0.36 0.32
Payout Ratio 62.5 - -
Liquidity Ratios:
Current ratio 0.64 0.64 0.61
Quick ratio 0.52 0.48 0.49
Solvency Ratio: