Managing Financial Resources and Decision-Making Strategies Report

This report analyzes financial resources and decision-making processes within businesses, evaluating various sources of finance for new, small, and large enterprises, as well as for those looking to acquire existing companies. It explores the implications of each funding source, including owner's capital, retained earnings, sale of fixed assets, third-party investments, bank loans, government grants, hire purchasing, and the issue of shares. The report provides insights into the advantages and disadvantages of each source, such as the impact on ownership, legal restrictions, and financial obligations. Furthermore, it applies investment appraisal techniques, unit costing, and ratio analysis to different scenarios, recommending appropriate financing options based on specific business needs. The report also includes an analysis of implications of sources of finance, such as legal, dilution of ownership, and bankruptcy implications.

Managing financial resources
and decision
Student name: Radu Teodor Cristea
1

2

TASK 1
INTRODUCTION
Financial resources are the essential elements of company and it is important for the managerial
level people to make optimum utilisation of available funds or money so that different activities can be
carried out in a suitable manner (Peirson and et.al, 2014). In the present study, researcher aims at
evaluating different sources of finance for new and old, large and small and for the new business start-
ups. Along with this, report will assess the implications of different source and lastly, appropriate
source of finance will be recommended to the small business for start-ups, large business for expansion
and group of people who are planning to buy up an existing medium sized company. On addition to
that, information included in different statements and their purposes have been presented in the report.
Various calculations have been made in an order the information is provided in different scenarios. The
investment appraisal techniques, unit costing and ratio analysis tools are used with respect to different
cases.
Scenario 1
Identifying different sources of funds:
Looking at the present corporate market, there are several opportunities that are available for the
entrepreneur, small and large sized companies to start, enhance or expand the business operations.
Thus, in order to establish business in new market or expand the existing one or buy up an organisation,
it is important for the entrepreneur or management to ensure adequate amount of funding (Demir and
Caglayan, 2012). In this context, there is a wide range of sources of finance that are available for
different needs and wants of entrepreneurs and businesses. Owner's Capital: In terms of starting a new business, owner's capital is considered as the best
suitable source of finance. However, this is the reason, entrepreneur already owns them and the
cost of acquisition is minimal. In this, individual does not have any kind of liability like interest
on bank loan or sharing returns to investors (Bernstein, 2015). According to the present given
scenario, this source can be used by the entrepreneurs who are planning to open a new venture.
However, there are certain drawbacks of owner's capital but the most significant one is that
individuals have to invest personal savings into business and if operations are not carried out
properly then it could lead to position of loss which may affect the entire financial status of
individual.
3

 Retained earnings: In general, retained earnings can be defined as the money kept reserved after
paying all the debts and share of the shareholders. However, this source can be used by
companies which already exist in the market and making valiant efforts to generate higher
profits so that they can keep it reserve even after satisfying the monetary needs and wants of
different stakeholders. On the basis of present case, retained earnings can be used by the large
or medium sized enterprise who has already established their mark in the corporate environment
(Dada, Azim and Ullah, 2014). Main aim of using this fund is that there is no increase of
liability on firm and management can use it for future expansion. Furthermore, advantage of
this source is that it can be used for long term as there is no compulsory maturity like term loans
and debentures. Sale of Fixed assets: It is one of the internal sources of finance that existing companies can use
in order to raise adequate amount of funds for the future expansion. However, for the short
terms financial needs of business, this source is considered as the best. However, it is the
responsibility of management of large or medium sized businesses to focus on those assets
which are of no use or less use can sell them and raise money for buying new machinery or
future investments (Philippon and Reshef, 2013). But in contrary to this, once the asset is sold,
it will be used in the near future and company has to make investment for new assets. Third Party Investment: Top level management for large or small sized firm or entrepreneur for
new start-ups has to influence third party to invest in their business ideas so that they can
provide adequate amount of money and would help in carrying the operations. However, third
party investors have less interest than the shareholders (Morana, 2014). But it is important for
senior officials of large or small enterprise to provide accurate and wide range of information to
the investors so that they can assess business for risk and accordingly, make decisions for the
future contingency. Bank loan: This source of finance is the most appropriate source that is considered to be an
external source of finance. Bank loan is available for all kinds of business including new start-
ups, existing business as well as an entity that wants to expand business. The loans are generally
borrowed money against which company has to pay interest. These sources can be categorised
in short term, long term and medium term. The companies who want to take loan should have
kept some securities with bank. The major advantage of using bank loan is flexible repayment
terms. Nonetheless, the higher interest can be a limitation. For existing firms, it becomes
4

difficult to obtain funds from such source due to poor credit rating. However, the business may
loss assets for secured borrowing. The advantage of this source for firms who are willing to
expand business is that they can raise funds with appropriate methods of financing fixed assets.
For small entity, it becomes hard to arrange bank loan due to higher interest rate. Government grants: Government grants are the systems in which the organization provides
huge monetary rewards for the start-up or existing firms against their business proposal that can
be designed with respect to the welfare of society. This is the most appropriate source of finance
for the existing large scale organization as most of government grants can total in the millions
of dollars. The most common advantage of such sources is that companies can receive
government grants in an easier way from government and private sources. The large scale
organizations who wants to expand business can also approach to such sources along with a
worthy investment proposal. Another advantage of this source is that these sources are
prestigious and can provide instant credibility and public exposure to corporate entity. The huge
competitive for preparing government grants is the limitation of this source. The disadvantage
of these resources is that it is a lengthy process (Cunningham, 2006). Hire purchasing: These sources of finance can be seen in two categories such as short to
medium term. This is the arrangement in which company can acquire new machineries and
equipment against easy down payment and a range of instalment. This source of finance can be
used by all type of business whether it is a small of large company. However, new ventures as
well as existing companies and partnership firms can use such sources of finance. The major
advantage of these sources is the availability of instalment credit such as rental, purchase and
interest being paid. The disadvantage of these sources is that the entities are provided ownership
outright at the end of payment term (Sources of finance, 2012). The companies can use that
assess that are acquired from hire purchase and can pay out the full amount over a defined
period. However, the business entities have to stick to the terms of agreement for owning the
assets at the end.
 Issue of shares: Issue of shares is the most common source of external finance that is called as
equity financing. This source of finance can be used by the limited company who has registered
themselves for IPO (Initial public offerings). In these sources of finance, funds are usually
invested by shareholders and this is a long term source. However, the advantage of this source
is that company has not to pay interest against the funds raised from public but it has to pay
5

dividend. The major advantages of using issue of share are that company can raise large amount
of funds to invest in business projects. However, there is certain disadvantage of using such
sources of finance (Pour, 2011). The business has to share the ownership of company with
external parties and the members become shareholders of company. As an advantage of these
sources, it can be said that the shareholders have opportunity to profit if company performs
well, but also take the risk of loss in case of non-performance of business. Hence, this source is
appropriate for the large scale organization that is looking for business expansion.
Implications of sources
Sources Legal Dilution of Ownership Bankruptcy
Owner's capital
There is no legal
restriction of generation
of funds by the owner's
capital.
Controlling power of the
company will be
diluted.
There will be no
financial obligation on
the organization with the
owner capital due to
insolvency situation will
not arise.
Sale of fixed assets
Similar to the owner's
capital, there will be no
legal implications on
sale of fixed assets.
With the sale of asset
there will be no change
in ownership position of
the business (Dransfield,
2004).
Solvency of business
will be affected in
adverse manner because
value of business will be
reduced.
Retained earnings
On this restriction can
be imposed by
shareholders of the
company because it can
reduce the return of
investment as dividend
policies are adversely
affected by it.
Through retained
earnings there is no
change controlling
position of the business.
It is a part of reserve and
surplus thus, financial
obligations are not
affected by it.
Consequently, it cannot
lead to the situation of
insolvency (Zoan,
2014).
6

Venture capitalist
There are no legal
implications of the
venture capitalist.
It will vary as per the
conditions imposed by
third party (Parkinson,
2012).
In situation where
organisation is not able
pay their liability to the
third party then they
declared as insolvent
Bank loan
More and more paper
work is to be done
Ownership remains with
Bank (Management
accounting, 2014)
There will be no
financial obligation of
using such sources
Government grants
This source required
effective proposal that is
based on ethical terms
Ownership remains with
organization
Loss to government in
such case
Hire purchasing
These sources are used
after making loss of
paperwork
The ownership comes to
the owner at the
payment of last
instalment
This creates a loss for
hire purchasing
company
Issue of shares
The company has to
registered for IPO
(Dada, Azim, and Ullah,
2014)
Decreases the level of
ownership percentage of
shareholders
The shareholder are not
entitles to have funds in
case of bankruptcy
(Sources of
finance,2012)
The above stated are the implications associated with different sources of finance. However, it is
the duty of senior officials of the company to make sure that they evaluate both negative and positive
aspects of the sources and accordingly make smart decisions regarding selection of appropriate source.
In the present case, different sources has been evaluated for different users thus, before selecting the
mode, management also have to understand the needs and wants.
Appropriate source of finance for three different cases
In the above study, different source of funds has been identified and it’s positively and negatives
have been evaluated. However, for a firm senior officials and entrepreneurs for new start-ups are
7

responsible to understand different implications of the sources and accordingly make decision
regarding selection of suitable and reliable sources (Read, 2002). According to the present given case,
researcher illustrates the appropriate source for small business start-up, a large business expansion and
small group of people for acquiring medium sized company.
Case 1: Sources of finance for Small business start ups
For starting a new venture is not an easy task for the individual, it is important for the
entrepreneur to take appropriate decision regarding selection of sources so that activities can be carried
out it appropriate manner. For starting a new small business, two sources are feasible for the
entrepreneur that is personal savings and bank loan. Bank borrowings is the source through the help of
which large amount can be raised in short span of time. For this, entrepreneur only has to complete the
few legal formalities (Kawai, Mayes and Morgan, 2012). However, repayment of loan is also based on
monthly instalments which would be feasible for the individual to start new venture. Along with this,
owner's capital another good source for small business start-ups. It is because, for initiating any
business, owner has to invest his/her own money so that other investors can be influenced. On the other
hand, there is not such liability on the part of firm but if investment is not used in suitable manner then
it can be major loss for the entrepreneur.
Case 2: Sources of finance for large business expansion
Herewith, in this section a case of existing firm is taken into consideration that is willing to
expand business in new markets. For example: This organisation is so called retail entity who has taken
registration for initial public offerings. There are various internal and external sources of finance
available for the business (Booker, 2006). For an expansion project the company requires large amount
for with the appropriate sources of finance are required. It has been assumed that the company is going
to open new outlets in the market so it becomes important to put money in expansion project. For
raising large amount of funds the company is suggested to go for equity financing as it will be the most
important sources of finance for large scale company (Morana, 2014). Through issuing shares in the
market the large amount of funds can be acquired by the company. The rationale behind suggesting
issue of share as sources because, it will provides benefits in terms of raising large amount of funds at
minimal cost. The company has not to pay interest but its can pay dividend as well.
The second and appropriate sources of finance for this large scale company for expansion is
retained earnings. These are that source available with companies in manner of saving from last year’s
business. The profit that are retained from past year business have been used to for expanding business.
8

The rationale behind using retained profits is that it is a cost effective source of finance but the
company has to pay opportunity cost for using such source of finance.
Case 3: Sources of finance for Small group of people
In order to buy a medium sized firm to enhance the level of operations, group of people should
use government grants and venture capitalist. The main aim behind recommending this source is that,
they will help in raising large amount of money through the help of which people working together can
buy medium sized firm and expand their business operations. The main advantage of government
grants is that they are easy to acquire as government of UK promotes such investment for the
expansion or growth (Demir and Caglayan, 2012). Along with this, grants are prestigious and easily
provide instant credibility and public exposure to the business. On the other hand, venture capitalist is
another major source through which group of people can buy the existing company. However, they
provide large amount of money for investment as well as have lesser interest then the shareholders. But
it increases responsibilities for the management to provide accurate and wide range of information to
the investors so that they can evaluate the business risks and accordingly make decisions regarding
future investments.
9

10

11

12