Managing Financial Resources and Decision Making: A Detailed Report

This report provides a comprehensive overview of managing financial resources and decision-making within a business context. It explores various sources of finance, including equity, debentures, private equity, and retained earnings, detailing their implications on a company's financial and legal standing. The report includes a discussion on the cost associated with each source of finance and the importance of financial planning for effective resource allocation. It also identifies key users of financial statements, such as managers, shareholders, creditors, and the government, and explains how finance impacts these statements. Furthermore, the Capital Asset Pricing Model (CAPM) is applied to assess the cost of equity. Desklib provides students with access to this assignment, alongside a wealth of past papers and solved assignments, to aid in their studies.

MANAGING FINANCIAL
RESOURCES AND DECISION
MAKING

INTRODUCTION
Finance is the resource that is scarcely available to the business firm. In the current
report, varied sources of finance are discussed in detail. Along with this, implications of different
source of finance are discussed briefly. In middle part of the report, budget is prepared and same
is interpreted in proper manner. Along with this, project evaluation method is also applied on
cash flows and results are interpreted. At end of the report, financial statements are discussed
and ratio analysis is done.
TASK 1
1.1Sources of information for the business firms
M1 In current time period varied sources of information are available to the business firms.
These sources are different from each other in term of cost of finance and time period for which
they are available to the business firms. Companies must select any source of finance after
considering lots of factors. Some sources of finance are explained below.
 Equity: It is the long term source of finance that is available to the business firms.
Radisson plc is the medium size company that is operating in the UK IT sector. It can
raise capital through equity. There are some rules and regulations in terms of listing of
shares. If Radisson plc successfully meet the determined criteria then it can issue shares
to the general public (Chen, 2012). Firm can bring IPO or FPO in the market. IPO refers
to the initial public offer which means that firm issue shares for the first time in the
market. On other hand, FPO means further public offer and it is issued by the firms who
already issue their shares in the market. Hence, it can be said that Radisson can raise fund
through this source of finance.
 Debenture: This is the long term source of finance which is available to the business
firms. Issue of debenture is the written acknowledgement of the debt taken by the
business firm (Finance and Zwerman, S., 2015). Any firm who can clear the parameters
set by the regulatory authority can issue debentures in the market. Interest is paid by the
firm for the debt that is given to it by the general public.
 Private equity: This is another external and long term source of finance. Mentioned
source of finance is used by the business firms who cannot issue shares in the primary
market. Under this mode of finance there is a private firm which makes investment in the

business firm by purchasing shares. Investment is made in installments by the private
equity firm (Frieden, 2015). Mentioned sort of firm acquire 60% stake in the company in
which it make an investment. Hence, private equity firm easily interfere in the firm
decision making process.
Internal source of finance
 Retained earnings: Retained earning refers to the part of the sales revenue that remains
after deducting all expenses from the revenue. This source of finance is available to all
sorts of business firms irrespective of their size.
1.2Implications of the sources of finance
M1 Implications of the varied sources of finance are explained below.
Financial
implications
Legal
implications
Dilution of
control
Bankruptcy
Equity For each source
of finance there
is a some cost of
source of
finance. For
equity dividend
that is paid by
the business firm
is the cost of
source of finance
(Gatti, 2013).
In order to bring
IPO in the
market it is
inevitable to
pass parameters
determined by
the stock market
regulator. Firm
needs to fill
some forms and
submit paper
documents like
financial
statements copy
in order to get
listed in the
primary market.
Issue of shares
reduced control
of existing
shareholders on
the business
firm.
In case of
bankruptcy of
the business firm
preference is
given to the
creditors in
comparison to
equity
shareholders in
relation to
payment of
capital amount.
Debenture It is the liability In case of Control of the In case firm get

of the business
firm to pay
interest to the
debenture
shareholders on
time. In case
company failed
to pay interest to
the debenture
holders then in
that case
mentioned
authority can
approach court
and can claim
interest amount.
debenture it is
necessary to take
permission from
the regulatory
authority. In this
regard first of all
firm need to
complete all
paper
formalities.
After doing
same firm can
issue debentures
in the market.
existing
shareholders
does not get
diluted as it
remains same
even firm issue
debentures in the
market.
bankrupt due
importance will
be given to the
debenture
holders relative
to equity
shareholders.
Private equity In case of
private equity
apart from
dividend there
are many other
expenses that are
bear by the firm.
it can be said
that there is a
very high
finance cost of
private equity as
a source of
finance.
Legal
implications for
this source of
finance are that
it is necessary
for the business
firm to submit
its five years
financial
statements to the
private equity
firms. Apart
from financial
statements firm
may submit
Control of
existing
shareholders
gets diluted if
funds are raised
through private
equity (Tierney
and et.al., 2011).
Importance is
given to the
creditors over
the private
equity firm. This
is because
private equity
firm make
investment in the
firm through
equity and due to
this reason it is
the real owner of
the business
firm.

other paper
document to the
private equity
firm according
to requirement.
Retained
earnings
No financial
implications
No legal
implications.
No dilution of
control.
It is necessary o
use retained
earnings to make
payment to the
creditors.
1.3 Appropriate source of finance
Each and every source of finance have some merits and demerits. Each source of finance
can be used in different situations. Hence, each source of finance cannot be appropriate for the
business firm. Equity cannot be used by the firm to finance its projects. This is because cost of
equity is very high and if firm will declare dividend then same will directly affect is profit. Debt
is best source of finance for the business firm (Visser, 2013). This is because cost of debt always
remains lower then equity. However, it is necessary to pay interest every year. Firm if follow
appropriate cash management strategy then it can pay interest to bank on time even it is earning
low revenue in its business. Control of existing shareholders does not get diluted in case of debt.
Hence, in case of debt management have higher freedom in terms of making business decisions.
Due to this reason debenture is appropriate source of finance for the firm. There is no cost of
retained earnings and this is the reason due to which it is also appropriate source of finance for
the business firm.
TASK 2
2.1 Cost of varied source of finance
 Equity: Dividend that is paid on equity is the cost of this source of finance. Usually, it is
observed that dividend rate is very high in comparison to interest (Wells, 2013). However, there
is flexibility in case of this source of finance and firm at its own discretion can pay dividend in
specific year.

 Debenture: Interest paid on debentures is the finance cost of mentioned source of finance. It is
necessary to pay interest every year. In case of default bank can take legal action against the firm.
 Private equity: This source of finance is the variant of equity. In case of private equity dividend
is paid to the PE firm. Apart from this seating fees is paid to the representatives of the PE firm
because they participate in the firm board meeting for making business decisions. Hence, it can
be said that cost of finance in case of PE is greater than equity.
 Retained earnings: In case of retained earning there is no finance cost. This is because it is the
portion of revenue that is earned by the business firm. It is assumed that opportunity cost is the
finance cost of retained earnings. Opportunity cost refers to the benefit that firm does not get
because it cannot make second best use of the asset.
2.2 Importance of financial planning for the business firms
Finance is the resource for the firm that is scarcely available and due to this reason it is
very important to make their effective use in the business. By preparing a financial plan business
firm make effective use of the cash that is available in the business. Radisson plc can classified
available fund in different categories like working capital, investment in business and investment
in the financial instruments. Firm can allocate 30% of available fund to working capital and 50%
for investment in business as well as 20% for making investment in financial instruments. By
preparing financial plan in such a way firm can make effective use of the available cash in the
business. Under financial plan sub plan must be prepared in respect to use of cash in different
categories (Bancel and Mittoo, 2011). Proper plan must be prepared that will be followed for
making investment in securities, assets in systematic way. Plan must be prepared in respect to
way that will be followed to make best use of the capital in business. In this way financial
planning help one in making best use of funds in the business.
2.3 Users of the financial statements Managers: Managers are the important stakeholder of the business firm. They require
financial statements in order to formulate strategy for the business firm in right direction
in respect to cost control and other things (Georgescu and Hartmann, 2013). Managers
use ratio analysis method in order to evaluate business performance. On the basis of
results of the ratio analysis they identify the direction in which they needs to work for
benefit of an organization.

 Shareholders: They needed financial statement in order to make investment related
decisions (Pau and Gianotti, 2012). By using ratio analysis they measure firm condition
and make investment decisions. Usually, investors use profitability, gearing and PE ratio
in order to make business decisions. On the basis of results of these ratios they decide
whether investment must be made in the business firm. Creditors: Creditors need financial statements in order to decide whether they must
further lend money to the business firm. By evaluating balance sheet and profitability
creditors make their business decisions. The main concern of the creditors is that many
times business firms does not make payment of debt payment on time. In order to abstain
from facing this situation creditors like to use financial statement of business firm. Government: Government require relevant statement in order to ensure that right value of
tax is paid by firm to it.
2.4 Impact of finance on financial statements
Finance to great extent affects the firm financial statements. If firm issue equity then
shareholder equity get increased in the liability side of the balance sheet. On same time cash also
increased in the assets side of the balance sheet. It can be said that finance affects the balance
sheet of the firm. If dividend is paid to the shareholders then it is recorded in the income
statement (Goncharuk, 2012). Due to recoding of dividend amount profit of the firm get
declined. Hence, equity affect the income statement of the firm. On other hand, if firm take debt
from the market the liability side of balance sheet increases because long term loan amount get
elevated. When firm take debt from the market cash increased in the business. Thus, debt affects
the financial statement of the firm. Interest is recorded in the income statement as an expenses.
Hence, due to this reason profit of the firm gets reduced. This reflects that debt affects income
statement of the business firm.
M2
CAPM
Assumptions
K(e)
5.10
%
RFR 8.2%
Beta 0.50
Rp 2%

CAPM model is applied on the relevant data and it is identified that cost of equity is 5.10%. In
this regard Treasury bill rate and beta value is identified. This model reflects that firm give return
of 5.10% for the risk that investors are taking for making investment in the firm.
Cost of debt after tax
Kd= Interest percentage*(1-corporate tax rate)
= 8%*(1-0.30)= 5.6%
Cost of debt after tax for the firm is 5.6%. Corporate tax rate is deducted because on debt firm
receive deduction from the tax department. Hence, 0.30 is deducted from the one and real cost of
debt for the firm is 5.6% whose amount in terms of value will be included in the income
statement and subtracted from operating profit.
TASK 3
3.1 Analyze budget and making business decisions
Table 1 Cash budget of the business firm
December January February March April May
Opening balance -13000 4700 15200 18200 14700
Sales 40000 52000 48000 45000 40000 48000
Total 40000 39000 52700 60200 58200 62700
Expense
Purchase 9000 9300 10500 8000 8500 9000
Salary 17000 17000 17000 22000 22000 22000
CAPEX 20000 0 0 0 0 0
Creditors 7000 8000 10000 12000 13000 10000
Total 53000 34300 37500 42000 43500 41000
Net balance -13000 4700 15200 18200 14700 21700
There is huge significance of the budget because in the budget values of expenses are
determined. Main target of the business firm is to make expenses within the determined
boundary. This thing help business firm in controlling expenses in its business. Due to control on
expenses in the business stability and growth is observed in the profitability of the business.
Thus, it can be said that budget give multidimensional benefits to the business firm, on one hand
by using budget expenses are controlled and on other hand profitability is enhanced. The second
main significance of the budget is that it help managers in identifying areas where firm give

excellent and poor performance. Thus, areas of flaws in terms of loose control on expenses are
also identified by preparing a budget. By formulating proper strategy weak areas can be
converted in to firm strong factor. It can be said that there are multiple benefits of the budget for
the business firm.
Interpretation
Cash budget is prepared by the business firm in order to project firm cash inflow and
outflow for the specific time period. It can be seen from the table that cash inflow of the firm is
fluctuating consistently, moreover, its growth rate is also change over the period of time. It can
be seen from the table that cash inflow is increasing from 40000 to 60,200 from month of
December to March. Thereafter, cash inflow declined in the business to 58200. In terms of sale it
can be observed that in the month of December and January sales of the firm increases.
Thereafter, sales of the firm decreases to 48,000 in the month of February. Thereafter, in the
month of March and April sales declined. However, in the month of May sales again increased
from 40,000 to 48,000. In case of expenses it can be seen that purchase is increasing from 9000
to 10,500 from the month of December to February. After the month of February expenses
declined in the month of March but again elevation observed in the expenses even sales declined.
Creditors of the business firm are increasing regularly from the month of December to April. In
the last month creditors of the firm decline. The interesting point is that must be noted here are
those sales of the firm are declining but then also expenses of the firm are increasing. When sales
are increasing expenses are reduced. It is clear that firm is not taking decisions on time. It is
following an approach under which it is waiting for improvement in situation. This is not a right
approach.
Table 2 Sales budget
December January February March April May
Forecasted sales units 400 520 560 530 450 480
Price per unit 100 100 100 100 100 100
Total sales 40000 52000 56000 53000 45000 48000
Interpretation
Sales budget of the firm is reflecting that from the month of December to the month of
February sales of the firm is increasing consistently. Thereafter in the month March and April

sales for the firm reduced. Sign of improvement seen in the month of May in last year. Hence, it
can be said that sharp fluctuation is observed in the firm sales.
3.2 Unit cost
Fixed cost 120000
Variable cost 160000
Total cost 280000
Number of units 900
Per unit cost 311
Mark up percentage 35%
Sales price 420
Interpretation
Unit cost refers to the per unit cost of the product. Unit cost is computed by doing sum of
fixed and variable expenses and by dividing same by the number of units manufactured at the
workplace (Cao and Zhang, 2011). This approach is followed to compute per unit cost of the
product. It can be seen from the table that overall cost of production is 311 per unit . Cost of
production is divided by the number of units produced and in this way cost of each unit of
product is computed.
3.3 Project evaluation methods
In order to measure the viability of the project many things were planned under which
cash flows are estimated and by applying project evaluation methods same are evaluated. In this
way viability of the project is measured. In order to evaluate a project payback period, ARR and
IRR as well NPV are applied on the cash flows. In this way substantial activities are planned and
managed to access viability of the project.
Table 3 Calculation of payback period
Project
A Project B
Initial investment -40000 -60000
1 10000 -30000 10000 -50000
2 15000 -15000 15000 -35000
3 18000 3000 20000 -15000

4 22000 25000 25000 10000
5 25000 50000 30000 40000
6 30000 80000 35000 75000
Interpretation
Payback period refers to the time period after which project will start giving profit to the
firm. Project A is covering investment amount in 2 years. Project B is covering investment in
three years. Thus, project A is profitable for the business firm.
Table 4 Calculation of ARR
Project A Project B
Initial
investment 40000 60000
1 10000 10000
2 15000 15000
3 18000 20000
4 22000 25000
5 25000 30000
6 30000 35000
Total 120000 135000
Average 30000 33750
ARR 75.00 56.25
Interpretation
ARR reflects the mean return that can be gained on the project (Nam and et.al., 2011).
ARR of project A is 75% and same of project B is 56.25%. Hence, it can be said that project A is
profitable for the firm relative to other one.
Table 5 Calculation of NPV
Project A Pv @10% Present value Project B PV @10%
Present
value

Initial
investment 40000 60000
1 10000 0.909 9090 10000 0.909 9090
2 15000 0.826 12390 15000 0.826 12390
3 18000 0.751 13518 20000 0.751 15020.0
4 22000 0.683 15026 25000 0.683 17075.0
5 25000 0.621 15525 30000 0
6 30000 0.565 16950 35000 0
Total 82499 53575
NPV 42499 -6425
Interpretation
NPV indicate the net present value of the project. Higher the NPV more viable project is
assumed. It can be seen that project A NPV is positive and same of other one is negative. Hence,
it can be said that project A is viable for the firm.
Table 6 Calculation of IRR
Project A Project B
Initial
investment -40000 -60000
1 10000 10000
2 15000 15000
3 18000 20000
4 22000 25000
5 25000 30000
6 30000 35000
IRR 35.11% 23.27%
Interpretation
IRR reflects the real return that can be earned on the project (Whan Park and et.al., 2010).
It can be seen that IRR of the project A is 35.11% and same of project B is 23.27%. IRR of
project A is high and it can be said that it is viable for the firm.

TASK 4
4.1 Financial statements for the business firms
There are some financial statements that are prepared by the business firms. Some financial
statements that are prepared by every sort of firm are explained below. Income statement: It is one of the most important financial statements that is prepared by
the business firms. This is because it is the statement which reflects the profitability of
the business firm for the specific time period. By using this statement managers identify
the expenses that they needs to control in order to increase business revenue (Bolenz and
et.al., 2010). Hence, it can be said that there is a significant importance of the income
statement. Balance sheet: It is the financial statement that is prepared by the firm in order to access
its financial position at end of the year. By using mentioned statement the extent to which
assets and liability get changed in comparison to previous year can be identified. On
these basis managers takes the decision in respect to cash management at the workplace. Cash flow statement: It is a statement which reflects the cash inflow and outflow that
happened in different operating, investing and financing activity. This statement helps
one in identifying the activities that highly influence availability of cash and its
equivalents in the business.

4.2 Comparison of format of financial statements
Figure 1 Balance sheet of partners
(Chen, 2012)

Figure 1 income statement of partners
(Source: Finance and Zwerman, 2015)
Sole trader
Figure 2 Income statement of sole trader
(Source: Frieden, 2015)

Figure 3 Balance sheet of sole trader
(Source: Gatti, 2013)
Company

Figure 4 Income statement of company
(Source: Tierney and et.al., 2011)

Figure 5Balance sheet of company
(Source: Visser, 2013)
In case of company the rules that are prepared under IFRS and GAAP are followed to
prepare the financial statements (Visser, 2013). Contrary to this, in case of sole trader and
partnership in simple manner financial statements are prepared. Apart from this there is no
difference in the financial statements that are prepared by sole trader, partnership and company.
M3 Difference between financial statements of company and sole trader is explained below.
Radisson PLC Five fields (Sole trader)
Structure of the financial
statements
In case of Radisson which is
company there is a long
In case of sole trader simple
format of financial statements

structure of the financial
statements.
is prepared.
IFRS In case of Radisson PLC
financial statements are
prepared by following IFRS
principles.
In case of Five fields IFRS is
not followed and simple
financial statements are
prepared by the managers.
Necessary to classify
expenses in different category
In financial statements of the
Radisson PLC all expenses
are classified in to three
different categories namely
direct, indirect and operating
expenses.
In case of Five fields same
thing is not done and all
expenses are grouped
together in the income
statement.
Classification in balance
sheet
In case of Radisson PLC all
items are classified in to
varied categories like current
assets, fixed assets, current
liability and long term
liability.
In case of Five fields all asset
related items are grouped
together and are not classified
in to different categories.
Same thing is done in case of
liability.
4.3 Ratio analysis
Table 7 Ratio analysis
Interpretation
 Gross profit ratio: Gross
profit ratio of Morrison is
3% and same of rival firm is -
3%. On this basis it can be
said that former have
higher control on its
Morriso
n (2015)
Morriso
n (2016) Tesco
Gross profit 761 617 -2112
Net sales 16816 16122 62284
Gross profit ratio 5% 3% -3%
Current assets 1144 1308 14828
Current liability 2273 2747 19714
Current ratio 0.50 0.47 0.75
Sales 16055 16122 62284
Creditor 1397 1775 4545
Creditor turnover
ratio 11.49 9.08
13.70

expenditure then latter firm. On comparison of two years of ratios of Morrison it can be
observed that gross profit get reduced. This happened because business firm failed to
maintain control on its expenses. Thus, it can be said that in the FY 2016 firm give poor
business performance.
 Current ratio: Current ratio of Morrison is 0.47 and same of Tesco is 0.75. It can be assumed
that liquidity position of latter firm is greater than former firm (Financial ratio analysis,
2016). Hence, Tesco is in better condition than Morrison in terms of payment of liability by
using current assets. Morrison liquidity position slightly get reduced in the current financial
year in comparison to previous one. Slight decline in value of ratio is not matter of concern.
Firm needs to elevate this ratio to 2:1 in order to maintain sufficient liquidity in the business.
 Creditor turnover ratio: Creditor turnover ratio of Morrison is 11.49 and same of Tesco is
13.70. On this basis it can be said that latter firm is making credit sales 13 times in a year in
comparison to rival firm who make credit sale 11 times in a year. Hence, here Tesco is in
better condition than Morrison. Creditor turnover ratio of Morrison in the FY 2015 was 11.49
and in the current financial year same is 9.08. This reflects that in the current fiscal year firm
generate less sales on credit basis. It can be said that firm take wise decision by selling less
amount of goods on credit basis in the business.
CONCLUSION
On the basis of above discussion it is concluded that multiple sources are available from which
finance can be raised by the business firm. All sources of finance must be compared with each other on
various parameters in order to select best one for an organization. It is also concluded that project
evaluation methods have a great significance and same must be used to measure viability of the project.
Ratio analysis methods must be regularly used to measure business performance. On the basis of ratio
results business decisions must be made by the managers.