Financial Decisions and Resource Management for Radisson Plc Report

This report analyzes the financial decisions and resource management strategies of Radisson Plc, a medium-sized computer software company in London, focusing on its expansion plans. It explores both internal and external sources of finance, including retained earnings, sale of fixed assets, share capital, bank loans, and debentures, evaluating the implications, pros, and cons of each. The report recommends bank loans and disposal of fixed assets as suitable financing options for the company. It further discusses the costs associated with equity and debt financing, highlighting the importance of financial planning for cash flow, capital, and income management. The report also details the informational needs for financial decision-making, emphasizing the role of financial departments in providing crucial data for cost reduction, revenue enhancement, and investment decisions. The report is contributed by a student to be published on the website Desklib. Desklib is a platform which provides all the necessary AI based study tools for students.

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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Task-1..............................................................................................................................................3
1.1 ...............................................................................................................................................3
1.2................................................................................................................................................4
1.3................................................................................................................................................6
Task-2..............................................................................................................................................7
2.1................................................................................................................................................7
2.2................................................................................................................................................7
2.3 ..............................................................................................................................................8
2.4 ...............................................................................................................................................9
Task-3..............................................................................................................................................9
3.1................................................................................................................................................9
3.2..............................................................................................................................................11
3.3..............................................................................................................................................11
TASK-4..........................................................................................................................................12
4.1..............................................................................................................................................12
4.2..............................................................................................................................................13
Conclusion.....................................................................................................................................13
References......................................................................................................................................15
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Index of Tables
Table 1: Cash Budget.....................................................................................................................11
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INTRODUCTION
One of the most important tasks performed by an organization is an effective
management of its finances. The most important implication of managing finance is an efficient
decision making. The financial decisions are very crucial in any organizations as all the business
activities are interconnected to them whether directly or indirectly. These financial decisions are
taken by the organizations for an effective and efficient utilization of financial resources. The
financial decisions are directly connected to the profitability of the company. The present report
addresses the various financial decisions taken by an organization and management of resources
in an optimal manner. By taking effective decisions the company is able to minimize the costs
and increase the profitability (Arnold, 2014). To fulfill the objective of expansion of Radisson
Plc which is a medium sized computer software company operating in London the following
report is prepared.
The main purpose of the following report is to highlight the different sources of finances, how
these can be used by the above cited firm to minimize the costs and increase the profits.
TASK-1
1.1
Finance is the lifeline in any organization as all the business activities are dependent on
them. To carry operations of the business it requires funds and the same thing will be applied to
Raddison Plc. The company that is Radission Plc is considering an expansion decision. As the
company has recently entered into a new software contract it requires funds for timely
completion (Chandra, 2011). The company can procure funds from external and internal sources.
Hence in order to procure funds there are many available internal sources sources if finance
which are described in the following paras.
Internal Sources-
Retained Earnings- These are the parts of profits that are kept and saved for future growth and
expansion plans of the business. The earnings are transferred to reserves and surplus accounts
which are reflected in the liability side of the balance sheet. This source can be used by the
company when there is availability of the requisite amount in the reserves and surplus account.
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Sale Of Fixed Assets- Radisson Plc can procure funds by the disposal of assets which are either
obsolete and outdated or are not used by the company anymore. As the software companies
usually depend on the latest technology and so many of the equipments become obsolete very
fast (Brigham and Ehrhardt, 2013).
Revenue Profits – Financing of a new expansion plan can be done by the using the profits of the
company. If an organization is generating adequate revenues than it can use them in to invest
into the new expansions or new ventures.
External Sources-
The various external sources through which Radisson Plc can avail funds are as follows-
Share Capital- Huge funds are required by the companies when it considers an expansion plans.
In case of Radisson Plc the funds are required to complete a large project and expand further. As
at present the company lies in the group of small and medium level companies it has a wide
scope of expansion and fall in the range of many large sized companies. When funds are issued
by the company it implies that that is inviting public to share the ownership of the company in
exchange of money. Hence here the public becomes the shareholders of the company. If
Raddison Plc opt for issuing shares in market than it will also have to distribute them dividends.
These dividends are the distributions made from the profits of the company. Hence the profits of
the company are distributed in case of issuing shares (Remund, 2010).
Bank Loans- Radisson Plc can also procure the required funds by applying for a bank loan. A
company can avail bank loans for either short and long term periods. Whenever the company
takes any bank loan it has to provide a security to the respective bank known as collateral
security. This security is a payment surety against the disbursement of the debt. Bank loans can
be availed by charging a fixed rate of interest (Collis and et. al., 2016).
Debenture Issue- Another method to raise funds by the company is to issue debentures.
Radisson can issue debentures to public and fulfill its financial needs. The people who buys the
debenture security are called debenture holders or the creditors of the company. In exchange of
these funds provided by the public the company provides regular interest in return.
1.2
Implications of the various Sources Of Finance will be explained in this task.
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Sources Of Finance Pros Cons
1. Retained Earnings The company will not be burdened
with the dividend or interest cost.
Also retained earnings are those
funds which are allocated for future
growth and development of an
organization (Collis and et. al.,
2016).
The concept of opportunity cost
cannot be avoided that it will
remain associated with the use of
retained earnings. Opportunity
costs implies returns from the
alternative use of funds.
2. Disposal Of Fixed
Assets
With the use of this source of
finance both the short term and the
long term requirements of the
funds can be met easily.
Due to urgent requirement of
funds there is increase in chances
that the assets might be sold at
lower prices than their actual
value in the market. This will have
an ultimate impact on the financial
position of the company
(Remund, 2010).
3. Revenue Profits Revenue funds can be used if the
company is earning huge sum of
business profits from its regular
business operations (Collis and et.
al., 2016).
Using the revenue profits in the
major financial decisions would be
unwise as it would drain the entire
liquidity and funds required for
carrying out regular activities.
4. Issue of Share
Capital
The company will be able to
procure large funds from the
public. Also the distribution of
dividends is not mandatory in case
of insufficient profits.
Ownership control of the company
will be diluted. If there is any
shortfall of funds from alternate
sources that implies that the
company will have to incur huge
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costs for issuing shares.
5. Bank Loan The accessibility to bank loan is
very easy, as it is available by just
signing few documents. Moreover
benefit of tax cover is also
provided to the borrowers (Ebert,
and et. al., 2014).
The interest cost is involved which
the company will have to incur till
the maturity of the loan amount.
6. Issue Of Debentures Funds at lower costs can be
available in comparison to other
debt borrowing options. Also
hybrid debentures can be issued
which involves the features of
equity and debt instruments.
Company has to pay compulsory
interest to the debenture holders
even in the event of losses
(Remund, 2010).
1.3
The appropriate source of finance for Radission Plc from the various available options
will be bank loan and disposal of fixed assets. The advantage of availing loans from banks is it
will avoid the interference of the financiers in the routine businesses of the company. Moreover
the control and ownership of the company does not get diluted which helps in an efficient
decision making of the company. However there are also some disadvantages of procurement of
funds from banks, that if the funds are not repaid the offered security will be confiscated by the
bank. Also the above cited company is considering financial funds for proposed expansion. The
company should dispose off its obsolete assets and use those funds in the business expansion
objective. The advantage of using this source for financing is that the company will not be
incurring any finance costs such as interests etc. However the financial position of the company
will be affected if the firm disposes its substantial assets (Remund, 2010).
However apart from the few disadvantages the company is able to avail many benefits by
procuring funds from the above mentioned sources. Hence bank loans and disposal of fixed
assets are two most beneficial sources of funds available to the stated company (Huston, 2010).
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TASK-2
2.1
A company can obtain funds from equity as well debt financing. For equity financing the
company might raise funds from the Capital Markets by issuing new shares, or Right issues.
A company can obtain funds from the loan reserves, bank borrowings, or obtaining loans from
any governmental institutions, or from venture capital and business extension scheme funds
(Collis and et. al., 2016).
Analyzing Cost of Equity- Cost of issuing equity shares lies in the distribution of profits
in the form of dividends. Also there is no tax cover attached with this distribution. Also the
ownership and control of the company is divided. This division leads to increase in the
interference of the affairs of the company by the newly formed shareholders.
Analyzing Cost of Debt- Interest expenses are the major cost of debts. The company has
to bear regular interest expenses till the time of maturity. Also are some initial loan disbursement
charges associated with the sanction of loan. However the total interest expenses are reduced by
the tax cover. Moreover the debt financiers usually do not interfere in the regular business
operations (Arnold, 2014).
2.2
Importance Of Financial Planning
Financial Planning is the process of managing the funds of the company in order to meet
the firms financial goals. It is basically an exercise of channelizing the funds in such a manner so
as to minimize the costs and maximize the profitability. For the purpose of obtaining enduring
profits by the best possible use of the assets available it is very important to plan the finances.
Some of the many advantages of financial planning can be explained with the help of the
following points-
Cash Flow- Financial planning helps to monitor and increase the cash inflows in the
organization. Taking appropriate actions can help in increasing the cash inflows, and control
effectively the expenditures, and managing activities on the basis of budgets formulated by the
management (Brigham and Ehrhardt, 2013).
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Capital- Professional financial planning helps in building a strong capital foundation. It further
helps in increasing the profits of an organization by increase in the investments and financing
decisions.
Income- With an effective planning it is able to channelize the income from the various
operations. Through the planned distribution of income will help the company to control the over
spending and in efficiently managing savings (Ebert and et. al., 2014).
Family Security- An effective financial planning helps to provide security to the family. For the
purpose of providing family security there are many financial polices available in the market.
Investment- A well designed financial plan will help in the selection of good investment policy,
which takes into account the expenditure and income of the company. Thus it enhances the
chances of an entity to achieve its goals.
2.3
Informational needs for financial decision making
The financial departments of an organization generates a large variety of information that proves
to very very helpful in decision making. By providing up to date and steady flow of information
businesses are able to take proper decisions about cost reduction, increase in revenues which
further lead to increase in profitability, purchase of capital assets, and the best source of funds
available for finances. The various financial statements generated by the company helps to draw
conclusions in the various ways-
 Through the Balance Sheet one is able to assess the assets and liability position of the
company. Also an accurate assessment of the liquidity position can be made by a proper
analysis of the balance sheet of an organization.
 Purchases & Sales statements can be analyzed in order to extract the details of the
ordinary activities of the business. It also reflects the profits earned by the company in the
usual course of business (Ebert and et. al., 2014).
 Cash flow Statements helps in analyzing the movements of cash for the financing,
operating and investing activities. It also helps in the financial planning and budget
formulation of the company.
 Budget statements- Budgets for any organization reflects the plan for future expenditures.
In short budgets are formulated for an effective and efficient execution of financial
9

planning. Hence through these statements one is able to assess the effectiveness of
financial planning made by the company. It is also necessary to execute the budgets
made for the accomplishment of the long and short term goals of an organization.
2.4
Impact of Financing Options On the Financial Statements
The process of recording the financial activities of any business or entity in a formal
manner is done in the financial statements of the company. Presentation of all the financial
information in an orderly arranged and structured manner in such form that is easily
understandable by the users is done in the preparation of financial statements. The four main
financial statements prepared by the company are-
Balance sheet- If the funds are procured through the means of retained earnings then it will not
affect the current years P&L statement but it will be reflected in the balance sheet and statement
of changes in retained earnings. However if funds are procured fro disposal of fixed assets and
bank loans the same will be reflected in the balance sheet as from the bank loan the liabilities
will be increased and from the disposal of assets the asset are going to decrease. Hence it will
have an impact on the balance sheet (Ebert and et. al., 2014).
Income Statement- If the funds are procured from the disposal of fixed assets then it wont have
any impact on the income statements until there are accounting profits or losses shown in the
sale. However if the funds are procured from bank loans than there will be regular interest costs
charged from the income statement (Basic investment appraisal techniques. 2012).
Statement of Retained Earnings- If the funds are procured from the sale of fixed assets there
will be no implication on the statements of retained earnings. Similarly if the funds are procured
from the Bank loans than also no implication will be there on the statement of retained earnings.
Cash Flows Statements- The finance made from the disposal of fixed assets will be classified
under the funds from the financing activities, while the funds procured from the bank loans will
fall under the cost of financing activities.
TASK-3
3.1
Analyzing Budgets and make appropriate decisions-
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Budgets can be defined as the structured financial plan for the organization's outgoing expenses
and incoming sales made for a particular time period. There are many advantages for budgeting
done by the organization. Budget variance can be defined by the difference between the actual
and the budgeted figures in the statement of budget. Some of the key advantages are-
 Planning, Tracking and controlling the Expenditures- The purpose of budget formulation
is that expenditures are planned and incurred within the predefined limits, and doesn't
cross the funds allocated for that particular purpose (Ebert,and et. al., 2014).
 Support Funding Requests- The purpose of budget formulation is to justify the requests
made for incurring the expenditures. As the budget for the expenditure to be incurred in
future are made in advance the managers are able to raise the requests for the funds
required in carrying out the necessary activities.
 Analyzing Variances- Budgets are formulated in order to effectively analyze the
variances and suggests the measures in the improvement in the procedures. The improved
procedures will help in the effective control of costs in order to fall within the budgeted
range (Basic investment appraisal techniques. 2012).
Since the cited company that is the Radisson Plc is carrying on the software development
operations it is very essential for it to incur costs in various departments as per the budgeted
framework. A proper budgeted framework should be made by the company so as to increase
profitability and achieve the company's long term goals and objectives (Budgeting. 2013.).
An illustration of cash budget has been presented.
Cash budget-
Table 1: Cash Budget
Particulars July August September October
Cash inflow
Sales revenue 20000 25000 27000 30000
Other income 10000 6500 3200 2000
Total cash inflow 30000 31500 30200 32000
Cash outflow
Purchase of raw material 3000 3500 2000 10000
Salaries of personnel 6000 2000 3000 5800
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Selling and distribution cost 2500 500 200 5500
other expenses 0 2000 500 3200
Total cash outflow 11500 8000 5700 24500
Cash deficit / surplus 18500 23500 24500 7500
Opening cash balance 12000 30500 54000 78500
Closing cash balance 30500 54000 78500 86000
3.2
Calculation of unit costs for Raddison Plc-
Particulars Amount (in £ )
Material Costs 3000
Development cost 6000
Other Expenses 1200
Total Expenses 10200
Add- Profit Margin of
10% 1020
Total Selling Price 11220
In the above calculation pricing of the unit of the Radisson Plc is done by following the cost plus
pricing technique. A profit margin is added in the total cost of the product that is the software.
Hence the total selling price comes out to be £ 11220. This will be the market price of the
software on which company will earn a profit of £ 1020 per software. The profit margin is
calculated at the rate of 10% on the total cost incurred (Arnold, 2014).
3.3
Investment Appraisal Techniques
Average rate of Return-
Project A Project B
Initial
investment 190000 120000
1 50000 20000
2 64000 25000
3 58000 30000
4 70000 35000
5 0 40000
6 0 45000
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