Report on Managing Financial Resources and Decisions in Finance

This report provides a comprehensive overview of managing financial resources and decisions, essential for any business. It begins by identifying and categorizing various sources of finance, distinguishing between internal and external options, and evaluating the implications of each. The report then delves into the importance of financial planning, analyzing the cost of different financing sources, and assessing the information needs of key decision-makers, including managers, government entities, and creditors. Furthermore, the report explores the impact of finance on financial statements, discussing budgeting, unit cost calculations, pricing decisions, and investment appraisal techniques. It also examines financial statements, comparing different formats, and interpreting them using relevant ratios. The report concludes by summarizing key findings and providing a detailed analysis of financial management principles within the context of a real-world business scenario.

MANAGING FINANCIAL
RESOURCES AND DECISIONS

TABLE OF CONTENTS
MANAGING FINANCIAL RESOURCES AND DECISIONS.....................................................1
INTRODUCTION...........................................................................................................................3
LO 1:................................................................................................................................................3
1.1 Identify the sources of finance available to a business.....................................................3
1.2 Assess the implications of different sources....................................................................3
1.3 Evaluate appropriate sources of finance for a business project........................................6
LO 2:................................................................................................................................................6
2.1 Analyze the cost of different sources of finance..............................................................6
2.2 Explain the importance of financial planning..................................................................7
2.3 Assess the information needs of different decision makers.............................................7
2.4 Explain the impact of finance on financial statements.....................................................8
LO 3:................................................................................................................................................8
3.1 Analyze budgets and make appropriate decisions............................................................8
3.2 Explain the calculation of unit costs and make pricing decisions using relevant
information.............................................................................................................................9
3.3 Investment appraisal techniques.....................................................................................10
LO 4:..............................................................................................................................................12
4.1 Discuss the main financial statements............................................................................12
4.2 Compare appropriate formats of financial statements for different types of business.. .12
4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and
external.................................................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

Index of Tables
Table 1: Calculation of profit margin..............................................................................................9
Table 2: calculation of ratio...........................................................................................................11

INTRODUCTION
Sainsbury is the second largest chain of supermarkets in the United Kingdom. It is
headquartered in London, United Kingdom. It was founded in the year 1869 by John James
Sainsbury. Finance is the lifeblood to any organization. For easy execution of work finance is
one of the most important component. The contents are aimed at identifying the sources of
finance available to a business and which is a small scale business. It also defines the importance
of financial planning and also the information needs of the decision maker. Further it deals with
the calculation aspect of the unit costs and making the pricing decisions accordingly and ratio
calculation.
LO 1:
1.1 Identify the sources of finance available to a business.
For any business to grow, it could do so only when there are sources of finance available
as finance is the lifeblood of any business. The finance available to a business are of various
sources and can be categorized into two broad categories of Internal and External sources.
Internal sources of finance are those funds which are found internally to a business whereas
external sources of finance includes the sources which are outside the business. Internal sources
includes the finance coming from the personal sources of entrepreneur which may be his own
initial capital or else it may also includes the sources such as Retained Earnings which the
company has not distributed as dividend and retained in the business for future contingencies and
also includes the finance coming form the friends and family (Kennedy, 2015). On the other
hand, external sources of finance includes the finance coming from outside the business which
are bank loan, bank overdraft, loans and grants etc. This can be long, medium and short term
finance. In long term finance basically is for capital budgeting and which is required for the
period of more than 5 years and which can extend to 20 years such as issuing equity share
capital, preference share capital, debentures etc. Medium term finance includes financing for 3-5
years and includes lease finance, hire purchase finance etc (Board, 2015). Short term finance is
financing for a period of less than 1 year and involves trade credit, fixed deposits, factoring
services, creditors, bill discounting etc.
1.2 Assess the implications of different sources.
Following are the implications of different sources of finance:

Sources of
finance
Financial
implications
Dilution of
Control
Legal
Implications
Bankruptcy
Shares If company's
financial position
is good the
finance cost will
not be a burden.
Existing
shareholders of
the company
loses control as
the time of new
issue.
Lot of paper work
formalities exists
here
It does not leads
to bankruptcy
(Poynton, 2015).
Bank loan Finance cost can
increase if loan is
taken at the
floating interest
rate
No dilution of
control on the
company.
Needs to
complete paper
formalities with
the banks.
If unable to repay
the loan,
bankruptcy may
occur.
Retained earnings No finance cost No dilution of
control
No legal
implications.
As its internal to
the business,
hence no
bankruptcy.
Hire purchase Here the financial
implication is
reduced as the
asset is acquired
and paid in
installment.
If unable to pay
the installment, it
may loose the
control over the
asset.
Here there is very
less paper work
as no contract is
signed.
No chance of
bankruptcy arises.
Venture capital As no financial
implication
because of
adjustable finance
cost.
This lead to
dilution of control
on the company
Contract has to be
signed hence
carries paper
work formalities.
No bankruptcy
Debentures Firm have to bear No dilution of Require to follow Risk of

fixed finance
burden (Price,
2014).
control of the
firm takes place
in the firm
rules and
regulation
determined by the
regulatory
authority.
bankruptcy exists.

1.3 Evaluate appropriate sources of finance for a business project.
Besides popping up with the idea of the business, the main work lies with the choosing
the appropriate sources of finance. Firms which are engaged in small scale business, for them to
raise the capital from the external sources like equity, debentures etc. the cost of raising capital
involves a huge cost to the company and for a small scale business it is not possible to arrange
that much amount. Hence to cater their needs they shift to the other sources of finance like taking
loan from the bank and retained earnings form the business itself. While taking a bank loan, it
should always take on the fixed interest rate and not on the floating interest rate as the risk
involves in floating interest rate is much higher than the fixed interest rate. Apart from the bank
loan, retained earnings can also be considered a good source. As from raising the finance by
retained earnings , there is no cost involved in doing that. But it should make sure that no
retained earnings is wasted. As if done so it may incur huge loss for the company. Hence before
raising the capital, one must careful analyze the sources of finance which the small business can
use to raise capital.
LO 2:
2.1 Analyze the cost of different sources of finance.
Following are the cost of sources of finance which are beneficial. They are- Bank loan- As the name suggests, bank loan means the loan taken from the bank. The
bank does not give the loan for free. It gives it at either the fixed or floating rate of
interest. Every coin has two sides, similarly bank loans has its merits and demerits.
Depending on the business condition and the size of the business one can decide the rate
of interest. The main feature which differentiate it from retained earnings are that it has to
be repaid within specified time not considering whether company is growing or not.
Fixed interest rate means that any changes in the economy but the interest rate remains
unaffected by that.
 Retained earnings- Retained earnings are the part of profits which are not distributed
among the shareholders and retained in the business for meeting the future contingencies.
It is the part of the profit which remains after paying all the expenses of the firm
(Corsatea,2014). Hence retained earnings are very important to the business and the
proper utilization of them is required by the organization. Using this source reduces our

dependence from the other sources specifically the external sources as one has to repay
the amount taken from the external sources but this does not happen in case of retained
earnings and the best part is that it carries no interest charges as in case of bank loan.
2.2 Explain the importance of financial planning.
In order to determine the sources of finance from which the funds are determined by
financial planning. It helps us to know if our business will be profitable or not. For a small
business, financial planning is basically a framework without which there is a huge chance of
business failure. Financial planning also helps in focusing on the future of the business as it
visualizes the long-range view and accordingly the daily expenditures can be dealt. Financial
planning helps in measuring the progress of the business as one can see to what extent the firm is
deviating from the initial plan (Deakins, 2016). Financial planning also helps in maintaining the
stability as it keeps the check on the inflow and the outflow of funds. And also reducing the
uncertainties as the plan is drafted well in advance and sticking to the plan helps in smoothing
the flow of the work as one does have to think of a new plan every time as everything is drafted
well in advance hence giving a direction to the work. With the help of financial planning, small
businesses can prioritize their expenditures accordingly as availability of cash is essential to the
business for making payment and if there is improper management it will lead to wasteful
expenditure. Basically, running a small business is very hard as one has to closely monitor every
small chances in the business.
2.3 Assess the information needs of different decision makers.
The information which is required for different decision makers are-
 Managers- Managers are responsible for the decision making for the top level
management. They take the strategic decisions and gives a new direction the
entire organization. For them to take the decisions, it is important to study the
financial statements of the company and on that basis they decide the strategies
are formulated which becomes the road map for the firm and other employees to
move in that direction (Caglayan, 2014). As managers assists the entire
organization hence they have a close look on the performance of each department
and recommends them if any improvement is required.
 Government- The government main purpose is to determine the tax collection of
the organization. This is achieved by examining the financial statements of the

company it gives an assurance that the firm is paying an appropriate tax or not. As
financial statements depict the condition of the company for the entire year ending
and thus the tax liability arises after that. Hence appropriate payment of tax is
necessary for any company otherwise this may lead to legal implications.
 Creditors- Creditors are the entities to which company owe debt. Thus for them it
becomes essential to know the financial position of the company as this gives
them the idea of the current position of the company and whether company will
be able to pay the debts in the coming future of not.
2.4 Explain the impact of finance on financial statements.
For the financial statements, finance is the essential requirement for creating the financial
statements. The impact of financial statements is determined by the owner’s capital, issues of
share, debentures, payment of dividend, expenses, cost etc. have. In the balance sheet, the
owner's capital arrives after the total of assets and deducting the total debts form that. This in
turn increases the total assets and affects the balance sheet. When it comes to issuing of shares,
huge money is invested to bring out a public issue and due to this company has to pay more
dividend to the shareholders and hence it will affect the income statement. When the investors
subscribe to the shares of the company, this increases the capital of the company and in turn
decreases the retained earnings of the company for the year. When company issues more debt by
the issue of debentures it increases the burden over the company as the company owe funds to
the debenture holders (Corsatea, 2014). And with that company has to pay the fixed amount in
form of interest to debentures holders. In the case of bank loan, the finance cost of the company
increases when the rate at which the loan if replayed is at floating rate this increases the risk.
Hence affect the balance sheet adversely. Even at the time of sales, it increases the revenue in the
income statement and in the balance sheet it decreased the inventory and increases the cash or
accounts receivable.
LO 3:
3.1 Analyze budgets and make appropriate decisions.
May June July August
Opening balance 50000 57500 88800 115300

Sales 30000 40000 45000 50000
Total 80000 97500 133800 165300
Expense
Purchase 2000 2200 2500 2800
Salary 3000 3500 4000 4300
Capital expenditure 15000 0 10000 0
Creditors 2500 3000 2000 4000
Total 22500 8700 18500 11100
Net balance 57500 88800 115300 154200
Based on the above budget figures, sales figures are showing an increasing trend every
month sales figures are increasing. Similarly the purchases is also showing an increasing trend.
The salary being an expense shows an increasing trend depicting that the rise in the number of
employees in the organization. The capital expenditures comes in the alternate months. The
creditors shows an increasing trend except in the month of July where is is decreasing meaning
that company is owing to the creditors. Hence the net balance is showing an increasing trend
resulting a positive condition of the company in the above months as the expenses in the above
given budget are lower than the incomes hence are advantageous to the company.
3.2 Explain the calculation of unit costs and make pricing decisions using relevant information.
Table 1: Calculation of profit margin
Fixed cost 40000
Variable cost 3500 per unit
Number of units 60
Profit margin 10.00%
The per unit costs based on the above information will be:
Fixed cost 40000
Add: Variable cost 3500 * 60 units = 210000

Total cost 250000
Per unit cost 250000 / 60 = 4166.67 per
unit
Sales Value 4166.67 + 10% = 4583.33
For calculating the unit costs, we require the total cost which is calculated by adding the fixed
and the variable costs. After arriving the total cost, it is divided by the number of units to arrive
at the per unit cost. Hence as per the above result the per unit cost is 4166.67 after assuming the
profit margin to be 10%, so the sales value comes out to be 4583.33.
3.3 Investment appraisal techniques
Investment appraisal techniques are related with selecting best appropriate project for
organization's effectiveness. In this regard, several tools are applied for investing decisions as
average rate of return (ARR), pay back period, Net Present Value (NPV) and so on. However,
return on investment is estimated through these methods can be expressed as:-
Net Present Value (NPV):- It is investment appraisal technique by which ideas are
incurred for investing fund for Sainsubury. Therefore, NPV for two projects is to be expressed
as:-
Project A Pv @10% Present value Project B PV @10% Present value
Initial
investment 100000 100000
1 25000
0.90909090
91
22727.272727
2727 20000
0.90909090
91
18181.818181
8182
2 32000
0.82644628
1
26446.280991
7355 36000
0.82644628
1
29752.066115
7025
3 34000
0.75131480
09
25544.703230
6536 38000
0.75131480
09 28550.0
4 42000
0.68301345
54
28686.565125
333 34000
0.68301345
54 23222.5
5 48000
0.62092132
31
29804.223506
8394 18000
0.62092132
31
11176.583815
0648

6 0
0.56447393
01 0 0
0.56447393
01 0
Total
133209.04558
1834
110882.88802
9258
NPV
33209.045581
8343
10882.888029
2578
Interpretation:- For evaluating net present value, total of present value is deducted with
initial investment amount. There are two projects as A and B and cash inflows all 6 years are
different. Therefore, net present value of two projects is 33209.0455818343 and
10882.8880292578 for A and B respectively. It is considered that the project which has higher
NPV will be selected for projecting. Thus, project B will be appropriate for organization's
growth efficiently.
Internal Rate of Return (IRR):- It is a kind of investment appraisal technique which is
related to investing fund. In accordance to this, comparison two projects is done for further
operating business activities.
Project A Project B
Initial investment -100000 -100000
1 25000 20000
2 32000 36000
3 34000 38000
4 42000 34000
5 48000 18000
6 0 0
IRR 20.92% 14.15%
Interpretation:- Two estimations are obtained for project A and B. However, it is
estimated that for project A, company can earn 20.92% on investment while for project B,
organization can gain 14.15% for further business operation. Thus, higher value as project A is
suitable for projecting and decision making related to rate of return on investment.