Report: Managing Financial Resources and Decisions for Burberry PLC

This report delves into the management of financial resources and decisions, focusing on the context of Burberry PLC. It begins by identifying various sources of finance, including internal sources like retained earnings, owner's funds, and sales of assets, as well as external sources such as share issues, bank loans, debentures, and government grants. The report then evaluates the costs associated with each source of finance, considering factors like opportunity cost and interest rates. Furthermore, it examines the implications of different financing options, weighing their benefits and drawbacks. The report also highlights the importance of financial planning, discussing its role in cash management, long-term decision-making, working capital management, and risk mitigation. It identifies the information requirements of different stakeholders, including owners, managers, and employees, and analyzes the impact of finance on financial statements. Finally, the report touches on the analysis and interpretation of financial statements using ratios, and the use of budgets and unit costs for decision-making.

MANAGING FINANCIAL RESOURCES AND DECISIONS

Table of Contents
INTRODUCTION ..........................................................................................................................4
ASSIGNMENT NUMBER: PART 1..............................................................................................4
1.1 Indentifying the sources of finance available to the business................................................4
2.1 Evaluating cost of different source of finance-......................................................................6
1.2 Implication of the different sources identified above-...........................................................7
ASSIGNMENT NUMBER: PART 2 .............................................................................................7
2.2 Importance of financial planning-..........................................................................................7
2.3 Information requirement of different stakeholders-...............................................................8
1.3 Measuring the appropriate source of finance for a business- ...............................................9
2.4 Impact of finance on the financial statements-....................................................................10
4.1 Main financial statements-...................................................................................................10
4.3 Analyzing and interpretation of financial statements using ratios-.....................................11
3.1 Analyze budgets and make appropriate decisions...............................................................13
3.2 Calculation of unit costs and make pricing decisions using relevant information..............14
CONCLUSIONS & RECOMENDATIONS.................................................................................14
REFERENCES..............................................................................................................................15

Table of Figures

INTRODUCTION
Today's business organizations are striving hard to successfully compete in the market. A
business entity will able to establish strong position in the market when it has sufficient
availability of finance. Finance refers to the funds which are obtained for the effectively carry
out of business activities. Once the funds are obtained it is very essential to effectively manage
and control that funds because any mishandling of funds can evoke big difficulty before the
business firm. Therefore proper managing of financial resources is very crucial for any business
entity as its all activities are based upon the availability of finance (Davison and Warren, 2009).
In order to explain how financial decisions and resources are managed in the firm this is
prepared. The report is will evaluate the aspect of management of financial resources and
decisions in the context of Burberry PLC. The company is one of the oldest luxuries British
Brand which performs business in fashion industry.
ASSIGNMENT NUMBER: PART 1
1.1 Indentifying the sources of finance available to the business
A business organization requires finance for various activities like working capital
management, procurement of raw material, expansion of new business territory, development of
new product, modification in the existing business and etc (Singh, Jain and Yadav, 2012).
Therefore it could be state that business entities require finance for different purposes which is
broadly categories into short-term financial need, medium term financial need and long-term
financial requirement (Shapiro, 2009.). To fulfill these financial need, a business entity has
various options for obtaining the finance which are explained below in detail-
Figure 1: Sources of finance
 Internal source of Finance: Internal source of finance refers to the obtaining of finance
from within the organization itself. A entity could raise finance internally by selecting
given below sources-
a) Retained Earnings- Every business organization like Burberry Plc kept
certain portion of profit within the business itself for further expansion and
development of the business (Paramasivan, 2009). This portion of profit is known
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as retained earnings. A business entity does not distribute its all profits to its
shareholder but it kept certain earnings within the business itself for future use.
Retained earnings are used to meet long-term financial need.
b) Owner's fund- It is the funds which the owner of the business contribute in
the business for the expansion of business activities. It is mostly used in small
organization (Osborne and Gaebler, 2003). This source of financing is used to
meet short-term and medium- term financial requirement of the business.
c) Sale of assets- A business entity also sometimes meet its short term
financial need by selling unused fixed assets or inventory.
 External sources of Finance: External source of finance means raising of finance for the
business from the outsiders. Underneath are the external sources of finance which are
used by the business organizations like Burberry Plc.
a) Issue of shares- This source of finance is used by the large business organization
when they require funds for the expansion of business activities at large level.
Here, the business entity issues shares to get funds from the investors (Nofsinger
and Varma, 2007 ). Share is the unit of ownership over the entity.
b) Bank loan- Bank loan refers to borrowing of funds from the bank by agreeing to
pay a fixed amount of installment on each specified time interval. The amount of
installment includes both interest as well as the certain part of principal amount
(Malina and Selto, 2001). Bank loan could be taken to meet either working capital
or long-term business need.
c) Issue of debenture- It is also a type of debt capital where funds are obtained from
large number of creditors. Here, the firm pays fixed interest to its creditors on the
borrowed amount.
d) Government grants- It is the funds which are obtained from the government to
fulfill the business objective with government objective (Grieve , 2013). It is also
a type of loan but here the interest rate is very marginal.
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2.1 Evaluating cost of different source of finance-
Cost is that element which is associated with each business activities whether it is
obtaining of finance or selling of products. Each sources of finance has some cost which are
associated with them. In the given below points the cost associated with each sources of finance
can be studied- Retained Earnings- The cost which is linked with retained earnings is opportunity cost. It
is the intangible cost which is not included in the books of accounts. Opportunity cost is
measured with the other alternative which is missed while selecting the particular option
(Elearn, 2013). Here, the entity could use the funds in more optimum way by selecting
another option. So the cost which can be viewed here is the opportunity which lost.
 Owner' fund- The opportunity cost is also associated with owner' funds which states the
owner could use its funds in more productive area instead of investing in own business.
 Sales of Assets- Here, the cost which the entity could have to bear is selling of assets
lower than the market value (Thomas, 2009). Further, the firm may require paying higher
price if it will require the same assets in the business.
 Bank Loan- It carries interest cost with it which is deducted from the total revenue of the
firm. The business will have to bear this till the last installment of the loan.
 Issue of Shares- This source of finance requires business firm to bear huge expenses at
the time of issue also requires to tolerate dividend cost (Viviers and Cohen, 2011).
Dividend is the part of profits which are distributed among the shareholder according to
their investment.
 Issue of Debenture- Alike to bank loan it also carries interest cost with funds obtained.
Company requires paying fixed interest to its creditor (Hill, 2014).
 Government grants- In this source of financing, the company will have to bear interest
cost indeed the cost is smaller than bank loan and issue of debentures and issue of shares
(Drucker, 2001).
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1.2 Implication of the different sources identified above-
Implications define the positive and negative aspects of a certain thing. In this, each
sources of finance will be evaluated in terms of their benefits and drawbacks.
Sources of finance Implications
Sales of assets Benefit: The company will able to get funds by disposing its
unused assets.
Drawback: The entity would not be able to receive the funds
which it expected for. In addition to that, the value of assets of the
firm will be decreased.
Retained earnings Benefit: The firm will not require borrowing funds from the
outsiders where it has to incur financial cost.
Drawback: Keeping of large amount of retained earnings will
disappoints the shareholders of the firm.
Owner fund Benefit: An owner fund also doesn’t carry any financial cost to
the firm (Davison and Warren, 2009). Further, the idle savings
could be used in better way.
Drawback: The owner of the business is at high risk if anything
will go wrong.
Issue of shares Benefit: It able to raise huge amount of funds for the expansion of
the business.
Drawback: It dilutes the shareholder's ownership over the
business (Broadbent and Cullen, 2012). Further, it takes huge time
for the completion of process.
Bank loan Benefit: It can be easily accessible as compared to issue of shares
and it also gives tax benefits to the firm.
Drawback: Firm may require submitting collateral securities
against the issue of funds by the banks.
Issue of debentures Benefit: The firm will able to get funds from the outsiders
(creditors) at lesser interest rate than the bank loan.
Drawback: Any default in interest payment may bring
unpleasant situation for the firm.
Government grants Benefit: The fund is acquired at very small cost.
Drawback: It requires lots of documentation.
ASSIGNMENT NUMBER: PART 2
2.2 Importance of financial planning-
Financial planning refers to the careful anticipating of those business activities which has
significant importance attain the business objectives (Brennan and Solomon, 2008). With the
help of financial planning a business will able to achieve its measurable goals such as
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enhancement in sales revenue, cash management, increment in profits, minimisation of cost and
etc (Bennouna, Meredith, and Marchant, 2010). Usually, a firm undertakes financial planning to
deal with uncertainties in the best manner. Presently, financial planning is viewed as very crucial
activity in the business organization like Burberry Plc as it helps the firm in 360 degree aspect.
Following are the importance of financial planning which can be exploited by the Burberry Plc- Proper management of cash- With the help of financial planning, a business entity would
able to assess its future cash inflow and outflow transaction (Hill, 2014). This assessment
will ultimately help the management to take future business decision in well defined
manner. In order to carry out financial planning to this aspect, the entity will require
preparing cash flow forecast (Osborne, and Gaebler, 2003).
 Assist in taking long-term decision for the business- The fact related to the importance of
financial planning in long-term decision of the business cannot be dismissed. In business
organization financial planning is undertaken with an aim of drawing long-term decision
for the business. This will be done by anticipating future growth opportunities in the
market and with that level of sales turnover will be planned. Burberry PLC adopts proper
financial planning to attain higher sales turnover in the business (Viviers and Cohen,
2011).
 Management of working capital- Financial planning has significant role in adequate
managing of working capital of the business by proper anticipation of cash inflows and
outflows.
 Effective management of financial risk- The financial risk related to the insolvency or
liquidation of the firm can be reduced with the help of appropriate financial planning
(Paramasivan, 2009).
2.3 Information requirement of different stakeholders-
A stakeholder refers to those persons which can influence or can be influenced by the the
actions of business organization. Stakeholders of the organization are categories into two types
i.e. internal and external stakeholders. The categorization is made according to their interest and
concern in the business. These stakeholders requires different information about the business
activities of the organization to draw different decision which is explained below-
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Figure 2: Type of Stakeholders
 Owner– A business owner is mainly concerned about the growth and profitability of the
business so he will require income statement and balance sheet of the firm to measure the
financial performance of the entity during the period (Vice, 2013).
 Manager- The management of organization like Burberry Plc is centered upon the
effective management and controlling of the business activities which will lead the
business towards growth and success (Shapiro, 2009). They take decisions on the basis of
performance evaluation of organization on the basis of financial budgets and financial
statements. Employees- Employees feels satisfied when they sees their growth with the
organizational success and at the same time they feel disappointed when their increment
gets obstructed due to the failure of business (Paramasivan, 2009). Therefore, they
measure the performance of the organization to foresee their growth and success to be
with the business entity. Shareholders – This are the stakeholders who wants to see incremental growth in the
profit and value of the firm (Osborne and Gaebler, 2003 ). They want to earn higher
return on their investment. So they look for company's financial statements to evaluate
the overall performance of the business.
 Government- Every business organization has to pay fixed percentage of tax on the profit
to the government. So government demands income statement from the firm to determine
the tax liability of the firm (Vice, 2013).
1.3 Measuring the appropriate source of finance for a business-
A business firm chooses sources of finance for its business activities after evaluating all
the cost and benefits associated with available sources of finance. According to the above
analysis, the most appropriate sources of finance which would suits the Burberry financial need
are retained earnings (Malina and Selto, 2001). Burberry can opt for issue of shares or bank loan
if the company would not have appropriate retained earnings with it. Further the decision related
to issue of share or bank loan would be decided upon the existing capital structure of the firm.
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2.4 Impact of finance on the financial statements-
If the company Burberry Plc will raise finance then following impact can be seen on its
financial statements-
 Impact on Cash Flow Statement- the use of retained earnings will not have any impact on
cash flow statement of the firm but issuing of shares or bank will have effect on Cash
flow statement. The raising of funds will stream the money into the business so this
inflow of cash will be appear under the heading cash flow from financing activities
(Brennan and Solomon, 2008). On the contrary, when the firm will pay dividend or
interest on the amount raised then its impact will also be shown in cash flow from
financing activity but with negative sign.
 Impact on Income Statement- A business entity will have to pay dividends or interest if
the funds will be obtained through either issue of shares or debentures so its impact could
be seen in the income statement of the firm (Grieve, 2013). Interest on bank loan is
subtracted from profit before interest and tax whereas distribution of dividend is shown
after determining the net profit of the firm.
 Impact on Balance Sheet- When the funds are raised by the business organization then its
impact could be seen on both sides i.e. Assets side and liabilities side of the balance sheet
(Davison and Warren, 2009). The inflow of funds will be appears in the cash and bank on
the assets side of the balance sheet whereas issue of shares or bank loan will be shown on
liabilities side of the balance sheet.
4.1 Main financial statements-
There are mainly four financial statements which are prepared by the business organization
like Burberry Plc-
1. Income Statement- It is prepared to evaluate the profit or loss of the firm of a particular
period. To determine the profit or loss of the business, all expenses are deducted from the
total revenue of the firm (Vice, 2013).
2. Balance Sheet- A balance sheet is that financial statement which demonstrates the
financial position of the firm at the end of the period. A balance sheet shows total assets,
total liabilities and total shareholders' investment in the firm.
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3. Cash Flow Statement- A cash flow statement is mandatory statement to complement the
balance sheet and profit and loss statement. The statement shows from which sources the
entity has generated cash and on what aspects the entity has used the cash (Brennan and
Solomon, 2008). So the statement presents the overall inflow and outflow of cash in the
business during the period.
4. Statement of changes in equity- This statement signifies the details about the movement
in owner's equity during the particular period. It shows movement in net profit, share
capital, dividend payments, retained earnings, revaluation surplus, unrealized gains on
investments, etc.
4.2 Comparing the appropriate formats of financial statements of different types of the business
There are three different types of the business which mainly operates in the market namely
Sole Proprietorship, Partnership and Limited Liability Company. The appropriate formats which
are used in this type of business are explained below- Sole Proprietorship: It is the type of business which is owned and managed by the
single person. Here, Income statement and balance sheet of the business is prepared
to measure the financial performance of the business (Malina and Selto, 2001). Partnership Firm: This is a type of business which is run by two or more person
with a common objective (Viviers and Cohen, 2011). They share profit and losses
according to their proportion of capital investment. Here, the financial statements
which are prepared are income statement and balance sheet of the firm.
 Limited Liability Company: As per the IFRS guidelines a limited liability company
needs to prepare 5 types of financial statements i.e. Income statement,
comprehensive income statement, cash flow statement, balance sheet and statement
of changes in owner's equity to provide all financial information to its stakeholders
(Davison and Warren, 2009).
4.3 Analyzing and interpretation of financial statements using ratios-
Table 1 Ratios comparison
Ratios 2011 2012 2013
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Gross Profit Margin = Gross Profit x100
Net Sales
67.3% 69.9% 72.1%
Net Profit Margin= Net Profit x 100
Net Sales
13.88% 14.18% 12.72%
Return on net capital employed
= EBIT/ Net Capital Employed x 100
30.62% 32.08% 25.88%
Asset Turnover Ratio
= Total Sales/ Total Assets
1.20
times
1.25 times 1.19
times
Current Ratio
= Current Assets/ Current Liabilities
1.63:1 1.72:1 1.77:1
Quick Ratio
= Quick Assets/ Current Liabilities
1.10:1 1.14:1 1.00:1
Stock Days
=365 * Average Inventory/Cost of Goods Sold
153.9
days
182.73
days
217.05
days
Debtor Days
=365 * Trade Debtors/ Total credit Sales
21.99
days
18.08 days 18.69
days
Debt Equity Ratio
=Debt/Equity
.085 .80 .65
Interpretations- Gross Profit Margin- By analysing the 3 year gross profit margin of Burberry Plc it was
found that the company is able to achieve additive growth in the gross profit margin
(Thomas, 2009). This was the resultant of increase in total sales revenue of the firm. Net Profit margin- In the analysis of Burberry Plc financial performance, it was found
that net profit of the firm goes down in the year 2013 due to rise in the operating
expenses of the firm. Return on net capital employed – This ratio shows how effectively the company used the
available capital in the attainment of sales revenue. From the assessment, it was derived
the firm has not achieved productive growth in total sales revenue in respect of total
capital employed in the business in the year 2013 (Vice, 2013). This decrement will
negatively impact the perception of shareholders' about the firm. Asset Turnover Ratio (ATR) - ATR is computed to determine the efficiency of the
company assets in the attainment of business objective related to growth in revenue. By
seeing the results, it could be stated that the firm Burberry Plc has been utilizing its assets
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