Financial Management: Analyzing Finance for Business Decisions

This report provides a comprehensive analysis of financial management concepts, focusing on the sources of finance available to a business, implications of different funding options, and the selection of the most appropriate source. It explores the importance of financial planning, the identification of information needs for internal and external stakeholders, and the impact of finance on financial statements. The report includes the projection of a cash budget, calculation of unit costs for pricing decisions, and an assessment of project viability using investment appraisal techniques. Furthermore, the report delves into the main financial statements, compares formats across different business organizations, and applies ratio analysis to interpret the financial performance of Marriott International. The assignment showcases the application of financial tools and techniques to facilitate effective business decision-making and financial resource management.

MFRD
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Table of Contents
INTRODUCTION................................................................................................................................3
Task 1....................................................................................................................................................3
1.1 Identifying the sources of finance available to a business ........................................................3
1.2 Assessing the implications of the different sources of finance .................................................4
1.3 Evaluating the appropriate source of finance for the business project......................................4
2.1 Analyzing cost of each above identified source of finance ......................................................4
2.2 Explaining the importance of financial planning to the business enterprise ............................5
2.3 Identifying the information need of several internal and external decision makers ................5
2.4 Explaining the impact of finance on the financial statement of firm.........................................6
3.1 Projecting cash budget for the purpose of decision making .....................................................6
3.2 Explaining the calculation of unit cost and making pricing decision based on it .....................8
3.3 Assessing the viability of two projects by taking into account the investment appraisal
techniques .......................................................................................................................................8
Task 2....................................................................................................................................................9
4.1 Discussing the main financial statements of the firm ...............................................................9
4.2 Comparing the formats of the different type of business organization ...................................10
4.3 Interpreting the financial statements of Marriott through ratio analysis ................................12
CONCLUSION..................................................................................................................................14
References..........................................................................................................................................15
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INTRODUCTION
In the present era, for starting a new venture entrepreneur requires huge amount of money.
Moreover, business entity can implement his idea only when they have sufficient fund. In this, cited
case situation presents that now government provides financial support to the entrepreneur with the
aim to encourage them to execute their unique ideas and concept. In this regard, business entity also
assigned with the responsibility to make optimum use of their financial resources. Entrepreneur can
manage its financial resources by making suitable business decision via financial tools and
techniques. In this context, the present report will discuss the sources through which business entity
can raise fund at low cost. Further, it will also shed light on how financial planning and investment
appraisal tools facilitate effectual use of money. Besides this, report is also going to discuss the
concept of unit cost which assists entrepreneur in making suitable pricing decision. For the second
part Marriott international has been selected which offers luxurious accommodation facility to the
customers. Thus, this project will also highlight the financial health and performance of the firm
through the ratio analysis tool.
TASK 1
1.1 Identifying the sources of finance available to a business
On the basis of the cited case situation by considering the response of government
entrepreneur has decided to start King bakery. In this, entrepreneur having only £20000 for
spending. In this, business entity can raise finance by taking into account the following sources for
meeting their financial requirements are:
Internal sources Sales of personal assets: Usually, entrepreneur have some assets which are used by them in
any purpose. In this, by selling the non-productive asset at their resale value business entity
can meet his financial requirement. Friends and family members: Entrepreneur can also raise finance by approaching their
friends and family members. Moreover, friends and family members are always ready to
provide financial support to their loved one. Thus, it is the most effectual source which will
help entrepreneur in raising fund.
External sources Bank loan: For starting new venture business entity can also approach to the bank on the
behalf of collateral security. Besides this, banks are always ready to offer money to the
small sized firm on concessional interest rate according to the instruction of government
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(Li, 2013). Leasing: Entrepreneur can start bakery more effectually by taking building as well as plant
and machinery on lease (Agrawal and et.al., 2012). By this, business entity can make use of
assets on rent rather than purchasing it.
 Issue of shares: Business entity can also raise money by issuing shares to the public. In this,
business unit has to incur very less expenditure.
1.2 Assessing the implications of the different sources of finance
All the sources of finance have direct impact on the business unit in terms of bankruptcy,
dilution of control etc. In bank loan company is obliged to repay the amount of loan after the
predetermined time frame. Along with this, in leasing business entity has to return asset to the real
owner of the asset. Further, business entity is also obliged to make use of assets according to the
instructions of owner. In the case of bankruptcy company has obligation to give priority to the bank
and lease provider rather than others. On the contrary to it, in shares equity-holder gets the least
priority in getting payment (Whitehead, 2014). Thus, all these aspects closely affect the decision
making and other aspects of the firm.
1.3 Evaluating the appropriate source of finance for the business project
King should raise fund through bank loan which is the most suitable source of finance. In
bank loan, business entity enjoys tax benefits and thereby he gets higher profit margin. Along with
this, in bank loan entrepreneur has to repay the amount of loan in the fixed monthly or periodical
instalments. In this way, financial burden can be reduced by the business entity to the great extent.
Besides this, by taking asset on lease business entity can fulfil his financial requirement. Leasing is
also offers tax benefits to the firm. In addition to this, lower rent in against to huge investment also
supports the suitability of it. Now, technological changes take place in the business environment
with the very high pace. In this, company will also free from the fear of obsolete of assets (Moran
and et.al., 2013). Besides this, by selling the personal assets business entity can meet the financial
requirements. Moreover, in this entrepreneur can raise money by bearing very fewer expenses.
Thus, all these three sources provide high level of financial assistance to the business organization.
LO2: Understanding the implications of finance as a resource within a business
2.1 Analyzing cost of each above identified source of finance
 Friends and family members: This source imposes opportunity cost in front of the firm.
Moreover, in this business entity has to offer shareholding to their loved one (Hershey,
Jacobs-Lawson and Austin, 2013). In this way, interference of them affects the strategic
aspect of firm to the large extent.
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 Selling of assets: For selling the assets entrepreneur has to make expenses on advertisements
and other formalities. In this way, it also has financial cost to the firm. Bank loan: In this, business entity has to pay interest to financial institution which closely
affects the profitability of King. Leasing: Under leasing, company is obliged to pay rent to the real owner of asset. This
source also impose financial cost in front of the firm (Jalil, Razak and Azam, 2013).
 Issue of shares: In the case of shares business entity has to pay dividend to their
shareholders for building and maintaining the faith of investors in firm's operation.
2.2 Explaining the importance of financial planning to the business enterprise
Financial planning may be served as an effectual administration tool which helps business
enterprise in determining their long and short term goals. In this, by making effectual financial plan
King can take suitable investment and other business decisions. Financial is highly significant
which provides assistance to the business entity by avoiding the situation of wastage and over-
capitalization (Financial planning, 2016). Moreover, such plan provides deeper insight to the
entrepreneur about the fund which they require for the execution of business plan.
Besides this, it also provides direction to King about the manner in which they employ
money in the various investment projects. Further, it also facilitates smooth functioning of the
production, operation and other departments of the firm (Kalyebara and Islam, 2014). Monetary
plan also helps in making control over the financial activities by comparing the actual cost with the
estimated amount. In this way, by taking strategic action within the suitable time frame business
entity can ensure optimum use of fund.
2.3 Identifying the information need of several internal and external decision makers
Information need of the varied decision makers are described below:
Internal users Management: Higher board or management of the firm undertakes all the financial
statements with the aim to analyzing the performance of an organization (Users of financial
statements, 2016). By taking into account such aspects manager are become able to take
suitable action for enhancing the performance of firm. Employees: They make assessment of the profitability statement of the business enterprise
with the aim to identify its consequences on future remuneration and job security of the
firm.
External users Lenders: In order to determine the company's ability in relation to making payment of
5

liabilities on maturity lenders and other financial statements makes evaluation of balance
sheet. Suppliers: cash flow statement has been assessed by the suppliers before supplying material
to the business unit on credit. Investors: In order to get information about the return and feasibility of investment
shareholders of the business unit makes evaluation of final accounts of the firm (Wahlen,
Baginski and Bradshaw, 2014). Through this, investors would become able to make suitable
investment decision.
 Government or tax authorities: legal personnel makes evaluation of the income statement to
assess their tax credibility aspect.
2.4 Explaining the impact of finance on the financial statement of firm
Financial sources place direct impact on the income statement and balance sheet of the firm
in the following manner:
Income statement
Particulars Amount (£) Particulars Amount (£)
Interest on bank loan xxxx
Rent on lease xxxx
Balance Sheet
Liabilities Amount (£) Assets Amount (£)
Long term loan xxxx Cash
Add: bank loan
xxxx
Leasing xxxx
Thus, if business entity makes use of bank loan then interest amount will affect the profit
aspect of the firm. Along with this, business organization also has to pay rent in the case of leasing.
Both are the expense for the company so they are recorded in the debit side of the income
statement. Along with this, bank loan as well as leasing imposes long term obligations on the firm.
On the contrary to it, amount of bank loan is increasing due to the inflow of cash.
LO3: Be able to make financial decisions based on financial information
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3.1 Projecting cash budget for the purpose of decision making
Cash budget may be defined as a financial tool which serves information about the income
which firm will incur during the predetermined time period (Kemp and et.al., 2015). Along with
this, it also provides direction to the business unit about the expenses which King needs to incur
during the pre-specified time period (Call, Chen and Tong, 2013). Cash budget of King for the
period of six years:
Particulars April (£) May (£) June (£) July (£) Aug (£) Sept (£)
Cash inflow
Sales revenue 75000 86250 99187.5 114065.625
131175.468
75
150851.789
0625
Other income 8000 8000 8000 8000 8000 8000
Total cash inflow 83000 94250 107187.5 122065.625
139175.468
75
158851.789
0625
Cash outflow
Purchase of raw material 36000 38880 41990.4 45349.632
48977.6025
6
52895.8107
648
Salaries of personnel 12000 12000 12000 12000 12000 12000
Selling and distribution
cost 6500 6500 7200 7400 7600 7800
other expenses 3000 3000 3000 3000 3000 3000
Total cash outflow 57500 60380 64190.4 67749.632
71577.6025
6
75695.8107
648
Cash deficit / surplus 25500 33870 42997.1 54315.993
67597.8661
9
83155.9782
977
Opening cash balance 25000 50500 84370 127367.1 181683.093 249280.959
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19
Closing cash balance 50500 84370 127367.1 181683.093
249280.959
19
332436.937
4877
From this cash budget it has been analyzed that cash inflow of the firm is higher than its
outflow. Sales of the firm is continuously increasing which is good sign for the company. This
aspect entails that customers prefers to purchase the bakery products or items. Along with this, due
to the regular income of other sources also may result into higher inflow. Besides this, cash inflow
of the firm is also inclined due to the rise in the cost of material as well as selling and distribution
cost. This in turn may result into positive and increasing cash inflow each year. Thus, business unit
can enhance its inflow by making focus on both tradition and modern means of promotion. Further,
by making control over the expenses business unit can improve its cash position to the large extent.
3.2 Explaining the calculation of unit cost and making pricing decision based on it
Unit cost: It refers to the expenses which are incurred by the firm for the production, storage and
selling purpose. Unit cost of the products or services include both fixed and variable cost. In this,
fixed cost refers to those which remains same at each level of production. Rent of the building,
salaries of the workers etc. are considered as fixed cots (Board, 2015). On the contrary to it,
variable costs are the one which changes inn accordance with the level of output produced.
Material, labour and overhead are account for this category.
Particulars Amount
Fixed cost £20,000.00
Variable cost £40,000.00
Total cost £60,000.00
Number of unit produced 200
Unit cost Total cost (Fixed + variable) / number of output
produced
Unit cost = 60000 / 200
= £300
Price Unit cost + (unit cost * profit %)
= 300 +(300*15%)
= 300+ 45
= £345
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On the basis of this aspect it can be stated that if King produces 300 units by incurring
£60000 then the per unit cost will be £300. Along with this, if business want to earn 15% profit
margin then it requires charging £345 by selling per unit of the products or services. Through this,
business unit would become able to get profit margin by recovering the initial expenses.
3.3 Assessing the viability of two projects by taking into account the investment appraisal
techniques
Investment appraisal tools refers to those which provides high level of assistance to the
business unit in assessing the profitability aspect of the project. Thus, business entity can evaluate
the viability of project through payback period, net present value and internal rate of return
technique before funding the project (Kalyebara and Islam, 2014). For instance: Two investment
projects are available to King bakery in which it can invest for enhancing their profitability.
Years
Project
A
Cumulati
ve cash
inflow
PV
factor
@10%
Discounted
cash
inflow
Project
B
Cumulat
ive cash
inflow
PV
factor
@10%
Discounted
cash inflow
Initial
investment 120000 120000
1 55000 55000 0.909 49995 58000 58000 0.909 52722
2 62000 117000 0.826 51212 65000 123000 0.826 53690
3 58000 175000 0.751 43558 60500 183500 0.751 45436
4 67000 242000 0.683 45761 69000 252500 0.683 47127
5 75000 317000 0.621 46575 78000 330500 0.621 48438
Total
Discounted
cash inflow 237101 247413
NPV (Total
discounted
cash inflow
– initial
investment
117101 127413
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)
IRR 41.62% 44.26%
ARR 660.40% 45.90%
Payback
period
2 + 3000 /
58000 =
2.05 years
1 +
62000 /
65000 =
1.9 years
Outcome of the investment appraisal technique presents that King should select project B
which will aid their growth and success by offering the several financial benefits. Moreover,
entrepreneur will get back money within the period of 1 year and 9 months if they make investment
in project B. Along with this, cash which firm will get after the period of five years is higher in
project B as compared to project A. IRR of project B is also greater than the project B. Thus, on the
basis of the selection criteria company will strengthen its financial aspect by investing money in
project B.
TASK 2
4.1 Discussing the main financial statements of the firm
Marriott prepares following financial statements for meeting their varied purposes: Income statement: This statement contains information regarding the income and
expenditure. Marriott prepares income statement with the aim to evaluate the profitability
generated by them during the year over the expenses (Bartov and Mohanram, 2014). Along
with this, company also undertakes this statement for assessing their growth aspect in
comparison to the previous years. Balance sheet: Company prepares the statement of assets, liabilities and capital for
evaluating their financial and solvency aspects. Through this, company can also determine
its capability in relation to the meeting of current obligations. Cash flow statement: It renders information about the extent to which changes of balance
sheet and income statement affect cash and its equivalents (Healy and Palepu, 2012). Cash
flow statement presents all the financial activities in well defined manner such as operating,
investing and financing aspects. The main purpose behind the preparation of it is to identify
the areas which are subject to high control.
 Statement of changes in equity: It contains information about the retained profit, changes
which take place in owners equity, capital reserves as well as dividend paid to the
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shareholders. By assessing this aspect higher management can take suitable decision about
the financial structure.
4.2 Comparing the formats of the different type of business organization
Financial statements of the different types of business organization vary on the basis of different
aspects which are enumerated below:
Basis of difference Sole trader Public and private firm Partnership firm
Meaning They are the one who
are solely responsible
for all aspects of the
business.
These firms are those
whose one of the main
objectives of earning
profit by making
contribution in the
growth and
development of nation.
In this, two or more
person come together
to share their profit or
losses at predetermined
ratio.
Financial statements Final account of the
sole trade mainly
includes profitability
statement. However,
they also prepare
balance sheet on the
basis of their own
willingness.
Marriott is also the
private limited firm
which prepares
following financial
statements are:
 Income
statement
 Balance sheet
 cash flow
statement
 Statement of
changes in
equity
Partnership firm also
drafts all the statements
which are setting up by
public and private firm
(Kraft, 2014). The only
difference is that they
prepare an additional
account such as
partners capital. It
clearly presents the
capital, goodwill as
well as profit and
losses of the partners.
Structure and content They do not follow
any structured format
for the preparation of
final accounts.
Marriott follows the
rules of IFR's and IAS
for the formation of
final accounts. It
includes the following
contents:
Same content is
included by partnership
firm in their account.
Content of partners
capital a/c are as under:
 Capital of the
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Income statement
Income Expenditu
re
Interest
received
Dividend
received
Light and
heating
Salaries
and wages
Other
office
expenses
Balance sheet
Liabilities Assets
Sharehold
ers equity
Long term
obligation
: bank
loan
Current
liabilities:
bank
overdraft
creditors
etc.
Fixed
assets :
land and
building,
plant and
machinery
etc.
Current
assets:
cash,
debtors
etc.
Cash flow statement
Operating activities:
office and other
expenses etc.
investing activities:
Purchasing and selling
partners
 Goodwill of the
partners
 Net profit or
loss of the
partners
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of fixed assets
Financing activities:
issue and redemption
of shares and
debentures
Publishing of financial
statements
No Mandatory Yes
4.3 Interpreting the financial statements of Marriott through ratio analysis
Ratio analysis is the most effectual tool which provides deeper insight to the company and
investors themselves about the financial, liquidity and solvency aspect of the firm (Peirson and
et.al., 2014).
Ratio analysis of Marriott and its competitor for the period of 2014 and 2015 are as follows:
Ratios Formula Marriott Hilton
2014 2015 2014 2015
Profitability ratios
Gross
profit
1966 2123 6483 7207
Net
profit
753 859 673 1404
Sales
revenue
13796 14486 10502 11272
Gross
profit
ratio
GP / net
sales *
100
14.25% 14.66% 61.70% 63.90%
Net
profit
ratio
NP / net
sales *
100
5.46% 5.93% 6.40% 12.46%
Liquidity ratios
Current Current .63 0.43 1.11:1 1.05
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ratio assets /
current
liabilities
Quick
ratio
Current
assets –
(Closing
stock +
prepaid
expenses
) /
current
liabilities
.39 0.37 0.74 0.69
Efficiency ratio
Asset
turnover
ratio
Sales /
total
assets
2.02 2.24 0.4 0.43
Return
on asset
%
11.03 13.27 2.55 5.42
Internal analysis (Marriott): From the above ratio analysis it has been determined that in the
accounting year 2014 gross and net profitability aspect of Marriott was 14.25% and 5.46%. On the
contrary to it, in 2015 gross and net profit of the firm inclined such as 14.66% and 5.93%. On the
basis of this aspect, it can be said that profitability aspect of Marriott increased but growth rate of it
is not very high. Liquidity ratio of the business unit entails that it is not highly capable in relation to
the meeting of current obligation from current assets. Thus, business unit requires to make control
over the expenses with the aim to improve their liquidity position. Efficiency ratio of Marriott also
inclined in the accounting year 2015 in comparison to 2014. Hence, it can be said that business
organization had made optimum use of their assets foe generating the sales.
External analysis
Grading criteria in terms of good or worst has been used for analyzing the financial and liquidity
aspect of Marriott and Hilton.
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Ratios Marriott Hilton
Gross profit ratio Worst Good
Net profit ratio Worst Good
Current ratio Worst Good
Quick ratio Worst Good
Asset turnover ratio Good Worst
Return on equity Good Worst
The above analysis presents that Hilton is highly sound in terms of its profitability and
liquidity aspects. In this, Marriott requires making focus on the promotional aspects for enhancing
their profitability aspects. Along with this, Hilton also requires making focus on framing cost
effectual strategies for making optimum use of their assets.
CONCLUSION
From this report, it can be concluded that business entity needs to select suitable source by
making thorough analysis of each and every aspect. Besides this, it can be inferred by taking
assistance of bank loan and leasing entrepreneur can start his bakery firm more effectively and
efficiently. Further, King needs to make focus on framing competent plan which ensures effective
management of financial resources to the significant level. It can be revealed from the report that
investment appraisal tool offers business entity with the clear framework about the project which
they need to select. Thus, by employing money in project B entrepreneur can aid in their
profitability aspect. It also has been concluded that profitability and liquidity aspect of Hilton is
better than Marriott. Thus, Marriott requires making changes in their existing strategic and policy
framework. By this, Marriott can enhance or strengthen their financial aspects.
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