Financial Management Report: Appraisal, Sources, and Credit Ratios

This report provides a comprehensive overview of financial management principles, focusing on investment appraisal techniques, sources of finance, and credit management. The report begins by comparing and contrasting various investment appraisal methods, including Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Accounting Rate of Return (ARR), detailing their advantages, disadvantages, and decision rules. It then explores both short-term and long-term sources of internal finance, such as reinvestment of profits, sale of assets, and working capital management. The role of the stock exchange in providing finance for businesses is also discussed, along with its merits and demerits. Finally, the report examines the ratios used by managers to make credit allowance decisions, specifically focusing on the Debtors Turnover Ratio and the factors considered when assessing a customer's creditworthiness. The report concludes by summarizing the importance of financial management in making optimal use of resources and selecting the most suitable projects to generate larger returns.

Financial Management

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question 1........................................................................................................................................1
Comparing the investment appraisal method withy their benefits and the limitation. ...............1
Explaining decision rule regarding every appraisal method and the factors that is to be taken
into account. ................................................................................................................................1
Question 2........................................................................................................................................1
Describing short and the long term sources of the internal finance.............................................1
Discussing role of stock exchange in relation to making provision of the finance for businesses
with its merits and demerits .......................................................................................................1
Question 3........................................................................................................................................1
1. Explaining the ratio that is used by the managers in making the decisions regarding
allowance of the credit.................................................................................................................1
CONCLUSION................................................................................................................................1
REFERENCES................................................................................................................................2

INTRODUCTION
Financial management is the practices that includes planning, controlling, organising and
monitoring of the financial resources within an organization in order to achieve the goals and the
objectives in an effective way. The present study throws a deeper insights towards the several
financial concept that includes capital budgeting methods and the decision rule on the basis of
which the proposal is selected. Furthermore, it includes the sources of the finance and the role of
the stock exchange. Moreover, the report reflects the bases that are taken into consideration by
the managers for making decision regarding the grant of credit to its customers.
Question 1
1. Comparing the investment appraisal method withy their benefits and the limitation.
Net present value- It is the method that determines current value of the future cash
inflows and the outflows that are been generated from the particular project (Karadag, 2015).
This method is used for making analysis of the projects that will be facilitating the higher profits.
It is been computed as total of discounted cash inflows less initial outlay.
Advantages Disadvantages
This method considers the concept of time
value of money.
It takes into account the savings and the
earnings for the whole life of the proposal.
Thereafter, such earnings or the savings are
been converted into the current value of the
money.
This method provides for selecting the project
with highest NPV as such projects will be
generating maximum profits.
It is the method that do not indicate the return
rate as the IRR methods indicates the expected
rate of return that the project will be
ascertaining.
Net present value method fails at the time
when the amount of the investment varies and
are comprising of different life.
This method needs enhanced knowledge in
relation to the cost of capital. In case the cost
of the capital is not known then NPV method
could no be used.
Internal rate of return- It refers to the rate of interest at which the NPV for all cash flows
towards a specific project equates to Zero (Ward and Forker, 2017). This method of investment
appraisal is useful in assessing the attractiveness from the particular investment.
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Advantages Disadvantages
At the time of making the calculations, it
incorporates the concept relating to time value
of the money (Engel and et.al, 2018). This
helps in evaluating accurate results.
This method offers the ranking towards the
project in order top analyse the projects that is
resulting maximum return.
IRR ignores scope and the overall size of
proposal. This result in undervaluation of the
larger projects as compared to the smaller
projects.
This method does not provides for the
reinvestments of the profits.
Payback period- It refers to the method that measures the amount of the time taken by the
proposal in respect of recovering the investment cost for the purpose of hitting the break-even.
Advantages Disadvantages
It is the most simplest method and is very in
understanding and computing the viable
project.
It focuses on giving more and more importance
towards liquidity in order to make decisions
towards investment proposal.
It is the period that deals with the risk as the
shorter payback period reflects lesser risk than
the longer period.
This method does not includes time value of
money concept.
It highly emphasizes on the liquidity and the
ignores the aspect of profitability.
Accounting rate of return- It means the return rate at which the investment made is been
compared to initial outlay (Awojobi and Jenkins, 2016). It is been evaluated by dividing the
average sum of annual profits with that of the initial investment.
Advantages Disadvantages
It is the method that facilitates a clear picture
in relation to the profitability of the proposal.
It is the most useful method in measuring the
present performance of an enterprise.
This investment appraisal method does not
considers the cash inflows which is counted as
the most crucial element for assessing the
accounting profits.
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ARR satisfies owners interest as they aims for
looking towards the expected return generated
on the investment.
It also does not takes into account the external
factors that directly affects project's
profitability.
2. Explaining decision rule regarding every appraisal method and the factors that is to be taken
into account.
Decision rule -
Net present value Internal rate of
return
Payback period Accounting rate of
return
Positive value of the
NPV, reflects that the
project is more
profitable. However
negative value,
indicates that the
proposal will be
generating net loss.
In case, IRR of the
proposed project is
higher than the
required return rate,
the proposal is counted
as desirable (Alkaraan,
2015). ON the other
state if the IRR
declines below
required return rate
then the proposal must
be rejected.
Shorter the payback
period, the project is
more profitable and
viable. Meanwhile, the
longer payback period
depicts that the
proposal is not viable.
Greater percentage
return indicates that
the project will be
generating higher
returns while lower
ARR reflects lower
profitability.
The other factors that plays a critical role in selecting the best project are the cost, quality,
time, cash flow, risk and the scope. It is very important for the owners to understand and assess
these factors so that suitable proposal could be chosen.
Question 2
1. Describing short and the long term sources of the internal finance
Reinvestment of the profits- Retaining the profits is the best approach that could be used
by the company in order to raise funds (Carbo‐Valverde, Rodriguez‐Fernandez and Udell,
2016). It is considered as the long term sources of the finance. Under this the owner decides for
recycling the profits instead of distributing it as the dividends to its shareholders.
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Sale of the Assets- An organization can also make use of its assets for generating finance
so that it could be invested in other profitable channels. It could be considered as short term
finance which helps in making the investment of the funds in attaining smooth functioning of the
working capital.
Reducing the working capital- It is the strategy that could be attained for managing the
money. By negotiating for the shorter period of the billing times with the clients and the longer
terms of the payment with the suppliers, the funds could be accumulated on a faster pace which
helps in smooth running of the routine operations (Ferrando and Preuss, 2018). It is an approach
that describes the strong relationship of the organization with its stakeholders.
2. Discussing role of stock exchange in relation to making provision of the finance for businesses
with its merits and demerits
Role of stock exchange-
 It plays a crucial role in facilitating raising of the resources from community for the
purpose of financing the corporate segment and the government in relation to several
activities.
 To provide a place for an organised market for investors in order to freely sell and buying
the securities.
Merits and demerits of listing-
Merits-
 Listing on the stock exchange provides for raising new finance by issuing the securities
and in making the organization less dependent on the retained earnings or the banks
(Beck, Dumay and Frost, 2017).
 It helps the company in increasing the market value of their shares which in turn counted
as the indicator of the performance as the share price is considered as forward looking. It facilitates easy transfer of the shares and less risk is attached to towards the investment.
Demerits-
 Control of the specific group of the shareholders might be diluted with allowing the
proportion of the shares that are to be hold by public.
 Company has to make greater disclosures and higher accountability is been associated
towards the shareholders.
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 It brings greater possibility of the takeover bid and might find it difficult in defending
itself with that of the wider ownership.
Question 3
1. Explaining the ratio that is used by the managers in making the decisions regarding allowance
of the credit
There are several grounds that will be taken into consideration be the managers at the time of
providing the credit to its customers are as follows-
 Making the assessment of the creditworthiness of the customers that is its credit score
which will helps the managers in knowing whether the customers are meeting their
commitments or not.
 Analysing that he has the potential or the capability towards meeting its obligations.
 Assessing the present debts that he has to be fulfilled.
 Determining its past records in relation to meeting its interest obligations.
Ratio that enables the management in identifying credit effectiveness-
Debtors turnover ratio- It refers to the efficiency ratio that shows the extent to which the
credit sales made by the firm is been converting into cash (Ward and Forker, 2017). It helps in
measuring efficiency of an enterprise in collecting and managing credit that are been issued to
customers.
CONCLUSION
From the above report it has been summarized that financial management plays an
important role in making the optimum use of the resources so that larger returns could be gained
from the particular project. Investment appraisal technique is the major source that helps in
selecting the most suitable project.
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REFERENCES
Books and Journals
Alkaraan, F., 2015. Strategic investment decision-making perspectives. In Advances in mergers
and acquisitions (pp. 53-66). Emerald Group Publishing Limited.
Awojobi, O. and Jenkins, G. P., 2016. Managing the cost overrun risks of hydroelectric dams:
An application of reference class forecasting techniques. Renewable and Sustainable
Energy Reviews. 63. pp.19-32.
Beck, C., Dumay, J. and Frost, G., 2017. In pursuit of a ‘single source of truth’: from threatened
legitimacy to integrated reporting. Journal of Business Ethics. 141(1). pp.191-205.
Carbo‐Valverde, S., Rodriguez‐Fernandez, F. and Udell, G.F., 2016. Trade credit, the financial
crisis, and SME access to finance. Journal of Money, Credit and Banking. 48(1). pp.113-
143.
Engel, L. and et.al, 2018. Systematic review of measurement property evidence for 8 financial
management instruments in populations with acquired cognitive impairment. Archives of
physical medicine and rehabilitation. 99(9). pp.1848-1875.
Ferrando, A. and Preuss, C., 2018. What finance for what investment? Survey-based evidence
for European companies. Economia Politica. 35(3). pp.1015-1053.
Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A
strategic management approach. EMAJ: Emerging Markets Journal. 5(1). pp.26-40.
Ward, A. M. and Forker, J., 2017. Financial management effectiveness and board gender
diversity in member-governed, community financial institutions. Journal of business
ethics. 141(2). pp.351-366.
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