Report: Managing Financial Resources, ABC Limited Company, Semester 1

This report analyzes the financial management practices of ABC Limited, focusing on launching a new business project. It identifies various sources of finance, including equity shares, loans from financial institutions, and bank overdrafts, assessing their implications. The report evaluates the suitability of bank loans and overdraft facilities for the project. It delves into the cost analysis of different finance sources, emphasizing the importance of financial planning and its execution. The information needs of internal and external decision-makers are assessed, along with the impact of finance on financial statements, including stock prices and investor decisions. The report discusses the main financial statements – income statement, balance sheet, and cash flow statement – and compares their formats for different business types. It also analyses a budget and assesses the viability of a chosen contract, providing a comprehensive overview of financial resource management.

Managing Financial
Resources
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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 different sources of finance....................................................4
1.3 Evaluating appropriate sources of finance for a business project..........................................4
Task 2...............................................................................................................................................5
2.1 Analyses the cost of different source of finance....................................................................5
2.2 Explain the importance of financial planning and how this financial planning is undertaken
......................................................................................................................................................5
2.3 Assess the information needs of internal and external decision maker 5
2.4 Explain the impact of finance on the financial statement .....................................................6
Task 4...............................................................................................................................................6
4.1 Discussing the main financial statements by explaining what they contain and their
purpose.........................................................................................................................................6
4.2 Compare appropriate formats of a financial statement for different type of business..........7
4.3 Interpret financial statement using a appropriate ratio .........................................................7
Task 3.............................................................................................................................................10
3.1 Analyses a budget and make appropriate decision .............................................................10
3.2 The calculation of unit cost for contract .............................................................................11
3.3 Asses the viability of chosen contract.................................................................................11
Conclusion.....................................................................................................................................13
References ....................................................................................................................................14
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INTRODUCTION
Financial management is planning, controlling and directing the financial activities such as
brutalization of fund for launching a new project. Financial planning helps the company in
managing all financial activities within a business. The present report is based on an ABC
limited company. The present report covers the cost of different sources of finance is analysed.
Along with this, the impact of finance on a financial statement is explained. Apart from that, the
sources of finance available to a business is identified
TASK 1
1.1 Identifying the sources of finance available to a business
According to the given scenario, ABC Company wants to launch a business project
which can be both demanding and rewarding. For this purpose, it is required to understand the
sources of finance which are available to business. There are two types of sources of finance, that
is, both long term and short term. Some of them are discussed as below:-
Equity share: Equity shares are the main sources of finance for any organisation. ABC
Company is launching a new project (Rossouw, 2016). So, it can raise funds from the public in
the form of equity share capital. Further, the company also pays a dividend to its shareholders in
return when they earn a profit.
Loan from financial institution: ABC Company can take the loan from the financial
institutions. There are various financial institutions which are established by the government as
well as they are private too. Companies can take the loan from them for a long period or form
short duration as well (Poynton, Lapan and Marcotte, 2015). They provide the loan to a
company after checking their financial stability. Further, they also check a managerial viability
of a project which ABC Company is launching.
Bank loan: Organization can take the loan from a bank as well by keeping the security
deposit. If the company takes the loan from a bank, then it can easily be paid with a low rate in
instalments. There are different kinds of loan which banks provide to the organisation that are
single, a line of credit and end of period payment loan (Arrondel, Debbich and Savignac, 2014).
For example: if ABC company takes loan form a bank for one year, then it needs to pay the same
with interest within specified duration.
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Bank overdraft: Bank overdraft is another source of finance which a company take for
launching its project. However, bank charges a high rate of interest on overdraft and it can only
be paid on the amount of overdraft.
1.2 Assessing the implications of different sources of finance
Every source of finance has its own implications on the business. Among different stated sources
of finance, implications of some are like:
Equity share: There are some advantages and disadvantages of issuing equity shares. It
can be stated that if ABC Company does not earn a sufficient profit, then it cannot pay attractive
dividends to the shareholders (Agarwal and Evanoff, 2015.). Further, there are some of the costs
which are associated with the issue of equity shares which further can become a huge
expenditure for the company.
Bank loan: Bank loan is an appropriate source of finance for a firm but company needs
to pay instalment regularly to a bank. Further, the bank only provides loan after completing a full
procedure which may take time. However, if ABC Company would not be able to pay the loan
amount back to the bank on time then it will show that firm is not earning the profit, and in this
situation, bankruptcy may arise. If the company is unable to pay the loan due to insufficient
profit, a bank will sell all company assets which it kept for security at the time of loan as well as
it will pay its pending payment.
Overdraft: It is a short term source of finance, and its implication is that interest is
charged at higher rate. But it is flexible in nature so; the company can take the same whenever it
is required within the short period.
1.3 Evaluating appropriate sources of finance for a business project
As per the given scenario, ABC limited company is launching a new project for which it needs
to select the best sources for collecting fund. For a selection of appropriate sources of finance, it
is necessary to understand the nature of business. Bank loan is an appropriate source of finance
for the organisation because, in this, the company needs to pay the instalment on a monthly basis
(Rehan, Ungerand Haas, 2015). The company can easily buy assets from that loan and
effectually start its business. Along with this, the company can also take overdraft facility
because it is not a time-consuming process and funds can be easily available within one or two
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days. Therefore, both these sources of finance would prove to be the best for ABC limited, and it
would help the organisation in starting a new project.
TASK 2
2.1 Analyses the cost of different source of finance
The cost of different sources of finance are as follow
Bank loan: ABC company take loan form a bank, then interest expenses will incur which
is separate form a loan amount. This expense is paid by a company form its financial cost.
Further, there are no extra expenses occur like other sources of finance.
The issue of equity: There are some cost that is floating cost which is which is connected with
an issue of equity share (Yao, Kohli and Cederlund, 2013). If ABC company use this-this source
of finance, then it needs to pay some floating cost. Further, the share form profit which is
distributed in the form of a dividend to a shareholder will be cost by a company.
Financial Institution: Financial Institution charge an Interest rate on a loan which company
take form them for a particular period. Further ABC company need to pay a loan amount
including a rate of interest form its firm financial cost.
Bank overdraft; Bank overdraft is
2.2 Explain the importance of financial planning and how this financial planning is undertaken
Financial planning is a crucial step in the process out and financial future of the organisation. If
there is a financial plan, then it becomes easy to make a financial decision and help in meeting a
goal. For an organisation, it is necessary to do the financial planning so that right amount of fund
should be available on a right time. If the financial planning is strong, then a company can get
success. Along with this company with an enough fund then it can operate business function
smoothly (Johnson, 2014). It also helps in deciding how much amount of fund is required to be
raised on a requirement of the company. Further through it the company can control expenses
and revenue by comparing a real figure with an estimated figure. Financial planning also gives a
new approach to a budget and improve control on financial activities.
2.3 Assess the information needs of internal and external decision maker
There are information required to gather for improving a decision-making the process by a
collecting local, national and international information.
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Employees: Employees information need to be taken for making any decision in an
organisation. That is employee are important for an organisation then makes a product and
services (Ittner and Michels, 2015). So information needs to be taken form them for making a
decision related to financial planning.
Customer: Customer is those who buy a product form an organisation decision can be
made on the basis of their information. They can give information regarding the products and
services which company make and then company make the decision on it.
2.4 Explain the impact of finance on the financial statement
The impact of finance on a financial statement is as follow
Impact on stock price: There is the drastic effect on a stock price of a company. At the time of
making the investment decision, there are many investors who look out the financial statement.
Further, if all the information is presented in a financial statement, it can affect the stock price up
and down.
Financing decision making; financing decision making can also impact the financial statement.
For example, if any organisation take any business loan then the lender will look the financial
statement and on the basis of it the decision is made of giving a loan or not (Peetz and Buehler,
2013). The further information present in a financial statement is not flattering than it may
negatively impact the company to take a loan.
New investor; New investor can be attracted by an organisation if their financial statement
shows more profit than expenses. There is some potential investor who will firstly see the
financial statement then make a decision whether they need to invest or not in an organisation.
TASK 4
4.1 Discussing the main financial statements by explaining what they contain and their purpose
There are three main types of financial statements such as balance sheet, cash flow
statement and income statement. These are discussed as below-
Income Statement: Income statement of a company shows its revenue and expenses for
a particular period. It indicates the way in which money is generated from a sale of products and
services before expenses are taken out. Along with this, its main purpose is to show financial
earning performance of the organization over a specific period. It is used by an investor to see
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the extent to which profit is generated by an organisation and on the basis of same, they make a
decision that whether it should invest in the firm or not.
Balance sheet: The balance sheet is one of the major financial statements which is used
by the business owner and accountant. It shows the financial position of the company, and by it,
many decisions are made by the owner of business (Agarwal and Evanoff, 2015). The main
purpose of a balance sheet is to reveal the financial status of a business and it is used by a
company's owner to check the extra expenses and the ways by which they can be reduced.
Cash flow statement: It is also a financial statement which shows the way in which
change in the balance sheet and income statement affects the cash and cash equivalent. It is
mainly concerned with the flow of cash in and out of business. It is used by the financial
manager to check the cash flow of a company.
4.2 Compare appropriate formats of a financial statement for different type of business
Comparison between formats of a financial statement of a different type of business is as follow.
There are the different type of business such as sole trader, partnership and public limited
company in each of them different formats of financial statements. In a sole trader, the balance
sheet is prepared to see the financial position of a company. In this liabilities and asset of the
company is reflected. It is made only for reporting the owner of the organisation. There is nee to
make an income statement; the only balance sheet is prepared. As compare to this in a public
limited company there are a different type of formats of a financial statement which are
International accounting principal (IAS), International Financial Reporting Standards (IFRS) and
generally accepted accounting principal (GAAP). This all is required to make so that comparison
can be done with the another firm. While sole trader only wants to know how its company is
generating a profit and. However, in a public limited company all the income tax payable, the
sale of cost, company liabilities, etc. need to be shown. On the other hand, a partnership
company makes the financial statement in which there are more then one capital account. It
depends on the partners. Along with this in profit and loss account all partners profit is reflected.
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4.3 Interpret financial statement using an appropriate ratio
Marriott hotel ratio
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Financial statement of a Marriott International hotel with a use of appropriate ratio
Efficiency ratio
Assets turnover ratio: Efficiency of the firm can be measured by a assets turnover ratio,
it shows how much company generate the sale and uses the asset. If there is a higher turnover
rate, then it means the company is using assets more. In a 2014 Marriott hotel assets turnover
ratio is 2.02, and in 2015 it is a 2.24. it shows that company used its assets more efficiency in
2015.
Receivables turnover ratio: a receivable ratio shows that how much company have an
ability to collect its receivables or not. In 2014 Marriott International hotel receivables turnover
ratio is 12.65 which is the increase in a 2105 and reach up to 13.15 %.it reflects that company is
improving in collecting money.
Profitability ratio
Gross profit ratio: Gross profit ratio show that how much company earn by selling its
product it means that product which they sold is profitable or not. In 2015 Marriott hotel gross
profit ratio is 14.66% which more than compare to last year.
Net profit; Company outcome after deducting a direct and indirect expenses is a net profit.
From the above table, it is clear that a Marriott hotel net profit increase in 2015 as compared to
2014.
Current ratio: current ratio if Marriott hotel indicates that company can fulfil its liability within
a given time or not. Marriott hotel current ratio decrease from 2014
Quick ratio: Marriott Hotel quick ratio is decreased in 2015 as .39% it shows that company can
convert is assets into cash or not. Marriott Hotel quick ratio decrease means it have low assets to
convert into a cash
TASK 3
3.1 Analyses a budget and make appropriate decision
Decembe
r January February March April May
Opening balance 25000 53600 82600 114150 145350 178350
Sales 40000 45000 50000 55000 60000 65000
Total 65000 98600 132600 169150 205350 243350
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Expense
Purchase 9000 13000 15000 20000 23000 30000
Creditors 900 1300 1500 1800 1500 1300
Logistic expenses 300 500 750 800 900 1000
Employee cost 1200 1200 1200 1200 1600 1600
Total 11400 16000 18450 23800 27000 33900
Closing balance 53600 82600 114150 145350 178350 209450
The Cash budget of ABC company shows that company have received a monthly instalment of
six months that is December, January, February, March, April and may. As it is clear from an
above table, that expense are increasing every month, so company need to use different strategy
for controlling it.
Decembe
r January February March February March
Forecasted sales units 4000 4500 5000 5500 6000 6500
Add: Planned ending inventory 450 500 650 750 800 850
Total production required 4450 5000 5650 6250 6800 7350
Less: Beginning finished goods
inventory 300 300 300 300 300 300
units to be manufactured 4150 4700 5350 5950 6500 7050
3.2 The calculation of unit cost for contract
In a given table, it shows that Figure of ABC limited comprising a fixed cost that is 16000 and
overall cost is 32600. This all cost is related to a production of 2600.
Particulars Amount
Fixed cost 16000
Raw material 9000
Logistic expenses 6000
Packaging 1600
Total cost 32600
Produced units 2600 12
Per unit cost 12.53 2716.6
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From a given data it is calculated that cost per unit is £12.53. So now the company have to fix
its selling price
3.3 Asses the viability of chosen contract
Payback period
Project Project B
Initial investment -200000 -200000
1 55000 -145000 58000 -142000
2 63000 -82000 68000 -74000
3 59000 -23000 64000 -10000
4 68000 45000 75000 65000
5 74000 119000 84000 149000
6 119000 149000
A payback period method suggested a period in which company can recover its initial amount in
a month. There is the too project who's cash flow is given above. ABC limited will select a
project A because in this it can recover its investment amount fast and earn the profit as
compared to project B.
Average rate of return
Project Project B
Initial investment 200000 200000
1 55000 58000
2 63000 68000
3 59000 64000
4 68000 75000
5 74000 84000
0 0
Total 319000 349000
Average 63800 58167
ARR 31.90% 29.08%
From the above table, it is clear that highest ARR is obtained from a project A as compared to
project B.
Net present value
Project Pv @ 10% Present value Project B PV @ 10% Present value
Initial
investment 200000 200000
1 55000 0.909 50000 58000 0.909 52727
2 63000 0.826 52066 68000 0.826 56198
3 59000 0.751 44328 64000 0.751 48084
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4 68000 0.683 46445 75000 0.683 51226
5 74000 0.621 45948 84000 0.621 52157
Total 238787 260393
NPV 38787 60393
19.39% 30.20%
From the above table it shows that project will be accepted whose higher positive figure as
compared to other. So ABC company will choose Project B because its value is 30% as
compared to project A.
Internal rate of return
Project Project B
Initial investment -200000 -200000
1 55000 58000
2 63000 68000
3 59000 64000
4 68000 75000
5 74000 84000
IRR 16.98% 20.54%
Form the above table it is clear that Project B is suitable as compared to a Project A because it
generate high rate of return that is 20%
CONCLUSION
From the above report, it can be concluded that there are different sources of the fund which
company can take for launching an new project. There are various sources of finance that are
bank overdraft, bank loan, etc. there are also some implication this source of fund that is
company need to pay a high amount of interest, and some of the financial institutions provide a
loan after checking an organisation financial stability. Further, it can be concluded that there are
different financial statement format which different type of organisation used. The sole trader
makes only balance sheet, so that company owner came to know about how much profit is
generated.
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