Managing Financial Resources and Decisions for Business Expansion

This report provides a comprehensive analysis of financial resource management and decision-making. It begins by identifying various financing sources such as equity shares, debentures, and bank loans, evaluating their implications on a business. The report then assesses the costs and expenses associated with these sources, emphasizing the importance of financial planning, including the need for information by decision makers and its impact on financial statements. Furthermore, the report delves into budgeting techniques, calculating unit costs and pricing strategies, and assessing project viability using appraisal tools such as the payback period. The content covers the financial aspects of business expansion, offering insights into making informed financial decisions and strategies.

MANAGING FINANCIAL
RESOURCES AND
DECISIONS

INTRODUCTION
Financial resources are integral part of every business entity among all kinds of the
resources required. Along with availability of various financial resources there are it is necessary
to utilize in appropriate and profitable way for taking efficient business decisions. The current
analysis and report describes about the different kinds of financing sources which helpful for
business expansion in the other market and country. Further, the suitable source of finance for
expansing business is also evaluated in the present study. It shows about the costing of finance,
significance of planning of the financials as well as its impact on the company's financial
performance and statements both. In the third part, information related to budgets and method for
determining cost and pricing level of every produced unit is provided with the example. From the
last part of the report, the reader able to understand about the financial statements such as key
components, formats and way of making interpretation of it.
TASK 1
1.1 Identification of available source of finance for business
When a business organisation going and taking decisions for expanding business then it
requires huge amount of capital. Because without the fund appropriate and adequate fund the
management not able to produce more products and then provide in new market. For raising
money there are some sources provide fund which are explained as below:
 Equity shares: In such kind of the financing source the company issue equity type of
shares and stock in the market which are purchased by local community or any external
party. In this, if the company is not listed in the stock market then cannot raise fund from
the market and raise fund (The 12 Best Sources of Business Financing, 2010).
 Debentures: It is one type of written documents and paper which called as debentures
and bond is to issued by the firm and purchased by any external party. Furthermore,
amount of the purchase and buy debentures is to be used for business expansion.
 Bank loan: Another external financing source which can be used by the company for
raising capital is bank loan where the firm reach up to the commercial banks. After that
the company has to show all its financial statements and then bank provide finance which
is used for business expansion.
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1.2 Evaluating implications of such financing sources
Financing sources Legal implications Financial implications Dilution of
control on firm
Equity shares In this the company needs to
listing in the stock market
and then able to issue shares
and raise fund. Apart from
this, it is also necessary to
fulfil all the legal
documentations (Chan and
et.al., 2012).
In this the business entity
has to pay amount to the
shareholders in form of
dividend from the net
profit generated. Because
of this condition
profitability ratio and
business performance
reduces.
Control over the
business diluted
with
shareholders.
Debentures In the management has to
fulfil all those
documentations which are
required at the time of
taking and issuing
debentures.
While raising fund from
the debt then from the
profit the firm has to pay
interest to the regulatory
body and coupon rate
both.
Control diluted
very low.
Bank loan In the bank loan the firm
needs to show all the
financial condition along
with the liquidity position.
The interest amount is to
be given by firm to the
commercial bank which
reduces the net profit at
the fiscal year ending
(Fernandez, Le Roy and
Gnyawali, 2014).
No dilution of
control but in
case of defaulter
bank has right to
cease firm.
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1.3 Evaluating suitable financing source for a business project
When the public listed business entity expanding the firm then for enhancing capital there
are bank loan and equity shares both are very appropriate source. Evaluation of such both the
source of the finance is given as below:
Equity shares- The respective source is helpful for raise fund on the permanent and
consistent basis because once the shares are issued then fluctuate and traded continuously in the
market. Further, cost of finance is also lower of the equity source and if the firm not able to
generate profit then it is not compulsory to allow dividend to the shareholders. On the other side,
when the equity shares are purchased by the stockholders then in this condition the firm needs to
involve them in some business meetings (Kunreuther and et.al., 2013). Due to which whole
control over the company gets diluted with the potential type of shareholders.
Bank Loan- Procedure for raising fund by the bank loan is short and easy compare to
other available sources by which firm easily able to enhance capital. In addition to this, when the
firm pay interest amount to the commercial bank then it provides facility of tax deductible by
which net profit ratio enhances. However, high amount of bank loan lead to reduce as well as
decrease the availability of net cash position at the fiscal year end.
TASK 2
2.1 Analysing costs and expenses of various financing sources
Equity shares- When the company raise and enhance capital by issuing and considering
the equity shares then it has to allow dividend amount to the potential stockholders from the sum
of money generated by in form of profit.
Bank Loan- In the bank loan cost of finance is imposes on the companies which is for
the long term and reduce the net profit. In this case, interest is to be provided by the firm which
takes loan to the commercial banks (Lee and Lam, 2012). Apart from this, as the interest rate
fluctuate then cost of finance also give response in same direction.
Debentures- While issuing debentures and improving capital amount then cost of it is in
terms of the interest rate as well as coupon rates which is allowed from to the external party who
make investment in this.
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2.2 Importance of the financial planning within firm
The plan which takes place at the workplace in order to make schedule for the financial
aspects is known as financial plan. The financial planning is very important for each business
entity which is expressed such as follows:
 It helps to the firm in order to collect various kinds of funds and capital in the optimum
ways.
 By using this financial planning the company able to fix highly appropriate and suitable
structure of capital in order to expand the business.
 With the use of financial planning the management of an entity highly able to make
investment in the correct project which provide the higher return in the future.
 Apart from this, financial planning is considered as a base of controlling the financial
resources (Martins, 2014).
 It supports to the company in order to link investment with the several financing
judgements.
2.3 Evaluating informations require for various decision makers
At the time of taking the financial decisions there are different informations are needed
like as profitability and liquidity condition of the company, efficiency to generate sales and
revenue, productivity etc. Higher the such kinds of position lead to provide more amount of the
capital by such external bases of the finance. When the commercial bank going to take decision
for provide fund to the company then it required to know about the return, profit, liquidity
position as well as valuation of it in the industry. When the value of overall business in its
respective sector is higher and in this condition bank allow more amount of the loan for business
expansion (Reay and Hinings, 2009). When talking about the equity then it concerns about the
level of profit because it is a base of giving dividend amount to the stockholders.
2.4 Explaining impact on financial statements of finance
Income statements- When the company increase the capital and fund within workplace
then various financial accounts and statements affects in positive or negative ways. In this the
company when raise fund the cost of finance is to be provided which is one type of expenditures
for it. Due to this condition total expenses and cost of production increase which lea to impact on
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the net profit in the negative manner. Hence, it can be said the at the time of taking finance from
such external sources then income statement affects in adverse way.
Balance sheet- Apart from income statement the balance sheet also gets influenced at the
workplace in form of positive way. The reason is that level of total capital enhances in the
balance sheet where in the current assets cash in hand also increases (Starling, 2010). On the
other side in the liabilities side long term loan increases and used for business expansion. Hence,
by raising fund total assets and total liabilities both affects in positive way in the statement of
financial position.
TASK 3
3.1 Analysis of budgets as well as taking suitable decisions
There are various kinds of budgets are to be prepare which supports to the company for
determine that after expansing the firm it will generate how much amount of sales and profit.
Different budgets are like as cash, sales, production, material purchase, overhead, direct labour
cost etc. Example of the cash budget given as below:
With the help of budgets the company make the appropriate and effectual business
decisions along with the suitable strategies because of giving financial data of the future times.
From the above table it can be visualised that from the month of April till the month of
September the company generates positive net cash position along with the increasing trend. By
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this the management of enterprise able to take decision for further expansion (Cash Budget,
2013). If the firm earns positive cash flow with enhancing trend then it will take decisions for the
investment also in the project for generating return.
3.2 Calculating unit and price of each unit
In the firm there are various and huge quantity of the products and services are produced
where different costs associated with that. When the business entity going to sale in the market
then needs to calculate total as well as unit cost which helps to make decisions for determining
the prices for make sales. In order to this, all the costs are to be taken into consideration whether
they are fixed or variables (Ujunwa and et.al., 2012). Example of the unit expense and price is
given as below:
It can be determined from the above table that total cost incur to make and manufacture
products and services is worth of 120000 GBP at where number of units manufactures are such
as 4000 items. In this case, cost of each and every unit comes is worth of 30 GBP which
determines in such way: 120000 / 4000. Apart from this, in order to take pricing decisions there
are cost plus pricing method is considered where desired and agreed profit level added in the unit
cost. Further, the management will sale its every unit at the price worth of 42 GBP where agreed
profit is such as 40%.
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3.3 Assessing project viability using appraisal tools
Payback period
Number of years Cash flow of project Cumulative cash flow
Initial investment 155000
1 24000 24000
2 49000 73000
3 58600 131600
4 80000 211600
5 125400 337000
Payback period 3.4 years
Lower the years when derive in the payback period then the project is more viable for the
company because initial amount will recover in less number of years. At the current case, the
initial investment which is worth of 155000 GBP made for 5 years will be recover within 3.4
years only. After that, up to 5 years the company will be profitable while it adopts it within
working environment.
NPV
Number of years Cash flow of project
Discounting factor
@9% Present value
Initial investment 155000
1 24000 0.917 22018
2 49000 0.842 41242
3 58600 0.772 45250
4 80000 0.708 56674
5 125400 0.650 81501
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Total 246686
Less: initial investment 155000
NPV 91686
NPV reflects that value of initial investment will be in which ways like positive or
negative. When net present value of the project is positive then it will be accepted by the
management in business process. Here behind investment of 155000 GBP, the management able
to generate 91686 GBP which is beneficial for it.
ARR
Number of years Cash flow of project
Initial investment 155000
1 24000
2 49000
3 58600
4 80000
5 125400
Summation 337000
Average 67400
ARR 43.48%
From average rate of return it has been analysed that, on an average the investment
amount will give how much return at the end of completion of investment periods. Higher the
value of ARR is better and in the present scenario ARR is 43.48% which is beneficial and
fruitful for the entity.
IRR
Number of years Cash flow of project
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Initial investment -155000
1 24000
2 49000
3 58600
4 80000
5 125400
IRR 24.86%
On the basis of internal rate of return it can be assessed that the project gives value is like
24.86% which is better.
By considering all the tools and techniques of capital budgeting it has been found that the
project is beneficial and viable for the company. Hence, it can be suggested to the management
that it needs to undertake and adopt the respective project at workplace.
TASK 4
4.1 Discussing about key financial statements
In the business entity there are variety of financial statements as well as accounts are to
be made which are explained along with key components as below:
Income statement- The respective type of financial account show situation of the company in
form of profit or loss. Under this the company able to know that in one fiscal year it generates
whether profit or loss. Further, main elements of current account are such as sales or revenue,
incomes and profit. There are mainly three kinds of profits are to be shown which are such as
gross, net and operating.
Balance sheet- According to the current statement management of the firm able to assess
liquidity position and condition of it in the industry (Bell and Rasheed, 2016). In this mainly two
types of headings are comes into consideration which are such as assets and liabilities. Under
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these both sides there are current and non current sub headings are included. Apart from this, it
shows total equity capital available within the firm.
Cash flow statement- Other financial statement is such as cash flow which shows amount of
different activities which are considered within the business organisation. It has three key
elements and components which are shown as below:
1. Cash flow from operating activities
2. Cash flow from investing activities
3. Cash flow from financing activities
4.2 Comparison of the financial statements of various businesses
Sole Trader business- The company at where only one entrepreneur operate overall
business and having whole ownership as well as liabilities both with him only. Apart from this
any kind of legal rules and legislations are not needs to implement within workplace. For this it
is not compulsory to prepare all the available financial statements in the firm but for the purposes
of knowing financial position it frames profit and loss account and balance sheet. In this not
require to add interest ad well as taxation amount while preparing the income statement for it
(Sala and et.al., 2017). Apart from this, in this not necessary to follow all the accounting
standards as well as theories while making accounting treatments.
Public listed business- The firm which operates in the industry by using different kinds
of rules as well as regulations which are framed by the government is identified as public
companies. In addition to this, such kinds of firms are listed in the stock market and can raise
fund from equity, preference shares etc. For such types of businesses it is compulsory to prepare
and frame all those financial statements which are available in the accounting process. In this it
is compulsory to make accounting treatments of the tax and interest in accounts of profit and loss
by considering all the accounting standards as well as GAPP theories. Apart from this for the
public listed companies it is highly required to use the auditing and accountability process.
4.3 Interpreting financial statements
For interpreting as well as analysing various kinds of financial statements there are
different measurements and techniques are available. Very most and suitable techniques for
make the interpretation of such statements and accounts is financial ratios under which several
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