Analysis of Finance Sources, Planning, and Financial Statements

This report provides a comprehensive analysis of financial resources available to businesses, including bank loans, retained profits, and equity shares, along with their respective implications, advantages, and disadvantages. It delves into the cost of different financing methods, highlighting financial and opportunity costs associated with each. The report emphasizes the importance of financial planning, discussing its role in making sound investment decisions and managing contingent liabilities. It explores essential financial information required for decision-making, focusing on the Profit and Loss (P&L) statement and balance sheet, and illustrates the impact of financing sources on these statements. Furthermore, the report evaluates the cash flow forecast of ABC Manufacturing Ltd., calculates contribution, break-even analysis, and profit, and examines the use of investment appraisal techniques. Finally, it covers the purpose and use of prime entry, trial balance, and final accounts, along with an analysis of financial ratios to assess the financial position of XYZ Co.

MFRD

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
Sources of finance which are available to new and old as we as large and small sized
business organization.............................................................................................................3
1.2 Implications of the each source of finance which have identified above.........................4
1.3Three case study examples................................................................................................5
TASK 2......................................................................................................................................5
2.1 Analysis of the cost of different sources of finance.........................................................5
2.2 Importance of financial planning.....................................................................................6
2.3 Financial information which are required for the decision making ................................6
2.4 Key elements of the P&L and balance sheet with reference to finance sources and their
related cost..............................................................................................................................6
TASK 3 .....................................................................................................................................7
3.1 Evaluating cash flow forecast of ABC manufacturing ltd. and formal business report
based upon the findings..........................................................................................................7
3.2 Calculation of contribution, break even analysis and profit.............................................7
3.3 Use of investment appraisal techniques in the decision of ABC Engineering ltd............9
TASK 4....................................................................................................................................11
4.1 Purpose and use of prime entry, trial balance and final accounts..................................11
4.2 Difference between the financial statements of different business organization...........11
4.3 Analysis of the ratios to assess the financial position of XYZ co.................................12
CONCLUSION........................................................................................................................13
REFERENCES ........................................................................................................................15
APPENDIX..............................................................................................................................17

INTRODUCTION
Financial resources are the essential element of business which facilitates execution of
business plan in an effective manner. Financial resources can be defined as money or funds
which are available to business. Thus, finance manager of an organization has responsibility
to frame cost effectual strategies which help them in making optimum use of the fund to a
large extent (Orlitzky, Schmidt and Rynes, 2003). This project is based upon different
scenarios which help in understanding the sources through which business entities can meet
their financial needs. Besides this, it states cost of the different sources of finance which
closely impacts the profitability aspect of an organization. This report will helps in
understanding the importance of financial planning in the growth and development of an
organization. Further, it will discuss the ratio analysis of organization to assess their financial
health and performance.
TASK 1
Sources of finance which are available to different type of business enterprises
Sources of finance which are available to new and old as well as in large and small
organization are enumerated as below:
Type of
enterpries
Source Features Advantages Disadvantages
New business Bank loan Organization
who wants to
start up their
business can
fulfill their
financial needs
by approaching
bank for the
loan.
Tax deduction
is one of the
major benefit
which helps
organization in
increasing their
profitability
aspects.
Bank charges
high interest
rate for
providing the
financial
assistance in
comparison to
other
commercial
institutions.
Old or existing
firm
Retained profit It is the part of
profit which
company keeps
with itself
Instead of
issuing shares
organization
can meet their
If existing firm
makes use of
retained profit
then enterprise

rather than
giving dividend
to shareholders.
Through this,
company is able
to meet future
contingent
situation.
financial
requirements
from the
retained
earnings.
Through this,
organization
can prevent the
interruptions of
the new
shareholders in
the decision
making aspects.
is unable to give
dividend to their
shareholders.
This aspect
places a
negative impact
on the goodwill
or image of the
firm.
Large
organization
Issue of equity
shares
Large sized
organization
can meet their
financial needs
by issuing
equity share to
existing and
potential
shareholders.
In the case of
equity shares
organization
needs to give
dividend to
their
shareholders
only when they
get sufficient
amount of
profit rather
than
debentures.
Shareholders
have the right to
take active
participation in
the decision
making process
which is one of
the major
drawback of
issuing of equity
shares.
Small
organization
Leasing Small sized
organization
can meet their
financial needs
through leasing.
It provides right
to the
When business
enterprise
undertakes
leasing then it
enjoys tax
benefit. It is one
of the main
Company has to
pay high rent to
the owner from
whom asset is
taken on lease
by the firm.
Thus, periodical

organization to
make use of the
asset without
making huge
investment on it
(Jagman and
et.al, 2014).
factors which
compel small
business
organization to
make use of
asset on lease.
interest payment
imposes
financial burden
on the firm.
1.2 Implications of the each source of finance which have identified above
Different sources of finance have different implication which is enumerated below:
Sources of finance Legal aspects Cost Suitability
Bank loan Bank has the legal
authority to cease the
asset if organization
makes default in
payment of loan
amount and interest.
In bank loan,
company has the
obligation to pay
high interest amount
along with the
periodical
installment. Thus,
bank loan is also the
subject of high
financial cost.
Installment payment
system is one of the
main aspects which
attract organization to
raise their capital
through bank loan.
Leasing As per the legal
aspect company has
the obligations to
return back the asset
to the real owner
after the
predetermined period
of time (Caglayan
and Demir, 2014).
In leasing, company
has to pay periodical
interest in return of
the use of the asset.
Tax deduction and
obsolation of the
technology is one of
the factors which
compel organization
to make use of the
asset on leasing
rather than
purchasing it.
Retained earning
Issue of equity shares
1.3Three case study examples

Types of business organization Sources of finance
Small business start up By approaching friends and family members,
business entities can easily fulfill their
monetary needs. Moreover, people who are
much closed to the business entity are always
ready to help them. In addition to this,
individuals can also start small business by
making use of their personal savings.
Large sized firm who is planning to expand
its business operations
By issue debentures large firm can fulfill
their financial requirements. It helps
organization in raising their finance without
providing right to make participation in the
decision making process.
Small group of people Small group of people who wishes to buy
medium sized company can meet their
financial needs through retained profit of
their existing company. In addition to this,
through bank loan they can meet their further
needs and requirements.
TASK 2
2.1 Analyzing the cost of different sources of finance
Different sources of finance place different cost such as financial and opportunity cost
upon the organization. If company raises their finance through retained earning then it is not
in position to make investment in the future productive activities. This aspect closely impacts
the sales and profitability aspect of business enterprise. In addition to this, when company
makes use of retained profit then it also places a negative impact on the mindset of
shareholders. Moreover, they think that company does not have sufficient amount of financial
resources to meet their financial needs or requirements. Further, if organization fulfills their
financial needs through bank loan then it has to give high interest on the amount of bank loan.
Thus, it may be the cause behind decrease in the net profitability aspect of firm. Moreover, it
is the expense for the organization so it has high level of influence upon profit and loss out of
it (Roseline and James, 2014). Besides this, if corporation issue equity shares to increase its

fund then company has responsibility to give dividend to their shareholders to build their
corporate image. Further, in leasing business, firm requires to pay interest on periodical basis.
Thus, interest amount is also recorded in the income and cash flow statement as an expense.
Therefore, organization needs to select the suitable source of finance after assessing the cost
of each.
2.2 Stating the significance of financial planning
Monetary planning may be served as a tool which provides deeper insight to the
finance manager about the fund which they required for performing business activities.
Through this, organization is able to make sensible finance decisions which aid in the growth
and development of the firm (What is Financial Planning?, 2015).
Financial planning is plays an important role in achieving achieves success in the
dynamic business environment on the basis of following aspects:
 It acts as a guide which helps organization in investing their money in the most
profitable project which gives higher return to them.
 By preparing effectual monetary plan, business organization is able to face contingent
liabilities or obligations more efficiently.
2.3 Essential Financial information required for the business decision making
Financial statements play an important role in the decision making aspects of an
organization. They provide assistance to the firm in making suitable decisions in relation to
the investment as well as other business decisions. Financial statements help organization in
making the suitable decisions (Hannam and et.al, 2015). For instance, if organization is
planning to expand its product chain then they need to make assessment of the cash flow
statement. It provides deeper insight to the organization about the fund which they need to
raise to execute their business plan. Thus, financial statements play a vital role in the
effective decision making which make contribution in attainment of goals.
2.4 Key elements of the P&L and balance sheet with reference to finance sources and their
related cost
Profit and loss a/c is the statement which provides information regarding the profit or
loss aspect of an organization. It includes expenses and income which are incurred or got by
them. In addition to this, balance provides includes assets and liabilities which clearly states
the financial position and performance of an organization. For instance: Organization takes

loan of 200000@12% per annum. In this situation impact of this sources of finance upon the
P&L and balance sheet are as follows:
TASK 3
3.1 Evaluating cash flow forecast of ABC manufacturing ltd. and formal business report
based upon the findings
Analysis of the sales budget: By analyzing the sales budget of ABC it has been assessed that
company fails to meet the budgeted sales amount. During the period of July to December,
company fails to meet the budgeted figures. It shows that company had not attained success
in attracting large number of existing and potential buyers to the products or services which
are offered by them. Thus, organization needs to undertake promotional strategies and
campaign in order to reduce the variances which occur in the sales performance of an
organization (Fabregat-Sanjuan, Ferrando and De la Flor, 2015).
Analysis of the cash flow forecast: From the cash flow analysis it has been evaluated that
sales of an organization shows fluctuating trend. Due to this aspect, profit margin of the firm
gets declined. Expenses such as wages, rent, light and heat, advertisement etc. shows
consistent trend which is good sign for the company. Fall in the revenue aspect is one of the
main causes behind decrease in inflow and increase in the outflow of cash. Hence,
organization needs to frame competent strategies and policies which help them in managing
their cash related business activities more effectively.
To
The director of ABC
Date…..

From this report it is can be concluded that sales of an organization is continuously
decreasing. Besides this, outflow of organization is higher than the inflow which is not good
sign for the company. These aspects will place negative impact upon the growth and
development aspect of an organization. Thus, organization requires making review of its
strategic framework. By this, company is able to perform its business functions and
operations in an effectual manner. Further, company requires making control upon the
expenses in order to improve their profitability aspects. Through this, business entity is able
to get desired outcome or profit.
3.2 Calculating of contribution, break even analysis and profit
Contribution per unit (CPU) = 21.55£
Particulars Calculation
Contribution to sales ratio 161625£/900000£*100
= 17.96%.
BEP ( In units)= Total FC / CPU 120000/21.55
= 5568.45 Units
BEP ( In £) 5568.45Units *120£
= 668213.46£
Margin of safety (MOS) ( In £)= Actual sales
- BEP Sales revenue
9000000£ - 668213.46£
= 231786.54£.
MOS (per unit) 231786.54£/7500
=30.90£
Calculation of profit under two proposals from different customers
According to the case scenario company have got have got proposal from Southwod
Electricals and Westbrook Engineering in relation to sell their products and services to them.

In this, company get different margin if they sell their product to two different customers
which are given below:
Name of the organization Calculation of selling price
Selling price = Cost + (Cost * profit %)
Southwood Electricals 120£ - 120*15%
= 120£ - 18£ = 102£
Westbrook Engineering 120£ - 120*25%
= 120£ - 30£ =90£
Computation of total gross profit or margin
Particulars Southwood Electricals Westbrook Engineering
Sales revenue 951000 990000
Cost of raw material 420000 446250
Cost of labor or human
resources 286000 303875
Variable overhead (VO) 81600 86700
Total Variable cost 787600 836825
Contribution 163400 153175
-FC 120000 120000
Gross margin 43400 33175
On the basis of the above analysis it has been assessed that organization £ 43400 as a
profit if they sell their product to Southwood electrical. If organization accept the proposal of
Westbrook electrical organization then they will get £ 33175£ in form of profit. Thus,
organization should accept the proposal of Southwood electrical which gives higher return to
them.
3.3 Utility of investment appraisal techniques in the decision making of ABC Engineering
ltd.
Capital budgeting tools or techniques help organization in evaluating the viability of
the investment (Capital Investment Appraisal / Appraisal Techniques, 2015). It acts as a
guide which helps organization in selecting the most profitable investment which gives
higher return to them.

Net present value (NPV):
Calculation of Payback period and NPV (In £)
Project A Project B
Year
Cash
inflow
(1)
Cumulativ
e cash
inflow
Discount
ing
factor
@6% (2)
Discount
ed cash
inflow
(1*2)
Cash
inflow
(3)
Cumulativ
e cash
inflow
Discount
ed value
@6% (4)
Discount
ed cash
inflow(3
*4)
1 180000 180000 0.943 169740 60000 60000 0.943 56580
2 230000 410000 0.89 204700 120000 180000 0.89 106800
3 280000 690000 0.84 235200 250000 430000 0.84 210000
4 120000 810000 0.763 91560 250000 680000 0.76 190750
Total
discount
ed cash
inflow 810000 701200 680000 564130
Less-
Initial
Investme
nt 450000 450000
NPV
(Total
discount
ed cash
inflow –
initial
investme
nt) 251200 114130
Payback period
Project A = 2+ 40000/280000
= 2+.14
= 2.14 years
Project B = 3+ 20000/250000