Financial Resource Management: Sources, Implications, Evaluation

This report provides a detailed analysis of managing financial resources within business organizations. It identifies various sources of finance available to businesses, including share capital, retained earnings, bank loans, cash management, and hire purchase/leasing, evaluating the implications, advantages, and disadvantages of each. The report also considers legal, ownership, and bankruptcy implications associated with different funding sources. Furthermore, it evaluates the appropriateness of different sources of finance for various business scenarios, such as small business start-ups, large business expansions, and acquisitions of existing medium-sized companies. The analysis emphasizes the importance of selecting the most suitable financial source based on the business's size, nature, and operational needs to enhance overall performance and profitability. Desklib offers a wide range of resources, including past papers and solved assignments, to support students in their academic endeavors.

MANAGING FINANCIAL
RESOURCES
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Table of Contents
INTRODUCTION ...............................................................................................................................3
TASK 1 UNDERSTANDING SOURCES OF FINANCE AVAILABLE TO BUSINESS .................3
Scenario 1.............................................................................................................................................3
Information pack for new and existing businesses which Identifies the sources of finance
available to business....................................................................................................................3
Implications of source of finance along with its advantage and disadvantage...........................5
Evaluating appropriate source of finance for business project...................................................7
M2: Appropriate source of finance for small business................................................................8
CONCLUSION....................................................................................................................................8
REFERENCES.....................................................................................................................................9
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INTRODUCTION
Management of financial resources is necessary in every organization and it is required for
smooth functioning of the enterprise. Further, every organization prepares different plans through
which finance can be managed in an appropriate manner. This allows business to focus on its key
activities and in turn boosts overall efficiency of the firm (Reid, 2003). Different sources of finance
are present which businesses can consider for satisfying its financial needs but it depends on every
organization which source to adopt so as to gain long term benefits with the help of this. To
consider implications of sources of finance is also necessary as through this appropriate decision
can be taken easily. The present study is being carried out by focusing on the range of finance
available to business along with its implications such as advantage, disadvantage etc. Apart from
this, three case study examples have been discussed in the report which involves small business
start up, large expansion etc.
TASK 1 UNDERSTANDING SOURCES OF FINANCE AVAILABLE TO
BUSINESS
SCENARIO 1
Information pack for new and existing businesses which Identifies the sources of finance available
to business
Different sources of finance are present in business with the help of which enterprise can
easily satisfy its financial needs. Selecting most appropriate financial source depends on the nature
of business, its size and type of operations being carried out in the company (Vermeer, 2002).
Further, to avoid unfavourable situations appropriate sources are adopted by the management which
enhances organizational performance in the market. Long and short/ medium term sources are
present in business but decision has to be taken which source has to adopt which is cheap and can
enhance profitability level. Different sources of finance present are as follows: Share capital: It is regarded as one of the most effective source of finance which usually
every organization considers. In order to satisfy financial needs business can issue equity
shares in the market through which large number of investors can be attracted. This source
of finance is generally suitable for businesses which are old and large. Companies which are
operating on wider platform can issue shares in the market and can easily raise additional
funds with the help of this (Weaver, 2012). By adopting this source it is possible for the
business to avoid unfavourable situations such as inadequacy of finance which can further
enhance overall reputation in the market which is one of the main objectives of firm behind
carrying out operations in the market.
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 Retained earnings: It is the next effective source of finance which business can easily
consider. Retained earnings are the amount saved by company in order to meet any
unforeseen contingency. This type of source can be easily considered by large sized
organizations that are having strong financial base and in turn this can easily satisfy
financial needs of the entity in the most efficient manner. This source is not applicable in
case of businesses that have been newly established in the market as their financial position
is regarded to be weak. Apart from this, one of the key attribute of using this source is that it
is cheap and amount can be easily obtained as per requirement of the firm (Norton and
Kelly, 2014).
 Bank loan: Taking loan from financial institutions also supports organization in satisfying
its financial needs and in turn acts as a development tool. Further, various banks are present
in the market who can provide loan to company at a cheaper rate of interest. In order to
satisfy financial needs, company can compare interest rate of different banks and can obtain
funds from specific financial institution present in the market. It is considered as an effective
external source of finance and through these financial needs of entity can be satisfied easily.
This source is especially beneficial when organization takes expansion decision and it assist
in carrying out operations in an effective manner (Burgess, 2007).
So these are some of the long term sources of finance which business can easily consider as
per requirement of the management. Further, short term sources of finance are also present which
are as follows: Cash management: It is considered as an effective short term source of finance where
organization can manage its cash through proper planning (Mushin, 2013). Through this
source organization can easily deal with the situation of inadequacy of finance and this can
be favourable for business in every possible manner. This source is beneficial for new
business start ups as through effective management of cash they can easily manage funds
which are necessary for the organization.
 Hire purchase and leasing: Hire purchase is regarded as the agreement in which owner of
assets lets them on hire for regular instalments paid by the hirer. This short term source of
finance can be easily considered by small and large businesses. When leasing as a source of
finance is adopted then assets can be financed without actually having to buy them outright.
On the other hand, with the help of hire purchase firm can use an asset for fixed period in
return for regular payment (Shahrokhi, 2008). Therefore, this source of finance is also
considered to be effective for small and start up businesses in the market.
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Implications of source of finance along with its advantage and disadvantage
Before considering any source of finance, it is necessarily required for business to know its
implications as it is also associated with growth and development of business enterprise.
Implications of different sources of finance are as follows:
Sources Legal Dilution of Ownership
control
Bankruptcy
Share capital Restriction on
authorized capital
Yes No
Retained earning No No No
Bank loan Bankruptcy No Yes
Cash management No No Yes
Due to poor cash
management business
will not be able to pay out
their obligations in timely
manner due to this aspect
solvency and liquidity of
business will be adversely
affected consequently
and this will lead to the
situation of insolvency
(Butters, 2004).
Hire purchase and
leasing
yes No Asset transfer Yes
Share capital: Main advantage of using this source in business is that it is permanent source of
capital which allows business enterprise to satisfy its financial requirement. Further, in case of
ordinary shares business enterprise has to pay dividend if there is a profit. On the other hand, main
disadvantage of using this source is that dividends have to be paid to be shareholders in relation
with the shares purchased by them (Shaoul, Stafford and Stapleton, 2010). One of the major legal
implications of this source of finance is that there is restriction on authorized capital where it is not
possible for the company to issue more shares than authorized capital. This source has dilution of
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ownership where some rights are transferred to the investors of company along with right to take
decisions.
Retained earnings: Main advantage of using this source is that it is not required for business to
increase liability and there is no need to pay interest. But on the other hand, main disadvantage of
using this source is that it is not applicable in case of small businesses. Retained earnings as a
source of finance has no legal implication as it is type of internal source. Apart from this, condition
of bankruptcy is not applicable in case of retained earnings as source of finance (Danso and
Adomako, 2014).
Bank loan: Main advantage of using bank loan as a source of finance is that loan taken can be
easily procured; interest paid on bank loan is tax deductible expenditure. On the other hand, main
disadvantage of using this source is that excess borrowing can lead to decreased cash flow and some
financial institutions carry prepayment penalty. Legal implication of taking bank loan is that it leads
to bankruptcy as sometime it is possible that organization may not be able to repay the amount of
loan taken which has adverse impact on the enterprise. Further, dilution of ownership does not take
place in case of bank loan (Bokpin, 2010).
Cash management: It is one of the most effective internal sources of finance whose main advantage
is that it saves major expenses of the business and cash can be managed with the support of
management. On the other hand, main disadvantage of this source is that it becomes difficult to
determine the most effective way to manage cash within the organization. There are no legal
implications and dilution of ownership control issues associated with this source. Apart from this, in
case of bankruptcy due to poor cash management business will not be able to pay its obligations and
due to this aspect liquidity position of enterprise can be badly affected (Dittenhofer, 2001).
Hire purchase and leasing: Main advantage of adopting hire purchase and leasing as source of
finance is that business can take benefit by utilizing assets without purchasing it. Further, all the
responsibility linked with maintenance of assets is done by the leasing company. On the other hand,
main disadvantage of using this source is that total cost of leasing may exceed and it can be higher
than the purchase of asset. In case if organization is not able to make payment for the assets
acquired then it leads to bankruptcy. Further, the legal implication of this source is that ownership is
not transferred and organization is having right to use the assets (Ezeoha, 2011).
So, these are some of the advantage along with disadvantage of source of finance which
every organization has to consider so that its operations can be carried out in an effective manner.
Further, every source has some implications in the form of legal, bankruptcy and dilution of
ownership control. By considering all these implications, it is possible for business to satisfy its
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financial needs in an efficient manner and it can act as development tool for the entity. Moreover,
selection of source of finance directly depends on the size, operations and overall nature of the
company which is also significant.
Evaluating appropriate source of finance for business project
Different sources of finance are present but it is required for management to determine the
best one through which financial needs of company can be satisfied easily. In the present scenario
three case study examples for businesses has been considered which involves small business start
up, large business expansion and small group of people who are looking to buy existing medium
sized company.
Small business start up: In case of small business start up it is feasible for business to use bank loan
as source of finance in order to purchase medium sized company. Further, this can easily enhance
liquidity position of the organization and in turn is fruitful for business (Fay, 2015). Generally small
businesses does not have sound liquidity position due to which taking loan from banks at an cheaper
rate of interest is beneficial for company and this can surely satisfy financial requirement of the
company. Main benefit of adopting this source is that it enhances liquidity position of enterprise
which is the main requirement of every company. Apart from this business has to pay high amount
in the form of interest to bank for the amount obtained which is one of the major drawbacks of this
source. Moreover, other sources of finance such as retained earnings and issuing shares in the
market are not at all appropriate for small business as their financial base is considered to be weak
and this does not allows management in accepting this source.
Large business expansion: For large business expansion appropriate source of finance is retained
earnings as through this finance can be easily obtained with the help of internal source. Further,
finance obtained by management can support in purchasing existing medium sized company. This
can surely support business in taking expansion decision where financial needs of enterprise can be
satisfied easily (Norton and Kelly, 2014). Need of large business expansion is to purchase existing
medium sized organization for which internal source is most appropriate as it can easily assist in
acquiring large finance keeping in view overall aim of the company. Generally it is well known fact
that in case of large businesses their financial base is quite strong due to which they can easily
utilize overall funds saved so as to meet any unfavourable situations.
Small group of people: The most appropriate source of finance for small group of people is cash
management as individuals can plan different things and can take corrective actions so as to manage
cash in appropriate manner. Further, main benefit of adopting this source to the business is that
financial requirements can be satisfied internally and it can save major expenses. Basic need of
business operated by small group of people is to purchase medium sized company already operating
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in the market (Mohsin, 2013). So, this need can be only satisfied only when cash management
techniques are adopted so as to manage funds of the business in effective manner. Main advantage
of using cash management techniques to business is that it supports in dealing with the situation of
inadequacy of funds and enhances overall performance of firm in the market. Through proper cash
management liquidity position of company can be improved to an extent and it can provide base to
business enterprise in every possible manner.
M2: Appropriate source of finance for small business
For small business enterprise taking bank loan is one of the most appropriate source of
finance as through this organization can enhance its liquidity position. Generally businesses
operating on smaller platform have weak financial position and in such condition it is preferable to
take loan from financial institutions at a cheaper rate of interest. This source is considered as best
for company as through this management can easily satisfy its financial requirement and in turn
situation such as inadequacy of funds can be easily avoided. But on the other hand, it can increase
expenditure level of business as company has to pay interest to bank for the amount obtained. Apart
from this savings of small businesses are not adequate due to which it is not possible to implement
financial decisions by using retained earnings as source of finance (Dittenhofer, 2001). Therefore, in
this way taking loan from financial institution is appropriate for small business and can assist in
implementing the financial plan. On the other hand, before considering any source of finance it is
necessary for management to consider its pros and cons so that source considered may not
adversely affect business enterprise. Sometime it can be possible that organization is not able to pay
the interest amount to bank for the loan taken and due to this reason it is necessary to ensure well in
advance regarding the source which can be considered for satisfying financial needs of business.
CONCLUSION
From the above study carried out it has become easy to understand the importance of
selecting appropriate source of finance. Different sources has been identified and has been
evaluated on the basis of implication dilution, bankruptcy etc. In case of small businesses it is
beneficial to adopt bank loan as a source of finance as it enhances liquidity position of organization.
Further, for large sized organizations they can easily consider retained earnings as a source as
management has strong financial base which allows them to use amount of savings which is fruitful
for business.
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REFERENCES
Books
Norton, M. S. and Kelly, L., 2014. Resource Allocation. Routledge.
Reid, J., 2003. Seven Fundamentals for Effective Financial Management. Juta and Company Ltd.
Vereker, J., 2002. Managing Resources for Development. Commonwealth Secretariat.
Weaver, M., 2012. Resource Management. Routledge.
Journals
Bokpin, A. G., 2010. Financial market development and corporate financing: evidence from
emerging market economies. Journal of Economic Studies. 37(1) .pp.96 – 116.
Burgess, C., 2007. Do hotel managers have sufficient financial skills to help them manage their
areas? International Journal of Contemporary Hospitality Management. 19(3) .pp.188 –
200.
Butters, J., 2004. Managing finances for a fulfilled Canadian retirement. Leadership in Health
Services. 17(1) .pp.12 – 18.
Danso, A. and Adomako, S., 2014. The financing behaviour of firms and financial crisis.
Managerial Finance. 40(12) .pp.1159 – 1174.
Dittenhofer, A. M., 2001. Behavioral aspects of government financial management. Managerial
Auditing Journal. 16(8) .pp.451 – 457.
Ezeoha, E. A., 2011. Firm versus industry financing structures in Nigeria. African Journal of
Economic and Management Studies. 2(1) .pp.42 – 55.
Mohsin, A. M., 2013. Financing through cash-waqf: a revitalization to finance different needs.
International Journal of Islamic and Middle Eastern Finance and Management. 6(4) .pp.304
– 321.
Shahrokhi, M., 2008. E‐finance: status, innovations, resources and future challenges. Managerial
Finance. 34(6) .pp.365 – 398.
Shaoul, J. Stafford, A. and Stapleton, P., 2010. Financial black holes: The disclosure and
transparency of privately financed roads in the UK. Accounting, Auditing & Accountability
Journal. 23(2) .pp.229 – 255.
Online
Fay, B., 2015. Sources of Financing for Small Business. [Online]. Accessed through
<https://www.debt.org/small-business/sources-financing/>. [Accessed on 6th Nov 2015].
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