A Report on Managing Financial Resource Decisions in Business

This report provides a comprehensive overview of managing financial resource decisions. It begins by exploring various types of finance sources, including internal and external options for businesses of different sizes and ages, and their implications. The report then delves into the cost of these finance sources, emphasizing the importance of financial planning and effective decision-making. It covers financial statements and their role in decision-making. Furthermore, the report analyzes sales budgets, cash flow forecasts, and the application of investment appraisal techniques such as payback period, accounting rate of return, net present value, and internal rate of return. It includes calculations of breakeven points, contribution, and profitability under different scenarios, alongside the analysis of financial statements and ratio analysis. The report concludes by summarizing the key findings and providing recommendations for effective financial resource management.

Managing Financial
Resource Decisions
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Table of Contents
INTRODCUTION......................................................................................................................1
TASK 1......................................................................................................................................1
AC 1.1 Types of finance sources...........................................................................................1
AC 1.2 Implications of different finance sources..................................................................1
AC 1.3 Case study examples for the businesses....................................................................2
TASK 2......................................................................................................................................2
AC 2.1 Cost of finance sources for raising the funds............................................................2
AC 2.2 Importance of financial planning..............................................................................3
AC 2.3 Financial decision making........................................................................................3
AC 2.4 Financial statements..................................................................................................4
TASK 3......................................................................................................................................4
AC 3.1 Analysis of sales budget and cash flow forecast.......................................................4
AC 3.3 Application of different investment appraisal techniques.........................................5
AC 3.2 Calculation of breakeven point, contribution and profitability.................................7
TASK 4....................................................................................................................................10
AC 4.1 Books of prime entry and financial statements of different organizations.............10
AC 4.2 Financial statements of different types of organization..........................................11
AC 4.3 Analysis of financial statements.............................................................................11
CONCLUSION
.................................................................................................................................................12
REFERENCES.........................................................................................................................13
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Index of Tables
Table 1: Calculation of payback period (In £)...........................................................................5
Table 2: Calculation of Accounting rate of return (In £)...........................................................6
Table 3: Calculation of net present value (In £).........................................................................6
Table 4: Calculation of internal rate of return (In £)..................................................................6
Table 5: Calculation of contribution per unit and profit (In £)..................................................7
Table 6: Profit and Breakeven point by changing the selling price (In £).................................8
Table 7: Profit and Breakeven point by changing the fixed cost (In £).....................................8
Table 8: Profit and Breakeven point by changing the material price (In £)...............................9
Table 9: Profit and Breakeven point by changing the labour price (In £)..................................9
Table 10: Calculation of profits (In £)......................................................................................10
Table 11: Ratio analysis ..........................................................................................................11
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INTRODCUTION
Every business organization establishes with the purpose of survival for a long time
period. Therefore, it becomes necessary for the organization to have adequate amount of
finance availability so as to run its operations in an effective manner. Finance is termed as the
lifeblood of the business for all the organizations whether new or old and large or small scale
organizations. This report helps in identifying a variety of finance sources that are available
to different type of organizations. Moreover, it describes the way that how organizations can
take effective business decisions through proper financial planning.
TASK 1
AC 1.1 Types of finance sources
Finance sources influence the business operating activities to a great extent. The types
of finance sources that is available to the organizations that are described below:
New and old: New business start ups can use its personal savings and loans from
others such as friend and family members. Moreover, they take loans from banks to a limited
extent. However, old business organizations can use internal and external sources. They can
use its retained earnings, banks loans and share capital.
Large and small: share capital and debt capital are considered as major finance source
available to large business organizations. Moreover, it can use venture capital and profits
from other businesses to expand its business operations (Davies and Crawford, 2011).
However, small business organizations can use overdrafts facilities, retained earnings and
short term and medium term bank loans. Moreover, it can sale its disposable assets and cash
can be squeezed through its operations.
AC 1.2 Implications of different finance sources
Every business organization use a combination of available finance sources at least
cost. Therefore, they consider its advantage, disadvantage and legal aspects.
Bank loans: It is a major source of finance the advantage is that available for different
time period at chargeable interest rates? The disadvantage is that in case of failure to pay the
bank loans the security kept against the loan can be disposed off. Moreover, banks charge a
higher rate of interest on loans for new business start ups. Many legal requirements have to
be fulfilled by the enterprises.
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Share capital: The advantage of this source is that the company is not obliged to pay
regular return to the shareholders. However, disadvantage is that shareholders are the owners
of the company so they have voting rights to the company (Romano, Tanewski, and
Smyrnios, 2001). Therefore, they have control over the organizations. Legal aspect is that
company cannot issue more than its authorised share capital.
Overdraft: The advantage is that it fulfils the urgent finance requirement while
disadvantage is that banks charges a higher rate of interest on these facilities. Moreover, it
negatively impacts the corporate image.
AC 1.3 Case study examples for the businesses
Small business start ups: ABC Ltd. wants to establish a small scale business. In order
to fulfil the finance need it use personal savings and take loans from friends and its family
members.
Large business expansion: After achieving the growth ABC Ltd operates its activities
at large market place. Moreover, the company wants to expand its operating activities to
achieve its objectives. For that purpose, it use both short term and long term finance sources
by using bank loans, issuing share capital (Mangan, Hughes and Slack, 2010). Moreover, it
can use profits from other business, sale its unusable assets that causes loss and provide
venture capital.
Buying an existing medium-sized company: ABC Ltd. wants to acquire an existing
medium sized business. It can issue debentures, share capital and take medium and long term
bank loans. Moreover, retained earnings are also available at without any cost to the company
for that purpose.
TASK 2
AC 2.1 Cost of finance sources for raising the funds
In order to ensure long run survival of the company every business needs to raise its
funds to meet its requirements.
Share Capital: Funds can be generated by issuing both equity and preference shares.
The cost of this finance source is that shareholders require dividend on their investment.
Moreover, they also have the objective of capital appreciation.
Debt capital: Another type of finance source is bank loans and issuing the debentures.
The cost of this source is that the company has to pay interest on the amount of loans
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(Managing Financial Resources and Decisions, n.d.). Moreover, it also requires instalment
payments over fixed time duration.
Retained earnings: Business can use its profit balance after paying return to the
shareholders. It does not involve any cost to the company and available as an internal finance
source.
AC 2.2 Importance of financial planning
Financial planning helps the organizations in many ways. It is important due to
different reasons that are described below:
Importance: Financial planning is a significant for the organization to achieve its
financial goals. It determines the amount of capital requirement for different purposes. Then
after, it identifies the available finance sources and selects an appropriate composition of it.
Thus, it can be said that it helps in fulfilling the organization funds requirement at least cost.
Moreover, it ensures that scarce sources have to be optimum utilized to increase business
profitability. Further, it frame policies regarding procurement, investment and for proper
administrating the funds (Manyard, 2013). In addition, it maintains proper balance between
fund inflows and outflows. Thus, it can be said that it ensure proper availability of working
capital for the businesses. This in turn, resulted in increasing the profits and maximizing
wealth and dividends to the shareholders.
AC 2.3 Financial decision making
Effective financial decision making ensures the organization success in a great
manner. Decision making process requires both financial and non financial information.
Financial information can be collected from the financial statements. Decision making
process involves gathering, processing and evaluating the information. Comparative financial
statements and ratio analysis method helps to analysing the financial information reported in
the financial statements (Bebbington, Gray and Laughlin, 2001). It helps in analysing the
business profitability, efficiency, liquidity and solvency position. Therefore effective
decisions can be made to improve its profitability and the business ability to pay its debts.
Moreover, the organization is able to ensure effective use of its assets. Budgets also can be
used for analysing the variance and take correct actions to mitigate it. Cash related
transaction also requires for proper administration of cash flows. It can be done by making
cash flow statements and for managing all the funds information can be collected from fund
flow statement. Moreover, cash flow management evaluates the cash flows regarding
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business operating, investing and financing activities. Thus, it helps in examining both the
revenue and capital expenditures. Therefore, it can be concluded that effective decisions
helps the business in moving upward direction by increasing the business growth.
AC 2.4 Financial statements
The cost of all the applied finance sources shows in the organization's income
statement and balance sheet.
Loan Capital: The cost is the amount of interest that the organization has to pay on
respective loans. It will show in debit side of profit and loss account while it increase the
liability hence, shows in liability side of the balance sheet (Baker, Dutta and Saadi, 2010).
Share capital: Total amount of dividend that is paid to the shareholders shows in debit
side of profit and loss account. However, in balance sheet it shows in liability side under the
capital head.
Cash squeezed: The delayed payments to the creditors shows in liability side under
the current liability head. However, received amount of debtors is deducted from total debtors
in assets side.
Retained earnings: it does not have any cost so it is not shown in the income
statement. However, the amount of retained earning that is used for getting the funds is
deducted from reserve and surplus in liability side (O' Bryan, 2010). Moreover, it shows in
statements of retained earnings.
Overdrafts: The amount of interest paid shows in debit side of profit and loss account.
However, in balance sheet it shows in liability side in the current liability head.
TASK 3
AC 3.1 Analysis of sales budget and cash flow forecast
Sales budget: The presented sales budget indicates that actual sales are less than the
forecasted or budgeted sales volume. Therefore, negative variances occur from July to
December. Moreover, the variances are increasing continuously indicate that company is
facing some difficulties that results in lower sales. The reason for such variances may be
increasing the product price, lowering the product demand and availability of substitute
products. Moreover, if the company is not adopting an effective marketing strategy than it
also results in declined the sales (Blocher and et. al., 2008). On contrary, the product quality
and customer services also impact the sales. In order to eliminate all the problems and
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improving the sales it is considered advisable that organization has to improve the product
quality by innovations. Moreover, qualified customer services at reasonable rates helps to
increase the product demand and sales. Further, effective and strategic market planning and
product differentiation helps for such purpose.
Cash flow forecast: To enhance the cash surplus and minimize the cash deficit the
organization has to increase its sales and decrease its expenditures. Moreover, the available
cash surplus may be further invested so as to get extra return on it (Longneck, 2011). This in
turn, helps in avail significant cash balance at the end of the period.
To
The Director of ABC Ltd.
Date 4/11/2015
After making a proper analysis it can be reported that organization sales is
declining continuously. It may be because of high level of competition, available substitute
products and higher the prices. Therefore, it is considered advisable that business has to
decide the prices by considering their competitor prices. Moreover, quality can be improved
by using better quality of material. Further, organization has to decrease the cost so as to
increase the cash availability. On contrary, to improve the cash balance it can reinvest its
previous cash balances and earn return on it.
AC 3.3 Application of different investment appraisal techniques
Investment appraisal techniques help to select an appropriate investment proposal that
yield maximum profits to the business (Gervais Heaton and Odean, 2011).
Payback period: It is considered as the time period to earn the initial cash outflow of the
proposal.
Table 1: Calculation of payback period (In £)
Project A Project B
Year Cash Flow Cumulative Cash flow Cumulative
0 450000 -450000 -450000 -450000
1 180000 -270000 60000 -390000
2 230000 -40000 120000 -270000
3 280000 240000 250000 -20000
4 120000 360000 250000 230000
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Total 810000 680000
Project A = 2 Year + 40000£/280000£
= 2.143 year
Project B = 3 year + 20000£/250000£
= 3.08 year
Decision: Project a take less time to earn the initial investment of 450000£.
Therefore, project A is more beneficial for the company.
Accounting rate of return: It identifies the accounting profit return on total investments.
Decision: The ARR of project A is 45% while project B has ARR of only to 37.78%.
It is higher in case of project A indicates that it provides more return to the company.
Net present value: It is the difference between discounted cash inflows and cash outflow
using an appropriate discount rate.
Table 2: Calculation of net present value (In £)
Project A Project B
Year Amount
Discounted
value@6%
Discounted
cash inflow Amount
Discounted
value @6%
Discounted
cash inflow
0 -450000 1 -450000 -450000 1 -450000
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1 180000 0.943 169740 60000 0.943 56580
2 230000 0.89 204700 120000 0.89 106800
3 280000 0.84 235200 250000 0.84 210000
4 120000 0.763 91560 250000 0.763 190750
Net present
value 251200 114130
Decision: The net present value of project A is 251200£ while B has net present value
amounted to 114130£. It is higher in case of project A so it is better for the company.
Internal rate of return:
Decision: The internal rate of return on both the projects is 29.20% and 15.02%. It
shows that project A provide higher return than compare to project B.
Recommendation: On the basis of above decisions, it can be concluded that ABC
Engineering Ltd. has to make investment in project A because of lower pay back period and
higher return (Bierman and Smidt, 2012).
AC 3.2 Calculation of breakeven point, contribution and profitability
Table 3: Calculation of contribution per unit and profit (In £)
Particular Per unit Total Amount on 7500 Units
Sales 120 900000
-Material cost 52.5 393750
labour cost 35.75 268125
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Variable overhead 10.2 76500
Total Variable cost 98.45 738375
Contribution 21.55 161625
-fixed cost 120000
Profits 41625
Contribution/sales ratio = 161625£/900000£*100
= 17.96%
Break-even Point = Total Fixed Cost/CPU
= 120000£/21.55
=5568.45 (5568, Approx)
Breakeven Point (In £) = 5568 Units *120
= 668160£
Margin of Safety = Total sales – break even sales
= 900000£ - 668160£
= 231840£
M/S per Unit = 231840£/7500 Units
= 30.91£
Break-even Chart:
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Impact on profits and breakeven point by varying the selling price and cost factors
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