Analyzing Sources of Finance and Financial Planning Project

This project delves into the critical aspects of managing financial resources within a business context. It begins by identifying and assessing various sources of finance, including internal sources like retained earnings and equity, and external sources such as bank loans and debentures. The implications, costs, and suitability of each source are analyzed, with a focus on selecting the most appropriate options for a small-scale business. The project then emphasizes the importance of financial planning, outlining its role in setting financial priorities and improving business performance. Information needs of decision-makers like owners, employees, suppliers, and customers are also evaluated. Furthermore, the project explores the impact of finance on financial statements, specifically income statements and balance sheets. The final section involves projecting cash flows, creating budgets using both marginal and absorption costing methods, and assessing the viability of a chosen contract through capital budgeting techniques like payback period analysis, comparing the profitability of different projects.

MANAGING FINANCIAL
RESOURCES
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INTRODUCTION
Finance plays an integral role in the business in uplifting the current business condition of an
entity. This project is al about selecting various sources of finance and then assess all the sources of
finance to be considered it for the future purpose. The cost of all the sources of finance will be
assessed by an individual. Budget will be prepared to analyse all the resources in the business along
with capital budgeting technique will be used to assess all the projects.
TASK 1
1.1 Identify the sources of finance available to a business
Internal source of finance
Retained earning- It is regarded as the internal source of finance in which surplus generated by an
entity will be retained by the owner of the business after paying off all kinds of dividends and
further expenses out of the generated profit (Coronel and Morris, 2016). The profit after paying
dividend will be held by an entity to be invested in their own business as source of investment.
Equity- This is another important source of finance in which finance will be remain in an entity on
which dividend will be paid by entity to all the shareholders who have given share in the business in
form of finance as their capital will be locked in with the firm.
External source
Bank loan- It is kind of finance in which an entity will raise large amount of finance from the
banks by depositing collateral security and this approach also requires interest to b paid on the
amount of loan.
Debentures- Coupon rate of interest will be charged by the lender from the borrower as the lender
will get debentures in exchange of the money given to the business.
1.2 Assess the implications of the different sources of finance identified
Basis Retained earning Equity Bank loan Debentures
Financial It increases
investment in the
business without
spending extra
cost
It raises fund for
the business in
order to
accomplish all the
tasks.
Fund will be
raised but it
required to pay
additional cost in
form of interest on
the amount taken
Coupon interest
rate will be paid
on the amount of
loan taken.
Legal It is personal Requires Legal agreement Debenture trustee
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property of an
individual
permissions of
central
government and
registrar of
companies
will be appointed
Control Full possession of
owner
Shareholders rule Bank have
authority
Ownership lies
with the business
1.3 Evaluate appropriate sources of finance for your business project
Internal sources- Retained earning and equity as sources of finance will be highly used by an
entity owner as these posses lots of opportunities for an entity with less amount of costs incurred in
a enterprise.
External sources- Bank loan and debentures are regarded as external debt imposed on an entity in
which interest will be paid by an entity owner to the external environment which decreases the
overall sales and the revenue of an entity in particular year.
Internal source of finance is regarded as the best suitable source of finance for the small
scale entity chosen for the given project who intends to open their business by taking help of
government relief. Internal source is regarded as the est as it incur fewer costs such as only in form
of dividend to all the shareholders.
TASK 2
2.1 Analyse the costs of each of sources of finance you have identified
Internal source- There is less imposition of cost incurred on the business which includes paying of
dividend to all the shareholders as retained earning is the personal property of an individual. Cost of
equity will be determined by an entity using CAPM approach.
Equity-Dividend is the basic costs incurred in an entity while using equity as source of finance.
External source-This kind of approach will include paying of interest in both the approach that in
bank loan and in debenture interest which is monthly obligation imposed on an entity (DaDalt and
Coughlin, 2016). The external obligation imposed on an entity will need to be decreases by
choosing another option.
Bank loan- Interest charged by the financial institutions on the amount lend by them to the
borrowers.
Debentures- Coupon rate of interest charged on the amount lend by the debenture holders to the
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business for specific time.
Hence, after evaluating the above sources of finance on the basis of all the costs incurred in all these
projects it can be said that an entity would take Internal sources of finance that is equity as source of
finance.
2.2 Explain the importance of financial planning and give details of how this financial planning
undertaken
Financial planning is regarded as one of the important approach used by an entity owner in
order to plan about all the financial resources in the business organisation. The desired aim of an
entity is to analyse the needs and the expectations of an entity in order plan about the future of an
entity. There are various ways in which financial planning would be helpful for an entity which is
given as below:
Financial priorities will be prepared by classifying the overall aims and targets into short, medium
and long term goals.
Financial plans will be created by an individual after analysing overall performance of an entity.
Financial planning is regarded as one of the important aspects as it enhances the overall
quality of current conditions of the business in order to improve their future performance. This can
be said that financial future maps chalk out by an entity on the basis of present financial resources
held by an entity. The efficiency and effectiveness of the present resources are used to predict the
future performance.
2.3 Identify and assess the information needs of decision makers
Owners- Knowing current performance of an entity will be helpful for an owner in order to
determine its existing cost incurred in the business as their primary aim is to minimise all the
current costs.
Employees- The good ability of an entity and financial stability of the firm is essential for an
employee to determine in order to ensure its survival for long time in the business as they will get
higher salaries and wages in the near future.
Suppliers- raw materials purchased by an entity from all the suppliers who have power to negotiate
more with the business earn their desired share. So, stable business conditions will be helpful for all
the suppliers to maintain their share in the business.
Customers- Business produces products for the customer's which will be manufactured by the
business according to the tastes and preferences of all of them.
2.4 Explain the impact of finance on the financial statements
Income statements- Dividend paid by an individual will affect the profitability of the business as
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this is regarded as the essential expenses (Davies and Drexler, 2010). This kind of expenses is
excluded from the sales incurred in the business. Retained earning used by an entity will not affect
the profitability of an entity in a particular year.
Balance sheet- Equity sources of finance used by an entity will be recorded in the balance sheet
under the head equity. The retained earning used by an entity will be recorded in the reserves and
surplus.
TASK 3
3.1 Project cash and other budgets and analyse these projected budgets and make appropriate
decision towards the chosen contract
Particulars Jan Feb March April May June July Aug Sept Oct Nov Dec
Initial cash 50000
Bank loan 55000
Income from
online sales 32000 40000 35000
3800
0
4100
0
4200
0
3600
0
2800
0
2700
0
2750
0
2800
0 33000
Income from
in-store sales 22400 56400 56800
5710
0
5880
0
6200
0
6640
0
6870
0
6540
0
6000
0
6080
0 64400
Sales income
from fashion
clothing 10000 10000 10000
1000
0
1000
0
1000
0
1000
0
1000
0
1000
0
1000
0
1000
0 10000
Sales income
from hair
and beauty
products 12000 12000 12000
1200
0
1200
0
1200
0
1200
0
1200
0
1200
0
1200
0
1200
0 12000
Receipts
from
disposal of
old store
building
3000
00
Total interest
receivables
3000
0 30000
Total cash
income
18140
0 118400
11380
0
1171
00
1218
00
4560
00
1244
00
1187
00
1144
00
1095
00
1108
00
14940
0
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Cash
disbursement
Store and
warehouse
building
lease rental
14400
0
Purchase of
office and
fire
Equipment 80000
Purchase of
delivery van
and cars
15000
0
Shelves and
store
furniture 50000
Purchase of
fork lift for
warehouse 70000
Store
worker’s
wages 11000 11000 11000
1100
0
1100
0
1100
0
1100
0
1100
0
1400
0
1400
0
1400
0 14000
Heating and
lighting 2000 2000 2000 2000 2000 2000 2000 2000 2700 2700 2700 2700
Council
taxes 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
Purchase of
cloths 40000 40000
4000
0
4000
0
5500
0
5500
0
Insurance 5000
Fuel and
maintenance 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800
Total cash
outflow
55030
0 21300 56300
1630
0
5630
0
1630
0
5630
0
1630
0
7500
0
2000
0
7500
0 20000
Net cash - 97100 57500 1008 6550 4397 6810 1024 3940 8950 3580 12940
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balance
36890
0 00 0 00 0 00 0 0 0 0
Opening
cash balance 0
-
368900
-
27180
0
-
2143
00
-
1135
00
-
4800
0
3917
00
4598
00
5622
00
6016
00
6911
00
72690
0
Closing cash
balance
-
36890
0
-
271800
-
21430
0
-
1135
00
-
4800
0
3917
00
4598
00
5622
00
6016
00
6911
00
7269
00
85630
0
Cash budget is regarded as one of the important budget prepared by an individual in order to
ascertain true position of cash in the organisation. The movement of cash flow in the business will
be determined by an entity in order to grab higher market advantage in the near future. The desired
aim of the business is to increase all the cash incurred in the business as they held responsible for
enhancing the current cash available in an entity which will be increases with the passage of time as
the basic objective of an entity (Ehrhardt and Brigham, 2016). Cash budgets prepared by an entity
to determine all the deficits or surplus generated by an entity in cash in order to help an entity in
order to grab higher competitive advantage over variety of customers who depends on the actual
business performance as all the business results will reflect true performance of an entity in the
external business environment. The above mentioned cash budget reflect the actual performance of
an entity that first five months of the organisation an entity is suffering with cash deficits that needs
to be removed with the passage of time by decreasing cash outflows and increasing the overall cash
inflow in the business. On the other hand, the rectification made by an entity in the later years that
an entity has earned higher cash flows by generating higher amount of cash inflow from the month
of June to December is reflecting good ability of an entity (Fletcher, 2016). Higher cash surplus is
god but at the same it is not suitable for an entity as it creates higher market risks which will be
balanced by investing all the higher amount of cash surplus by taking investments in bonds or
another business in order to generate higher returns in the near future.
3.2 Explain the calculation of unit costs for the chosen contract and make pricing decisions using
relevant information
Particulars Cost (£)
Variable cost
Direct material 15000
Direct labor 10000
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Direct expenses 5000
Total variable cost (TVC) 30000
Fixed overhead cost
Labor 4000
Other production overhead 3000
Total fixed cost (TFC) 7000
Total cost (TC) 37000
Cost per unit (CPU) Selling price (SP)
Marginal costing = TVC/ number of units
= £30000/4000 units
= £7.5
= £7.5 + (£7.5*20%)
= £7.5 + £1.5
= £9
Absorption costing = TC/ number of units
= £37000/4000 units
= £9.25
= £9.25+ (£9.25*20%)
= £925 + (£1.85)
= £11.1
Marginal costing- It is that kind of costing in which only variable is considered by an entity while
devising al the prices set by an individual for all the products or services offered by an entity to
satisfy all the needs and expectations of variety of customers located in the external business
environment. The selling price of the current technique is less than this particular approach doesn't
consider the fixed cost in the prices of an entity in order to achieve all the needs and higher
expectations of an entity owners which will get fulfilled with the passage of time.
Absorption costing- This kind of approach emphasises on considering both fixed and variable
costs while designing all the products or services offered to the variety of customers located in the
external environment (Evans and Porter, 2010). This is also regarded as the complete costing in
which both kinds of costs will be considered by an entity such as fixed as well as variable costing as
all the cost incurred in the business will be considered by an entity while designing all the prices of
products which is essential in order to attract variety of customers. The ultimate aim of the business
is to consider all kids of costs along with the specific percentage of profit in developing the
products or services.
3.3 Assess the viability of the chosen contract
Table 1: Calculation of cash inflow of project A
Year Machine 1 Depreciation Sale of New Cash inflow
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(profits) machine
Machine
purchase
2016 £40000 £33000 £73000
2017 £40000 £33000 £73000
2018 £40000 £33000 £21000 (£50000) £44000
2019 £30000 £10000 £40000
2020 £30000 £10000 £40000
2021 £20000 £10000 £30000
Total £200000
Working note:
Depreciation on Machine 1:
= (Initial investment – Residual value)/Estimated lifetime
= (£120000-£21000)/3 year
= £33000
Depreciation on Machine 2:
= (£50000-Nil)/5 Year
= £10000
Table 2: Calculation of cash inflow of project B
Year Machine 2 (profits) Depreciation Cash inflow
2016 10000 20000 30000
2017 20000 20000 40000
2018 30000 20000 50000
2019 60000 20000 80000
2020 70000 20000 90000
2021 55000 20000 75000
Total 245000
Working note for depreciation
= (£120000-0)/6 year
= £20000
Payback period:
Table 3: Calculation of payback period
Year Project A
Cumulative
cash flow Project B
Cumulative
cash flow
Initial investment -120000 -120000
2016 73000 -47000 30000 -90000
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2017 73000 26000 40000 -50000
2018 44000 70000 50000 0
2019 40000 110000 80000 80000
2020 40000 150000 90000 170000
2021 30000 180000 75000 245000
Project A: 1 year + (£47000/£73000)
= 1.64 year
Project B: 3 year
Interpretation
Payback is traditional form of capital budgeting which is used to determine the time period
in which future returns will be generated by an entity in order to select or reject a particular project
in the particular financial year (Hosain, 2016). Desired aim of the business is to select the best
suitable project according to the desired aims and the objectives of the business as initial investment
applied by an entity owner in relation to all the returns they get in exchange of the returns in less
period. Hence, project A will be selected by an entity owner as this generates higher amount of
returns in the near future in less period as compared to the other project analysed by an entity by
applying this particular techniques.
Accounting rate of return (ARR)
Table 4: Calculation of accounting rate of return
Year Machine 1 (profits) Machine 2 (profits)
2016 £40000 10000
2017 £40000 20000
2018 £40000 30000
2019 £30000 60000
2020 £30000 70000
2021 £20000 55000
Total £200000 245000
ARR: Average profit/Initial investment*100
Project A: (£200000/6 year)/£120000*100
= 27.78%
Project B: (£245000/6 year)/£120000*100
= 34.03%
Interpretation
Average rate of return is that modernised technique of capital budgeting or investment
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appraisal technique whose major aim is to test the ability of a particular project by evaluating its
overall profitability. The higher profitability generated by a business project will be taken into
consideration for the future purpose as this is the desired aim of an entity. Projects are categorised y
this particular approach in order to consider the best suitable project which generate higher returns
in the near future (Jorgensen and Rotter, 2016). According to the results of the above evaluation
table, it can be said that project B will be considered for the future purpose as the ARR rate is
higher as compared to the above result generated by Project B as compared to the results produces
by the project A. This particular rate is higher as compared to the internal cost of capital of an entity.
Net present value (NPV)
Table 5: Calculation of Net present value
Year
Project A (In
£)
Discounted
value of £1
@20% DCF (In £)
Project B
(In £) DCF (In £)
2016 73000 0.833 60809 30000 24990
2017 73000 0.694 50662 40000 27760
2018 44000 0.579 25476 50000 28950
2019 40000 0.482 19280 80000 38560
2020 40000 0.402 16080 90000 36180
2021 30000 0.335 10050 75000 25125
Total future value 182357 181565
Less: Initial
investment (120000) (120000)
NPV 62357 61565
Interpretation
Net present value is the modern approach of the capital appraisal technique whose major
aim is to determine the future profitability generated by a particular project in the near future. The
basic aim of the business is to select the best suitable project for the future purpose as this kind of
technique uses the time value of concept by applying the best appropriate discounting rate in order
to test the viability of the business project. Projects will be evaluated on this particular technique in
order to provide ultimate advantage to an entity. Project A will be selected by an entity on the basis
of higher results generated by this particular project (Kostova and Nell, 2016). So, This project will
be considered by an entity for the future in order to accomplish desired aims and the objectives
within a given period.
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