Financial Resources and Decision Making Report for Hardwood Ltd

This report provides a detailed analysis of financial resource management and decision-making for Hardwood Ltd. It begins by exploring various sources of finance, including internal and external options like retained earnings, equity, debentures, bank loans, and hire purchase, along with their implications and suitability. The report then delves into the cost of different financing sources and the importance of financial planning. It includes a cash budget analysis, calculation of unit costs, and project evaluation using techniques like payback period, ARR, NPV, and IRR. The report further examines financial statements, their formats for different organizational structures, and applies ratio analysis to assess financial performance. The conclusion summarizes the key findings and recommendations for effective financial management.

MANAGING FINANCIAL
RESOURCES AND DECISON
MANKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Sources of finance.................................................................................................................4
1.2 Implications of source of finance..........................................................................................5
1.3 Suitability of source of finance.............................................................................................7
TASK 2............................................................................................................................................7
2.1 Cost of different source of finance........................................................................................7
2.2 Importance of financial planning for the firm’s....................................................................8
2.3 Information needs to different decision makers....................................................................8
2.4 Impact of finance on financial statements.............................................................................9
TASK 3............................................................................................................................................9
3.1 Analysis of budget.................................................................................................................9
3.2 Calculation of unit cost.......................................................................................................10
3.3 Project evaluation techniques..............................................................................................10
TASK 4..........................................................................................................................................13
4.1 Main financial statements...................................................................................................13
4.2 Format of financial statements for different organizations.................................................14
...................................................................................................................................................15
...................................................................................................................................................16
4.3 Ratio analysis......................................................................................................................22
CONCLUSION..............................................................................................................................23
REFERENCES..............................................................................................................................24
INDEX OF TABLES
Table 1: Cash budget for Hardwood ltd...........................................................................................9
Table 2: Calculation of unit cost....................................................................................................10
Table 3: Calcification of payback period method..........................................................................10
Table 4: Calculation of ARR.........................................................................................................11
Table 5: Calculation of NPV..........................................................................................................11
Table 6: Calculation of IRR...........................................................................................................12
Table 7: Ratio analysis...................................................................................................................22

ILLUSTRATION INDEX
Illustration 1: Income statement of the company...........................................................................14
Illustration 2: Balance sheet of the company.................................................................................15
Illustration 3: Cash flow statement of the company......................................................................16
Illustration 4: Income statement of sole trader..............................................................................17
Illustration 5: Balance sheet of sole trader.....................................................................................18
Illustration 6: Cash flow statement of sole trader..........................................................................19
Illustration 7: Income statement of partnership.............................................................................20
Illustration 8: Balance sheet of the partnership..............................................................................21
Illustration 9: Cash flow statement of partnership.........................................................................21

INTRODUCTION
Finance is life blood of an organization and due to this reason firms needs to utilize
financial resources in a proper manner. In this report, sources of finance are described in detail
by the firm. Along with this, appropriate source of finance is also selected for the firm. After
that, in the report budget is prepared and its trends are analyzed and necessary comment
regarding same is made in the report. Along with this, project evaluation is also done in order to
select most viable project for the firm. At the end of the report, ratio analysis technique is applied
and comments regarding the same are made in the report.
TASK 1
1.1 Sources of finance
Finance plays a very important role in growth of an organization. Without it, no
organization can survive in the competitive business environment. Some sources of finance that
an organization can use are given below.
Internal source of finance Retained earnings- It is a portion of the revenue that remains with the company after
deducting all expenses from the revenue earned by the firm. The main point is that no
cost is attached in this source of finance. Sales of asset- Firm can sale its asset in order to finance company operations
(Dell'Ariccia, Detragiache and Rajan, 2008). If company has some assets which is ideal
or not giving sufficient return then it can use this source of finance.
External source of finance Equity- Under this source of finance, a firm raised a capital from the general public by
bringing IPO or FPO. For this, it needs to fulfill some criteria that are determined by the
regulatory authority. Due to flexibility feature in finance cost, this source of finance is
popular among business firms. Debentures- It is a written acknowledgment of debt taken by the company from the
general public. Under this, source of finance is required by the firm to pay interest to the
debenture holders on time. In case of default in payment they have the right to sue firm
(Hill, Leitch and Harrison, 2006).

 Bank loan – Firm can take a bank loan in order to finance its operations. Loan will be
available at fixed or floating interest rate. Companies must abstain from taking loan at
floating interest rate because with change in interest rate firm finance cost may increase.
Whereas, in case of fixed cost such problem does not come into existence. Hence, taking
loan at fixed interest rate is more profitable for the firm then flexible interest rate.
 Hire purchase – It is an agreement in which business firm take an asset on lease and it
pays a rent for same to the owner. This source of finance is used when price of capital
asset is very high and technology changes are taken place at the fast pace. In this source
of finance, if rent paid till the date becomes equal to asset value then it is assumed to be
purchased by the lessee (Davies and Crawford, 2011). So, by making payment in
installments asset can be purchased by a business firm under this source of finance.
1.2 Implications of source of finance
Following are the implications of sources of finance.
Sources of finance Legal Bankruptcy Dilution of control
Retained earnings There are no legal
implications regarding
use of retained
earnings
In case of bankruptcy,
amount of retained
earnings can be used
to make payment to
the creditors.
There is no dilution of
control in this source
of finance
Sale of asset If asset that a firm
intend to sell is
mortgaged then it
cannot sell that asset in
the market (Bowen,
2011)
In case of default in
payment, assets are
sold to make payment
to the creditors.
No dilution takes
place.
Equity Firm needs to fulfill
certain criteria in order
to bring IPO or FPO in
the market.
If firm is bankrupt then
after making payment
to the creditor’s equity
shareholders will get
back capital invested by

them in the company.
Control gets diluted
with issue of shares
through IPO or FPO.
Debentures In order to issue
debentures certain
parameters that are
determined by the
regulatory authorities
needs to be fulfilled.
In case of bankruptcy
of the firm debenture
holders are paid by the
firm before equity
shareholders.
Control does not get
diluted in case of this
source of finance.
Hire purchase The company needs to
enter in to agreement
with the lessor in hire
purchase agreement.
Means that firm needs
is required follow all
rules and regulations
determined in the
agreement.
In case of bankruptcy
of the firm, asset will
be returned back to the
owner and payment of
lease amount to lessor
will be stopped by the
firm (Love, Preve, and
Sarria-Allende, 2007).
No dilution of control
takes place.
Bank loan In order to take bank
loan, organization
need to make
projection of revenue
and that revenue will
be certified by the
chartered accountant.
Further, firm will also
need to enter into
agreement with bank
for getting loan from
If firm gets bankrupt
then its assets are used
to pay principle
amount to the bank.
Control does not get
diluted on this source
of finance.

same.
1.3 Suitability of source of finance
The main disadvantage of debt as a source of finance is that in case of downturn in
economy firm have to face heavy burden of finance cost. But, main advantage is that firm
owners control will not get diluted in the company. In case of equity, finance cost is adjustable
but control gets diluted in the firm. Hire purchase also has some advantage like by making
payment in installment an asset can be purchased. So, due to lack of finance, company operations
do not face hindrance (Olawale and Garwe, 2010). Hire purchase agreement, burden on the firm
increases in case of recession in an economy. Moreover, by using hire purchase agreement firm
cannot finance all its business operations. So, firm must cautiously use mentioned source of
finance. On other hand, there are retained earnings and by using this entire project cannot be
financed by the firm which is its big limitation. But Hardwood can partially use it to finance its
operations. Firm cannot issue shares by bringing IPO because it is not able to meet parameters
set by the recognized stock exchange. So, it can use bank loan in order to finance its operations.
By using bank loan, all sorts of operations will get financed. The main benefit that firm will get
by raising a capital through debt will be that control of the existing shareholders will not get
diluted. Hence, firm decision making power will not be reduced in the company management.
Hardwood must make sure that loan is taken at fixed interest rate (Lin and Sun, 2006). If loan
will taken at the flexible interest rate and if central bank increase interest rates then finance cost
for the firm will get increased. Hence, Hardwood must take a loan at the fixed interest rate. So
that it remains same even interest rate gets changed for the firm. Hence, by considering positive
and negative factors of all sources of finance, bank loan is considered better for the firm.
TASK 2
2.1 Cost of different source of finance
Cost of different source of finance is as follows.
Sources of finance Cost of finance
Retained earnings There is no cost of this source of finance. But there is an opportunity
cost which comes in existence when there is alternative use of the

capital.
Sales of asset There is no cost of this source of finance.
Equity Dividend paid to shareholders, preliminary expenses regarding same
and underwriting commission paid are cost of this source of finance.
Divided payment depends on management discretion. Hence, it can be
said that finance cost of equity is flexible in nature.
Debentures Interest paid to the debenture holders is a cost of this source of
finance. It is a fixed finance cost and due to this reason in case of
downturn in economy finance cost burden on the firm will be heavy
(Love, Preve, and Sarria-Allende, 2007).
Hire purchase Amount of rent paid to lesser is a cost of this source of finance.
Continuation or discontinuation of asset depends on the management.
Hence, it can be said that finance cost of this source of finance is
flexible in nature.
Bank loan Interest paid at fixed or floating interest rate is a cost of this source of
finance. If loan is taken at floating rate then with change in interest
and currency rate finance cost will increase. But same thing is not
seen in case of fixed interest rate (Davies and Crawford, 2011).
Hence, it can be said that this source of finance is fixed and flexible in
nature.
2.2 Importance of financial planning for the firms
Financial planning has a great importance for the firm and by using the same; company
can allocate its budget among several business operations. Hardwood is producing furniture and
it wants to increase its capacity. For this firm will first estimate the required amount. After that,
determined amount will be divided among the firm like in case of internal operations, purchase
of capital asset and other business operations (Hillier, Grinblatt and Titman, 2011). On the basis
of priority, a ratio will be determined and as per these ratios entire budget will be allocated
among these activities. In this way, financial planning will help in proper allocation of budget

among mentioned activities in the Hardwood ltd. financial planning refers to the decisions that
are related to the allocation of funds for financing several company operations. In the financial
planning the way in which funds will utilized is determined in proper manner. In financial plan
firm may decide to make an investment in the derivative contracts and capital assets that
managers intends to buy for the firm. Under financial plan managers will allocate an amount for
the investment in the derivative contracts. They will also determine the way in which entire
allocated amount will be invested in these instruments. In financial plan managers of Hardwood
will determine firm future needs and accordingly they will arrange money in order to make sure
that in future company operations will not hinder due to lack of finance. Hence, it can be said
that financial planning helps managers in preparing plan for arranging finance to fulfill future
needs and making best use of available funds.
2.3 Information needs to different decision makers
Following are the stakeholders who require company’s information for taking their
decisions. Managers- These are those who manage an organization activities. In order to run an
organization in proper direction it is necessary to analyze company’s financial statements.
On the basis of analysis of these statements, manager identifies performance of the
company and points where its performance is poor (Brealey, 2012). Hence, by analyzing
financial statements manager gets a direction and by formulating a strategy, they further
improve company performance. Shareholders- They need financial statements in order to decide whether to keep
investment in the firm or to withdraw investment from the firm. In this regard, they use
ratio analysis technique in order to evaluate firm from various sides. Hence, due to this
reason shareholders keenly wait for the firm’s quarterly and annual results. Creditors- These are those who give debt to the firm. In order to ensure that their debt
amount will be received on time they use ratio analysis technique. On the basis of results
of these ratios creditors identify possibility of receipt of debt amount on time. Hence,
creditors also need information for taking their credit related decisions.
 Government- It need financial statement in order to make sure that firm is making
accurate amount of tax payment (Cullis, Jones and Jones, 2009). Hence, time to time
regulatory authorities evaluate company’s financial statements.

2.4 Impact of finance on financial statements
Finance to large extent affects financial statements of the firm. Hardwood is taking loan
of £ 50,000 at the end of the year. Hence, on receipt of loan, cash balance in the balance sheet
will increase. Loan taken from specific entity is a liability for the firm. Hence, creditor’s side of
liability will also increase. In this way, balance sheet asset and liability side will come equal to
each other (Wilmott, 2013). In same way, if shares are issued then firm equity capital will
increase on liability side of balance sheet. On asset side, cash balance will increase in the balance
sheet. In this way, both assets and liability side of balance sheet will increase and come equal to
each other.
TASK 3
3.1 Analysis of budget
Table 1: Cash budget for Hardwood ltd
April May June July Aug Sept
Cash Receipts
Sales 270,000 270,000 270,000 270,000 270,000 275,000
Total Receipts 270,000 270,000 270,000 270,000 270,000 275,000
Purchases 80,000 80,000 80,000 95,000 95,000 100,000
Labor 85,000 85,000 85,000 85,000 85,000 85,000
Other variable
expenses 25,000 25,000 26,000 27,000 28,000 29,000
Fixed expenses 35,000 35,000 35,000 35,000 35,000 35,000
Machine purchase 700,000
Total Payments 225,000 225,000 226,000 942,000 243,000 249,000
Net 45,000 45,000 44,000 -672,000 27,000 26,000
Opening balance 15,000 60,000 105,000 149,000 -523,000 -496,000
Closing balance 60,000 105,000 149,000 -523,000 -496,000 -470,000
Analysis/ Interpretation
From the budget it can be seen that firm closing balance is increasing continuously till the
month of June and after that it start decline. But due to purchase of machine its closing balance

becomes negative and after that it continuously is falling. This happens because sales are
stabilizing at a specific point and a capital investment of huge amount is made by the firm.
Hence, it can be said that firm needs to take some efforts that will increase sales growth rate.
3.2 Calculation of unit cost
Table 2: Calculation of unit cost
Costs April May June July Aug Sept Cost
Purchase £80,000 £80,000 £95,000
£95,0
00
£100,
000
£105,
000 555,000
Labour £85,000 £85,000 £85,000
£85,0
00
£85,0
00
£85,0
00 510,000
Variable expenses £25,000 £26,000 £27,000
£28,0
00
£29,0
00
£30,0
00 165,000
Fixed expenses £35,000 £35,000 £35,000
£35,0
00
£35,0
00
£35,0
00 210,000
Total cost
£1,440,
000
Budgeted Output-
Units 10,000
Cost per unit £144.00
Interpretation
Per unit cost of product is £144 which is calculated by dividing total cost of production of
all months divided by the budgeted unit. Hence, it can be said that Hardwood will be adding
certain percentage on this cost and can determine price for its product. This pricing strategy is
also known as cost plus pricing.
3.3 Project evaluation techniques
Payback period method
Interpretation: Payback period indicate the time period within which project can recover
invested amount on the specific project (What are some methods of capital expenditures. 2015).
As per figures, project A can cover investment amount in 2.5 year. Project B can cover same
amount in 3.9 years. Hence, on the basis of analysis of figures it can be said that project A is
viable then project B.
ARR

Interpretation: ARR indicate the average return that a project can earn on the invested amount.
ARR of the project B is greater than project A. Due to this reason, project B is considered viable
than project A.
NPV
Interpretation: NPV indicate the net present value of the project that remain after deducting
initial investment value from the present value of the cash flows (Methods of project evaluation.
2015). NPV of the project B is greater than project A. Due to this reason, project B is again
considered viable than project A.
IRR method
Interpretation: IRR indicate the actual return that a project can earn on the invested amount. IRR
of project B is greater than project A and due to this reason former project is considered better
than latter project.
TASK 4
4.1 Main financial statements
The main financial statements that firms used are as follows. Income statement – The main purpose of preparing income statement is to get
information about the income earned and expenses made by the firm. By analyzing a
statement and comparing with previous year financial statement manager comes to know
about the performance of the firm (Daske and Gebhardt, 2006). Hence, it can be said that
in order to measure company’s performance this statement is used by the managers. Balance sheet- The main purpose behind preparing a balance sheet is to identify
company financial position. By using ratio analysis, company’s condition is evaluated
from various angles. Due to this reason, most of the firms use balance sheet in order to
evaluate their financial position on the specific date.
 Cash flow statement- Main purpose of preparing a cash flow statement is to identify the
sources from where cash inflow is happening and places where it is invested in an
organization (Brigham and Houston, 2011). It provides information about the operating,
investing and financing activity of an organization. Due to this reason, this statement is
widely used by the firm in their business practice. (Methods of project evaluation. 2015)