Report: Financial Resource Management and Decisions for M&S Analysis

This report examines the financial resource management of Marks and Spencer (M&S), focusing on identifying and assessing various funding sources, including internal sources like retained earnings and personal capital, and external sources like bank loans and the issue of shares. The report e...Read More

Managing
Financial
Resources and
Decisions

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1 ..............................................................................................................................................3
1.1 Identifying sources of fund available to M and S..................................................................3
1.2 Assessing the implications of sources...................................................................................3
1.3 Assessing the appropriate sources of finance for M and S....................................................4
Task 2...............................................................................................................................................5
2.1 Analyzing the cost of different source of finance..................................................................5
2.2 Explaining the importance of financial planning for the success of the M and S.................5
2.3 Assessing information needs for each decision maker..........................................................5
2.4 Explaining the impact of source of fund on Balance sheet and income statement................6
Task 3...............................................................................................................................................6
3.1 Analyzing budgets and make appropriate decisions..............................................................6
3.2 Explaining the calculations of unit costs and making pricing decisions using relevant
information...................................................................................................................................7
3.3 Assessing the viability of a project using investment appraisal techniques..........................7
Task 4.............................................................................................................................................10
4.1 Discussing the financial statements.....................................................................................10
4.2 Comparing appropriate formats of financial statements for different organization............10
4.3 Calculation of the following accounting ratios....................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
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INTRODUCTION
Managing financial resources helps the company in handling the finance (Hayre, 2015).
This report is going to discuss about managing of financial resources and their decisions. It is
based on the case study of Marks and Spencer and it focused on sources of fund and their
impacts and implications on business. In also covered, financial statements, ratios and their
formats.
TASK 1
1.1 Identifying sources of fund available to M and S
For expanding business or for setting up of new branch, fund is required by M and S.
funds are available from the internal and the external source (Fraser, Bhaumik and Wright,
2015).
Internal source
Retained earning- This is an undistributed profit and this source of finance is available
only to those business who is trading for more than 1year. The main benefit is that no interest is
charged on them (Chwieroth, 2015).
Personal Capital- It is an owner's personal saving and fund is available to the company
by collecting money from them. In this source, no extra cost and interest is charged.
External source
Bank loan- This is an external source in which money is available from the bank. Bank
grants loan to the company of fixed amount for fixed period of time it charges fixed rate of
interest and with fixed repayments (Pike, Neale and Linsley, 2015).
Issue of shares- Finance can be raised by issue of firm’s shares and then the profit of the
company is distributed to shareholder in a form of dividend.
1.2 Assessing the implications of sources
Sources Legal
implications
Financial
implications
Ownership Bankruptcy
Retained earning The main legal
implication of
this source is that
This is the
undistributed profit,
which is used for
No ownership is
transferred, it
remains with the
This is used for
future if M and S
faces bankruptcy,
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it is available for
those companies
who are trading
from more than 1
year.
future and there is
no financial
implication.
company
(Rashid, 2014).
then they can use
this source
Bank loan If the company is
applying for the
loan then the
permission is to
be taken from the
Board of
members (Santos,
and Spring,
2013).
The financial
implication which
company bears is
the bank charge
fixed rate of interest.
While granting
loan, securities
are acquired by
the bank till the
amount is repaid
by the company.
Bank keeps the
securities if firm
is unable to repay
the loan (Fraser,
Bhaumik and
Wright, 2015).
Equity shares For issuing
shares,
permission is
taken from Board
of members.
The implication is
that the industry has
to pay dividend
from the profits.
Ownership is
transferred to the
shareholders.
Firstly, firm have
to clear all the
account of
creditors and
after that
remaining
amount is
distributed
among
shareholders
(Hayre, 2015).
1.3 Assessing the appropriate sources of finance for M and S
For selecting source of finance, organization has a variety of choices. For M and S bank
loan and issue of shares are appropriate source of finance. From bank loan, they can borrow
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money from the bank and can also repay after a specified period (Hussain and Scott, 2015). For
expanding business or for setting up of new branch, bank loan is appropriate source of finance.
The rate of interest which bank charge is usually low and can easily be repaid by the company
and it is also tax deductible expenditure for the company (Keuper and Lueg, 2015).
Another appropriate source of finance for the cited firm is through issue of shares
(Coleman, 2015). Dividend is to be paid to the shareholder who holds the shares and for paying
profit there is no burden on M and S.
TASK 2
2.1 Analyzing the cost of different source of finance
The cost of different source of finance is the cost which is charged at the time of
financing (Chwieroth, 2015). For taking a loan from the bank, interest is charged on them and
the interest paid by the M and S for taking loan is the cost of finance. For short term loan, bank
charges high rate of interest. In debt financing, interest paid by the company is the cost of
finance. The cost of finance in equity financing is the dividend which is compensated by the
mentioned company. The debt financing is less risky than equity financing because the dividend
of equity paid is higher than the interest charged (Wohlner, 2013). These are the cost which is
paid by the M and S while taking finance.
2.2 Explaining the importance of financial planning for the success of the M and S
To achieve the goals and objectives of the M and S, financial planning helps the firm in
making decisions. To make profits, it is important to make financing planning. It helps the cited
company in measuring the alternatives plans and also helps in selecting the best investment plan
(Santos and Spring, 2013). By considering the expenses and the income, financial planning helps
in choosing the best investment policy for the company. Through planning, firm can increase the
cash flow, with a proper cash flow there will be increase in capital which helps in constructing
strong capital formation. Financial planning assists in increasing, managing and controlling
income of the business more efficiently (Fraser, Bhaumik and Wright, 2015). At the time of
requirement of finance, financial planning helps the company to choose appropriate source of
fund.
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2.3 Assessing information needs for each decision maker
Decision makers Information needs
Financial institution The information which is required by the institutions is the
creditworthiness of the company and the cash flow history (Pike, Neale
and Linsley, 2015). After analyzing this information, it helps FI in
making decisions whether to grant loan or not.
Shareholders The performance/profitability and the cash flow history are required by
the shareholders. This information helps shareholders to decide whether
to invest or not (Keuper and Lueg, 2015). The information can be
accessed from the cash flow and from Profit and loss a/c
Investors Company's background, experience in the field of work,
creditworthiness etc, these all information is required so that they can
analyze the returns from the investment.
2.4 Explaining the impact of source of fund on Balance sheet and income statement.
There is a great impact of source of fund on balance sheet and income statement (Rashid,
2014). Bank loan and issue of shares are appropriate source of fund but they have impact on
company's financial statement. When bank grant loan to the companies, they charge some rate of
interest which is paid by the company. By paying this interest, firm's profit decreases as the
impact of interest is on the debit side of the profit and loss statement a/c. This is also shown on
the liabilities side of the balance sheet (Coleman, 2015). By issuing shares more dividends are
paid by the company which affect the profit and loss a/c and reduces the profit and further
increases the capital in Balance sheet.
TASK 3
3.1 Analyzing budgets and make appropriate decisions.
Cash Budget
Cash Budget
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Particulars July August September October
Beginning Bank Balance 50000 93000 146000 131000
Sales 150000 100000 125000 120000
Total Cash Available for Use 200000 193000 271000 251000
Less: Cash Disbursement
Cash purchases 52000 32000 74000 82000
Credit purchases 46000 20000
Rent paid 45000 45000
Other expenses 10000 15000 20000 20000
Interest on bank loan 10000
Total Disbursement 107000 47000 140000 167000
Cash Surplus 93000 146000 131000 84000
Cash budget is prepared to calculate the inflow and outflow of cash of the company
(Hayre, 2015). As in every month company is gaining surplus, through this surplus they can
utilize the money by investing in the market and the another option is to pay down debts .
3.2 Explaining the calculations of unit costs and making pricing decisions using relevant
information.
Calculation of unit costs
Per Unit Costs (£)
No. of units 500
Total direct cost 20000
Fixed cost 10000
Total cost 30000
Total cost per unit 60
33.33%profit margin 20
Selling price 80
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The selling price £80 is appropriate for the company because all the expenses are
recovered from this price and firm also gained profit from this selling price.
3.3 Assessing the viability of a project using investment appraisal techniques.
Net Present Value
Project A
Project A
Year Cash flow 10.00% Present value
1 20000 0.909 18182
2 17500 0.826 14455
3 25000 0.751 18775
4 32500 0.683 22198
Total present value 73609
Initial investment 50000
Net present value 23609
Project B
Project B
Year Cash flow 10.00% Present value
1 23750 0.909 21591
2 23750 0.826 19618
3 23750 0.751 17836
4 23750 0.683 16221
Total present value 75266
Initial investment 50000
Net present value 25266
Project C
Project C
Year Cash flow 10.00% Present value
1 20000 0.909 18182
2 15000 0.826 12390
3 12500 0.751 9388
4 25000 0.683 17075
Total present value 57034
Initial investment 50000
Net present value 7034
From these 3 project company can select the best investment project. Project B Net
present value is £25266., therefore it is more desirable.
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Pay back period
Project A
Project A
Year Cash flow Cumulative frequency
0 -50000 -50000
1 20000 -30000
2 17500 -12500
3 25000 12500
4 32500 45000
Pay back period 2.5
Project B
Project B
Year Cash Flow Cumulative frequency
0 -50000 -50000
1 23750 -30000
2 23750 -12500
3 23750 12500
4 23750 45000
Pay back period 2.1
Project C
Project C
Year Cash flow Cumulative frequency
0 -50000 -50000
1 20000 -30000
2 15000 -15000
3 12500 2500
4 25000 27500
Pay back period 3.2
Investment with the shortest period is more advantageous for a company (Payback
Period, 2016). Therefore, project B of 2.1 is more advantageous.
Average rate of return
Project A
Project A
Total average profit over the 23750
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investment year
Initial investment 50000
Average rate of return 47.5
Project B
Project B
Total average profit over the
investment year 23750
Initial investment 50000
Average rate of return 47.5
Project C
Project C
Total average profit over the
investment year 19375
Initial investment 50000
Average rate of return 38.75
Greater the ARR, the project will be acceptable. Project A and Project B, both will be
acceptable.
TASK 4
4.1 Discussing the financial statements
There are two main financial statements which gives information about the operations
which are held in the business. In these statements all the financial activities of the company are
recorded and summarized (Keuper and Lueg, 2015). The financial statements are Balance sheet
and Profit and loss a/c.
Balance sheet- It includes the Assets and liabilities of the firm. On which liabilities
shown on right side and assets always show on left side. The aim is to study the financial
position of the firm. According to the basic accounting equation, the assets of the company is
always equal to the liabilities. It is always dated on the last day of the financial year.
Profit and loss a/c- It includes both expenses and income of the company, where
expenses shows on the debit side of income statement and on credit side it covers income. It
provides information about the profit which firm earn or loss they suffer (Chwieroth, 2015). If
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the expenses are more than income, then company bear losses and if income are more than they
earn profits.
4.2 Comparing appropriate formats of financial statements for different organization.
Organizations Formats
Partnership firms The appropriate format for the partnership firm is income statements
because they want to know the profit and loss, as these losses or
profits are distributed among partners (Coleman, 2015).
Limited company Limited companies maintain all the financial statement. So that, they
get to know the financial position of the company.
4.3 Calculation of the following accounting ratios
Ratios
RATIOS
Profitability ratio £ (000)
gross profit 650
net sales 800
Gross profit ratio gross profit/net sales *100 81.3
net profit 230
Net profit ratio Net profit/net sales*100 28.75
EBIT 230
capital employed Total assets-current liabilities 880
Return on capital employed EBIT/ capital employed*100 26
Liquidity ratio
Current assets 680
current liabilities 450
Current ratio current assets/current liabilities 1.5
quick assets 380
Acid test ratio Quick assets/ current liabilities 0.8
Liquidity ratio- It is calculated to get the knowledge about the amount of convertibility of cash.
It covers current assets which shows current assets divided by current liabilities (Hussain and
Scott, 2015).
Profitability ratio- It helps the company in making decision for the investment. It includes gross
profit ratio, net profit ratio and return on capital employed.
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CONCLUSION
In this project, M and S avail funds from bank loan and issue of shares as a source of
finance and their impact on business. It also assessed the importance of financial planning and
cash budget is analyzed. Different investment appraisal techniques like ARR, NPV and pay back
period are covered in this report.
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REFERENCES
Books and journals
Chwieroth, J. M., 2015. Managing and transforming policy stigmas in international finance:
Emerging markets and controlling capital inflows after the crisis. Review of International
Political Economy. 22(1). pp.44-76.
Coleman, L., 2015. Facing up to fund managers: An exploratory field study of how institutional
investors make decisions. Qualitative Research in Financial Markets. 7(2). pp.111 – 135.
Fraser, S., Bhaumik, S. K. and Wright, M., 2015. What do we know about entrepreneurial
finance and its relationship with growth?. International Small Business Journal. 33(1).
pp.70-88.
Hayre, A., 2015. Managing Financial Resources and Decisions. GRIN Verlag.
Hussain, J. G. and Scott, J. M., 2015. Research Handbook on Entrepreneurial Finance. Edward
Elgar Publishing.
Keuper, F. and Lueg, K. E., 2015. Finance Bundling and Finance Transformation. Springer
Gabler.
Pike, R., Neale, B. and Linsley, P., 2015. Corporate Finance and Investment: Decisions and
Strategies. Pearson Education Limited.
Rashid, A., 2014. Firm external financing decisions: explaining the role of risks. Managerial
Finance. 40(1). pp.97 – 116.
Santos, B. J. and Spring, M., 2013. New service development: managing the dynamic between
services and operations resources. International Journal of Operations & Production
Management. 33(7). pp.800 – 827.
Online
Wohlner, R., 2013. WHY-FINANCIAL-PLANNING-MATTERS. [Online]. Available through:
<http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/01/16/
why-financial-planning-matters>. [Accessed on 1st April 2016].
Payback Period. 2016. [Online]. Available through:
<http://accountingexplained.com/managerial/capital-budgeting/payback-period>.
[Accessed on 1st April 2016].
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