Report: Financial Resource Management for Medium-Sized Business

This report delves into the critical aspects of managing financial resources and making sound financial decisions within a medium-sized organization, specifically in the context of a fashion outlet. It begins by identifying and evaluating various sources of finance, including personal savings, bank loans, hire purchase agreements, and leasing options, assessing their respective implications, costs, and suitability for meeting both short-term and long-term financial needs. The report then emphasizes the importance of financial planning, highlighting its role in linking financial decisions with investments, determining optimal debt-equity ratios, and ensuring financial stability. It further examines the information needs of both internal and external decision-makers, illustrating the impact of financial decisions on key financial statements like the income statement, balance sheet, and cash flow statement. Finally, the report analyzes budgeting, including sales and cash budgets, providing insights into revenue projections and cash flow management. The report concludes with an overview of financial planning, including budget analysis and the impact of financial decisions on financial statements, making it a comprehensive guide to financial resource management.

MANAGING FINANCIAL
RESOURCES AND DECISIONS

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INTRODUCTION
Financial management is considered as an efficient as well as effective management of
the funds in a way that it can result in attainment of organizational targets to a greater extent. It is
specialized function directly attached with the higher level authority (Brigham and Ehrhardt,
2013). The executive of the business take wide range of decisions in order to grow and succeed
for longer course of time. The present report on managing financial resources has been discussed
in context of medium sized organization. The study entails to understand the sources of finance
that are available to the business. Along with this it includes financial decision making on the
basis of financial information.
TASK 1
1.1 Identification of sources of finance available to business
Internally the funds the would be gathered by the means of operating activities. It assist in
mitigating the needs for short term and long term requirement for funds. Such have been
enumerated in the manner stated as under: Personal saving: The business can make investment of its own savings to a significant
level as such this is available at much cheaper rate. This is due to the reason that entity is
not required to make payment of the financial in using amount of personal saving. Loan from bank: Fashion outlet can take loan from bank in order to satisfy its long term
requirements (Hill and et.al., 2013). Interest is being charged by the financial institution
against this and also the organization needs to keep certain asset as security with the
bank. Hire purchase: Under this the fashion outlet can acquire assets by making payment of
certain amount as down payment. Later after the payment of last installments the
possession of the product would transfer to the business.
 Leasing: There is presence of certain equipments that are high priced. In situation of
establishing new fashion outlet the business can lease the asset for certain period of time.
For this it can make payment of rent to the leasing firm.
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1.2 Assessing implications of different sources of finance determined
The implications of the financial sources that have been determined is enumerated in the
manner stated as under: Personal savings: It is being assessed that there is absence of financial implications.
Along with this there are no legal implications. Here, the control would be in the hand of
the owner. No bankruptcy as the amount used is not required to be repaid. Leasing: It can be described as the rent payment for the use of asset is the financial
obligation. In case the payment of rent is done on time then leasing company can take
legal action against the organization. No dilution of control prevails under this. Further
there is absence of bankruptcy. Bank loan: Payment of the interest is considered as the financial implication. In situation
delay is made towards making payment of the interest in bank loan then legal actions can
be taken by the bank (Brigham and Houston, 2012). This would lead to affecting the
credit rating of the organization. There is no dilution of control in case of bank loan. In
case the amount is not paid on time by the organization then its assets can be seized.
Further in situation the amount is not recovered through asset the bank can declare
company as bankrupt.
 Hire purchase: The liability towards payment of interest is the financial obligation under
this. In case organization does not make payment of installments on time then asset can
be taken back by the firm. There is no dilution of control. Firm is required to pay the
vendor in situation of bankruptcy (Oikonomou, Brooks and Pavelin, 2012)
1.3 Evaluation of appropriate sources of finance
There are various kind of financial resources which the business can use in order to fulfill
its short term as well as long run requirements for funds. The evaluation of the appropriate
financial sources has been enumerated in the manner stated as below: Loan from bank: It is considered as one the suitable financial source that can be used for
accomplishing the long terms needs of the organization. Loan can be repaid within
specified duration of time. Moreover the payment of interest is allowable expenditure for
taxes. Thus it offers tax benefits to the firm (Brigham and Daves, 2012). However it has
major disadvantage in terms that it requires firm to keep certain assets as security.
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 Leasing: It is considered as effective method that can be used by organization for meeting
its financial requirements. Under this the company can lease the assets that are higher
prices. However it has major demerit that is sometimes the cost of rent is higher than cost
of purchasing the equipments.
 Personal saving: It is regarded as one of the suitable source of finance. It does not brings
any cost to the organization. Through this the funds are generated at cheaper rate. Here
the owner has full control over the business without including third party.
2.1 Costs of each of sources of finance identified
There is certain cost involved for each sources of finance that is being determined. This
has been enumerated in the manner stated as below: Opportunity cost: It is considered as the cost that is attached with the personal saving. It
is regarded as sacrificing cost regarding the use of the same amount in meeting the needs
of next best alternative. Interest: It is another type of cost that is associated with loan from bank. When business
takes loan from bank then it has make payment of the interest on regular basis (Berman
and Evans, 2013). This is considered an expense towards borrowing funds which
decreases the profitability of the firm like Fashion outlet to a greater extent.
 Rent: This is considered as the cost that is attached with leasing. In order to make use of
the expensive machinery and equipments the fashion outlet can lease the assets. This
requires the firm to make payment of the rent which is considered as expense. It also
reduces the profitability of the firm to a greater extent.
2.2 Importance of financial planning
As a management consultant for it is very important for this Fashion Outlay to establish
the financial plan for business. The main objective of the financial planning is to run the business
activities in effective and efficient manner. It is the process of estimating the capital requirement
within the organisation. It is a process of framing the financial policies in administration of fund
of an enterprise. Various importance of financial planning are as follow-
 In fashion Outlay Company, the planning helps to create a link between financial
decisions and investments. It helps in deciding the equity ratio and debt ratio by deciding
where to invest the fund.
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 Financial planning suggest that how the fund are to be allocated for various purpose by
comparing different investment proposals (Dorfman and Cather, 2012).
 It helps in ensuring reasonable balance between inflow and outflow of funds so that
stability is maintained.
 The most important significance of financial planning is to frame the objectives, policies,
programmes, and budgets regarding business financing activities.
 It helps in reducing the uncertainties with regards to changing market trends.
 It helps in coordinating various business functions like manufacturing, sales, promotion,
production techniques.
 Financial planning relates present requirement of funds in the company with future
requirements by anticipating growth plan and sales.
2.3 Identifying and assessing information needs of internal and external decision makers
Company is required to disseminate the financial statements to meet the information need
of external and internal decision makers which are as follows-
Internal decision maker- Internal users of fashion outlay company would be someone who are
inside of the company and they are directly involved in the day by day operation of the business
activities. Some of important internal decision makers are as follow-
Human resources- human resource of the fashion outlay company also act as important decision
makers because all their decisions are highly affected on the routine schedule of employees
(Finkler, Smith, Calabrese and Purtell, 2016). So it should be very important to take involvement
of employees in decision making procedures in the company.
Managers- Managers are the main internal decision makers of the company as they use the
information to see how well the organisation is operating under their guidance. Manager
undertakes income and cash flow statement are well as profit and loss and balance sheet to assess
the growth of the company.
External decision maker
External decision maker are those who does not have any direct link with the
organization. They are the ones who comes into the category of outsiders.
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Investors- They are the people who use their personal money to buy and invest into the
company. The hold an objective of becoming a shareholder in the business (Grzegorz, 2012).
They invest and make money and carries a keen interest in the company’s business.
Financial institution- They are such sources from where company can borrow the fund for
running the business. These includes banks, financial institutes etc.
2.4 Impact of finance on financial statements
There is greater impact of finance on the financial statements. Every business transaction
affects the financial statements including cash flow, income statement as well as balance sheet of
the business. Such has been enumerated in the stated as under: Loan from bank: In case of loan from bank the amount of loan increases the cash with the
business which is considered as asset of Fashion outlet. However the interest that is being
paid on the loan taken increases the expenses of the firm that is reflected in income
statement. The amount of loan is demonstrated at liability side in balance sheet as it has
to be repaid within specified duration of time. Leasing: This kind of source of finance has greater impact on the financial statement such
as with use of asset Fashion outlet can increase its profitability which would enhance the
cash within the business (Aebi, Sabato and Schmid, 2012). This is reflected on the asset
side in the balance sheet. On the other hand the rent that needs to be paid on leasing is
considered as an expense that is demonstrated on income statement. This affects the
profitability of the firm to a significant level.
 Personal saving: It is another financial source that can be used by firm to fulfilling its
requirement for funds. The amount of personal saving reduces the reserves with the
business. This would increase the equity with the firm that can be used for further
investment.
3.1 Analysis of budget
 Sales budget: It assist to make estimation of the total number of units, gross sales as well
as net sales that can be attained by the business in future source of time.
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The major focus of the sales budget is increasing the selling price per unit. The above
table reflects that it is demonstrating an enhancement by 4% inflation rate every month. The
organization that is Fashion outlet is offering discount rates of 6% on the entire sales. As a
reason of improvement in sales unit as well as prices the net sales reflects increasing trends in
September from £153408 to £409689.6. Thus it can be stated that Fashion outlet would attain
increasing revenues by the means of carrying out operations in UK market.
 Cash budget: It is regarded as the statement that makes forecasting of the cash inflow.
Along with this such is utilized in several business functions that assist in estimating net
cash flow as well as closing balance of cash (McPherson and Pincus, 2016). The cash
budget of Fashion outlet has been presented in the manner as under:
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From the cash budget it can be viewed that Fashion outlet receives 80% of the net sales in
cash as well as 20% in credit. This is one month lad period. As a reason of enhancement in the
sales revenue, there is increase in the cash sales as this has improved from £122726 to £327752.
However the credit sales for the September month £81938 would be attained in the month of
October. In contrast to this Fashion outlet make purchase of material at £65 per unit and make
payment of wages at £25. Further the manufacturing overhead is at £10 per unit. Therefore the
total cash that is being spent has been increased from £136000 to £336750. This is turn has
assisted in conversion of the negative net cash flow balance to positive that is from (£13274) to
£57557. The closing balance at the end of September is £161053. It is being recommended to
Fashion outlet to keep control over its expenses by making purchase of the material at lower
price. Cash deficit can be covered by means of decreasing the expenses of the business of some
extent. On the other hand efforts are being made to increase the sales so that targets can be
achieved. The plan regarding use of growing cash is towards expansion. This would assist in
increasing the business activities to a greater extent.
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3.2 Explaining calculation of unit costs and making pricing decisions
Unit cost is the cost of a single unit. It is being calculated by summing up total fixed cots
as well as variable cost of the firm and then dividing it by the number of units that have been
produced (Peirson, Brown, Easton and Howard, 2014). The method of cost plus pricing can be
used by enterprise in order to determine suitable prices for the products of Fashion outlet. The
benefit of such is that assure desired amount of return on the cost that has been borne.
Formula for calculation of unit costs = Total costs
Number of units produced
Selling price = Costs per unit + Mark-up @ 20%
For instance, Here 20% profit mark up is based on assumption. This can be changed as per the
cost attained by the organization.
Fixed costs 12000
Variable costs 80000
Total costs 92000
Number of units produced 1000
Costs per unit 92
Add: Mark-up @20% 18.4
Selling price 110.4
In accordance with the table above it can be stated that while deciding selling price at
£110.4, Fashion outlet is able to earn £18.4 as profit per unit. Therefore its profit margin over
sales would be:
Profit margin on sales = Profit margin/sales price*100
= £18.4/£110.4*100 = 16.66%
3.3 Assessing viability of the project through investment appraisal tool
Investment appraisal is the tool that assist in making evaluation of whether the particular
project would yield maximum return in future course of time. It is comprised of wide range of
techniques that includes pay back period, net present value as well as account rate of return.
Accounting rate of return: It is considered as the average rate of return on the initial cash outlay
(Michalski, 2012). The project that will offer greater return will be regarded as effective for
Fashion outlet.
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In the above case Project A possess higher ARR that is 43.21% in comparison with
Project B which has ARR of 39.09%. Thus it would be effective if company makes selection of
Project A as it would yield greater amount of return.
Net present value: This is considered as the most suitable tool as it takes into account time value
of money. It takes into account discounted value of all the cash inflows and offers suitable
outcomes in relation with the return on investment.
In accordance with the table above the NPV of Project A is £41433. This is greater than
that of Project B that has NPV of £27087. Thus it can be stated that Project A would offer higher
returns in comparison with Project B.
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Thus by taking into account method of investment appraisal it can be stated that Fashion
outlet can plan to make investment in Project A. It is due to the reason that this project is more
feasible for the purpose of making investment.
TASK 2
4.1 Main financial statements
According to the International Financial Reporting Standard business unit is required to
prepare the following financial statements as follow:
Profit & loss account – It is an account under which annual net profit and loss of the business is
ascertained. It can be assessed by the giving a summary of how the business incurred its revenue
and expenses through both non-operating and operating activities (McNeil, Frey and Embrechts,
2015). This account starts from the result of trading account. Only indirect expenses and indirect
revenues are to be considered in it.
Cash flow statements The cash flow is calculated by making certain adjustments to the net
income by adding or subtracting differences in revenue, expenses and credit transaction. This
statement provide the information regarding inflow and outflow of the cash related activities. It
allow the investors to understand how a company is running its operations. It shows where the
money is and how it is being spent.
Balance sheet - The balance sheet represents a company’s financial position at the end of the
specified date. It summarizes the company assets, liabilities, and shareholders’ equity at specific
point of time. It helps in making assessment of the monetary position and performance of the
company (Drexler, Fischer and Schoar, 2014). The total amount of assets listed on the balance
sheet should always equal the total of all liabilities and equity account listed on the balance
sheet.
4.2 Comparing appropriate formats of financial statements for different kinds of business
Basis Sole properties Partnership Public and private
ltd
Type of business Sole proprietor is a
business under which
In partnership
business, legal form of
Public is a company
which is owned and
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the purpose is to
increase the
profitability with the
aspect by satisfying
the needs and want to
the customers. It is an
unincorporated
business with one
owner who pay
personal income tax
on the profit from the
business.
business operation
between two or more
partners who share
management and
profit. A partnership
may result in issuing
and holding equity or
may be only governed
by the contract (Pierce
and Aguinis, 2013).
traded in public
manner. Private
company is owned and
traded in private
manner. In public ltd
company have at least
7 minimum member
and in private ltd have
at least 2 member.
Financial statements All financial
transaction related to
income and expenses
are recorded in profit
and loss accounts.
Under this simple
profit and loss account
is prepared as it this
kind of business does
not need to show its
accounts to any
shareholder. As he is
the sole of owner thus
needs to determine the
loss and profit for own
sake.
In this type of
business, firm shows
the ratio of which each
partner have paid
interest on capital and
drawing net profit. The
financial statements
that are being prepared
under this is partners
capital that reflects
that amount of capital
invested by each
partner. Further it also
prepares profit and
loss account as well as
balance sheet.
Public and private ltd
used the all financial
statement profit and
losses, cash flow
statement as well as
balance sheet. This is
because it has to
disclose its accounts to
shareholders.
Rules and regulation This business is The agreement should It follows all
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unincorporated and
also is not a limited
liability, so rule for
sole proprietor do not
permit employees. It
must have file various
tax forms with the
internal revenue
services and pay any
tax due.
also include what role
each partner will be
performing when the
business will become
operational. Day to
day control within the
operation can be seen.
government rules and
regulation within the
business.
4.3 Interpreting financial statements using ratios
There is decline is the gross margin as well as net margin of Sainsbury in 2015. This
reflects that position of the business was unsound. This can be due to increase in the expenses
and decline in the revenues of the business.
Current ratio is regarded as the current asset which is available with the firm in order to
fulfill its obligations. However quick ration determines the ability to exclude inventory. Stability
in current ratio as well as increase in quick ratio reflects that there is not much improvement in
the liquidity position of Sainsbury (Current Ratio - Liquidity Ratio - Working Capital Ratio,
2014).
Comparison with competitors
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Sainsbury Tesco
2015 2015
Gross profit ratio 5.08% -3.39%
Net profit ratio -0.70% -9.22%
Current ratio 0.64 0.6
Quick ratio 0.48 0.42
There is decline is the gross margin as well as net margin of Tesco in 2015. This reflects
that position of the business that is Sainsbury is sound in comparison with its competitors. This
can be due to increase in the expenses and decline in the revenues of the business. There is not
much difference in Current ratio of both the companies. However quick ration of Sainsbury is
higher than Tesco. Thus Sainsbury's liquidity position is suitable.
CONCLUSION
It can be concluded from the report that management of financial resources has
significant role in increasing the growth as well as success of the organization in long run course
of time. Along with this role of investment appraisal tool is significant in assisting the
organization to make selection of the best suited project that can yield maximum amount of
return.
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