Analysis of Financial Resource Decisions for Textile Business Report

This report provides a comprehensive analysis of financial resource decisions within the context of a textile business. It begins by exploring various sources of finance available to the textile industry, including personal savings, bank loans, lease financing, and overdrafts, evaluating the implications of each source and determining the most appropriate options based on the business's needs. The report then delves into the costs associated with different financing options, emphasizing the significance of financial planning in ensuring efficient fund utilization and minimizing financial risks. It outlines the information requirements of both internal and external stakeholders, such as management, workers, lenders, and suppliers, and examines the impact of financing choices on financial statements. The report also includes the preparation of a projected cash budget, unit cost calculations, and the application of investment appraisal techniques to assess project viability. Finally, it covers the main financial statements, their purpose, and interpretation through ratio analysis, using J. Sainsbury's financial statements as a case study.

MANAGING FINANCIAL
RESOURCE DECISIONS
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TABLE OF CONTENTS
INTRODUCTION......................................................................................................................4
TASK 1......................................................................................................................................4
AC 1.1 Understanding source of finance available to textile business.............................4
AC 1.2 Implication of different finance source on textile firm........................................5
AC 1.3 Evaluation of appropriate source of finance for textile business.........................5
TASK 2......................................................................................................................................6
AC 2.1 Cost of various discussed finance sources on textile firm....................................6
AC 2.2 Significance of financial planning in textile business..........................................6
AC 2.3 Information requirement of various internal and external stakeholders...............7
AC 2.4 Impact of above discussed finance sources on firm's financial statements..........7
TASK 3......................................................................................................................................8
AC 3.1 Preparation of projected cash budget and take appropriate decisions through
analysis..............................................................................................................................8
AC 3.2 Unit cost calculation and make appropriate pricing decisions.............................9
AC 3.3 Analysing project viability through different investment appraisal techniques.10
TASK 4....................................................................................................................................12
AC 4.1 Main financial statement with explanation of their contain, purpose and users 12
AC 4.2 Description and comparison of formats of financial statements for different
businesses........................................................................................................................13
AC 4.3 Interpretation of J. Sainsbury's financial statements through ratio analysis method
.........................................................................................................................................13
CONCLUSION........................................................................................................................14
REFERENCES.........................................................................................................................16
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INDEX OF TABLES
Table 1: Projected budget for the period of six months ending on September..........................5
Table 2: Calculation of Pay back period ...................................................................................7
Table 3: Calculation of Net present value .................................................................................7
Table 4: Calculation of Internal rate of return............................................................................8
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INTRODUCTION
In the present age of globalization, Small and Medium Enterprises (SMEs) play an
important role in contributing to the economic development of the nations. Firms who
employ less than or equal to 250 staffs are called SMEs. For the promotion of SMEs, the UK
government set an ambitious target that £1 in every £3 will goes to SMEs by the year 2020. It
will help to open market for the small businesses and make it easier for them to access and
take advantageous of available government opportunities. It will encourage increased
competition and market innovations to deliver the best value for the taxpayer. Textile
business has been selected for the present project report. Present report will discuss the
importance of government plan for the textile business in getting sufficient amount of fund
and its management in an appropriate way so that they will be able to ensure better survival.
TASK 1
AC 1.1 Understanding source of finance available to textile business
Textile firms are engaging in production of yarn, cloth and distribution of their
products in the market. They use natural or man-made raw material for the production
purpose. Entrepreneurs intend to bid for a supplier contract through which they can acquire
raw material at fixed price and remain unaffected from the price fluctuations in the market. In
the given scenario, it has been stated that owner has amount of £20,000 available whereas
maximum contract bidding price is £300,000. Thus, balance of the funds can be borrowed
from the described sources:
Personal savings: Textile firm owner can invest their personal savings for starting up
their business. It helps to decrease the amount of borrowed funds in the organization
(Abozaid, 2010). The most important benefit of this is that it is available without any cost.
Bank loans: Textile firm's owner can borrow needed funds through bank loans. Loans
help to provide funds for short as well as long term period (Smith, 2010). Thus, mitigate
funds requirement to a great extent. Moreover, as per the government plan, National Loan
Guarantee Scheme (NLGS), the UK government secure loans through providing their own
guarantee to the banks.
Lease financing: It will assist textile business owners to finance office equipment and
buildings. Thus, it can lower start-up costs of establishment (Kraemer-Eis and Lang, 2012).
Reason behind this is that organization does not need to invest large cash outflow in the
equipment.
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Overdraft: It is a facility to withdraw some high amount than available bank balance
in the account. Hence, this facility will assist users to eliminate their short-term capital needs.
AC 1.2 Implication of different finance source on textile firm
Under the personal savings, funds will be available to a limited extent. However, it is
good aspect as it is available at cheaper rates. Moreover, owner takes high risk through
investing their own funds in the establishment. Moreover, bank provides loans at implied
interest rates. It may be fixed or fluctuate hence; fixed interest rate imposes fixed liability to
the textile business (Serrasqueiro, Maçãs Nunes and Leitão, 2011). However, under fluctuate
interest rates, if market rate goes high then, it will increase business liability and vice versa.
Furthermore, collateral security is also demanded by the banks to secure their funds and
eliminate risk of default. On contrary, its benefit is that the bank provides loans for short
medium and long-term period. Moreover, it does not transfer the control rights to the lenders
hence; owners can control operations as per their own desire. However, under the lease
financing, fixed hire or rental charges needed to be paid at a fixed interval of time period
(Lakshmi, 2015). Furthermore, it does not transfer the ownership of the assets to the business.
But still, high initial investment to purchase the assets can be eliminated. At last, on the
overdrafts, banks have to pay charged interest which is a bit higher than loan interest rates.
Moreover, it will be available at limited extent hence; cannot be used for a long term of
period.
AC 1.3 Evaluation of appropriate source of finance for textile business
As above discussed implications, it becomes clear that loan will be very appropriate
source for textile firm to collect required funds. There are various reasons behind these
decisions given as below:
 It help to mitigate short-term, medium-term and long-term financial requirements.
 It does not transfer controlling rights to the lenders henceforth; no diversification or
dilution of control exist (Beck, Demirgüç-Kunt and Singer, 2013).
 Government guarantee schemes and policies help textile owner to gather secure funds
on the basis of guarantee provided by the UK government. Moreover, it will satisfy
banks about minimizing their default and credit risk through securing their debts.
 Interest obligations are the fixed liabilities but still it is considered as allowable
business expenditure at the time of tax computation (Baños and et.al., 2010). Thus, it
will reduce firm's tax liabilities and increase their profitability. Hence, it is
comparatively a cheaper source of finance than others.
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 Through using debts in the capital structure, textile firm can take benefits of trading
on equity. By this, they can maximize their shareholder's return by fulfilling their
interest obligations on right time.
TASK 2
AC 2.1 Cost of various discussed finance sources on textile firm
Personal savings: Opportunity cost is the cost of personal savings that has been
invested in the business. If the owner of textile firm does not invest his funds for business
start-up then, he can use these funds for alternative purpose that may yield return to him.
Therefore, the loss of this return is called opportunity cost. Another cost is that there is high
risk associated with the entrepreneur’s funds.
Loans: Bank collects interest charges on their respective debts that are cost of loan
collection. Furthermore, some legal formalities must be confirmed such as collateral security
(Rostamkalaei and Freel, 2016). Henceforth, cost of registration, stamp and photocopier
charges are also the cost of debt funds.
Lease: A person who provide his or her assets to the textile firm for using purpose
charges some interests in the rental charges. Thus, this interest charges is known as cost of
lease financing.
Overdrafts: Interest rate on overdraft is higher than interest rate on loans.
Henceforth, this charge is known as cost of used bank overdrafts (Kuntche and et.al, 2012).
Moreover, it should be keep in mind that regular overdraft balance will adversely affect
corporate image and may create dissatisfaction among the users.
AC 2.2 Significance of financial planning in textile business
As a new establishment, financial managers of textile business have to construct a
comprehensive financial plan for core operations. It aims at maintaining efficient utilization
of funds and minimizing financial risk. It enables entrepreneurs to take sound decisions about
the financial sources through which textile firm gather funds. It determines the amount of
required funds and type of finance to run a successful business. It helps to achieve short as
well as long-term financial objectives and ensures good profitability. Moreover, it assists firm
in identifying company's strength, weaknesses, future opportunities and challenges (Lear and
Roberts, 2010). Start-up costs, cash flow projection, preparing projected balance sheet,
income statement and budgets are the part of financial planning. Through this, textile
business owner will be able to do its operations without any difficulties. It will reduce
financial cost and maintain the same at an acceptable level.
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AC 2.3 Information requirement of various internal and external stakeholders
Stakeholders are the ones who are directly or indirectly affected by the firm’s
operations due to some kind of interest. There are number of internal and external users
existed in every small as-well-as large corporation. They need varied information about
business operations, described as below: Management: In the textile business, managers will be held responsible for hazard
free operational functioning. Therefore, they need information regarding costs,
revenues, profits, losses, assets and liabilities (Rao, 2010). They use financial
statements and make in-depth evaluation of it to determine negative performance and
take good decisions. Along with this, they need information regarding cash earning
ability to ensure effective cash management. Workers: They are involved in business operations for some monetary payment. They
require information about textile firm's performance, market growth and financial
position so that their personal objectives can be satisfied. Lenders: They fulfil company's financial need by the way of providing debt funds.
They analyse profits, cash earnings, solvency position and firm's goodwill to analyse
risk associated with their funds (Maalej, Kurtanovic and Felfernig, n.d). They provide
funds to the organization in which credit risk can be maintained at an acceptable level.
 Suppliers: They supply goods or material on credit so, they need information
regarding liquidity position. It infers the extent to which firm will be able to repay
their short-term obligations on time. Good credit worthiness enterprises will be
greatly able to generate credit for some period.
AC 2.4 Impact of above discussed finance sources on firm's financial statements
Interest charges on loans will be shown in profit and loss account as business
expenditures are subtracted from the available cash under the current assets head. Moreover,
in balance sheet, borrowed funds will be reported as long-term liabilities increases the
available cash (Irwin and Scott, 2010). Further, interest on overdraft will be treated as
expenditures in profitability statement while in balance sheet, taken overdraft will be shows
as short-term liabilities. It is because; textile firm needs to pay this within one year of time
period. Both the cost and actual overdraft used will affect cash balance of the company. On
contrary, lease financing cost that is rental charges will be shown as spending in the profit
and loss account and will be deducted from the available cash balance.
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TASK 3
AC 3.1 Preparation of projected cash budget and take appropriate decisions through analysis
Table 1: Projected budget for the period of six months ending on September
Income/Expenses April May June July August September
Cash revenues
Sales revenues 23000 28000 36000 58000 75000 90000
Total cash incomes 23000 28000 36000 58000 75000 90000
Purchase 10000 12000 17500 28800 37000 45000
Rent of premises 3000 3000 3000 3000 3500 3500
Machinery purchase 5000 - - 3000 - 2000
Workers payment 1500 1500 1550 1600 1600 1650
Other
payment(Interest and
utilities) 350 500 500 650 650 700
Total cash expenses 19850 17000 22550 37050 42750 52850
Net cash
flow(Surplus/Defici
t) 3150 11000 13450 20950 32250 37150
Opening cash
balance 3150 14150 27600 48550 80800
Ending cash 3150 14150 27600 48550 80800 117950
Through prepared budget, it can be concluded that in all the subsequent months,
textile firm will earn grown revenues. It got increased from £23,000 to £90,000. However,
due to contract with suppliers, purchase payments show a moderate increase. It has taken
place due to the high demand of purchase quantity therefore; it turned out from £10,000 to
£45,000. However, capital expenses for machinery purchase and revenue nature expense for
workers salary, interest and utilities lead to increase total payments. Total cash outflows got
increased from £19,850 to £52,850. But still, in all the period, NCF indicates favourable
balance and shows an inclining trend. It got increase from £3,150 to £37,150. Thus, closing
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balance of cash shows a significantly increase from £3,150 to £117,950 in the month of
September.
Through above interpretation, it can be reported that firm has to control their
payments through regular monitoring of actual workers performance with the desired targets.
Moreover, it has to construct policies to achieve their revenue targets so that they can
accomplish set targets (Berman, 2015). Moreover, in the given case, textile business has
adequate availability of NCF so it should is recommended that firm invest this surplus in
alternative purposes so that it can improve their earnings through receiving return on it. In
this way, NCF and closing cash balance can be improved.
AC 3.2 Unit cost calculation and make appropriate pricing decisions
Unit cost: It refers to cost of each separate unit that can be computed by dividing total
production cost to the number of units produced by Textile firm (Haynes, 2015). It has been
computed hereunder:
Cost per unit = Total production cost/number of units produced
Items Cost
Material cost £25000
Labour cost £15000
Other fixed and variable overheads £10000
Total cost £50000
Number of units produced 4000 units
Unit cost/Cost per unit (£50000/4000) = £12.5
Pricing decisions: Cost oriented method is a very basic method of price computation.
In this method, selling prices are decided by adding an appropriate or desired mark-up
percentage with per unit cost (Valuckaitė and Snieška, 2015).
Selling price = cost + desired profit percentage on cost
Desired mark-up percentage = 20%
= £12.5 + 20% of £12.5
= £12.5 + £2.5
= £15
It is concluded that textile firm has to sell their product at £15 per unit so that they can
generate 20% profit on cost.
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AC 3.3 Analysing project viability through different investment appraisal techniques
Investment appraisal techniques are the financial planning tools which assist users in
determining the project which is the most viable from the available alternatives. In context to
textile firm, investment appraisal technique is applying here to take decisions about the
acquisition of machinery. It has two available proposals at an initial cost of Pay-back Period (PP) method: Recovery period of initial cash outlay is called PP
henceforth; lower PP is considered good for textile firm (Meyer and Kiymaz, 2015).
 Accounting Rate of Return (ARR): It is the rate which measure potential net earnings
on inital project investment. High ARR is most profitable for the textile business
because it indicates that company will generate high profits.
Table 2: Calculation of Payback period
Year CI (A)
Cumulative cash
inflows CI (B)
Cumulative
cash inflows
1 60000 60000 86000 86000
2 86000 146000 127000 213000
3 125000 271000 189000 402000
4 350000 621000 345000 747000
Total 625000 780000
PP or recovery period
Project A = 3 year + (£400000-£271000)/£350000 = 3.37 year
Project B = 2 year + (£400000-£213000)/£189000 = 2.99 year
ARR
Project A = (£625000/4)/ (£400000)*100 = 39.06%
Project B = (£195000/4)/ (£400000)*100 = 48.75% Net Present Value (NPV): NPV is the difference between total discounted value of
the future cash inflows and project outflow. It is a discounted approach that takes into
consideration the time value concept of money (Rossi, 2015). Positive or high NPV is
more profitable for textile business and vice versa.
 Internal Rate of Return (IRR): Rate of return at which NPV will be zero is IRR
hence; total future value and project cost will be same. Project that has high IRR is
seems to be good for the company (Champathed and Chansa-ngavej, 2015).
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Table 3: Calculation of Net present value
Year
Cash
flow Cash flow
Discounted value
of 1 at 10%
DCF of
project A
DCF of project
B
1 60000 86000 0.9090909091
54545.4545454
545
78181.81818181
82
2 86000 127000 0.826446281
71074.3801652
892
104958.6776859
5
3 125000 189000 0.7513148009
93914.3501126
972
141998.4973703
98
4 350000 345000 0.6830134554
239054.709377
775
235639.6421009
49
458588.894201
216
560778.6353391
16
Less: Initial
investment 400000 400000
NPV
58588.8942012
156
160778.6353391
16
Net present value
 Project A = £58588.89
 Project B = £160778.63
Table 4: Calculation of Internal rate of return
Year Project A Project B
Initial investment -400000 -400000
1 60000 60000
2 86000 146000
3 125000 271000
4 350000 621000
IRR 14.95% 37.37%
IRR
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 Project A = 14.95%
 Project B = 37.37%
Recommendations: Above computation interpreted that textile firm has to invest in
project B. This is because; it has lower PP to 2.99 year which indicates that company will
regenerate its initial investment earlier than project A. Another, high ARR indicates that net
earnings will be higher in this project hence; firm will be able to meet out shareholder
expectations. Furthermore, maximum NPV of £160,778.63 and high IRR of 37.37% infer that
project B should be undertaken because; it will provide more benefits to the organization.
TASK 4
AC 4.1 Main financial statement with explanation of their contain, purpose and users
Particulars Profitability statement Balance sheet Cash flow statement
Contain Profit and loss account
includes all the payments
and incomes during a
certain period.
It comprises all the assets
and liabilities of the
organization.
It has all the cash
inflow and outflow
from operating,
financing and
investing activities
(Sridharan, 2015).
Purpose Determining the profit
and loss of the
organization is the
purpose of profitability
statement.
It is prepared to determine
the financial position of the
company (Robinson and
et.al, 2015).
It aims at identifying
the changes between
cash balance reported
at two different
balance sheet
prepared on certain
dates.
Users Managers, owners, lender,
investors, employees,
creditors and government
make use of this
statement.
Managers, owner’s lenders,
investors, suppliers,
competitor and other use
balance sheet for collecting
information.
Managers, lenders
and investors often
make analysis of cash
flow statement to
determine cash
earning ability of the
company.
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