Financial Resource Management and Investment Appraisal Report

This report delves into the critical aspects of financial resource management and decision-making within a business context. It examines the identification of various funding sources, including bank loans, equity shares, and retained earnings, evaluating their implications, advantages, and disadvantages through case studies. The report analyzes the cost of different finance sources and underscores the importance of financial planning. It highlights the financial information necessary for informed decision-making and explores the impact of finance on financial statements. Furthermore, the report presents an evaluation of cash flow forecasts and sales budgets, providing recommendations for improvement. The application of investment appraisal techniques, such as payback period, net present value, and internal rate of return, is demonstrated. The report also covers unit cost calculations, pricing decisions, and break-even analysis, alongside a discussion of key financial statements and ratio analysis for performance interpretation. Overall, the report offers a comprehensive overview of financial management principles and their practical application.

Managing Financial Resources and
Decisions

TABLE OF CONTENTS
Introduction......................................................................................................................................1
Task 1...............................................................................................................................................1
1.1 Identifying the source of finance currently available for different businesses......................1
1.2 Assessing the implications of each source including the relative advantages and
disadvantages...............................................................................................................................2
1.3 Providing three case study.....................................................................................................3
Task 2...............................................................................................................................................3
2.1 Analyzing the cost of different sources of Finance...............................................................3
2.2 Explaining the key aspects /importance of financial planning..............................................4
2.3 Highlighting the types of financial information required for decision making purposes......4
2.4 Explaining the impact of finance on the financial statements...............................................5
Task 3...............................................................................................................................................5
3.1 Evaluation of cash flow forecast and sales budget and presenting present findings and
recommendations in a formal written report to the Directors of ABC Manufacturing Ltd.........5
3.3 Application of different investment appraisal tactics and recommendation..........................5
3.2 Explaining the calculation of unit costs and make pricing decisions using relevant
information...................................................................................................................................7
Task 4.............................................................................................................................................12
4.1 Discussing the main financial statements............................................................................12
4.2 Comparing appropriate formats of financial statements for different types of business.....12
4.3. Interpreting financial statements using appropriate ratios and comparisons, both internal
and external................................................................................................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................15

INDEX OF TABLES
Table 1: Calculation of payback period...........................................................................................6
Table 2: Calculation of Net present value.......................................................................................6
Table 3: Calculation of internal rate of return.................................................................................6
Table 4: calculation of unit costs.....................................................................................................7
Table 5: Calculation of profit and BEP by varying the sales price.................................................8
Table 6: Calculation of BEP by varying the fixed cost...................................................................9
Table 7: Calculation of BEP by varying the material Cost...........................................................10
Table 8: Calculation of BEP by varying the labour cost...............................................................10
Table 9: Calculation of total profit................................................................................................11
Table 10: Calculation of ratios of XYZ co....................................................................................13

INTRODUCTION
The success of an organization is greatly affected by its ability of the management of
wide range of financial resources as per the distinct business requirements. In this process, the
managers of business requires to consider different tools of accounting and financial
management such as ratios, income statements, cash flow statements, costing, break even
analysis, etc (Galloway and Deakins, 2012). All these tools assist managers in the collection of
wide range of financial data through which management is able to take appropriate decisions
regarding the assessment and usage of wide range of accounting data.
This report is going to discuss different aspects of financial management and business
decision making process. In this process, report examines the role of different investment
appraisals in investment decisions of an organization. Apart from that, this report will use ratio
analysis for evaluating the business performance.
TASK 1
1.1 Identifying the source of finance currently available for different businesses
For handling different business requirements, an organization uses a wide range of
financial source for the attainment of different business objectives. Some important sources of
funds are examined as below:
 Bank loan: It is one of the most common tools which are used by each type of
organization, that is, new or old as well as large or small. New companies take bank loan
for business start up and existing firms take bank loans for different business
requirements such as short term finance for the liquidity management (Brigham, 2011).
On the other hand, long term bank loans are used for the long term business decisions.
 Equity shares: It is considered as an important source of finance for large companies.
This is because; small companies are not able to expand the capital of company through
equity shares. It provides significant support to large companies while taking major
expansion decisions along with the mergers or acquisition (Collis and Jarvis, 2002). In
this process, risk on investment is managed by investors.
 Retained earnings: Every organization saves some portion of profit for the attainment of
distinct business requirements. It is called as retained earnings through which
organization is able to manage short and long term requirement of funds. This source of
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fund cannot be used by new start ups because they do not have any kind of retained
earnings.
1.2 Assessing the implications of each source including the relative advantages and
disadvantages
Sources of funds Advantages Legal Implication Financial implication
and Disadvantages
Issue of share By issuing shares,
business entity can
raise the funds in large
volume.
Risk on investment is
mainly taken by the
shareholders (Shim
and Siegel, 2008).
By selling stock,
business entity cannot
repay the amount to
shareholders.
If company acquires
funds through shares,
business entity has to
consider a wide range
of regulations of
public authority, stock
markets, etc.
It enhances the value
of shareholders capital
of company in
government records.
It leads to cost of
underwriter's
commission, stock
market charges,
dividend, etc.
In this process,
management losses
their control over
business (Kastantin,
2005).
Long term bank loan,
Overdrafts, Short-term
loans
The obligation or
liabilities of
organization will be
finished when
management will
repay the entire loan
amount (Menifield,
2013).
The interest on
business bank loans is
tax-deductible thus,
It increases the
liabilities of company.
Long term loans are
also backed by
property thus, non-
payment of different
kinds of bank loans
leads to bankruptcy.
It increases the
expenditure of
organization in the
form of processing
fees, legal charges,
annual renewal fees
and interest.
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management can
acquire tax benefits.
Retained earning It plays an important
role for managing then
short term business
requirement.
It does not have any
legal impact.
It cannot be considered
by the new
organization.
1.3 Providing three case study
Case 1: Multinational or big companies such as LMN Ltd. are mainly using equity shares
for raising the funds for different business requirement such as expansion of business in new
markets and new product development.
Case 2: Old companies also consider retained earnings for managing short term as well
as long term requirement of finance that assists the managers for assessing funds without any
cost of finance such as interest, dividend, etc (Norton and Larry Kelly, 2014).
Case 3: Two people want to start retail shop they have some money that is not enough for
business start up. Therefore, these individuals mainly consider banks and private lenders as a
source of finance. This is because; new start up can get loan from these sources without any
difficulties and within less time.
TASK 2
2.1 Analyzing the cost of different sources of Finance
 Equity shares: When an organization acquires funds through equity share then
management has to manage wide range of expenditures such as dividend, stock market
charges, underwriter's commission etc. In addition to that management of business has to
consider various other expenditures while issuing of shares (Acquiring and managing
financial resources. n.d).
 Bank loans: If bank loans are considered by an organisation for raising of funds then
management has to manage wide range of expenses such as interest, documentation
charges and legal fees.
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 Retained earnings: Consideration of retained earnings as a source of finance does not
lead any kind of expenditure of company. But, it is mainly used for short-term business
requirement.
2.2 Explaining the key aspects /importance of financial planning
Financial planning is essential for every organization. The importance of financial
planning is examined below:
 It helps managers for estimation of needs of finance for different business requirement.
 This concept plays important role in formulation of wide range of budgets as per the
objectives and goals of organization through which management is able to examine the
performance of company as per the current market trends (Nga and Yien, 2013).
 This approach also supports management in selection of best source of finance along with
their utilization in different business operations.
 By conducting a systematic financial planning, management can avoid the wastage of
financial resources.
2.3 Highlighting the types of financial information required for decision making purposes
For taking different management decisions, different kind of financial information is
required.
 The information related to cost of different source of finance assists finance manager
during selection of best source of finance for different needs of organization.
 Information related to profitability and current market position of company provides
significant assistance to investors of company in their investment decisions (Srinivasan,
2012).
 Every organization always tries to expand business with the help of new projects and
activities therefore it can be stated that information related to profitability of project helps
managers in selection of best project for company.
 Banks and financial institutions facilitate funds to business in form of debt so as they
require information regarding solvency position of business in order to asses present
capability of business for repayment of loan (Vance, 2002).
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2.4 Explaining the impact of finance on the financial statements1. Income statement- Net profit of organization is reduced due to financial cost of sources
which is considered in income statements in the form of interest, dividend. These
expenses are recorded on the debit side of income statement.2. Balance sheet statement- When an organization acquires funds from different financial
sources then both asset and liabilities side of position statement are affected (Meyers,
2013). It makes increase in financial obligation either debt or equity or reduced the value
of retained earnings.
3. Cash flow statement- Amount of cash inflow is increased when company is raising funds
from different sources. This is considered in financing activities of cash flow statement.
TASK 3
3.1 Evaluation of cash flow forecast and sales budget and presenting present findings and
recommendations in a formal written report to the Directors of ABC Manufacturing Ltd
As per sales budget of ABC Manufacturing Ltd. it has been addressed that company is
continuously significant variation between budgeted sales and actual sales. In this context, it is
evaluated that firm is managing fewer sales as per the budgeted sales. In this regard, there have
been several causes evaluated that lead deficit in sales of company that could be wrong
forecasting of sales, change in interest of consumers, improper preparation of budgets, change in
business environment etc (Norton and Larry Kelly, 2014). In order to resolve these issues,
management should consider an appropriate budgeting technique through which business entity
is able to carry out appropriate forecasting.
The evaluation of cash flow forecast of ABC Manufacturing Ltd. has found that company
is facing negative cash flow due to significant up-down in income of company. Apart from that
high expenditure on purchase along with salaries etc. has increased the value of negative cash
flow. In order to resolve these issues, the management of company needs to select different short
term source of funds for attainment of shortage of cash such as working capital and bank
overdrafts etc.
3.3 Application of different investment appraisal tactics and recommendation
Scenario 2:
Calculation of payback period (In £)
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Table 1: Calculation of payback period
Project A Project B
Year Amount Cumulative Amount Cumulative
1 180000 180000 60000 60000
2 230000 410000 120000 180000
3 280000 690000 250000 430000
4 120000 810000 250000 680000
810000 680000
Payback period 2.68 years 3.58 years
Net present value:
Calculation of Net present value (In £)
Table 2: Calculation of Net present value
Project A Project B
Year Amount
Discounted
value@6%
Discounted
cash inflow Amount
Discounted
value @6%
Discounted
cash inflow
1 180000 0.943 169740 60000 0.943 56580
2 230000 0.89 204700 120000 0.89 106800
3 280000 0.84 235200 250000 0.84 210000
4 120000 0.763 91560 250000 0.763 190750
Total 810000 701200 680000 564130
Less- Initial
Investment 450000 450000
Net Present
value 251200 114130
Internal rate of return:
Calculation of internal rate of return
Table 3: Calculation of internal rate of return
Year Project A Project B
0 -450000 -450000
1 180000 60000
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2 230000 120000
3 280000 250000
4 120000 250000
IRR 29.20% 15.02%
Accounting rate of return
Accounting rate of return (ARR) = Average profit/Initial Investment*100
Project A Average Profit = Total Profit/number of year
= 810000£/4
= 202500£
ARR = 202500£/450000£*100
= 45%
Project B
Average Profit = 680000£/4
= 170000£
ARR = 170000£/450000*100
= 37.78%
As per the above evaluation, it can be stated that management of ABC Engineering Ltd.
needs to consider Project A for business. This is because it is recovering initial investment in less
duration as compared to project B (The Investment Decision Making Process, 2011). In addition
to that value of NPV, IRR, and ARR are showing that Project A is better than Project B.
3.2 Explaining the calculation of unit costs and make pricing decisions using relevant
information
Scenario 3:
Table 4: calculation of unit costs
Particular Per unit Amount
Sales 120 900000
-Material cost 52.5 393750
labour cost 35.75 268125
Variable overhead 10.2 76500
Total Variable cost 98.45 738375
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Contribution 21.55 161625
-fixed cost 120000
Profits 41625
Contribution per unit (CPU) = 21.55£
Contribution to sales ratio = 161625£/900000£*100
= 17.96%.
Break-even point ( In units)= Total Fixed Cost/CPU
= 120000£/21.55£
= 5568.45 Units
Break-even point ( In £)
= 5568.45Units *120£
= 668213.46£
Margin of safety ( In £)= Total sales - BEP Sales
= 9000000£ - 668213.46£
= 231786.54£.
Margin of safety per unit = 231786.54£/7500
=30.90£
Calculation of profit and BEP by varying the sales price
Table 5: Calculation of profit and BEP by varying the sales price
5000 Units 8000 Units 10000 Units
Particular 5£ increase 5£ decrease 5£ increase 5£ decrease 5£ increase 5£ decrease
Sales 625000 575000 1000000 920000 1250000 1150000
-Material
cost 262500 262500 420000 420000 525000 525000
labour cost 178750 178750 286000 286000 357500 357500
Variable
overhead 51000 51000 81600 81600 102000 102000
Total
Variable
492250 492250 787600 787600 984500 984500
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cost
Contributio
n 132750 82750 212400 132400 265500 165500
-fixed cost 120000 120000 120000 120000 120000 120000
Profits 12750 -37250 92400 12400 145500 45500
Contributio
n per unit 26.55 16.55 26.55 16.55 26.55 16.55
BEP 4519.77 7250.75 4519.77 7250.75 4519.77 7250.75
Calculation of BEP by varying the fixed cost
Table 6: Calculation of BEP by varying the fixed cost
5000 Units 8000 Units 10000 Units
Particular
5000£
increase
5000£
Decrease
5000£
increase
5000£
Decrease
5000£
increase
5000£
Decrease
Sales 600000 600000 960000 960000 1200000 1200000
-Material
cost 262500 262500 420000 420000 525000 525000
labour cost 178750 178750 286000 286000 357500 357500
Variable
overhead 51000 51000 81600 81600 102000 102000
Total
Variable
cost 492250 492250 787600 787600 984500 984500
Contributio
n 107750 107750 172400 172400 215500 215500
-fixed cost 125000 115000 125000 115000 125000 115000
Profits -17250 -7250 47400 57400 90500 100500
CPU 21.55 21.55 21.55 21.55 21.55 21.55
BEP 5800.46 5336.42 5800.46 5336.42 5800.46 5336.43
Calculation of BEP by varying the material Cost
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Table 7: Calculation of BEP by varying the material Cost
5000 Units 8000 Units 10000 Units
Particular 5£ increase 5£ decrease 5£ increase 5£ decrease 5£ increase 5£ decrease
Sales 600000 600000 960000 960000 1200000 1200000
-Material
cost 287500 237500 460000 380000 575000 475000
labour cost 178750 178750 286000 286000 357500 357500
Variable
overhead 51000 51000 81600 81600 102000 102000
Total
Variable
cost 517250 467250 827600 747600 1034500 934500
Contributio
n 82750 132750 132400 212400 165500 265500
-fixed cost 120000 120000 120000 120000 120000 120000
Profits -37250 12750 12400 92400 45500 145500
CPU 16.55 26.55 16.55 26.55 16.55 26.55
BEP 7250.75 4519.77 7250.75 4519.77 7250.75 4519.77
Calculation of BEP by varying the labour cost
Table 8: Calculation of BEP by varying the labour cost
5000 Units 8000 Units 10000 Units
Particular 5£ increase 5£ decrease 5£ increase 5£ decrease 5£ increase 5£ decrease
Sales 600000 600000 960000 960000 1200000 1200000
-Material
cost 262500 262500 420000 420000 525000 525000
labour cost 203750 153750 326000 246000 407500 307500
Variable
overhead 51000 51000 81600 81600 102000 102000
Total
Variable
517250 467250 827600 747600 1034500 934500
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cost
Contributio
n 82750 132750 132400 212400 165500 265500
-fixed cost 120000 120000 120000 120000 120000 120000
Profits -37250 12750 12400 92400 45500 145500
CPU 16.55 26.55 16.55 26.55 16.55 26.55
BEP 7250.75 4519.77 7250.75 4519.77 7250.75 4519.77
Scenario 4:
Calculation of profit under two proposals from different customers
On the basis of the case scenario Southwod Electricals and Westbrook Engineering have
placed their orders to the company. In this situation, calculation of the profit of an organization is
as follows:
Southwood Electricals:
Selling price = 120£ - 120*15%
= 120£ - 18£ = 102£
Westbrook Engineering:
Selling price = 120£ - 120*25%
= 120£ - 30£ =90£
Calculation of total profit
Table 9: Calculation of total profit
Particular Southwood Electricals Westbrook Engineering
Sales 951000 990000
-Material cost 420000 446250
labor cost 286000 303875
Variable overhead 81600 86700
Total Variable cost 787600 836825
Contribution 163400 153175
-fixed cost 120000 120000
Profits 43400 33175
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As per the above evaluation, it is examined that the order associated with Southwood
Electricals is more profitable for company so as management should have to consider this option
for business.
TASK 4
4.1 Discussing the main financial statements Income statements: It is formulated to assess new profit/loss of company by deducting all
total income from total expenditure. Expenditures are shown in debt side of income
statements and income is shown in credit side. Balance sheet: It reflects overall financial position of company. It contains two sides in
which all assets and liabilities value are added (Nga and Yien, 2013). Assets include land,
building, debtors etc. Liabilities include loans, creditors, etc.
 Cash flow Statement: It supports management to determine inflow and outflow of cash
through different business operations that associated with operating, financing and
investing activities of business.
4.2 Comparing appropriate formats of financial statements for different types of business
Different kinds of statements are prepared in different companies. A systematic
comparison is provided below:
Particulars Income statements Balance sheet Cash flow statement
Some traders It is an only statement
is prepared by sole
trader.
It is not necessary. It is not necessary.
Partnerships This reflects the
profitability of firm to
different partners.
It also prepared by
partners to assess
position of company
(Srinivasan, 2012).
Not essential.
Limited companies Limited firm follows
international rules for
developing income
statements (Vance,
2002).
It is developed to
determine overall
business position.
It is also prepared to
examine liquidity
position of business.
Non-profit making It is prepared to
determine different
transactions of
company.
It is also developed in
normal manner.
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4.3. Interpreting financial statements using appropriate ratios and comparisons, both internal and
external
Table 10: Calculation of ratios of XYZ co.
Ratios Formula 1995 1996
Profitability ratios
Gross profit 40000 50000
Net profit 30000 35000
Net Sales 120000 200000
Gross Profit Ratio (Gross Profit/ Net Sales) *100 33.33 25.00
Net Profit Ratio (Net Profit/ Net Sales) *100 25.00 17.50
Liquidity ratios
Current Assets 20000 54000
Current Liabilities 6000 25000
Closing Stock 7000 18000
Current Ratio Current Assets / current Liabilities 3.33 2.16
Quick ratio Quick Assets/Current liability 5.24 2.04
Activity ratio
Net Sales 120000 200000
Total Assets 35000 66000
Total Assets
Turnover Ratio Net Sales/ Total Assets 3.43 3.03
Inventory turnover
ratio Net sales/ Inventory 17.14 11.11
As per the above analysis, it is evaluated that profitability of XYZ co. is reduced in 1996
as compared to 1995. This is because net profit of company is reduced to 17.5% from 25%. In
addition to that value of net profit is also showing negative trends. Apart from that liquidity of
position of organization is also hampered in 1996. This is because both quick and current ratios
are showing negative trends. In addition to that the assets turnover ratio is reached to 3.03 times
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in 1996 as compared to 3.43 times of 1995. Therefore, it can be stated that the performance of
XYZ co. is not good in 1996 due to all ratios are showing negative trends.
CONCLUSION
In accordance with the present project report, an appropriate conclusion can be drawn
that finance management is most important part of business. This report has found the budgeting
and breakeven point provides significant assistance for carrying out an appropriate financial
planning. This assessment has found that ratio analysis is a most suitable tool to determine
financial position of business so as top managers are able to take appropriate decisions associated
with distinct business requirement.
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