Financial Resource Management: Analysis of Finance and Investment

This report, focusing on financial resource management, explores various aspects of finance within a business context. It begins by identifying different types of businesses and their respective financial needs, subsequently delving into the diverse sources of finance available, including bank overdrafts, trade credit, bank loans, and issuing shares. The report then contrasts right issues of shares with loan notes, evaluating their implications on a company's financial structure. Furthermore, it addresses the optimal sources of finance for buildings and non-current assets. A significant portion of the report is dedicated to working capital, defining its components and importance, along with exploring financing options. The report also examines financial statements, including the statement of profit and loss, statement of financial position, and statement of cash flow, along with the impact of financing options on these statements, WACC, and gearing. Investment appraisal techniques, such as payback period and net present value (NPV), are discussed, culminating in a recommendation to a board of directors. The report concludes with a comparison of cash flow and profit, financial planning, and the interpretation of financial statements through ratio analysis.

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Table of Contents
INTRODUCTION...........................................................................................................................1
2.0 Identifying the source of finance available to business.........................................................1
2.1 Types of business...................................................................................................................1
2.2 Sources of finance available to business...............................................................................1
2.3 Compare and contrast right issue of shares and loan notes...................................................2
2.3.1 Right issue..........................................................................................................................2
2.3.2 Loan stock...........................................................................................................................3
2.3.3 Implications of right issues and loan stock.........................................................................3
2.4 Sources of finance for buildings and NCA............................................................................3
2.5 Working capital.....................................................................................................................4
2.5.1 Define.................................................................................................................................4
2.5.2 Why it is important.............................................................................................................4
2.5.3 Sources available for working capital.................................................................................4
3 Financial statements..................................................................................................................4
3.1 Statement of profit and loss...................................................................................................5
3.2 Statement of financial position..............................................................................................5
3.3 Statement of cash flow...........................................................................................................5
3.4 Impact on these financial statements.....................................................................................5
3.4.1 WACC for three options.....................................................................................................5
3.4.2 Gearing for three options....................................................................................................7
3.4.3 How these finance impacted on financial statements.........................................................7
3.5 Earning per share...................................................................................................................7
3.5.1 what information does this provides...................................................................................7
3.5.2 calculation of Earning per share.........................................................................................7
3.5.3 Explanation of answer........................................................................................................8
4 Investment appraisal.................................................................................................................8
4.1 Why it is important to appraise potential investment............................................................8
4.2 What are the risks to future cash flow...................................................................................8
4.3 Different type of techniques..................................................................................................8
4.3.1 Payback period....................................................................................................................8
4.3.2 Calculating payback period................................................................................................8
4.3.3 Net present value................................................................................................................9

4.3.4 Calculation of net present value.........................................................................................9
4.4 Recommendation to board of directors................................................................................10
4.5 Unit cost...............................................................................................................................10
4.5.1 Concept of unit cost..........................................................................................................10
5.0 Cash flow vs profit...............................................................................................................11
5.1 Main trends and messages contained within cash flow.......................................................11
5.2 Importance of financial planning.........................................................................................11
5.3 Explain why company may be profitable but run into problem with liquidity...................12
5.4 Users of financial statements...............................................................................................12
5.4.1 Who are they.....................................................................................................................12
5.4.2 What information do they need........................................................................................12
6 Interpretation of financial statements.....................................................................................13
6.1 Ratio analysis.......................................................................................................................13
6.1.1 Profitability ratios.............................................................................................................13
6.1.2 Liquidity ratio...................................................................................................................13
6.2 Overall opinion on current performance of firm.................................................................14
7.0 Main differences in the financial statements.......................................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Managing financial resources within the enterprise plays significant role as finance is
regarded as one of the major resource without which no organization can survive in the market.
Apart from this, inadequacy of finance has adverse impact on business and it acts as hurdle
especially at the time of accomplishing desired aims and objectives of company. Further, various
techniques are present through which business enterprise manage its financial resources such as
by indulging into proper plans etc (Arffa, 2001). Moreover, identification of appropriate source
of finance is also crucial for business and by selecting specific source it is possible for business
enterprise to carry out its overall operations in effective manner. Apart from this, to take decision
in relation with investment in any new project investment appraisal techniques are effective
which are net present value, internal rate of return etc. By using different methods it is possible
to allocate funds in right project and is fruitful for business. Present study being carried out is
based on management of financial resources where different scenarios have been provided.
Various tasks have been covered in the report which involves selection of appropriate source of
finance, benefits of net present value method, concept of unit cost etc.
2.0 Identifying the source of finance available to business
2.1 Types of business
Different types of businesses are present which requires finance in order to carry out
overall operations in the market. Such businesses involve public, private, partnership etc.
Financial requirement of every business differs from each other and it depends on the nature and
size of business operations are being carried out. Moreover, it depends on management the type
of source being adopted for satisfying financial need and it directly assist in accomplishment of
desired aims along with objectives.
2.2 Sources of finance available to business
Different sources of finance are present which can be adopted by Taste plc for
accomplishing its overall aims along with objectives. Such sources are described below:
Sources Feature Advantage Disadvantage
Bank overdraft (Short
term)
This source of finance
can be undertaken by
firm where more
Main benefit of using
this source is that by
nature it is flexible and
High rate of interest is
charged by bank and it
increases expenditure
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amount can be
withdrawn by firm than
those lying in the
account (Drake and
Fabozzi, 2012)
large amount can be
withdrawn easily
level of company
Trade credit This source is basically
practice of vendors
with allows firm to
place and receive
orders without
providing immediate
payment
Main benefit of
undertaking this source
is that it has minimal
cash outlay with the
help of which shelves
of enterprise can be
stocked easily
(Needles, 2010)
Main disadvantage of
this source involves
fees and penalty
imposed by supplier on
firm
Bank loan (Long term) Company can take loan
from financial
institution at an cheaper
rate of interest
Main benefit of
considering this source
is that it boosts
liquidity position of
organization
It enhances expenditure
level of firm as
business has to pay
interest to the financial
institution
Issuing shares (Long
term)
Taste plc can issue
shares in the market
and can satisfy its
financial needs through
investors
Main advantage of this
source is that shares
can be easily sold in the
market and are liquid.
But main disadvantage
of this source involves
payment of dividend on
equity shares is not tax
deductible expenditure
(Rasid and et.al, 2011)
2.3 Compare and contrast right issue of shares and loan notes
2.3.1 Right issue
It is considered as the form of dividend where organization grants right to existing
investors so that they can purchase shares at a discounted price. Further, shares are offered to
present shareholders instead of others (Ross, Westerfield and Jordan, 2008). Right issues are
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preferred by public limited companies and they prefer to satisfy financial needs through this
source.
2.3.2 Loan stock
It is possible for Taste plc to issue loan notes in the market which can be converted into equity
shares after a specific period of time. Further, raising funds through right issue is more effective
for company in comparison with debt issue (Reid and et. al., 2008). Moreover, when
organization satisfies its financial needs through existing investors then it is not required to incur
extra expenses for attracting them
2.3.3 Implications of right issues and loan stock
Main implication of this source is that it influences controlling power of company and
has impact on ownership structure. Further, through this issue investors can take appropriate
decisions which are fruitful for enterprise. It provides less funds to equity issue in comparison.
Company like Taste plc is financially strong and due to this reason business can easily
attract investors in specific period of time. Further, through debt issue financial needs of business
can be satisfied. Apart from this, when loan notes are issued then company has to pay interest to
the holders. In short, satisfying financial needs with the help of loan notes are compared with
equity source is considered to be costly. Further, for this source business has to provide security
in against of loan.
2.4 Sources of finance for buildings and NCA
From the range of sources present most appropriate source for buildings and non - current
assets is equity financing where firm has issue equity shares in the market through which
business can keep more cash in hand and it is less risky as compared with loan notes. Main
benefit of considering this source is that it does not creates financial burden on business as
compared with debt financing (White, 2006). Further, firm can easily satisfy its financial needs if
shares are issued to the investors and this can enhance overall liquidity position of the business.
Moreover, it is not required for business to pay finance fees and brings on investors which can
enhance business strength. On the other hand there are some disadvantage of issuing shares in
the market which involves payment of dividend to shareholders and this increases expenditure
level of the business. Further, some level of ownership is transferred which is also regarded as
one of the major drawback of this source (Carmichael, 2011).
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2.5 Working capital
2.5.1 Define
Working capital is regarded as the capital of business which is used in order to carry out
day to day operations and is the difference between current assets and liabilities.
2.5.2 Why it is important
Working capital is required by business in order to carry out day to day operations and it
is the difference between current assets and liabilities. Major components of working capital are
receivable, inventory, cash and cash equivalence etc. Inventory of taste plc takes into
consideration work in progress, finished goods and raw materials. In case when excessive stock
is present then it has high burden on cash resources of organization and leads to decrease in sales
volume. Further, for better management of stock it is required for Taste plc to keep track of stock
for all major items of inventory (Carr, Kolehmainen And Mitchell, 2010). Receivable is also
regarded as major component which involves large portion of current assets. While investing into
receivable business has to bear opportunity along with time value. Therefore, for management of
receivable management of Taste plc can control credit and can prepare most effective policies.
Cash and cash equivalence is also major component through which it is possible to know size of
asset balance of company and highlights correlation between maintaining adequate liquidity with
cash in bank. So, all these are key component of working capital and through proper
management business can meet its day to day expenses (Chan and Lee, 2003).
2.5.3 Sources available for working capital
One of the most appropriate source of finance for working capital is bank overdraft as
through this company can withdraw more amount than those lying in account and can satisfy its
financial needs. By considering this source business has to pay interest to bank. Further,
company can manage components of working capital to generate financial source. Moreover, it
is possible to delay creditor payment and policies can be introduced to recover funds from
debtors.
3 Financial statements
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3.1 Statement of profit and loss
This statement supports in knowing the profit and loss of business. Further, profit and
loss account is prepared by every organization so as to know about overall income and gains of
firm over a given period of time.
3.2 Statement of financial position
Balance sheet is regarded as the statement of financial position which represents overall
assets and liabilities of the company. Assets are the things which company owns and they are
regarded as the resource of business which has been acquired through transactions. Further,
labilities are the money that firm owns to outside parties.
3.3 Statement of cash flow
Cash flow supports organization in knowing the range of activities which is leading to
inflow and outflow of cash for business. In short it represents how efficient a particular business
is and assists in enhancing the financial strength. Cash flow statement considers different
activities which are operating, investing and financing.
3.4 Impact on these financial statements
3.4.1 WACC for three options
At present taste plc is having three investment options which are issue of equity, loan
stock and issue from equity along with loan options. Financial evaluations of the options are as
follows:
WACC = Weight of equity X Cost of equity + Weight of debt X cost of debt
Particulars Option 1 Option 2 Option 3
No of issue MV No of
issue
MV No of
issue
MV
500000@2 1000000 1000000 250000 @
2
500000
from loan
1000000
Profit before interest
and tax
(12/100)*1
000000
120000 (12/100)*1
000000
120000 (12/100)*
1000000
120000
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PBIT
120000 120000 120000
Less: Interest 0
60000
30000
PBT 120000
60000
90000
Tax 30% 36000
18000
27000
PAT 84000
42000
63000
Dividend coverage
ratio
PAT/
Dividend
paid to
shareholde
rs
2 - - PAT/
Dividend
paid to
shareholde
rs
2
Dividend for equity
shareholders
PAT/2 42000 - - PAT/2 31500
No of shares 42000/500
000
8.40% - - 31500/325
000
9.69%
Re D0/p0
(8.4/200)
4.20% - - D0/p0
(9.69/200)
4.85%
Cost of debt - - I(1-t)/Pd
(6(1-.3)/3)
1.40% I(1-t)/Pd
(6(1-.3)/3)
1.40%
WACC 4.2*(4000/
4000)
4.20% 4.2*(3000/
4000)+1.4(
1000/4000
)
3.50% 4.85*(350
0/4000)+1
.4(500/40
00)
4.42%
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3.4.2 Gearing for three options
In the first option only equity is present as debt financial source is not used for the
generation of funds due to this aspect cost of equity will be cost of capital. Gearing in this option
cannot be determined as there is absence of debt portion in capital structure of enterprise. In the
second option ratio of debt to equity is 3: 1 and in the last option debt to equity ratio is 7:1. In
comparison between all the three options it is recommended to business to consider second
option whose ratio is balance and through this it is possible to mitigate risk and stability is also
present.
It is suggested to board of directors to consider the second alternative which is beneficial
for firm. Further, by adopting this option company can easily raise funds by obtaining loan of
1000000 @ 6%. It helps in granting more balance upon the financial obligation of company.
Further, this source can provide tax shield to the company and can have less financial cost.
Impact of debt finance on finance statement
3.4.3 How these finance impacted on financial statements
The second alternative is debt financing which has direct impact on balance sheet of firm
as through this long term obligation of business increases and simultaneously cash and cash
equivalence of the enterprise also increases(Da, Guo and Jagannathan, 2012). Further, in case of
income statement it is shown on debt side and this reduces profitability level of the organization
due to financial cost. Therefore, in this way debt has direct impact on financial statement of
enterprise.
3.5 Earning per share
3.5.1 what information does this provides
Earning per share provides information regarding profitability of the enterprise and it
represents how efficient particular organization is in carrying out overall operations. Through
this information shareholders take decision whether to purchase shares of company or not.
3.5.2 calculation of Earning per share
Profit before interest and tax = 720,000
Profit after interest=720,000 – 60,000 = 6,60,000
Profit after interest = 6,60,000*(1-.3)
=4,62,000
Earning per share = PAIT/ no. of equity shareholders
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=462/3000
EPS =15.4%
3.5.3 Explanation of answer
Earning per share is considered as the income which investors of company receive by
investing funds into the shares of enterprise. Further, shareholders of firm are interested in
knowing income earned by firm and through this they obtain idea regarding income level.
Further, Taste plc is financially sound and through this business can easily satisfy need of its
shareholders (Jakhotiya, 2002). Apart from this, the range of investment decisions taken is
associated with development of organization. Further, to assess the level of return profit after tax
is divided by number of shares which investors receive from business.
EPS of company is quite high and it is representing that higher profits are earned by
business and stock value of organization is also as expected. Through this, firm can easily satisfy
need of its investors in appropriate manner.
4 Investment appraisal
4.1 Why it is important to appraise potential investment
By applying investment appraisal technique it is possible to know the feasibility of the
proposal in which amount can be easily invested. Further, it is ultimate objective of every
organization to allocate funds in project which yield higher return along with value. Therefore,
by applying different techniques such as net present value, payback period etc it is possible to
invest funds in project which is profitable.
4.2 What are the risks to future cash flow
Fluctuation in the number of customers and increase in the price of raw materials/
operational cost. So these are the major risks linked with future cash flow.
4.3 Different type of techniques
4.3.1 Payback period
Payback period as an investment appraisal techniques supports in knowing the time
period in which invested amount can be recovered back. Proposal having shorter payback period
is accepted and others are rejected.
4.3.2 Calculating payback period
Pay back period for hotel chain in Asia
Initial investment = $7500000
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Pay back period = 2 years
Payback period calculation for European investment
Project A Cumulative frequency
Initial investment $-8000000
Year 1 2595000 -5405000
Year 2 2845000 -2560000
Year 3 3175000 615000
Year 4 3513800 4128800
Pay back period= A+B/C
2+2560000/3175000
2.81years
Payback period of project of Asia costing $8,000,000 is 2 years and 8 months. In this
time period entire amount of investment can be recovered by firm.
4.3.3 Net present value
Net present value techniques support business in knowing the feasibility of the proposal
in which funds can be allocated. Further, it is one of the main issue for every firm to decide the
appropriate project in which amount can be invested easily (Li, 2010). Main advantage of
adopting this method is that it gives importance to time value of money and considers
profitability along with risk of the project. On the other hand main drawback of this technique
involves difficulty in determining discount rate and to implement (Sherman, 2012).
4.3.4 Calculation of net present value
NPV calculation for European investment
Year Revenue
Net profit
($) Depreciation
Cash
inflow($)
NPV value
10%
Total value
1 25000000 2500000 95000 2595000 0.926 2402970
2 27500000 2750000 95000 2845000 0.857 2438165
3 30800000 3080000 95000 3175000 0.794 2520950
4 34188000 3418800 95000 3513800 0.735 2582643
Total
present
value
9944728
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