Business Finance Report: Sources, Planning, and Financial Statements

This report provides a comprehensive analysis of financial sources and planning for a business, using the example of a hair salon named 'Stylish'. It explores both internal and external sources of finance, assessing their implications and suitability. The report delves into financial planning, its significance for a business, and the information needs of internal and external decision-makers. It examines the impact of financial sources on financial statements, including income statements and balance sheets. Furthermore, the report includes a detailed cash budget, unit cost determination, pricing decisions, and an evaluation of investment viability through investment appraisal techniques such as payback period and net present value (NPV). Finally, the report analyzes the financial statements prepared by Sainsbury, comparing them to those of other firms and applying ratio analysis. The report aims to provide a thorough understanding of financial management concepts and their practical application in a business context.

MFRD

Table of Contents
INTRODUTION........................................................................................................................3
TASK 1......................................................................................................................................3
1.1 Sources of finance available to the business organization...............................................3
1.2 Assessing the implications of different financial sources................................................3
1.3 Selecting and evaluating the suitability of sources..........................................................5
2.1 Identifying the cost of varied source of finance...............................................................5
2.2 Presenting the significance of financial planning for business entity..............................6
2.3 Assessing the information need of internal and external decision maker........................6
2.4 Finding the impact of financial sources on final accounts...............................................7
3.1 Preparing cash budget and analyzing it for making suitable decisions............................7
3.2 Determining unit cost and making pricing decision........................................................9
3.3 Evaluating the viability of proposed investment through investment appraisal..............9
TASK 2....................................................................................................................................11
4.1 Assessing the main financial statements prepared by Sainsbury...................................11
4.2 Distinguishing the financial statements of Sainsbury with other kind of firms.............11
4.3 Analyzing financial statements of Sainsbury through the means of ratio analysis........11
CONCLUSION........................................................................................................................12
REFERENCES.........................................................................................................................13
APPENDIX..............................................................................................................................14

INTRODUTION
In the present times, effective management and control of financial resources are
highly required to attain success in the competitive business environment. The rationale
behind this, at each level of operations business unit has to incur money to satisfy the needs
and wants of customers. Thus, it is highly required for the manager to wisely take decisions
by undertaking the monetary tools and techniques. The present report is based on Hair style
Salon namely ‘Stylish’. Hence, by considering the government support business entity has
taken decision in relation to start venture. In this, report will shed light on the tools and
techniques that can be undertaken by an entrepreneur for decision making which in turn
ensures smooth functioning of operations.
TASK 1
1.1 Sources of finance available to the business organization
Internal source
 Personal savings: Entrepreneur can start venture by using personal savings or funds.
Moreover, each business entity saves some amount of funds for meeting the future
requirements.
 Sales of unused assets: Business entities have several assets which are not used by
them in other productive activities (Topa and Herrador-Alcaide, 2016). Thus, by
selling unused land and equipments owner of Hair Salon can generate funds.
External sources
 Bank loan: Financial institution offers both long and short term loan to the business
organizations whose business plan is highly competent. Hence, by approaching to
banking institution owner of Hair salon can raise funds.
 Leasing: By taking fixed assets such as land, equipments on lease business entity can
fulfill the financial needs.
 Government grant: In the recent times, government has taken several initiatives for
offering support to the entrepreneurs (Shortall and et.al., 2016). Hence, by preparing
and presenting sound business plan in front of the government authority owner can
raise finance.

1.2 Assessing the implications of different financial sources
Sources of
finance
Financial
implications
Legal Dilution of
control (High,
limited and
lower)
Bankruptcy
(Priority level in
getting funds)
Internal sources of finance
Personal savings Opportunity
cost: Loss of
interest on
capital
- _ Least
Sales of assets Registry and
other expenses
Transfer of
ownership from
seller to buyer.
- -
External sources of finance
Bank loan Interest on bank
loan
Fulfilment of
documentary
formalities is
highly required.
Limited Financial
institution
enjoys priority
in getting
payment of loan
along with the
interest amount.
Leasing Rent on leased
assets
In the case of
leasing, lease
holder is obliged
to make use of
assets according
to contractual
terms (Herbener
and Rapp, 2016).
Limited Lease provider
has right to get
back assets at
the time of
bankruptcy.
Government
grant
Interest amount
charged by
government
institution
In accordance
with the legal
aspects, business
unit is obliged to
Limited Moderate

make use of
money in the
activities for
which it is
granted.
1.3 Selecting and evaluating the suitability of sources
Owner of Hair Salon should undertake following sources to meet the monetary
requirements are:
 Bank loan: It is highly suitable source of finance which in turn offers tax benefits to
the owner of hair salon. Further, government is always ready to offer loan in against
to collateral security. In this way, by approaching to bank business entity of Hair
Salon can meet the monetary needs (Malik, Field and Gorwood, 2016). However,
interest and installment amount imposes fixed burden in front of an entrepreneur.
 Government grant: Entrepreneur should raise fund through the means of government
grant. Hence, by furnishing clear and appropriate information owner of Hair salon can
easily get financial assistance. Besides this, in such source interest rate is negligible
and thereby imposes fewer burdens on firm. However, in this, entity has to comply
with more documentary formalities as compared to other sources.
2.1 Identifying the cost of varied source of finance
Sources of finance Cost
Bank loan In the case of bank loan, business entity has
to pay interest on the financial assistance
taken. In this way, interest amount imposes
high cost in front of Hair Salon owners.
Government grant Under government grant, owner of the firm is
obliged to make payment of interest. In
comparison to bank loan, lower interest rate
is charged by government authority. Thus,
interest on government grant has cost in front
of firm (DaDalt and Coughlin, 2016).
Equity cost If business entity will take decision in relation to

raising fund from equity source then dividend
will impose cost. Moreover, in shares sole trader
is entitled to give profit to the shareholders
whenever they earn profit. In this way, equity
source imposes financial cost in front of the
company.
2.2 Presenting the significance of financial planning for business entity
Financial planning is the process which lays emphasis on making optimum allocation
and utilization of finance. Hence, financial planning is highly significant for both existing and
new start-up. Thus, owner of Hair Salon should undertake financial planning which in terms
help in making co-ordination between the various activities (Financial planning, 2017).
Along with this, by developing financial plan business unit can assess financial requirements
and thereby would become able to take decision. For instance: For opening Salon business
entity requires £100000. In this, by preparing competent plan entrepreneur can assess whether
they need to raise funds from equity or debt instruments and thereby would become able to
develop optimal capital structure. Besides this, financial plan will also give indication to sole
trader about the areas which will demand for finance in the near future. Further, financial
plan enables firm to make evaluation of performance by making comparison of actual
performance with standard aspect (Ho and Peng, 2016). In this way, financial plan helps in
making control on expenses and thereby ensures optimum use of funds.
2.3 Assessing the information need of internal and external decision maker
Decision makers Financial statement Information need
Internal decision makers
Higher management Income and cash flow
statement, balance sheet
Assessment of own
performance over the period
and in against to the
competitors. Hence, by
evaluating statements firm
can develop suitable
framework for the near
future.

Employees Income statement To assess company’s
profitability and its impact on
salary structure as well as
plan income statement is
evaluated by the personnel of
Hair Salon (Verbano and et.al.,
2016).
External decision makers
Investors All final accounts To get information about
profitability, liquidity,
solvency and efficiency
aspect or performance.
Financial institution Statement of financial
position
For assessing company’s
ability in relation to making
payment of loan on time
business unit makes
assessment of balance sheet.
Suppliers Balance sheet For evaluating the extent to
which business unit has
ability to meet obligations on
time firm makes evaluation
of balance sheet.
Government Income statement To determine tax liability
owner of Hair Salon makes
assessment of Income
statement (Picker and et.al.,
2016).
2.4 Finding the impact of financial sources on final accounts
Selected sources of finance have following impact on financial statements:
Income statement
Gross profit ............................XXX

Less: Interest on bank ..................XXX
Less: Interest on government loan ....XXX
Net profit ..........................................XXX
Balance sheet
Liabilities Amount (in £) Assets Amount (in £)
Long term debt XXX Cash (Bank loan +
government grant)
Government grant XXX
 Impact on income statement: If business entity will raise fund from the sources of
bank loan and government grant then indirect expenses of hair salon will increase in
the form of interest. Along with this, dividend offered by the company to its
shareholders also affects the profit margin to the significant level.
 Impact on balance sheet: Along with income statement, selected sources of finance
also have significant impact on the liquidity and solvency aspect of firm. Moreover,
liabilities side of hair salon will increase with the amount of bank loan, government
grant and equities. Besides this, cash element of balance sheet will also increase with
such amount as per the concept of dual effect.
3.1 Preparing cash budget and analyzing it for making suitable decisions
Cash budget of ‘Stylish’ from July to December is as follows:
Particulars July August September October
Novembe
r December
Cash inflow
Opening cash balance 15000 29700 45434 62255.7 80221.4 99390.6
Sales revenue 25000 26250 27562.5 28940.6 30387.7 31907
Other income 5000 5000 5000 5000 5000 5000

Total cash inflow 45000 60950 77996.5 96196.3 115609 136298
Cash outflow
Administration expenses 3000 3150 3307.5 3472.88 3646.52 3828.84
Salaries of personnel 7000 7000 7000 7000 7000 7000
Promotional expenses 1800 1836 1872.72 1910.17 1948.38 1987.35
Electricity 1500 1530 1560.6 1591.81 1623.65 1656.12
Maintenance and other
expenses 2000 2000 2000 2000 2000 2000
Total cash outflow 15300 15516 15740.8 15974.9 16218.5 16472.3
Closing cash balance 29700 45434 62255.7 80221.4 99390.6 119825
The above depicted cash budget entails that closing cash balance of the firm increased
from £29700 to £119825 respectively. Hence, sales revenue of firm also increased in each
month significantly. Moreover, from October to December due to Christmas season Stylish
Hair Salon attained success in attracting more customers (Schroeder, Clark and Cathey,
2016). Along with this, total cash outflow also increased from £15300 to £16472
respectively. Thus, by considering the overall performance it can be stated that cash position
of Hair Salon is sound.
3.2 Determining unit cost and making pricing decision
Computation of unit cost and price per customer:
Particulars Amount (in £)
Cosmetic products 5000
Electricity and other expenses 2000

Promotional expenses 2200
Salaries 6000
Miscellaneous expenses 3000
Depreciation on equipments 1000
Maintenance expenses 2500
Total cost 21700
Average number of customers served 75
Cost per customer
Total
cost /
number
of
customer
s served 289.33
Gross margin 20%
Price per customer
Cost +
(cost *
gross
margin
%) 347.2
3.3 Evaluating the viability of proposed investment through investment appraisal
Entrepreneur of Hair Salon undertakes investment appraisal techniques to evaluate the
attractiveness of project. For instance: Business entity has two projects which will offer
following cash flows:
Calculation of payback period and NPV
Project A
Year
Cash
inflow
Cumulative
cash inflow
PV factor
@ 10%
Discounted
cash inflow
1 50000 50000 0.909 45455
2 58000 108000 0.826 47934
3 55500 163500 0.751 41698
4 67000 230500 0.683 45762
5 80000 310500 0.621 49674
Total discounted cash inflow 230522
Initial investment 150000
NPV (total discounted cash
flow – initial investment 80522
Internal rate of return (IRR) 28%

Payback period: 2 + 42000 / 450000
= 2.8 years
Project B
Year Cash inflow Cumulative cash inflow PV factor @ 10%
Discounte
d cash
inflow
1 45000 45000 0.909 40909
2 52000 97000 0.826 42975
3 48000 145000 0.751 36063
4 62000 207000 0.683 42347
5 74000 281000 0.621 45948
TDCF 208242
II 150000
NPV 58242
IRR 23%
Payback period = 3 + 5000 / 62000
= 3.1 years
By considering the above outcome, it can be stated that project A will offer higher
benefit to the firm. Moreover, according to the selection criteria NPV of project A is higher
such as £80522. Besides this, IRR (28%) and payback period (2.8 years) of project A is good.
Thus, by investing money in project A owner of Stylish will get high monetary returns.
TASK 2
4.1 Assessing the main financial statements prepared by Sainsbury

Sainsbury prepares following financial statements are enumerated below:
 Income statement: Sainsbury prepares income statement at the end of an accounting
year with the aim to assess the profit generated by it over expenses. This statement
clearly presents information regarding the gross and net profit, other income received
etc. Hence, by making comparison of current profitability with the previous year and
in against to the competitors Sainsbury can take suitable action for improvement.
 Cash flow statement: Operating, investing and financing are the main activities or
elements of cash flow statement. Hence, Sainsbury prepares cash flow statement to
identify the sources and activities where fund is used and received from (Robson,
Young and Power, 2017). The main aim behind the preparation of such account is to
evaluate the area of finance which requires high control.
 Balance sheet: To get information about assets and liabilities in the summarized
format Sainsbury frames balance sheet. It clearly provides information about the
extent to which business unit has assets for meeting the monetary obligations.
4.2 Distinguishing the financial statements of Sainsbury with other kind of firms
Basis of difference Sole trader Private and publicly listed
companies
Meaning Sole traders are the one who
takes business decision by
their own without any
interference of others.
Publicly listed companies are
the one which makes
decision by following the
guidelines revealed by the
government.
Financial statements Profitability statement Income and cash flow
statement, balance sheet,
statement of changes in
equity and supporting notes
are prepared by the firm.
Auditing and publishing
requirements
No Yes
Rule and regulation
requirements
No UK GAAP, IFRS