Financial Resource Decisions: Sources, Analysis, and Planning

This report provides a comprehensive analysis of financial resource decisions, covering various aspects crucial for effective financial management. It begins by identifying and evaluating eight different sources of finance, discussing their implications and associated costs, and recommending the best source for specific financial needs, such as expansion, working capital, and fixed asset purchases. The report then emphasizes the importance of financial planning and assesses the information needs of different decision-makers. A significant portion is dedicated to variance analysis, unit cost calculations for pricing decisions, and investment appraisal techniques, including accounting rate of return, payback period, net present value, profitability index, and internal rate of return. Furthermore, it discusses the main financial statements, compares formats for different business types, and interprets financial statements using ratio analysis to evaluate a company's financial performance. The report concludes with recommendations to improve financial performance and ensure long-term sustainability, offering valuable insights for strategic decision-making.

MANAGING FINANCIAL RESOURCE
DECISIONS
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TABLE OF CONTENTS
INTRODUCTION ...............................................................................................................................3
TASK 1.................................................................................................................................................3
1.1, 1.2 An identification of 8 sources of finance with its implications..........................................3
2.1 Analyzing the cost of the different sources of finance ..............................................................5
1.3 Selection of the best source of finance for meeting the financial requirements........................5
2.4 Explain the impact of finance on the financial statements........................................................5
(a). Obtaining a five year loan of £10000 at an interest rate of 10% p.a.........................................6
(b). Obtaining a one year line of credit with a major supplier for purchasing amount worth £1500
.........................................................................................................................................................6
(c). Issuing additional 1000 shares at £3.50 each share...................................................................6
(d). Selling some furniture worth £2000 at its net realisable value with no profit..........................7
TASK 2.................................................................................................................................................7
AC 2.2 Stating the importance of financial planning .....................................................................7
AC 2.3 Assessing the information need of the different decision makers.......................................7
PART A.................................................................................................................................................8
3.1 Variance analysis of Yuri's budget.............................................................................................8
3.2 Calculation of unit cost and pricing decisions...........................................................................9
1. Calculation of total cost of the job and cost per leaflet...............................................................9
2. Calculation of total production cost...........................................................................................10
3. Calculation of price....................................................................................................................10
4. Re-estimation of price................................................................................................................10
(1) At 2.5 labour hours...................................................................................................................10
(2) At 1.5 labour hours...................................................................................................................11
PART C...............................................................................................................................................11
3.3 Assess the viability of a project using investment appraisal techniques..................................11
1. (1). Calculation of Accounting rate of return.............................................................................11
(2). Payback period........................................................................................................................12
(3). Net present value.....................................................................................................................12
(4.) Profitability Index...................................................................................................................12
2. Internal rate of return:................................................................................................................13
3. Advantage and disadvantage of project evaluation techniques.................................................13
4. Advice........................................................................................................................................13
TASK 4...............................................................................................................................................14
PART A (4.1 ) Discussing the main financial statements of the firm ...........................................14
PART B (4.2) Comparing the formats of the financial statements for the two different types of
business organization.....................................................................................................................15
PART C (4.3) Interpreting the financial statements of R. Riggs and J&B by using ratio analysis
.......................................................................................................................................................15
CONCLUSION..................................................................................................................................17
REFERENCES...................................................................................................................................19
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INTRODUCTION
Looking at the present competitive and dynamic business world, it is the primary goal of the
organizations to have adequate availability of funds any time so that it can protect itself from the
potential threats. Having required quantity of finance sources and its proper administration is
necessary so that business can achieve their financial goals in most effectual manner. Present project
assignment will demonstrate different types of sources that an organization can use to fulfil their
financial need. Effective analysis and examination of the sources helps to identify most appropriate
sources so that firms can fulfil their financial requirement at less cost.
Moreover, the significance of financial planning will be discuss to manage funds
appropriately and overcome the possibility of future financial difficulties. Besides the role and
importance of budgeting tools will be explain to accomplish target business goals and eliminate
adverse variances that create negative impacts. Furthermore, unit cost will be calculated to take
effective pricing decisions. Investment appraisal techniques will be applied to determine most
viable project which assist in taking qualitative investment decisions. At the end, various kinds of
financial statements and its purpose will be discussed. The financial performance of R. Riggs also
will be evaluated by examining the financial figures through the use of ratio analysis. It will help to
take effective and strategic decisions to improve potential performance to assure long run
sustainability.
TASK 1
1.1 & 1.2 Identification of 8 sources of finance with its implications
As per the scenario, local enterprise agency to design and deliver training packages to
medium enterprise organizations in the local area. All the participants have been invited to attend by
the local council as they indicate the need for support in the area of business finance, presently,
directors of enterprise agency desires to conduct a two day training programme. Hence, he will need
funds which can be satisfied through the following sources, described here as under: Personal investment: Enterprise agency's owner can supply some portion of required funds
from available savings. Its benefit is it does not bring any costs to the agency but still; funds
will be available to a limited extent. Moreover, higher the level of owner's savings will be
helps to eliminate the need of borrowing through outsiders (Siano and et.al., 2010). It does
not involve any legal implication while it helps to dilute controlling rights in the hand of
owners. On contrary, there is no bankruptcy implication. Financial assistance: Local agency can take financial helps from their relatives, friends and
family members. Such financial assistance helps to satisfy business need at less cost. It does
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not involve legal formalities and do not diversify controlling rights. Moreover, if agency
became insolvent than it will not be obliged to pay them by selling their assets hence, it does
not impose bankruptcy implication. Hire purchase: This helps to acquire assets at making some initial payment and thereafter,
remainder can be paid in fixed and periodical instalment (Broadbent and et.al., 2012). Its
legal implication is agency need to comply with legal formalities and pay instalment
inclusion of interest at a fixed interval. It do not diversity control rights to the vendor and in
case of insolvency before payment of whole instalment, vendor has right to get back their
assets because of having ownership. Overdraft: Bank allows enterprise to withdraw high amount than available balance is called
overdraft. Its legal and financial implication is agency need to pay high interest on
overdrafts. While, it does not transfer rights to the lenders and if agency goes for insolvent,
than it need to pay taken amount. Hence, bankruptcy implication exists in overdraft facility. Bank Loan: Financial institution provide funds for different time period and local enterprise
agency can acquire funds through borrowing funds from bank. Agency has to comply legal
formalities such as providing collateral security and guarantee which is its legal implication
(Adams and et.al., 2010). Lenders do not receive any voting rights hence; they cannot take
part in business control. While, bankruptcy implication exists in bank loan means in case of
insolvent, agency has to make payment of principle amount by selling its assets. Trade credit: It is a facility through which agency can make payment to their suppliers after
a short duration. It is a facility to buy now and pay them later. Agency is legally obliged to
pay suppliers at maturity date. New partner: Agency can involve a partner and enter into partnership. It helps to obtain
capital contribution of new partner and mitigate financial need. Its legal implication is both
the parties has to agree on same terms by making an partnership agreement, also called
deed. Further, new partner will be able to control business operations because of dilution of
control (Kalamova and et.al., 2011). No bankruptcy implication exists in it. However, its
financial implication is new partner will also have a share in business profit or loss.
 Government grant: Federal, state and local government provide grants to the agencies for
some specific purpose or for specific time period. It may in the form of guarantee, interest
rate subsidy, loan, direct appropriation etc. Due to excessive legal formalities, it becomes a
very lengthy process to qualify and approve grants as agency has to provide required reports
timely to the government. But the benefit is agency will not need to repay such amount.
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2.1 Analyzing the cost of different sources of finance
Varied sources of finance have both financial and opportunity cost which closely affects the
profitability aspects of the firm. Personal saving has opportunity cost because in this business entity
is unable to get any return from the capital which is invested by them. Further, in bank loan and
overdraft business organization has obligation to pay interest to the financial institutions. This is
the financial cost for the firm which have high level of impact on the profit margin of firm.
Nevertheless, bank loan offers high level of tax benefits to the business organization and thereby
increase their profitability (Georgiou, 2010). In addition to this, under trade credit, suppliers charge
interest which affects the profitability aspect of firm. Whereas, if agency raise finance by involving
new partner then it impose opportunity cost for the firm. Moreover, in this, business unit needs to
consult each and everything with the new partner. Thus, increasing interference affects the
functioning of business unit. In this, trade credit and entrance of new partner does not offer any tax
benefit to the business organization. Whereas, government grant offers high level of tax benefits to
the business organization.
1.3 Selection of the best source of finance for meeting the financial requirements
Local business unit can undertake the following sources for meeting the financial needs for
expansion, working capital and purchasing of fixed assets: Expansion project: By taking into account the implications and cost of different sources, it is
recommended to the Local business enterprise agency to take financial assistance from
bank. Moreover, in bank loan, company requires to return back the money to financial
institution in the form of easy periodical instalments. This aspect reduces the financial
burden of firm to a large extent. Further, bank loan offers high level of tax benefits to the
business entity and thereby, helps in saving money. Thus, company needs to take loan from
bank which helps them in getting high level of monetary benefits or advantages. Through
this, they are able to expand their business operations and functions more effectively. Working capital: In order to fulfil the working capital requirements business unit needs to
make use of overdraft facility which is offered by the financial institution. Thus, by raising
fund through overdraft facility business organization is able to perform their activities and
functions in an appropriate manner. It enables firm to meet their immediate financial
requirements by making interest payment to the lending institutions.
 Purchasing of fixed assets: Enterprise agency needs to purchase the fixed assets through the
system of hire purchase. This source of finance helps business entity in fulfilling their
financial needs at cost effective prices. In this, business unit needs to pay amount in the form
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of instalments which offers high level of convenience to them. Thus, all these sources prove
to be more beneficial for the business organization which helps them in achieving success in
competitive business environment.
2.4 Explain the impact of finance on the financial statements
Scenario presented the balance sheet of R. Riggs for the year ended 2015 with necessary
adjustment. It will impact R. Riggs financial statement in following ways:
Profit and loss statement of R. Riggs for the year ended
31st December, 2015
Fixed assets 5020
Less: Dispose of office furniture 2000
Net fixed assets 3020
Current assets 35974
Add: Cash increase through sales of furniture 2000
Add: cash increase through issuing additional
share capital 3500
Add: cash increase through obtaining a loan 10000
Total current assets 51474
Total assets 54494
Less: Current liabilities 5657
Increase in suppliers 1500
Add: Accrued interest on loan 1000
8157
Net current assets 46337
Less: long term liabilities 10000
Net assets 36337
Financed by
Capital
Share capital 14900
Add: net profit (£23937-£1500-£1000) 21437
36337
Working note:
Interest on long term loan
£10000 * 10% = £1000
(a) Obtaining a five year loan of £10000 at an interest rate of 10% p.a.
Loan for five year or more is called long term loan. Thus, it will increase long term
liabilities of R. Riggs in the liability side of balance sheet. On contrary, it will increase R. Riggs
cash balance hence; it will be included in current assets head of balance sheet. However, its
financial cost that is interest obligations will be revenue expenditures therefore; it will be shown as
expenditures and thereby reduce business profitability of R. Riggs (Beck, Levine and Loayza,
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2000). In the given case, R. Riggs will be obliged to pay £1000 as interest per annum. Moreover, it
is an accrued interest which R. Riggs did not paid in cash so it will be included in current liabilities
as well. All the explained impact of long term bank loan on the financial statement of R. Riggs can
be seen in above prepared balance sheet after taking into account all the adjustments.
(b) Obtaining a one year line of credit with a major supplier for purchasing amount worth £1500
Suppliers are those who provide short term credit to R. Riggs for less than one year. Thus, it
is a part of current liabilities (Mason, 2006). In that given case, R. Riggs obtained credit of £1500
from the suppliers for one year. Therefore, it will increase its current liabilities by £1500 while
credit purchase will be shows as expenditures in profit and loss statement. It will decline profit of R.
Riggs by £1500. All the adjustments can be seen in the above presented balance sheet of R. Riggs.
(c) Issuing additional 1000 shares at £3.50 each share
In that case, R. Riggs issued 1000 shares at a price of £3.50. it will increase owner's
contribution in the form of share capital by £3500. While, in assets side, it will enhance cash
balance and include in current assets of R. Riggs. As a result, both the liabilities and assets will be
increase (Balance sheet presented above).
(d) Selling some furniture worth £2000 at its net realisable value with no profit
R. Riggs sold some furniture at a net realisable value of £2000 at no profit. It means that
assets have been sold at its cost value. Thus, it will decline R. Riggs fixed assets balance by £2000.
However, balance of current assets will be increase due to obtained cash funds. On the other hand,
profit and loss statement remains unaffected because such transaction did not bring any profit or
loss (Bougheas, Mizen and Yalcin, 2006). Moreover, balance of total assets will remains constant
because decline in furniture will be offset by increase in cash balance in the current assets head.
TASK 2
AC 2.2 Stating the importance of financial planning
Financial planning plays a very important role in the success for any business enterprises.
The significance of such planning is discussed here as under. Here are ten powerful reason with
financial planning.
 Income: It possible to manage income and more effectively through this process. It helps
company in identifying what amount of money is needed in tax payment.
 Cash flow: It helps in increasing the cash flow. It evaluates the business cash inflows and
outflows so as to assure proper using of all the funds (Bougheas, Mizen and Yalcin, 2006).
 Capital: The determining Capital funds can be arranged from various sources and are used
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for long term, medium term and short term.
 Investment: Through planning funds can be allocated for various purposes by comparing
various investment proposals.
 Financial security: Financial planning gives financial security to the company and its
business.
AC 2.3 Assessing the information need of different decision makers
Specifically, there are seven users of financial statements who undertake varied accounts to
satisfy their information need. Thus, information need of the different decision makers are as
follows: Owner or Board or Directors: Board of Directors undertake all the financial statements for
evaluating their financial position and image over the competitors. On the basis of this, they
are able to strategic move over others. Managers: For setting the cost effectual strategic framework for the near future manager of
the business enterprise make comparison of the profit of the current year from the previous
one. Thus, income statement provides assistance to the manager in making effective
business decisions. Employees: Personnel of the firm are highly concerned with the profitability and stability
aspect of the business unit. Thus, they make evaluation of the company's ability in relation
to the offering of high salaries and benefits (Gray and et.al., 201). In order to satisfy this
information need human resources of the manufacturing company makes evaluation of the
income statement to determine their career growth and advancement. Shareholders: Investors are usually concerned with the aspect that whether they buy more or
hold and sell the shares of firm (Kumbirai and Webb, 2013). For this purpose, shareholders
of the business organization make assessment of the financial health and performance of it
by taking into account the income statement and balance sheet. Government: Tax authorities which are the part of the government bodies have keen interest
in the financial performance of the firm for tax and regulatory purpose. Thus, legal
authorities undertake income statement to assess that the suitable tax amount
(Users of Financial statements, 2016). It also helps government in assessing that company
has paid Financial institutions: Bank makes evaluation of the financial capability of the firm on
maturity or not. For fulfilling this information need, business organization makes assessment
of assets and financial obligations of the firm through balance sheet.
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 Suppliers: In order to assess the company's ability that they are able to fulfil the financial
obligations on time or not when it becomes due. Hence, suppliers make evaluation of
liquidity aspect by taking into consideration the balance sheet of firm.
PART A
3.1 Variance analysis of Yuri's budget
Yuri is a manufacture of spoons who operates in highly competitive environment.
Budgeting is an effective technique that helps to forecast revenues and expenses and compare
it with the actual performance for analysing the variances, done below:
Variance type Budgeted Actual Difference
Sales unit variance 100000 75000 25000(A)
Material variance
Price 4500(A)
Usage 3000(A)
Total material variance 15000 22500 7500(A)
Labour variance
Rate 3750(F)
Efficiency 5625(A)
Total labour variance 22500 24375 1875(A)
 LRV: It is the result of difference between actual and target wages rate. Favourable LRV of
3750 is the result of good labour availability in the market. It indicates that Yuri paid their
workers at less wages rate as compare to set targets.
 LEV: Adverse variance of £5625 arisen because labour is not efficient and highly
experienced in cutlery manufacturing. Thus, its remedial actions will be that Yuri has to find
out experienced and talented workers who are able in their work (Mondal and Percival,
2010). Higher efficiency will helps to overcome from such variances and thereby result in
less actual labour cost.
 MPV: Adverse variance of £4500 is arisen because of shortage of steel in adequate quantity.
Therefore, suppliers charged high prices which results in high actual cost. Finding suppliers
from alternative sources at cheaper rate is only the remedy available to overcome from such
variance.
 MUV: Wastage of material may be the reason for high actual usages of steel. Thus, making
effective control over wastage and recycling is only an action that is available to reduce
adverse MUV (Hjalmarsson and Mårtensson, 2011).
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 SVV: Less market demand and high price due to high price of steel may be the reason for
fewer sales in unit. Demand can be increase by providing qualitative products at affordable
prices through receiving material at cheaper prices.
3.2 Calculation of unit cost and pricing decisions
Unit cost is the basis for price computation by taking into account the desired mark-up
percentage (Haynes, 2015)
1. Calculation of total cost of the job and cost per leaflet
Job costing is a method that accumulates both the direct or indirect cost associated to
an specific project (Blocher, Chen and Lin, 2008). For the given scenario, total cost and unit
cost for printing company has been determined here as under:
Particulars Calculation Amount ( In £)
Direct costs
Paper 204 reams *100000*£3 61200000
Ink 2 litres*100000 * £9 1800000
Labour 2 hours *100000*£15 3000000
Total direct costs 66000000
Indirect cost
Production and machine overheads 2 hours*100000*£55 11000000
Selling, distribution and administrative
overheads 2 hours*100000*£20 4000000
Total indirect costs 15000000
Total cost 81000000
Cost per leaflet (£81000000/1000000 leaflet) 810
2. Calculation of total production cost
Total production cost = Total direct cost + production and machine overheads
= £66000000 + £11000000
= £77000000
3. Calculation of price
Price = cost each unit + mark-up percentage
= £810 + (10% of £810)
= £810+£81
= £891
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4. Re-estimation of price
(1) At 2.5 labour hours
Particulars Calculation Amount ( In £)
Direct costs
Paper 204 reams *100000*£3 61200000
Ink 2 lires*100000 * £9 1800000
Labour 2.5 hours *100000*£15 3750000
Total direct costs 66750000
Indirect cost
Production and machine overheads 2.5 hours*100000*£55 13750000
Selling, distribution and administrative
overheads 2.5 hours*100000*£20 5000000
Total indirect costs 18750000
Total cost 85500000
Cost per leaflet (£85500000/1000000 leaflet) 855
Selling price - £855 + (£855*10%)
= £855 + £85.5
= £940.5
(2) At 1.5 labour hours
Particulars Calculation Amount ( In £)
Direct costs
Paper 204 reams *100000*£3 61200000
Ink 2 litres*100000 * £9 1800000
Labour 1.5 hours *100000*£15 2250000
Total direct costs 65250000
Indirect cost
Production and machine
overheads 1.5 hours*100000*£55 8250000
Selling, distribution and
administrative overheads 1.5 hours*100000*£20 3000000
Total indirect costs 11250000
Total cost 76500000
Cost per leaflet (£76500000/1000000 leaflet) 765
Selling price - £765 + (£765*10%)
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= £765 + £76.5
= £841.5
PART C
3.3 Assess the viability of a project using investment appraisal techniques
Scenario presents that a capital project A is available to a manufacturing company.
Investment appraisal techniques help to assess the potential profitability of such project and thereby
take good quality of investment decisions.
1. (1). Calculation of accounting rate of return
ARR indicates the profit percentage of the proposed capital investment proposal (Bennouna
and et.al., 2010).
ARR = Average profit/(Initial investment + scrap value)/2
AP = (£35000+£30000+£25000+£20000)/4 = £27500
Avg, investment = £50000+£10000/2 = £30000
ARR = £27500/£30000*100
ARR = £91.67%
(2). Payback period
It reflects the time period to get back initial investment of £50000.
Year Amount Cumulative frequency
Initial investment -50000 -50000
1 35000 -15000
2 30000 15000
3 25000 40000
4 20000 60000
Resale value at the end of 4th year 10000 70000
PP = 1 year + (£15000/£30000)
= 1.5 year
(3). Net present value
It is the excess of future values of all the cash inflow over project cost. It helps to assess net
project viability and project that has positive NPV is always consider viable over other (Hise and
et.al., 2013).
Year Amount
Discounting factor at
10% Discounted cash flows
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