Sources of Finance and Financial Decisions: Home Textile Business

This report analyzes the financial aspects of establishing a home textile business. It begins by exploring various sources of finance, including internal and external options like personal savings, loans, and government incentives, along with their implications. The report then delves into the costs associated with these financing sources and emphasizes the importance of financial planning, covering topics like financial planning's significance, the users of financial information, and the impact of financing on financial statements. Furthermore, the report provides practical financial decision-making tools such as cash budgets, unit cost analysis for pricing, and investment project viability assessments using payback period, Net Present Value (NPV), and Internal Rate of Return (IRR) calculations. The report underscores the significance of financial management for the business's growth and profitability.

Managing Financial Resources & Decisions

INTRODUCTION
Managing financial resources, includes the management to finance in the business or from which
sources finance should be take so that it will financial for the organization. First thing an entrepreneur need
in the business is finance. An enterprise need a secure or adequate fund to start a business. In this case an
entrepreneur is thinking to establish a new business of home textile products. For the purpose of establishing
the business he will evaluate the market condition, financial sources available for business.
TASK 1
LO 1
1.1 Various sources of finance available for business
For starting or setting up the business an entrepreneur needs fund to start that business and for
meeting us the daily operations of a business. Finance is the major part of the business but selecting the
appropriate one is the main thing (Böhm, Eggert and Thiesbrummel, 2017). There are two sources from which
an entrepreneur can take finance they are internal sources of finances or external sources of finance.
Internal source of finance means entrepreneur personal finance that he is willing to invest in the business. It
includes
 Personal saving-An entrepreneur can invest his personal savings in order to start the new business.
This in turn recognized as cheap source of finance because there is no obligation to pay back funfs.
 Borrowing from friends-Friend and family who are supportive can provide finance to the
entrepreneur for setting up the new business. Such source of finance offers flexibility of re payment
and interest as compared to other alternatives available.
 Credit card-This is the popular way of financing to start a new business. Working of credit cards be
like this, each month entrepreneur pay for expenses related to business on credit card. After 15 days
credit card statement is sent and the balance is paid by the business within credit free period (Cardin,
Jiang and Lim,2017). Effect to this business get access of free credit for 30-45 days.
External source of finance means taking finance from outside institutions. It includes the loan, leasing, or by
issuing the shares. Etc.
 Loan capital- An entrepreneur can start venture by taking loan from financial institutions. Thus,
business entity can easily take loan on the behalf of collateral security and thereby would become
able to meet financial requirements.
 Lease-Lease is the agreement between two persons where one party grant the right to use the assets
or services to other party for certain period. In other words, by taking fixed assets on lease business
unit can fulfil funding requirements significantly. Hence, in such case, firm only needs to pay rent in
against to using assets.
 Loan from government- Sometimes many incentives or loans are given by government in order to
help the businessman in starting new business or expanding the existing business.
In order to set up the business of home textile product. Entrepreneur
has to make arrangement of finance through the internal or external sources. In this entrepreneur has only
£20,000 as an internal source of finance and entrepreneurs wants £250,000 in order to set up the business. So

for the remaining fund he will go for the external sources of finance. Entrepreneur will either go for bank
loan, or will take finance on lease or will take from government.
1.2 Implication of different sources of finance
Sources Legal Financial Dilution of control Bankruptcy
1. Personal saving No implication No implication No implication No implication
2.Bank loan Documents are to be
submitted as a
security against
loan.
Interest will be as
per the loan.
Priority will be
given.
3.Share capital
4.Lease Agreement will be
made.
Financial
implication will be
as per the
agreement.
Priority will be
given.
1.3 Appropriate sources of finance for starting a business
For starting a business of home textile product's entrepreneur will compare all the sources of finance
and will choose the best source of finance. As entrepreneur will firstly opt for the internal sources of finance
but the entrepreneur has only £20,000 as an internal source of finance and rest of will be taken from external
source of finance that is £230,000. Entrepreneur will compare all the options on the bases of their legality
and financial implication.
In case of loan there is obligation of interest at the end of every month. Entrepreneur has to pay
interest at the end of every month but this is the easiest way to take finance and interest rate is also
minimum(Gianni, Gotzamani and Vouzas,2017). Lease will be depend upon the parties as what they have
decided in respect of interest or amount.
Borrowing from government is also the best way. As sometimes government offers incentive plan or
lower interest rates to the entrepreneur.
For setting up the business £230,000 will be taken from government institution as government is
giving various incentives plan for setting up the new business. And interest rates are also low as compared
to other.
LO 2
2.1 Cost of financing resources
 Loan capital- In case of borrowing from the bank, entrepreneur has to pay interest on the loan to the
bank. Interest rate of loan varies from bank to bank. Generally interest rates on loan are between 10-
15%. Interest on loan is paid monthly to the bankers.

 Lease- Lease is depend upon the agreement made between the parties. In this case leasee has to pay
rent to lessor (Grabher and König,2017) Rent is determined by the lessor on the bases of the time of
lease.
 Loan from government-Cost of taking borrowing from government is low. in these loan rates are low
as compared to other institutions. Sometimes in order to promote the businessman government may
give incentives. Entrepreneur again has to pay to interest on loan. But the rates may differ.
 Venture capital-Cost of hiring the venture capital is high as they take at least 40% venture in client
firm.
2.2 Importance of financial planning
Financial planning is the process of estimating the capital requirement of business. It relates to the
process of framing financial policies, investment and administration of funds of the enterprises. With the
help of financial policies' entrepreneur can make effective and adequate financial policies which will give
positive return to the business (Hisrich and Ramadani,2017). Importance of financial planning are:
 Financial planning helps entrepreneur in getting adequate funds for setting up the business, and
ensure the consistency of goals by coordinating the objective of business with the financial
requirement.
 With the help of proper financial planning proper utilization of fund can be done.
 An entrepreneur can anticipate the future requirement.
 Financial planning helps to reduce the uncertainties which can be obstacle to the growth of business.
This helps in ensuring stability and profitability.
 Financial planning helps the entrepreneur in making right decision.
 It ensures the balance between the outflow and inflow of the business.
 It also supports the strategic growth of the organization, by evaluating the risk, estimates and
opportunities in the market.
All these importance’s of financial planning helps an entrepreneur in setting the business (Karakaya
and Karakaya, 2017). As with the help of this entrepreneur can anticipate the demand of home textile products
in the market. And accordingly entrepreneur will invest in the business.
2.3 Users of financial information
Financial information is useful for the person who wants to invest in the business. Various users of
financial information are internal users and external users.
Internal users are those users which are within the organization. It includes
 Management- Management of the organization need financial information in order to know the
financial position of the organization and accordingly strategies will be planes.
 Employees- Employees analysis the company profitability in order to expect the increment in there
salarie4s in future.
 Owners- Owners are the person who run the business, they want financial information to check out
the growth and position of their organization.
External users are those users which are the outside the organization. They are

 Creditors-They want the financial information to know the credit worthiness of the
organization .Terms of credit is decided on the bases of organization financial health.
 Tax Authorities- For determining the creditability of tax of then organization.
 Investors- Investors analysis the financial information to access the feasibility of investing in the
company. Investor wart higher return on their investment.
 Customers- Uses the financial information to access the financial position of its supplier in order
to maintain the stability of supply.
 Regulator Authorities- Check the financial information that organization has disclosed all the
information or not. Or the financial statements are made according to legal rules or not.
2.4 Impact of finance on financial statement
Financial statements are the record that outline the financial activity of the business.
Financing from different sources affect the balance sheet and profit and loss account of the business
(Kolokytha, de Oliveira Galvão and Teegavarapu, 2017).
 Owners own fund- Owners own fund mean the personal fund which has invested by owner
in the business. Owners fund affect the balance sheet it is shown at right side of the balance
sheet under the heading owners’ equity.
 Loan from various institutions- If an entrepreneur is financing fund from loans than it will
affect both the balance sheet and profit and loss account of the business. As loan increase the
liability of business and shown under the heading the liabilities as a ”Long term liability”,
and the interest on loan will affect the profit of the business as it will deducted from profit of
the organization. It is shown on the left side as “To interest on loan” and will get deducted
from profits.
 Share capital- If fund is accumulated through the issue of share capital than it will increase
the liability of the company and will be shown under the heading liabilities under the sub
heading share capital. Interest on shares paid to shareholder will affect the profit and loss
account as the interest will be deducted from the profit.
LO 3 Financial decision based on financial information
3.1 Cash budget of the Home textile products of the six months

From above cash budget it is analysed the cash inflows are regularly increasing during the period of
six months. Cash inflows are higher than the cash outflows. There is continuous increase in sales made by
the home textile product. As this is the indicator of the good growth of the business, and in upcoming months
also business will make profit only.
3.2 Unit cost helps in making price decision
Unit cost mean total expenditure done by the company to produce, store and sell one unit of product or
services (Leitner, Rausch and Behrens, 2017). Unit cost include all the cost like fixed cost, variable cost,
overhead cost and all direct material cost. For instance Home textile product is manufacturing the 200 bed
sheets In manufacturing the 200 bed sheets following fixed and variable expenses incurred by the
organization.
 Fixed expenses- £20000
 Variable expense- £60000
By following cost unit cost can be determined by adding both the cost and divide it by the total
number of bed sheets manufactured by the organization
Unit cost = (Fixed cost + Variable cost)/ number of bed sheets

= (20000+60000)/200
=£400
Further is the business wants to attain the margin of 20% through mark up pricing method than price
will be
Price per unit: 400 + (400*20%)
= 400 + 80
=£480
Hence from above calculation it is notice that in order to get the profit of £80 company has to
charge £480 from each individual.
3.3 Viability of investment project
Payback period
Computation of Net present value (NPV) and intermal rate of return (IRR):

Capital Budgeting refers to evaluating and analysing potential growth and revenue of project. As many times
we want to know when project will start giving profit and in how many years the cost of project will be
recovered (Murendo and Mutsonziwa, 2017).
Payback period: payback period provides an analysis when the project will recover its cost and significant
approach towards profitability of project. As there are two investment projects are given Project A and
Project B, the company should accept project B as payback period is less then Project A. Payback period
states that the cost of project will be recovered within 2 years as compare to 2.1 years.
Net Present Value (NPV) and Internal Rate of Return (IRR) : NPV and IRR are the main component of
capital budgeting and provides time value of money. NPV refers to difference between present value of
inflow and outflow. Project A has 117648 as NPV whereas Project B has 131366 as NPV. So the
organisation should choose Project B as it is more compared to Project A.
IRR is a discounting rate which takes NPV = 0. IRR for project A is 40.69% and for project B 43.68% . So
the organisation should go for Project B.
TASK 2
4.1 Financial statements
Financial statements represent a formal record of the financial activity which has place during the
year. The three basic financial statements are balance sheet, Income statement and such flow statement.

 Balance sheet –Balance sheet is the statement of assets, liabilities and capital of business. Balance
sheet gives the idea to investors about the company owns and owes. Balance sheet work on basic
formulae that is Assets = Liabilities + Equity.
Balance sheet contain three element assets liabilities and equity. Asserts are the properties invested in the
business to be used in the operation of business. Such as cash, inventory, building etc. Liabilities are the
legal obligation on the organization such as loans. Equity are the cash or non-cash items invested by the
owner or investors.
Uses of balance sheet
 Balance sheet helps us in determine the working capital of the business. Working capital is the
difference between the current asset and current liability.
 Balance sheet helps the organisation or investors to know the net worth of the business. Net worth
defines the true value of an entity.
 Balance sheet helps to company in sustain future needs. By seeing the balance sheet an entrepreneurs
can sustain the future needs.
Income statement – It is also known as the profit and loss account of the organization as it shows the
revenues and expenses made by the organization during the year. Income statement include the sales,
gross profit, other general and administration expenses or any income.
For obtaining the net profit firstly gross profit will be ascertained. After gross profit all the expense
will be deducted and all the income will be added in gross profit in order to get the net profit of the
firm.
Cash flow statement- Cash flow statement shows the inflow and outflow of the cash during a
particular period of time (Nizamidou and Vouzas, 2017). Cash flow activity involves cash generated
from operating activities, cash generated from investing activities and cash from financing activities.
Cash from operating activities include the cash generated from sales and purchases made by the
organization. Cash from investing activities include the cash inflows and outflows made by
investment made by the organization like investment purchase, sell of investment. Cash from
financing activities includes cash inflow and outflow from the selling and purchasing of shares,
dividend paid etc.
All these financial statements are seen by the lender, investor, creditor in order to know th position
of the organization. As balance sheet gives the idea regarding worth of the organization, profit and
loss account shows the profit or loss made by the organization or cash flow statement shows the
balance of cash with the organization for used in the daily operations.
4.2 Comparison of financial statements
Basis of
difference
Sole trader Partnership
firm
Public and private
firm
Non-profit
making
organization
Meaning Sole traders
implies for the
Firm in which
two or more
Firms which create
employment
Organization
which works

one who owns
and manages
their operations
without any
interference of
others.
entities come
together for
sharing profit &
loss as per the
predetermined
ratio, known as
partnership.
opportunities and
make efforts for
maximizing
shareholders wealth
considered as public
& private firms. For
instance: Hilton
comes under the
category of publicly
listed firms which
develops strategy for
maximizing both
productivity and
profitability.
for the welfare
for other
recognized as
NGO.
Format No specific
format is
followed by
sole traders
Standardized
format is
followed within
partnership for
the preparation
and disclosure of
final accounts
Likewise partnership
firm, specific format
or structure is
followed for
financial reporting.
Financial
statements
Sole traders
only prepare
profit & loss
account for
getting
information
about income
aspect.
Likewise, public
and private firm
it prepares all
accounts.
However,
partnership firm
also prepares
partners’ capital
account. This in
turn furnishes
information
about capital and
goodwill of
partners.
Such kind of firms
prepare following
accounts at the end
of an accounting
year:
 Income
statement
 Balance
sheet
 Statement of
cash flows
 Statement
of changes in
equity
It lays
emphasis on
preparing
income &
expenditure
a/c.
Auditing and
publishing
requirement
No Yes Yes No
Compliance
requirement
No nee d to
comply with
accounting
rules
Financial reports
are prepared by
the partnership
firm as per the
rules contained
in IFRS and
IASB.
Compliance with
IFRS and IASB is
highly required.
No

4.3 Interpretation of financial statements
Ratio Analyses
Ratio analyses determines the financial performance of the company and determines the scope of
growth in several important components of the organisation.
Profitability Ratios: it determines the earning after deducting expenses and other relevant costs.
In the question we have calculated Gross profit, Net profit on the basis of total sales made by the company in
a year and made comparison with 2014 data.
In comparison to year 2014 there is a significant increase in GP ratio and NP ratio which suggest that the
sales were more due to increase in number of consumers in Marriott International.

Liquidity Ratios: As the term signifies it measures the Marriott International ability to meet its working
capital or short term liabilities. Current ratio signifies that whether the organisation has enough assets to pay
off its debt whereas quick ratio signifies the amount readily can be made available by the organisation within
reasonable period of time. In comparison to 2014 the ratio has significantly decreased and it emphasis that
Marriott International assets are not sufficient to meet the cost of its debt.
Efficiency Ratios: it measures how efficiently Marriott International uses its assets to get return and how
maximum uses it for his benefits.
In this we have calculated asset turnover ratio and receivable turnover ratio to know how organisation has
utilised its assets in its maximum capacity (Wojewnik-Filipkowska, 2017). In comparison to 2014 there is a
significant increase in the ratio of asset turnover which emphasis on that the Marriott International has fully
utilised its resources whereas receivable turnover ratio states that the debtors of the company has paid the
credit amount and it may impact on decrease of bad debts.
In short we can say that there is increase in profitability and efficiency in Marriott International and decrease
in liquidity.
Hilton hotel financial position through ratio analysis
2014 2015
Revenue 10502 11272
Gross profit 6483 7207
Gross profit margin 61.7310988383 63.9371894961
Current assets 2499 2585
Current liabilities 2257 2467
Current ratio 1.1072219761 1.0478313741
Marriott International vs. Hilton hotel
 Gross profit ratio:- In 2014, Marriott International earned 14.25% while it is for Hilton
hotel is 61.73% that is more than the other firm. However, it is analysed that profit earning
capacity of Hilton hotel is better than Marriott that will be leads to improving efficiencies in
future time. However, in 2015, the gross profit margin of Marriott International is 14.66%
and for Hilton hotel is 63.93%. It is recognized through comparing profitability of both
organizations that Hilton hotel is better than the other one. As per this ratio analysis, it is
suggested to Marriott International hotel for finding out reasons behind its poor financial
position as well preparing strategies for improving it.

 Current ratio:- It is evaluated through dividing current assets to current liabilities of any
organization. An ideal current of any organization must 2:1 that presents financial and
liquidity position of entity. According to this ratio analysis, it is interpreted that in 2014,
Marriott International hotel's current ratio is 0.63 while Hilton hotel's ratio is 1.10 that is
more effective than the other one. However, this ratio in 2015 of Marriott International is
0.43 while, It is for Hilton hotel is Marriott 1.04. Thus, it is analysed that on hotel's
performance is better than Marriott International. Therefore, it is required organization to
increase liquidity position through implementing prepared strategies for better quality
services at systematically.
Conclusion
From taking above report into the account Home textile product has to select the source of finance
by analysing all the financial resources, as by this company can increase its profitability. Further by
providing proper information to its users it make company more trustworthy. By doing the budget and
financial planning it is avoiding the wastage use of money. From overall report is can be concluded that
proper decision regarding finance and selections of project make company more profitable.

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