Comprehensive Report: Financial Resources and Decision-Making Analysis

This report provides a comprehensive analysis of financial resource management and decision-making for a business. It begins by exploring various sources of finance, including bank loans, retained earnings, venture capital, equity, and debentures, along with their implications on the business. The report then delves into the importance of financial planning, including budgeting and the information needs of decision-makers. A detailed cash budget is prepared and interpreted, followed by the computation of unit costs. Project evaluation methods, such as payback period, average rate of return (ARR), and net present value (NPV), are applied to assess investment opportunities. Finally, the report examines financial statements, including format and ratio analysis to assess the financial performance of the business. The report concludes with a summary of the key findings and recommendations for effective financial management.

MANAGING FINANCIAL
RESOURCES AND DECISIONS
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Finance sources for business firms........................................................................................3
1.2 Implications of finance sources.............................................................................................4
1.3 Appropriate source of finance................................................................................................5
TASK 2 ...........................................................................................................................................5
2.1 Cost of source of finance.......................................................................................................5
2.2 Importance of financial planning for firms............................................................................5
2.3 Information needs of decision makers...................................................................................6
2.4 Impact of finance on the financial statements........................................................................6
TASK 3............................................................................................................................................7
3.1 Cash budget for Clariton........................................................................................................7
3.2 Computation of unit cost.......................................................................................................8
3.3 Project evaluation method .....................................................................................................9
TASK 4..........................................................................................................................................10
4.1 Financial statements.............................................................................................................10
4.2 Format of financial statements ............................................................................................11
4.3 Ratio analysis.......................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
INDEX OF TABLES
Table 1 Preparation of cash budget..................................................................................................7
Table 2 Per unit cost calculation......................................................................................................8
Table 3: Calculation of payback period...........................................................................................9
Table 4: Calculation of ARR...........................................................................................................9
Table 5: Calculation of NPV..........................................................................................................10
Table 6: Ratio analysis...................................................................................................................11
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INTRODUCTION
Finance is the one of the important factor that heavily influence business performance of
any firm. In the current report, varied finance sources and there implications on business are
discussed in detail. Along with this, budget is prepare and and interpretation about same is made.
Project evaluation methods are applied on cash flows and best one is selected for the firm. In end
section ratio analysis is done and comments are made on performance.
TASK 1
1.1 Finance sources for business firms
There are two sort of business firms namely unincorporated and incorporated business.
There is difference between both sort of business firms. Unincorporated business refers to the
sole trader and partnership business. Whereas, incorporated business refers to the company.
Sources of finance for both are given below.
Unincorporated business Bank loan: Bank loan is the source of finance which comes in debt category (Raheman
and et.al., 2010). In order to meet long and short term finance need bank loan is usually
taken by the business firms. Retained earning: It is a portion of sales value which remain as residual amount after
paying all expenses out of cash inflow amount.
Incorporated business Venture capital: It is a long term source of finance in which VC company buy shares of
any other firm and in return latter entity receive cash in its business. Thus, it is attractive
source of finance. Equity: Similar to VC equity is also long term source of finance. Firm need to obtain
prior approval from stock exchange in order to issue shares in the market (Wilmott,
2013).
 Debenture: Debenture is similar to bank loan and only difference between both is that
in case of former one assets are not mortgaged but in latter case specific asset is
mortgaged. Interest is paid to creditor on debt amount.
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1.2 Implications of finance sources
Source of finance Legal Finance Dilution of
control
Bankruptcy
Venture capital It is mandatory to
ink a agreement
with other firm in
which investment
will be made
(Tirole, 2010).
Higher finance
cost relative to
other source of
finance.
Control remain
unstable in case
of VC.
Amount is paid to
the creditors and
then capital is
paid back to
shareholders.
Equity Inevitable to
furnish statement
of income and
financial position
to the stock
market regulator.
Same as above
except venture
capital.
Same of VC. Same of VC.
Debenture Necessary to
make available
relevant
documents to the
market regulator.
Lower finance
cost relative to
equity and VC
(Embrechts,
Klüppelberg and
Mikosch, 2013).
Control remain
unchanged.
Same of VC.
Bank loan Mortgage of asset
is required to take
loan from bank.
Same of
debenture.
Same of
debenture.
Same of VC.
Retained earning There are no legal
implications for
retained earning.
There is no
finance cost of
retained earning
Same of
debenture.
Same of VC.
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1.3 Appropriate source of finance
Debt is the appropriate source of finance for the Clariton in comparison to other source of
finance. This is because small percentage of interest is charged on the bank loan amount by the
business firms. Moreover, Directors of Clariton will be able to make business decisions
independently and without any person interference. Thus, on this ground debt seems appropriate
source of finance for the business firm (Brigham and Ehrhardt, 2013). Venture capital and equity
both are not assumed for the relevant firm because there cost is so high and decision making
power of the Directors also get reduced. Hence, in order to prevent this situation debt is
considered appropriate one for the business firm. Retained earning is the best option that firm
currently having because there is no cost of retained earning. Hence, bank loan and retained
earning is considered best source of finance.
TASK 2
2.1 Cost of source of finance Dividend: In case of venture capital and equity dividend is paid to the investors for the
investment they make in the specific company. Thus, dividend is considered as cost of
finance of both venture capital and equity. In case of VC company have to pay seating
fee to the former entity. Due to this reason cost of equity and venture capital is
considered high. Interest: Banks and other creditors charged a interest on the debt amount that is payable
by the business firm. Bank loan may be taken at stable or non stable interest rate. In case
of non stable interest rate finance cost get changed regularly (Lo, Wong and Firth, 2010).
 Tax:Tax is payable by the business firm in case it declared dividend to the shareholders.
Relaxation in tax payment is give only when funds were raised by the business firm
through bank loan or debenture.
2.2 Importance of financial planning for firms
Importance of financial planning is explained below. Budgeting: Budget is prepared by taken in to account entire financial plan. In the
financial plan allocation of cash is already done and same is followed to allot cash
amount to different expenditures in the budget. Thus, it can be said that financial
planning have significance for the firms.
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 Implication of failure to finance adequately: Most of the business firms have limited
amount of cash in their business and they failed to make best use of same. It is the
financial plan that help firms in making best use of cash in the business (Sarumathi and
Mohan, 2011). Thus, financial plan ensured that business firm will not financed
inadequately.
 Over trading: Due to over trading of goods some times receivables increased at rapid
pace in the business. They get converted in to bad debts with passage of time period.
Financial plan ensure that less amount of debtors will be bad debt. This happened
because in financial plan amount of sales that will be done on credit basis is determined
earlier.
2.3 Information needs of decision makers
Information needs of varied decision makers is given below. Partners: Partners require an income statement and balance sheet of the other firm in
order to make acquisition related decisions. They are already aware about their business
performance and due to this reason does not need their firm financial statements. Apart
from this, partners also need business related information of company which they wants
to acquire in order to make business decisions. Venture capitalist:Venture capitalist needed financial statements of Clariton and other
business firm. This is because return of VC firm depends on the performance and
business conditions given and faced by the Clariton and other business firm. Thus, it can
be said that venture capital needed lots of information related to both firms.
 Finance broker:Finance broker require an information related to the amount that of debt
that is already taken by the firm from the market (Krätke, 2010). On this basis they can
access current burden of finance cost on the firm and can identify whether they will
receive fee amount on time from Clariton.
2.4 Impact of finance on the financial statements
Finance have great impact on the firm financial statements. This is because if any
company issues shares in the market then in that case shareholder equity will increase. At same
time cash amount in the asset side of balance sheet will increase. In any case if dividend is paid
to the shareholders then in that situation profit amount will declined by some percentage. On
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other hand, if business operations are funded through bank loan then in that condition also bank
loan amount will be increased and in same time asset side of balance sheet will elevate (Chandra,
2011). Interest that is paid annually will be recorded in statement of income and by this value
profit will slightly reduced in the business. It can be said that different sources of finance heavily
affects financial statements of the business firm.
TASK 3
3.1 Cash budget for Clariton
Table 1 Preparation of cash budget
Particulars Januar
y
Februar
y March April May June
Opening cash 110000 -539750 -
392000 -76750 4850
0 166250
Sale 15000 22500 30000 15000 1500
0 3750
Receivables 142500 262500 405000 547500 3300
00 285000
Total cash inflow 267500 -254750 43000 485750 3935
00 455000
Payment 807250 137250 119750 437250 2272
50 219750
Total outflow 807250 137250 119750 437250 2272
50 219750
Closing balance -539750 -392000 -76750 48500 1662
50 235250
Interpretation
Cash budget is revealing that in the first three months increases but after that trend get
break and reverse one comes in existence. In the month of June sales declined at sharp pace from
15000 to 3750. However, payment amount increased in the first four months. This reflects that
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with increase in sales payments also increased. In the month of May and June decline comes in
the payment value. Hence, it can be said that with increase in sales payment increase or vice
verse. This reflects that budget is prepared in appropriate manner. Due to high amount of
payment relative to sales value closing balance is negative and it slowly become positive from
the month of April. Effective use of surplus cash must be made by the business firm and in this
regard it must allocate 60%,20% and 20% of cash surplus among operating activities, to meet
working capital needs and to make investment in shares. In this way best use of cash can be
done in the business.
3.2 Computation of unit cost
Table 2 Per unit cost calculation
Purchase cost 142137859
Employee cost 70000
Other expenses 50000
Total cost 142257859
Units procured 1000
Per unit cost 142257.86
Margin percentage 25.00%
Sales price 177822.32
Interpretation
Unit cost is calculated by taken in to account various expenditures like purchase cost,
employee cost and other expenses. Thereafter, total cost is divided by the units produced in order
to calculate per unit cost. Margin of 25% is added on per unit cost to calculate sales price. All
costs that are taken in to consideration are variable in nature. Variable cost refers to the expenses
that never remain static during entire life of the business firm (Chimucheka and Rungani, 2011).
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3.3 Project evaluation method
Table 3: Calculation of payback period
Investment 1
Investment
2
Initial investment -8.6 -4.4
1 1.6 -7 0.8 -3.6
2 2.8 -4.2 1.4 -2.2
3 3.4 -0.8 2 -0.2
4 3.6 2.8 2.4 2.2
5 4 6.8 2.3 4.5
6 4.2 11 2.6 7.1
Interpretation
Payback period is revealing that investment 1 and 2 both cover corpus in three years.
Hence, no alternative seems viable on this parameter.
Table 4: Calculation of ARR
Investment 1
Investment
2
Initial investment 8.6 4.4
1 1.6 0.8
2 2.8 1.4
3 3.4 2
4 3.6 2.4
5 4 2.3
6 4.2 2.6
Total 19.6 11.5
Average 3 2
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ARR 34.88% 45.45%
Interpretation
Standard for ARR is 35% and in comparison to it only investment 2 have higher ARR.
Thus, due to higher ARR relative to standard second alternative is assumed profitable which
reflect that if investment is made then firm can earn 45.45% return on average basis.
Table 5: Calculation of NPV
Investment
1 PV @ 14%
Present
value
Investment
2 PV @ 14%
Presen
t value
Initial
invest
ment 8.6 4.4
1 1.6 0.877 1 0.8 0.877 1
2 2.8 0.769 2 1.4 0.769 1
3 3.4 0.675 2 2 0.675 1
4 3.6 0.592 2 2.4 0.592 1
5 4 0.519 2 2.3 0.519 1
6 4.2 0.456 1.913464 2.6 0.456
1.1845
25024
Total 12 7
NPV 3.38 2.53
Interpretation
Both projects NPV is much higher then standard which is 2 million. Investment 1 is
considered profitable because its NPV is greater then other one and also high relative to standard
value.
Most of project managers give due importance to results of NPV relative to ARR. On this
basis investment 1 is considered profitable for Clariton.
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TASK 4
4.1 Financial statements Statement of income: This statement indicate the revenue gained and expenditure made
by the firm in its business during a year (Fracassi, 2016). Cost control strategy is
prepared on the basis of input provided by income statement. Statement of financial position: This statement indicate the assets and liability value at
end of year. Varied areas where attention needed is identified by using this statement. Statement of cash flows: This statement is prepared to find out sources from which cash
inflow happen and places where same invested resultant amount of cash and equivalent
inn business (Fayol, 2016). This statement help one in preparing strong cash management
strategy. Statement of equity:: It reveal the overall change that happened in the value of equity
during a year. This statement is prepared by every company in its business.
 Notes on financial statements: It indicate the values that are taken in to consideration to
calculate final value of specific element of income statement and balance sheet.
4.2 Format of financial statements
There is huge difference in the financial statements of the sole traders, partners and
company. As per rules every company have to follow IFRS and GAAP in order to prepare its
financial statements. Whereas, in case of sole trader and partnership same rules does not applied.
In partnership assets, liability, profit and loss are shared among partners but in case of company
same thing does not happened (Ireland, Paul and Dujardin, 2011). Thus, it can be said there is a
difference in the financial statements of the company, sole trader and company. In case of
company each and every item is put in the specific category all things are presented in detail but
in case of sole trader and partners same does not happened. These are the basic difference
between the format of financial statement of business firms.
4.3 Ratio analysis
Table 6: Ratio analysis
2016 2015
Gross profit 178 175
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Sales 1255 1220
Gross profit ratio 14% 14%
Net profit 33 23
Sales 1255 1220
Net profit ratio 3% 2%
2015 2014
Current ratio 101 71
Current liability 317 309
Current ratio 0.318612 0.229773
COGS 1077 1045
Inventory 47 46
Inventory turnover
ratio 22.91 22.72
Interpretation Gross profit ratio: Gross profit ratio is same across the years which reflects that same
level of control is maintained on direct expenses by the business firm. Further,
improvement in performance is required. Net profit ratio: Net profit ratio increased from 2% to 3% which is good but not
sufficient. It can be said that firm does not have control on its indirect expenses. Current ratio: This ratio is used to access firm liquidity position (Current ratio, 2016).
Ratio value improved from 0.22 to 0.31 which is below 1. This reflect that Clariton does
not have required value current assets to meet current liability.
 Inventory turnover ratio: Inventory turnover ratio decline by negligible points. It can be
said that Clariton manage stability in its performance and it turned inventory in to sales
27 times in a year. It can be assumed good business performance.
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CONCLUSION
It is concluded that best finance source must be selected by the firm because by doing so
control can be managed on cost. Each source of finance must be evaluated deeply and thereafter
specific one must be chosen by the managers. It is also concluded that financial plan must be
prepared regularly because by doping so cash is managed properly in the business. Ratio analysis
method must be used to evaluate firm business performance and by doing so weak areas can be
converted in to strength.
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REFERENCES
Books and journals
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage
Learning.
Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
Chimucheka, T. and Rungani, E.C., 2011. The impact of inaccessibility to bank finance and lack
of financial management knowledge to small, medium and micro enterprises in Buffalo
City Municipality, South Africa. African Journal of Business Management. 5(14).
p.5509.
Embrechts, P., Klüppelberg, C. and Mikosch, T., 2013. Modelling extremal events: for insurance
and finance. Springer Science & Business Media.
Fayol, H., 2016. General and industrial management. Ravenio Books.
Fracassi, C., 2016. Corporate finance policies and social networks. Management Science.
Ireland, M., Paul, E. and Dujardin, B., 2011. Can performance-based financing be used to reform
health systems in developing countries?. Bulletin of the World Health Organization.
89(9). pp.695-698.
Krätke, S., 2010. ‘Creative cities’ and the rise of the dealer class: A critique of Richard Florida's
approach to urban theory. International Journal of Urban and Regional Research. 34(4).
pp.835-853.
Lo, A.W., Wong, R.M. and Firth, M., 2010. Can corporate governance deter management from
manipulating earnings? Evidence from related-party sales transactions in China. Journal
of Corporate Finance. 16(2). pp.225-235.
Raheman, A. and et.al., 2010. Working capital management and corporate performance of
manufacturing sector in Pakistan. International Research Journal of Finance and
Economics. 47(1). pp.156-169.
Sarumathi, S. and Mohan, K., 2011. Role of micro finance in women’s empowerment (An
empirical study in Pondicherry region rural SHG’s). Journal of Management and
Science. 1(1). pp.1-10.
Tirole, J., 2010. The theory of corporate finance. Princeton University Press.
Wilmott, P., 2013. Paul Wilmott on quantitative finance. John Wiley & Sons.
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