Report: Managing Financial Resources for a Business Project

This report provides a detailed analysis of financial resource management, focusing on a business project. It begins by identifying and assessing various sources of finance, including equity shares, retained profits, bank loans, and overdrafts, along with their implications. The report then examines the costs associated with each source of finance, such as dividends, interest rates, and legal formalities. Furthermore, it emphasizes the importance of financial planning, outlining its role in setting objectives, allocating funds, and making informed decisions. The report also identifies the information needs of internal and external stakeholders, such as investors, employees, and customers, and discusses the impact of finance on financial statements, including balance sheets and cash flow statements. Additionally, the report includes a projected cash budget analysis and an assessment of the viability of chosen contracts. Finally, the report discusses the main financial statements, their purposes, and formats for different business types, using the Marriott hotel as a case study to interpret financial statements.

Managing financial
resources
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TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Identify the sources of finance available to a business..........................................................3
1.2 Asses the implication of the different source of business identified.....................................4
1.3 Appropriate sources of finance for a business project...........................................................5
2.1 Analyze the cost of each sources of finance which is identified...........................................5
2.2 Explain the importance of financial planning........................................................................5
2.3 identify and assess the information need of internal and external decision maker................6
2.4 Explain the impact of finance on the financial statement......................................................6
3.1 Project cash and other budget and analyze this projected budget..........................................7
3.2 The calculation of unit cost for the new project and make pricing decision........................7
3.3 Assess the viability of chosen contract by using different appraisal method........................8
Task 2...............................................................................................................................................9
4.1 Discuss the main financial statement by explaining their purpose and uses........................9
4.2 Compare the format of main financial statement for different type of business.................10
4.3 Interpret financial statement of a Marriott hotel .................................................................11
Conclusion ....................................................................................................................................13
References......................................................................................................................................14
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INTRODUCTION
An effective and efficient management of funds in a such a manner through which
company objective is achieved on time is known as financial management. This function is
directly associated with the top management. Present report is based on a XYZ company, which
is launching a new project. A new project which is launch by a company is demanding and
rewarding for the organization. In a Present report, the different sources of finance is identified
for a new project. Along with this, the main financial statement and their purpose is discussed.
Apart from that, the cost of different sources of finance is analyzed.
TASK 1
1.1 Identify the sources of finance available to a business.
According to the given scenario, XYZ company want to launch an ambitious business
project which is a demanding and rewarding. For a new project company need to identify
different sources of finance.
There are two type of sources of finance long and short term that are discusses below
Equity share: Equity share are known as ordinary share and it is a common sources of
finance for any organization (Agarwal, Amromin and Evanoff, 2015). XYZ company can issue
share and then sell them on the stock exchange, to raise cash for a new project.
Retained profit; Retained profit is a profit which is company own money. (Dorfman
and Cather, 2012). If company used profit for launching a new project then they no need to pay
interest. Further it avoid the possibility of a change in control resulting form an issue of new
share.
Bank loan: Bank loan is appropriate source of finance for XYZ company. There is some
legal formalities which company need to fulfill before taking a loan from a bank. Further, bank
charge some specific amount of rate of interest form company. In addition to this, bank also keep
some security deposit, so that in any case if company fail to pay loan amount, bank can re-payed
loan form a security deposit.
Bank overdraft; It is a short term source of finance which a business need for a day to
day requirement. However, XYZ company need to pay a high interest on bank overdraft within a
given period of time.
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1.2 Asses the implication of the different source of business identified
There are some implication of sources of finance which are identified, this all significance are
discussed below
Source of finance Legal cost Financial cost bankruptcy Dilution of
control
Equity share For raising a fund
from a equity
share company
need to fulfill a
lots of legal
formalities.
In a equity share
capital financial
cost is dividend
which company
paid to its
shareholder.
There are less
priority to a share
holder at the time
when company
become
bankruptcy.
Dilution of
control in equity
share capitals
high because
shareholder have
power
Retained profit In a retained
profit there is no
legal formality
required because
company is using
a money from it
own profit.
There is financial
cost because
company is using
it own money
Their is no
priority given to a
shareholder at
when company
use a retained
profit form
starting a new
profit
Their is low
dilution of control
Bank loan At the time of
raising a fund
from a bank there
is also some legal
formalities which
need to fulfill
before getting a
loan. Bank
provide loan to a
company after
checking their
financial stability.
There is some
specific amount
of interest which
company need to
pay to loan.
If company
become
bankruptcy then
bank re payed its
loan from a
security deposit.
There is a high
priority given to a
bank because
their loan is need
to be payed
In a bank loan
there is low
dilution of control
because there is
interfere of
shareholder
Bank overdraft Bank overdraft is
a short term loan
and company can
take it whenever
it required for
raising a fund.
In a bank
overdraft
company need to
pay a high rate of
interest to a bank
In a bank
overdraft high is
given to a bank,
there overdraft
amount is nee to
be fulfilled by the
organization on
times.
In a overdraft
there is also a less
dilution of control
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1.3 Appropriate sources of finance for a business project
There are different type of sources of finance which company can take at the time of
launching a new project. Each sources of finance have some implication so firm need to choose a
right fund for raising a cash. XYZ company is opening a new cafe for this purpose it can use it
retained profit. This sources of finance is very benefited for the entrepreneur because there is no
need to pay a interest or divides to a shareholder or a bank (Peetz and Buehler, 2013.). On the
other hand, bank loan is also a appropriate source of finance because it help in gaining a extra
finance. Their is less risk involved and company need to fulfill some legal formalities for taking
a loan form bank. Further this loan is also for a short period and log period so company can
decide after determining its project viability which type of loan it need to take. In addition to
this, there is best fixed rate of interest is charge by a bank which company need to fulfill in
installment.
2.1 Analyze the cost of each sources of finance which is identified
There are different sources of finance is identified which is each have some specific cost
which are given below
Equity share; A company can raise a fund from a public and it need to pay dividend to
shareholders. There is low amount of risk because it paid only in liquidation form to public.
Bank loans: fixed rate of interest is charged by a bank if company take a loan from a
bank (Peetz and Buehler, 2013). The rate of is low on a bank loan and there is also some other
fee is charged and applicable which is related with a cost.
Overdraft: There is some interest charge on a overdraft by a XYZ company which is
termed as cost. Further its interest rate is higher as compared to bank loan interest rate. All the
interest rate is paid by a company form their financial cost.
2.2 Explain the importance of financial planning
Deciding monetary objective and formulating policies and procedure for achieving the
target form a systemic process is known as financial planning (Healy and Palepu, 2012). Further
it help in setting a short and long term goals of the organization which is a crucial step in
mapping out a financial future of XYZ company. Organization made a financial plan because it
made easy for taking a financial decision so that goal can achieved on time. Importance of
financial planning is discussed below
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 Financial planing is important for tapping a appropriate sources of fund on a suitable
time. Long term fund can be taken by a shareholder and debenture holder while medium
term can be taken by financial institution.
 Financial plan help in suggesting the way through which fund should be allocated in a
organization for a various purpose (Brealey and et.al., 2012). Further it compare various
investment proposal so that financial planning can be done.
 Financial planning help in utilizing a finance properly in a department within a
organization. All the business plan is depend on a condition of financial planning.
2.3 identify and assess the information need of internal and external decision maker
In a organization there are direct and indirect kind of stake in a business activities and
operation which is called as a stakeholder. There are are some of the important stakeholder of
XYZ company have whose information is need for making a internal and external decision. This
all are described below
Investor are those who want a dividend from a organization, they are high concerned for
it because they invest a lot of money in company project. They need information related to a
business profitability, capital structure and dividend growth etc for fulfilling their objective. On
the other hand employee are also important stakeholder, thy need a information related to
company stability and objective. Workers put their efforts in a organization for accomplishing a
goal and objective on time (Doğan, 2013). Further, supplier of XYZ company need payment on
time and they also evaluate the net return. While on customer are also important stakeholder they
want a quality product at fair price. They want that product which is receive by organization is of
good quality and deliver on right time. Contrary to this , government also need a information
related a to a activities which is performed within a ionization, to make sure that all the business
activities are for public interest and should be ethical.
2.4 Explain the impact of finance on the financial statement
The impact of sources of finance on a financial statements
There is a impact on a stock price because it show financial condition of the organization
to a investor. There are many companies which are listed in a stock exchange need to be aware
of a equity capital of company. On the other hand the financial decision of the company is also
affected by a financial statements.
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Different source of finance appear on a financial statement
In a balance sheet there is a information provided which help in taking a many decision
related to expenditure and revenue. A possibility of growth is show in a balance sheet. On the
other hand cash flow statement also help in a taking a decision of a organization
3.1 Project cash and other budget and analyze this projected budget
Decembe
r January February March April May
Opening balance 25000 64200 103500 144400 187600 231050
Sales 55000 60000 65000 70000 75000 80000
Total 80000 124200 168500 214400 262600 311050
Expense
Purchase 13000 17000 20000 22000 27000 33000
Creditors 1100 1600 1800 2200 1800 1600
Logistic expenses 500 700 800 1000 1050 1050
Employee cost 1200 1400 1500 1600 1700 1700
Total 15800 20700 24100 26800 31550 37350
Closing balance 64200 103500 144400 187600 231050 273700
Analysis: Form the above table it show a increasing trend of XYZ company form a January to
June. It clearly indicate that company need to used different strategy for controlling a expense.
In a table it also show that company revenue is increasing means company is earning a profit
because Company revenues is increasing.
Decembe
r January February March February March
Forecasted sales units 5500 6000 6500 7000 7500 8000
Add: Planned ending inventory 600 650 700 750 800 850
Total production required 6100 6650 7200 7750 8300 8850
Less: Beginning finished goods
inventory 500 500 500 500 500 500
units to be manufactured 5600 6150 6700 7250 7800 8350
3.2 The calculation of unit cost for the new project and make pricing decision
In the given table it show that XYZ company fixed cost is 13000 and it produce 2500 unit.
Fixed cost 13000
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Raw material 7000
Logistic expenses 4000
Packaging 1200
Total cost 25200
Produced units 2500
Per unit cost 10.08
In a table it show that company is producing a 10.08 per unit
3.3 Assess the viability of chosen contract by using different appraisal method
Pay back period
Project Project B
Initial investment -150000 -150000
1 25000 -125000 33000 -117000
2 35000 -90000 48000 -69000
3 45000 -45000 57000 -12000
4 60000 15000 50000 38000
5 65000 80000 40000 78000
6 80000 78000
Pay back period method indicate a time duration of a company which is can recover a
initial capital investment from the expected cash flow which is invested in a project. If there is
longer pay back period then that project is taken into a consideration. Form above payback
period it is clear that project A take short period of time, so it is acceptable by a XYZ company
Average rate of return
Project Project B
Initial investment 150000 150000
1 25000 33000
2 35000 48000
3 45000 57000
4 60000 50000
5 65000 40000
0 0
Total 230000 228000
Average 46000 38000
ARR 30.67% 25.33%
Average rate of return is a ratio which show how much company can generate profit form
a investment project. Higher ARR project is selected and lower ARR project is canceled. Form
the above table of ARR it show that project A have a higher rate of return so XYZ company will
select this project.
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Net present value
Project Pv @ 10% Present value Project B PV @ 10% Present value
Initial
investment 150000 150000
1 25000 0.909 22727 33000 0.909 30000
2 35000 0.826 28926 48000 0.826 39669
3 45000 0.751 33809 57000 0.751 42825
4 60000 0.683 40981 50000 0.683 34151
5 65000 0.621 40360 40000 0.621 24837
Total 166803 171482
NPV 16803 21482
11.20% 14.32%
Net present value show that the project is acceptable whose value is high, form the above
table it is clear that XYZ company will choose project B because it have a higher value.
Internal rate of return
Project Project B
Initial investment -150000 -150000
1 25000 33000
2 35000 48000
3 45000 57000
4 60000 50000
5 65000 40000
IRR 13.65% 15.26%
Internal rate of return show the interest rate on a project . The project which have a high
rate of return will be selected. XYZ company will choose project B because there is high rate of
return on interest.
TASK 2
4.1 Discuss the main financial statement by explaining their purpose and uses
Different type of financial statement are income statement , balance sheet and cash flow
statement. This all statement are discuss below with a purpose and use in company.
Balance sheet : Balance sheet is prepare in every end of the financial year so that
company financial position can be determined (Hiesl, Crandall and Wagner, 2016). In this
balance sheet information is given related to all the profit and loss which is generated by an
organization. Further, it is used by investor to see the financial position of company. It is used
by a company owner to see overall expense and of company of a particular year.
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Income statements: income statement of company show a revenue and expense of a
particular year. It reflects how money is generated by selling a product and all the unnecessary
expenses. It is prepared by a organization so that all unnecessary expense can be controlled and
focus on product which help in increasing a profit (Leung and Brockerhoff, 2014). Its main
purpose is to see the financial position of company of a financial year. Its purpose is to show
financial earning performance of company. On basis of it decision is made by investor whether
they need to invest in new project or not.
Cash flow statement: Cash flow statement show a change between balance sheet and
income statement which can affects the cash equivalent. It is related with a cash which flow
inside and outside the organization. Financial manager used this cash flow statement to see a
cash flow of company and decision take on basis of statements.
4.2 Compare the format of main financial statement for different type of business
There are different type of organization used different format of financial statements
which are compared below
Sole proprietorship there is only one owner and there is no obligation of other owner at
the time of preparing a financial statement (Zager and Zager, 2006). In a sole trader company
only balance sheet is prepared by a organization for a owner. It is necessary to made a balance
sheet so that owner of company came to know how strong its company is financial position. It is
made only for owner so that it can take declension on the basis of this statement (Zimmermann
and Jørgensen, 2015). All the assets and liabilities of company is indicated, so that owner came
to know its main assets. Fuhrer there is no need to prepared a income statement because there is
not any other owner. While on the other hand in a partnership business income statement is made
and there is more then one capital account (Capital Investment Appraisal Techniques. 2015). It
depend on a partners in a company. Apart form this, in a public limited company, there are
different type of statement is prepared by a organization that are International financial reporting
standards (IFRS), generally accepted accounting principal (GAAP) etc. this all are need to mad
so that comparison can be done with a different companies. It maintained a record of a company
expense and profit and investment with a subsidiary company etc.
4.3 Interpret financial statement of a Marriott hotel
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Aforementioned table of Marriott hotel gross profit and net profit increased form a 14.66% and
5.93% in 2015. it us because of increase in sale and expenditure is controlled by a organization.
Further current ratio show that company can fulfill its fallibility within a given time or
not. Marriott hotel current ratio in 2014 is 0.63% which is decreased to 0.43 % in 2015. it show
that company is performing better in fulfilling a current liability in 2014 as compared to 2015.
while quick ratio reflect that how much assets company have to convert it into a cash. Company
ratio in 2015 is 0.37 means company is performing well.
Marriott hotel debt equity ration is is declared in 2015 is 1.57 to 1.07 is show a decline ratio
depicts and company have less investment risk. The standard ratio of Marriott hotel is 0.5: 1
which show that company is generating a fund through a equity capital, It help in maintaining a
capital risk.
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CONCLUSION
From the above report it can be conclude that there are various sources of finance which
company can take for raising a fund for a new project. There are also some implication of a
different sources of fund which can affects company profitability. By making a effective
financial plan company can manage all its financial activities.
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