Managing Financial Resources and Decisions - Finance Report

This report delves into the crucial aspects of managing financial resources and making sound financial decisions within a business context, specifically focusing on a textile business scenario. The report begins by identifying and evaluating various sources of finance, including bank loans, overdrafts, personal savings, and lease finance, considering their implications and suitability for the business. It then explores the costs associated with each source and highlights the significance of financial planning in ensuring the optimal utilization of resources. The report further examines the information requirements of internal and external stakeholders, such as investors, top management, employees, and suppliers, and analyzes the impact of different financing options on the firm's financial statements. The analysis extends to the preparation of a projected cash budget, enabling informed decision-making. Unit cost calculations and pricing decisions are addressed, along with an assessment of project viability through investment appraisal techniques. Finally, the report covers the main financial statements, compares their formats across different businesses, and interprets J. Sainsbury's financial statements using ratio analysis. The report underscores the importance of financial planning and effective resource management for achieving business growth and stability. The document is a valuable resource for students on Desklib.

Managing Financial
Resources and
Decisions
1

TABLE OF CONTENTS
Introduction......................................................................................................................................4
Task 1...............................................................................................................................................4
1.1 Understanding source of finance available to textile business..............................................4
AC 1.2 Implications of different finance source on textile firm..................................................5
AC 1.3 Evaluation of appropriate source of finance for textile business....................................6
Task 2...............................................................................................................................................6
AC 2.1 Cost associated with sources ..........................................................................................6
AC 2.2 Significance of Financial Planning in Textile business...................................................7
AC 2.3 Information requirement of various internal and external stakeholders..........................7
AC 2.4 Impact of above discussed finance sources on firm's financial statements.....................8
Task 3...............................................................................................................................................8
3.1 Preparation of projected cash budget and take appropriate decisions through analysis........8
3.2 Unit cost calculation and make appropriate pricing decisions.............................................10
3.3 Analysing project viability through different investment appraisal techniques..................10
Task 4.............................................................................................................................................13
4.1 Main financial statements....................................................................................................13
4.2 Comparison of formats of different businesses...................................................................13
4.3 Interpretation of J. Sainsbury's financial statements through ratio analysis method...........14
Conclusion.....................................................................................................................................14
References......................................................................................................................................15
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INTRODUCTION
In the present scenario, every business enterprise is required to manage their financial
resources in order to achieve higher sales and profitability. Further, effective management of
finances also supports organizations in getting better opportunities for growth and development.
It also plays very important role in carrying out smooth flow of activities and operations of a
business enterprise. The present report reflects the key and different sources of finances which
are available to organizations. In addition to this, it also highlights the implication and evaluation
of all available sources of finances.
TASK 1
1.1 Understanding source of finance available to textile business
The main objective of a textile business behind carrying out its operations is to
manufacture cloth and then supplying the same to people in the market. In order to produce
cloths different type of resources such as human, financial and technological resources are
employed by businesses in the textile industry. Along with this, bid is also carried out by these
organizations in order to make sure that the best and most effective quality of raw material is
acquired. According to the provided case scenario, the owner is looking forward for investing
£300000 in bidding of the raw material. Furthermore, the problem is that the owner is also
having £20000 with himself. The remaining amount can be raised by using a variety of sources
which are highlighted below as:
 Bank Loan- It is considered as one of the most common and trusted source from which
businesses can raise required funds (Ferguson and Smets, 2010). In order to make
arrangements for remaining amount, the owner of textile business can take loan from
bank and will be required to pay a particular interest against the sum which has will be
issued.
 Overdraft from bank- It is a kind of sources of finance in which the people can withdraw
more money from bank as compared to what they are having in their respective bank
account.
 Personal saving- In order to raise funds, people can also make use of the amount which
they have saved for their future.
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 Lease finance- It is a kind of source of finance in which owner gives other parties with
the right to use their assets. Furthermore, a sum of money is charged against the rights
provided.
AC 1.2 Implications of different finance source on textile firm
It can be stated that every businesses owner is required to determine different implication
of available sources of finances before selecting the appropriate one. The implications of
different sources are provided below as:
Sources Legal Dilution of
ownership
Bankruptcy
Personal savings Each and every
individual has right to
use their personal
saving in whatever
activities or task of
their choice (Irwin
and Scott, 2010)
In terms of dilution
of ownership, it can
be expressed that
personal saving are
real assets of
businesses and
therefore needs to be
used only for
business purpose.
In terms of
bankruptcy, personal
saving results in loss
of entrepreneur or
owner
Bank loan The business will be
required to deposit
collateral security
against the sum issues
by bank. Further legal
formalities are also
required to be
completed.
The rights and
ownership are not
transferred from one
person to another
The amount of debt
can be recovered with
the help of making
use of collateral
security
Bank overdraft The rate of interest
which businesses are
required to pay is
The time period to
repay the amount is
In terms of
bankruptcy, overdraft
from bank is loss of
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generally very high also limited bank.
Lease finance The funds can be
transferred only in
situation where all the
paper formalities are
accomplished
Funds are transferred
for limited time
period only
The asset can be
regained by leasing
institutions (Kaplan,
and Atkinson, 2015)
AC 1.3 Evaluation of appropriate source of finance for textile business
From the above stated discussion, it has become very clear that there are various sources
of finance available in front of textile business. After determining the implication of each and
every source of finance, it can be stated that raising finance from the medium of bank loan will
be more appropriate for the textile business. As it has been already discussed that there is
shortage of £280000 and the amount is very big. Such a big amount cannot be raised with the
help of lease finances, overdraft from bank and personal saving. Along with this, there are
various types of schemes which has been developed by government. Under this scheme, the
textile business can take loan from banks under the title of corporate loans (La Rocca, La Rocca,
and Cariola, 2011). Furthermore, the organization will be required to deposit a particular security
in bank and need to pay interest against the same.
TASK 2
AC 2.1 Cost associated with sources
At the time of selecting appropriate sources of finance, organizations are required to
make sure that they calculate cost associated with each and every source. This supports in
selection of the best and most suitable source of finance (Oakshott, 2012). The cost of different
sources are mentioned below as:
 Personal saving- It can be termed as the source of finance which is directly linked with
the opportunities cost. Furthermore, the use of personal saving can either provider
benefits to business or can lead to several kinds of consequences. The decision making
power is completely in the hand of owner in terms of determining how the saving will be
utilized.
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 Loan from bank- In situations where organizations select for raising finances from bank
loan, the overall cost of business will get increased (Siano, Kitchen and Giovanna
Confetto, 2010). Along with this, the cost of collateral security and completion of other
legal documents will also increase expenditures.
 Overdraft from bank- The cost of bank overdraft can be also termed and it will also
develop a negative image of business in front of the bank. This image will create obstacle
in acquire finances from bank in the future.
AC 2.2 Significance of Financial Planning in Textile business
In the present scenario, financial planing is very important for businesses such as Textile
business. One of the most important benefit of carrying out financial planing is that it supports in
making the best and most optimum utilization of available resources (Managing Financial
Resources and Decisions, 2013). This is going to help Textile business in assuring long terms
success and growth. Furthermore, it can be stated that the use of financial planning will also
support in development of the most effective and suitable capital structure for the business
(Epstein and Buhovac, 2014). The results of this is that business will be able to manage all funds
in the best possible manner. Other than this, financial planning also play significant role in
eliminating the chances of business shocks and uncertainties.
AC 2.3 Information requirement of various internal and external stakeholders
At the time of carrying out their operations, every business is required to make sure that
adequate information is provided to internal and external stakeholder as and when it is required.
The different information required to different stakeholder is mentioned below as:
 Investors- These are the external stakeholders which has invested their respective
money in the business enterprise. Investors generally require information related to
company's overall financial performance, solvency position, profits and loss
 Top management- The top management is considered as one of the most important
internal stakeholder of a business enterprise (Kaplan and Atkinson, 2015). The
information required by top management is associated with overall cost of operation,
market trends, liabilities, expenditure and profits.
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 Employees – These are the people within business enterprise which put their efforts in
accomplishment of its aim and objectives. The information which employees seeks for
includes market conditions and company' overall growth.
 Supplier- these are the external stakeholder which render different things which are
required by organization to carry out smooth flow of their operations. The supplier
wants information related to the liquidity position of an organization.
AC 2.4 Impact of above discussed finance sources on firm's financial statements
After carrying out the above mentioned discussion, it can be stated that bank loan is one
of the most appropriate sources of finance available in front of Textile business. Furthermore,
raising finances from bank loan will directly results in affecting the overall financial statement of
Textile business. The total amount raised with the help of bank loan will result in increasing the
liability side under balance sheet. On the other side of this, the loan which will be received in the
form of cash will increase assets side of Textile business. Other than this, the business will be
required to pay a particular interest on the amount raised from bank loan. This is going to
directly affect the expenditure side of another financial statement which is income statement. The
expense will also incur in carrying out the entire process of documentation and formalities.
TASK 3
3.1 Preparation of projected cash budget and take appropriate decisions through analysis
Cash
budget
July August September October November December
Opening bank
balance 50000 74000 153240 292260 396354 556605
Revenues
Cash sales 76000 132240 191520 157594 212751 368769
Total inflow 126000 206240 344760 449854 609105 925374
Expenditu
re
Cash purchases 2000 3000 2500 3500 2500 2000
Payment to
suppliers 45000 35000 40000 45000 50000 55000
Payment of rent 15000 15000 15000 15000 15000 15000
Other expense 20000 20000 20000 20000 20000 20000
Repayment of loan 15000 15000 15000 15000 15000 15000
Total outflow 52000 53000 52500 53500 52500 52000
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Closing cash
balance 74000 153240 292260 396354 556605 873374
Interpretation:
From the above depicted table of cash budget it has been evaluated that, management is
making valiant efforts to carry out the operations of firm appropriately which indeed resulting
positively. However, positive opening balance of £50000 indicates that, in past company
achieved better demand for their products and the strategies employed are helping the course in
satisfying the demand. Furthermore, constantly increasing cash sales states that top level
management is producing quality of products and as per the need of consumers which indeed
influence them to buy commodities at cash. In regards to expenditure, in comparison to inflow,
managers are putting efforts to maintain the outflow of fund. However, increasing inflow of fund
and stability in expenditure indicates that employees are carrying out their roles and
responsibility in the best possible manner. This indeed leads the firm to generate positive closing
balance within increasing figures. Current position of cash or liquidity within the company will
help the course in mitigating short term financial obligations in effective and efficient manner.
Sales Budget:
Particulars July August
Septembe
r October
Novembe
r December
Units sold 1000 1450 1750 1200 1350 1950
Sells price 80 96 115 138 166 199
Sales value 80000 139200 201600 165888 223949 388178
Discount@ 5% 4000 6960 10080 8294 11197 19409
Net Sales 76000 132240 191520 157594 212751 368769
Interpretation:
In context to above sales budget, increasing demand of products within the market
company is expected to generate increasing sales figures till December. However, it is important
for the firm to make use of trending marketing strategies which indeed will assist in influencing
more number of people and eventually leads to increase the sales figures.
Purchase Budget:
Particulars July August September October
Novembe
r December
Opening units 500 600 950 1050 1250 1450
Purchase 2000 3000 2500 3500 2500 2000
Closing units 1200 1000 1750 2350 1650 1800
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Consumption/
Production 1300 2600 1700 2200 2100 1650
Interpretation:
Looking at the demand of product within the market, top level management of cited firm
is focusing on increasing its production unit in the coming months. However, starting with 500
units, managers are hoping to reach 1450 units till December.
3.2 Unit cost calculation and make appropriate pricing decisions
In general, cost refers to the expenses that company has to bear in order to manufacture a
single unit of product.
Calculation of unit
price
33.33 % mark-up on cost price
3
0
%
re
tu
rn
o
n
ca
pi
ta
l
e
m
pl
o
ye
d
Direct cost 15000 Direct cost 15000
Fixed Cost 8000 Fixed Cost 8000
Total Cost 23000 Total Cost 23000
Units 1000 Units 1000
Cost per unit 23 23
33.33 % mark-up on cost
price 7.67 30 % return on capital employed 15000
Per unit return 15
Selling price 30.67 Selling price 38
Pricing decision:
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From the above computation of per unit cost it has been evaluated that, top level
management should focus on certain percentage on capital employed method as it has helping
the course of company to generate better return on per unit of £15. On the basis of this it is
recommended that, company should price its product at £38 to generate higher returns in near
future.
3.3 Analysing project viability through different investment appraisal techniques
Capital budgeting techniques are considered as the significant tool for making smart and
effective decision regarding selection of future investment proposal (Dyson and Berry, 2014).
Different techniques are available such as NPV, IRR, Payback and ARR etc. to evaluate the
reliability and validity of the investment proposal (Epstein and Buhovac, 2014).
Cash flows:
Year Proposal 1 Proposal 2
0 -£80,000.00 -£80,000.00
1 £54,000 £62,000
2 £56,000 £64,000
3 £58,000 £66,000
4 £60,000 £68,000
Total £228,000 £260,000
Net present value:
Proposal 1:
Year Inflow PV Factor Inflow by considering pv factor
1 £54,000 0.909 £49,086
2 £56,000 0.826 £46,256
3 £58,000 0.751 £43,558
4 £60,000 0.683 £40,980
Total inflow £228,000 £179,880
Less: Initial investment £80,000
Net present value £99,880
Proposal 2:
Year Inflow PV Factor Inflow by considering pv factor
1 £62,000 0.909 £56,358
2 £64,000 0.826 £52,864
3 £66,000 0.751 £49,566
4 £68,000 0.683 £46,444
Total inflow £260,000.00 £205,232
Less: Initial
investment £80,000
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Net present value £125,232.00
Payback period:
Proposal 1:
Year Inflow Cumulative inflow
0 -£80,000.00 -£80,000
1 £54,000 -£26,000
2 £56,000 £30,000
3 £58,000 £88,000
4 £60,000 £148,000
1.48275862
Proposal 2:
Year Inflow Cumulative inflow
0 -£80,000.00 -£80,000
1 £62,000 -£18,000
2 £64,000 £46,000
3 £66,000 £112,000
4 £68,000 £180,000
1.28125
Internal Rate of Return:
Proposal 1:
Year Inflow
0 -£80,000.00
1 £54,000
2 £56,000
3 £58,000
4 £60,000
59%
Proposal 2:
Year Inflow
0 -£80,000.00
1 £62,000
2 £64,000
3 £66,000
4 £68,000
70%
Accounting rate of Return:
Proposal 1:
Year Inflow
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