Managing Financial Resources for General Sportswear: A Detailed Report

This report presents a comprehensive analysis of financial resource management, focusing on a case study of General Sportswear. It begins by identifying various sources of finance, categorizing them as long-term and short-term, and evaluating their implications for the business. The report then delves into the costs associated with different finance sources, including tangible costs, opportunity costs, and their impact on taxation. Financial planning is discussed, emphasizing the importance of budgeting and forecasting. The report also analyzes financial statements, including the preparation of different formats for various business structures, and the calculation of key financial ratios for comparative analysis. Furthermore, it includes the preparation and analysis of a cash budget and recommendations for improvement. Finally, the report assesses the unit cost of different operational options and calculates the cost of various projects, providing a holistic overview of financial management strategies and their practical application within a business context.

Managing financial resources

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Different sources of fiance available to business...................................................................3
1.2Implication of source of finance.............................................................................................4
1.3 Evaluating range of appropriate sources of finance ..............................................................5
TASK 2............................................................................................................................................6
2.1 Analyzing the costs o different sources of finance................................................................6
2.2Importance of financial planning............................................................................................7
2.3 Identifying main decision makers and assessing their financial information needs..............7
2.4 Impact of finance on financial statements.............................................................................8
TASK 3 ...........................................................................................................................................9
3.1 (a )Preparing and analyzing cash budget...............................................................................9
3.1(b) Recommending General Sportswear to bring improvement in cash budget...................10
3.2 Finding the unit cost in both the options .............................................................................10
3.3 Calculating the cost of each project ....................................................................................11
TASK 4..........................................................................................................................................12
4.1 Main financial statements....................................................................................................12
4.2 Preparing different financial statement formats for different business ...............................13
4.3 Calculating ratios for Comparator.......................................................................................15
CONCLUSION .............................................................................................................................18
References......................................................................................................................................19
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Illustration Index
Illustration 1: Financial statement for sole trader..........................................................................15
Illustration 2: Financial statement for limited liability company...................................................17
Illustration 3: Financial statement for partnership.........................................................................17
Index of Tables
Table 1: Cash budget.....................................................................................................................10
Table 2: Unit cost...........................................................................................................................11
Table 3: Net present value method................................................................................................12
Table 4: Table 4: Accounting rate of return of both project 1& 2.................................................12
Table 5: Table 5: The pay back period..........................................................................................13
Table 6: Ratio analysis...................................................................................................................18
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INTRODUCTION
Managing financial resources is the key task to give upward direction to business. The
financial department of any organization play vital role in managing all business activities and
bringing positive improvement in the performance of business. Present report is based on case
study of General Sportswear which deals in leading brands and operate on private basis. In this
regard, range of sources of financial are identified which could be used by an organization while
expanding business. Further, different types of cost associated with sources of finance have also
been explained. In addition to this, cash budget has been explained by which cash can be
controlled. Apart from this, interaction of assets and liabilities on the balance sheet and
international equivalents under the International Accounting Standard.
TASK 1
1.1 Different sources of fiance available to business
There are different sources of finance which can be used by business for different
purpose like expansion, for recovering losses or for continue the present business. These sources
can be divided into two parts such as long or short term. These are explained as follows-
Long term sources of finance
Long term source of finance are those which are arranged to fulfill certain requirement of
business. According to the give case study General Sportswear is facing issue related to liquidity
crunch and high overdraft (Bennouna, Meredith and Marchant, 2010). It might affect the future
performance to a great extent. Owing to this different long term sources of finance can be
accessed by the firm. These are explained as follows- Bank loan-it is the most effective source of finance because company can access bank
for meeting long term requirement of finance. Under this, several kind of formalities need
to be completed prior to taking loan. Thus, it require extensive time and proper security
on which behalf company can acquire loan (Gitman, 2013). Leasing companies-It is the another effective long term source of finance which provide
financial assistance to corporation by providing assets on rental basis. Under this, General
Sportswear can easily get updated technologies so as to speed up in the flow of
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production and meet requirement of customers in an effectual manner. This proves ot be
effective in creating competitive edge of the firm. Hire purchase-This is also alternative source of long term finance wherein General
Sportswear can access to hire purchase companies. It helps to provide assets on hire
basis which reduce financial burden of firm for particular time span (Murphy and
Yetmar, 2010). It aids to increase sales turnover and deliver good quality of services with
the incorporation of highly updated technologies. Special financial institutions-The special financial institutions are made for providing
assistance to corporation. However, they provide finance on basis of project which is to
be done by the firm. It facilitates to carry out operation of firm effectively. Furthermore
special financial institutions provide full support in the expansion and growth of firm.
Short term source of finance
Short term source of finance are those which are referred to fulfilled short requirement of
firm such as daily business activities and for meet short term liabilities. General Sportswear can
use any of following short term source of finance in order to meet short term requirements- Retained profit-it is the amount of profit which is kept aside by the management for the
purpose of reinvestment. It does not require to incur any kind of assets and can be avail n
short time span. However, use of retained profit in another business activities may create
opportunity cost for the firm (Singh, Jain and Yadav, 2012). Sale of old assets-Sale of old assets refers to generating short term cash for meeting
requirement of business through selling unused assets of company. It enables corporation
to generate enough cash and ensure optimum utilization of limited resources in order to
fulfill lng as well as short term objectives of the firm (Amendola and et. al., 2011).
 Personal savings-Personal saving here refers to owner capital which is used in own
business. However, use of personal saving in the business may be problematic because
owner's among will be blocked for business purpose for particular time span. Although, it
proves to be effective source in case of liquidity crunch of corporation so that
management can easily manage all business activities in an effectual manner.
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1.2Implication of source of finance
According to the given case study the directors of General Sportswear are having the
negative impression towards debt finance. They consider that it merely increase cost of
production and affect overall performance of the firm. However, there are both positive and
negative aspect of different sources of finance. It is totally based on management that what type
of sources are selected by them to fulfill long or short term requirement of business. For example
bank loan provide both short or long term loan on the basis of fixed interest rate and several
other conditions (Grewal and et. al., 2011). At this juncture management need to ensure that they
are capable to pay the debt on right time. It is because delay in payment may affect credit rating
of firm in negative manner. On the other hand, special financial institutions also require time to
time information with regard to progress of project. Apart from this, retained profit serve as the
most effective source of finance for fulling short term requirement of business. However, by
making use of retained profit, management cannot manage their production process as retained
profit is the single aspect to run business in case of liquidity crunch (Milner and Rosenstreich,
2013).
On the other hand, sale of old assets is the another foremost source of finance which
proves to be effective to manage liquidity crunch of the firm. This is because corporation uses
their unused assets for business purpose only. However, it might be possible that assets is
undervalued for that particular time span (Gaskell and Ashton, 2008). Thus, both positive and
negative aspect need to be kept into mind in order to improve performance and ensure speed up
in the flow of production.
1.3 Evaluating range of appropriate sources of finance
According to the above evaluation appropriate sources of finance can be selected for
expansion purpose of General Sportswear. It assists management to carry out business
effectively and also manage the liquidity crunch. Following appropriate sources have been
mentioned which aid to give upward direction to business. In this regard, following sources will
be accessed- Special financial institutions (SFI)-These institutions contribute corporation to expand
in the marketplace and ensure ling term growth with increased rate of return. According
to the give case, General Sportswear can take advantage of special financial institutions
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as these provide full supports to businesses to move ahead (Allen and Economy, 2011).
Here, organization can raise long term source and can expand two outlets in desired
areas. This in turn generate greater profitability and meet requirement of business in an
effectual manner. Furthermore, finance provided by SFI proves to be effective in creating
competitive edge because it will be remove liquidity crunch thereby management can
bring innovation in products and services. Personal saving-It is the effective short term source of finance because management
want to access cost effective source of finance. However, retained profit was also the
good alternative here but due to liquidity crunch it cannot be referred (Bloodgood, 2006).
This helps to speed up in the flow of production and increase sales turnover of the firm.
However, it will provide only short term finance so that corporation can increase number
of customer and meet their requirement in an effectual manner. Furthermore, cost of
personal saving is based on owner that how he/she want to charge for the money
provided to business.
 Leasing companies-In order to expand business in the marketplace, General Sportswear
can approach leasing companies for getting assets on rental basis. However, it will create
cost but will contribute operate two outlet within specified time span (Lapsley, Miller
and Panozzo, 2010). This is the effective means by which company can be able to create
competitive edge in the marketplace. Furthermore, after a certain time General
Sportswear can either pay off the whole installment for the assets or can return the assets
in accordance with agreement. With this, General Sportswear can increase range of
products in order to increase number of customers.
Thus, aforementioned sources of finance are appropriate which can support General
Sportswear to move ahead and increase level of satisfaction. However, these sources create cost
but the main thing is that organizational performance which could be easily achieved by the new
managing directors of General Sportswear (Prorokowski, 2011).
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TASK 2
2.1 Analyzing the costs o different sources of finance
There are different types of cost included in the different source of finance. However,
cost is based on what type of resources are being used by the firm. These are explained as
follows- Tangible cost-It consists of cost like dividend, interest and floatation cost. For example
when bank loan is granted then certain percentage of interest need to paid on right time.
Further, shareholders are provided dividend according the terms and conditions (Nguyen,
2010). Similarly, floatation cost is incurred at the time of issue of shares. All these cost
increases overall cost at the initial stage by which overall rate of return reduces to a great
extent. Opportunity cost-It is another cost which is occurred due to use of retained profit. For
example retained profit is generally used for further investment in the production
activities. This in turn additional cost need to be incurred to manage the production
activities, in case retained profit is used in expansion of business (Bhaird, 2010).
 Impact of cost on tax-Cost of finance has direct impact on tax because due to high cost
of finance profitability go down. This again reduces amount of profitability to a great
extent (Devaney, 2014).
2.2Importance of financial planning
Financial planning is refers to plan for the resources to be approached in order to get
appropriate sources of finance. It assists corporation to cope up with changing scenario and
deliver good quality of services to large number of buyers. For example budget is the effective
method through which forecasting is done for the income and expense. It aids to determine
certainty for future business activities (Hansen, Mowen and Guan, 2009). Furthermore, financial
planning helps General Sportswear to expand business in the marketplace with increased rate of
return. It enables corporation to create competitive edge in the marketplace. This is because with
the help of financial planning General Sportswear can bring innovation in the products and
services. This in turn customers can be attracted so as to accomplish aim of the corporation.
Apart from this, appropriate financial planning assists management of company to invest
in the right project by which initial investment can be recovered in short time span. Similarly, all
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operational activities are completed in an effectual manner (Phillips and et. al., 2008). The
foremost thing is that plan for finance aid to avoid business shocks as it establish proper link
between investment and financing decisions. In addition to this, it helps to coordinate with each
department like production, sales and marketing.
2.3 Identifying main decision makers and assessing their financial information needs
There are several decision makers who are directly or indirectly engaged with
corporation. These are as follows- Employees-These are the internal stakeholders who want to access the information
related to growth and success of the firm. This is because they want to assure their own
security at workplace. Furthermore, they willing to incorporate in the decision making
process of the corporation in order to determine their own growth at workplace. For
example, employees of General Sportswear are interested in expansion of company so as
to increase overall rate of return (Zoubi and Al-Khazali, 2007). Customers-These are the important parties to whom organization offer wide range of
branded products and services. Here, General Sportswear need to provide timely
information to customers with regards to range of products, new outlets and other related
information. Also, company need to take views / feedback from customers in
manufacturing their desired products and services (Mao, 2012).
 Suppliers-It is the external party who supply raw material to General Sportswear. Here,
corporation must pay off short term liability on right time. Furthermore, suppliers want to
access the information related to expansion of firm which in turn enhance their own
scope.
2.4 Impact of finance on financial statements
(a)The cost of different sources of finance is shown in the income statement of firm. For example
interest is recorded in the dr side of profit and loss where dividend is recorded in fund flow
statement. These all expenses decreases overall revenue of the corporation (Khan and Hildreth,
2004). Similarly, floatation cost also serves as the additional expenses which is shown in profit
and loss account of General Sportswear. In addition to this, cost of the finance decreases cash
remain with corporation which in turn affect assets side of balance sheet.
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(b) The assets and liabilities are shown in balance sheet as main financial statement of General
Sportswear. In this regard International Accounting Standard are referred by the corporation to
match balance of both side (Gaskell and Ashton, 2008). For example, bank loan is taken for the
expansion of General Sportswear then it will increase liability side as well as assets side.
Furthermore, all the transaction has its impact on two side of financial statement. Furthermore,
as per IAS all the information need to be presented clearly so that stakeholders need can be
catered in an effectual manner. It facilitates to ensure ethical conduct of business (Chulkov,
2014).
TASK 3
3.1 (a )Preparing and analyzing cash budget
Cash budget depicts that estimated expenses and income which could be generated buy
an organization within future time period. It assists management to take right decision in the
direction of growth and success of the firm. It is because budget tend to give certainty for future
business activities so that competitive edge of firm can be created in the marketplace (Amendola
and et. al., 2011). Furthermore, variation in cash budget serve as the guidance for management so
that accordingly they can bring improvement in the performance of the firm. The cash budget for
General Sportswear has been made as follows. It proves information related to four months
regarding its surplus or deficit.
The blow mentioned budget is showing profit in first two months and deficit in last two
months. It assists management of corporation to start business with increased rate of return.
Furthermore,it has been found that expenditure of General Sportswear has been increased due to
capital expenses. However, credit policy is made effectively which in turn overall rate of return
can be increased. Furthermore, sales revenue of firm is kept on increasing but additional
expenses increased to a great extent. Owing to this, company is having deficit in March and
April. Apart from this, it has been found that in first month there was total revenue of £61340
but in the month of February it becomes £28900. Apart from this, in March month total revenue
was £ 29740. It is showing downward trend in the total revenue and in the same way rate of
return is going down.
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Table 1: Cash budget
Months January (£) February(£) March(£) April(£)
Receipt 50000 8740 7900 -1860
Sales 11340 20160 21840 23360
Total (A) 61340 28900 29740 21500
Payment
Purchase 1200 12100 13100 14100
Expenses 9400 6900 8500 9900
Salary to store
manager 2000 2000 2000 2000
Capital expenditure 40000 8000
Total (B) 52600 21000 31600 26000
Deficit/surplus(A-
B) 8740 7900 -1860 -4500
3.1(b) Recommending General Sportswear to bring improvement in cash budget
According to the aforementioned cash budget it has been found that additional expenses
of corporation are increasing. This kind of situation has occurred due to high capital expenditure.
Further, corporation should provide training to workforce so they can work in accordance with
set standards. It aids to speed up in the flow of production save additional cost (Grewal and et.
al., 2011). In addition to this, General Sportswear approach cost effective source of finance. It
facilitates to increase ratio of profitability and create competitive edge in the marketplace. Apart
from this, company can review its structure in order to provide right guidance to employees and
motivate them to achieve their targets within specified time span.
3.2 Finding the unit cost in both the options
Cost refers to money forgone in the production of particular number of units. According
the the given scenario X ltd want to produce 2000 chairs and cost of each chairs have been
specified. However, two methods have been specified for setting the prices. Accordingly
calculation has been done as follows-
Table 2: Unit cost
Cost 30% mark-up on cost price
25% on return on
capital
Direct Material 190000 190000
Direct labour 150000 150000
Prime cost 340000 340000
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Overheads(Fixed) 100000 100000
Total cost 440000 440000
Profit margin 132000 250000
Sales 572000 690000
Selling price/per
unit 286 345
The above table is showing that by setting 30% mark up on cost price of each chair will
be £286 whereas in accordance with return on capital price of per chair will be £345. It depicts
that option second is more profitability as it generates high rate of return for the firm. Also, it
aids to increase sales turnover and deliver good quality of services to large number of buyers.
Furthermore, second option is generating high revenue than first one because it covers cost of
production in an effectual manner. Hence price of products will be set according to 25% return
on capital employed (Milner and Rosenstreich, D2013).
3.3 Calculating the cost of each project
The investment appraisal technique is the foremost way to analyze the project which
proves to be beneficial for the growth and success of the firm. It consists of different techniques
like net present value, payback and accounting rate of return. These are explained as follows-
A) The net present value method-It is the most important technique for calculating approximate
value of each project. As per the given scenario two project have been given for purchasing new
plant for Axis limited (Allen and Economy, 2011). Owing to this, net present value method has
been applied which depict that none of the project is generating high rate of return. This is
because both project generates negative cash flow for the firm till three years.
Table 3: Net present value method
Project 1 (£) Project 2 (£) 10% d.f
Present value
Project 1
Present value
Project 2
cost -100000 -60000
1 29000 20000 0.909 26361 18180
2 32000 20000 0.826 26432 16520
3 25000 15000 0.751 18775 11265
residual value 20000 15000 0.751 15020 11265
Total present
value 86588 57230
Less: cost (100000) (60000)
NPV -13412 -2770
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