Managing Financial Resources Report: General Sportswear Analysis

This report delves into the crucial aspects of managing financial resources, focusing on the sources of finance available to a business, their implications, and the importance of financial planning and budgeting. It examines both short-term and long-term financing options, including commercial paper, letters of credit, overdrafts, bank loans, equity financing, debt financing, and retained earnings. The report assesses the legal, ownership, and bankruptcy implications of different funding sources and evaluates the suitability of various financing options for General Sportswear's expansion project, which involves opening two new outlets. It also analyzes the costs associated with different sources of finance, the preparation of a cash budget, cost computation, and investment appraisal techniques. Furthermore, the report covers different financial statements, their formats, and the interpretation of financial statements using ratio analysis, specifically applied to a comparator company to assess its market position.

MANAGING FINANCIAL
RESOURCES
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Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 The sources of finance available to a business......................................................................3
1.2 Assess the implications of the different sources....................................................................5
1.3 Evaluate appropriate sources of finance for General Sportswear's business project of
opening two outlets......................................................................................................................6
TASK 2............................................................................................................................................7
2.1 Costs associated with different sources of finance................................................................7
2.2 Importance of financial planning...........................................................................................8
2.3 Assessing financial information needs of three main decision makers.................................9
2.4 Impact of finance on the financial statements......................................................................10
TASK 3..........................................................................................................................................11
3.1 Preparing the cash budget....................................................................................................11
3.2 Cost computation and selling price decision.......................................................................12
3.3 Investment appraisal techniques..........................................................................................13
TASK 4..........................................................................................................................................15
4.1 Different financial statements ............................................................................................15
4.2 Different financial statement formats for different business...............................................16
4.3 Interpreting financial statements using ratio analysis of Comparator.................................17
CONCLUSION..............................................................................................................................19
REFERENCES .............................................................................................................................21
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INTRODUCTION
Accurate financial management is essential for the success, survival and sustainability of
business enterprise. However, this is one aspect that can make huge impact on the decision
making process irrespective to the size, sector etc. of the company. It is the responsibility of
senior financial officials to manage and control the financial position of business in suitable and
reliable manner so that desired results and outcomes can be achieved (Ball, Jayaraman and
Shivakumar, 2012). Furthermore, managing financial resources assist in providing right direction
and accountability to the activities or operations of business.
In the present report, researcher focuses on enhancing the understanding of where and
how to access sources of finance for a business and the skills required by the people to use
financial information for making smart and corrective judgements. Present report undertakes
cases of different organisations such as General sportswear, X Ltd and Axis Ltd for presenting
the practical implications of different financial tools and techniques used in making smart
decisions.
The main purpose of conducting current study is to provide learners and readers broad
understanding of the sources and availability of finance for the selected company. Along with
this, positive and negative implications of modes of funding has been evaluated for making
appropriate judgement regarding selection of the best suitable source of finance. Thereafter,
investigator highlights the importance of financial planning and budgeting. Lastly, with the help
of different appraisal techniques, reliability and validity of investment project has been evaluated
as well as financial ratios of the company has been compared with industry standards to analyse
the current standing of business enterprise in the target market.
TASK 1
1.1 The sources of finance available to a business
The sources of finance are divided on the basis of time which are:
 Short term financing
 Long term financing
Short term financing
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Short term finance is loan which holds for few time period like months or one year. In
sportswear, company is using short term finance:
Commercial paper- The sportswear company can use commercial paper for short-debt
obligations in money market. It has maturity time between 1 to 365 days. It is promise to pay on
the specified date of maturity to issuing bank or financial institution. So it is beneficial to fulfil
present financial requirement for the mentioned entity (Paramasivan, 2009).
Letter of credit- In this type of loan, company receives a document from financial
institution or slimier party (may be purchaser). Through this document issuer is liable to pay to
the origination against the goods and services which is delivered to the buyer. On fixed date (as
per the agreement), purchaser will pay money to the bank or issuer party. Then company saves
its time while using letter of credit because it reduces frequency to reach purchaser and collect
money.
Overdraft- Company can use the facility of overdraft for short-debt. In this, business can
withdraw excessive sum of money from its account balance. But there is a limit of maximum
amount that can be debited. Banks will charge some interest on the overdraft quantity (Sources
of finance, 2012).
Short term bank loans- In the sportswear company, Bank loans are specifically taken for
particular purposes. It provides help to fulfil the short term urgent requirement. It is easily
available by the bank on the basis of goodwill of the company and also bank charge some
amount of money as interest on loan. Example like company takes loan on purchase of
machinery.
Long term financing
It is used to fulfil need of long term finance. The sources of long term finance are:
Equity financing- Equity financing includes ordinary or equity and preference share as
stock. In this, company sales its stock to increase the capital of business. The investors purchase
shares and organization receives money. But company also pay dividends after a time period.
Debt financing- In debt financing, company receives loan and gives promise to repay the
amount to general public. The nature of loan may be secured and unsecured both. It provides
long term availability of funds to invest in business projects (Drake and Fabozzi, 2012).
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Retained earning: Retained earnings are the profits that have been kept safely with the
company. This is the sources of finance that is used to invest in the profitable business.
However, company has to pay opportunity cost for choosing retained earnings.
1.2 Assess the implications of the different sources
The section above represents the sources of finance that are available to General
Sportswear. However , there are certain implications of such sources of finance to the public.
The table below represents the legal, duplication of ownership and bankruptcy implications.
Table 1: Implications of Sources of finance
Sources of funds Legal implications Dilution of
Ownership
Risks of bankruptcy
Issue of debenture The legal implication
of debt financing is that
the company has to use
lot paper work for
raising funds from
public
In this kind of source,
the ownership of
business will not be
transferred to the
investors.
In case the company
declared bankrupt,
the investors will loss
their amount
Equity financing For issuing the shares
to the public, the
company has to
registered it self with
IPO norms (Business
finance. 2011).
On the issue of shares
, the ownership of
company will be
transferred to the
stakeholders
In the situation of
bankruptcy , the case
is not entitled to pay
dividends to
shareholders
Retained earnings In order to use retained
earnings , the company
has to take the legal
permission from the
board. However the
profits will be used
after paying divided to
the shareholders
This is the sources in
which only Company
can declare the
ownership (Marcal
and Roberts, 2001)
This is not impaled in
the case of
bankruptcy as there
will not any profits
with company
Commercial paper For using commercial
paper, the company has
to follow some norms
and regulations
In case of using this
sources of finance ,
the ownership can not
be transferred to any
party before whole
the process is
completed.
In case the company
become bankrupt, the
commercial papers
can be canceled bu
the authorities
(Stolowy and Lebas,
2006)
Short term bank
loan
In order to use short
term bank loan and
funds raised through
The business will
keep some assets as
an security to the
The business will
loss the securities
kept with the bank ,
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such sources the
company has to do
legal formalities.
bank due to bankruptcy
Overdraft The company has to
maintain the
creditworthiness with
bank or the record of
business should be
clear.
This source does not
impact on the
ownership of
business
In case company will
become insolvent the
amount can be keep
back from current
account
Letter of credit Legal formulates have
to be done as the bank
account of both the
entities are necessary
Ownership issues
arise with banks
This sources gives
assurance of amount
entitled repayment to
the party
1.3 Evaluate appropriate sources of finance for General Sportswear's business project of opening
two outlets
According to the case scenario, General Sportswear is wishing to expand the business by
opening two outlets in London, therefore, it requires sources of finance. There are various
sources of finance through which the financial need of company can be fulfilled. The foremost
sources of finance that can be used by the company is “Retained earnings”. The retained
earnings are the profits that have been secured by General Sportswear. It has been witnessed that
this sources of financial will in be internal and long term source of finance that will avail
company with sufficient amount of capital that can be invested in opening stores.
In addition to that, “Equity financing” can also be used an appropriate sources of finance
for General Sportswear's business
project of opening two outlets. The funds can be raised from the public against issuing shares of
the company. The company can raise sufficient amount of funds from market to open new
outlets however, the company has to pay dividend to the shareholders (Loayza, Levine and Beck,
2000). The dividend amount paid to the shareholders can be seen as expense of business. Along
with this the company has to share the ownership of business with shareholders. This will be the
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significant impacts of using e equity financing sources. On the other hand, it can be said that
organization can raise large amount of fund through using equity financing sources.
However there is an alternative source of finance to fulfil the financial need of company
that can be said as “Debt Financing”. Using this sources of financial, the sufficient amount of
capital can be raised from public as loans that will be repaid after an specific time. This will be
the long term source of finance in which the sufficient source of finance can be raised to invest in
expanding business through opening new stores. Nonetheless, the business has to pay interest to
the debenture holders against their amount (Brigham, 2013). The amount raised from the source
can be repaid after an specific time period. Thus, there are three main source of finance , that are
available to General Sportswear for getting finance at low business risk.
TASK 2
2.1 Costs associated with different sources of finance
In general there are several costs associated with different sources of finance. However, it
is the duty of senior financial officials to make sure that evaluate each and every aspects of the
sources available to them and then make suitable decision regarding raising the funds (Maynard,
2013). In the present case, top level management of General Sportswear are not in favour of debt
financing and due to which finance managers are recommended to use issue of shares and
retained earnings for the expansion of two new outlets. Following are the costs associated with
selected sources of finance of the General Sportswear Ltd: Tangible costs: In general, it is a cost that typically includes the things that a business can
buy directly for specific expenses like labour, raw materials and building (Prusak, 2009).
Therefore, it can be said that it is the cost that a firm has to bear up front. In the present
case, General Sportswear Ltd is using equity financing method such as issue of shares for
raising the funds. There are several costs associated with the issue of shares, but the
major tangible costs is of dividend. This is the expense that General Sportswear Ltd has
to make after encouraging people to buy their shares (Chandra, 2011). Further, this is
deducted from profit earned by the company which may lead to decrease in net profit of
the firm. Contradicting to this, tangible cost is necessary in this case because it
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encourages shareholders to buy more shares of the company in near future and help them
in raising the funds for future contingencies. Opportunity Costs: In case of General Sportswear Ltd managers are recommended to use
retained earnings for the new outlets' expansion. However, management using this source
may affect the entire financial position because it decreases the liquidity available to the
firm. While on the other hand, opportunity cost is associated with it which means money
can be invested to earn more rather than keeping it idle (Pynes, 2008). Thus, finance
manager has to make decision of opportunity cost to take it or leave it.
 Impact of finance cost on Tax: Tax has major impact on the overall functioning of
General Sportswear Ltd because it decreases the profitability of firm. However, it is
because top level management of General Sportswear Ltd has to cost of finance for all
the sources and then have to make the payment of tax. This leads to significant decrease
in the profit of the firm.
2.2 Importance of financial planning
Financial planning is the process by which company evaluates its current and future state
with using cash flows, assets values and withdrawal plans. In this, there is also a determination
of allocation and procurement of funds. In financial planning Sportswear company is considers
both short- term and long- term requirement of funds (Uyar, 2012). The main objective of
financial planning is to control over cash, landing and borrowing of the originations. In this
calculate the structure of capital and forecasts outflow and inflow of funds. In this company
analyse maximum rate of return.
Adequacy of funds
The Adequateness of funds or the planning of finance is depends according to the goals
and objective of the sportswear company. To achieve objectives of organisation proper
formulation of funds policy is necessary.
Cash flows
Financial planning helps in to maintain inflow and outflow of cash and also creates
balance. In this they plan about the stability of funds and Company foresees the future
requirement of cash (Armitage, Marschke and Plummer, 2008).
Suppliers payments
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General Sportswear company creates plan about the easily payment to its suppliers then
they contentiously invest in the company.
For growth and expansion
Recently, company is planning to establish two new outlets so for this expansion and growth
accurate financial planning is required. This practice provides help in long term survival of
business.
Training and development
Employee skills development is essential for company. Through this process, sportswear
company creates modification in motivating level of workers. So this increases working quality
of employees (Shepherd, Wiklund and Haynie, 2009).
Technical advancement
Time to time organization wants to update its technology to improve profitability. The
sportswear company is availing its fund for technology alteration. It is important to compete to
its rivals.
Economic condition
Economic condition of external environment of organisation is creates impact on the
policies of fund arrangement. However, it is because company may be set up its funds through
outside borrowings.
Political changes
Political party always affect to the company's policies. Organisation strategies of finance
are depends upon political environment (Chadwick and Dabu, 2009). Sportswear Company
consider the rules and regulation of present government in planning of availability of funds in
business.
2.3 Assessing financial information needs of three main decision makers
Operating at a large level there are several stakeholders associated with the functioning of
General Sportswear Ltd. However, it is important for Board of Directors to make sure that
appropriate and accurate information is provided to the users so that they can make correct
decisions and remain loyal towards the firm. Following are the three main decision makers
associated with General Sportswear Ltd and their financial information needs are as follows:
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 Management: Senior officials of business enterprise is responsible for taking all the
decisions regarding present and future contingencies. However, it is important for the
managers to provide wide range of accurate information to the members of management
so that they can take corrective actions (Nobes, 2014). According to General Sportswear
Ltd, Finance Director has to provide accurate information related to inflow and outflow,
income and expenditure, working capital, liabilities, available assets to the top level
management so that they can take effective and smart functioning decisions regarding
strategic planning of the two new outlets. Shareholders: They are the one from whom General Sportswear Ltd is planning to raise
large amount with the aim of opening new outlets and increasing the competitive edge
against the competitors like Premier Sports etc. Therefore, it is important for Finance
Director to provide correct and detailed information about the profit and retained earnings
so that they can calculate their dividends and make decisions regarding future
investments.
 Employees: These are the integral part of the organisation, they are responsible for
carrying out the functioning of business in suitable manner. Operating in such a
competitive market it is important for the management to understand needs and wants of
employees and accordingly motivate and encourage them to work effectively for the firm
(Abraham, Deo and Irvine, 2008). Employees require the financial statements to evaluate
the current position of business so that they can analyse the capability of firm regarding
paying salary, hikes and bonuses. Along with this, they evaluate financial statement to
analyse the future growth prospects.
2.4 Impact of finance on the financial statements
Being a private limited company it is important for the firm to prepare all the major types
of financial statements so that they can record each and every transaction correctly. The other
main purpose of preparing all the major statements is that different users can generate
information of their interest and makes decisions. However, these statements are affected by
each activity carried out by the General Sportswear Ltd. Therefore, following are the impact of
finance on the financial statements of the company:
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 Income statement: It assists in defining all the income and expenditure incurred by the
firm during the reporting period. However, in case of source of funds, costs of issuing
shares are the major expenditure that General Sportswear Ltd has to bear and it will be
recorded in the expenses side of the statement (Evans and Porter, 2010). However, this
directly decreases the net profit of the firm which reduces the retained earnings. Cash flow statement: The fund generated through issuing of shares will be recorded in the
financing activity of the cash flow statement. But on the other side, amount paid for
dividend will be shown in the cash outflow of the statement (Sabău, 2013). Along with
this, costs that General Sportswear Ltd bears for issuing the shares will also be showing
in the financing activity as an outflow.
 Balance sheet: Both the recommended sources of funds for the General Sportswear Ltd
will affect the assets and liability side of the balance sheet (Sonnenberg, 2008). However,
it is because the fund raised through issue of shares will increase the cash under the
heading of equity capital as well as increase the liability for paying dividends to the
shareholders at the end of financial year.
TASK 3
3.1 Preparing the 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
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Deficit/surplus(A-B) 8740 7900 -1860 -4500
The main purpose behind preparing cash budget is that it assist in estimating cash inflows
and outflows of the business or individual for a certain period of time (Palepu and Healy, 2007).
Along with it, finance managers prepare cash budget in order to evaluate and analyse the
sufficiency of cash for satisfying day to day operations. In case of General Sportswear Ltd,
functioning at such a large level it is crucial to prepare cash budget because it will help them in
controlling the cash expenses. Along with this, helps the senior authority of cited firm in making
planning for the most efficient or optimum use of available cash.
On the basis of above computed cash budget it has been identified that, cash flow of
General Sportswear Ltd is constantly decreasing and the main reason behind this is increasing
cost of production. In context to open two new outlets, capital expenditure took place and
increases the overall outflow of funds. Thereafter, looking at the deficit of last two months
clearly indicates that company has increased its expenses in significant manner. However, this
has adversely affected the entire course of functioning.
On the basis of present condition it can be recommended to the senior authority of cited
firm that they should organise training and development sessions at the regular intervals so that
employees can be enhance their skills and abilities on the basis of current trends and
environment and mould their functioning accordingly to enhance the production process. This
will further help in minimizing the overall cost of production.
3.2 Cost computation and selling price decision
A) At 30% markup on cost price
Particular Amount (£)
Direct material 190000
Direct labour 150000
Prime cost 340000
Fixed costs 100000
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