Financial Resources and Decisions: Report and Analysis of Finance

This report delves into the critical aspects of managing financial resources and making informed financial decisions. It begins by exploring various sources of finance, including long-term options like share capital and retained earnings, as well as short to medium-term options such as hire purchase and bank loans. The report analyzes the legal, financial, and bankruptcy implications of each source, comparing their advantages and disadvantages to determine the most suitable options for a business enterprise. Furthermore, it examines the costs associated with different financing methods, like interest, dividends, and opportunity costs, and emphasizes the importance of financial planning, including cash budgeting and capital management. The report also identifies the key users of financial information, such as workers, customers, suppliers, shareholders, and regulatory authorities, and highlights how they utilize financial statements for decision-making. Finally, the report provides a comprehensive analysis of the financial ratios of Tesco Limited and their impact on decision making.

Managing Financial
Resources and Decisions

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1...........................................................................................................................................1
1.2...........................................................................................................................................2
1.3...........................................................................................................................................3
TASK 2............................................................................................................................................4
2.1...........................................................................................................................................4
2.2...........................................................................................................................................4
2.3...........................................................................................................................................5
2.4...........................................................................................................................................6
TASK 3............................................................................................................................................6
3.1...........................................................................................................................................6
3.2...........................................................................................................................................8
3.3...........................................................................................................................................9
TASK 4..........................................................................................................................................11
4.1.........................................................................................................................................11
4.2.........................................................................................................................................12
4.3.........................................................................................................................................13
CONCLUSION .............................................................................................................................14
Index of Tables
Table 1: Operating budget...............................................................................................................7
Table 2: Calculation of unit cost.....................................................................................................8
Table 3: Calculation of NPV..........................................................................................................10
Table 4: Calculation of NPV..........................................................................................................10
Table 5: Calculation of IRR...........................................................................................................11
Table 6: Calculation of ratios of TESCO.......................................................................................13

INTRODUCTION
Finance is the major source or elements of an organization that aids in carrying out various
activities of a business organization. It is the backbone of every enterprise on which the business
function effectively. The present research report is designed to provide readers with a deep
understanding of varied sources of finance and their availability for the business. The aim of this
study is to create an insight on how and where to access distinct sources of finance and the
ability to utilize financial information for decision making. Furthermore, the report presents
advantages and disadvantages of various sources such as retained earnings, share capital, bank
loan and hire purchase and their suitability as well (Ojha, Gianiodis and Manuj, 2013). Likewise,
various ratios of Tesco limited has also been highlighted in this report that becomes the basis for
making various decisions by several users of it. Moreover, a budget has also been prepared and
the calculation of unit cost to provide readers and insight on the usefulness of it and how
decisions are taken based these data's.
TASK 1
1.1
Funds are required for various purposes and an entrepreneur needs funds to start-up a
new venture and carry on the operations of the same. In order to purchase various equipments,
leasing land, buying stocks, an owner opts for several sources of finance through which it can
avail money. In the present research report, the best sources of funds for the entrepreneur have
been highlighted below:
Long term sources: An entrepreneur may require high amount of funds to invest in
purchasing equipments, land and machinery. They can refund the amount of money in the either
5, 10, 20 or more years according to the terms and conditions of the respective source. Some of
them have been enlisted below: Share Capital: This is a method used to raise funds by selling the companies share to the
external members. The shareholders invest their money the respective company and for
this purpose they receive dividends at the end of the financial period (Nga and Yield,
2013). Retained earnings: This is the amount of funds that is earned by an organization in the
previous financial year. For instance, the entrepreneur has invested £100000 in purchase
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of inventory and the amount availed by him at the end of the period by sale of respective
goods can be invested again the business (Magni, 2010).
Short/ medium term sources: These are small amount of money required by an business
enterprise to meet its routine of daily expenses. Moreover, these can be used to purchase small
equipments of the organization. Furthermore, these are generally refundable in the period of 3 to
1 years. Hire purchase: The sad entrepreneur can purchase various assets for its company on the
basis of hire purchase. Herein, the owner gets possession of the goods or assets as soon as
he repays its last instalments (Kaplan and Atkinson, 2015).
 Bank Loan: There are several banks in UK that provide loans to the entrepreneur and
pursue them to start up new businesses in regard with taking some documents as security.
The owner can refund the amount of money taken as loan along with the interest in the
prescribed time limit stated by the bank.
1.2
The above suggested different sources of finance have diverse effects on the functioning
of concerned business enterprise. There are several stages of a business entity and at that time
each source of finance has distinct implication and the same has been illustrated in this section:
Legal Implications:
 In case of raising share capital, the owner needs to share its various rights with it various
shareholders. They has the power to make decisions in regard to the concerned company.
Moreover, a company cannot raise shares through public offering till it turns into a public
limited corporation (Jenkins, 2002).
 The ownership of goods of assets does not transfer to the hire purchaser until and unless
all the instalments is paid to owner. Though he can use the machine in the prescribed
period. As discussed above a bank provides loan on the basis of certain documents or asset kept
as security. These can be seize anytime by the bank if the owner fails to pay respective
instalments.
Financial Implications:
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 Shareholders are part owners of a company and they have the right to share profits of the
company. Apart from it, the owner is not entitled to repay the amount of investment, they
only need to give dividends from the amount of profit made in the current period.
 Regarding the hire purchase the owner needs to pay periodic instalments to the owner in
order to avail the full possession of the assets (Hildreth, 2004). The financial implication that governs bank loan is that the amount of amortization or
interest shall be paid timely by the owner.
Implication at times of dilution:
 At the time of closure of said enterprise, the control that shareholders possesses in the
company gets diluted at the time of dilution.
 If the owner repays all the instalments to the hirer then the possession of good remains
with is and vice versa if the full amount is not repaid (Helfert, 2004). In case of bank loan there is not any dilution of control.
Implication at Bankruptcy:
 At times when the company is disclosed bankrupt, the shareholders are the least to avail
the amount of profit or remaining assets of the company.
 At times of bankruptcy of owner, the possession of respective asset transfers to the initial
owner.
 In case if the borrower is declared bankrupt, it must use its assets to repay the loan first
and thereafter it can address and refund various shareholders, creditors, etc.
There is as such no implications with regard to using retained earnings. It is owners property and
he can make the use of it as and when he wants.
1.3
For the current business enterprise, the above enlisted sources of finance are best for the
entrepreneur. But it is essential to evaluate and analyse one best source that can be adapted by
the owner. For this purpose, it is essential to assess various pros and cons of the same. In order to
avail long term finance, share capital is the best source of finance. It will enable the owner to
make investments by purchasing assets (Grieve, 2013). It is beneficial because the return on
investment in particular source is much higher than the other sources. Moreover, the cost of
implementation is quite low. Whereas, it is not intellectual to use all the retained earnings in the
business because it causes serious cash flow troubles thereby affecting the financial statements.
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Likewise, in regards with the short or medium term financing, the best out of two is hire
purchase if the owner needs to buy goods or assets urgently. It is easy to repay the amount of
money in instalments without any interest as in the case of Bank loan. Moreover, there is a high
amount of risk involved in taking loan and along with that at times there are high penalty fees
and number of limitations relating to it (Elearn, 2013). Additionally, too much of loan
undertaken to purchase assets affects the cash flow statement and repayment of borrowings can
even result in overtaking incomes. Thus the best sources of finance for said enterprise is share
capital and hire purchase.
TASK 2
2.1
In order to implement any of the above source of finance in the said business
organization, it is essential to analyse and evaluate the cost of it. There are several lenders who
provide a firm with the prescribed money and they charge interest for the same. This is the basic
element of cost that is charged in each of the source (Dayananda, 2002). The various prices that
comes along with the enlisted sources of finance are interest, dividends, opportunity cost.
When the owner of the said organization opts for raising funds from share capital, then it
has to surrender some amount of its profit to the shareholders in for of dividends. Moreover,
undertaking the following source requires money to register in the share market and promote its
company's share. Contrary if the owner prefers to reinvest its profit in the company, then it has to
lose alternative projects that can provide much more benefit than the retained earnings. This can
also be termed as opportunity cost.
Likewise, choosing to raise funds from bank loan, the entrepreneur needs to incur several
cost along with repaying interest and these are penalty fees, various taxes and large amount of
risk in keeping assets as security (Davis and McKevitt, 2013). Contrastingly, there is no physical
cost involved in purchasing equipments on hire purchase basis.
2.2
Financial plan of company is an outline of various activities that will enable the
entrepreneur to manage its funds effectively. It involves setting up of budgets, policies,
objectives to monitor its financial resources and manage them in the most efficient manner that
renders huge profits to the organization. Relevance of financial planning in context with the
current organization is enlisted below:
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 Cash Budgeting: It aids in managing the outflow of cash by undertaking several
measures such as tax planning, judicial spending thereby increasing the cash flow of the
company. Income: Planning assist in increasing the income of said concern by duly reducing the
amount in tax payments, ensuring optimum supply and demand of money. It also enables
the firm to increase its savings thereby leading to rise in profits (Cox and Fardon, 2005).
 Capital: It also aids in building a strong capital base of the company that will enable the
entrepreneur to carry out investment decisions most efficiently.
 Apart from the above enlisted points, there are several other uses of financial plan and its
imperativeness in the present organization. It also helps in evaluating the potential
opportunities and threats of the future and plan actions accordingly.
2.3
There are mainly three types of decisions that are required to be made by each and every
business enterprise. These constitutes of strategic, operational and managerial decisions. For this
purpose varied informations are needed in form of financial statement of the company, audit
report, etc. The various users of these information have been listed below: Workers: They require various information of the company in order to ascertain relative
changes in the price and compensation trends of the company (Brigham and Ehrhardt,
2013). Their salary and bonus depends upon the profit made by the said organisation on
the respective period. Customers and Suppliers: They are the external users of the information and review the
financial position of the said organization in order to make various decisions regarding
providing credit and purchasing products and services of the firm. Shareholders: These are the internal users of information and review these statements to
ascertain the amounts of dividend that can be availed by them. Moreover, their
investment decisions are based on these data's and further judgements to make alteration
in the current policies and procedures are made by them (Brigham 2001).
 Regulatory authorities: These includes governments, tax consultants, auditors, etc. They
require various information of the company to ascertain the financial position of the
company and acknowledge that the current enterprise is capable of paying the amount or
not.
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2.4
Each companies carries out several transactions in a day and the same has consequent
impact on the financial statements of the firm. Further, it becomes the basis of decision making
of firm and its investors (Bose, 2006). The ways in which finance affects the financial statements
of the concerned business enterprise have been enlisted below:
From the above enlisted sources of finance, share capital affects the balance sheet as it is
shown in the liability side which demonstrates that the same amount is to be repaid back to the
shareholders in terms of dividends. Likewise, it has a consequent impact in the profit and loss
account as the dividend paid to the shareholders is shown in the indirect expenses of the firm.
Similarly, is the entrepreneur uses its existing profits in the company the capital of the firm will
increase thereby affecting the balance sheet and the cash statesmen will show a negative balance
as the profit is being used again. Moreover, the cash will also increase (Bennouna, Meredith and
Marchant, 2010).
Contrary in the case of Bank loan, the amount of loan shall be highlighted in the balance
sheet on the liability side and the amount of interest and various expenses availed in taking it
shall be shown in the profit and loss account in the head indirect expenditure. The cash flow also
has a consequent impact as the loan taken brings in the amount of money in the company.
Whereas in the case of hire purchase, the assets of the firm will increase thereby duly reducing
the amount of cash that has been incurred in repaying the instalment money (Baker and Powell,
2009).
TASK 3
3.1
Budget is that quantitative statement which prepares in present in order to forecast its
future as it is uncertain which can only predict (Bose, 2006). It is quantitative expression of a
programme which is designed by the owner for a specific period. It is also regarded as “first aid”
box for an organisation in accidental business situations. It will carry all the tools such as
planning of sales and revenue, monitoring of costs and expenses, increasing assets and
decreasing its liabilities by enhancing the cash flows in an enterprise.
The basic aim behind preparation of this kind of budget is to alert the business owner to
deal with the upcoming difficulties by strengthening its existing financial capabilities (Brigham
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and Ehrhardt, 2013). There are different kinds of budgets which is prepared by an enterprise
owner to determine its existing abilities to cop up with future difficulties which are given below:
Operating Budget
It is a forecast analysis of projected income and expenses which takes places in an
organisation in a given period (Bose, 2006). It helps to create authenticate and accurate picture
about the financial health as the good decisions are taken on the defined financial performance of
this enterprise.
It involves various factors such as sales, production, labour costs, material costs,
overheads, manufacturing expenses and administrative expenses which cover all the prospective
expenses arises in the business enterprise (Bose, 2006). The frequency of this budget is weekly,
monthly and yearly to keep a track on all the expenses of a firm.
Table 1: Operating budget
Particulars
January
(1000 Units
produced)
February
(2500 Units
produced)
March
(4500 Units
produced)
Sales 10000 25000 45000
Cost of sales 8000 16000 32000
Gross profit 2000 9000 13000
Expenses
Production overhead 500 2000 5000
Labour costs 300 1200 2500
staffing costs 200 2000 4000
Material costs 100 1000 10000
Manufacturing expenses 100 500 1300
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Administrative expenses 1000 1000 1000
Total 2200 7700 23800
Variance -200 1300 -10800
Interpretations
 The above operating budget of an enterprise is prepared for three months which covers all
the expenses and sales generated by the organisations.
 Sales generated in January is 10000 which is increases in February is 25000 and later on
45000 as the production unit is showing increasing trend from 1000 units then 1500 units
and lastly at 2000 units in March.
 Expenses are also increasing from one period to another in proportion to the sales
generated by an enterprise in a given month.
 It has observed from this budget that only in February month this enterprise generated
positive results otherwise in starting month and last month there are negative results.
3.2
Table 2: Calculation of unit cost
Particulars 1000 units
Per unit
cost
Direct material 3000/1000 3
Direct labour 2000/1000 2
Variable cost 1000/1000 1
Fixed cost 2000/1000 2
Total cost 8000/1000 8
Profit margin(25%) 8000*25/10 2
8

0
Selling price 10
Pricing techniques
It has been observed that in the above cost plus pricing technique has been utilised in
order to determine the selling price of an enterprise.
Cost plus pricing technique is that technique which is useful for an enterprise as it will cover all
the costs involved in the business should be taken into considerations (Brigham, 2001). It can be
seen from the above mentioned calculation in which the owner has determined the specific
amount of profit percentage in the price of the products to compensate the costs incurred in its
business with the higher generation of the sales and the revenue.
3.3
Payback period
Year Project A Cumulative Project B Cumulative
Initial investment 200000 200000
1 20000 20000 30000 30000
2 40000 60000 60000 90000
3 60000 120000 90000 180000
4 80000 200000 120000 300000
5 100000 300000 150000 450000
Calculation of Payback
Project A= 4 years
project B
= 3+90000/180000-30000
3+90000/120000
3+0.75= 3.75years
Interpretations
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From the tow projects given above within a standard time limit of 5 years project A will
get back its initial investment in 4 years on the contrary, Project B will generate returns in 3.75
years which is less than project A (Baker and Powell, 2009). Hence, among the two projects,
second proposal should be selected as it will return all the initial investment in lesser time than
the first proposal.
Table 3: Calculation of NPV
Year Project A
Cumulative
cash inflow PV@10% Discounted value
Initial
investment 200000
1 20000 20000 0.9091 18181.81
2 40000 60000 0.8264 49586.77
3 60000 120000 0.7513 90157.77
4 80000 200000 0.6830 136602.7
5 100000 300000 0.6209 186276.41
Total 480805.45
NPV 280805.45
Table 4: Calculation of NPV
Project B
Cumulativ
e cash
inflow
PV
factor
@10%
Present
value
10

200000
30000 30000 0.9091 27272.72
60000 90000 0.8264 74380.16
90000 180000 0.7513 135236.66
120000 300000 0.6830 204904.03
150000 450000 0.6209 279414.59
Total 721208.18
NPV 521208.18
Interpretations
NPV is an evaluation technique that assess the projects on the basis of the future returns
generated by that projects in near future in positive terms (Elearn, 2013). From the above it has
been seen that project B has higher NPV than project B so, it is recommended that second
proposal should be taken into consideration.
Table 5: Calculation of IRR
IRR Project A Project B
Years Cash flow Cash flow
Initial investment -200000 -200000
1 20000 30000
2 40000 60000
3 60000 90000
4 80000 120000
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5 100000 150000
IRR 12.01% 26.28%
Interpretations
Internal rate of return is another capital evaluation technique that judges a project on the
basis of its rate of return in comparison with the internal capital rate adopted by an organisation.
As per this given technique all the rate of return are higher than the internal rate of return but the
best suitable project which generated more than 2 times of internal rate of return that is the
reason this project should be selected.
TASK 4
4.1
The essential requirement of a tesco is to ascertain its financial performance by preparing
the standard financial statements to ascertain their financial position. There are different financial
statements prepared in a firm which are given as below:
 Income statements- It is preprepared to ascertain the profitability of the firm as it will
include all the amounts of the sales and the revenue generated by the firm after deducting
all prospective expenses in the firm from this figure to obtain the exclusive figure in
gross profit and the net profit (Grieve, 2013). The sub statements covered in the income
statements are trading account and the profit and loss account which prepared in an
enterprise in the given period to determinate the actual profitability of the business to
predict its future and use it's as a tool against their competitors (Helfert, 2004). The
hitherto profitability will also help to attract wide number of investors in the forming of
shareholders who will invest by purchasing shares sand the debentures of the business.
 Balance sheet- Essential part of the financial statements prepared in an enterprise to
determine the financial position of the business d that is the reason its is also recognised
as the position statement as it will determine the position of a business in the external
market by defining all the total assets and the liabilities of the business.
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4.2
There are different kinds of the business exist in which different nature of the business
are operating by following various structures of the financial statements in different ways which
are given as below:
Partnership- It is that business two or more partners will form an enterprise and started their
business operation in order earn profit by forming mutual agreement and all the terms and
conditions to operate their business successfully (Jenkins, 2002). In this kind of the business
income statement has been prepared by bifurcated the total profit into the number of partners of
an enterprise in agreed share of the profit among the partners. Balance sheet are also prepared by
dividing all the assets and liabilities of a partner specifically.
Sole proprietor- The rules and obligations to prepare all the financial statements are nnot
mandatory for this organisation (Magni, 2010). It will prepare all single entry systems in all the
business transactions are entered without giving double effect as per the double entry system of
the book keeping that is the standard accounting statements. The business owner are also not
confined to follow any kind of IAS while preparing the income statements and the balance sheet.
4.3
Table 6: Calculation of ratios of TESCO
Ratios 2014 2015
Profitability
GP ratio 6.31 -3.87
NP ratio 1.53 -9.22
Liquidity ratio
Current ratio 0.73 0.6
Efficiency ratio
Asset turnover 1.27 1.32
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Inventory turnover 16.27 19.71
Receivables ratio 17.48 15.09
Interpretations
GP ratio- The basic ratio which is calculated in order to ascertain the profitability of an
organisation as this amount is an exclusive amount of all the taxes and interest from the raw
amount of the sales and the profit generated by a firm (Rasid, 2014). It is that amount which is
determined after excluding cost of goods sold from the sales and revenue produced by an
enterprise. In the given case scenario, the GP ratio is higher in 2014 and in the next year it goes
to negative as the sales in that year was not good and higher than compared to the cost ODF sales
that is all the expenses incurred in the business.
NP ratio- The final profitability of the organisation has been judged by ascertaining the amount
of this net profit (Siano, Kitchen and Confetto, 2010). This amount is exclusive amount as it
ascertained after deducting all the taxes amount and the interest and all other expenses incurred
by the business in given period. In the cited case, the net profit decreases from 1.53 to -9.22 due
to the higher taxation burden and the interstate paid to all the debenture holders held by an
enterprise which is called up as sourced of finances to strengthen the organisation.
Current ratio- This ratio has calculated by multiplying the current assets and the current
liabilities held by an enterprise as it will determine the financial ability of a firm in order to pay
back its short term obligations in order to maintain a balance in the business n terms of keeping
adequate amount of cash (Sivakumar, 2011). The current has decrease from one year to the
another year which signifies the higher liabilities incurred by an enterprise.
Efficiency ratio- These ratios are calculated to determine the efficient capabilities of enterprise
to minimise its burden of the expenses and transform them into strengthens in order to collect All
the debts given by the company to other businesses by calculating receivables turnover.
Receivables has decreases from the initial ratio which shows the capability of enterprise (Wang,
2011). Inventory turnover management ratio has increases along with the asset turnover as these
ratios will determine the efficiency of the business in terms of the assets held by them as sources
of income.
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