Comprehensive Report: Analyzing Finance Sources and Financial Planning

This report delves into the critical aspects of financial resources for businesses, exploring various funding sources such as bank loans, retained earnings, debentures, and leasing, suitable for different organizational sizes and stages. It analyzes the implications of these sources, considering legal aspects, costs, and suitability, while also examining financial and opportunity costs. The report emphasizes the importance of financial planning in making sound business decisions and coordinating organizational activities. It highlights the significance of financial statements, including profit and loss accounts, balance sheets, and cash flow statements, in providing crucial information for decision-making. Furthermore, the report includes case studies of businesses seeking to acquire medium-sized organizations and provides recommendations based on cash flow forecasts, contribution analysis, break-even analysis, and investment appraisal techniques. Overall, the report offers a comprehensive overview of financial management, aiding in strategic decision-making for businesses.

MFRD

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Sources of finance which are available to new and old as well as large and small sized
organization............................................................................................................................1
1.2 Implication of the different sources of funding ...............................................................2
1.3 Three case study examples who wishes to buy medium-sized organization ...................3
TASK 2............................................................................................................................................4
2.1 Analysis of the cost of different sources of finance.........................................................4
2.2 Stating the importance of the financial planning..............................................................5
2.3 Statements who highlights the financial information which required for the decision
making....................................................................................................................................5
2.4 Key items of the P&L and balance sheet..........................................................................6
TASK 3............................................................................................................................................6
3.1 Recommending the actions on the basis of the critical evaluation of the cash flow forecast
of ABC manufacturing ltd......................................................................................................6
3.2 Calculation of contribution, break even and profitability analysis...................................7
3.3 Use of investment appraisal techniques and financial planning for ABC engineering in
making strategic decisions....................................................................................................13
TASK 4..........................................................................................................................................16
4.1 Aim and utility of trial balance as well as financial statements of an organization.......16
4.2 Difference between the financial statements of business organization..........................16
4.3 Analyzing the ratio of XYZ ltd......................................................................................17
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Financial resources are one of the crucial elements of the corporation which plays a
significant role in executing the business plan in an appropriate manner. Financial resources
consist of the fund which is available to business to spend it in the activities and functions of an
organization. Thus, it is necessary for the firm to manage their financial resources in an effective
manner by preventing the wastage of money (Brigham and Ehrhardt, 2013). This report is based
upon case scenario that helps in understanding the sources which business organization can
undertake to meet their monetary needs. Besides this, it also provides understanding regarding
the importance of financial planning which make contribution in the attainment of organizational
objectives. In addition to this, it depicts the analysis of the cash related activities which helps
organization in assessing their liquidity aspects.
TASK 1
1.1 Sources of finance which are available to new and old as well as large and small sized
organization
New and existing as well as big and small sized organization can undertake the following
components to raise its finance are enumerated below:
New business enterprise
Bank loan: New business organization can meet its monetary requirements by taking into
consideration bank loan on the basis of the financial security (Poynton, Lapan and Marcotte,
2015). Thus, it provides assistance to the company in raising capital for their new venture.
 Pros: Tax deductible source of finance Cons: Bank charges high interest rate for monetary assistance in comparison to other
financial institutions.
Old business enterprise
Retained earnings: It refers to the part of net income which each and every business enterprise
retain with itself on the basis of the fixed percentage.
 Pros: It is one of the main internal sources of finance which provides financial assistance
to an organization at the time of contingencies. Cons: If organization makes use of retained earnings then they might face difficulty in
coping up with the contingent situation or aspects.
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Large sized organization
Issue of debentures: large business organization can easily raise their finance by issuing
debentures to the potential investors. It is most effectual source of finance which new business
firm can undertake to meet their financial requirements.
 Pros: Investors are always ready to invest in the debentures which provides fixed
periodical income to them (Heraty and McCarthy, 2015). Through this, organization can
easily raise their capital. Cons: One of the major drawback of this sources that organization has to pay interest to
the debenture holders whether they make profit or not. It imposes financial burden in
front of the company.
Small sized organization
Leasing: This source offers opportunity to small sized organization to use the asset in productive
activities for the predetermined period without making huge investment on it.
 Pros: It provides tax befits to the small sized organization and there by maximizes the
profitability of them.
 Cons: In leasing, firms have to pay periodical rent to the owner of assets for making use
of it. This aspect clearly reflects that leasing also impose cost upon the firm in terms of
money.
1.2 Implication of the different sources of funding
Various sources of finance are significantly differs in terms of their implication on firm in the
following manner:
Sources Legal aspects Cost Suitability
Bank loan Banks have the legal
authority to case the
asset of an
organization if they
make default in the
amount of loan and
interest.
Bank charges high
interest rate for
providing the financial
assistance to the
organization.
Easy installment
payment system is one
of the main aspects
which attract
organization to fulfill
their financial needs
through bank loan.
Retained earning As per the legal If organization uses It is the more suitable
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aspects every
organization needs to
kept fixed amount
with itself which
enables them to coping
up with the dynamic
business arena more
effectively (Danes,
Rodriguez and
Brewton, 2013).
retained earning then
they are unable to face
the contingent
situation more
effectively due to the
lack of sufficient
amount of fund.
source which prevents
organization to issue
the equity shares. It
facilitates no dilution
or interruption of the
shareholders in the
decision making
aspects of an
organization.
Issue of debentures In case of debentures,
holders of it have no
right to make
interference in the
decision making
aspects. The liability
of the firm is limited
to make periodical
interest to them.
When organization
raises their finance
through debentures
then they have to pay
interest to the holders
(Rehan and et.al,
2015). It imposes high
financial cost in front
of the company.
This source of finance
is more suitable for the
organization because
amount of interest
related with the
debentures are very
low as compared to
other mediums.
Leasing Organization has to
return the asset to the
real owner after the
predetermined time
period.
Owner of the asset
charges periodical rent
for making use of the
asset.
It is the more suitable
source because it
provides high tax
benefits to the
organization.
1.3 Three case study examples who wishes to buy medium-sized organization
Three case study examples in relation to the sources of fund which small sized
organization, large business expansion and small group of people can use are as under:
Case study examples Sources of finance
ABC company who wants to start up their new By using their personal saving and taking
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venture financial support from angel investors ABC
can easily begin its new business. In this, ABC
does not have needs to pay any interest and
thereby saving the monetary cost of the firm.
XYZ large business organization who wishes
to expand their business operations
XYZ can fulfill their financial needs and
requirements by issuing the equity shares. It
provides assistance to an organization in
expanding their business operations and
functions. By encouraging the several
shareholders company can fulfill their
monetary requirements. In this, company needs
to pay dividend only when they will generate
sufficient amount of profit. Thus, this source
proves to be more suitable for the corporation.
CBN partnership firm or small group of the
people who wants to purchase medium-sized
organization
By approaching bank for the loan CBN
become able to purchase the medium sized
organization. Besides this, by making use of
the profit organization can easily fulfill their
financial necessities.
TASK 2
2.1 Analysis of the cost of different sources of finance
Specifically financial and opportunity cost is the main aspects which place different
impact upon the organization as per the nature of source which are as follows:
Financial cost Bank loan: Moreover, bank charges high rate of interest on the amount of loan in
comparison to the other financial institutions. Thus, if organization raises their capital
through bank loan then have to pay high interest amount. Retained earnings: In case if old organization makes use of retained earnings to fulfill
their financial needs. Then organization is unable to make investment in the most
profitable project which may arise in future.
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 Issuing debentures: When organization issue debenture to their existing and potential
investors then have to pay interest to them (Togashi and et.al, 2015). It imposes high
financial cost in front of the organization.
 Leasing: If small sized organization undertakes leasing then they requires to pay rent to
the real owner of the asset on the periodical basis.
Thus, all these sources impose high level of cost in front of the organization in the
monetary terms.
Opportunity cost
Retained earnings: If organization makes use of retained earnings to raise their capital then it
negatively impact in the mind of existing and potential shareholders. Moreover, dividend
decision of the firm is highly dependent upon the profit and the part which they retain with it.
When company make focus upon retaining or making use of profit in business projects then they
are not in position to give dividend to their shareholders.
Issue of debentures: When organization have decided to raise their capital by issuing the
debentures over the other sources of finance. This aspect shows that business operations and
function of an organization are not stable and there by negatively affects the decision making of
the stakeholders.
2.2 Stating the importance of the financial planning
Financial planning: It is the process which helps business organization in making sensible
business decisions in terms of money. This plan assists employees in spending money in the
business activities or functions in an effectual manner.
Importance
 Monetary plan helps company in investing funds in the highly appropriate project which
provides benefit to them in terms of high sales revenue.
 Further, it helps organization in coordinate the activities of the different fields such as
manufacturing, sales etc.
 Effective financial planning also helps organization in coping up with the uncertainties
which might be arise in future (The Importance of Personal Financial Planning, 2015).
 Financial planning helps organization in assessing the deviations by making comparison
of actual spending with the budgeted amount. By this, company is able to undertake
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effectual measures within the suitable time frame and thereby aid in profitability aspect
of them (Kumbirai and Webb, 2013).
 Financial plan also provide assistance to business entity in expanding their business
operations more effectively. By making effectual plan business organization is able to
invest money in the right direction.
2.3 Statements who highlights the financial information which required for the decision making
Financial statements are the main source which highlights the information required by an
organization for making cost effective decisions. It includes profit and loss account, balance
sheet and cash flow statements. These statements provide deeper insight about the financial
position of an organization. Profit and loss a/c provides information regarding the expenses and
income of an organization. It helps them in identifying the areas of the expenses over which they
needs to exert control (Karande and Chakraborty, 2012). Besides this, balance sheet of an
organization provides information regarding the financial obligations and assets of an
organization. For instance: If enterprise wishes to enlarge their business activities they need to
identify the cash which is available to them. It renders information to the firm about the amount
of fund which they require to raise by undertaking various sources of finance.
2.4 Key items of the P&L and balance sheet
Profit and loss account shows income and expenditure of an organization where as
balance sheet represents the financial obligations and assets of an organization (Dellavigna and
Pollet, 2013). Different transaction places different impact the profit and loss as well as balance
sheet of an organization.
For instance: Company issues 6%debenture worth of £200000 to raise their capital then
treatment of this transaction in p&l and balance sheet are as under:
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TASK 3
3.1 Recommending the actions on the basis of the critical evaluation of the cash flow forecast of
ABC manufacturing ltd.
Analysis of the sales budget of ABC manufacturing ltd.: The given sales budget of ABC
manufacturing ltd. states that actual sales generated by an ABC are not in line with the estimated
sales amount. This aspect clearly indicates that ABC has not achieved success in encouraging the
customers towards the products or services which are offered by them. It may cause behind the
discrepancies which occurred in the sales aspect of the firm. Thus, organization needs to make
use of advertisement and other means of promotion to raise the sales of firm. Through this,
company is able to reduce the deviation of sales budget (Bierman Jr and Smidt, 2012).
Analysis of the cash flow of ABC manufacturing ltd.: Cash flow budget of ABC shows
fluctuating pattern in the sales of an organization. Sales of the company are decreasing at the
very high rates. In addition to this, wages, rent a rates, insurance, advertisement as well other
office expenses shows consistent trend in the expenses made by an organization. Whereas
purchase expenses shows fluctuations because as sales decrease manufacturing aspect is also
decreases. Thus, organization needs to make competent strategies in order to enhance the sales as
well as profitability aspects to the large extent.
To
The Director of ABC Ltd.
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Date_______
On the basis of the sales budget analysis it has been identifying that company fails to
generate the revenue which is estimated by them. Besides this, cash flow analysis shows
decreasing trend in the sales of an organization. Thus, company needs to make efforts to
enhance high level of sales and profit with the help of the effective marketing efforts. Through
this organization is able to improve their financial and liquidity aspects or position.
3.2 Calculation of contribution, break even and profitability analysis
Calculation of contribution and profits
Particulars Amount
Contribution per unit (CPU) 21.55£
Contribution to sales ratio 161625£/900000£*100
= 17.96%.
Break-even point (In units) Total Fixed Cost/CPU
= 120000£/21.55£
= 5568.45 Units
Margin of safety (In £) Total sales - BEP Sales
9000000£ - 668213.46£
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= 231786.54£.
Margin of safety per unit 231786.54£/7500
=30.90£
Calculation of profit and Breakeven point id sales price is variable
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Calculation of Break Even Point when fixed and material cost is varied
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