MANAGING RESOURCES AND FINANCIAL DECISION
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Tables of content INTRODUCTION ..................................................................................................................... 3 TASK 4 ...................................................................................................................................... 3 (a)Types and purpose of the main financial statements and their formats ............................ 3 (b) Information needs of different users of financial statements ........................................... 4 TASK5 ....................................................................................................................................... 5 1Sources of finance for business............................................................................................ 5 2 Implication of sources of finance ........................................................................................ 5 3 Cost of sources of finance ................................................................................................... 6 4 Impact of finance on financial statements .......................................................................... 6 5.Benefits of financial planning ............................................................................................. 7 CONCLUSION .......................................................................................................................... 7 REFERENCES .......................................................................................................................... 8
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INTRODUCTION Financial management is the heart of any business organization as it provides a way to efficiently utilize the available resources. Business needs financial resources to start a new business or to expand the existing one. Managing financial of resources is referred as the tool to efficiently manage available resources in order to generate more profits. The report aims to identify the sources of funds to develop a business. The cost associated with these sources, impacts Company’s financial health. The role of financial planning has also been explained.
TASK 1 Market Financial decision based on Financial Information When income of the company exceeds from expenditure amount then surplus situation is arises for business. In this case, income of an organization is high as compare to its expenses and it shows that company is not in loss position. The above figure shows the cash budget of company and it explored that respective firm sales are increase in June and July months but it is decease in August month and again it increases in September month so overall on sales base figure represent the surplus situation. Firm has efficient amount of cash and they are having good cash balance in all four month. Company has enough amounts of cash and it easily expands its business activities with helps of surplus amount. The firm credit is increase in respective august and September month and its increase the burden of an organization. Perry Bar Corporation can reduce it credit purchase and its helps firm to minimizing the liabilities. Total inflows of firm illustrate that all four months cash comes in business and it increase month by month. Hence if company has adequate amount of cash then managing director of company can pay other relative expenses. Other expenses of and organization is increase every month and Company should proper manage its resources and tried to reduce its expenses. Closing balance is fluctuating in every month. Surplus amount can be invest in development and expansion activities and find out the new growth opportunities for the business. It is responsibility of MD to use this money in effective manner and reduce cost of the production in well planned manner.
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TASK 2 Make financial decisions based on financial information NPV method NPV of Project A = 318610 - 260000 = 58610 NPV of Project B = 416560 - 320000 = 96560 Net present value method help an organization to selecting the best economical project based on their present factors. In this situation, NPV value of project B is high as compare to Scheme B so firm should adopt Scheme B. Payback period The payback period of project A is 2 year and the payback period of project B is 3 year. Payback method is used to evaluate investing opportunities and product development project base on the time period in which project invested money return. In given case, Project A gets its invested money in 2 years while Project B gets in 3 years. Hence Project A achieve more return in less time as compare to other Project B so scheme A is select for investment. Basis on PBP UK automobile organization accept investment proposal and it should adopt project A because it gives quick returns on initial investment in shorter time.
TASK 3 Financial statements are generally known as financial reports. These are formal records of the financial activities of a business. These financial statements aim to provide brief of a company’s performance and position at a given period of time. They all are interrelated and effect the information they have with them (Drake and Fabozzi, 2012). In the annual report of company there are three types of financial statements described underneath: Income statement refers to P&L account. It gives the information of income and expenses of the company during a particular time period. It is divided into incomes and
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expenses. These incomes and expenses are of operating and non-operating nature. The difference between incomes and expenditures show net loss or net profit for company. Balance sheet is a statement of financial position of business. It refers to the accounting statement comprising various assets and liabilities and sub classification of them. It has to be made on the particular date or at the end of financial year. According to accounting equations, both sides of balance sheet have to be equal (Belkaoui, 2004). So assets should be equivalent to liabilities and owners equity (Stolowy and Lebas, 2006). Cash flow statement shows the facts of inflow and outflow of the cash at a particular point of time. There are three activities in cash flow statement such as: operating, investing and financing activities .Operating activities consist of daily cash transaction. Investing activities snapshot the investments and amount recovered gets matured from invested funds. Financing activities show issues related to funds from various resources and repayment of loans taken in previous years (White, 2006). The main purpose of preparing the income statement, balance sheet and cash flow is to ascertain financial situation of an enterprise. The format of financial statements can vary with the objective and size of the businesses. There are mainly three types of organization which operate in business environment. They are sole proprietorship, partnership and public limited company ( Rasid and et.al, 2011). The differences in formats of these are as follows. Partnership firms: The partnership firms prepare their accounts with separate heading of partners’ capital as they have to divide the profit and loss in order to their capital invested. Public Limited Company: The Company that is listed in companies act 1956 follows strict accounting and financial reporting standards. These companies prepare financial statements to assure the information needed for various stakeholders. Sole proprietorship: The sole proprietor adopts simple accounting method in preparation of their accounts. They only focus to the cash flow statements as to ascertain the amount of profit earned or losses incurred during a particular time. The sole traders do not make the accounts to satisfy informational needs of public or other government bodies (Cunningham, 2006).
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(b) Information needs of different users of financial statements The objectives of different financial reports are to explain the financial performance of business. There are different decision makers, who can use the company’s financial information. The users of financial statements are shareholders, investors, employees, lenders, suppliers or trade creditors, customers, governments and the general public. Share holders: These are considered as owners of company. They need information to identify the amount of dividend paid to them. They verify balance sheet, so they can judge the ability of enterprise to pay dividends. Investors: The investors put their funds in the company and they need information to determine whether they should invest or not. Lenders: Lenders need the information to find out whether their loans and the interest amount will be paid on due dates or not. Customers: Customers get services or products from the companies and they have an interest in financial information about the persistence of company as they have a long-term involvement with it. Government: Government and their agencies allocate funds to company the and also require information in order to regulate the activities of enterprises. They use financial information to determine taxation policies. They also keep an eye on whether the company is paying tax or not (William ,Fleming and Allport, 2014). Suppliers: The information available in financial statements helps to assure the suppliers that the amount they owe to the company will be paid when due. General public: A financial statement provides information about new trends and recent developments of the company. CSR activities of companies attract public (Sabău, 2013).
TASK 4 1 Sources of finance for business If a company wants to expand its business, firstly it should identify the amount it needs for the operations. Business can generate funds from within the business or from
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outside the business. If owner raises funds from inside the business, it is called internal financing. The funds raised from other sources are called external financing. The owner can use its own savings to finance the business. There are other sources of internal financing such as family and friends, employee contributions, member contributions, retained profits, sale of assets, etc. Business can use resources of external financing. These are bank loans & overdraft; public finance, debt financing, hire purchase leasing and venture capital. To start a new business it has been assumed that company needs 100000£. The owner has 20% as personal saving which can be used in business. The rest of amount can be raised by taking loans from relatives and banks. The entrepreneur can also go for venture capital in which the other companies will invest in business. Business can also acquire some assets in the way of hire purchasing. Franchisee can be the other option to raise funds. In future business can be expanded and other partners can be involved in it . The partners will invest their capital at certain proportion and will get share in company’s profit and loss. Business can use its retained earnings as the source of finance. Retained profits are the part of last year’s profit that a business keeps with itself as savings (Loayza, Levine and Beck, 2000). 2 Implication of sources of finance By using different sources of finance, business can raise funds to meet its monetary needs. As the business is now operated by a signal person, it is business of sole trader. The owner is individually operating the business. If he takes funds through outside it has to share its ownership and he will lose its control over operations. The decisions pertaining to business deal will be taken by the consent of all partners. Financing through issuing shares, company will change business into public Sector Company. The holders of share will become the shareholders of company, so company has to pay dividend to them. Business would have to follow all the rules and regulations according to companies act 1956. Employee stocks ownership plans (ESOPs). If private companies share ownership with employees then business has to involve its employees in decision making. Company can take loan from bank. For that it has to keep some securities with the bank against the loan in this way owner lose its control from its other assets till the repayment of loan amount (Brigham, 2013).
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3 A source of finance includes various costs. There are different sources of finance which owner can use to finance its new business but there are some costs associated with them. Personal saving: If business uses its capital to finance the business he will misuse it’s all saving for personal needs and business will fail. Loan from relatives and friends: In this case he has the burden to pay the loan as soon as possible otherwise his relations with those members will spoil. He may also pay some interests against the loan. Issue of share: If the company issues its share in general public, they have to share its ownership with share holder. The cost associated with public financing is a dividend cost. The company will have to pay dividend to its share holders. Retained earnings: The use of retained earning generates opportunity cost. As more the company earns, it has to pay more divided to its share holders. Bank loans: The cost associated in the form of interest payments. The business also has to leave its personal securities with bank. Although the amount of interest is high but is suitable to meet all kinds of business requirement (Prince, 2008). Issue of debentures: Issue of debentures will create interest cost and cost of repayment for business as business will pay interest to debenture holder. On the other hand if debenture holders use the option of convertible debenture then company will also bear divided burden. Hire Purchase: It will be an expensive method, as company will pay more money for assets in instalments which can be paid in less by purchasing those assets in cash (Theeke and Mitchell,2008). 4 Impact of finance on financial statements Financial statements are the reports which show the financial health of company. These are prepared on the historical cost basis of accounting .The sources of finance have major impact on financial statements. The business can finance itself through two ways: debt finance and equity finance. These all sources of finance will give both positive as well as
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negative impact. If company uses debt financing its balance sheet will show more debts. If company issues the debentures, the interest against loan will show expenses side of profit and loss account and company’s expenses will increase. In the balance sheet, company’s creditor will increase. The same treatment will go for bank loans. If business sells its obsolete assets, they will acquire funds and they will be shown at the credit side of balance sheet. Personal savings will increase capital of business and will go to liability side. Issue of share will be treated as equity for business and the dividend paid to equity and preference shareholders is an expense for business. By this, expense of company will increase resulting as gross loss. The financial statements are based on double entry system. Every source of finance will have its impact on statements, which are, income and balance sheet. Use of retained earnings will keep companies reserve and surplus amount low. Overall different sources of finance give the financial strength to company but alternatively they will cost for business (Palepu and Healy, 2007). 5. Financial Planning is a critical element for the success of any organization. Through the planning of financial resources, company can use its monetary resources in a better way. For a business enterprise it is a combination of sources of funds and its utilization. The company can better find its future sources of funds and can select the efficient financing option while minimizing its cost (Murphy and Yetmar, 2010). By proper utilization of available funds, company can maximize its profit. The financial planning helps the managers in planning future strategies of business and to manage company’s incomes and expenses. It is very effective in creating current financial position of an organization. Through financial planning, financial system of business can be evaluated and revised (Deaconu, Nistor and Popa).
CONCLUSION The report explains various sources of finance available to an entrepreneur in order to expand its business. It helps to understand the implications of finance in different financial
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statement. The format of financial statement varies according to objectives and size of firms. The report also explains the role of financial planning in business.
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REFERENCES
Belkaoui, A. ,2004. Accounting Theory (ed. 5). London: Thomson Learning.
Brigham, E. ,2013. Financial Management: Theory and Practice.Cengage Learning.
Cunningham,D.H.,2006. Financial Statements Demystified. Allen & Unwin.
Deaconu, A., Nistor, C. C., and Popa, I., 2009. Analysis of the Stakeholders' Needs and Their Inference Upon Financial Reports of SMEs. Journal of International Business and Economics.9(1), 39-52.
Drake,P. and Fabozzi,F.J., 2012. Analysis of Financial Statements. John Wiley & Sons.
Loayza, N., Levine, R. and Beck, T., 2000. Finance and the sources of growth. Journal of Financial Economics. 58(1-2). pp.261-300.
Murphy, D. and Yetmar,S.,2010. Personal financial planning attitudes: a preliminary study of graduate students. Management Research Review 33(8). pp.811 – 817.
Palepu, K. and Healy,P.2007. Business Analysis and Valuation: Using Financial Statements. Cengage Learning.
Prince,T., 2008 .Research note: how the financial styles of managers impact financial and valuation metrics. Review of Accounting and Finance. 7 (2). pp.193 – 205. Rasid,A. and et.al, 2011. Management accounting and risk management in Malaysian financial institutions: An exploratory study. Managerial Auditing Journal. 26 (7). pp.566 – 585.
Sabău,L.,2013. Information needs of financial statements users - between harmony and conflict. [Pdf]. Available through:< http://fse.tibiscus.ro/anale/Lucrari2013/Lucrari_vol_XIX_2013_104.pdf >.[Accessed on 17th July 2014].
Stolowy, H. and Lebas, M., 2006. Financial Accounting and Reporting. Cengage Learning
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