INTRODUCTION TO FINANCIAL MANAGEMENT
In the success of any business effective management of funds play an important role. Every organisation requires finance to fulfil the financial need of business. Financial management is the technique to manage the financial resources of a firm while attaining the organizational objectives (Bhat, 2008). The management of financial resources in a straight line associated with the top management. The reports aim to identify the different sources of finance and their implication to the business. After going through the report one can also know about the impact of financial information on financial decision. The report also explains the technique to identify the viability of a project .By using the information available with the financial statement how individuals can evaluate the finance performance of a company.
1.1Sources of finance available to a business
There are different sources of finance available to the business. The sources are divided into two parts; internal and external (Counihan, 2000). Internal sources of finances refer to raising funds from the business itself and the external source refers to raising money from outside the business. Internal sources of finance include owners personal saving and loan from friends, family and relatives and the external sources are again divided into long term and short term financial sources (Jay, 2003).
Internal sources of finance
Personal savings: The business can use its own saving as the source of finance.
Sales of business assets: The short term need of finance can be fulfilled through selling the existing assets which are not in use.
Retained earnings: Retained earnings are the part of profit in the last years. Business can use it as a financial source.
Working capital: The organization can avail the funds by reducing in its working capital.
Loan from family and friends: Owner can take the loan from its family and friends and raise the funds (Riley, 2012).
External sources of finance
Issue of debentures: Company issues its debentures in the public and raises the funds. Debenture holder is known as the creditors of company.
Issue of shares: By issuing its share in the public organization can raise the funds. Share holder is considered as the owner of the company. Company issues both preference and equity share.
Bank loans: Bank loan is the major source of finance. Companies can take loan from banks by depositing some security and through paying the interest.
Government grants: Business owner can also take the loan from government by fulfilling the loan criteria (Beck, 2000).
1.2Implications of the different sources of finance
The various sources of finance have their implication on the business. The company can have some benefits by using the different financial sources. The use of internal sources will help company to avail finance at a low cost. If any organization goes for the external sources it can raise the huge amount of funds. Financing through issue of debentures and shares will create the company image in marketplace. The general public will come to know about the operations of company in market. The impacts of debt and loan financing will give advantage of: tax deduction for interest payable, committed to repayment, reduce EPS restrict use of assets or secured finance, on the other hand the equity finance will impact as investor can only withdraw by selling shares, no tax deduction for dividends paid and the company can have the ability to regulate under the regulations of capital markets. The fund borrowed from the government grants requires the low interest amount. Long term sources of finance give the business a sufficient time to repay so the company can run operations in a smooth way whereas the short term financing fulfils the immediate need of funds (Jennings, 2005).
1.3Appropriate sources of finance for a business project
An organization wants to assess the different types of finance based on different financial needs. Whenever a corporate owner plans a project its main focus lies with the sources to finance that project. Before evaluating the sources, proper analysis of project is required. It includes: total amount of funds needed, the time frame for repayment of plan, cheapest option, the amount of risk involved with the source, the length of time of the requirement for finance. To assess the appropriate source the nature of project is to be identified. If the project gives its repayment in short term then the main types of finances are: Bank Overdraft, credit from suppliers, personal savings, loan from relatives and the reduction in working capital etc. If it is assumed that the project will repay its initial cost in long run than :Mortgages, bank loans, issue of share & debentures, Retained profits, Hire purchase and leasing can be used as the source of finance for that project. An advance way of raising funds for the projects is venture capital. Merchant banks and investment specialists may be willing to provide finance project which have growth opportunities.
2. 1 Cost associate with financial sources
It is very important every business to understand sources of financing and the costs associated with those sources. The main two sources can be debt and equity. The cost of debt financing or loans is interest and cost of equity financing or investments could include dividends or a share of the profits and ownership of firm. Retained earnings have the opportunity cost as in the upcoming years the amount of profits increase the business had to pay dividend to the share holders and the company’s saving will go down. Personal savings are the easiest and cheapest sources but it holds a great degree of personal financial risk and on the other side family, friends and relatives can be the creditors but this may potentially affect personal relationships of owner. By issuing the shares and avail finance is provided in exchange for a share of business, therefore the business has e to share its ownership and the dividend cost is associated with the issue of shares. Debenture holders are treated as the borrowers of company. Company has the burden of loan on it that it has to pay the interest on the debenture holder’s money, so issue of debenture has its own interest cost (Palepu, 2007). Leasing is associated with obtaining equipment from financiers; it requires making rental payments during the lease. A bank loan includes term loans, mortgages and bank overdrafts. Bank loans are secured but businesses need to meet certain requirements as security against the loan and the specific interest instalments (Bhat, 2008).
2.2 Implication of financial planning
Financial planning involved the analysis of future fund requirement and the sources to avail the funds for a company and it is also essential to manage income and expenditure more efficiently. The cash analysis and budgeting are the part of financial planning. It includes: forecasting of financial statements under alternative operating plans, determining the amount of capital needed to support the planned projects, identify the funds that can be generated within the business and the other sources from external capital can be raised (Cortes, 2009). Financial planning also focuses to establish a performance-based management compensation system that rewards employees for their performance towards the fulfillment of business goals. It is an important task of financial planning to monitor operations after implementing the plan and if any steps are to be taken for the effectiveness of planning, do the corrective actions.The importance of financial planning for the business is that the financial planning helps the organization in analysing the financial statements that forecast the resource implications of making business financial decisions (Brandon, 2009).
2.3 Assess the information needs to different decision makers
In order to get the better results, different decision making needs the information which can help them to take the effective decision that can be implemented to attain the organisational goals. Usually in the firm the members of top level management take the business decision so they should be aware with the position of the business and should have the both internal and external information pertaining to organization’s functions. The decision makers can avail this information from the financial statements. There are different people involved in the business of a particular firm. The peoples are the customer, shareholders investors and the government bodies. The investors need the information regarding the financial performance of the company so they can take decision whether they should invest in the firm or not and how much the amount of profit they can earn by investing their funds. The information of dividend paid to the shareholders and the interest paid to debenture holders can get form the P&L and balance sheet of last year (Paramasivan, 2009). The government body needs the information regarding the tax paid form the company so they can regulate the public sector companies. For the different decisions makes should have the information of cash expenses and cash incomes so they can take the effective decision for the firm (Mohamed, 2001).
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2.4Impact of financial statement on finance
Financial statements comprise of different information which can be helpful for different people involved in the business while making financial decision. The different types of finances and their relative cost are differently treated in the financial statements under the rules of international Accounting Standards (Mitchell, 2007). The interest paid to the debenture holders and banks are shown in the Profit and loss account in the debit side as expenses and the capital received from it will go to the balance sheet Liability side. The owner’s capital will also go to the liability side because Company is treated as the separate entity from its owner and it has to pay the interest to its owner for its capital investment (Lusardi, 2008). The shareholder gets dividend on their investment and the dividend paid goes again to the expenses side and the amount is shown as the equity on the liability side of balance sheet. So the cost of financing is treated in two phases in both P&L and balance sheet. The individual elements of a balance sheet and P&L account change from day to day and reflect the activities of the company (Overton, 2007).
3.1 Analysis the budget and decision making
A budget is defined as s widespread and synchronized plan which is expressed in financial terms, for the operations and funds of a venture for a given future period (Ray, 2010). In the case, a six months cash budget is given of Easy Electronics Ltd. from July to December 2013. Having the budget it can be seen that the cash sales of the company are continuously increasing as in July 1500000€, August 1575000€, Sep.1653€, Oct.1818000€, Nov.2000000€, Dec.2200000€. On the other hand the expenses of the company are also fluctuating as in July it was 4136000€, then in October it becomes 9124000€ which is increasing in a big figure .It seems that the company had worked on it and the expenses reduced at 6156000€ in November2013. In December it again increased by1006000€. In the last three months, the company has negative closing cash balance which shows that the company’s expenses are too high then its income. The sales revenues is only 30% of net sales and the settlement for credit purchase is 30 days , this shows that the company will earn its payment in coming month. If we will see the budgeted income statement of company for six months, it is found that the profit after tax is 7697000€ which shows the company’s sound position in coming six months. In this way the cash budget can be analysed.
3.2 Calculation of unit costs and make pricing decisions
In the case study the budgeted cost of sales of Easy Electronics for six months is 18878000 €, the current selling units are 650036, selling price per unit is 55.12 €. If the company will reduce the selling price by 10% it will be 49.60€. On the other hand the price cost will increase by 20% and become 22653600€. Units of sale will increase by 20% and becomes 780043. Now the cost per unit will be 29 which were earlier at same. So from the case it can be concluded that by applying the information given will have the impact on Easy Electronics. The cost will remain same if the company applies the steps. But the sales will increase which is good for the company as it gains more profits. The revenue of company will increase and will go at 38690133€ which was 35830000€ before. Overall company should reduce the price by 10%.
4.1 Types of financial statements
Financial statements are called as financial reports. In order to show the financial position and pass the information to various people involved in business, every organization has to prepare financial statement at a certain period, generally after financial period. There are four types of financial statements: income statement, balance sheet, cash flow statement and statement of changes in owners’ equity.
Income statements: The income statement refers to the P&L account; it shows the treatment of income and expenses of business after a period of time. The difference of incomes and expenses show the net profit or net loss for the business. It includes different parts as: Income from continuing operations, results from discontinued operations e , gross and net profit or loss.
Statement of financial position: Generally known is known as balance sheet is prepared by company to identify the financial position. The balance sheet consists of three: assets, liabilities and owners equity. Accounting equation says that both sides of balance sheet has to be equal.
Cash flow statements: The cash flow statement provides the information cash activities as cash flows within or out the business during the period. This statement has three parts: investing, financing and operating activities.
Statement of Changes in Owners’ Equity: A Statement of Changes in owner’s equity is also prepared that shows the impact of OE on the balance sheet for whole period of business from starting to end (Baker, 2011).
4.2 Formats of financial statements for different types of business
The aim of different financial statements is to provide information of company’s performance and to help in decision making( Mun,2006 ).There is a little different between the formats of financial statements for different types of business such as sole proprietorship, partnership and company registered under the companies’ act 1956.
Sole proprietors: A sole trader who operates the business individually without having any regulation of government prepares the income statement and cash flow statement to determine the profit and losses occurring in business and cash incomes and expenses during the period of time in the business.
Partnership firm: The important elements of partnership business is to divide capital of business among the partners of firm, having this objective it designs only the profit and loss to know the net profit and loss for the business and identify the share of each partner in occurred profits and losses.
Listed Company: it has to follow the rules of Company’s act 1956 and has to prepare financial statements while following the international accounting standards and prepare all three financial statements as income, P&L and balance sheet (Hung, 2000).
4.3 Interpretation of financial statements using appropriate ratios and their comparisons
In the given case study the different types of financial rations of WM Morrison Supermarkets PLC and J Sainsbury Plc has been calculated to compare the financial position of both the companies. There are different types of rations available to evaluate the financial position of a company. Liquidity ratios are used to find out a company’s ability to meet its short-term debt obligations. Supermarkets PLC current ratio in 2011 is .57 which was .55 in 2010 and Sainsbury Plc ratios are .65 and .58. It shows that the financial position of J Sainsbury Plc is better than other one. The Asset turnover ratio is a sign of the efficiency of assets. The net assets turnover ratio of Supermarkets PLC is 2.34 and Sainsbury Plc is 2.42 in years 2011 is shows that the Sainsbury Plc is generating more revenues per dollar of assets. ROCE indicates the profitability and the efficiency of a company with which its capital is employed. Supermarkets PLC ROCE has increased from 12.44 to 12.53 on the other hand Sainsbury Plc has decreased from 9.78 to 8.63. The profit margin of is going in the same way Supermarkets PLC ratio has increased by .9% where the Sainsbury Plc’s has decreased by .34%. From the above analysis of different ratios it can be concluded that the financial position of WM Morrison Supermarkets PLC is better than J Sainsbury Plc.
The reports explain various sources of finance available to the business owners and their relative cost. The effective financial planning for the organization and the cash budget is also analysed. The different investment techniques are applied to evaluate the viability/ flexibility of project of Easy Electronics Ltd. In the report the different ratios are evaluated of two companies Supermarkets PLC and J Sainsbury Plc. From the analysis it can be concluded that the financial position of WM Morrison Supermarkets PLC is better than J Sainsbury Plc.
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