Unit 2: Managing Financial Resources and Decisions

Introduction

An effective and efficient management of funds in a such a manner through which company objective is  achieved on time is known as financial management. This function is directly associated with the top management. Present report is based on a XYZ company, which is launching a new project. A new project which is launch by a company is demanding and rewarding for the organization. In a Present report, the different sources of finance is identified for a new project. Along with this, the main financial statement and their purpose is discussed. Apart from that, the cost of different sources of finance is analyzed.

Task 1

1.1 Identify the sources of finance available to a business.

According to the given scenario, XYZ company want to launch an ambitious business project which is a demanding and rewarding. For a new project company need to identify different sources of finance.

There are two type of sources of finance long and short term that are discusses below

Equity share:

Equity share are known as ordinary share and it is a common sources of finance for any organization (Agarwal,  Amromin and Evanoff, 2015). XYZ company can issue share and then sell them on the stock exchange, to raise cash for a new project.

Retained profit

Retained profit is a  profit which is company own money.  (Dorfman and Cather, 2012). If company used profit for launching a new project then they no need to pay interest. Further it avoid the possibility of a change in control resulting form an issue of new share.

Bank loan:

Bank loan is appropriate source of finance for XYZ company. There is some legal formalities which company need to fulfill before taking a loan from a bank. Further, bank charge some specific amount of rate of interest form company. In addition to this, bank also keep some security deposit, so that in any case if company fail to pay loan amount, bank can re-payed loan form a security deposit.

Bank overdraft;

It is a short term source of finance which a business need for a day to day requirement. However, XYZ company need to pay a high interest on bank overdraft within a given period of time.

1.2 Asses the implication of the different source of business identified

There are some implication of sources of finance which are identified, this all significance are discussed below

Source of finance

Legal cost

Financial cost

bankruptcy

Dilution of control

Equity share

For raising a fund from a equity share company need to fulfill a lots of legal formalities.

In a equity share capital financial cost is dividend which company paid to its shareholder.

There are less priority to a share holder at the time when company become bankruptcy.

Dilution of control in equity share capitals high because  shareholder have power

Retained profit

In a retained profit there is no legal formality required because company is using  a money from it own profit.

There is financial cost because company is using it own money

Their is no priority given to a shareholder at when  company use a retained profit form starting a new profit

Their is low dilution of control

Bank loan

At the time of raising a fund from a bank there is also some legal formalities which need to fulfill before getting a loan. Bank provide loan to a company after checking their financial stability.

There is some specific amount of interest which company need to pay to loan.

If company become bankruptcy then bank re payed its loan from a security deposit. There is a high priority given to a bank because their loan is need to be payed

In a bank loan there is low dilution of control because there is interfere of shareholder

Bank overdraft

Bank overdraft is a short term loan  and company can take it whenever it required for raising a fund.

In a bank overdraft company need to pay a high rate of interest to a bank

In a bank overdraft high is given to a bank, there overdraft amount is nee to be fulfilled by the  organization on  times.

In a overdraft there is also a less dilution of control

1.3 Appropriate sources of finance for a business project

There are different type of sources of finance which company can take at the time of launching a new project. Each sources of finance have some implication so firm need to choose a right fund for raising a cash.  XYZ company is opening a new cafe for this purpose it can use it retained profit. This sources of finance is very benefited for the entrepreneur because there is no need to pay a interest or divides to a shareholder or a bank (Peetz and Buehler, 2013.). On the other hand, bank loan is also a appropriate source of finance because it help in gaining a extra finance. Their is less risk involved and company need to fulfill some legal formalities for taking a loan form bank. Further this loan is also for a short period and log period so company can decide after determining its project viability which type of loan it need to take. In addition to this, there is best fixed rate of interest is charge by a bank which company need to fulfill in installment.

2.1 Analyze the cost of each sources of finance which is identified

There are different sources of finance is identified which is each have some specific cost which are given below

Equity share:

A company can raise a fund from a public and it need to pay dividend to shareholders. There is low amount of risk because it paid only in liquidation form to public.

Bank loans:

fixed rate of interest is charged by a bank if company take a loan from a bank (Peetz and Buehler, 2013). The rate of is low on a bank loan and there is also some other fee is charged and applicable which is related with a cost.

Overdraft:

There is some interest charge on a overdraft by a XYZ company which is termed as cost. Further its interest rate is higher as compared to bank loan interest rate. All the interest rate is paid by a company form their financial cost.

2.2 Explain the importance of financial planning

Deciding monetary objective and formulating policies and procedure for achieving the target form a systemic process is known as financial planning (Healy and Palepu, 2012). Further it help in  setting a short and long term goals of the organization which is a crucial step in mapping out a financial future of XYZ company. Organization made a financial plan because it made easy for taking a financial decision so that goal can achieved on time. Importance of financial planning is discussed below

  • Financial planing is important for tapping a appropriate sources of fund on a suitable time. Long term fund can be taken by  a shareholder and debenture holder while medium term can be taken by financial institution.
  • Financial plan help in suggesting the way through which fund should be allocated in a organization for a various purpose (Brealey and et.al., 2012). Further it compare various investment proposal so that financial planning can be done.
  • Financial planning help in utilizing a finance properly in a department within a organization. All the business plan is depend on a condition of financial planning.

2.3 identify and assess the information need of internal and external decision maker

In a organization there are direct and indirect kind of stake in a business activities and operation which is called as a stakeholder.  There are are some of the important stakeholder of XYZ company have whose information is need for making a internal and external decision. This all are described below

Investor are those  who want a dividend from a organization, they are high concerned for it because they invest a lot of money in company project. They need information  related to a  business profitability, capital structure and dividend growth etc for fulfilling their objective. On the other hand employee are also important stakeholder, thy need a information related to company stability and objective. Workers put their efforts in a organization for accomplishing a goal and objective on time (Doğan, 2013). Further, supplier of XYZ company need payment on time and they also evaluate the net return. While on customer are also important stakeholder they want a quality product at fair price.

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They want that product which is receive by organization is of good quality and deliver on right time. Contrary to this , government also need a information related a to a activities which is performed within a ionization, to make sure that all the business activities are for public interest and should be ethical.

2.4 Explain the impact of finance on the financial statement

The impact of sources of finance on a financial statements

There is a impact on a stock price because it show financial condition of the organization to a investor.  There are many companies which are listed in a stock exchange need to be aware of a equity capital of company. On the other hand the financial decision of the company is also affected by a financial statements.

Different source of finance appear on a financial statement

In a balance sheet there is a information provided which help in taking a many decision related to expenditure and revenue. A possibility of growth is show in a balance sheet. On the other hand cash flow statement also help in a taking a decision of a organization

3.1 Project cash and other budget and analyze this projected budget

 

December

January

February

March

April

May

Opening balance

25000

64200

103500

144400

187600

231050

Sales

55000

60000

65000

70000

75000

80000

Total

80000

124200

168500

214400

262600

311050

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

Purchase

13000

17000

20000

22000

27000

33000

Creditors

1100

1600

1800

2200

1800

1600

Logistic expenses

500

700

800

1000

1050

1050

Employee cost

1200

1400

1500

1600

1700

1700

Total

15800

20700

24100

26800

31550

37350

Closing balance

64200

103500

144400

187600

231050

273700

Analysis:

Form the above table it show a increasing trend of XYZ company form a  January to June. It clearly indicate that company need to used different  strategy for controlling a expense. In a table it also show that company revenue is increasing means company is earning a profit because Company revenues is increasing.

 

December

January

February

March

February

March

Forecasted sales units

5500

6000

6500

7000

7500

8000

Add: Planned ending inventory

600

650

700

750

800

850

Total production required

6100

6650

7200

7750

8300

8850

 

 

 

 

 

 

 

Less: Beginning finished goods inventory

500

500

500

500

500

500

units to be manufactured

5600

6150

6700

7250

7800

8350

3.2  The calculation of unit cost for the new project and make pricing decision

In the given table it show that XYZ company fixed cost is 13000 and it produce 2500 unit.

Fixed cost

13000

Raw material

7000

Logistic expenses

4000

Packaging

1200

Total cost

25200

Produced units

2500

Per unit cost

10.08

In a table it show that company is producing a 10.08 per unit

3.3 Assess the viability of chosen contract by using different appraisal method

Pay back period

 

Project

 

Project B

 

Initial investment

 

-150000

 

-150000

1

25000

-125000

33000

-117000

2

35000

-90000

48000

-69000

3

45000

-45000

57000

-12000

4

60000

15000

50000

38000

5

65000

80000

40000

78000

6

 

80000

 

78000

Pay back period method indicate a time duration of a company  which is can recover a initial capital investment from the expected cash flow which is invested in a project. If there is longer pay back period then that project is taken into a consideration. Form above payback period it is clear that project A take short period of time, so it is acceptable by a XYZ company

Average rate of return

 

Project

Project B

Initial investment

150000

150000

1

25000

33000

2

35000

48000

3

45000

57000

4

60000

50000

5

65000

40000

 

0

0

Total

230000

228000

Average

46000

38000

ARR

30.67%

25.33%

Average rate of return is a ratio which show how much company can generate profit form a investment project. Higher ARR project is selected and lower ARR project is canceled. Form the above table of ARR it show that project A have a higher rate of return so XYZ company will select this project.

Net present value

 

Project

Pv @ 10%

Present value

Project B

PV @ 10%

Present value

Initial investment

150000

 

 

150000

 

 

1

25000

0.909

22727

33000

0.909

30000

2

35000

0.826

28926

48000

0.826

39669

3

45000

0.751

33809

57000

0.751

42825

4

60000

0.683

40981

50000

0.683

34151

5

65000

0.621

40360

40000

0.621

24837

Total

 

 

166803

 

 

171482

NPV

 

 

16803

 

 

21482

 

 

 

11.20%

 

 

14.32%

Net present value show that the project is acceptable whose value is high, form the above table it is clear that XYZ company will choose project B because it have a higher value.

Internal rate of return

 

Project

Project B

Initial investment

-150000

-150000

1

25000

33000

2

35000

48000

3

45000

57000

4

60000

50000

5

65000

40000

IRR

13.65%

15.26%

Internal rate of return show the interest rate on a project . The project which have a high rate of return will be selected. XYZ company will choose project B because there is high rate of return on interest.

Task 2

4.1 Discuss the  main financial statement by explaining their purpose and uses

Different type of financial statement are income statement , balance sheet and cash flow statement. This all statement are discuss below with a purpose and use in company.

Balance sheet :

Balance sheet is prepare in every end of the financial year so that company financial position can be determined (Hiesl,  Crandall and Wagner, 2016). In this balance sheet information is given related to all the profit and oss which is generated by an organization.  Further, it is used by investor  to see the financial position of company.  It is used by a company owner to see overall expense and  of company of a particular year.

Income statements: 

income statement of company show a revenue and expense of a particular year. It reflects how money is generated by selling a product and all the unnecessary expenses. It is prepared by a organization so that all unnecessary expense can be controlled and focus on product which help in increasing a profit (Leung and Brockerhoff, 2014). Its main purpose is to  see the financial position of company of a financial year. Its purpose is to show financial earning performance of company. On basis of it decision is made by investor whether they need to invest in new project or not.

Cash flow statement: 

Cash flow statement show a change between balance sheet and income statement which can affects the cash equivalent. It is related with a cash  which flow inside and outside the organization. Financial manager used this cash flow statement to see a cash flow of company and decision take on basis of statements.

4.2 Compare the format of main financial statement for different type of business

There are different type of organization used different format of financial statements which are compared below

Sole proprietorship there is only one owner and there is no obligation of other owner at the time of preparing a financial statement (Zager and Zager, 2006). In a sole trader company only balance sheet is prepared by a organization for a owner. It is necessary to made a balance sheet so that owner of company came to know how strong its company is financial position. It is made only for owner so that it can take declension on the basis of this statement (Zimmermann and Jørgensen, 2015).

All the assets and liabilities of company is indicated, so that owner came to know its main assets. Fuhrer there is no need to prepared a  income statement because there is not any other owner. While on the other hand in a partnership business income statement is made and there is more then one capital account (Capital Investment Appraisal Techniques. 2015). It depend on a partners in a company. Apart form this, in a public limited company, there are different type of statement is prepared by a organization that are International financial reporting standards (IFRS), generally accepted accounting principal (GAAP) etc. this all are need to mad so that comparison can be done with a different companies. It maintained a record of a company expense and profit and investment with a subsidiary company etc.

4.3 Interpret financial statement of a Marriott hotel

A forementioned table of Marriott hotel gross profit and net profit increased form a 14.66% and 5.93% in 2015. it us because of increase in sale and expenditure is controlled by a organization. Further current ratio show that company can fulfill its fallibility within a given time or not.  Marriott hotel current ratio in 2014 is 0.63% which is decreased to 0.43 % in 2015. it show that company is performing better in fulfilling a current liability in 2014 as compared to 2015. while quick ratio reflect that how much assets company have to convert it into a cash. Company ratio in 2015 is 0.37 means company is performing well.

Marriott hotel debt equity ration is is declared in 2015 is 1.57 to 1.07 is show a decline ratio  depicts and company have less investment risk. The standard ratio of Marriott hotel is 0.5: 1 which show that company is generating a fund through a equity capital, It help in maintaining a capital risk.

Conclusion

From the above report it can be conclude that there are various sources of finance which company can take for  raising a fund for a new project. There are also some implication of a different sources of fund which can affects company profitability. By making a effective financial plan company can manage all its financial activities.

References

  • Doğan, M., 2013. Does firm size affect the firm profitability? Evidence from Turkey. Research Journal of Finance and Accounting. 4(4). pp. 53-59.
  • Dorfman, M. S. and Cather, D. A., 2012. Introduction to risk management and insurance. Pearson Higher Ed.
  • Gumbo, T., 2010. Eccentric housing finance sources by the urban poor in Zimbabwe: case of Cowdray Park low-income self help housing scheme in Bulawayo. Economia. Seria Management. 13(1). pp. 89-105.
  • Healy, P. and Palepu, K., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.
  • Hiesl, P., Crandall, M. S., and Wagner, R.G., 2016. Evaluating the long-term influence of alternative commercial thinning regimes and harvesting systems on projected net present value of precommercially thinned spruce–fir stands in northern Maine. Canadian Journal of Forest Research. 47(999). pp.203-214.
  • Ittner, C. D. and Michels, J., 2015. Risk-Based Forecasting and Planning and Management Earnings Forecasts.
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