2016

[MANAGING FINANCIAL
RESOURCES AND DECISIONS]
Contents
Introduction ..................................................................................................................................... 3

Task1 ............................................................................................................................................... 3

LO1 Understanding the sources of finance available to a business ................................................ 3

1.1identifying the sources of finance available to a business ..................................................... 3

1.2Assessing the implications of the different sources ............................................................... 4

1.3Evaluate appropriate sources of finance for a business project ............................................. 5

Task2 ............................................................................................................................................... 6

LO2 Understanding the implications of finance as a resource within a business ........................... 6

2.1Analysing the costs of different sources of finance ............................................................... 6

2.2Explaining the importance of financial planning ................................................................... 6

2.3Assessing the information needs of different decision .......................................................... 7

2.4Explaining the impact of finance on the financial statements ............................................... 7

Task3 ............................................................................................................................................... 8

LO3 Being able to make financial decisions based on financial information ................................ 8

3.1Analyzing budgets and making appropriate decisions........................................................... 8

3.2Explaining the calculation of unit costs and making pricing decisions using relevant
information .................................................................................................................................. 9

3.3Assessing the viability of project using investment appraisal techniques ........................... 10

Task 4 ............................................................................................................................................ 10

LO4 Being able to evaluate the financial performance of a business ........................................... 10

4.1Discussing the main financial statements ............................................................................ 10

4.2Comparing appropriate formats of financial statements for different types of business ..... 11

4.3Interpreting financial statements using appropriate ratios and comparisons, both internal
and external ............................................................................................................................... 12

Conclusion: ................................................................................................................................... 14

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References ..................................................................................................................................... 15

Introduction
Financial resources can be collected from various sources in the form of credit, cash and written
document of assets and these resources can be used for any kinds of transaction related to
business. The collected financial resources must be managed tactfully and the source of
resources must be reliable. In order to ensure the growth of the business, financial resources must
be utilized in a way that is efficient. Before taking decision to invest in the profitable project,
strategic management of the organization identifies the threats and opportunities (Broadbent &
Cullen, 2003).

Task1

LO1 Understanding the sources of finance available to a business

1.1identifying the sources of finance available to a business

In order to increase the profitability of the business financing for business is a hard task.
Financing is needed for an organization from the beginning of the business to winding up of the
company. In order to collect fund from various sources it must be considered that the sources
will be reliable and less expensive.

With the little cash and own funds it is impossible to go ahead. So the organization must find out
the reliable, effective and individual sources of finance in order to develop the business. The
collected funds from individuals and other institutions needs to be categorize as short term loan,
midterm and long term loan. They are giving below:

Short term loan: Short term resources are needed to maintain the short term needs. Basically
daily operation is managed by short term loans. The duration of short term loan cannot be
exceeded 12 months after lending money (Financial resources, 1968). For company trade credit,
bank loans, leasing and overdraft are the sources of short term loans.

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Medium term finance: Medium term finance is required for replacement of some fixed asset.
These types of resources are used for investment. The range of the validity of this loan is one
year to five years. Hire purchase is the medium term loan for which a percentage of the price is
paid down and the rest will paid in installments. Other type of medium term loan is leasing for
which asset will be used by users but the ownership will be in hand of the loan taker.

Long term finance: Long term financing is needed for investing in assets. Plant, building,
house, patent, machinery and other fixed assets are the sources of long term finance. Long term
finance is needed to expand the business and this finance is raised for the period of 10 years.

1.2Assessing the implications of the different sources

To run the business the organization needs to collect fund from various sources but when to
collect fund the organization must determine the financial and legal performance of the sources
of fund. The implication of different sources of fund for the organization is given below:

Fund collected from relatives: At the time of establishment of the organization relatives can help
the owner of the organization by giving funds. When the owner collect fund from relatives he
needs not pay any kinds of interest. If the owner cannot pay the amount collected from relatives,
the relatives can take legal action against the owners.

First capital: At the beginning of the organization the owner can use his savings and own assets
as capital. Without paying any interest he can use this fund so it is reasonable sources of
financing.

Profit of business: As the organization decided to invest their profit as capital so it has increased
its share of the people as dividend share. Organizational capital increases by these types of legal
approach. Opinion of the shareholder must be taken to invest profit as capital.

Credit: The organization take fund from local bank when the business will be renowned and it
will create face value. In order to take fund from local bank, the organization must pay interest
based on the amount and time. If the organization cannot pay the credit, the bank can take legal
actions. Then the organization must pay the credit by selling the assets if needed (McNew,
1965).

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Share: IPO share can be sold in the market in order to increase capital. For this IPO share new
investor will be increased and this is the legal way of collecting fund. The shareholder will be
participants of loss and profit of the organization as they invested in the organization.

Support of the government: Government provides financial and legal support to the organization.
Exemption can be got from government by organization. As example Britain state government
gives exemption to flourish industry.

1.3Evaluate appropriate sources of finance for a business project

It is thought by the organization manager that it has opportunity to expand the business in its
industry sectors. The organization can flourish its business if it contracts with other organizations
to supply its product.

The organization manger can take loan from local bank if it wants to increase capital. By selling
share in the share market it can increase organizational capital. Organization can provide
dividend share to the existing shareholder to reinvest the profit as capital.

In order to expand the business area this business needs 8000000 totally. The operational
manager collected 2500000 from local bank in terms of loan for 6 months. For every month the
bank will charge 20% interest. Within short time the loan needed to repay by the organization.

The organization will collect 2500000 by selling IPO share in the market to the new shareholder
among the rest. When the business will be renowned, it will collect capital from share market.
For this reason numbers of shareholder will be increased. The shareholder then will participate in
the profit and loss of the organization.

By reinvesting the profit of the organization will collect 3000000 as rest amount needed for
expanding the business. The organization will give dividend share to the existing shareholder to
invest the profit as capital (Ladley & Wilford, 1980). The numbers of share will be increased of
the existing shareholder as they have been given additional share.

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Task2

LO2 Understanding the implications of finance as a resource within a business

2.1Analysing the costs of different sources of finance

There are various kinds of sources of financing as the organization needs finance for expanding
the project. Loan taking from local private bank and the share are the sources of funding that
business organization needs. From this sources operational manager decided to collect funds.

Debt finance is a type of bank loan that can form loan. In order to take this type of loan the
organization must pay specific amount of interest. From the income statement the interest will be
deducted.

The organization can increase its capital by selling initial public offering and supplying dividend
to the shareholder. Initial public offering will be sold in the share market and dividend must be
paid to existing share holder. For organization due interest is the burden. If the organization
collects capital from share, the interest need not to pay and in this case the share holder takes the
risk of loss and profit (Sources of finance for industry and commerce, 1974).

As large organization want to increase its business area so the business needs to use debt and
equity financial resources.

2.2Explaining the importance of financial planning

In order to gain success in the business, the organization needs to perform financial planning.
The task related to collecting financing, managing the funds and utilizing the fund are the
discussing factors of financial planning. Financial plan is required for consuming the fund in the
best way. Financial planning is needed for organization for following necessity:

When finding out optimal sources of finance, the organization can be helped by financial
planning. Financial plan will help to analyze all the sources of financing and then the best
suitable sources will be selected by organization because of the help of financial plan.

Financial plan will focus on the risk, cost and opportunities of the sources of the fund that is
needed by organization to determine.

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In order to invest capital in the project, the organization needs to analyze the entire project.
Because of financial plan organization can decide which project is profitable and where they will
invest. The advantages and disadvantages of the project will be determined by the financial
planning and depending on this management will decide to use the capital (Hitt, 2011).

2.3Assessing the information needs of different decision

After analyzing the information organization decide to expand the business. In order to analyze
the information, organization collects information from the competitor of same business. The
demand of the organizational product or service is analyzed by decision maker.

In order to analyze the information and access the information needs the decision maker collect
competitor’s and customers financial statement and evaluates the performance of the
competitor’s business. The decision maker determine the competitive strategy of the competitors
analyzing the financial statement of the competitors and then the decision maker can be able to
develop own company competitive strategy.

Investors of the business like shareholder and bank can decide to invest in the business by seeing
the financial statement of the business. Investor invest capital in the business by determining the
profitability and success of the business and investor can decide to invest money in the project by
analyzing the information, financial statement.

2.4Explaining the impact of finance on the financial statements

In order to establish the organization fund is needed and the operation of the business need fund
to operate in the business environment. As fund is collected from various sources, these sources
affect financial statement of the cherished organization.

If the organization collects fund from bank, the amount of loan will be credited to account of the
business. If the organization credits its balance, the amount of money in the bank balance will
increase. As bank balance is increased, the amount balance in the balance sheet will increase.

If balance is withdrawn from bank by the organization, the cash amount will increase but the
bank balance will be decreased. In terms of interest the short term bank debt will increase. As
short term debt is increased, the expenses will be increased in the income statement. If the

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interest is paid by organization, the cash and the short term debt will be decreased (Merville &
Tavis, 1974).

In order to increase the equity IPO share is sold to the shareholder so the equity statement will be
increased. Because of equity in balance sheet bank balance will be increased.

Task3

LO3 Being able to make financial decisions based on financial information

3.1Analyzing budgets and making appropriate decisions

Budgeting process can be categorized in various types and the financial decision is taken from
the budget. In order to take appropriate decision the organization can analyze different types of
budgeting given below:

Capital budgeting: From capital budget the decision related to company expansion is taken. This
types of budget is used for long period and basically larger amount of money is expended for this
budget.

Operational budgeting: Operating budget refers the budget that is used for running the regular
activities of the company. In order to improve the company performance and increase the
profitability, these types of budget is required (Sealey, 1978).

Cash budgeting: Organization collects cash from selling IPO share to the shareholder in the share
market and from bank by taking loan. In order to utilize the cash properly, this type of budget is
needed. Cash budget is needed to determine amount of liquid cash of the organization that is
stayed in hand.

Human resources budget: These types of budget are needed to utilize the experts because
personnel are needed to run the business organization. So organization prepare budget for this
purposes.

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Sales budgeting: The organization that produces product or service has expenses and cost. The
expenses and cost is needed to manage properly and for this purposes organization prepare sales
budget (Langdon, 2002).

3.2Explaining the calculation of unit costs and making pricing decisions using
relevant information
The assumed entire cost of `150 piece of product is given as follows

Cost needed Amount

Cost of material 9000
Cost for expert 6000
Utility cost 2500
Total cost 17500

Unit cost of the products: Fixed cost for one product + Variable cost for one product/ Unit cost
needed producing one product totally

The unit cost for the product of the organization will be determined as 17500/150 =117

Unit price of the product: It is assumed that there is 125% mark up will be set in order to
determine price

So 125% mark up will be implied on total cost to determine unit price such as 17500 x125% =
21875

The price of one product will be like that:

Cost of material 9000

Cost for expert 6000
Utility cost 2500
Mark up 21875
Total 39375

Total/Number of products = 39375/150 = 263

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The price of one product is 263

3.3Assessing the viability of project using investment appraisal techniques

There are various types of investment appraisal techniques that will be utilized by organization.
Net present value and payback period determination are the investment appraisal techniques that
will be assessed by the organization.

If the organization want to expand the project, net present value of the project is better to utilize
because by using this organization can carry on the expansion of the project.

By payback period organization can determine whether they will invest money in the project or
not. For the organization payback period works as identifier of profitability. If the payback
period of the amount of money that is invested is lower, the organization can invest in the
project. If the payback period of the money invested is higher, it is not wise decision to invest
money in the project (Adler, 2000).

These investment appraisal techniques will help manager to determine whether they will invest
money in the project or not.

Task 4

LO4 Being able to evaluate the financial performance of a business

4.1Discussing the main financial statements

There are numbers of financial statements used in the organization. They are described below:

Owner’s equity statement: This statement provides shareholder statements and how much the
managing committee invested in the project will be determined by this statement. How much the
shareholder invested in the project will be shown by these statements (Financial Statements,
2012).

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Balance sheet: Balance sheet shows final situation of the organization for specific time period.
As balance sheet displays assets and debts organizational strengths will be displayed by it. The
power of overcoming financial problems faced by organization will be analyzed by balance
sheet.

Cash flow statement: This statement displays current status of the business in terms of cash in
hand. This statement determines the amount of cash in hand and how much is needed in future
will be depicted by this.

Statement of income: The earnings and the expenses of the business will be shown by this
statement. Profit or loss is the differences between excess earnings and excess expenses.

4.2Comparing appropriate formats of financial statements for different types

of business
Different organization keeps different types of financial statement. Because of the nature of the
business different formats of financial statements are prepared by organizations.

Formats of financial statements for types of business are given below:

Partnership business organization: There are two or more than two owners in partnership
organization. Here capital is higher than proprietorship organization. Income statement, balance
sheet and capital statement are the main financial statement prepared by partnership
organization.

Proprietorship business organization: There is only one owner in proprietorship organization so

capital is lower than other types of organization. Here the amount of transaction is low because
there is not much debtors and creditors. Profit and loss statement are the two financial statement
used in a proprietorship organization.

Private and public company: There are types of complex transaction in company as it has more
than seven shareholders. Assets are large and also debt so it must perform large amount of cash
transaction. The statement used in company such as balance sheet, equity statement, cash balance
and income statements (Tiffin, 2005).

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4.3Interpreting financial statements using appropriate ratios and
comparisons, both internal and external
Different types of ratios will be needed by organization in order to interpret financial statements.
Different ratios are calculated for British Airways compared to competitors given as follows:

Determination of current ratio = Current asset of British Airways / current liabilities of British
Airways

Competitor of British
British Airways Airways
2112 / 4508 = .468 3225 / 4809 = .670

Here current ratio of British Airways is smaller than the ratio of competitors

Determination of Acid Test Ratio = (current asset of British Airways- Available Inventory) /
Organization’s current liabilities

Competitor of British
British Airways Airways

(2112 – 875) / 4508 = (3225 – 860) / 4809 =

.274 .491

The acid test ratio of British Airways is smaller than that of competitors

Determination of Debt to Total Assets Ratio = organization’s total debt / organization’s total
assets

Competitor of British
British Airways Airways

6900 / 11256 = .61 £5800 / 10072 = .57

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The acid test ratio of British Airways is higher than the competitors

Determination of Total Asset Turnover Ratio = organization’s net sales / organization’s total
assets
Competitor’s of British
British Airways Airways

19536 / 11256 = 1.73 19562 / 10072 = 1.94

In terms of total asset turnover ratio British Airways has smaller ratio compared to competitors

Determination of Gross profit Margin Ratio = Organization’s gross profit / organization’s net
sales

Competitor’s of British
British Airways Airways

1590 /19536 = .081

1357 / 19562 = .069

In terms of gross profit margin ratio the competitors has lower ratio than that of organization.

Determination of Net Profit Margin Ratio = organization’s net profit after taxes / organization’s
net sales

British Airways’
British Airways competitor

850 / 19536 = .043 342 / £19562 = .017

British Airways net profit margin ratio is higher than that of competitors

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Determination of Return on Asset Ratio = organization’s net profit after tax / organization’s total
asset

Competitor’s of British
British Airways Airways

850 / 11256 = .075 342 / 10072 = .033

British Airway’s return on asset ratio is higher than that of competitors

Determination of Return on Equity = Organization’s net income / organization’s shareholder’s

equity
Competitors of British
British Airways Airways

850 / 6034 = .140 342 / 5046 = .067

The equity ratio of British Airways is higher than that of competitors

Conclusion:
Because of the help of the financial statement, British Airways can take decisions about British
Airways growth and expansion. By analyzing the financial statement the decision maker decide
whether to invest or not. For any organization budget can work as monetary plan by which
organization will be able to attain its target. Investors of the business like shareholder and bank
can decide to invest in the business by seeing the financial statement of the business. Investor
invest capital in the business by determining the profitability and success of the business and
investor can decide to invest money in the project by analyzing the information, financial
statement.

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References
Adler, R. (2000). Strategic investment decision appraisal techniques: The old and the
new. Business Horizons, 43(6), pp.15-22.

Broadbent, M. and Cullen, J. (2003). Managing financial resources. Oxford: Butterworth-

Heinemann.

Financial resources. (1968). Akron.

Financial Statements. (2012). Review of Income and Wealth, 58(4), pp.774-785.

Hitt, E. (2011). Financial Planning for Scientists. Science.

Ladley, B. and Wilford, J. (1980). Money & finance. New York, N.Y.: Neal-Schuman
Publishers.

Langdon, K. (2002). Investment appraisal. Oxford, England: Capstone Pub.

McNew, B. (1965). Financial resources. Jackson, Miss.: Mississippi Economic Council.

Merville, L. and Tavis, L. (1974). Long-Range Financial Planning. Financial Management, 3(2),
p.56.

Sealey, C. (1978). Financial Planning with Multiple Objectives. Financial Management, 7(4),
p.17.

Sources of finance for industry and commerce. (1974). London: Confederation of British
Industry.

Tiffin, R. (2005). The complete guide to international financial reporting standards. London:
Thorogood.

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