Assignment on Managing financial resources and decisions

Introduction:

JS and co is running in the UK since 1869, which is a medium sized retailer formed by two partners James and Sainsbury. Along with specialization in quality food products it also sells other non-food products. In the market this company gains wonderful success from the last three years. We are going to discuss about this company sources of finance, financial decisions, finance as a source, and financial performance in this discussion.

LO1: Understand the source of finance available to a business

1.1 Identify the sources of finance available to the business

Current financial resources of a company may be inadequate when it grows rapidly. The number of companies who have capability to finance their extended plans from cash flows alone is very few. As a result raising finance from other outer sources takes place in their consideration. In addition, managers may not have enough resources to get the company who are looking to buy-in to a business or buy-out a business from its owners. For achieving their objectives they will need to raise finance.

In a growing business to meet the needs there are a number of potential sources -

- On hand shareholders and directors funds

- Business angels

- Factoring and invoice discounting

- Venture capital

- Clearing banks (overdrafts, short or medium term loans)

- Hire buy and leasing

By striking equilibrium between equity and liability it is ensured that funding structure suits the business.

1.2 Assessing the implications of different sources.

Interconnections, innovation, and growth become stronger by financial institutions that surpass national boundaries and employ such activities as wide-ranging interbank contracts, over-the-counter derivatives contracts, syndicated loan issuance, quit, bond, and trading activities internationally. Increase of the efficiency of the worldwide financial system as a result of tighter interdependencies by smooth credit distribution and risk diversification ; potential for cross-market and cross-border troubles to reach quickly also increased by them .Risks which complicate the assessment of counterparty risk, policy responses and risk management were not fully recognized by financial regulators and institutions, now they have done by financial innovations. Although relations among institutions have usually focused on solvency concerns, the recent crisis reminds us of the importance of liquidity spillovers, particularly that

(1) Difficulties in rolling over liabilities may fall over to the financial system all together means Interconnectedness; and that

(2) In present overturn risk related with short-term liabilities not only in the banking sector but also evenly important in the nonblank financial sector. Hence, improving our realizing and watching of direct and indirect financial systemic linkages is essential, which may be done by reinforcing methods to judge systemic link-ages.

Four corresponding approaches to evaluate financial sector systemic linkages and focus on this meaning of systemic risk:

-         The network approach

-         The co-risk model

-         The distress dependence matrix

-         The default intensity model

1.3 Choosing the appropriate source of finance for the business.

To rise finance for a business there are different ways and nature of business determines which type has to choose. The capability of large organizations to use variety of finance sources is wider than that of smaller ones. Savings are a good way in business to put money. From families and friends a business can also borrow money, which is small. By issuing shares companies raise finance. Companies which are large most of time have thousands of shareholders.

A business can take loan to gain extra finance and the loan is provided mainly from a bank or other financial organization. Before providing loan the lender of money needs to know all the business opportunities and risks involved with the loan. Most of time lenders prefer to provide a secured loan.

An overdraft facility with a bank is another means of raising short-term finance. It is permissible for the borrower to take out more from their account than they have put in. A maximum limit is fixed by the bank for the overdraft. On the overdraft interest is charged daily.

Businesses may also be eligible for donations. By meeting certain conditions businesses may become eligible to get Government and private funds.

Out comes:

I understood the different long term and short term sources of finance by this module. It also helps to realize the advantages and disadvantages of different sources of finance.

LO2: Understand the implication of finance as a source within a business:

2.1 Assess and compare the costs of above mentioned sources of finance.

From the following sources a company might raise new funds from:

The capital markets:

i) New share issues, for example, by companies acquiring a stock market listing for the first time

ii) Rights issues

-         Loan reserve

-         Bank borrowing

-         Preserved earnings

-         Government sources

-         Franchising

-         Business extension scheme funds

-         Venture capital

Ordinary (equity) shares

To the owners of a company ordinary shares are issued. They have a nominal or 'face' value, naturally of $1 or 50 cents. There is no relationship between the market value of a quoted company's shares and their nominal value, but when ordinary shares are issued for cash, the nominal value of the shares must be equal to the issue price or less than issue price.

Deferred ordinary shares

They are a form of ordinary shares; only after a certain date or if profits rise above a certain amount they are entitled to a dividend. Here voting rights might also vary with those attached to other ordinary shares.

In company Ordinary shareholders put:

a) By paying for a new issue of shares

b) Through retained profits.

New shares issues

A company looking for gaining further equity funds may be:

a) To get a Stock Exchange quotation, an unquoted company wishing

b) To issue new shares an unquoted company wishing without obtaining a Stock Exchange quotation

c) To issue additional new shares a company wishing, that is already listed on the Stock Exchange.

2.2 Explaining the importance of financial planning

Financial planning

It is a process in which in order to meet the goals the present financial situation and the modifications in the spending pattern presents before a person, organization or even a country.

Importance of Financial Planning

For obtaining enduring profits through the assets available, it is significant to plan finances. Through financial planning the investments are structured suitably and handled by experts. If a appropriate plan is developed in advance, every decision concerning our finances can be supervised. The importance of financial planning is explained in the following points.

Cash Flow: To increase cash flow and monitor spending financial planning helps. By undertaking actions the cash flow is increased like- tax plan, careful expenditure and prudent budget.

Capital: With the help of professional financial planning a strong capital foundation can be built. Therefore, one can consider about investments and by this means develop his financial situation.

Income: Through planning it is possible to control income efficiently. For separating income into tax payments, other monthly spending and savings managing income helps.

Family Security: In the viewpoint of family security financial planning is essential. For the intention of financially securing the family, various policies existing in the market are serving.

Investment: A good financial plan helps in choosing the proper investment policy, which considers the income and spending of a person. It facilitates the person to achieve the set goals.

2.3 Describe the information needs of different decision makers.

The indicators used commonly used indicators do not present sufficient indications of sustainability; gross national product (GNP) and measurements of individual source or pollution flows are some commonly used indicators. Methods are not adequately developed or applied which are used for evaluating relations between different environmental, demographical, social and developmental factors. For sustainable development, indicators of need to be developed to provide firm bases for management at all levels and to contribute to a self-governing sustainability of incorporated situation and improvement systems.

(a) By better identification of users, more money-making and related data collection and measurement are achieved in both the public and private sectors, and it should contain all of their information from at the local to international levels;

(b) Local, provincial, national and international information are collected and using multicultural information in decision-making processes to strengthen and to increase capacities to gather and evaluate data and information for decision-making, mostly in developing countries;

(c) Planning for sustainable improvement in all sectors must be based on timely, dependable and functional information, to expand or support local, provincial, national and international means;

(d) To facilitate relevant information’s use, they should need to be available in the form and at the time required.

2.4 Describe the impact of finance on the financial statements.

The process in which the financial activities of a business, person, or other entity are recorded in a formal way is known as financial statements (or financial reports).

Presentation of all the related financial information of a business enterprise in a structured manner and in a form of easily understandable is called the financial statements. There are four basic financial statements:

Balance sheet: In this statement company's assets, liabilities, and Ownership equity at a given point in time are reported to explain the financial position or situation.

Income statement: It also known as Profit and Loss statement (or a "P&L"). In this statement a company's income, expenditures, and profits over a period of time are reported. Information related to the operation of enterprise is provider by Profit & Loss account. The sale and different costs incurred during the processing state are included in these.

Statement of retained earnings: give explanations of the changes in a company's preserved income over the reporting time.

Statement of cash flows: In this statement company's cash flow activities, mostly its operating, financing and investing activities are reported.

Most of time these statements are complex for large corporations, extensive set of notes are included for discussion and analysis. Each item on the balance sheet, income statement and cash flow statement are typically described in further detail in these notes. Notes are an integral part of the financial statements.

Outcome:

I make out the costs of finance as a resource, way to frame a budget due to specified information and implication of failure to finance satisfactorily by this module.

LO3: Be able to make financial decisions based on financial information

3.1 Analyze budgets and make appropriate decisions

How much unbudgeted shortcoming risk you should handle

Worst-case situation (given catastrophic losses) vs. regret

The value (and cost) of compliance with regulations (for example, SOX)

Real Options: The Value of Midcourse Corrections to Projects

Considering options have value is one of the basic insights of contemporary financial theory. "We are out of options"- this phrase certainly indicates a symbol of problem. Though in a dynamic environment corporations (and other organizations) make decisions, their midcourse options should be considered in project assessments:

The Option to throw away a project:  It is done when return value or savings are lower than the expectation.

The Option to enlarge a project: It is done when return value or savings are higher than the expectation.

The Option to holdup a project: When core variables change with a positive trend then it is done.

The Option to outsource a project: This is done when internal resources don't have necessary experience and expertise.

Actually, companies occasionally have further choices. For making decision they can wait for the time when the availability of information is more. Even they can summon outside help after deciding to leave. A project's anticipated mean NPV and risk can be spectacularly affected by such investment timing choices. The Projects which don’t offer such flexibility are less valuable than that can easily be customized in this way. The more unsure the outlook, the more helpful this flexibility becomes.

3.2 Calculate unit costs and make pricing decisions using relevant information.

Defining Costs

When performing a breakeven analysis several types of costs need to be considered. Some of most relevant of them are given below-

Fixed costs: These are costs which remain unchanged with the lapse of time and selling. For example- all start-up costs like rent, insurance and computers etc. and these are essential before making any sell.

Variable costs: These are the costs which are change with the increase or decrease of production.

Setting a Price

For breakeven analysis setting price is critical because without this it is hard to calculate the expected revenue.

Psychology of Pricing: Many researches are done on marketing and psychology about how consumers identify price, because consumer play a vital role in decision-making process of pricing. Before choosing a price for a product or service a company needs to spend time to review articles on pricing strategy and the psychology of pricing.

Pricing Methods: During conducting a breakeven analysis some different schools of thought are used for how to treat price. It is a combination of quantitative and qualitative factors.

The formula: This formula is quite simple. In this formula to conduct breakeven analysis fixed costs is divided unit selling price, minus variable costs. The equation is given below:

Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs)

This calculation help to determine the number of product will need to sell to reach breakeven point.

Every additional unit sold after the breakeven point increases profit by the amount of the unit contribution margin.

3.3 Assess the viability of a project using investment appraisal techniques.

Learning Outcome

Assessment Criteria

1.      within a business environment try to understand the character of accounting, accountability and stewardship

2.      Understand book-keeping and accounting’s nature and purpose and the difference between them.

Be able to:

Give explanation of the difference among book-keeping, management accounting and financial accounting.

Classify different stakeholders and their importance in the financial place of the business.

Give explanation of the way accounting can be used for planning, control and decision making.

Be able to:

Identify and illustrate the elementary accounting models of going concern, growths, constancy, caution and true and fair.

Spot the key factors of financial statements (income, assets, expenses, capital, liabilities) and explain their link via the accounting equation.

1. Within a business environment try to understand the character of accounting, accountability and stewardship (continued)

With Identification of the main financial statements it is important to explain how they are compiled (Balance Sheet, Profit and Loss Account and Cash Flow Statement).

Express how financial accounts are synchronized by means of accounting standards.

2. To evaluate the performance of a business it is important to understand the way in which financial statements can be examined and interpreted.

It can be done by using ratio analysis by which stakeholders can review the performance of a business.

Be able to:

Classify expected users of ratio analysis and explain the way they may use the information.

Profitability ratios are calculated and interpreted (ROCE, gross profit, net profit, asset turnover).

Liquidity ratios are calculated and interpreted (current ratio, debtor days, acid test ratio, stock turnover days, creditor days).

Investment ratios are calculated and interpreted (gearing, simple EPS, interest cover)

To make comparisons between one business with other or to compare results to industry standards ratio analysis is used. The advantages and constraints of ratio analysis should be explained.

3. Understand the significance of functioning capital maintenance (continued)

The way creditors can be used as a source of finance should be explained and the costs of trade credit should be identified.

The way of the factors of working capital can be handled successfully to minimize borrowing and its related costs should be explained.

The way of forecasting a cash flow that can be used to predict and control future working capital requisites should be understand.

Be able to:

Make a distinction between ‘cash’ and ‘profit’.

Categorize and recognize the implications of non-cash accounting amendments such as reduction and provision for bad debts.

Identify periods of cash surplus or cash scarcity and set up a plain cash flow forecast.

4. Recognize and evaluate different sources of financial supports on hand for business

Realize that there are a variety of sources of finance existing for businesses and those diverse kinds of finance are appropriate for different uses.

5. Know and differentiate between costs based on their behavior

Know that costs may be classified in diverse means based on their behavior.

Outcome:

I am able to realize the different investment assessment systems and character of long-term decisions by the help of this module.

LO4: Be able to evaluate the financial performance of a business

4.1 Explain the purpose of main financial statements

The three main financial statements are:

The balance sheet- in a certain period a corporation's assets, stockholders' equity, and liabilities are reported in it (e.g., as of midnight of December 31, 2009).

The income statement- In a period of time a corporation's revenues and expenses are reported such as a year, month, quarter, 52 weeks, 13 weeks, etc.

Cash flow statement /the statement of cash flows- During the similar period of time as the income statement change in a corporation's cash and cash equivalents are reported in it.

In accordance with generally accepted accounting principles (GAAP) the financial statements need to be prepared that are circulated outside of a company. For instance, the cost principle usually needs that the balance sheet should report long-standing assets at cost minus collected reduction. The matching principle needs that the cost of long-standing assets used in the business are assigned to different accounting periods in which they produce revenues or are used up.

4.2 Compare appropriate formats of financial statements for different types of business

There are three kinds of financial statements: cash flow statements, balance sheet and income statements.

Income Statements: income statements states revenue first then expenses. By subtracting expenses from revenue net income is calculated. It is the most simplified income statements and most service providers use this process. Income statement for a manufacturing or retail store operation is very difficult. The first line of the income statement is for revenue or gross income, followed by subtraction of cost of manufactured or goods sold. This provides a gross income amount. The second section is lists of all expenses include administrative or general costs, selling and so on. Operation income is calculated by subtracting all expenses from gross income. The last section subtracts any other expenses, taxes, interest expense to arrive at the net income of the business.

Balance Sheet: it shows the shareholder’s equity, liabilities and assets of the business. The total assets are equal to total shareholder’s equity and liabilities. The first section is lists of all assets include equipment, real estate, investments, cash and other business holdings. The next section is list of all liabilities includes any loans or account payable and last section is shareholder’s equity. This balance sheet is suitable for small company but for larger company, the business often breaks it down to current and long term assets and liabilities.   

Cash Flow statement: it shows the actual flow of cash in and out of the business. It helps investors and others to determine if the business is having difficulty managing its cash flow. It starts with the cash flow from operations, followed by cash flow from investing and cash flow from operations. Each category shows incoming and outgoing cash from the business. The ending cash flow should be equal to the amount of cash the business has on hand. 

4.3 Analyses financial statements using appropriate rations and comparisons, both internal and external.

1. WORKING CAPITAL RATIO/ CURRENT RATIO:

Relationship between current assets and current liabilities is defined as Current ratio it another name of it is working capital ratio.

CURRENT RATIO/ WORKING CAPITAL RATIO = Current assets/ Current liabilities

Year ended	Current assets(in crores)	Current liabilities(in crores)	Ratio
2007-08	913.27	1479	0.62
2006-07	2333	994	2.347
2005-06	1614	475	3.397
2004-05	1171	336	3.485
2003-04	913.27	213	4.132

Interpretation:

Usually A ideal current ratio is 2:1.

The company is not enjoying the sufficient liquidity, if it is less than 2.

a decline in the ratios is seen in past five years.

2. QUICK RATIO:

Quick ratio = (Current Assets – Inventory – Prepaid Expenses)/ Current Liabilities

Year	Current assets	Inventory	Current Liabilities	Ratio
2004	964	39	283	3.393
2005	1171	41	336	3.363
2006	1614	46	475	3.301
2007	2333	96	994	2.250
2008	2988	145	1564	1.345

Interpretation:

Ideal quick ratio is 1.

It was higher than 1in all the last five years, where the funds were correctly employed.

LEVERAGE RATIOS

1. DEBT EQUITY RATIO:

Debt-equity ratio is used to calculate the relative claims of outsiders and the owners (i.e., shareholders) against the firm’s assets. It is also known as External-Internal ratio. The correlation between the exterior equities or the outsider’s funds and the interior equities or the share holder’s funds is indicates by this ratio.

Debt equity ratio = Outsider’s funds/ Shareholder’s funds

Year	Long-term Debt	Share holders equity	Ratio
2004	-	128.45	-
2005	-	140.71	-
2006	-	285.15	-
2007	13	291.80	0.44
2008	28	298.45	0.093

Interpretation:

Ideal debt equity ratio is 2:1.

There is no debt equity ratio in 2004-06.

It showed a small value in 2007 an 2008.

2. PROPRIETARY RATIO:

The ratio between shareholders equity and entire assets is known as proprietary ratio.

proprietary ratio = Shareholders Equity/ Total Assets

Year	Share holders equity	Total assets	Ratio
2004	125.34	1309	0.095
2005	140.71	1651	0.085
2006	285.15	2257	0.126
2007	291.80	3389	0.086
2008	298.65	3987	0.074

Interpretation:

The proprietary ratio better if it is higher

It is less than one in all the five years.

Feeble financial situation of the business is shown by it.

3. INTEREST COVERAGE RATIO:

The ratio between EBIT and Interest is known as interest coverage ratio.

Interest coverage ratio = EBIT/Interest

Year	EBIT	Interest	Ratio
2004	355	-	-
2005	410	-	-
2006	499	1	499
2007	693	6	115.5
2008	834	13	64.15

Interpretation:

Interest coverage ratio is better if it is higher.

There is no interest coverage ratio in 2004.

A heavy ration is showed in 2006, 2007 & 2008, which indicates a greater safety

Out come:

By this I understand the basic business and accounting terms used and should be able to deduce the information gathered from financial statements by means of ratio analysis and could draw conclusions from it.

CONCLUSIONS

I understood the different long term and short term sources of finance by this module. It also helps to realize the advantages and disadvantages of different sources of finance. I make out the costs of finance as a resource, way to frame a budget due to specified information and implication of failure to finance satisfactorily by this module. I am able to realize the different investment assessment systems and character of long-term decisions by the help of this module.

By this I understand the basic business and accounting terms used and should be able to deduce the information gathered from financial statements by means of ratio analysis and could draw conclusions from it.

References:

Anthony, L. (2012), Formant of a financial statement [online], Available from: http://smallbusiness.chron.com/format-financial-statement-3768.html [Accessed: 4th January, 2014]

UKessays, (2012) [online], Available from: http://www.ukessays.com/essays/finance/managing-financial-resources-and-decisions-js-and-co-finance-essay.php [Accessed: 4th January, 2014]

UKessays, (2012) [online], Available from: http://www.ukessays.com/essays/finance/managing-financial-resources-and-decisions.php [Accessed: 4th January, 2014]