Assignment on Finance as a resources; Making financial decisions & analyzing financial performance

INTRODUCTION:

Finance is a very important for all kinds of business. It is also called the life blood of a business. Financial management is consisting of identifying the source of finance, maintaining the financial resource and proper allocation of these resources. A proper maintenance of the resource helps a business towards the goal. This assignment is includes some primary source finance resource, its implication and real life example related to the finance. Here also the discussion of the cost of each source of finance and financial planning. It also includes the information analysis for the decision making process and the hypothetical calculation of unit cost and its price decision.
Here is also some hypothetical financial statement analysis of different firms for the better understand of the effects of the source of finance. There is also evaluation of an investment appraisal using payback period, rate of return, net present value and internal rate of return. At last in Task four a financial manager will also come to know the financial performance analysis by accounting issues.

Task: 1

The key to success of the business is depends on the perfect financing decision and selection of appropriate source of finance. It helps a business to attain their expected profit and development in the business. In this part of the assignment, there are some source of finance, its implication and real life example for the better understanding of management of finance.

Point: 1.1

 Sources of finance for a business:

In the business there are two types of finance.

 ü  Internal source of finance

 ü  External source of finance

Internal Source	External Source
	Long Term Financing	Short Term Financing
¨ Own Funds. ¨ Equity/ Ordinary Share ¨ Preference Share ¨ Retained Earnings.	¨ Capital Market ¨ long term Loans ¨Debentures/Bonds and Securities. ¨ Leasing and Hire Purchase. ¨ Venture Capital Financing.	¨ Accruals. ¨ Account Payable. ¨ Short Term Bank Loans. ¨ Commercial Paper. ¨ Notes Payable. ¨ Short Term Credit. ¨ Mortgage of Inventory. ¨Discounting Notes           Receivable.

Sources for different types of business

For new business	For existing business	For large business	For small business	For Expending business
ü  Own fund  ü  Issuance of share  ü  Preference share	ü  All sources of the first stage  ü  Capital market  ü  Mortgage of Inventory  ü  Commercial Paper  ü  Retained Earnings  ü  long term Loans	ü  All sources of the first and second stages.  ü  Leasing and Hire Purchase.  ü  Venture Capital Financing.	ü  Own fund  ü  Loan from relatives  ü  Loan from NGOs and banks   ü  Accruals  ü  Short term credit.	ü  Financing through acquisition of new business  ü  Existing investors  ü    New investors  ü  Venture Capital Financing.

Point: 1.2

 Implication of sources:

There are different types of source of finance. Every source of finance contains some advantage along with some problem too. Here is a brief discussion about it:

Sources	Implication
Own Funds	No need t to pay interest, no repayment condition, can use for a long period of time and it don’t have any legal obligation. So that it is very suitable for the business.
Equity/Ordinary Share	It is the major source of finance for the large business or corporation. Distributes the risk to the shareholders. It is more complex to issue and less control. The stock holders receive dividend annually.
Long Term Loans	It is used by the large business. It is a kind of debt that is used for the extra Task of the capital. It creates healthy financial position and gives tax advantages. But it creates higher interest charge.
Debentures/Bond	Large business issue bonds for the additional Task of capital. It gives tax advantages to the Company. But it contains fixed interest rate.
Leasing and Hire Purchase	This is a source of long term finance. It is less costly, easy to maintain, flexibility in structuring of rentals, more simple and provides tax benefits to the firm. But it contains restriction to use, loss of residual value and consequence to defaults.
Account Payable	All types of business use it as a short term source of finance. It helps to maintain the working capital for short period and short outcome.
Short Term Bank Loans	New and existing business and others use this source of finance for their short term Task and to maintain the worki8ng capital. But it contains high interest rate.
Retained Earnings	Large company used it for their both long and short term finance. It is very easy to maintain and less costly too. But it creates dissatisfaction to the shareholders.
Venture Capital Financing	Large business often gets together so that they both can have the competitive and financial advantage. But some it creates proper distribution problem of profit and finance.

Point 03

Case study - 01

ABC company is a partnership business. They are furniture retailer. To start their business they need a showroom and decorated it well. They also initially need to purchase some furniture.

Here is a table for their cost allocation:

particulars	Amount
Primary expense	1,00,000
Rent for showroom	5,00,000
Decoration cost	2,00,000
Purchase of furniture	10,00,000.
total	18,00,000

The business needs both long term and short term finance. For the initial investment at first their own fund is $10 million, this is less costly and they take long term loan $5 million from bank with a interest at 25%. So they have decided to another partner who wants 15% of his investment. So they should take new partner avoiding bank loan. They also take borrowings from relatives $2 million as a short term source of finance.

Case study - 02  

Royal Stage is a large beer producer company. It is a profitable business position last 4 years. Their annual turnover is $5 million. Recently they have decided to expend their business and want to build a new plant. For this reason they need land, building and equipment.

Here is the needed finance for their new plant:

particulars	Amount
Land	50,00,000
Building	30,00,000
Equipment	40,00,000
Other primary expenses	5,00,000
total	1,25,00,000

For this investment the Royal Stage can use long term finance. They can issue common stock, bond and take lease of land and equipment. For their expansion long term finance is suitable source for the investment. They have retained earnings only $10, 00,000. For finance they can issue $80, 00,000 shares that would be more expensive and complex job. Therefore, they are expecting to issue bond for the remaining balance. As it has not much fixed asset to provide as security for the bond it is going to issue debenture with certain interest rate.

Case study-03

Jones, Peter, Rex and James are friends. They want to start a business. But they don’t want to take the initial problem faces a new established business. So they want to purchase a medium size business. The present owner of Rosen Garden Corporation wants to sell the firm for their consistent loss and they want to buy it.

The financial position of the firm is as follows:

Rosen Garden Corporation

Balance Sheet

As at Dec 31^st 2014

Particulars	Amount	Amount
Total Current Asset:   Fixed Asset:    Buildings   Machinery                                                                       Total Asset Current Liabilities:   Long Term Liabilities: Owners’ equity Less: Net loss after Tax Total Liabilities	25,00,000 15,00,000 30,00,000 (5,00,000)	10,00,000 40,00,000 50,00,000 5,00,000 20,00,000                   25,00,000 50,00,000

 For this reason they need $50, 00,000. So they need both long and short term finance. They can finance from their owned fund $30,00,000  and if they want to  take long term loan from the bank $20,00,000 , it will cost 20% interest but  is a good source of long term finance. So it is very suitable for them to take some loan from relatives because it is less risky and costly that is $ 10,00,000, then the interest of bank loan will be less.

Task: 2

Point-2.1

Purpose of financial statements:

There are so many reasons that are why different company prepares financial statement. Some purposes are shown below:

ü  The main purpose of the financial statement is to provide the actual and relevant information to the users.

ü  It shows the financial condition of the company as well as the operating results of the company.

ü  By preparing the financial statement different users can easily understand the present condition of the company.

ü  It represents weather the company is profitable or not to the creditors. The Government can identify tax or the directors may analyze it for their decision making process.

Point-1.2

Cost of different source of finance:

A business can collect their finance from any source that is suitable for them. But there contain cost as well. Here are a brief discussion about the finance and its cost:

Ø  Owned fund – it is the most common and easiest source of finance. It contains more opportunity cost and high rate of personal risk.

Ø  Collection from Family and relatives –it is also a form of finance; it is one of the cheapest source of finance. Generally no interest or lower interest rate but sometime it may cause conflict in relationships.

Ø  Leasing and Hire Purchase – large business generally take lease. For lease it includes annual rental payment and sometime it may need to pay down payment at the beginning.  .it includes more risk to use the owner’s assets because the lessee is not the owner.

Ø  Bank loans – for both short term & long term financing it is a good source of finance. These include term loans, mortgages and bank overdrafts. Short-term unsecured loans cost high interest rate & long-term secured loans cost lower interest rate with long payback period.

Ø  Equity/ Ordinary Share – a company can issue ordinary share for their long term finance. Against the equity share company need to pay dividend or the profit of the firm, bonus share etc.

Ø  Debt financing –debentures & bond is the main of source of debt financing which includes higher fixed rate of interest to the money market. If debt is more than the assets then sometimes it may be a threat of bankrupt for the business.

Ø  Retained Earnings— it is also a source of long term and short term finance for the company business. If company uses it, they cannot able to pay dividend that dissatisfied shareholders.

Factors that should be considered in financial decision:

In the terms of financial decision every company must have to consider about the cost of finance. The finance manager should consider the terms and condition of the finance. Ones need to invest long term finance in the long term investment and short term finance in the short term investment. Also need to thing about the payment procedure and the return of the finance.

Point-1.3

Importance of financial planning:

Every large and small business needs financial planning. for the investment , there are a wide range of factors and choices. And the source of finance relates to its costs. So a perfect Financial planning in any business leads them to attain their goal. The importance of financial planning for business can be seen as follows:-

Ø  Financial planning helps to understand how cash flows in and out of the business. It helps business to be financially stable.

Ø  Financial planning shows a firms source of finance and where to finance them.

Ø  It helps to forecast the financial position of the firm. By forecasting different situation concerning outstanding debts and rising cost, it maintain financial capability of a business.

Ø  Financial reports contain records of expense, earn and also evaluate the total assets, like- current assets, intangible assets and fixed assets of a business. This is a good way to monitor the overall condition of the assets of a business.

Ø  Financial planning helps to analyze the total liabilities, long term and short term debt and the owners’ equity of the business. It also suggests when and how to pay the interest and dividend to the creditors and shareholders.

Ø  Financial plan reduce periodical fluctuation of cash flow & allows a business owner to take opportunities such as buying inventory from suppliers at reduced prices or seasonal period.

Point-1.4

Information used by different stakeholders:

By using income statement and statement of financial position, the financial manager, stockholders and others can make different decision, shown as follows:

Ø  Shareholders: Using the information the shareholders can understand the firms present financial condition. They can know about the security of their capital, solvency, earning per share, their annual turnover etc. so that they can take decision whether to invest or not in the company.

Ø  Management authority: they are the large user of the income statement and financial position. Using it they can forecast about the firm, can control the unnecessary expenses, direct the firm and coordinate the total job.

Ø  Expected investors: using the data about income statement and financial position statement, they can understand about the security of their investment, administrative skills, their expected return and the ability to the liabilities.

Ø  Creditors: before investing in a firm, the creditors wants this information to know the financial condition of the firm, profit earning ability, ability to repayment of loan and their present debt conditions.

Ø  Tax authority: The tax authorities use this data of income statements and statements of financial positions to the Net income and Tax of the company.

Ø  Directors: directors of the company use this data for their making police decision, for planning, identifying the proposal and for controlling process.

Point-1.5

Effects of different source of finance in financial statement:

Different forms of finance effects the financial statement. There are four types of financial statement. Here is a brief discussion of the effects of finance in different financial statement are discussed below-

Statement of financial position	Income statement	Cash flow statement	Statement of changes in equity
It is called balance sheet. It represents the financial position of a company. Capital, long term loan, creditors, notes payable, mortgage loan, accruals and other reserves etc. shows here that remain against the total assets of the company.	It is called profit and loss account. In this statement it shows different cost of finance like interest on bond, debenture, long term loan and capital. It also shows bad debt, discount etc.	Every short term and long term finances in a company effect the cash flow statements. The other sources of finance like change in inventory, notes receivable, purchase of assets, payments loan and receipts of accruals are effects here	It is called retained earnings statement. In this statements, it shows how the equity increase or decrease through the dividend, net profit/loss, unpaid dividend etc. over a period.

Point-1.6

Scenario: 1B

The company’s financial statement analysis through following ratio can be very effective in its financial planning.

Profitability Ratio:

Ratio and Formula	As on 31st March 2003	As on 31st March 2002
ROCE (Return on Capital Employed) Profit before interest and tax / Capital Employed (Non-Current Asset+ Current Asset - Current Liability)	(5,750/47,505) x 100% = 12.10%	(6,515/34,912)x 100% = 18.66%

Ratio and Formula	As on 31st March 2003	As on 31st March 2002
Gross Profit Margin - Gross Profit/Net Sales	(33,092/205,157) x 100% = 16.13%	(28,800/182,530)x 100% = 15.77%

Comments:

Analyzing the above ratio it shows that the Return on capital employed is 18.66% in 2002 and in 2003, it is only 12.10%. Here the return is less in 2003 than in 2002 that is not much satisfactory for them. But on the other hand it shows that the Gross Profit Margin in 2003 is greater than the year 2002. In 2002 it was 15.77% that is 16.13% in 2003.  

Efficiency / Turnover ratios:

Ratio and Formula	As on 31st March 2003	As on 31st March 2002
Stock Turnover Cost of goods sold/ Average Inventory	172,065/(12,482+11862)/2 = 14.14 Times	(153,730/11,862) = 12.96 Times

Ratio and Formula	As on 31st March 2003	As on 31st March 2002
Here, Debtors Turn over = Debtor Collection Period =	205,157/32,287= 6.35 times 365/6.35 = 57.5 Days	182,530/28,410= 6.42 times 365/6.42 = 56.5 Days

Ratio and Formula	As on 31st March 2003	As on 31st March 2002
Here, Creditors Turn over = Creditor Payment Period =	(172,065/17084)=10.07 times 365/10.07 = 36 days.	1537530/13585 = 11.32 times 365/11.32 = 32 days.

Comment:

Form the above data, it shows that the in 2002 the stock turnover ratio was 12.96 times that is in 2003 improved by 14.14 times. On the other hand the debtors and creditors turnover ratio also satisfactory. In 2002 the debtors’ collection period was 56.5 days that become consistent the following year in 2003 is 57.5 days. The creditors’ payment period was in 2002, 32 days, that become slowdown in 2003, is 36 days.                                                                                          

Summary: By analyzing the ratio of the company it can be said that the overall condition of the company is very well. Here the Return on capital employed is decreased than the previous year but the Gross profit margin increased than the previous year. On the other hand the stock turnover ratio and creditors payment period is much batter comparing the last year but Debtors collection period is become slow than the last year.

Recommendation: •So it can be easily said that the financial position of the finance is very well. but they need to improve their stock turnover and debtors collection period because their creditors payments periods is more than the debtors collection period. 

Task : 3

Point: 3.1          

The Northfield Component recently facing some problems. Here is a brief discussion about the problem they faced:

Cash Deficit:	The main problem faced by the Northfield component is the deficit of cash. The deficit balance is trying to overcome but due to some problem they are not get rid of this problem.
Inconsistency of cash flow:	In the cash Budget of Northfield Component The cash flow is not consistent. For the betterment of the cash budget it is very important to maintain a consistency of cash of the company.

Point: 3. 2

Causes of the problems

Remedy of the problem

ü  Lower amount of sales: The main problem of the Northfield Components is the insufficient of sales. Due to the lower amount of sales they are facing consistent cash deficit.  ü  Increase of expenses: There is also a problem that causes their cash deficit that is the increase of the different expenses. In their cash budget it shows that the wages, fixed motor expenses and sundry expense are more than the necessary.

üIncrease of sales: To get rid of this problem the Northfield component need to increase the cash sales. If they can maintain the sufficient amount of cash sales regularly then they can maintain cash surplus.                         üReduce the cost: They also need to reduce the unnecessary cost. They need to reduce their motor and sundry expense. If the is reduced, then they can go to a cash surplus

RECOMMENDATION:

After analyzing the cash flow budget, the Northfield Company needs to increase their sales volume consistently over the year. They also need to reduce their unnecessary expense. They can purchase vehicle that can reduce their fixed motor cost permanently. Also they need to recruit efficient accountant to maintain their cash flow budget. If they do so then their cash deficit will be turn into surplus.

Scenario: task 2B

Investment decision making:

To evaluate the both appraisal, we need to calculate the Net Present Value (NPV):

We know,

NPV =  [ CF/{1+r)¹  +  CF/{1+r)²   + CF/{1+r)³  + CF/{1+r)⁴  ] – NCO

Here, for project A we have,

Cost of capital = 6%

CFs per year are £180,000; £230,000; £280,000; £120,000;

Now,

NPV of project A = £ [180,000/(1+0.06)¹   + 230,000/(1+0.06)²  + 280,000/(1+0.06)³ +  120,000/(1+0.06)⁴ ] – £450,000

= £704,654 – £450,000

= £ 254,654

Here, for project B we have,

Cost of capital = 6%

CFs per year is £60,000; £120,000; £250,000; £250,000;

Now,

NPV of project B= £ [60,000/(1+0.06)¹   + 120,000/(1+0.06)²  + 250,000/(1+0.06)³ +  250,000/(1+0.06)⁴ ] – £450,000

= £571,332 – £450,000

= £ 121,332

Summary: After analyzing Net Present Value of the project of A and B, it is got from the computation is the project that the NPV of project A is 254,654 and the NPV of project B is 121,332.

Rr      Recommendation: •After this computation it can be said that the  Company should take the project A. here the NPV of project A is greater than the NPV of project B. so it can be easily recommend that project A is more profitable than the project B

Scenario (task 2C)

Calculation of Cost per puppet:-

We have, production unit= 40,000 puppets

Direct material cost = £ (40,000 × £3) =        £ 120,000

Direct Labor cost =    £ (40,000 × £1.1)=          £ 44,000

Variable overheads= £ (40,000 × £0.70)=        £ 28,000

Total fixed cost=                                               £ 65,000

Selling cost=                                                      £ 28,000

Total cost (40,000)                                          £ 285,000       

Now, Cost per puppet= £285,000/40,000

                                    = £7.125

Again,

Total cost of the puppets =                             £285,000

Mark-up 15 %( of £285,000) =                          £42,750

Total selling price of the puppets =             £327,750

Conclusion:

over-viewing the total assignment Management of finance, it is very important to maintain high profitability and manage average cash flow. for this reason identifying  the appropriate source of finance for a business is very essential. Before financing the business must need to consider the cost of every source of finance. And then a business need to calculate the return of the investment appraisal by using NPV method.then the financial statement analysis is an important part for the business. So it should be prepare more carefully to calculate the profitability, liquidity and efficiency of any business. And this assignment will give you the necessary information that will help you to take perfect decision for a business.