Essay on Managing Financial Resources Assignment

Program	Diploma in Business (Marketing)
Unit Number and Title	Essay on Managing Financial Resources
QFC Level	Level 5

Introduction

Finance is the act of providing money for business project. Financial resources are such places that where money is available to the business in the form of credit, securities and cash. Owner requires sufficient financial resources so that they are to operate efficiently and sufficiently in order to attain their success. Money is required for various purposes such as starting new business, running the business activities and for business expansion. With this financial plans are necessarily required for the purpose of managing finance. Some of the organisation prepare budgets to allocate their available financial resources and utilised them in effective manner. In the below essay on managing financial resources assignment all these terms get discussed effectively.

Task 1

AC1.1 Identify the sources of finance available to a business

Finance is the act of providing finance for business. And  financial resources  are such places that provide finance in the form of liquid, credit and securities. Business require adequate sum of finance for the purpose of operating their activities in adequate manner (Bhattacharya & Londhe, 2014). Sources of finance get divided into two different forms such as:

• Short & long term: Short term sources are such sources in which finance needs to be repaid within a year. Long term sources are such sources in which finance need to be repaid more than one year.
• Internal & external: Internal sources are such sources in which business arrange their funds within their business only. External sources are such sources in which business arrange their funds from the external environment (Bhattacharya & Londhe, 2014).

There are various sources that get discussed below such as:

Internal Sources
Name of Source	Description
Owner’s investment	The amount saved by the owner and invested in the business. This is also termed as start-up capital. It is fall under long term source of finance and treated as additional capital.
Retained profit	Existing business minimum for one year having this source as it is the part of the earned profit. It is fall under medium and long term source.
Sale of stock	The unsold stock get sold up with the regular sales and it is a short term source of finance.
Debt collection	Debtor is the firm or individual that owes business finance. At the requirement debts get collected from their debtors. This source falls under short term source of finance.
Sale of fixed assets	When organisation realise that they not require some machinery any more than they sold it out in order to attain some funds. This is a medium source of finance.
External Sources
Name of Source	Description
Bank loan	Business borrows money from banks at agreed rate of interest for a specific period of time. This can be medium or long term source of finance.
Bank overdraft	Bank allows the business to withdraw amount more than their balance in their account. With the help of this facility they write cheques even they don’t have sufficient funds with them. It is for a short period of time.
Share issue	Business issues  their shares and for this purpose they need to convert themselves into limited company. It is a long term source of finance.
Leasing	By availing this option business is allow to attain required assets without paying capital amount. In leasing lessor rent the equipment for a specific period of time. After the completion of lease asset get return to the lessor (owner).
Hire Purchase	By availing this option business is allow to attain required assets by paying small amount to them and remaining into small instalments. After the completion of time period organisation (buyer) become the owner of the equipment.
Government grants	There are various government organisations such as Invest NI provide grants to business for existing as well as new ones.

AC1.2 Assess the implications of the different sources

Implications vary from sources to sources such as: -

Source	Legal	Financial	Dilution	Bankruptcy
Owner’s investment	There is no legal implications are made.	This amount is utilised for a long term and didn’t need to be repaid.	Control remains with the organisation only.	There is no implication is related to the bankruptcy
Retained profit	No legal implication is implied as organisation uses their savings.	This amount needs not to be repaid.	Control remains with the organisation only.	No bankruptcy implications are implied over it.
Sale of stock	Legal license is required only to make sales.	Stock get sold out in order to get finance.	Control remains with them only.	No bankruptcy implications are implied.
Debt collection	Legal procedure need to be followed.	Adequate share of funds get recovered from market.	Organisation attains their funds with them.	Bankruptcy implications are not implied over it.
Sale of fixed assets	Sell agreement need to be signed.	Ownership of assets gets transferred against adequate sum.	Control remains with the organisation only asset get sold out.	No bankruptcy is associated with it.
Bank loan	Assets get seizure in the case of defaulter.	Instalment need to be paid monthly/quarterly/ yearly in order to repay the funds.	No dilution of control.	Assets get taken into consideration for securing funds and in case of defaulter these assets get sold out in order to recover money and declare the business bankrupt.
Bank overdraft	Various forms need to fill up related to the repayment documents.	High rate of interest is implied. And in case amount is not paid well on time they bank implies penalties and other charges.	Control remains with the organisation only.	During bankruptcy they fall among first that get the payment.
Share issue	Every shareholders attain right to vote in Board election in order to manage their company.	Company share profits with their shareholders in the form of dividends but they are not obliged to pay.	Control gets diluted with shareholders.	Amount need not to be repaid and during bankruptcy they get money in the very end.
Leasing	Required lease agreement to be signed.	GST is charged over the rentals paid and this amount can be claimed as a tax deduction.	Control remains with the organisation only.	Lessor files a case in order to get the funds first in case of bankruptcy.
Hire Purchase	Legal agreement need to be signed.	Buyer gets the tax credit facility as they claim depreciation as a tax deduction.	Control didn’t get diluted with the effect of hire purchase.	There is no effect of bankruptcy
Government grants	Need to show documents in order to get the grants from the government.	Effective funds are provided by the government.	Organisation didn’t share their control with Government.	There is no effect in case of bankruptcy.

AC1.3 Evaluate appropriate sources of finance for a business project

The appropriate sources of finance for a business project are as follows such as: -

Sources	Description	Advantages	Disadvantages
Owner’s investment	Owner makes investment of some adequate share of finance. It is the start-up capital.	The amount needs not to be repaid. There is no interest is charged over it.	Owner makes investment of limited amount in business.
Bank loan	Business borrows funds from the bank at agreed rate of interest and time period.	Small instalments need to make as it helps in managing the available funds.	Interest payments make it expensive source of finance. Bank demand security against the loan amount.
Leasing	Business gets the required assets without paying capital amount. Assets taken over rent and after a set period of time it get return to its owner.	Updated equipments are utilised. Payments made into small instalments. Helps in managing the available finance.	It can be expensive due to rentals. Assets ownership remain with its owner only.
Hire purchase	Business gets the required assets without paying capital amount. Assets taken over instalments and after a set period of time buyer get the ownership.	Updated equipments are utilised. Payments made into small instalments. Helps in managing the available finance.	The cost paid in the form of instalments are much higher than its original cost.
Government grants	Government organisation grants some amount to business units whether they are existing or new.	This amount needs not to be repaid.	It follow certain conditions such as location and many more. All business types are not eligible for grant.

Task 2

AC2.1 Analyse the costs of different sources of finance

There are different costs associated with the different sources of finance such as:

• Share capital: The cost of share capital is in the form of the amount paid to the shareholders in the form of dividends. There are few costs are there such as issuance fees, fees of registering under stock listing. Shareholders expect that the amount of dividends get increased over time and they get it on consistent basis (Serrasqueiro, et. al., 2011).
• Borrowed funds: The interest rate either it may be fixed or variable. Borrowed funds are generally debt to the business and the paid interest over debt amount is considered as the cost of source. Along with this there are few amounts in the form of administration fees to order to process the requirements of loan. Interest and fees are considered as the cost of source.
• Government grants: The amount paid in the form of the administration fees for the purpose of applying for grants and ensures that they are eligible for receiving grants (Serrasqueiro, et. al., 2011).
• Retained earnings: There are no such costs associated with the retained earnings as tax is already paid over it before putting it in their reserve funds. Utilising amount of retained profit decreases the share of dividend paid out of it (Serrasqueiro, et. al., 2011).

AC2.2 Explain the importance of financial planning

Financial planning is the process for framing policies, objectives, procedures and programmes in context to the financial activities. With the help of it organisation attain business objectives and manage their financial resources (Bird, et. al., 2014). The importance of financial planning is as follows such as: -

• With the help of it financial resources get managed effectively.
• Management monitors their cash flows (inflow and outflows).
• Management use it in their decision making in order to prepare effective decisions.
• They make forecasting related to the need of finance.
• With the use of it they attain growth and expand their business activities and support long term survival to their business.
• Management make ensure that they maintain adequate funds.
• It helps in getting adequate balance between their cash flows (inflow and outflow) and also provides stability.
• They prepare effective  marketing financial planning  that attract numerous investors towards their business projects.
• Management get prepared for the uncertainties with the use of it and easily deal with market changes (Croy, et. al., 2010).

AC2.3 Assess the information needs of different decision makers

The financial information is demanded by two types of users such as: -

• Internal users: These are such users that have direct link with the organisation such as managers, employees and owners.
• External users: These are the stakeholders or members of public such as investors, government, regulatory bodies, customers and many more (Tan, et. al., 2014).

Both users required information for their purpose that gets discussed below such as: -

Internal Users	External Users
They make use of information for forecasting They make adequate management of their debt and liquidity Make decisions related to the staffing, investing, financing and many more.	They make decisions related to the investment. Government use for evaluating their tax responsibility. Assessing organisational financial strength. Understand the liquidity position Evaluate the position of business in market and utilise their assets in efficient manner.

There are different decision makers that require different information such as: -

• Investors: They assess the information to evaluate their financial planning’s so that they make investments in order to get attractive profits.
• Employees: They assess the information in order to know about organisational stability and profitability and for this purpose they extract information related to profitability and liquidity. They also assess information in order to evaluate the organisation ability related to remuneration, retirement benefits and growth opportunities (Tan, et. al., 2014).
• Banks: They assess the information in order to know about the liquidity and stability of organisation in order to evaluate whether they get their funds well on time or not.
• Supplier & creditors: They assess the information related to their liquidity and stability in order to evaluate whether they get their funds well on time or not.
• Government: They assess the financial statements in order to evaluate the tax policies followed by them. They make use of the profitability information of the organisation (Tan, et. al., 2014).
• Regulatory bodies: They assess the financial statements as they measure whether organisation is following their set rules and regulations and guidelines or not. If not then they took legal actions against them.

There are various features that denote the information as good information such as:

• Provided information should be relevant to the business activities.
• Information should be time specific as it is related to the current year that helps in making effective decisions.
• Information should be error free and accurate enough. This includes the disclosure of the assumptions or estimations recorded under it.
• Presented information should be completed as none of the part remains incomplete.
• Information should be presented in effective manner so that it can be understand and utilised easily.
• The presented information must be in such a form that meets the requirements of the users.
• The  information and knowledge  must worth the cost as some cost is associated with it.
• Information should be reliable so that it helps in making effective decisions (Puri, 2014).

AC2.4 Explain the impact of finance on the financial statements

The finance put adequate level of impact over the financial statements such as: -

Sources	Balance sheet	Profit and loss account	Cash flow statement
Owner’s investment	It recorded as capital account under the liabilities in balance sheet.	There is no cost is associated with it so no impact is put over profit & loss account.	It increases the cash balance of the investing activities as it leads to cash inflows.
Retained profit	It decreases the reserve funds under liabilities. Gearing ratio gets reduce with the effect of it.	There is no such cost is associated with it and with this effect there is no impact is measured over Profit and loss account.	There is no impact over the cash flow statement.
Sale of fixed assets	There is increase in current assets (cash account) and decrease in fixed assets balance.	This statement gets impacted effectively with it as fixed assets get sold above their cost then it is termed as profit and it increases their revenue and vice-versa.	The sale of asset gets recorded under investing activities and increase the cash balance.
Bank loan	It is the form of debt that increases the long term liabilities and also increases the current assets (cash & bank balance). It also increases the gearing ratio.	Company pay interest over loan amount that get recorded under expenses. Their overall profit gets reduced.	Taking loan lead to cash inflow and repayment of loan lead to cash outflow. Both activities recorded under financing activities.
Bank overdraft	It is the form of debt that increases the current liabilities and also increases the current assets (cash & bank balance).	Company pay interest over overdraft amount that get recorded under expenses. Their overall profit gets reduced.	Availing overdraft facility lead towards cash inflow and with the repayment it leads towards cash outflow. Both of these activities recorded under financing activities.
Share issue	With the issue of shares there is increase in the equity share capital and also increase the current assets balance. It helps in reducing the gearing ratio.	In the form of dividend they share earned profits. They record it as a expense under profit and loss account.	The inflow of cash takes place with the issue of shares and cash get outflows with the payment of dividend amount. Both transactions get recorded under financing activities.
Leasing	This transaction recorded under liabilities as long term liability.	Paying rentals get recorded as expenditure and decrease the ratio of profits.	Under financing activities the payment of leasing gets recorded.
Hire Purchase	This transaction recorded under liabilities as current liabilities.	Paying instalments get recorded as expenditure and decrease the ratio of profits.	Under financing activities the payment of instalments of hire purchases gets recorded.

Task 3 

AC3.1 Analyse budgets and make appropriate decisions        

Budget is a plan that prepared well in advance. With the help of budget report money get segregated as per the requirement. There are various reasons behind preparing budgets such as controlling and monitoring, effective planning, enhance coordination and communication, increase efficiency and motivation (Roper & Ruckes, 2012).  Cash budget is prepared as follows such as: -

Analysis: Above statement is the cash budget and by analysing it is observed that the flow of getting revenues is not constant as for three months it shows increment but after that there is huge downfall in revenues. Expenses also shows the same trend but the rate of increasing expenditure is much higher as compare to revenues. Due to the difference of increasing rate they attain deficit cash balance that affects their performance.

Below is the production budget: -

Analysis:  As per the analysis of the above production budget it is realised that there is inconsistency in the production department as it keeps on fluctuating. There is no consistency is noted down as every month production get increasing or decreasing. There is effective need to attain consistency (Grimm & Blazovich, 2016).

AC3.2 Explain the calculation of unit costs and make pricing decisions using relevant information

Cost: - It is such amount that gets paid against getting something. Cost is the monetary valuation of the material, time and many more.Unit cost: - When company produce same identical products. All the variable costs and fixed costs get added and get divided
by the total number of units. The cost attained is termed as unit cost (Roper & Ruckes, 2012).
Unit cost = Direct cost + indirect cost
Cost per unit = (Total variable costs + Total fixed costs) / total units produced.
As the number of units gets increases then the cost per unit get decreases and vice-versa. Due to this cost per unit is not constant 
Variable cost: These are such costs that having changing nature as they keep on fluctuating such as material cost, labour cost and many more.
Fixed cost: These are such costs that have fixed nature as they remain same for the whole production period or at every level such as rents, depreciation and many more (de Souza & Lunkes, 2016). There are two different costing methods are available that followed in order to calculate the cost: -

• Marginal costing: This costing makes inclusion of only variable cost for the purpose of calculating unit cost.
• Absorption costing: This costing method makes inclusion of variable cost as well as fixed costs for the calculation of unit cost (de Souza & Lunkes, 2016).

In the below table calculation of unit cost and pricing is shown such as: -

For pricing decision cost plus price method is utilised as per this all variable as well as fixed costs get included in order to calculate the unit cost and after that adequate profit margin is added to get revenues by make sales (de Souza & Lunkes, 2016).

AC3.3 Assess the viability of a project using investment appraisal techniques

Investment appraisal techniques are such techniques that get utilised for assessing the available project whether it is worthwhile or not. There are various methods are available such as: NPV, IRR, ARR and PBP. These techniques get discussed and utilised in effective manner such as: -

NPV: It is the discounted cash inflow which is attained by multiplying the cash inflows with discounted rates. It is utilised for evaluating the overall profitability of the project (Adkins & Paxson, 2014).
NPV = Discounted cash inflows – Initial investment

Total discounted cash inflows = 103,576
Initial investment = 100,000
NPV = 103,576 – 100,000
NPV = 3,576

Pay-back period: The length of time period taken to recover the initial investment made in project or investment (Adkins & Paxson, 2014).
Pay-back period = (Days/weeks/months * initial investment) / Total cash received
= (60 * 100,000) / 140,000
= 42.857 months
PBP = 3 years 6^3/4 months

IRR: It is such rate at which NPV becomes zero.

IRR = 10% + [(103576 – 100,000) / (103,576 – 90,620)] (15% - 10%)
= 10% + [(3576) / (12,956)] (5%)
= 10% + 1.38%
IRR = 11.38%

ARR: It shows the average return made by the investment. Project is favourable when ARR is equal to their rate or more than that rate.
ARR = average accounting investment/ average investment * 100
Average accounting investment = (24,000 + 20,000 + 28,000 + 32,000 + 36,000) – 100,000 /5 = 8,000
Average investment = 100,000
ARR = 8000/100,000 * 100 = 8%

Results:

Techniques	Results
NPV	3,576
PBP	3 years 6 ¾ months
IRR	11.38%
ARR	8%

Task 4

AC 4.1 Discuss the main financial statements

• Financial statements: - these statements are financial summaries of a business that renders financial performance and financial position at the end of the financial year. The three main financial statements get discussed below such as: -
• Profit and loss account: this statement is prepared for showing the flow of sales and costs for a period. It get utilised for evaluating profit and loss. It makes record of two things such as income and expenditure (Robinson, et. al., 2012).
• Balance sheet: It is a snapshot of firm’s position. It shows case the assets and liabilities of the company along with the equity capital. It helps in evaluating the working capital, gearing ratio and total value of firm effectively. There are three main things in balance sheet such as Assets, liabilities and equity capital.

Assets = Liabilities + Capital
Assets are segregated into two parts such as current assets and fixed assets or non-current assets.On the other hand liabilities are  also segregated into two parts such as current  contract liabilities  and long term liabilities (Robinson, et. al., 2012).

Cash flow statement: This statement is the summary of all cash inflows and cash outflows for a specific period of time. This statement helps in putting control over the use of the available liquid funds. This statement is segregated into three parts such as operating activities (cash sales, interest received, etc.), financing activities (sale or purchase of fixed assets) and investing activities (sale of shares, dividend paid and others) (Robinson, et. al., 2012).

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

There are three different forms of business which get discussed below such as: -

Company	Partnership	Sole-traders
Owners are shareholders.	Owners are partners	Owner is sole proprietor
They show equity capital under balance sheet	They show partners capital under balance sheet.	It makes record of owner’s capital under balance sheet.
Profit is distributed among shareholders as dividend.	Profit or loss is shared among partners in their profit sharing ratio.	Owner is liable to bear all losses and enjoy all profits.
They prepare profit and loss account to measure their profitability and took corrective actions to make improvements.	They prepare profit and loss account to calculate and share the earned profit or loss.	They prepare profit and loss account to measure their profit or loss.
Statutory audit is compulsory for them.	For them Statutory audit is compulsory.	There is no need of Statutory audit.
They prepare cash flow statement to manage their available cash.	They didn’t prepare cash flow statement.	They didn’t prepare cash flow statement.
They follow all the set rules & regulations, guidelines by the GAPP for the preparation of financial statements to avoid legal consequences.	They also follow the set rules and guidelines for preparing their financial statement	They didn’t follow such rules or guidelines for preparing their financial statements.

AC 4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.

Below is the calculation of the ratios of Marriott hotel such as: -

S. No.	Ratios	Calculations	2015	Calculations	2014
1	Current ratio
	Current assets/current liabilities	1921 / 3060	0.63	1903 / 2675	0.71
2	Quick ratio
	Quick assets/current liabilities	1857 / 3060	0.61	1836 / 2675	0.69
3	Gross profit
	Gross profit/ net sales	1966 / 13796 * 100	14.25%	1764 / 12784 * 100	13.80%
4	Net profit
	Net profit/ net sales	753 / 13796 * 100	5.46%	626 / 12784 * 100	4.90%
5	Account receivable turnover
	Revenue/avg. acct. receivables	13796/1100	12.54	12784/1081	11.83
6	Total assets turnover
	revenue / avg. Total assets	13796/6865	2.01	12784/6794	1.8

Interpretation of ratios: -

Ratios	2015	2014	Interpretation
Current ratio	0.63	0.71	It shows the efficiency of getting funds to meet out liabilities. As per the results it is analysed that there is fall in their efficiency as they fail to maintain adequate funds with them.
Quick ratio	0.61	0.69	It shows the efficiency of getting liquid funds to meet-out their current liabilities. As per the results it is analysed that there is fall in their efficiency as they fail to maintain adequate liquid funds with them.
Gross profit	14.25%	13.80%	It shows the ability of getting revenues with the help of sales. As per the ratios there is enhancement in their ability as ratios get increased significantly.
Net profit	5.46%	4.90%	It shows the operational ability to utilise their revenues and get profits out of them. As per the ratios there is enhancement in their operational ability as their ratios get increased ineffective manner.
Account receivable turnover	12.54	11.83	It shows the ability of minimizing credit sales but by looking at the ratios it is analysed that there is increase in the turnover rate that shows that there is increase in their credit sales.
Total assets turnover	2.01	1.88	It shows the efficiency of utilising available total assets in order to get revenues. As per the ratios there is effective increase in the revenues earned with the help of total assets.

Conclusion

In the end it is concluded that appropriate sources are evaluated with the help of their implications and advantages and disadvantages. The finance get utilised in effective manner with the help of financial planning and budgeting as it get segregated into effective manner. Available projects or investment get evaluated with the help of investment appraisal techniques such as NPV, IRR, ARR and PBP. Ratio analysis is performed to evaluate the financial performance of the organisation.

References

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