Managing Financial Resources And Decisions Of Finance Finance Essay

Task 1(a) There are different types of sources of finance. Categorizing according
to time they can be:

1. Short term sources of finance

2. Long term sources of finance

Short term sources are:

Bank Overdraft: Overdraft facilities are provided by banks where a pre arranged
limit is first set and then the customer if he exceeds the limit, he has to pay the
fee on the exceeded amount and this varies from one bank to another.

Trade Credit: When different businesses combine and share finance and make
use of finance for meeting common pre decided business objectives the money
shared is called Trade Credit.

Leasing: The process of using assets for certain period of time by paying rent
without actually purchasing or owing them is called leasing. The party who uses
the assets is called LESSEE and the party who actually owns these assets is
called LESSER and the time period of this contract is called the Term of LEASE.

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Bank loans: Loan is money borrowed from the lender which the borrower is made
to pay back in installments and also the returned amount total is more than the
money borrowed. The initial amount borrowed is known as Principal and the
additional amount of money paid back is called Interest which is a fixed
proportion of the Principal.

Credit Cards: The concept involved is same as Bank Overdraft except the
borrower receives a smart card which he can use to buy products and services.
The limit of a card is pre-determined like in the overdraft and the borrower is
charged additional fee if limit is exceeded.

Long term sources are:

Bank Loans: As discussed above bank loans can also vary in time and
accordingly can be a short or long term source of finance.

Share capital: When a particular sector of the company needs investment the
company can issue shares in the market and use the capital earned to invest for
the task. It can be authorized that is the total amount a company can issue to
shareholders or Issued which is the actual amount paid by the share holders.

Debentures: Debentures is a debt or may be known as borrowed money and is

similar to Share except for the fact that the money gained by issuing debentures
is not an earning but only a debt which the company has to pay back or at least
pay the interest on the amount received per debenture. Debenture holders unlike
share holders do not have a right to vote but can encash the money lended at
any time since the profit margins are almost fixed.

Asset Sales: The company assets which are not in use anymore can be sold to
get money in turn, which can be used since it comes into circulation and the
assets not in use are dead value.

Venture capital: This is the money invested by a bigger company in smaller

company to assist and make more profits. When after a study the giant company
notices the trend of growth for a small rapidly developing company, it plans to
invest money and get good returns benefitting from the rate of growth for a
smaller company which could be more than the rate at which the giant company
is progressing.

Retained profit: It is a part of companys earnings for the previous year which can
be used as an investment for further developing the company rather than paying

it as dividends. So the figure keeps on cumulating year after year when the
company is in profit.

Owners' capital: It is the total capital money which is owned by the share holders
of a company. At launch the company can issue IPO Initial public offering at a
fixed price and there after depending upon the growth of the company the value
changes.

Grants: Grants are issued by a Government to small units for helping them to
develop their business. The money may be lended at a very low interest or given
as a Non return value.

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Task 1(b)

The financial resources discussed above have different implications in an Odd

situation of dilution or bankruptcy.

Bank loans or Overdrafts are always given against a security which may be a
property or asset owned by the company. In case of Failure to pay back the loan
if the company is bankrupt the bank acquires the assets against which the loan
was issued and can sell them to get the amount issued back to the account.

Trade credit taken from other business may go into dilution if the company goes
bankrupt and is a sure loss. So the risk involved in trade credit is quite high and
the terms of sharing the money should be predefined including actions to be
taken in case of bankruptcy.

Leasing is a safe play as the assets always belong to the Lesser and if the lessee
is unable to return the amount committed as a part of rent or installment the
contract can be abolished and the assets are acquired back by the lesser.

Credit cards can again be a loss to the issuer in case of a failure to pay back the
balance amount pending. A legal action can be taken against the defaulter as per
the terms and conditions decided at the time of issue of the card.

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In case of share capital the position of a company in the market is not always the
same. A share holder has to be up to date for the current situation and future
trends of the company whose shares he buys. In case the company is expected
to go in loss the shares can be sold at a reducing price.

Debentures are also subjected to terms and conditions stated by the company at
the time of purchase. If the company goes bankrupt the investment goes for a
toss.

Venture capital is a risk involved investment and the lender has to have a
positive forecast for the company where it invests money.

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Task 1(c)

In regards to the upcoming Sudan Highway Project, I will like to choose amongst
the few available options we can choose to finance our project with the option
best suiting our needs.

As the elapse time of the project is 7 years we can choose over long term
financial sources the best amongst which is getting a Venture Capital from any
other existing construction company as the project assures good returns for sure
in the long run and any company with market experience and knowledge will
accept the offer to finance on ratio based system for profit which also covers us

from any risks involved since the initial expenses will be high and we expect low
returns during first 2 to 3 years.

Just in case we are unable to find a Venture interested in investing the capital we
can also opt for Bank Loan since that also covers us from the initial risks involved
and even if the turnover is below than what is expected for initial years we will
have enough margin to switch our needs going ahead with time. Bank loans will
give us flexibility for the funds and the areas of investment and apart from this it
also enables us to take independent decisions without being pressurized by a
third party investor in the project.

Rest about the assets we will need for initial start up can be done on lease basis
since investing in assets initially will be highly spending and will not yield
expected profit.

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Task 2(a)

The cost of various sources of finance varies and makes one source preferable
over other depending upon the business needs. Discussing a few preferred
sources:

Leasing In case of leasing the cost is less if the deal is for a short duration as it
cuts down the original cost of actually purchasing the equipment and also there
is no depreciation since the goods are only rented and now owned. But in long
run it can prove costly as the rent paid could be equal to or more than the actual
cost of asset.

Hire Purchase This is different from leasing as the asset used is actually
purchased and owned by the company and a fixed amount is paid in
installments. The total amount paid is always more than the actual cost but since
the payment is made in installments the burden of big investment is reduced.The
equipment used also undergoes depreciation so the loss is tolerated by the
owning company.

Debt Factoring If the customers fail to pay back the money,the company can
actually sell the accounts to a third party which pays the company 80 to 90% of
the original amount and the third party in turn does collection on original
companys behalf.

Government Finance is a free of cost money offered by Govt. for development of

a company. The interest charged is either nil or very low so that the company in
loss can withstand the situation.

Trade Credit is mostly considered as a free source of finance. The supplier can
supply goods without receiving the return payment immediately and the
payment can be made after a fixed period which is generally 30-90 days.

Retained Profits This is the cheapest source of finance since the money is owned
and not borrowed.

Own Capital this is also a costless source of finance but there is risk factor
involved for the money could be lost.

Working Capital is the wealth owned by the company on day to day basis.It is the
difference between the current assets owned and the current liabilities of the
company.

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Task 2(b)

Financial planning is important for cash budgeting and also for avoiding
overtrading.The following points are the benefits of Proper Financial Planning:-

Cash Flow: Financial planning can increase the cash flow as an outcome of
careful budgeting and planning how and where to spend including tax payment.

Capital: The money involved can be increased by planning the investments and
calculating expected profits in advance.

Income: Income can be planned in advance and decisions can be made to

divide it effectively for tax payments or other fixed expenditures.

Investment: With the help of proper planning after analysis is done one can
wisely make investments to yield more profits.

Security of Living standard: By proper planning we can avoid crisis situations or

develop management actions to be taken if a situation of crisis arises.

Financial Understanding: After doing good financial planning one can access the
current market situation and make good understanding with working employees
to make them aware of the situation and share the plan to progress.

Assets: Assets always have liabilities attached. If nothing more then at least the
investment is required just to maintain the assets. By judicious planning we can
cut down on liabilities and build assets that are not a burden to the company.

Savings: To cope with a crisis situation it is always good to have liquidity as an

investment which can be used in better sense after planning.

Overtrading is an absurd source of loss in trading. Overtrading happens when a

business undertakes task and attempts to complete it, but later finds itself short
of resources (labour, working capital or net assets).The major cause is improper
or no planning to foresee things like manufactured quantity, time involved etc. If
things are planned and followed in the right order each trade can be looked as a
separate transaction. Planning beforehand always helps to avoid a situation of
chaos which may end up shutting down the complete business. Some small units
have a false belief that they do not need planning since the money involved is

less but the amount is not relevant when it comes to planning. Planning will
always help a business to grow in the long run.

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Task 2(c)

Different types of information is needed by decision makers depending upon the

stage of operation they are in. The decision involved can be Quantitative or
qualitative.

Equity Investors- The share holders require information for making share trading
decisions so they can decide on buying new issues or sell existing shares. They
want to make judgments regarding movements in future share prices, likely
future dividend payments and management efficiency. This helps them take
voting decisions in Annual general meetings. They can compare profitability
ratios to determine management efficiency. They should have the previous data
to compare the market trend and future estimates.

Customers (especially buyers of fixed assets) need to know information which

will help them understand the long term viability of the business. They should
know the warranty terms and service offered after sales from the manufacturer.
The customers get info from market surveys or from the current users who
promote or detract a product.

Suppliers and trade creditors information needs are similar to those of the short
term suppliers. They should be aware of the business position of their trade
partners and the future plans of the trading company. If the company still stays
in the same line of business only then it is worth to go ahead with a trade credit
or else the money should be recovered if there is a doubt that the company may
change their LOB.

Business Rivals To keep in competition it is important to know the financial

ratios of the Rivalry Company. This helps them understand where they stand in
terms of profit making and also plan their next moves to stay at par or over par
to their rivals. The other business my plan to launch a new attractive offer or

scheme for promoting a product. This information is critical so that they can
withstand a different relevant offer to counter it.

Managers Managers need all financial data for the market share progress,
profitability, loss sectors, employee attendance, work inputs, current plans,
forecasting etc. Information needed is related to employees along with the short
term viability of the organization.

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Investors Need to know about the current position (profit or loss) in the market
and the long term viability of the company including the cash flow to ensure
interest.

Employees-Need to know the available options in the job market and also the
position of their company to ensure job security.

Loan creditors Need information about cash flows and priority of repayment.
Long term creditors look at the overall strength of business and estimate future
position of the business.

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Task 2(d)

Different types of finance impacts financial statements in various ways.

Assets-Assets have an impact on the balance sheet. A balance sheet shows

company's assets, liabilities and owner's equity. If the assets are owned and not
financed the company is in advantage. In balance sheet assets equal to liabilities

added to owners equity. Financed assets increase liabilities and owned assets
increase equity.

Liabilities-Liabilities also impact balance sheet. More liabilities mean less money
owned by the company. If assets are constant and liabilities increase the equity
decreases. So if assets are constant and liabilities decrease the owners equity
increases.

Equity- Owners equity is calculated as the difference between current assets and
current liabilities. Whenever the asset or liability accounts changes the equity is
changed along depending upon increase or decrease of either an asset or a
liability.

Revenue-Revenue has an impact on income statement. Revenue is the money

business earns in any form. Net income or loss is given by income statement.
Net income or loss is calculated as the difference between revenue and
expenses. If revenue is more than expenses the company has a net income and f
the expenses exceed revenue then the company suffers loss.

Expenses-Expenses also impact the income statement. For a business to

progress expenses need to be controlled. If expenses are in excess they harm the
finances of a business. If expenses are more tan revenue it means the business
spent more than what it earned and is encountering loss.

A balance sheet is marked based upon the following equation:

Assets = Liabilities + Shareholders' Equity (Owners equity)

So a balance sheet consists of 2 parts and each part balances the other. It means
that the assets which are means used to perform an operation in the company
are balanced by liabilities, equity investment brought into the company and the
companys retained profits. Liabilities and Equity are two sources which support
the assets used for companys operation. Equity stands for the amount of money
which was initially invested in the company and also includes retained earnings
which combined together forms a source of funding for the business. So at any
point of time balance sheet can be regarded as a snapshot of companys
financial position.

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Task 3(a)

Solution:

Forecasted Cash Sales starting from Nov till Feb = 3000+ 4000 + 4500 +
4500

= 16000

Selling Price = Cost price +30%

Therefore Cost price + 30%= 16000

Cost Price = 16000 X 10/13 = 12307

Monthly Overhead = 2200

Total overhead for the Budget period = 13200

ANGUS Ltd. Cash Budget Sep 2010- Feb 2011

Estimated Cash Balance at the Beginning of the Period

Total Inflows

Cash Sales

Collections of Credit Sales

Bank Loans

Total Outflows

Payment to Suppliers

Payments of Operating and Other Expenses

Payments of Equipment Vehicle Expenses

Payments of Bank Loan and Interest

Inventory Purchases

Investment in Short-Term Securities

Estimated Cash Balance at the End of the Period 9493

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Task 3(b)

Solution:-

Weight of the RING = 8 g

Cost of Silver (per gram) = 15

Cost of Ring material = 8 X 15 = 120

Manufacturing labor cost = 20 per hour

Time to make 1 Ring =2.5 hours

Total cost of labor for 1 Ring = 20 X 2.5 = 50

Service labor cost = 8 per hour.

Service time for 1 Ring = 40 mins (2/3 hours)

Service cost for 1 Ring = 8 X 2/3 = 5.33

Total factory indirect costs = 10,000

1 Ring cost = 120 + 50 + 5.33 = 175.33

500 rings cost = 175.33 X 500= 87665

Adding Total factory indirect costs = 87665 + 10000 = 97665

Final price per Ring = 97665 / 500= 195.33

Market price for 60 Rings = 195.33 X 60= 11719.80

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Task 3(c)

Solution:-

To calculate the BEP

Total Fixed cost= 4.50 X 100000= 450000

Cost of machinery to be added for first year = ( 750,000) X 100000

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(100000+80000+70000+55000)

= 245901.64

Overhead on advertisement = 550000

So TOTAL FIXED COST= 450000+ 245901+550000= 1245901

BEP = Total fixed cost / (Selling Price Variable cost)

= 1245901 / 30 ( 5.75 + 5.00)

= 1245901/ 19.25

= 64722

So the total number of units to be sold before the company starts getting profits
is 64722.

So the company should be able to make profits after selling 64722 pieces.

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Task 4(a)

Profit and Loss account

Profit and loss account is prepared to monitor a businesss progress. This

includes monitoring sales and costs. If the company shows its going in profits it is
good enough but if it is going in loss then relevant action needs to be taken to
remedy the situation in future. To start with it takes into account the Trading
entries i.e. income from sales and direct cost associated in making those sales. It
also takes into account the other expenses in the business along with the
balance of stocks at the start and end of the financial year.

Balance Sheet

Balance sheet is a statement of assets, liabilities and owners equity. The main
purpose is to find profits or losses incurred by business. Assets equal the sum of
liabilities and equity. It helps to identify financial liquidity problems and identifies
companys potential to meet the financial obligations. It gives an account of the

working capital and the indebt situation of a company. It gives an estimate if the
company can meet its short term liabilities and as to where a company stands if
compared to its competitors.

Cash Flow Statement

The main purpose of this statement is to calculate the cash balance at the end of
a period. It consists of cash flows from Operating, investing and financing
activities. It gives information about previous sources of cash and enables to
predict even cash flows in future. It also gives the potential of a company to
meets its financial obligations. Helps identify the main source of cash which is
preferably cash from operating activity. It also explains the effects of financing
and investment activities on business operations.

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Task 4(b) Different Formats of financial statements by business entities:

Government financial statements: Government statements either use Accrual

accounting or Cash accounting. They can even use a combination of these two
accounting methods. They use a complete set of Chart of Accounts which is
totally different from the normally used Chart of profit oriented business.

Non-profit organizations: For a nonprofit organization a statement generated is

simple as compared to a for-profit organization. The statements just include a
balanced sheet marked with statement of different activities (indicating income
and expenses) which is just like a Profit and loss statement generally made for a
for-profit organization.

Personal financial statements: Personal financial statements are generally

required when applying for a loan or aid. The organization which supplies loan
makes filling a form as a formality to access the candidates financial position.
This is generally a single form for reporting personal income and expenses.

Inclusion in annual reports: For share holders interest the annual reports are
generated by the parent company to indicate the progress and assure them their
investment is going on a good side. This generally contains letter from
companys CEO which describes companys performance and financial
achievements throughout the year. To attract new investors pleasing graphics
and photos are added to annual report.

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Task 4(c)

Solution:-

Starting the analysis by calculating simple Profitability Ratios:

Gross Margin: Gross Profit X 100

Net sales

= 300000 X 100 = 50% ( For 2008)

600000

= 250000 X 100 = 38.46% ( For 2007)

650000

Gross Margin increased as compared to last year indicating business has

expanded overall in size.

Profit Margin: Net Profit

Net Sales

= 111000 = 0.185 ( For 2008)

600000

= 70000 = 0.107 ( For 2007)

650000

Even the profit margin shows an increase since the Net Profit stood out to be
more than previous year.

Return on Sales: Operating Income

Net Sales

= 86000 = 0.143 ( For 2008)

600000

== 136000 = 0.209 ( For 2007)

650000

Return on Sales dropped as compared to last year as the retained earnings were
less due to more investment done and also the paid dividends were more.

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Return of Investment: Net Income

Avg Owners Equity

= 86000 = 0.506 ( For 2008)

170000

= 136000 = 0.618 ( For 2007)

220000

RoI is dropped since the net income was less as compared to Previous Year ,Even
the Equity showed a decrease but overall impact shows business is dipping in
terms of returns generated.

Liquidity Ratios:

Current Ratio: Current Assets

Current Liabilities

= 125000 = 1.25 ( For 2008)

 100000

= 140000 = 2.00 ( For 2007)

70000

Current Ratio has decreased indicating business needs to plan and manage more
assets and try to cut down on liabilities as for a business to grow CR > 1 and also
the trend should be rising.

Mark Up Ratio: Gross Profit X 100

COGS ( Cost of Goods Sold)

= 300000 X 100 = 100% ( For 2008)

300000

= 250000 X 100 = 62.5% ( For 2007)

400000

Acid Test Ratio: Current Assets ( Inventories + Prepays)

Current Liabilities

= 25000 = 0.25 ( For 2008)

100000

= 70000 = 1.00 ( For 2007)

70000

Debt Ratio: Total Liabilities

Total Assets

= ( 40,000 +36,000+25,000+50,000+18,000+20,000 ) + 100000

125000 + 150000

=189000 + 100000 =1.05 For (2008)

125000 + 150000

= (36,000+34,000+24,000+50,000+16,000+20,000 ) + 70000

140000 + 150000

= 180000+ 70000 = 0.86 For (2007)

140000 + 150000

Since the Debt Ratio which was under 1 last year and has exceeded to greater
than 1 now, so clearly the business is not going in Profit.

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Referencing

www.accountingcoach.com

www.bized.co.uk

www.en.wikipedia.com

www.bizfinance.about.com

www.businessplans.org

www.capitalbudgetingtechniques.com

www.economywatch.com

www.yourbusinesspal.com

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