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.
****************************************************************************************************
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.
****************************************************************************************************
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.
____________________________XXXXXXX_________________________________
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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