Sample on Managing Financial Resources
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7667 Downloads I Published: 11 Jan ,2017
Management of financial resources is very essential in the process of decision making. It is required at all levels as finance is the major element to be imposed in the business. In the following report, the different sources of finance available to the firm will be presented. Discussion of ratio analysis will be presented to elaborate the financial records of the business.
Finance is the key element which is required for every kind of business that is irrespective of its nature. It is essential at every level of operation. Considering the different types of business such as new and old, large and small business entities for the purpose of new business set-up and expansions, the sources of finance are available to them which are as follows:
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Retained earnings – For old business firms who are operating since a long period, the best source of funding that is available to them is retained earnings. It is the amount which is kept as reserve out from the profits and is accumulated every year in a particular proportion (Fridson and Alvarez, 2002). This amount could be used for the purpose of expansion or for setting up the new venture of similar business.
Share capital – The other source of finance which is available to the newly establishing firm is raising fund through share capital. Under this method, company allot shares in the market to the public and accumulate funds from them. It is available to new as well as old firms in the form of liabilities which they have to pay back to their shareholders after certain period with dividend (Funke, 2007).
Bank loan – It is the most common source of finance for new firms who are planning to work at small level in the initial stage. Bank loan is the form of complete debts which could be raised from the banks and other financial lending institutions (Helfert, 2004). This source of finance could be raised even for the purpose of setting large business firms after observing the repaying capacity of organization by financial lenders.
By adopting the sources of finance that are available to different types of business firms, there are various benefits and disadvantages to business and legal aspects. Also, there are certain costs which are available to them which companies have to bear. All the relative factors for sources of finance are described as under:
Advantage - The fund raised through retained earnings is available in the form of assets. Company does not have to pay any kind of debts to the third party (McMenamin, 2002).
Disadvantage – It eventually leads to reduction in the profitability of business which is to be disclosed among stakeholders of the frim.
Advantage – By the means of raising share capital, company could raise huge amount of fund through public.
Disadvantage – Liability of the firm increases which could negatively affect the financial statements of company.
Advantage – It is a very easy process of borrowing fund and raising capital which is provided by all kinds of financial institutions.
Disadvantage – Loan taken for longer period leads to accumulation of interest which increases the amount that is to be repaid by firm.
For every form of business, finance is required at the initial stage. There are different sources of finance which are available to different types of business which are as follows:
Small business start-up – Loan taken from bank is the best source of finance that is available to small business firms while starting up the business. The advantage available in obtaining loan is that they can easily obtain loan from financial institution by fulfilling the required formalities (Brigham and Ehrhardt, 2011). The cost which is to be bear by the firm includes payment of interest over principle amount which has been taken.
At the initial stage, company have opted for bank loan to initiate their business from the primary level. When they were at the level of small business start up, company have raised amount through bank loans.
Large business expansions – For the purpose of expansion by large operating firm, the best source of raising capital is generating through share capital. Company has an advantage of their past business performance and goodwill. Hence, by disclosing their plan to public, companies could easily raise funds. They have to pay dividend to shareholders which will be treated as cost to company.
Considering the company which has adopted all the sources of finance in different phase of business, SONY could be considered. As they grew bigger, SONY became able to collect amount out of their own earnings. The amount accumulated through retained earning have been utilized for the purpose of large business expansion. Large business expansions – For the purpose of expansion by large operating firm, the best source of raising capital is generating through share capital. Company has an advantage of their past business performance and goodwill. Hence, by disclosing their plan to public, companies could easily raise funds. They have to pay dividend to shareholders which will be treated as cost to company.
Acquiring medium sized company – When there are plans to acquire some other firms, the ideal source of capital is retained earnings by individual person or organization (Broadbent and Cullen, 2012). Although, it might affect the profitability of every firm, but they will not get bounded under any kind of liabilities or debts.
They increased their scope of business and acquired a musical medium sized company and took them into their name. For the purpose of performing acquisition, SONY have generated revenue through share capital from public and increased their level of business.
Finance for business can be raised by many sources as discussed earlier in the report. Considering the different types of business such as new and old, large and small business entities for the purpose of new business set-up and expansions, the sources of finance available are internal and external sources. Internal sources includes retained earnings, personal savings, share capital, selling of assets etc (Ittelson, 2009). Retained earnings are the part of last year revenue which can be used for financing existing operations. Sale of assets is another option under which they can sell old assets or assets which are available in spare (Siano, Kitchen and Confetto, 2010). Personal savings and funds from friends & relatives can also be poured into the new business.
External sources of finance include debt, equity, bank loan, hire purchase etc. Debt financing is related with issue of debenture capital in the market and let general public to invest in business. It act as loan for the company. Equity financing is concerned with issue of equity and preference share (Sources of finance. 2012). Bank loan can also be adopted for funding at the confined rate of interest and after fulfillment of certain legal obligations. Hire purchasing is another good option under which company can acquire the necessary asset at a particular time by paying the price in installments.
Starting of a new business requires lot of research and development activities to be performed. It is also important to identify and evaluate the risk associated with every business decision. The factors which are to be taken into consideration includes sources of funds, resources, and location and legal aspects (Fridso and Alvarez, 2002). Financial planning helps in eliminating the uncertainties related with the business. It helps in estimating the needed funds and establishing the financial policies related with management of finances. It is needed to perform budgeting activities and then objectives, programs, policies, budgets etc are placed. Financial planning manages the cash outflow and cash inflow in order to achieve stability within the business (McMenamin, 2002). It can identify appropriate sources of finance needed and the ways to avail them. Company can effectively invest in profitable projects on the basis of use of investment appraisal methods. Planning can tell about the distribution of funds to all the resources within business.
Financial department of an company generates lot of information which is helpful in taking many decisions. Balance sheet, income statement and cash flow statement are the documents which renders lot of data. These documents generates data related to expenses, income, sales, costs, profits, dividend, assets, liabilities, capital etc (Neftci, 2004). These information can be very useful to many people such as:
The sales budget of Regal Construction Ltd is facing lots of issues as business is facing a negative variance of 8-10% every month. There are two types of variances positive and negative (Broadbent and Cullen, 2012). Positive variance is a good sign for the business while negative variance is unfavorable. Company has not taken into consideration the budgeted sales figure while preparing the cash flow forecasts. Accumulate deficit can be seen which shows that they have incurred extra expenses which are required to be minimized.
There can be several reasons for these variances in budget. Market is always surrounded with unpredictable shifts. Plans prepared for business may have reflected in contrast from which was estimated. Poor planning and estimations can also be the cause for it. Estimation of prices was not done correctly due to which sales aroused at different prices from what was planned (Brigham and Ehrhardt, 2011). Failure of business strategies can also be the cause for variances. Liquidity position of the company may be affected due to bad results in cash flow forecasts. Further there can be an impact on its operational affairs.
Company need to focus on effective sales strategies which can increase their sales. It also needs to follow an appropriate pricing strategy taking into consideration the prices from competitors. A suitable budgeting technique is to be applied suitable to their business operations. Further business can adopt an appropriate costing system. For company like Regal Construction Ltd, process costing system can be more suitable. Deficits can be improved by employing a skilled workforce, which has the potential to make hard efforts. All resources are to be utilized effectively avoiding any kind of wastage. Further there is a need to do correct estimation of expenses and income. For that purpose, analysis of marketing trends is very essential.
Variable cost per unit=50.50+30.75+10.25
Variable cost per unit=£ 91.5
Unit CM=200 – 91.5 = 108.5
Unit CM = 108.5
Contribution per unit = 108.5 / 200 = 0.54
Income statements – This statement records only profits and losses for the accounting period. The purpose is to identify what amount of net profit and gross profit is made by the business.
Balance sheet – This statement lists all the assets and liabilities within the company. The purpose is to display the liquidity position of the business.
Cash flow statement – This statement records the cash flow from three types of activities that is operating, financing and investing activities.
Sole proprietor – It is not essential for sole entrepreneur to prepare all the three financial statements as it depends on their willingness.
Partnership – In this business, owners have to prepare all the three statement. Along with that the partners are required to prepare individual capital account.
Company – It is mandatory for public limited firms to produce all the three statements.
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