Managing Financial Resources and Decisions - Case Study Example

Managing Financial Resources and Decisions Managing Financial Resources and Decisions Introduction TESCO as a company that has been in business for a longer period has experienced a number of challenges that have shaped it business management abilities. The company has developed better financial resource allocation measures through which it has managed to run successfully its business. The different aspects of this paper develops in report form a number of aspects ranging from the different sources of funding that the company has employed in the management of its operations as in the first report task one to the analysis of a given budget period for the company as per assignment two. The discussion of the main financial documents and their contents follows as in task three. These all aim at explaining the management of the financial resources and decisions of the company in relation to how the company handles these and make better decisions with regard to the management of their financial resource. The management of any business and the results of their financial relations require a critical consideration of the financial statements and their analysis for better understanding of the financial needs and the drive of the resource in an organization. Many companies that have succeeded in having positive results have employed an understanding of the different financial sources and the costs to ensure that they obtain the best out of their investments. Conducting research into the different financial sources available for use provides the companies with better positions aim at making decisions on the sources of finance to consider. Understanding the different sources of finance will lead to better decisions on budgeting and a better understanding of the different financial statements and their implications to the company. Task One Introduction Task 1 focuses on the different financial sources that TESCO has employed in their business. It discusses external and internal sources of finance separately making it easier to understand the shape of the financial platform of TESCO. It also covers both positive and negative aspects of the sources of finance. It further considers a project with the appropriate sources of finance that will support it. Through these, an understanding of the different sources of finance and their effects to a business becomes easy aiding in the business management aspects. Sources of Finance used The sources of finance used in any company are provided in two folds. That is the internal sources and the external sources. The internal sources of financing relate to the different forces within the organization that provide funds for running the operations of the business. These ranges from profits made by the company during the financial year that are invested back into the business to cash freed from assets that the company does not need anymore or use. These boost the cash abilities of the company making it operate smoothly. The external sources of financing include sources of financing that provide from outside the company. These include banks and creditors. They are normally divided into short-term sources and long-term sources. The short-term sources refer to those that require settling within a period of less than a year while those that go beyond reflect long-term sources of financing (BBC, 2014). Another source of financing for companies is the prepayments made by customers. Understanding these two forms of financing enable one understand the forms of financing employed by TESCO to finance its activities. Types of finance sources used by TESCO A keen look at the balance sheet of a company reveals the different sources of funding used by the company. The company applies both internal and external sources of funding to fund its activities. The company through its profits provides for internal funding of its activities. Short-term investments also provide funding to a business and ensure that the business obtains ample funding for its activities. The external forms of funding available for the company weighs most with creditors, bank loans and share values as source of funding. All these provide the company the finance needs to help it run its operations. The major source of capital that the company starts up with normally the equity aspect is also considered in treatment of capital. These related with the assets that the company has the debtors and other forms of items that provide cash to company hold cash for the business. Considering the balance sheet of the TESCO, one sees these identified as the source of financing. Considering the different shareholders and their shares in the company also associates the financing of the business. Shareholders are another resource of funding through encouraging the purchase of shares. Shareholders buy shares of the company with the aim of owning a stake in the company. These shares normally sold to them at a price that ensures an inflow of cash to the company allows it to provide for its financing needs. Assessment of the positive and negative effects of the form of financing used by a business As identified above, a number of capital sources appear that TESCO uses to finance its activities. These provide the company with the following advantages and disadvantages. Internal sources of financing that uses profits enables the company to benefit from their profits to run their activities hence providing a cheaper source of financing. Profits result from the activities of the business and using them to grow the business is the ideal source of funding that the business may rely on. The disadvantage with these is the fact that it is always a small fraction of the capital of the business and therefore cannot cover major investment plans that a company may choose to engage in. Short-term investment aspects produce returns that the company may use to run its activities as a form of financing. This provides the company with a cheap source of funding since it has no interest attached to it and does not affect the company ownership like many sources of external nature. The disadvantage with this means also is that it does not provide ample funds for investment into huge capital needs of the business hence making it less reliable in such situations. Considering the external sources, one realizes that many of them share a cost aspect to the business. Considering sources such as the bank loans that offer long-term and short-term effects to the business, an interest aspect is associated with them. The bank charges interest as a form of security for future values of money that they lend to businesses and this interest affect the business. The interest charge is supposed to be paid by the company and therefore if the company uses the money to invest in aspects that produce less than the interest, they will have to use part of their profits in paying back the interest and the principle that affects the business. Bank loans also normally have specific conditions and timelines that may affect the business. They may impose a restrictive effect to the business’s operations in quest to settle the loan first whose effect could include more interest if not settled on time. They also put the businesses assets at risk in case the business fails to clear the amount, it risks losing its assets. On the other hand, the advantages with bank loans are that they provide a large sum of money for funding the business making them more efficient in sourcing. Raising funds through dispersion of shares to different interested buyers puts the business in a position of having many owners that share in the profits. This makes the business profits diluted with many owners sharing them affecting the original owners of the business. The advantage with this is that it may have fewer costs associated with it especially for the case of preferential shares. Companies use them for mostly and control the distribution of ordinary shares, which do not attract interest in many cases but offers many controlling abilities to the buyer into the company. Financial Planning Financial planning refers to the development of plans that pertain to financial aspects of the business to help control the effects of finances and their application to businesses. Financial planning may involve development of plans for the future finance needs of the business and covering all the different aspects that may affect finances of a company. The financial plans normally reflect in form of budgets that indicate the type of item the company intends to spend on and the amount of money it intends to spend on it. They help the company provide their finances well and achieve their goals overtime. Importance of financial planning Financial planning plays a vital role in businesses that ensures the business performs controlled activities. Financial planning provides the business with abilities to control the finances and ensure proper allocation of each (Moyer, McGuigan & Kretlow, 2008, p.103). The business may have many items that require funding but through financial planning, management of the businesses is possible and they all help it achieve the set objectives overtime. Financial planning provides the business with control over the activities and the distribution of resources of financial nature. The business is in position to operate their financial accountability aspects more easily when financial planning is employed. Undertaking Financial Planning The development of financial plans follows the development of the strategic or operational plans of the business. The financial planning aspect relates to giving the operational and strategic plans the financial sense. Financial planning develops budgets for the different activities and ensures that the scarce financial resources are employed effectively in managing the business. The process of financial planning yields budgets, which are used to monitor the spending in each aspect of the operational and strategic plans of the company. The budgets resulting from these provide support to both the internal and external decision makers in an organization. The financial needs of the internal decision makers include information on the budgets, the resulting financial reports and the different transactions that the company produces as a result of its daily transactions. Internal decision makers include the management from the line managers to the top management. The external decision makers include the government with regard to taxations, the courts when handling a court aspect that may result into decisions with regard to financial implications. External auditors too need to use this information in developing audit reports for the company that reflects an opinion on the financial aspects of the company. Effects of the sources of finances to the financial statements The different sources of finance that a company uses have different implications to the financial statements. The financial statements ranging from the income statements, the balance sheets and the cash flows all suffer some effects and are influenced by the different sources of financing. The profits of a business result in the income statements and their positivity or negativity affects the capital aspect of the balance sheet. The balance sheet either reflects an increase in capital through the different aspects of retained earnings or shows a capital dent to cover losses. Long term funding appears in the noncurrent liabilities part indicating an increase in the liabilities in the balance sheet. The interest charged on such forms of funding reflects in the income statements for each period charged. The cash flow statements also develop based on the retained earnings of the company. Task Two Analysis of a suitable budget period Considering the level of activity of the business, a suitable budget period would cover a period of one year. Budgeting for a year will allow for easy adjustments during financial year. Considering a full year will allow for the follow up of the events in the budget in relation to the accounting year under consideration. Considering a year will make it easy to track performance of the business. The year’s budget is then broken down into small units that form the constituent parts of the major budget. These allow for the management of the budget and ensuring that the company runs its activities smoothly. The consideration of these will help in managing the financial behavior of workers and a constant review of financial aspects to identify any deviations from the financial plans that the company has developed. The action to take in such incidences is to ensure that the budget is monitored on a regular basis. Analysis of the actions of the company on a monthly basis reveals the different budget aspects and helps in solving them overtime. Consideration of unit costs and selling price decisions Unit costs and selling prices of an item help in the determination of the profits that each project produces. The unit cost refers to the costs incurred in production of one unit of an item this involves both fixed costs and variable costs of the project. The selling price is the cost of the product with a profit margin involved in the product. The selling price determines the price of the market and makes the product viable. Unit costs help in determining the breakeven point of a project. Investment Appraisal Techniques The different investment appraisal techniques aim at discovering the productivity of a project. They aim at reflecting to the company the level of business that each project will engage based on the costs incurred in starting it and the costs of running it related with the returns from the business. The investment appraisal techniques provide for the identification of the period that the project will take to produce returns for the investors and majorly consider the time value for money aspect. These guides in the making of capital budgeting decisions that influence a company’s development and hence providing proper effective evaluation measures for business investments that require huge capital investments. The different investment appraisal techniques include the payback period, the Net Present Value (NPV), Internal Rate if Return and the Accounting Rate of Return (Rohrich, 2007, p.3). All these are applied in the investment appraisal process and influence the decision of a company. The NPV is the major item in the determination of the investment appraisal of a project. It is considered among the most accurate evaluation techniques. The NPV applies the value for money aspect and is used to determine the actual present values of all the cash flows less the initial outlay. The fact that the technique employs the time value for money aspect makes it reliable and accurate in determining the viability of a project. The more positive the NPV the more viable a project is for investment. The payback period PBP aims at determining the period after which the project will have recovered the initial cash outlay invested in. This means considers projects that pay within a shorter time as more viable. The internal rate of return considers the point at which the NPV of a project is equal to zero. It helps in identifying how the project will produce returns based on its internal abilities and the profits as per the projects returns. The accounting rate of return is not a much effective means compared to the rest since it does not consider the time value for money aspect making it less reliable. Task Three Financial Statements Discussing the main financial statements reveals a number of aspects that range from the different contents and their effects to the business. The following task relates to these and describes them in details. The Main Financial Statements There are majorly three two financial statements that each company develops and these are the income statement and the balance sheet. Other financial statements include the cash flow statement that indicates the flow of cash within an organization in relation to a given financial year. The contents of the two major statements reflect the business in many ways with the income statement also known as the profit and loss statement indicating the sales of the company generating to the gross profits after application of the cost of sales. The gross profit then has the expenses reduced to leave behind the net profit of the organization. The purpose of the income statement therefore is to determine the actual income that the company makes during a financial year. These reflect the actual income even after taxation and payment of interest charged on loans. The balance sheet is the most comprehensive statement of finance that serves to indicate the financial position of the business. It reflects the different assets that the business has and their liabilities. The balance sheet also reflects the different abilities of the business through the use of its contents one can understand the future profitability of the business, they strength of their working capital, the current rations, acid ratios and other ratio considerations that aid in understanding the position of the company. The financial statement reflects the assets that the business has current and noncurrent, the liabilities both current and noncurrent, the capital aspects and the other aspects that reflect the share aspects of the company. Comparing the two financial statements one realizes the difference in formats with the income statement covering aspects that reflect things handled within a single financial year that reflect only revenue aspects while the balance sheet handles capital aspects of the company (Crundwell, 2008, p.71). Financial Statements for different organizational types There exist different types of organizations that range from nonprofit organizations to profit making organizations. The nonprofit organizations differ in their preparation of financial statement from those prepared by profit making organizations. The nonprofit organizations prepare statements that indicate incomes and expenditures while the profit making organizations make the income statement that reflects the profits made by the organization. The incomes and expenditures reflect the incomes that the organization received compared to the expenditures to identify the deficit or surplus. Comparing the balance sheet of the two, both the companies reflect nearly the same document though serving the same purpose but for nonprofit making organizations, their capital is referred to as accumulated fund while that of the profit making organizations remain capital. The sources of funding and the objectives of the two businesses reflect the difference that identifies one as an organization formed for the sole purpose of obtaining profits from engagement of different business aspects while the nonprofit organizations aim at provision of a given service to a given class of people. The management of these different sets of financial statements requires knowledge in both for easy and proper management. The other difference between the financial statements is the difference between the trading companies and the manufacturing companies. Manufacturer’s accounts differ from those of the companies trading items but all reflect the same balance sheet. The difference is in the income statement that reflects the manufacturing process in manufacturing accounts. These cater for all cost aspects first before using them into the income statement. These all serve the same function of determining the incomes in net terms of the companies be they manufacturing or service oriented. They aid in the development of targets and interpretation of the financial positions of the business, which all prove vital in the determination of the business’s status and ability to survive for longer. They also determine the ability of the business to cater for its debts and remain operational and the ability to sustain its operations throughout a fiscal year. Analysis of three financial years of TESCO The fiscal years under review for the financial analysis of the company are 2013, 2012, 2011. The different ratios for comparison will be the return on assets, return on equity, current ratios, debt asset ratios, total asset turnover, fixed assets turnover. These are based on the yahoo figures deduced for the years as provided in yahoo financials (TESCO Corporation, November 2014). Ratios considered Formula 2013 2012 2011 Return on Assets ROA=Net Sales/Total Assets 525253/637679=0.82 553139/583772=0.95 512969/549215=0.934 Return on Equity ROE=Net Sales/Shareholder’s Equity 525253/35501=14.70 553139/35501=15.58 512969/35501=14.45 Current ratio Current ratio= current assets/current liabilities 381438/110985=3.44 322877/103219=3.13 293804/125668=2.34 Debt Ratio Debt Ratio=Total Debt/Total Asset 412/637679=0.00065 261/583772=0.00044 6625/549215=0.0121 Fixed Asset Turnover Fixed Asset Turnover=Sales/Fixed Assets 525253/256241=2.05 553139/260895=2.12 512969/255411=2.00 Analyzing the details as above, one realizes that the company obtained better results in 2012. The company had a better return on asset rate with a better Return on Equity rate too. The fixed asset turnover rate was also reasonable compared to 2013 and 2011. References BBC, 2014. Business Studies: Sources of Finance. Retrieved from http://www.bbc.co.uk/schools/gcsebitesize/business/finance/sourcesoffinancerev2.shtml Crundwell, F. 2008. Finance for Engineers: Evaluation and Funding of Capital Projects. Springer. Moyer, C. R., McGuigan, J. & Kretlow, W. 2008. Contemporary Financial Management. Cengage Learning. Rohrich, M. 2007. Fundamentals of investment Appraisal: An Illustration Based on a Case Study. Oldenbourg Verlag. TESCO Corporation, November 2014. Balance Sheet. Retrieved from http://finance.yahoo.com/q/bs?s=TESO+Balance+Sheet&annual Read More