Managing Financial Resources and Decision - Assignment Example

Managing Financial Resources and Decision Table of Contents Task 4 Introduction 4 Long Term Sources 4 Medium Term Sources 5 Short Term Sources 6 Conclusion 7 Task 2 8 Introduction 8 Importance of Financial Planning for a Business 8 Impact of the Financial Source over the Travel and Tourism Industry 9 Conclusion 10 Task 3 11 Introduction 11 Budgeting and its Importance in SMEs 11 Use of Net Present Value Tool by Management 12 Conclusion 12 Task 4 13 Introduction 13 Profitability Ratios 13 Gross Profit Ratio 13 Operating Profit Ratio 14 Net Profit Ratio 14 Return on Equity 15 Liquidity Ratios 15 Current Ratio 15 Quick Ratio 16 Cash Ratio 16 Efficiency Ratio 16 Inventory Turnover 17 Total Assets Turnover 17 Accounts Payable Turnover 17 Conclusion 18 18 References 19 Task 1 Introduction A healthy flow of finance is quite important for any organisation, as the execution of business operations depends on resources. In this regard, businesses are required to obtain funds with the intention of meeting the finance requirements from short to long term basis. Additionally, businesses are needed to generate funds both internally as well as externally. Subsequently, financial sources are identified to be segregated in the three major heads such as long-term source, medium-term source and short-term source (OICV-IOSCO, 2014). Long Term Sources The long-term finance is a capital management process, which leads to steady financial inflow within a company. Long-term finance is a funding option, which has been obtained for a long-term basis. Long-term financing is a form of finance, which provides finance to a company with a time limit of more than one year. Long-term finance is primarily adopted by those entities that are facing a shortage of finance and they are unable to repay the amount within a short time limit. Several purposes of long-term financing policies are to fixed assets as well as generate the required fixed portion of the working capital (Group of Thirty, 2013). Long-term financing may require for the expansion of a new company. The increase in facilities and launching a product requires huge amount of long-term finance. As the expansion of the company as well as the increase in facilities requires long term investment, so these situation is considered to be a need for obtaining long-term funds within an organisation (Wesgro South Africa, 2015). The three long-term sources of finance are provided hereunder. Issues of Shares Ordinary shares of a company are identified as equity shares of a company, which are used for long-term financing. Equity shares or ordinary shares are considered to be a risk capital, as they are issued for managing financial risks (OICV-IOSCO, 2014). Venture Capital The venture capital is a one of the most important long-term source that has been used for financing business operations. In the business world, venture capital is becoming the most significant sources for all the developing companies. An entity providing support of venture capital to a company is recognised as venture capitalist. Venture capitalists are group of individuals making investment in a business sector for financing facilities within a company. However, venture capitalist is considered to be one of the most risky matters for which it has been refused by several commercial banks. Government Grants Government grant is considered to be one of the most important and secure funds for a company. Government grant has been provided to firm having financial shortage. Several companies are seeking for government loans, as these loans are provided with comparative lower rate of interests. Moreover, government finance is important for the growth of a company. Government finance is considered to be beneficial for a business to conduct operations with economic terms (Wesgro South Africa, 2015). Medium Term Sources Medium term source of finance is a type of funding available for medium term duration. Medium term finance is adopted during the expansion of a business. Enterprise finance guarantee, small business finance partnership and start-up loan as major source of short-term finance (Wesgro South Africa, 2015). The three key medium-term sources are provided hereunder. Preference Share Preference shares are having lower risk than ordinary shares. As preference shares are having lower risk, so the return from preference shares is also lower. Four types of preference shares are present within a company. Preference shares are four types such as cumulative, non-cumulative, participating and redeemable shares (OICV-IOSCO, 2014). Bank Loan & Mortgage Loan Bank loan is a one kind of financing processes that has been provided by the commercial banks to the companies in need of funds to conduct short-term operations. Mortgage Loan Mortgage loan is a loan that has been provided with an exchange of any product or asset. A bank provides loan to the customers by taking any assets as a mortgage. In case of bank loan, it is provided with an exchange of interest rate (Wesgro South Africa, 2015). Short Term Sources Short-term loan is provided with the validity of less than one year. Several sources of short-term loan facilities have been financed to the companies. Bank overdraft is one of the most popular and short-term loans that have been provided by a bank as high rate of interest. Several other sources of finance are also provided that include trade credit and invoice discounting (Wesgro South Africa, 2015). Conclusion By reviewing the study, it can be comprehended that the financial sources are essential resources of a company. Most of the companies are having several financial sources that they use in the business process very effectively. In this regard, companies have been planning to use their source of income very efficiently. Issue of shares are the main source of the capital of a company. Apart from this, convertible bond and trade credit are important financial sources. These are the various financial sources that the Financial Consulting firm should highlight to organisations in order to execute operations effectively. Task 2 Introduction As the economic wellbeing of the company is dependent on the financial structure of a company, so several companies consider financial structure planning for better-balanced performance of business operations. Financial structure is helpful in the formation of a company. In this regard, a company needs to hire professionals to prepare effective and proper financial report for a company. Financial planning will be helpful for the future operations of a company (Wesgro South Africa, 2015). The objective of the study is to describe about the importance of the financial planning within a company. Importance of Financial Planning for a Business Financial plan is one of the critical phases of a business process. The key success of a business depends on the effective financial planning. During the formation of a company, the management of a company should be more attentive towards applying for a loan. Out of all the financial statement, cash flow forecast is one of the most important parts for the future planning process (Small Business BC, 2002). Apart from this, balance sheet, income statement as well as cash flow forecast are considered reports for the preparation of financial statement. In addition, financial planning is also important for the within an organization (Small Business BC, 2005). With the application of an effective financial planning should be able to manage the income statement of a company. In this regard, a company will be able to manage tax liability as well as other monthly expenditures. The increase in cash flow will also increase the capital of a company. Cash management also plays an important role in managing revenues on a monthly and seasonal basis. To build-up a financial plan, a company should take the decision of managing all the revenues of a company. To minimize all the risk factors, a company needs to be focused towards the preparation of the financial statement. In this context, an effective financial plan will help a company to manage several expenditures appropriately (Alberta, n.d.). Impact of the Financial Source over the Travel and Tourism Industry The travel and tourism industry has been identified to be an important developing sector with better growth prospect globally. In this context, the industry is considered to be one of the appropriate sectors for maintaining the problem regarding financial planning. In this context, financial sources are considered as one of the vital factors for building the company’s financial structure. It has been also noted that the primary source of finance of the industry is issue of shares. The industry issues shares to the public as financial instrument in the stock exchange market. The industry issues convertible bonds in the stock market with the exchange of lower rate of interest. Besides that, the industry has the aim of maximizing the profits. In this regard, to maximize profit, the industry has taken the decision of raising sales and reputation globally for attracting global people (Wesgro South Africa, 2015). Being a service providing industry, it is having a concept of raising sales by promoting business through advertisement in the global market. In this regard, the industry is able to increase its revenue collection sources. For instance, the industry collects revenue from the travellers and tourists (Alberta, n.d.). Besides that, the industry collects revenue from the /promotion of different events that include social programs, sport events and cultural events among others. The industry is also identified to be important for generating revenue from hotel industry and transportation among others (Alberta, n.d.). Conclusion Based on the above discussion, it can be comprehended that companies consider financial planning as one of the key elements of the future growth. In this regard, the travel and tourism industry is ensure that the financial statements are prepared for having a better understanding about the funding requirements and sources, so that operations are performed successfully. The planning for the financial structure from the base level has been considered an indicator for the success of the industry. Task 3 Introduction In the present day challenging business environment, it is important that companies conduct their business efficiently in each of the business domain. The performance of any business in the present day scenario is not only dependent on the quality of the products and services delivered, but at the same time, it will also be based on the internal business operations. In this context, it can be depicted that financial performance as well as proper management of the same is an important part that management of business unit must need to focus in order to ensure a sustainable and competitive existence within the marketplace (Hope & Fraser, 2013) Budgeting and its Importance in SMEs Among the various factors involved in the management of financial accounting in any business, the role of budgeting is deemed to be quite vital. Budgeting is a particular process that involves planning the short and long term spending with regard to the operations of a business. It is regarded as a statistical or numerical representation of a particular plan of expenses for a particular period of time. Budgeting has its own significance in the business domain. It helps business units to predict the future financial activities of the business with regard to its expenditure in a more or less accurate manner. There are certain key objectives of the concept of budgeting in the present business environment. Budgeting is an important part of planning for any particular business unit. Companies often implement the tool of budgeting to identify the development of a business in the long run. Furthermore, the objective of the technique of budgeting also includes controlling the cost and expenditure of the company while conducting the operations of a business. The tool influences the managers within the workplace to manage the activities of a business in a manner that can control the cost of a business one way or the other. Budget has certain specific importance for small and medium business unit. With the use of budget in SMEs, companies are being able to limit their expenses and set a brief map for the financial operations of the same. In addition, when these business units are able to forecast their financial operations efficiently, their operations are impacted in a positive manner (OECD, 2010). These aspects further enhance the performance of the SMEs, which further ensures them a business position where they could be able to attract the attention of the inventors at large (Stonebow Media Ltd, 2015). Use of Net Present Value Tool by Management Net Present Value (NPV) is a particular tool that depicts the present value of cash inflows and outflows in any form of business. NPV is a particular tool used by companies for depicting the return on investment for any particular project. It is evident that in the present day uncertain business environment, it is quite challenging for business units to forecast the future trend of the market and likewise, devise the operations of their business accordingly. In addition, with the assistance of NPV, management of business units are availed with the opportunity to derive understanding about the present value of the capital invested in a particular project. Hence, with this particular tool, companies are able to decide their investment approach for any particular project appropriately. Conclusion From the overall understanding, it can be concluded that NPV and budgeting are among the key tools used by business units in the present day business context. Notably, these tools are considered effective in forecasting the future financial performances of business units. Task 4 Introduction British Airways is one of the notable names within the airline industry of the world. It is a UK based company, which operates in the global platform. The company has developed itself and its services in a rapid manner through enhancing efficacy of the business in a collective manner altogether. The operational hub of the company is in the Heathrow Airport of London, which is one of the biggest airports in Britain and the world (British Airways Plc, 2013; British Airways, 2009). In order to have a better understanding of the performance of the company, this particular study focuses on comprehending the financial operations of the company in the global business sector with the help of the evaluation of the financial data of the company for the year 2012-13. Some of the ratios that would be explored in this particular study include profitability, liquidity ratios and efficiency ratios among others. Profitability Ratios These ratios are aligned with the factors that influence the profitability of a particular business unit. It also includes the ratios that can be helpful in determining the ability of a company to generate profits within its operations. Some of the most widely used profitability ratios to conduct analysis of a business include gross profit margin ratio, operating profit ratio, net profit ratio and return on equity ratio among others. Gross Profit Ratio The gross profit ratio of the company i.e. British Airways for the year 2012 is provided hereunder. The above table depicts that the gross profit margin of the 1.26, which reveal to be positive. However, concerning the past year performance of the company where the figure was much higher than that this figure can be considered under the desired level of the company. Operating Profit Ratio The operating profit ratio of British Airways for the year 2012 is around 0.62. Though the figure is depicted as positive, the performance of the company in terms of operating profit could not be regarded as positive. This is because of the fact that the sales of the company have declined considerably in 2012 when compared to the preceding year. Net Profit Ratio It is quite evident that profit is one of the prominent aspects of any particular business irrespective of the domain they operate. In this regard, net profit ratio of the company is in the positive side. This only depicts that the company is on a profitable run though to a minimum extent. Return on Equity The return on equity (ROE) of the company is 2.74. It depicts the chances of having positive return for the shareholders from any particular business. It is quite positive considering the past performances of the company. Liquidity Ratios Liquidity ratios of the company depict the collective liability of a particular company in the market. This aspect also depicts the financial health of a particular company to a considerable extent. Some of the liquidity ratios of companies include current ratio, quick ratio and cash ratio among others. Current Ratio This particular aspect measures the ability of the company to pay back its short and long-term debt. The table provided below depicts that the current ratio of the company is 0.60, which though quite less can be a positive aspect for the business. This shows that the company would be able to payback its debts to a certain extent. Quick Ratio It primarily depicts the short-term liquidity of any particular business in a considerable manner. As per the table provided hereunder, the quick ratio of the company is around 0.22, which depicts a stabilised business performance in terms of liquidity. However, in the end, the company will need to enhance this particular aspect in a significant manner. Cash Ratio This particular ratio primarily depicts the cash flow of the company. It also determines the financial positioning of any particular business in terms of profitability, cash inflow and outflow among others. As per the table below, the cash flow ratio of British Airways in on a positive side, which depict that the business in terms of cash flow. Efficiency Ratio This particular set of ratio measures the manner or the extent to which a particular business has been able to manage its resources and assets in an effective manner. Some of the commonly used efficacy ratios include inventory turnover, total assets turnover and accounts payable turnover among others. Inventory Turnover It depicts the flow of stocks and inventories of business units. Inventory turnover of the company is 94.17, which is on the positive side and further be regarded as appreciative to an extent. This aspect also depicts the stability of the company. Total Assets Turnover Asset turnover is a particular indicator that depicts how efficiently a particular business is utilising its assets for attaining its goals and objectives. The asset turnover of the company is around 0.93, which depicts that British Airways been able to use its assets and other resources efficiently. Accounts Payable Turnover This particular ratio depicts the ability of a particular company to pay off its debt to the suppliers. For British Airways, the figure is positive owing to which it can be ascertained that the business is capable of paying off its debt in the long run. (Data Source: British Airways Plc, 2012) Conclusion From the overall study, it can be concluded that the financial performance of the company has been quite stable in the recent years, which has further developed a better reputation for the business at large. References Alberta, No Date. Tourism Funding Sources Guide. Tourism. [Online] Available at: http://tpr.alberta.ca/tourism/programs-and-services/investment/regional/pdf/FundingSourcesGuide.pdf [Accessed January 09, 2015]. British Airways, 2009. Matching Capacity to Demand. Annual Report and Accounts, pp.1-22. British Airways Plc, 2013. Annual Report and Accounts. British Airways, pp. 1-72. British Airways 2008. Annual Report and Accounts. 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[Online] Available at: http://thelincolnite.co.uk/2014/09/importance-budgeting-smes/ [Accessed January 09, 2015]. Wesgro South Africa, 2015. Sources of Finance. Investor Regulatory Guide, pp. 1-27. Read More