Managing Financial Resources and Decision - Assignment Example

registration number Managing Financial Resources and Decision of [Pick the Managing Financial Resourcesand Decision L01: Task 1 Funding a business necessitates a firm financial background due to the massive capital requirement needed to make a company successful. Sourcing typically can be drawn from either internal or external sources, though as argued by financial experts, external sources are the avenues to significant financial sources. External financing takes may take the form of short term, midterm or long term depending on the amount needed, the urgency, and the reason. Among the most common sources of finances, in the short run is trade credit. The credit is usually extended for the purpose of purchasing goods meant to be resold. Working on a buy now pay letter, the source of finance is typically lent to a firm for a specified length of time with the expectation of being paid for goods received. As a standard practice, the credit cycle of a trade credit generally runs for a period of 28 days. However, it is normal for businesses to default the payment for much longer periods. The default time grants the company time to deal with its finances, balance its cash flows as required. As a source of credit, trade credit is among the best ways in the financing of inventories, which according to scholarships, is the amount of time the vendor will grants before payment dues. The merit of trade credit is that it incurs zero transaction costs since it is mostly offered by vendors as an inducement to continue business relationships (Lawlor, 2011, p. 23) Given that it is normal for any business to hold an account with a banking institution, banks are aware that commercial entities do not always raise funds from sales instantly at the point of sale. Banks have this knowledge due the fact they handle all the deposits and withdrawals of the business. Bank overdrafts are facilities granted by banks to its customer, specifically those holding current accounts. The facility allows the client to overdraw their account to values greater than their bank balances. Advancing of the overdraft is dependent on other factors the creditworthiness of the client. The bank prescribes a limit to overdraw from the account enabling the business to meet its short financial obligations by writing cheques to the extent of the limit permitted (Lawlor, 2011, p. 23) Banks sometimes advance credit to businesses by discounting bills of exchange against documentation that details the information and the promise of the borrower. The business promises to pay back an agreed upon sum of money on a specified date. Upon the preparation of the documents before the bank for discounting, the bank then credits the agreed amount to the account of the business after reducing the discount. The value of the discount reduced equals to the amount of interest on the bill at that time (Lawlor, 2011, p. 23) Despite the ease in which short-term sources can be accessed, their short maturity may prompt firms to seek alternatives in the form of mid-term sources. Sometimes a business may wish to possess a given asset but financial constraints may hinder it from acquiring the asset. As a form of credit for the acquisition of assets, hire purchase serves as a good source of midterm credit. Hire purchase works under agreed terms in which the client agrees to pay for the asset over an agreed period. Typically, the customer is mandated to make an initial payment (deposit) which will be followed by subsequent equal monthly installments until the outstanding balance is settled. However, it is vital to note, until the settlement of the owed amount, the asset legally belongs to the owner. Despite being a common form of credit, its use is typically limited to the acquisition of machineries and freehold properties. As such, its use cannot be extended to the development of human resources (Chandra & Fealey, 2009, p. 70) When in need of a certain asset, rather than acquire it directly from the supplier, a business can make arrangements within another business to purchase it and subsequently leases to another business. Leasing comes in two forms; financing lease and he operating lease. For a business to acquire a leased asset, it must be stable. Debt factoring is service offered by financial institutions known as factor. Deb factoring usually involves the element being in charge of the firm’s debt collection. The financial institution besides being in charge of normal credit control, it may manage credit inquiry and provide security for approved credit sales. The factor sometimes goes ahead to offer advances to the business when it approves its trade receivables. The services, which the factor offers come at a cost and it, is usually 2% of the sales volume while the advance attracts interest similar to the bank overdraft (Chandra, A. & Fealey, T. 2009,p. 72) In the long run, the firm may need to raise resources that are admissible under the short term and long term schemes. As such, a firm may opt to go for long-term sources of finance. Businesses, which are listed in the stock exchange, can issue its shares either through initial public offer in the primary market or the secondary market. If a firm needs long-term source of funds, it can issue shares but up to a given Bank loans are the famous source of long-term finance for most business. Sometimes banks offer loans up to a period of 25 years. The loans usually attract higher interest expenses. The interest rates vary depending on inflation. As inflation rises, so does the bank do increase it to the borrowed loans. Before a bank issue loans, credit worthiness of the borrower is usually conducted to avoid the risk of defaulting. A source of financing that only accrues to a firm that already exists. Some companies have the ability of making enormous profits. Shareholders may decide to take these profits for personal use while others may decide to plow it back to the business. If a form is in its initial stage, more capital is required for its growth. The retained earning can be used to buy equipment, land, and property. LO2. Task 2 The impact the key sources have on the company’s financial statements (Income Statement and the Balance Sheet) In as much the sources of funding can help a firm during times of financial distress, of importance is to note that there are either costs or merits associated with every of the mentioned sources. In the short run, there are no costs related to having a trade credit granted to a firm. Since suppliers are in most instances in a similar position as the firm regarding cash flow, the purchase price from the suppliers is often than when paid in cash. In the case of a bank overdraft, regular bank statements in overdraft display the account to have a negative account balance. Nevertheless, protocol dictates that the over-drafted bank account should be entered as a negative asset on the balance sheet. Rather, it is accepted that the business offsets the balance with any other available cash. Since a bank overdraft similarly affects the income statement of a business, whereby banks charge the business fees for cashing the overdraft check. The business will thus incur the charges as expenses; the expenses have the impact of reducing the net income of the business. On the other hand, the amount of obligations due from discounting bills that are underwritten by an organization are conventionally disclosed in the company’s financial statement by way of a note despite the probability of a loss to the firm (Bennouna, Meredith, & Marchant, 2010, p. 234) As earlier provided, in the midterm, a business can opt for midterm financing given the nature of the investment at hand. Leasing enables a firm avoid expenses that tend to decrease its bottom line. For instance, assets with high probability of suffering from depreciation, leasing can significantly prevent the loss of value. Based on the business rule of thumb that dictates the lease of depreciating assets, through leasing a company can use a piece of equipment during its prime years. Since the lessor retains the ultimate ownership of a lease, no maintenance expenses are entered in the income statement. In the case of hire purchase, the transaction can be arranged with a final balloon payment at the culmination of the term. Because an upfront deposit is made to reduce the company’s rental commitment, the deposit is accounted for in the balance sheet ((Bennouna, Meredith, & Marchant, 2010, p. 236). In the case of debt factoring, despite being a form of account receivables, debt factoring is considered off balance sheet financing. Consequently, it is not entered in the balance sheet since as a contingent asset; its financing is secured from a source apart from lenders. In the long run, the financing sources discussed include bank loans, issuance of shares and retained earnings. A bank loan is represented as a liability on the balance sheet. A loan increases the appropriate asset account of the company and the loan account. Being a liability, its occurrence affects both the assets and liabilities portion of the total liabilities and equity. Importance Financial planning in any business Groppeli and Nikbath (2002, p. 319) define financial planning as the ways in which a venture calculates the level of necessary financing needed for the continuity of the activities of the company. As such, financial planning creates the way in which financial goals are met. Financial planning is vital for cash management. With the seasonality of revenue streams, a firm, goes through periods of plentiful and shortages. In drafting the financial plan, business takes the cycles into consideration and thereby maintaining a tight rein on expenditures especially on predicted low revenue times. Maintaining a financial plan structured to cushion the business against the financial shortages puts the business at an advantageous position. The cash cushion permits the business to take advantage of the opportunities that might crop up. It is easier to become focused in business on issues that need immediate attention. Nevertheless, for short-term oriented business, the management may not allocate adequate time for planning for the actions to be taken to expand the business in the long run. With its forward-looking focus, a financial plan grants the business a chance better to see the expenditures needed to be maintain the business on a growth giving it a competitive advantage. Thus, the financial plan acts as the blueprint for continued improvement in the company. For the success of a business, the conservation of financial records is important. The process of financial planning helps the business in differentiating vital expenditures that bring about immediate enhancements in productivity against those with long payback periods. Most corporations and business undergo this prioritization process, whereby they compare the costs to the yields of every prospective expenditure. During the inception of the enterprise, it is imperative for the management to work long hours while dealing with an array of challenges. Nonetheless, it can be cumbersome to differentiate between progress and mired mediocrity. The capacity to see the actual results hands the business much-needed motivation. The financial plan permits the owner a chance to see with greater clarity the growth path of the business L03: a. A budget shows the revenues and the operating cost of a business in a given period. The goals of a budget are for planning, coordination, resource allocation, performance review, communication, motivation, and control (Lazaridis, 2004, p. 428). SMEs use the budget to plan for the business. To plan primarily looks at the development and growth a firm. Managers are supposed to avail detailed plans to enable the strategic plan implementation. Annual budgets help managers to plan for future activities, revise the existing plans and respond to changes. Planning helps managers to anticipate problems before they occur (Lazaridis, 2004, p. 428) The budget requires participation of various departments in an organization. The accounting department, human resource department, the finance department and the procurement department need to be involved when making the budget. It is important that managers examine the relationship between the various departments that assist in decision-making and resolving problem. Managers have a role in understanding the requirements for ensuring budgetary compliance. The management uses the budget to communicate an organization corporate objective downwards and ensure that the employees understand them. The act of preparation, as well as the budget itself, will also improve communication (Cothran, 1993, p. 445). The budget can be a source of motivation to the management of an organization if it performs in line with the goals of the objectives. The budget, therefore, set the standards that managers may be motivated to achieve. The budget also motivates the subordinates in working towards given goals set (Cothran, 1993, p. 445). Managers also use the budget to control various operation in the firm. Through analyzing different variances, managers can identify those costs that do not conform to the long term plans hence they require alteration. The budget also forms the basis of controlling mechanism for the various resources of a business. In addition, the budget highlights different variances that are far from the expected and with the manager can take a measure to control them (Lazaridis, 2004, p. 430). A budget is used to evaluate the performance of a business. When an organization meets the set goals, aims, and objectives that had been previously set then, it is assessed as a performing one. In addition, the budget is used to judge employee performance using the variance from the budget. The budget is used in deciding where to allocate the various resources a company has such as fixed assets It is important for SMEs to come up with a budget as it helps in limiting the expenditure of the firm by limiting how much money is spent in a given activity. In limiting the amount of capital spent by a business requires the owners and managers to find new suppliers for acquiring inputs, saving money and meeting budget limits (Bennouna et.al, 2010, p.225). By adopting a budgeting system, it helps firms to have a financial roadmap for the business operations. Most business review past budgets to determine how well they followed the guidelines and why there were some budget variances. If the difference occurred due to unexpected growth in sales revenue, then the firm has to make adjustments to increase the budget amounts for future sales increase (Cothran, 1993, p. 445). Budgeting is paramount to a business as it is often used to plan the future growth and expansion. Budgeting for the future growth opportunities ensures that a firm has a capital on hand when in need to make quick decisions for business development (Bennouna et.al, 2010, p.236). A budget shows the revenues and the operating cost of a business in a given period. The goals of a budget are for planning, coordination, resource allocation, performance review, communication, motivation, and control (Lazaridis, 2004, p. 428) SMEs use the budget to plan for the business. To plan primarily looks at the development and growth a firm. Managers are supposed to avail detailed plans to enable the strategic plan implementation. Annual budgets help managers to plan for future activities, revise the existing plans and respond to changes. Planning helps managers to anticipate problems before they occur (Lazaridis, 2004, p. 428). The budget requires participation of various departments in an organization. The accounting department, human resource department, the finance department and the procurement department need to be involved when making the budget. It is important that managers examine the relationship between the various departments that assist in decision-making and resolving problems. Managers have a role in understanding the requirements for ensuring budgetary compliance. The management uses the budget to communicate an organization corporate objective downwards and ensure that the employees understand them. The act of preparation, as well as the budget itself, will also improve communication (Cothran, 1993, p. 445) The budget can be a source of motivation to the management of an organization if it performs in line with the goals of the objectives. The budget, therefore, set the standards that managers may be motivated to achieve. The budget also motivates the subordinates in working towards given goals set (Cothran, 1993, p. 445).Managers also use the budget to control various operation in the firm. Through analyzing different variances, managers can identify those costs that do not conform to the long term plans hence they require alteration. The budget also forms the basis of controlling mechanism for the various resources of a business. In addition, the budget highlights different variances that are far from the expected and with that the manager can take a measure to control them (Lazaridis, 2004, p. 430). A budget is used to evaluate the performance of a business. When an organization meets the set goals, aims, and objectives that had been previously set then, it is assessed as a performing one. In addition, the budget is used to judge employee performance using the variance from the budget. The budget is used in deciding where to allocate the various resources a company has such as fixed assets b. Net present value (NPV) of an investment is the difference between the sum of the expected cash flow and the initial outlay of the project (Orsag, 2013, p.71). NPV is a capital budgeting technique that aims at increasing the shareholders wealth (Steinberg, 1997, p.28). It is used to predict the amount by which the sum of the expected cash flows exceeds the project cost in current value terms. NPV is one of the discounting techniques in capital budgeting as it considers the element of time which is imperative (Orsag, 2013, p.72). Managers, to settle on when it comes to venture decisions, use NPV. NPV decisions are made depending when NPV is a positive one, negative or equals to zero. NPV, which has a positive value, shows that the project will be making a profit. A project with a negative NPV will lead to losses hence decline in shareholders wealth. Projects with NPV equivalent to zero will mean that the management will be unsympathetic between accommodating and rejecting the project. Projects with positive NPV should be chosen while those having negative NPV should be dismissed. Independent projects are those projects that their cash flows are independent (Sun, 2002, p. 532).Managers will accept independent projects if they have NPV greater than zero. In mutually exclusive projects, by taking one venture by design precludes the other. Manager will only choose a plan that has a higher NPV than the other (Sun, 2002, p. 532). L4: Task 4: Financial analysis is applied to the measurement of the financial health and stability of a firm. In the analysis of an organization from the point of view of an investor, piotroski’s contribution to the subject is great. Piotroski argues that a firm, which gains 5 points out of the 9-analysis ratio, makes it a more profitable venture (Korb, 2010,p. 16) Among the most important measures of profitability for a company is the company’s gross profit margin and operating profit margin. BA’s gross profit margin averaged 15.17 percent for the year ending June 2013. The results show that the company’s ability to retain each dollar of sales is at 15.15 percent. As such, the company is left with sufficient funds to cater for expenses and net profit. The measure of liquidity evaluates the ability of BA to meets its prevailing obligation as depicted by the company’s current ratio and quick ratio. BA’s current ratio remained at 0.48 these results according to Korb ( 2010) indicate an efficiently managed company that follows recent trends of corporations that are shifting to streamlining their operations by cutting down CRs to the 1.0-1.5 range or even lower and corresponding cuts in LR. Such activities are undertaken by introducing reductions in the company’s cash investment, account receivables and inventories. As an extension, BA’s current ratio shows that the company’s current liabilities are accounted 0.439 times by the current assets. In addition, the QR of 0.4169 implies that the current liabilities are covered 0.4169, handing them a conservative assessment of the billing capacity of the company (Capstone 2013) Efficiency ratios are mostly focused on the relationship between asset levels and turnover. Key to the component to the measure of efficiency is the inventory turnover ratio. The ratio monitors every time BA’s inventories are sold and restocked. For the year ending 2013, BA’s inventory turnover stood at 0.654 times. It is argued the effectiveness of the ratio is attained when a correlation exists between the acquired. The company’s fixed asset ratio stood at .097 indicating that the company’s ability to return on the fixed assets is at 97 percent. References Bennouna, K., Meredith, G.G. & Marchant, T. 2010, "Improved capital budgeting decision making: evidence from Canada",Management Decision, vol. 48, no. 2, pp. 225-247. Chandra, A. & Fealey, T. 2009, "BUSINESS INCUBATION IN THE UNITED STATES, CHINA AND BRAZIL: A COMPARISON OF ROLE OF GOVERNMENT, INCUBATOR FUNDING AND FINANCIAL SERVICES", International Journal of Entrepreneurship, vol. 13, pp. 67-86. Cothran, D.A. 1993, "Entrepreneurial budgeting: An emerging reform?", Public administration review, vol. 53, no. 5, pp. 445. Korb, B.R. 2010, "Financial Planners: Educating Widows in Personal Financial Planning", Journal of Financial Counseling and Planning, vol. 21, no. 2, pp. 3-15,83. Lawlor, S.F. 2011, "Funding a New Business with Your 401(k)", Business NH Magazine, vol. 28, no. 10, pp. 23. Lazaridis, I.T. 2004, "Capital Budgeting Practices: A Survey in the Firms in Cyprus", Journal of Small Business Management, vol. 42, no. 4, pp. 427-433. Orsag, S. & McClure, K.G. 2013, "MODIFIED NET PRESENT VALUE AS A USEFUL TOOL FOR SYNERGY VALUATION IN BUSINESS COMBINATIONS", UTMS Journal of Economics, vol. 4, no. 2, pp. 71-77. Steinberg, S.M. 1997, "What is the net present value of your agency to the principal?", Agency Sales, vol. 27, no. 2, pp. 28-31. Sun, D. & Queyranne, M. 2002, "Production and inventory model using net present value", Operations research, vol. 50, no. 3, pp. 528-537. Appendices Ratio Formula Calculation Value Cash ratio 0.437 Quick ratio 0.419 Gross profit margin 0.1516 Inventory turnover 0.97 Read More