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Unit 2: Managing Financial Resources & Decisions
TASK 1: EXPLORE THE SOURCES OF FINANCE AVAILABLE TO A BUSINESS
- Identify the sources of finance available to a business.
There are various sources of finance that is available to a business, and with each finance that is available they carry different benefits and costs. Therefore, the sources of finance that is available to Rituals Coffee House are Bank Loans, Personal Savings, Family and Friends, Commercial Banks (overdraft) and Venture Capital.
The type of finance that is used for the running of the business depends on the nature of the business. Larger organizations have a wider variety of finance sources than a smaller business enterprise. Savings is one way of that can be to fund the business. Another source of finance is through family and friends.
In an effort to gain extra finance, businesses take out loans from the bank or other financial institution. A loan is the sum of money that is issued to a person for a given period of time. Loan repayment is done with an interest rate.
Another way of raising short-term finance is through an overdraft facility with a bank. The borrower is given authorization to take out more from their account than they have put in. The bank fixes a maximum limit for the overdraft. Interest is charged on the overdraft daily.
Venture Capital is also another way to raise funds for a business. Merchant banks and investment specialists is willing to provide finance for a promising and fast-growing small business. This usually involves a package that is a mix of share and loan capital.
Once a business is in operation there are several ways to finance its expenditures. Equipment for the business can be leased rather than buying the equipment. This type of finance can save the business a lump sum of cash. Hire Purchase is another way of purchasing items of equipment. With a leased item you use and pay for the item but never own it. With the hire-purchase you put down a deposit on an item and then pay off the rest in installments. When the last installment has been paid you become the owner of the item.
- Assess the implications of the different sources.
Each type of financial source has a set of implication for example, when a person or a business borrow money from a bank, they will need to pay a certain amount of interest on the principle; as well as they will be penalized for late payments or other infractions of the written contract between lender and borrower. Applying for a bank loan whether for personal purposes or for business purposes it can be detrimental for that person because the business or person will then have to think about how to repay the loan.
The implication of using personal savings to fund a business is that the person runs the risk of losing all the money that was invested into the business. This can be a big problem not only for the owner but also for the business because the business would have to close down and make all its employees redundant and the owner will lose all the money that was invested and possible their house or cars or any other asset because they use these assets as collateral for the business.
The implication of using family and friends for business finance poses a negative effect on the business because it not only affects the business but also the relationship to which the loan was borrowed.
The implication of commercial banks (overdraft) is that if you borrow from a commercial institution, the lender may require you to use your property as collateral for the loan. If that loan is not repaid the lender can take the property and sell it to get back the money. If you pledge business property as security for the loan, and your business slows down or doesn’t take off and the business is unable to make loan payments, the business would start to lose all its valuable assets just when you need them the most.
The implication of using venture capital to source a business is a critical aspect for the business because it causes person to lose ownership of their business as well as autonomy. Autonomy meaning that the venture capitalists would be involved in the decision-making process of the business as well as the stipulations and restrictions for the management team, employee salary and other factors.
- Evaluate appropriate sources of finance for a business project.
Once a business is functional there are various ways to finance its expenditures. Rather than buying the equipment the business can rent it from a leasing company. This saves having to lay out sums of money and the business does not have to worry about having to carry out major repairs itself. Motor vehicles, machines and office equipment are often leased.
Hire Purchase is an alternative way of purchasing items of equipment. With a leased item you use and pay for the item but never own it. With hire-purchase you’re able to pay for the items by doing down payments and rest through instalments.
Another common way in which firms can finance their business in the short term is through trade credit. In business it is common practice to purchase items and pay for them later. The supplier will normally send the purchaser a statement at the end of each month saying how much is owed. The buyer is then given a period of time in which to pay
TASK 2: ANALYZE THE IMPLICATIONS OF FINANCE AS A RESOURCE WITHIN A BUSINESS
2.1 Analyse the cost of different sources of finance.
The financial planning section of the business plan involves estimating the business’s financial requirements, identifying potential sources and costs of finance and evaluating the advantage and disadvantage of each to determine the most suitable option to fund the business.
When estimating the business financial needs, it is important that you accurately identify and assess all the potential costs that the business will face. These costs will include:
- Start-up costs – the initial one-off outlays that occur when setting up a business, including expenses such as purchase of equipment, office set up, business registrations and shop fit-outs.
- Ongoing costs – the recurring costs required to run and maintain the business, including expenses such as wages, rent, electricity and advertising.
2.2 Explain the importance of finance planning.
A financial plan is an estimate of the total capital requirements of the company. It selects the most economical sources of finance. It also tells us how to use this finance profitably. Financial plan gives a total picture of the future financial activities of the company (Akrani, 2011). In conducting a finance plan it allows one to budget and mange their money whether personally or for business reasons.
Financial planning is what helps you to determine your short and long-term financial goals and how you can go about to create a balanced plan to achieving those goals. Therefore initiating a finance plan is important because it helps to manage income more efficiently, helps to increase ones cash flow and to monitor spending habits and expenses, to build a long term capital-base and shape your financial future, to provide for your family's financial security with proper coverage through right kind of policies, to maintain the standard of living and to save for a rainy day.
Income To manage income more efficiently will outline and show the best way possible in managing budgeting one’s income. Regardless of the amount of income earned, part of the earning will go for tax payment, expenditure and what's left would be the saving. Thus, proper management of income is necessary in increasing cash flow.
Cash flow This would help to increase cash flow and monitor one’s spending habits and expenses. Financial planning will help to determine what should be done to generate cash flow in order to make investing possible.
Capital To build a long term capital-base and shape your financial future. Once there is an increase in cash flow, it means an increase in capital base. This allows one to be able to venture into various portfolio investments.
Family Security To provide for your family's financial security with proper coverage through right kind of policies. How much income should one plan in needing for the family's financial security? In doing these projections, inflation effects must be considered too. This is where financial planning will help.
Standard of living To maintain your family's present standard of living by maximizing the household insurance portfolio. One can create a personal and family financial plan so that there are clearly defined goals or targets and there is enough savings to get there. For example, one can make sure that there is enough disability coverage to replace any lost income. This can ensure that the family remains financially secure if the head of the family or the bread winner dies. Thus, the family's standard of living doesn't suffer and is maintained.
Savings It used to be called saving for a rainy day. An emergency fund for example might be ideal. This saving is liquid meaning that it is very easy to convert the fund into cash. Savings bank or money market accounts are examples of investment with high liquidity. This way, a systematic and organized saving and investment plan can be provided for children's education and secure a comfortable retirement and on top of that, be ready for any unexpected occurrences.
2.3 Assess the information needs of different decision makers.
Decision is a choice made between alternative courses of action in a situation of uncertainty (WebFinance, Inc, 2014). Decision making is an important aspect for businesses because it helps individuals and businesses to identify and choose suitable options based on the principles and preferences of the decision maker. It allows business operations to run more efficiently when the right decision is made. Businesses are decision making units that comprises of a different decision makers like the owners, stakeholders, employees, customers and the government.
As a business enterprise there is always continuity when it comes on to making decisions for the business and these decisions can take place at all levels in a company. When conducting a business there are several decisions that a manager must perform to make an appropriate decision that would keep the business up and running. The owners make decisions regarding the direction the business will take, and have the last word on proposed changes to business procedures. They provide the resources that are required for the business to operate efficiently. These include the employment of workers, identifying suitable premise and procuring machinery, equipment and raw materials. They make timely decisions to ensure that the business remains profitable.
Employees are the person that is employed to carry out the assigned tasks for the business in an effort to achieving the company’s aims and objectives. Employees must work efficiently to accomplish tasks assigned. Accomplishing tasks may require teamwork and therefore employees must have good interpersonal skills. Employees must adhere to the rules and regulations of the company.
The customers are the ones who make the business. They are the supporters for the business. They purchase goods and services to satisfy their needs and wants. The customers assist businesses in indentifying the goods and services to be produced based on their demands. Their aim is to help the business to identify changing trends in the market and so prepare business operators for future demands.
The role of the government is to monitor and regulate business activity to ensure that the consumer is treated fairly
2.4 Explain the impact of finance on the financial statements.
Businesses regularly put out financial statements such as the income statement, balance sheet and statement of cash flows. When these financial statements are issued, they have negative impacts on the business as well as investors of the company. It is critical for the business to ensure that the information that is outlined in the statements is correct.
Impact on Stock Price
Financial statements can have a negative effect on the stock price of the company. Investors look at the financial statements when making investment decisions. A review of the financial statement for a company can make or break the company by outlining whether the stock price moves up or down. Investors often use financial ratios based on information from the financial statements to make assumptions. Because of this, the financial statements can have a drastic effect on the investors of a business.
Financial decisions can also have an impact on how easy it is for a business to get financing. If a company is trying to take out a business loan, the lender will typically want to look at the financial statements of that company. If the information on the financial statements is not flattering, it may negatively impact the ability of the company to borrow money.
In some cases, financial statements can affect other businesses. For example, a leading company in a particular industry releasing financial statements can influence that industry as a whole. Bad numbers by a leading company can sometimes lead to a negative outlook on other companies. This may drive down the stock prices on other companies in the same industry or sector of the market.
TASK 3: MAKE FINANCIAL DECISIONS BASED ON FINANCIAL INFORMATION
3.1 Analyse budgets and make appropriate decisions.
Cash Flow: Financial planning helps in increasing cash flow as well as monitor the spending pattern. The cash flow is increased by undertaking measures such as tax planning, prudent spending and careful budgeting.
Capital: A strong capital base can be built with the help of efficient financial planning. Thus, one can think about investments and thereby improve his financial position.
Income: It is possible to manage income effectively through planning. Managing income helps in segregating it into tax payments, other monthly expenditures and savings.
Family Security: Financial planning is necessary from the point of view of family security. The various policies available in the market serve the purpose of financially securing the family.
Investment: A proper financial plan that considers the income and expenditure of a person helps in choosing the right investment policy. It enables the person to reach the set goals.
3.2 Explain the calculation of unit costs and make pricing decisions using relevant information.
According to (WebFinance, Inc, 2014) unit cost is an expenditure incurred in producing one unit of a good or service, computed usually as average cost.
3.3 Assess the viability of a project using investment appraisal techniques.
TASK 4: EVALUATION OF THE FINANCIAL PERFORMANCES OF A BUSINESS
4.1 Discuss the main financial statement.
Financial statement is a collection of reports about an organization's financial results and condition (Bragg, 2014). A financial statement is a written report that outlines the financial strength, performance and liquidity of the company. The main aim of a financial statement is to provide information about the financial position, performance, and the position of the business. The financial statements of the business must be appropriate, understandable, reliable, and comparable. An understandable financial statement helps business stakeholders to get reasonable knowledge about the business and its economic activities.
Therefore the main types of financial statements are Statements of Financial Position (balance sheets), Income Statement, Cash Flow Statement as well as Statement of Retained Earnings.
Statement of Financial Position (Balance sheet)
This outlines the financial position of the business for a given time period. The balance sheet aspect of the financial statement for the business would include assets, liabilities and owners equity. Assets include current assets, such as cash and inventory, plus fixed assets, such as the plant and other property. Liabilities include short-term liabilities, including accounts payable and long-term liabilities, such as bonds.
The income statement is a report that outlines the business financial performance in terms of their net profit or loss over a given time period. The income statement for the company’s financial position would include its income and expenses that the business would have accumulated.
Cash Flow Statement
This is a financial report that describes the sources of the company's cash and how that cash was spent over a specified time period. These types of statement generally include the operating activities, the investing activities and the financial activities for the business.
Statement of Retained Earnings
This is the amount of net income that is left in the business after the distribution dividends or withdrawals by the owner.
4.2 Compare appropriate formats of financial statements for different types of business.
Financial statements can be done using many different formats. Whatever format that companies used then the results will be the same. There is no set format for the preparation of the income statement. The company selects a method of presenting its expenses by either function or nature; this can either be shown, on the face of the income statement, or in the notes. Different types of businesses use different formats. For example; a sole proprietor would prepare a simple profit and loss account compared to a public limited liability company which will have to prepare based on the financial standard. When financial statements are not prepared based on standards it is difficult to compare with other organizations. Some businesses prepare a single step income statement format where all expenses classified by function and are deducted from total income to give income before tax. The other is a multi step format where cost of sales is deducted from sales to show gross profit, and other income and expense are presented to give income before tax. The difference between these two formats is that the single format does not show the margins while the multi step format gives the margin by classifying what is direct cost and indirect cost. These classifications are important in making good financial decisions. The single step format leads to low quality accounting information. In a balance sheet some businesses match assets to equity and liabilities. Here equity and liabilities represent the amount invested in the form of owner’s investment plus borrowings from lenders and creditors. Assets refer to the amount of tangible and intangible properties belonging to the business. In most businesses the balance sheet is prepared matching assets less liabilities represent the owner’s equity.
4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.
Various sources of financing are available. Not every business can use all of the available financing choices. Choosing the right financing source is based on these vital points; business condition and the interest rate or the other cost of the finance. Some sources of finance are more flexible than the others, according to the business situation, while refunding risks should also be considered.
In conclusion it is important to understand the different sources of finance that is available to fund a start-up business. By understanding the implications of finance as a resource for a business and how to be able to make financial decisions based on financial information.