The Role of Financial Resources

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BUSINESS RESOURCES

THE ROLE OF FINANCIAL RESOURCES



All businesses money is essential so as to operate properly. Finance can be defined as dealing and controlling large amount of money. Sources of finance means where the money can be obtain. There are external and internal sources in a business.

Internal source can be found inside the business. Internal are mostly used because it’s cheaper and easier to arrange. The internal sources of Al Shams engineering company can be personal savings and from owner’s investment. Mostly used by sole traders and partnerships. Owners of engineering company may use the money as capital and invest in the business. Saving is a good method because interest does not need to be paid to someone else the money is being used and the will be always be controlled by the owner. Owner’s investment the money comes from owner’s saving. Engineering company can own their own money before starting the business and when it gets to be known can be put in profit in business and bring improvements on products and facilities provided. Therefore owner’s investment is important before starting a business.

External source is from outside business. External sources of engineering company are banks and friends & family. Banks can help the company to establish a credit record. Good credit record gives an opportunity to qualify for a loan and receive better interest rate on a loan. Engineering company will pay less money for the amount it has borrowed. Moreover banks accounts enable engineering company to use credit cards to pay bills through online or phones. Family and friends will help engineering company not to be charged interest and also they can longer period repayment. Family and friends are flexible. Furthermore no needs of security or less security compare to banks.

In conclusion the above are external and internal sources of finance and can be used in Al Shams Engineering SAOG (SE) in operating its business. It is recommended the company to use the sources in conducting its business.

Task 3

  1. Current ratio =

Year

Current assets

Current liabilities

Current assets/Current liabilities

Approximation

2013

30,982,609

26,070,375

1.884220691

1.2

2012

26,351,617

20,865,355

1.2629364322

1.3

2011

26,228,039

19,930,336

1.3159857917

1.3

  1. Acidic ratio =

Year

Current assets

Inventory

Current liabilities

Current assets-Inventory/Current liabilities

Approximation

2013

30,982,607

3,721,307

26,070,375

1.0456811611

1

2012

26,351,617

3,964,155

20,865,355

1.0729490105

1

2011

26,228,039

18,762,703

19,930,336

0.3745715075

0.4

  1. Gross profit percentage = Gross margin =

Year

Gross income/Sales

Gross profit margin x 100%

Approximation

2013

0.1316889598

13.1688959757

13.2%

2012

0.1555339807

15.5533980693

15.6%

2011

0.1407998743

14.0799874272

14.1%

  1. Net income profit = Net profit margin =

Year

Net income/Sales

Net profit margin x 100%

Approximation

2013

0.0048215139

0.4821513893

0.5%

2012

0.0096802026

0.9680202597

1%

2011

0.0100824283

1.0082428254

1%

  1. Return on capital employed =

Year

Profit for the year before taxation + Interest = Operating profit

Operating profit/Total capital

Approximation

2013

3,266,572

0.2771121286

0.3

2012

3,616,387

0.3360555679

0.3

2011

3722715

0.4330501289

0.4

  1. Stock turnover =

Year

Cost of goods

Inventory

Cost of goods/Inventory

Approximation

2013

-39,101,168

3,721,367

-10.5073749626

-10.5

2012

-29,734,265

3,964,155

-7.5007826384

-7.5

2011

-38,641,059

18,762,70

-2.0594612088

-2.1

  1. Debtors collection=

=

Year

Sales

Debtors(account receivable

Sales/Debtors(account receivable)

Number of days of the year

Debtors collection

Number of days of the year/Debtors collection

Days

2013

4502931292

967404

46.5485898342

365

46.5

7.8494623656

8

2012

4502931292

-

-

-

-

-

-

2011

4502931292

-

-

-

-

-

-

  1. Assets turnover =

Year

Sales

Total assets

Sale/Total assets

Approximation

2013

45,031,292

45,055,891

0.9994540337

1

2012

35,210,730

38,024,981

0.9259894173

1

2011

44,973,293

34,807,029

1.2920750289

1.3

B and C

  1. Current ratio

From 2011 to 2013 the current ratio of engineering company is not good. But it shows that the current assets are high than current liabilities which means the company is able to pay their own loans. Current ratio can be improved by;

  • Sweep banks account
  • Sell – off unproductive assets
  • Improve current assets by raising shareholder’s funds
  • Quick conversation cycle of Debtors or account receivable
  • Pay off current liabilities

(2)Acidic ratio

“In finance, theAcid-test or quickratioor liquidratiomeasures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values” (Google, 2014). In Al shams engineering company for all years the current ratio is not good. It means that the company cannot pay current liabilities. Moreover it shows that if the company has short term assets to cover first liabilities. When it happens acid test ratio is lower than capital liabilities it means that current assets are depending on inventory. The most easy way to improve current ratio is pay off the current liabilities at the same time to increase sales in order to increase cash in hand. Other ways can be used to improve current ratio are;

  • Sweep accounts
  • Drawings
  • Paying off current liabilities
  • Improving collection period
  1. Gross profit percentage

This is a result which shows how much profit the business got after costs like labour and electricity have been paid. In 2011 the profit was 14.1%, 2012 profit was 15.6% and 2013 profit was 13.2%.This shows that the past few years before 2013 the company started to fall and it might face many problems. Therefore the engineering company should increase sales without increasing cost of goods.

  1. Net profit percentage

From 2011 to 2013 the net profit is not good. In 2013 was worse than other years. From each sale produce not more than 1%. This is not good for engineering company and the business should decrease its expenses after realizing the cause of falling whether if it is relates with cost of goods, expenses or sales all affects the net profit. The following are the improvements which can be made in net profit percentage;

  • Reduce cost of goods sold
  • Increase sales revenues
  • Reduce labours and operation costs
  • Audit utilities and insurance
  1. Return on capital employed

It is a financial ratio which expresses the measurement of company’s profitability and efficiency with which its capital is employed. Engineering company shows that the return on capital is not good for all years. Return on capital can be improved by;

  • Increasing operating profit without increasing same as capital employed
  • The capital employed should be reduced and preserve operating profit.
  1. Stock turnover

The amount of products of a company sells during a specific period and contrast with the average value of that products it has obtainable for sale during that period. The stock turnover of engineering company is negative it means have loss. In 2013 the company experienced more loss than 2011 and 2012 about -10.5. In 2011 the company was doing better. The following are the ways to improve stock turnover in engineering company includes;

  • Establish new strategies to decrease stock holdings
  • Selling off or getting rid of slow moving stocks
  • Updating the product so as to decrease stock requirements
  1. Debtor’s collection

The action of making people or business to pay their debts, normally focus on people who took too long to pay or refused to pay. In engineering company has few days in 2013 which is 8 days only and rest have no day’s means the company have no a lot of debts. Debtor’s collection can be improved by reducing unnecessary taxes.

  1. Assets turnover

The ratio shows the efficiency in which a company is positioning its assets. When the ratio is higher it is favourable and when it is lower it means the company is not doing well facing many problems. In Al shams engineering company shows the ratio is 1 which means the net sales of the company is equal to the total average assets of the whole year. These results are not good. The following are the ways to improve assets turnover includes;

  • Increase revenue
  • Accelerate accounts receivable
  • Better inventory management
  • Leasing
  • Liquidate assets

Task 2

Trading, profit and loss account

Calculates the amount of profit obtained in purchasing and selling of goods in a specific period. The following are the elements of Al shams engineering company found in Trading, profit and loss account and its purposes includes;

Gross profit the profit gained by selling and buying of goods of engineering company. If the business obtained more income through other trading it could be added to gross profit. Example the business was able to rent a space in a building the rent received will be added in gross profit.

General and administration expenses usually the expenses of Al shams engineering which are are connected with operating business such as wages, insurances, rent and other.

Income tax expense normally is connected with the net income reported on engineering company income statement. Example the engineering company is usually is using straight line depreciation on income statement nevertheless will use accelerated income deprecation on its income tax return.

Balance sheet

“A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders” (Google, Investopedia, 2014). The following are the elements of Balance sheet and its purposes include;

Long – term liabilities is the amount of money owned by engineering company which will be repaid for a long period of time.

Current liabilities the amount of money owned by engineering company which required to be repaid within the year.

Assets are resources owned by engineering company. The purposes of assets are for production and services. Assets can be fixed or variable.

Task 4

  1. Cost of engineering company budget most rely on monitoring investments and projects plans. Fixed costs are costs which do not change with output and variable costs are costs which change with output. The following are the budget problems and solutions includes;

Variables Expenses

Among the problems occurs in budgeting that people faces when dealing with expenses. Bills changes from month to month makes hard to estimate. It happens when it needs you to estimate the expense until you know how much will be. Solution of variable expenses is to fix all the expenses to set specific amount for each expense in budget.

Tracking expenses

Moreover common problem is to keep track of expenses that you have while you can just create a good budget. It will not affect unless to keep a track of what has being spent. The best solution is to use web expenses that will be easier to communicate direct with the clients.

Category Budgeting

Common tactic in budgeting is to break all expenses and dividing them into categories. This shows how much the money is spent in each category such as projects, investment. The problem is to know how much money will be needed in each category and deciding which category is essential than other categories. The solution of the problem is to track the expenses three months before to know the money where it goes the most then it will be easier to know which budget is needed.

  1. When starting Al sham engineering company includes cost. The cost of starting a business is the money used to open the business. And running costs are the money used every day such as electricity. There are fixed costs and variable costs. Fixed costs do not change with output but variable costs changes with output. Example of variable cost is salaries, rents and others.

Total costs = Fixed cost + Variable cost

Revenue

Revenue is the money entering to a business (income). Sources of income include investment that all the people shares in a business. Furthermore there is rental income that can be rented a property or equipment not owned by the company

Expenditure

Expenditure is the money is being spent such as salaries, raw materials and stock materials. So as Al shams engineering company to get money the money should be spent

Break even

Break-even is a point of intersection where profits are equal to costs. The formula of break – even is as follows;

BEP =

Figure1. Break - even chart (Google, 2014).

http://www.tutor2u.net/business/images/break_even.gif

Break – even analysis is good for Al shams engineering to know fixed costs and variable costs. They will not know the costs and how many times products need to be purchased so as to make a profit if no break – even is available.

Budgeting

Budgeting is to purchase or plan something for the future. In Budgeting Al shams engineering company will be able to decide how much money should be spent and how to lower costs and to know how much revenue they are getting.

Budgetary control

Budgetary control is dissimilar to budgeting because when controlling the budget the company CEO is monitoring rather than thinking.

(c) A cost of goods is the money used to make products. By using budget managementthe company can know the cost and the future plans of production. Plans which will make engineering company to succeed and get rid of all mistakes.

The cost can run out of control hence it will cause engineering company to spend more than what they are supposed it will turn profit to loss. If the company spend less than it required the budget will be overstated than those funds can be available in other business. The costs should be monitored or else it will lose such chances.

The company has spent direct cost -38,641,059 in 2011, -29,734,265 in 2012 and -39,101,168 in 2013 which mean that the liquidity of the company is negative which is not good. The company did not control its out flow. The company will continue to make loss if no action is taken. Direct cost relates to employees’ salaries so it’s better to reduce overspending to be able to pay their salaries and control its direct costs to eliminate over spending.

Decline of growth of the company will cause the company not to expand in the future externally or internally. This will make the company to lose in existing competitive due to no good plans for future. The company to be successful should have enough budgets to run the business.

Decline of stock in the company due to increasing of expenses and drop in profit Al shams engineering company will not be able to survive because the budget is not enough to fulfil all the needs of the company.

All in all the above are problems and solutions, consequences and break- even chart which shows how the cost are controlled. Budget is very important when conducting any business. It is recommended that Al shams engineering company to have good budget.

References

Anon, (2014). [online] Available at: https://www.google.com/webhp?sourceid=chrome-instant&rlz=1C1CHWA_enOM615OM615&ion=1&espv=2&ie=UTF-8#q=meaning of acidic ratio [Accessed 24 Dec. 2014].

Investopedia, (2003).Balance Sheet Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/b/balancesheet.asp [Accessed 24 Dec. 2014].

Tutor2u.net, (2014).introduction to break-even analysis. [online] Available at: http://www.tutor2u.net/business/production/break_even.htm [Accessed 24 Dec. 2014].

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