The Issues of Managing Financial Resources and Decisions

Published: 2021-06-29 11:05:03
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Before studding and researching any business organisation or company first we have to know nature, purpose and role of accounting of the business. We know, there are various types of business in the word such as Sole trader, Partnership, Private limited company and so on. The Trevor Plc. is well known famous wholesale distributors and Private Limited Company. Although it is not too large organisation but now it recently gains rapid economics prospect due to its successful management process and product bend. It is not really easy task to scrutinize everything of the specific company because almost every business management has private business policy to save them from competitive business world. The “Trevor Plc.” as Toy Company they have to creative minded and they have to update their production because children are more attractive to new product. In my academic writing I will describe financial sources, decisions, performance and financial transaction of the business. Financial Statement: (P11) In the financial accounting financialstatement is a formal written record of the financial activities of a business, person, or other entity. For a business enterprise, all the relevant financial information, presented in a structured manner and an easy form to understand, are called the financial statements. To achieve this, a business’s accounting system will normally produce three particular statements on a regular basis. These three statements are concerned with answering the following questions: *What cash movement (that means cash in and out) over a particular period? *How much wealth (profit or loss) was generated? *What is the accumulated wealth of the business at the end of the period and what form does the wealth take? 1. Cash flaw: Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time. It uses and reorders the information from a company’s balance sheet and income statement. 2. Income statement: The basic role of the Income statement providing information with Profit & Loss account on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. Profit & Loss account. Income statements also report earnings per share. This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. 3. Balance sheet: A balance sheet is a report on a company’s cash flow activities; particularly its operating, investing and financing activities. It provides detailed information about a company’s assets, liabilities and shareholders’ equity. Purpose of financial statements: The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization’s financial position. Formats of the Financial Statements: (P12) In the preparation of financial statements there are different formats used by different types of business. This is because the nature and structure of the organisations are not same. However, although using formats are different for same project but the results will be the same for every format. In case of income statement, there is no prescribed specific format for the preparation of the income statement. The company should select a method of presenting its expenses by either function or nature; this can either be as encouraged, on the face of the income statement, or in the notes. Different types of businesses use different types of formats. For instance, a sole trader would prepare a simple profit and loss account compared to a public limited liability company which will have to prepare based on GAAP. But it is difficult to compare with other organisations if financial statements are not prepared based on standards. 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 while other use it multi step format where cost of sales is deducted from sales of product to show gross profit, and other income source and expense are presented to give income before tax. The main difference between these two formats is that the single step 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 term of 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. In most businesses the balance sheet is prepared matching assets less liabilities represent the owner’s equity. Calculation of Ratio: P13 Probability Ratio Gross profit Aƒ-100% Sales £2,076,340Aƒ- 100% £7,172,160 =28.9% Operating profit margin Aƒ-100% Sales £651,850 Aƒ- 1 00% £7,172,160 9.08% Liquidity Ratios: The liquidity ratios measure the company’s ability to meet its current obligations. Current obligations are all the obligations that fall under the period of 1 year. Current ratios This is the liquidity ratio that measures the company’s extent at which its current assets can pay off its current liabilities. Current assets Current liabilities £1,376,180 £637,100 2.16:1 The quick ratio which is also known as the acid test ratio =current assets -stock Current liabilities £1,376,180- 423,700 £637,100 1.5:1 Efficiency Creditors turn over = creditors Aƒ- 360 Cost of sales 367,100 Aƒ- 360 5,095,820 46 days Stock turn over =closing stock Aƒ-365 Cost of sales 423,700 Aƒ-365 5,095,820 30 days Dividend per share = total dividend payable Number of shares £50,000 £ 200,000 =25p Investor Ratio: This ratio is use to find out appropriate factor for investor to investment Earnings per share=net earnings/number of outstanding earning 456850/200000= £2.28 per share Dividend per share = Dividend /Number of share issue 50,000/200,000 = £0.25 per share Pass-P10 Solution: Here, Variable cost per unit= (material cost + labour and variable cost) =10+8 =18 And fixed cost is £90000 The cash flow for this project for the year 1:

Sales 25*50000= 1250000 Less Variable cost 18*50000= (900000) Fixed cost (90000) CF1 =260000 The cash flow for this project for the year 2:
Sales 25*60000= 1500000 Less Variable cost 18*60000= (1080000) Fixed cost (90000) CF2 =330000 The cash flow for this project for the year 3:
Sales 25*70000= 1750000 Less Variable cost 18*70000= (1260000) Fixed cost (90000) CF3 =400000 The cash flow for this project for the year 4:
Sales 25*80000= 2000000 Less Variable cost 18*80000=(1440000) Fixed cost (90000) CF4 =470000 Here is the cash flow for this project: Year Net cash flow Cumulative cash flow 0 -1000000 -1000000 1 260000 -740000 2 330000 -410000 3 400000 -10000 4 470000 460000 Net present value (NPV) for this project: Here, NPV=CF1/ (1+k) + CF2/(1+k)2+ CF3(1+K)3+CF4(1+K)4-I0 Here, CF=periodic cash flow K=discount rate (required rate of return I0+= initial investment NPV=CF1/ (1+k) + CF2/(1+k)2+ CF3(1+K)3+CF4(1+K)4-I0 = {260000 / (1.08) + 330000 / (1.08)A² + 400000 / (1.08)A³ + 470000 / (1.08)4} – 1000000 =240740.741+282921.811+317535.9213+345461.228-1000000S = 1186659.701 – 1000000 = 186654.701 Internal Ratio of return (IRR): Cost of capital rate NPV 8% 186659 10% 132632 12% 78621 14% 30260 16% -14778 IRR=positive rate + [positive NPV/ (positive NPV + negative NPV)] * range of rate = 14 %+[{ 30260 / (30260+1477843)}] Aƒ-2% =14 %+ [0.671Aƒ-0.02] =0.14+ 0.01342 = 0.1534 =15.34% Payback period: Year Net cash flow Cumulative cash flow 0 1000000 -1000000 1 260000 -740000 2 330000 -410000 3 400000 -10000 4 470000 460000 From year 4: Payback period for £10000 10000/470000=0.02 Payback period=3.02years. ARR Using the average capital employed: Average capital employed = (initial capital employed+ residual value)/2 =(1000000+0)/2 =500000 Average profit = (260000+330000+400000+470000)/4 =365000 ARR=Average annual profit before interest and taxation/Average capital employed on the project =(365000/500000)*100 =73% 2.2 Accept or reject the project: From the findings in 2.1 I would like to recommend the company to take this project because, The net present value (NPV) is positive. Payback period is 3.02 years This project have good accounting rate of return Financial Sources: (p1) A business needs enough finance to start up and continue to grow. For a new business, it is too risky lake of personal financial sources because as a new business other sources may not be reliable. Almost every investor has to keep some extra fund to improve and develop their product and services. In the business world, there are some common types of financial sources such as, External, internal, short-term, long-term, and medium-term. There are some important sources of finance: Long-term sources of finance: Long-term financing can be found from the following sources: Debentures/Bonds of different types Loans from financial institutions Loan from state financial corporation Loans from commercial banks Venture capital funding International Medium-term sources of finance: Medium-term financing can be raised from the following sources: Preference shares Public deposits/fixed deposits for duration of three years Commercial banks Financial institutions State financial corporations External commercial borrowings Short term sources of finance: Short-term financing can be found from the following sources: Trade credit Commercial banks Fixed deposits for a period of 1 year or less Advances received from customers Various short-term provision Implication of the sources: (p2) Banks and Financial institutions: Bank and other financial institutions are first and fare financial source for a business. They supply range of facilities to grow and contribute a business. Because if any organisation face or fall unexpected problem they try to overcome or solve its problem in the difference way. Business angels: Business angel is private types of financial organisation which invest money from the starting of the business with some condition. It is not helpful like bank or financial institution because always it try to make profit and partial ownership by buying shares in the business. Venture Capitalist: Venture Capitalists are the almost same types of source as Business angels. They invest money for the Private limited company at the primary stages. Sometime the Venture Capitalists maintain and advice some managerial and technical issue of the company. Government Agencies: One more sophisticated financial sources of the business is Government agencies. They supply capital after make sure that the business environments are appropriate. Even, sometime they also provide some training to run the business accurately. Tax effect of the financial sources: This is common phenomenon of a business. Tax of business is consisting of different types of sources of finance depending on the price elasticity of demand and supply who bears more of the tax or who receives more of the subsidy may differ. A marginal tax which is on the sellers of a product will shift the supply curve to the left until the vertical distance between the two supply curves is equal to the per unit tax, when other things remain equal, this will increase the price paid by the buyer, and decrease the price received by the sellers. On the other hand, a marginal tax on consumption will shift the demand curve to the left, when other things remain equal, this will increase the price paid by consumers and decrease the price received by sellers by the same amount as if the tax had been imposed on the sellers, although in this case, the price received by the sellers would be the new market price. The end result is that no matter who is taxed, the price sellers receive will decrease. Ownership and control of the sources: We know ownership is an owner of the property or assets. The word ownership is complicated in tern of different types of financial sources. For example, if any organization gets money from bank and other financial company then the organizations will be sole ownership of the finance. Sole ownership occurs when one owns a complete interest in property. Ownership is passed by the typical transfer documents, or by the laws of intestate succession. The complete interest is included in the estate of the decedent. Alternatively, when company get money from other sources like venture capitalist and business angels where these financial sources get interest by share ownership this is called join ownership. Another most freedom external financial sources are government agencies that provide money to business without liability so in this cases owner of the business will be strongly liable for the ownership. Cost of the financial sources: (p4) The overall percentage cost of the funds used to as a firm’s assets. Cost of capital is a composite cost of the individual sources of funds including common stock, debt, preferred stock, and retained earnings. The overall cost of capital depends on the cost of each source and the proportion that source represents of all capital used by the firm. The goal of an individual or business is to limit investment to assets that provide a return that is higher than the cost of the capital that was used to finance those assets. All businesses need short-term finance from the very beginning to start up the business and to cover day-to-day running costs. However businesses also need long-term capital to help them to grow and expand, and this is paid back over a number of years. Without finance a business would find it difficult to accomplish anything, for example someone who decided to start up a shop would need finance at first to just buy the shop and the stock. For sole traders and partnerships a common source of finance, especially for start-up is money from the individuals who are forming the business. They may also borrow money from family and friends. Own capital is a costless form of finance, but carries the risk of the money being lost. Impact of Finance: (p7) We know already know accounting are divided into two types one is management accounting and another one is financial accounting and the financial statement is essential element for the financial accounting which is almost designed by financial transaction. Basically, most of the financial statements make for focusing financial position of a business. So the impact of the finance on financial statement is certain without finance the financial statements are like a man without bone. It is worth pointing out that in real life businesses do not normally draw up a statement of financial position after each day as shown above. Such an approach is not likely to be useful, given the relatively small number of transactions each day. In real life, a statement of financial position for the business is usually prepared at the end of a defined reporting period. Timely and accurate financial statements preparation creates confidence, credibility, reliability and business awareness of the owner and senior management in the eyes of bankers and other financial institutions and investors who provide cash and working capital to the business. Bankers and other financial institutions are more apt to provide the necessary cash and working capital when they have confidence the owners and senior management know what’s happening in the business. The greater the level of confidence bankers and other financial institutions have in timely and accurate financial statements preparation, the easier and faster it is to obtain the necessary cash and working capital at attractive interest rates, with satisfactory covenants, terms and conditions and the easier it is to increase cash and working capital as the business grows. This is especially valid when the business experiences ups and downs during the various economic cycles of the domestic and worldwide economy. The best method of raising 1 million pound for the project: (p3) In order to above discussion I think the best method of raising one million is debt finance because debt finance is cheaper than issuing shares. Moreover, in debt finance there is a limited period to payback the debt while in issuing of shares, you keep paying dividends to the share holders. Shareholders want to use their money as capital because they don’t want to pay too much income tax. By using shareholders money the company can satisfy the shareholders and feel more secure in terms of loss. Financial Planning P5 A business plan is an indicator for the operation of a commercial business. It is a process which describes the current financial position and the adjustments in the spending pattern of an individual organisation or even country, in order to meet the goals. There is no legal requirement for a business plan, but there are good reasons for a business plan. The following points explain why financial planning is important: Cash Flow: Financial planning helps in improving cash flow as well as monitoring 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 almost impossible to management income effectively without appropriate planning. Managing income helps in segmenting it into tax payments, other monthly expenditures and savings. Financial Understanding: The financial planning process helps to gain an understanding about the current financial position. Adjustments in an investment plan or evaluating a retirement scheme becomes easy for an individual with financial understanding Savings: It is good to have investments with high liquidity. These investments, owing to their liquidity, can be utilized in times of emergency and for educational purposes. Break Even Analysis: New businesses must achieve profitability to remain in operation. Break-even analysis determines the crossover point at which a business ceases to lose money and begins to make money. Break-even analysis is used in companies’ financial plans to show the crossover from losing to making money for expansions or additional products or locations. Decisions making:P6 Normally the word is used to solve problem in order to the different situation. But it is important and common role is take time to decide to the solving problem. To do this there are several question arise regarding the issue, what is the problem? What decisions need to be taken? For each of the causes or its effects, make a list of information or data that will be required, and clarify how that information will lead to a better decision. Finding the information, this is matter of concerned that the sources from where information needed for decision-making can be obtained. What information needs to be taken? Which component of the problem at hand will it help? Evaluate the sources to see which of them can provide the best information, and identify the mode and format in which the information is presented. Keep in mind that different sources provide information in different formats for different reasons. Processing the Knowledge: This where the information gathered is matched with the problem in hand. The relevant information from each source is extracted and information from multiple sources is organized. Which parts of the information collected needs to be used? What additional data or information is needed? How can information be best presented to be able to understand this situation and take decisions? The collected information is evaluated and integrated for its relevance, validity and interconnectedness Taking the decision:It is an interactive and inclusive process including all the concerned parties, form an opinion and the information collected for its effectiveness and efficiency. Use it to take the decision. Has the decision taken help in solving the problem at hand? Was the decision satisfactory and took into account all the views of concerned parties? A decision taken may need to be examined closely and refined, and modified to meet differing needs over time. Unit cost to make Toy and profitability: (P9) Costs Year 1 Year 2 Year 3 Year 4 Marginal cost at 10(W1) Labor cost at 8 (W2) Fixed cost Total cost Cost per unit (W3) Profitability margin(W4) 500,000 400,000 90,000 990,000 19.80 units 21% 600,000 480,000 90,000 1170,000 19.50 units 22% 700,000 560,000 90,000 1350,000 19.28 units 23% 800,000 640,000 90,000 1530,000 19.12 units 23.5% Working 1: Number of units 50,000; rising by 10,000 and £10 Marginal cost = Number of units x cost Year 1 = 50,000 x 10 = £500,000 Year 2 = 60,000 x 10 = £600,000 Year 3 = 70,000 x 10 = £700,000 Year 4 = 80,000 x 10 = £800,000 Working 2: Number of units 50,000; rising by 10,000 And Cost 8 pound Labour cost = number of units x cost Year 1 = 50,000 x 8 = £400,000 Year 2 = 60,000 x 8 = £480,000 Year 3 = 70,000 x 8 = £560,000 Year 4 = 80,000 x 8 = £640,000 Working 3: Cost per unit = Total cost / Total unit Year 1 = 990,000/50,000 = 19.80 unit Year 2 = 1,170,000/60,000 = 19.50 unit Year 3 = 1,350,000/70,000 = 19.28 unit Year 4 = 1,530,000/80,000 = 19.12 unit Working 4: Selling price £ 25 Profitability margin = (Profit / sales) x 100 Year 1: Selling price 25 Less: cost (19.80) Profit 5.20 Profitability margin=(Profit / sales) x 100 = (5.20/25)x100 = 21% Year 2: Selling price 25 Less: cost (19.50) Profit 5.50 Profitability margin=(Profit / sales) x 100 = (5.50/25)x100 = 22% Year 3: Selling price 25 Less: cost (19.28) Profit 5.72 Profitability margin=(Profit /sales) x 100 = (5.72/25)x100 = 23% Year 4: Selling price 25 Less: cost (19.12) Profit 5.88 Profitability margin=(Profit /sales) x 100 = (5.88/25)x100 = 23.5% Cash budget (P8): No, because the information is provided sufficient. Conclusion: This is obvious common theory of a business to finding appropriate sources of finance and making decision in order to economic progress. Because if a business get finance by some over interested sources then it may be face straggling every situation specially in new starting business. Only a well planned, appropriate decision and proper and fair sources of finances will be key success of business. After long discussing and analyzing the Trevor Plc.’s data information we are clear how it decrease cost and increase profit using accurate financial plan.

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