Unit 2 Managing Financial Resources and Decisions

Topics: Generally Accepted Accounting Principles, Cash flow, Balance sheet Pages: 24 (6493 words) Published: April 24, 2015
CONTENTS

1. Understanding the Sources of Finance Available to a Business

Identify the sources of finance available to a business.
Assess the implications of the different sources
Evaluate appropriate sources of finance for a business project

2. Understanding the Implications of Finance as Resource within a Business

Analyse the costs of different sources of finance
Explain the importance of financial planning
Assess the information needs of different decision makers
Explain the impact of finance on the financial statements

3. Making Financial Decisions Based on Financial Information

Analyse budgets and make appropriate decisions
Explain the calculation of unit costs and making pricing decisions Assess the viability of a project using investment appraisal techniques

4. Evaluate the Financial Performance of a Business

Discuss the main financial statements
Compare appropriate formats of financial statements from different types of business Interpret financial statements using appropriate ratios and comparisons, both internal and external.

Internal Sources:
Working Capital – Money available for day-to-day running of the business. Retained profit, reducing inventory and tighter credit control all fall under this heading

Retained profit - the profit kept in the company rather than paid out to shareholders as a dividend. (http://beta.tutor2u.net/business/blog/qa-what-are-retained-profits - visited 11 March 2015)

Advantages:

Cheap form of finance
No interest and readily available
No risk of ownership dilution due to shares issue.

Disadvantages:

Shareholders may require a dividend be paid
If no profit, then no expansion

Cost:

To the shareholders who will not get the dividend payout they expected. Pressure cost for the Manager/owners to ensure that the money they reinvest in the company pays a higher dividend in the long term.

Tighter Credit Control – Chasing debtors and offering discounts for early payment. Paying suppliers at the end of credit period and not early.

Advantages:

No Interest rates
Better cash flow
No repayments

Disadvantages/costs:

Late payment of supplier could mean loss of reputation/no more credit. Only small amounts of money
Time cost of staff chasing invoice payments.

Family/Own Money – This is money invested by the owner and/or family and friends.

Advantages:

Quick easy cash
Interest and repayment terms easier and cheaper than a bank loan Invaluable when the business is starting up

Disadvantages/Costs:

Added pressure on the owner to perform
Funds may be limited
Family/Friends may want a say in how the company is run
Family/friends may need the loan paying back early due to unforeseen circumstances Pressure costs due to the money being from friends and family or your own savings, and to get a return on the money and pay it back as soon as possible. Cost of interest that you could be earning on your savings.

Reduced Inventories – Reducing the stock held can reduce storage costs and also if selling the stock this will help the cash flow.

Advantages:

Reduced cost of storage, insurances.

Disadvantages:

Need to not run stock too low or you may not have enough to cover orders.

Cost:

Reputational cost – clients not being able to obtain what they want from you Loss of clients

Sale of Assets – selling assets of the business to raise funds, such as cars, buildings and equipment.

Advantages:

Sell off unused old assets, make money for new assets/projects Could be a quick cash flow fix if you are selling a car for example Disadvantages/Costs:

Money may not be readily available as it could take time to sell the asset Reduction in assets means reduction in company worth, may work against the company when applying for finance/loans Confidence in company may drop

Share prices may fall
Time cost to sell the assets
Depreciation costs of assets

External Sources:...

References: Brigham, E. F., & Ehrhardt, M. C. eds. 2005, Financial Management Theory and Practice. Ohio: South-Western.
Brealy, Richard A., & Stewart C. M., eds. 2003. Principles of Corporate Finance. Boston: McGraw-Hill/Irwin.
Banerjee, S. (2015). An analysis of profitability trend in Indian Cement Industry. Economic Affairs, 60(1),171-179.
Michael, R. (2015). Ratios Overview. In Financial Ratios for Executives (pp. 1-5). Apress.
Whyte, R., & Lohmann, G. (2015). The carrier-within-a-carrier strategy: An analysis of Jetstar. Journal of Air Transport Management, 42, 141-148.
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