Managing Financial Resources and Decisions

Question: Describe about the Case Study for Managing Financial Resources and Decisions? Answer: Identification of different types of sources of finance available to Green Supplied Ltd. The start-up companies raise their funds to expand the business by many ways such as seed capital from the venture capitalists, borrowing money from the lenders and hiring machineries from the suppliers. These all are different types of external sources of funds. Therefore, there are three types of general sources of funds to expand the business in the market. In this context, the analysts have found that there are internal sources of funds like retained earnings (Schreiber 2013). The firms may expand its business by using the reserve funds in the balance sheet (Krishnan, Nandy and Puri 2014). However, a new company may not have much business in past to promote the future expansion by its reserve money. Therefore, the new firms have to find different sources of funds. The firms those have started its business for less than five years, cannot issue shares in the capital markets (Branch 2013). It is the normal procedure for the maximum country in the world. Thereby, the small start-ups normally source the funds by pledging its shares to some types of companies (Gartner, Frid and Alexander 2012). In this context, Green supplies may source its funds from Celtic Group. However, the available funds from Celtic Group will be a type of external source for the company. The following discussion will focus on the advantages and disadvantages of different types of sourcing of funds. Assessment of implications of different sources of finances The costs and risks of sourcing the funds are the main reasons to evaluate the different types of sources before taking the money. The external sources like equity pledging to the funding company are highly risky from the viewpoint of fund raising company. Green Supplies Ltd will have to risk its management control to the fund providers as they may stop its banking transactions as well as sell the pledged shares in the market for their benefit. It might cause to lose the management control of the existing managers in the market (Nehf et al. 2015). The external sources like borrowing money from the lenders have different risk exposures. The borrowing company has to repay from time to time for the borrowing amount and they have to rely on its revenue to do so. Further, the rate of interest may change from time to time due to change in inflation rate of the economy (Chandra and Medrano 2012). Therefore, borrowing money from the lenders is not much feasible as there will be regular burde n to repay the amount with long-term risk of upside down in interest rate. The equipment in the firm may be hired from the suppliers to reduce the operating cost. It may allow the firms to get relief from heavy capital expenditure due to expanding its capacity. However, in this way, the firm may not get the capital to expand its fixed assets like building or may not get the seed for working capital. Therefore, Green supplies cannot select hiring of equipment as the only source of funds. The risk of sourcing funds in this way is low as well as the long-term expenses too (Shourideh and Zetlin-Jones 2012). The start-up funds normally source their capital from the venture capitalists. The seed capital is provided by the venture capitalists on long-term borrowing basis. However, the firm does not need to pay any interest for the seed capital. It may manage its business with its core objectives as well as expand the same in a long-run. The capitalists may select to opt out from the investment after some contracted period by negotiating the market valuation of the shares or the investment as per the options arrive in due course of time. The issuance of shares by the company may be an option for the capitalists to get back their money in future (Mason and Harrison 2015). The internal sources of financing the expansion has the lowest risk as the firm does not need to pay any interest. Further, the internal source is available without any condition. The cost of the internal sources of finance becomes same as the rate of required return on investment in the business (Fraser, Bhaumik and Wright 2015). The borrowing money from the lenders have high risk with bankruptcy cost in future due to hike in interest rate as well as in low revenue generation in the business (Abe, Troilo and Batsaikhan 2015). The venture capital or pledging the shares expose the risk of the business towards losing the control of management in future. However, there is no bankruptcy cost associated in these types of sources of funds. The internal source of funds has no bankruptcy cost either, or any risk exposed to external environment of the business (Brooks and Mukherjee 2013). Evaluation of appropriate sources of finance There are many types of sources financing the expansion program discussed in the above section. However, it is found that Green Supplies must source its funds from internal reserve, venture capitalist and lease-hiring of equipment from the suppliers. The advantages of all of these have discussed in the above section. However, Green supplies may have some exquisite advantages such as there will be no interest cost for all of these sources. Further, the firm does not need to control over its management except in funding the business by venture capital. The financial expenses like capital and operating cost of the business will be low using these types of funds in the expansion program. Analysis of costs of sources of funds Green Supplies Ltd must use the source like venture capital. Venture capital has no borrowing cost as the firm does not need to repay the loan every month. Therefore, it can expand its business with a long-term objectives. Further, the company does not need much equipment to expand as it has to buy the electronic products and software. Thereby, it is difficult to get the lease from the suppliers of these types of equipment. There will be no change in the income statement of Green Supplies Ltd for taking the funds from venture capitalist. However, the difference will be observed in the balance sheet of the company. The equity section of the firm will show infusion of capital from the capitalist by issuing restricted shares. The investment will go to the asset or in the cash segment of the balance sheet to balance the equation. Importance of financial planning Financial planning is important in a long-run for a business as it forecasts the income and financial position of future. According to Van Auken (2015), financial planning of a business generates the target for the operational people in the business. Additionally, the planning is also important to assess the actual performance of the business with the target value. In case of Green Supplies ltd, the financial planning of the business may provide the management an idea of the future of the financial position. The management also may set target for the future using the plan. The target of business in future as well as the operation can be created using the financial target only (Seuring and Gold 2013). The deviation from the actual performance with the target can be obtained from the planned financial information by the management. Assessment of different information for making decision in business There are many types of stakeholders present in the company. The internal stakeholders are the employees and the management of the firm. Further, the external stakeholders of the firm is suppliers, lenders and the customers. The management of the firm needs to gather information on all of the stakeholders before drawing any decision in the business (Weiss 2014). The management must gather information like salary, bonus, working capacity, attitude of the internal stakeholders. It helps the management to make decision of the operational as well as strategic changing in the organisation. Additionally, the target of the board of directors also requires in making decision as the return on investment is mainly deduced on basis of this information. The external information such as customers buying behaviour and their purchasing power are important in making decision regarding the business outcomes (Matos and Silvestre 2013). The management must sue the information of the economic opportunit y can be obtained from the lenders as it may reduce the cost of borrowing. The information of the suppliers is necessary as the availability of the products and operations in production facility are highly depended on time of supply of the products (Hauswald and Hack 2013). Therefore, a management needs specific information from every stakeholders of the business. Impact of loan and equity finances on the balance sheet The loan finances can influence the balance sheet as well as income statement. The cost of interest grows in the income statement due to infusing of debt in the balance sheet. The balance sheet equation also enriches with more liabilities as well as assets in the balance sheet (Chaudhry et al. 2015). The equity finances change the equation in the balance sheet only. It has no influence on the income statement as it has no cost or accrued presentation on the income statement normally (Kwon, Heo and Hwang 2014). June, 1 July, 1 August, 1 September, 1 opening cash balance 75000 -295000 -275000 -240000 cash sales 60000 70000 75000 85000 cash from past credit sales 550000 630000 770000 cash purchase 310000 450000 500000 520000 Credit payment 55000 65000 60000 Rent 30000 30000 loan repayment 15000 15000 15000 15000 Other expenses 75000 80000 90000 95000 Closing balance -295000 -275000 -240000 -105000 Net cash after September -915000 From the above analysis of cash budget, we can see that the business of Heath limited has a deficit of 915000 at the end of September, 2015. However, the situation can be dealt by borrowing overdraft from the bank to equate the deficit with the borrowed money at the end of the month. Further, the management may reduce the credit term of the buyers at 15 days so that half of the credit can be collected from the market within the month of the sales. It would reduce the deficit of cash in the first two months. In the last month, there would be surplus of cash in the company for going with this strategy (Cunningham et al. 2012). Fixed cost/unit 100 variable cost/unit 150 total cost/unit 250 Total cost for 550 units 137500 Selling Price for 550 units 195 at 30% mark-up price Fixed cost/unit 100 variable cost/unit 150 total cost/unit 250 Selling Price for 550 units 187.5 at 25% mark-up price cost/unit for additional 1500 150 total cost 225000 SP /unit 187.5 Total revenue 281250 total cost 259375 profit on 1500 unit 21875 The above tables show the investment analysis of the three projects using NPV and payback period methods. According to Parsons and Tinkelman (2013) NPV method is suitable to analyse the investment in different projects with having same rate of return. However, the individual period of the different projects may be different. In this technique of appraisal, the projects of different period and investment can be analysed by evaluating the rate of return in present value. However, the method cannot show the comparison of sustainable advantage from any project. The risk of the investment also cannot be predicted using the NPV method (Cilloni, Marinoni and Merino 2013). The payback period ensures the return of the invested sum. In this method, the investors may get the information of risk of period that they have to bear to get back the investment from the projects (Schroeder, Clark and Cathey 2013). However, it does not provide the information of exact return on investment as in this met hod the return on investment is considered in future value. Further, the method estimates the time rather the return on investment (Oberholzer 2013). In this context, the project A is the most viable financially as well as measuring the risk associated with the investment. The payback period of the project A is the lowest as well as the present value of the return is the highest. Therefore, management of Day choice Ltd must go for the project A. Explanation of main financial statements From the business, we may get two types of financial statements income statement and balance sheet. Income statement provides the information on the revenue income of the business on current basis. Further, the current expenses on the operation of the business can be observed in the income statement. However, the capital expenditure cannot be obtained from this statement (Tan 2013). The balance sheet provides the information on current assets and liabilities at the end of the period (Ormiston and Fraser 2013). It also encapsulates the non-current assets and the non-current liabilities of the firms. Further, the equation of balance sheet equates the deficiency in liabilities with assets by the equity present in the business (Huang, Ye and Du 2014). Therefore, the main financial statements generates the information on the revenue income and expenses as well as the financial position of the business. The equation of Income statement is as follows: Income expenses = net profit The equation of balance sheet is as follows: Assets Liabilities = Capital Comparison of financial statements of a Sole trader and a Public Limited company The financial statement of Sole trader comprises of trading and profit loss statement of a period. It also adds the balance sheet in its statement of finance (ZHU, ZHANG and ZHANG 2014). However, the financial statement of a Sole trader also generates information of personal other income in the statement. Thereby, the financial income or loss can be offset by other personal income or losses (Bucci 2014). Additionally, in a sole traders financial statement, the balance sheet is optional while it is mandatory for the public limited company (Wei 2014). The reason is to provide clear information on financial position of the company to the shareholders can be produced. However, for a sole trader, the owners know about the position of the balance sheet. In a sole trader account, the profit can be withdrawn as cash without any tax treatment. But, the same treatment is not possible in case of public limited company. Personal borrowing is also possible from the business account while only th e directors can borrow with certain limitation in a publicly traded company (Gov.uk, 2016). The publicly traded companies pay tax under corporate tax while the sole traders pay class 4 income tax on taxable profit (Fairlie 2012). Interpretation of financial ratios From the ratio analysis of wholesale and retail business we can see that both the segment have different financial ratios. According to Brooks and Mukherjee (2013), profit margin of the revenue operation can be obtained by analysing the gross and net profit margin of the business. Thereby, profitability of Wholesale and retail segments have different profitability. The gross margins were same both in wholesale and retail segments. However, the difference was seen in net margin. The retail segment has made more profit in the year than the wholesale segment. The current ratio of a business shows the presence of liquidity in the business. The liquidity is measured to understand the situation of cash or the liquid assets compare to the current obligations. Therefore, liquidity measurement is important for the analyst to know the capacity to meet the current liabilities with the existing balance sheet (Lipman 2016). In this context, the current ratio of retail business was higher than the wholesale business. Further, the quick ratio of retail segment was higher than that of the wholesale segment. The gearing ratio provides the information on gearing funds with respect to the existing capital in the business. Thereby, it posits the analysis of external funds in the business. 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