London School of Science & Technology

Qualification

Unit number, title and Level

UNIT 2:

Pearson BTEC Level 5 HND Diploma Managing

in Business (QCF)

Financial

Resources

and

Decisions

Date issued

Level 4
Assessor name
Mohamad Hassan
Completion date
Submitted on

25th January 2016

Internal Verifier

8th May 2016 by 5:00pm

Dr George Panagiotou

Student name and ID number

Assignment title Managing Financial Resources and Decisions

Instructions

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Unit 2: Managing Financial Resources and Decisions - January 2016

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Introduction
The management of the financial decision and the resources is very much important for the business
organization. This report deals with these facts. How the firms can collect funds from the different
sources, the impact of financing on the different segments, the determination of the products price,
the investment appraisal techniques, the performance measurement of the firms all are discussed in
the report.

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Task 1
Q.1 Three sources of finance that ABC Ltd. can use to expand its business and
give a brief explanation of each (1.1)
Every business organizations need financing for conducting its business. It is the most important task
of the business. Financing indicates raising the funds or resources for conducting the business.
There are many sources of financing. It can be internal sources that indicate collecting funds from the
inside of the country. It can be the external sources that indicate collecting funds from the outside of
the country. The external sources can be again the long term, short term and medium term basis.
These are discussed here:

Internal sources of collecting funds:

Retained earnings:
It indicates the remaining funds or profits after providing the all expenses including dividend of the
company. If the firm is a growing business its retained earnings would be very high and it can be an
useful sources for the organizations. The ABC Ltd. can also raise funds from this source.
Sales of existing assets:
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The sales of the existing assets can be the other source. It helps the organization to raise funds but it
can have the negative effect on the market. The market or the stakeholders think that it has no other
sources of financing and the company would not seem viable.
Cut down stock levels:
The company such as ABC Ltd. can also raise funds by using this factor or source. In this source the
inventory level can be reduced and the saved money can be provided to the organizational
operational purpose (Brigham, and Gapenski, 2010).
Internal sources of collecting funds:
Long term source:
The sources of duration of these funds are ten years or more. The cost of raising these funds is
higher than the other sources of funds.
Bank loans: the company can take loans from the banks for the loan term basis. It needs to provide
interest against the raising or borrowing funds. The banks often seek collateral for the borrowing
money.
Issuing Debentures:
The firm can also issue debentures with a specific price to the capital market for generating funds for
the business. The firms that are public limited company and are listed with the capital market can
raise funds for the purpose. It can help the business firms to raise funds when the requirement is
huge (Brigham, and Gapenski, 2010).
Issuing Shares:
The firm can also issue share with a specific price to the capital market for generating funds for the
business. The firms that are public limited company and are listed with the capital market can raise
funds for the purpose. It can help the business firms to raise funds when the requirement is huge.
Medium term source:
Leasing:
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Through leasing the firms can collect funds for operation. In this system the firm can use the desired
property for a specific time period against the payment of instalment (Horrigan, 2010). However it can
acquire the assets after the lease agreement by paying some additional money.
Hire purchase:
In this system the organization can buy the goods or assets by making the payment on instalment
basis to the account payables. This can be the other sources of financing.
Short term source:
Bank overdraft:
Here the firms can take loans from the bank to meet up its daily expenses. But the cost of raising
funds is higher in terms of this.
Bank loans: the company can take loans from the banks for the loan term basis. It needs to provide
interest against the raising or borrowing funds. The banks often seek collateral for the borrowing
money.
Creditors:
The business organization can collect funds from the creditors to meet up its short term financing
funds. They can delay the payment to their supplier to meet up this requirement (Horrigan, 2010).
Factoring:
When the business organization needs funds for the urgent time basis then the funding can be
another source of financing. Here the firms sell their accounts receivable to the bank for collecting
funds in terms of money. Often the bank pays some less money over the account receivables to
cover the potential loss.

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Q.2 A report to the director assessing the implications of your chosen sources
of finance, together with a choice of the most appropriate source to be
adopted and analyzing the costs of theses finance options (1.2, 1.3, 2.1)
A report on the implications of chosen sources of finance and the appropriate source of financing is
shown below:

7th March, 2016

The Board of Director,
ABC Ltd.
Subject: The implications of chosen sources of finance and the appropriate source of
financing.
Dear Sir,
In the complicated business world there are many sources available for the company. But it would be
a prudent decision if the company can make the effective source of financing and all the financing
sources have an implication on the business. The business organization needs to evaluate the
effective sources and based on this it should take the most appropriate sources of finance.
The implications of chosen sources of finance:
Retained earnings: it is a source of internal financing. However it can be the financing option for the
company. But it can create the agency conflict between the shareholders and managers. The
shareholders seek the additional dividend that can reduce the amount of the retained earnings and if
the retained earnings are reduced the available funds of the organization can be decreased.
Issuing Shares: the firm can collect huge amount of funds by issuing shares to the general public.
But however the issuance of the shares may dilute the control of the company. The shareholders

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having the majority of the shares of the firm can control or influence the management of the company
(Brigham, and Gapenski, 2010).
Issuing debentures: the firm can collect huge amount of funds by issuing debentures to the general
public. But however the issuance of the debentures may impose additional rules and regulations to
the company and it may avoid the company for taking further actions.
Bank loan: the company can take loans from the banks for the loan term basis. It needs to provide
interest against the raising or borrowing funds. The banks often seek collateral for the borrowing
money. If the company may not have the adequate assets to keep as collateral it may be less
attractive to conduct financing using this source as it increase the cost of raising funds.
Long term debt: the debt is good for the company. But it is very much difficult for the company to
seek for the proper capital structure of the company. If the combination of the debt and equity for the
firm is good or optimal then the value of the firm increase but if the combination of the debt and equity
for the firm is not good or sub-optimal then the value of the firm may decrease. Again if the amount of
debt is increasing in the organization then it can reduce the credibility of the firm.
Factoring: Here the firms sell their accounts receivable to the bank for collecting funds in terms of
money. Often the bank pays some less money over the account receivables to cover the potential
loss. If the accounts receivable turnover is very high and the company has a doubt on the collection
then it would be a better decision for the firm to go for the factoring. In this situation the factoring can
be non-recourse factoring.
The appropriate source of financing:
In the above section the influences of the different sources of finance is discussed. And in this section
the appropriate source of financing is discussed. Here to select the appropriate source of financing
the company should consider the cost of raising funds select the sources that are the least costly.

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While the firm can take loan or issuing debt, it has to pay interest for this loan or debt. And the
interest can reduce the profit of the firm. However the interest is tax deductable and for this reason
the firm can get tax advantage in this regard. It may reduce the cost of financing.
When the firm issues shares or stocks either the common stock or preferred stock it may reduce the
retained earnings of the firms as the firms need to pay dividend on the issuing shares. The dividend
is not tax exempted. So it may increase the cost of raising funds. However the costs of equity are
costlier than the cost of debt.
Based on the discussion it can be considered that the firm can go for the debt financing. But if the
source is not available then it can go for the equity financing. However in terms of financing the firm
can consider the opportunity costs of the collection of funds.
However the ABC Ltd. has an opportunity for expansion. If the firm cannot raise funds from the
appropriate sources it may increase the costs of capital and also reduce the profitability of the
investment project. So this aspect should be taken with a great care or consideration.
From,
Juel
Finance officer
Date: 7th March, 2016.

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Task 2
A) A cash flow forecast for ABC Ltd (3.1)
A forecasted cash flow is the statement that is prepared by the company to make a prediction of the
cash outflow and the cash inflow of the company. It is prepared by the company to make the better
use of the resources.
The forecasted cash flow is given below:

In this statement the cash inflows such as sales are added with the beginning balance and by
deducting the cash outflows the ending balance is 45000 in the month of September. The credit
purchase paid, the rent, overhead expense and loan repayment are considered as cash outflow.

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B) The importance of financial planning for viable business decision making
(2.2)
The financing decision is very much important for the company. It affects the various aspects or
factors of the company. The success of the company depends largely on the prudent financial
planning.
The company should plan how much they need to generate fund, the costs of funds, and the maturity
period of the funds and so on (Johnson, 2012). Besides this it should also select the most profitable
investment source for ensuring the better resource management. Based on the proper financial
planning the stability of the business performance or in terms of the financial aspect can be ensured.
The wastage of the funds can be reduced and also the agency conflict between the debt holder and
the shareholders, the shareholders and the managers, the managers and the debt holders can be
managed.

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Task 3
Q.1 The unit price based on both costing methods and select the price (3.2)
If the firm is a manufacturing company then the production costs and the price of the products should
be determined by the company sincerely. The production costs can be increased if the purchase of
the raw materials can be increased and it may lead to the increase product price. And if the price of
the product is increased it may have two effects. The first effect is it can increase the revenue of the
firm and the other effect is it can reduce the demand of the product as the price of the products
seems higher costly (Johnson, 2012). And due to this the revenue can be adversely affected. There
are many methods available for pricing the products or costing the products. In this report the mark
up and return on employed capital method are used for costing. These methods are discussed here:

The mark up method:

Here the total direct costs are 250000 and total fixed cost costs are 75000. By adding these costs
the total costs would be 325000. Here the mark up percentage is 35% and by adding the mark up
costs the total mark up price is 438750. And the mark up price is 877.50.
The return on employed capital method:

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Here the employed capital is 100000 and the return on capital employed is 25%. So the desired
profit is 25000 (100000*.25). And by adding the profit to the total costs the total price of the product
would be 350000. And the cost per meter is 700.
So it can be considered that for Class A+ glass the price of the product for cost per meter is 877.50
using the mark up method and 700 using the return on employed capital method.

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Task 4
Q.1 Calculation and analysis of the appraisal tools (3.3)
After finishing the financing activity the firm should select where to invest the funds. The investing
source should be the most profitable source. And in order to select the most profitable source the
firms such as the ABC Ltd. should consider the project or investment appraisal techniques. Here the
net present value, payback period and the accounting rate of return is analyzed to analyze the most
profitable projects.
Payback Period:
It measures the time period that can be required for collecting the investment capital from the
particular project. The formula of the payback period:
Payback period= the full recovery period + uncovered amount/ total cash flow of the following year.
The payback period of the three projects is:

If a project has lower payback period it indicates that the project can cover the initial investment
within the short period of time and the rest of the amount is the profit of the project. Here the project
Italy has the lower pay back period of 2.89 years. The lower the payback period the more beneficial it
is for the company and vice versa (Palmer, 2013). So it can be considered that the project Italy is the
most viable for the investment purpose. Similarly the project Switzerland has the higher payback
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period 4.40 years. So it can be considered that the project Switzerland is not viable for the investment
purpose. For the same reason the project Germany is not viable for the investment purpose.
Accounting Rate of Return:
The accounting rate of return measures the percentage of the return coming from the investment. It
does not consider the time value of money (Palmer, 2013). The formula of the accounting rate of
return (ARR) is ARR: average return/ average investment. The ARR of the three projects is:

Here the ARR is highest for the project Italy and the percentage is 32%. The higher the accounting
rate of return the more viable the project is and vice versa. So it can be considered that the project
Italy is the most viable for the investment purpose. Similarly the project Germany is not viable for the
investment purpose as the ARR is lower 22%.
Net Present Value (NPV):
It considers the time value of money. It is the mostly used method of the investment appraisal
method. It considers how much the project earns cash inflow to cover the cash outflow. If the net
present value is positive then it can be viable for the investment purpose (Palmer, 2013). The formula
of the net present value is: NPV= cash outflow- present value of the cash inflow.

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Here the project Italy has the positive net present value and the other project has the negative net
present value.

So it can be considered that the project Italy is the most viable project for the

investment purpose.

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Task 5
Q.1 The purpose of Income Statements and the Balance Sheet (4.1 and 4.2)
There are many financial statements especially four that are prepared by the company. And the
overall situation of the company can be identified by the financial statements.
The purpose of Income Statements:
Income statement indicates the amount of the revenue or the expenses as well as net profit at a
specific time period (Palmer, 2013). All the revenue and expense accounts are placed in this
segment. The stakeholder can identify the profit condition of the company based on the income
statement. Again the revenue generates condition of the company as well as the expense
management condition of the company can be known by this financial statement. The sample of the
income statement is given below:

There are many formats of preparing the income statement. Again the preparation of the income
statement may vary in terms of the different business condition.
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Single step income statement: here the expenses are deducted with the revenue. No breakdown of
the expenses and revenues are shown here.

Multi step income statement: here the breakdown of the revenue and the expenses are shown.

The balance sheet indicates the financial condition of the business such as the ABC Ltd. It reflects
the assets, liability and the equity condition of the business at a specific time period.
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The purpose of Balance sheet:
Through the balance sheet the stakeholders can inform about the asset, liability and equity condition
of the firm. How much the firm is effective in terms of using its resources can be known by this
statement. The quality of the asset, liability and equity can be known through this. The sample of
balance sheet is given below:

There are many formats of preparing the balance sheet. Again the preparation of the balance sheet
may vary in terms of the different business condition (Seitz, 2010).
Account format: it indicates the asset accounts on the right sides and the liability and equity
accounts on the left sides.

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Report format: it represents the assets, liability and equity accounts in the statement.

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Q.2.1 The information needs of different decision makers and stakeholders (2.3)
There are many people related to the company directly or indirectly known as stakeholders. The
stakeholders require different kind of information. The different stakeholders are directors, managers,
employees, stockholders, debt holders and so on.
The internal information of the company is mostly known by the managers, directors, employees and
so on. They should know about the internal strength, weakness, opportunity and threat of the firm.
They should take decisions by considering these aspects. The other information is also needed by
the external stakeholders (Seitz, 2010). The debt holders wish to know how much the firm is capable
to make the payment of the company. The suppliers also wish to know this. The shareholders want to
know how much they can earn as a form of dividend from the company. The profit condition and the
sustainability condition of the business firm should be known by the stakeholders so that the related
parties can take their investment decision effectively.

Q.2.2 The impact of finance on the financial statements (2.4)

Financing is the core activities of the business. This activity has much impact on the business. All the
financial statements are affected from this activity.
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The impact on income statement:
When the firm such as ABC Ltd. makes payment of their borrowing funds as a form of interest
payment it can reduce the profitability of the firm. Again when the firm such as ABC Ltd. makes
payment to their shareholders as a form of dividend it can reduce the retained earnings of the firm.
Besides this the firm can generate revenue when they make investment.
The impact on balance sheet:
When the firm raises funds through the issuance of the equity it can increase the assets sides by
increasing the cash amount and also it can increase the equity amount by increasing the number of
shares. When it raises funds by using debt it can increase the assets and liability sides of the balance
sheet at a time (Wilkes, 2010).

Q.3 Evaluation of the business performance (4.3)

The performance of the business organization such as ABC Ltd. needs to be evaluated with the
frequent time interval basis to measure the success of the business. It can be analyzed by using
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some ratios such as current, acid test and so on ratios. The performance of the business over the
years as well as against its competitors can be measured through this.

The current ratio: it measures the liquidity of the firm. If the firm has more liquid asset it can ensure
the liquidity of the firm. The formula of the ratio is:
Current ratio= current assets/ current liability
In 2015 the current ratio of the company is 2.247. It indicates that the company has 2.247 current
assets to meet up its current liability of 1. The liquidity of the firm has increased in this year.
The acid test ratio: it measures the liquidity of the firm. If the firm has more liquid asset it can ensure
the liquidity of the firm. The formula of the ratio is:
Acid test ratio = total current assets prepaid expense- inventory/ current liability- bank loans.
In 2015 the current ratio of the company is 1.62. It indicates that the company has 1.62 current
assets to meet up its current liability of 1. The liquidity of the firm has increased in this year.
Return on capital employed: it measures how much the firm can generate profits by using its
employed capital. The formula of the ratio is:
Return on capital employed: net profit/ total debt+ total equity.
The ratio is 4.1%. It indicates that the company can make this amount of return by using it total
employed capital. The ratio falls below slightly than the past year.
Gross profit margin: it indicates how much the firm generates profit through its revenues after
deducting the cost of goods sold. The formula of the ratio is:
Gross profit margin: gross profit/ sales.
This ratio is 80% in the recent year. It is better than the past year 2014.
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Net profit margin: it indicates how much the firm generates profit through its revenues after
deducting the all the expenditures. The formula of the ratio is:
Net profit margin: net profit/ sales.
This ratio is 7% in the recent year. It is not better than the past year 2014. It indicates the cost of the
firm is increasing in the recent year (Wilkes, 2010).

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Conclusion
The business organization needs to take prudent decision about the proper financial planning. The
success of the business largely depends on this aspect. For this reason the business often forecast
about its resource usage in the future period. Besides this the financial statement and the ratios
analysis of these factors can help the organization in a better way about its lacking and strength so
that it can take corrective action to improve itself to achieve the sustainable development.

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Reference
Brigham, E. and Gapenski, L. (2010). Financial management. Chicago: Dryden Press.
Brigham, E. and Houston, J. (2010). Fundamentals of financial management. Fort Worth: Dryden
Press.
Clark, J., Hindelang, T. and Pritchard, R. (2012). Capital budgeting. Englewood Cliffs, N.J.: PrenticeHall.
Deakin, E. and Maher, M. (2011). Cost accounting. Homewood, Ill.: Irwin.
Holland, J. and Torregrosa, D. (2011). Capital budgeting. [Washington, D.C.]: Congress of the U.S.,
Congressional Budget Office.
Horngren, C. (2012). Cost accounting. Englewood Cliffs, N.J.: Prentice-Hall.
Horngren, C. (2014). Management and cost accounting. London: Prentice Hall Europe.
Horrigan, J. (2010). Financial ratio analysis. New York: Arno Press.
Johnson, R. (2012). Capital budgeting. Belmont, Calif.: Wadsworth Pub. Co.
Johnson, R. (2011). Financial management. Boston: Allyn and Bacon.
Nicholson, J. and Rohrbach, J. (2010). Cost accounting. New York: Ronald Press Co.
Palmer, J. (2013). Financial ratio analysis. New York, N.Y.: American Institute of Certified Public
Accountants.
Paramasivan, C. and Subramanian, T. (2011). Financial management. New Delhi: New Age
International (P) Ltd., Publishers.
Seitz, N. (2010) Capital budgeting and long-term financing decisions. Chicago: Dryden Press.
Vanhorne, J. (2011). Financial management and policy. Englewood Cliffs, N.J.: Prentice-Hall.
Wilkes, F. (2010). Capital budgeting techniques. London: Wiley.

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