STRATEGIC FINANCIAL MANAGMENT

Table of Contents
QUESTION 2 ............................................................................................................................................ 3
Task 2 of 2 –Report ............................................................................................................................ 4
Answer to Question 2 ................................................................................................................................ 4
4.1 Need of Short-Term Working Capital and Long-Term Fund ......................................................... 4
4.1.2 Needs for Long-Term Fund as follows ...................................................................................... 5
4.2 Source of Funding................................................................................................................................ 5
4.2.1 Short Term Source of Finance ................................................................................................... 5
4.2.2 Medium-Term Sources of Finance ............................................................................................ 6
4.2.3 Long Term Source of Finance ................................................................................................... 6
4.3 Justification for Selecting the Source of Funding For an Additional £1,000,000 Related To Cost
and Risk ............................................................................................................................................. 7
References: ................................................................................................................................................ 8

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QUESTION 2

Task 2 of 2 –Report
Scenario:
The Board of Penco approved your recommendations and decided to purchase
stock in the two organisations you recommended. In fact, based on your
recommendations, they decided to invest more than anticipated. The previous
budget was £2,000,000 but the board wants to invest £1,500,000 in each of the two
organisations you recommended which means that an extra £1,000,000 is required.

Instructions:
Write a short report containing:
• An introduction discussing the need for short term working capital and long-term
funds.
• A main body comparing the sources of funding, including their pros and cons.
• A justified recommendation of your choices of funding for the additional
£1,000,000 using a range of criteria related to cost and risk.

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Answer to Question 2
TASK 2
4.1 Need of Short-Term Working Capital and Long-Term Fund

4.1.1 Need for Short-Term Working Capital are follows

The short-term operating cash helps the business meet its daily needs. An
organization needs a specific amount of cash on a daily basis to pay for regular
expenses, handle unforeseen contingencies, and purchase basic materials that are
essential to the firm's operational activities. (Booc and Anton, 2021).

Having efficient short-term working capital management assists the company in

maintaining and improving the profitability and earnings of the Penco. Therefore,
the ultimate objective of the short-term working capital is to maintain the operating
cycle of the working capital also in minimizing tecsot of the capital that is spent in
the working capital. Therefore, this would lead to maximizing the potential return
from the investments in the current assets. Short-term working capital works as an
accounting strategy that emphasizes the maintenance of the adequate balance
between the current asset of the company and the current liabilities. The short-term
working capital of a company assists the Penco in covering the financial obligation
of the organization since it boosts the earnings of the same (Kliestik et al., 2021).

Managing the short-term working capital of an organization means managing the

cash, inventories, accounts receivables, and accounts payable. This assists the
Penco to emphasize the areas that are highly important to maintain the profitability
and liquidity of the organization (Hakim and Kasenda, 2021).

Short-term working capital also works as a metric to check the liquidity, efficiency,
and overall health of the company. Since it works as a reflection of the outcomes of
the other multiple activities of the Penco. The requirements of the working capital
are highly varied from the different industries. Therefore, the requirement of the
short-term working capital also depends on that. It is because there is a difference
in the collection period and the policies of the payment and some more.

4.1.2 Needs for Long-Term Fund as follows

The long-term funds of an organization help the company in aligning the capital
structure of the organization with its goals that are long term and strategic. This
helps the organization in taking more time to make the proper planning for
attaining the target of earning an adequate return on the investment

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The planning with the long-term funds helps the company to coordinate the
decision for the purchasing of the assets. Purchasing the expensive machinery that
will help the Penco to grow requires a huge investment. Therefore, precise
planning for the investment on the assets to make them workable in favor of the
business (Salvioni and Gennari, 2021).

When a company has long-term funds, it helps them in building sustainable

relationships with the investors. Having the appropriate investor will help the
Penco in creating furthermore partnerships and relationships with the existing
shareholders and the other investors. Since such a company is financing for such a
long-term prospect, the organization will not be required to identify the prospect
repeatedly by themselves. Since the potential investors will reach out to the
company by themselves.

A company that holds the long-term funds minimizes itself from the risk from
financial risk that arises due to the fixed interest rates, debts. Since the existence of
such factors can immediately impact the balance sheet of the organization.
Therefore, it protects the company from any losses. As if the Penco encounters any
losses, then the organization will be able to pay off the long-term funds (Krizanova
et al., 2021).

The long-term funds of a company provide it greater resources and the flexibility
for the funding of the multiple capital needs of the organization. Therefore, this
gives the company another source for the utilization of the funds and the company
does not have to rely on a single capital source. Furthermore, it assists the
company to spread out all the debt in different areas of the Penco (Krueger et al.,
2021).

4.2 Source of Funding

The different sources of the funding are as follows

4.2.1 Short Term Source of Finance

Pros
Short-term sources of finance give a quick payout to avail the cash whenever it is
needed. Therefore, it is highly helpful during any emergency. Such a source of
finance does not require going through the lengthy process for approval. Besides, it
allows the borrowers who have had bad credit in the past. Moreover, having a

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short-term loan allows the borrower to build or improve good credit history
(Kliestik et al., 202).

Cons
In the short-term sources of funds, the interest rates that are charged are high. Offer
it is seen to be higher than the long-term sources of funds. Therefore, the interest
amount gets high that has to be paid every month. Besides, not paying the loan
amount at a time according to the schedule can damage the credit score too.
Furthermore, for the borrowers, the chances are high they get into the debt cycle. It
is because the borrowers start to increase the purchase of expensive products.
Therefore, it puts them into the perpetuity cycle to rely on the debt (Weng et al.,
2021).

4.2.2 Medium-Term Sources of Finance

Pros
The medium-term sources of finance have a fixed rate of interest. Having a fixed
rate of interest also the owners of the business in knowing the exact costing that
has to be paid overtime. This source of finance requires making the payment
regularly. However, there is some weeks spaced in-between months or in every
fortnight. This is beneficial for the businesses that are maintaining a budget to
cover the fixed cost expenses (Horvathova and Mokrisova, 2021).

Cons:
The medium-term sources of finance need a longer application process. It is
because it requires more paperwork than the short-term sources of finance.
However, the application process takes lesser time in comparison to long-term
loans. Moreover, if the borrower does not have a good cash flow or credit score,
then it will be tough for the borrower to qualify for this type of loan. Furthermore,
for taking this loan one has to require collateral (Bui, 2021).
4.2.3 Long Term Source of Finance
Pros:
According to the borrowers, debt is the less costly source of financing. The reason
for the long-term loan to be cost-effective is the interest on the debt is a tax-
deductible expense. Besides, the creditors and the bondholders assume this debt to
be as the relatively has less risk for the investment. Furthermore, it needs lower
returns. Long-term financing provides adequate elasticity in the financial structure
or the capital structure of the company (Nieuwenhuijsen et al., 2021).

Cons:
It is a permanent burden for the company t pay the interest on the debt. Since the

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company has to make the payment to the creditors or the bondholders at a fixed
rate even if the organization does not earn profit or makes losses from the
investment. However, for paying the debt there is a fixed maturity period.
Therefore, debt is considered as the source of finance that is risky. As the
organization has to initiate the payment for the principal amount and the interest at
a specific time. Since if the organization does not make the payment of the
principal and the interest amount on time the company might lead to bankruptcy
(Wijburg et al., 2021).

4.3 Justification for Selecting the Source of Funding For an Additional

£1,000,000 Related To Cost and Risk
Now after understanding the Penco and the company in which the Penco will
invest the sum in those companies, therefore it is better to take the long-term
source of the funds for making the payment of the additional £1,000,000. Since
this will help the company in minimizing the cost and the risk. Besides, the
company will have enough time to initiate the payment to reduce the risk burden of
the cost. Therefore, the Penco will be able to put the main focus on the return on
the investment.

Since Penco can manage to invest the majority of the amount by the retained
earnings of the firm of the overall years according to the assumption, hence
£1,000,000 the Penco will be easily be able to pay all the debts when the time will
come for paying the investment. Also taking the investment opportunity now will
be effective since the probability is high that duties to the presence of inflation it
will be difficult to invest in the year to come. As the interest rate for taking the loan
will increase. Furthermore, the financial institution does not have many obligations
for taking the land from them. However, in the future, the financial institutions
might increase their rules and regulations for the lenders for taking the long-term
source of finance

Both the companies where Penco will invest its amount will get an adequate return
from anyone of them. Hence opting for the long-term source of finance will help
the firm in understanding the different streams of income for initiating the entire
payment. Also, in that duration, Penco will be able to understand whether the
investment is giving any return to the company. Hence, the company gets another
way for making the payment is through the return which the company will earn
from the investment (Nikbakht, 2021).

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References:

Booc, C. And Anton, S.G., 2017. Is profitability driven by Working Capital

Management? Evidence for high-growth firms from emerging Europe. Journal of
Business Economics and Management, 18(6), pp.1135-1155.

Bui, T., 2020. Supply chain finance, Uncertain Supply Chain Management, 8(1),
pp.37-42..

Hakim, L. and Kasenda, F., 2018. Determinants of capital structure and their
implications toward financial performance of construction service companies in
Indonesia stock exchange (idx). International Journal of Asian Social Science, 8(8),
pp.528-533.

Horvathova, J. and Mokrisova, M., 2020. Business Competitiveness, its Financial

and Economic Parameters. Montenegrin Journal of Economics, 16(1), pp.139-153.

Kliestik, T., Kovacova, M., Podhorska, I. And Kliestikova, J., 2018. Searching for
key Sources of Goodwill Creation as New Global Managerial Challenge. Polish
Journal of Management Studies, 17.

Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M. And Vrbka, J., 2020.
Remaining Financially Healthy and Competitive: The role of financial predictors.
Journal of Competitiveness, 12(1), p.74.

Krizanova, A., Lzroiu, G., Gajanova, L., Kliestikova, J., Nadanyiova, M. and
Moravcikova, D., 2019. The Effectiveness of Marketing Communication and
Importance of its Evaluation in an Online Environmental Sustainability, 11(24),
p.7016.

Krueger, P., Sautner, Z. and Starks, L.T., 2020. The importance of climate risks for
institutional investors. The Review of Financial Studies, 33(3), pp.1067-1111.

Muslih, M., 2018. The Influence of Budgeting System, Organizational Culture, and
Firm Size to Performance. FIRM Journal of Management Studies, 3(2).
Nieuwenhuijsen, J., de Almeida Correia, G.H.,

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Nikbakht, E., 2021. Investigating Long-Term Short Pairing Strategies for
Leveraged Exchange-Traded Funds Using Machine Learning Techniques (Doctoral
dissertation, Concordia University).

Salvioni, D.M. and Gennari, F., 2017. CSR, Sustainable Value Creation and
Shareholder Relations. Salvioni, DM & Gennari, F. (2017). CSR, Sustainable
Value Creation and Shareholder Relations, Symphonya. Emerging Issues in
Management (symphonya. Unimib. It), 1, pp.36-49.

Weng, B., Lu, L., Wang, X., Megahed, F.M. and Martinez, W., 2018. Predicting
Short-Term Stock Prices Using Ensemble Methods and Online Data Sources.
Expert Systems with Applications, 112, pp.258-273.

Wijburg, G., Aalbers, M.B. and Heeg, S., 2018. The Financialisation of Rental
Housing 2.0: Releasing Housing into The Privatized Mainstream of Capital
Accumulation. Antipode, 50(4), pp.1098-1119.

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