Unit 2 Managing Financial Resources and Decisions

Unit 2 Managing Financial Resources
and Decisions
Managing
Financial Resources & Decisions
Introduction
Top of FormBottom of Form| In this report we are going to help Mr T Jones to
start his fast food restaurant in Manchester. Mr T. Wants to start a franchise
restaurant Wimpy and needs help with the financial resources and planning part.
Step one, there are different souses of finance and it’s divided into
internal and external finance, money that comes from within a company and the
opposite any way in which company raises financing other than using its own
money. (See page 4). We are now going to go thru different options of finance
for Mr T franchise.|

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Task 1

1.1 Range of sources of finance for different businesses.

Here are most common sources of business financing for small or large
businesses. * assets /”love money”
* banks/credit unions,
* government assistance
* business partners/strategic alliances
* venture capital ”angel investors”
* “going public” , PLC

Assets/ ”love money”

Top of FormBottom of Form| It is essential for a start-up business to have
personal savings, assets in order to finance the business and make it work.
However in most cases it’s rare for start-up businesses to have enough personal
savings to completely finance the whole business. In order to have chance to
borrow money from the bank you need to have some amount of savings and bankers
tend to see the amount of personal savings you are willing to put in to your
business as an indicator of a business owner’s commitment to the business.

”Love Money” is just as it sound, money from family and friend who support your
business. Money is provided as a loan or as a gift, either way’s there should
be agreement document between bout parts that includes record of everything
that has been said.|

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Banks /credit unions

One of the most common sources of financing that is used by business owners is banks,
credit unions and other financial institutions. Before loaning any money out
most financial institutions will require a business to make a detailed business
plan which usually consist of financial statement for the business including
proposals if the business is just starting up which can include personal
statement of net worth, discussion on industry and target market etc. Before
lending any money out financial institutions will consider the level of risk
your company represent. The important part which lenders pay particular
attention to are: * cash flow and profitability * management capability

* working capital
* level of debt
* personal net worth of the business owner
* historical trend and ratios

Government assistance

Government assistance is available for business owners in form of grant and
loans which are mostly targeted at specific industries or ares. There are
strict criteria which must be met by the business in order to obtain government
financing. Some examples of government agencies and organizations in UK
Such grants and loans from government can be very valuable source of
financing.

Business partners/strategic alliances

Top of FormBottom of Form| Some businesses enter into partnership or alliances
with other business owners to obtain financing. Both parties involved are the
ones to organize the partnership and these can include formal partnership,
joint ventures or joint ownership. It is crucial for both parts to decide
issues such as sharing of profits, control, decision making and
responsibilities before entering into partnership. |

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Venture capital

Top of FormBottom of Form| Venture capitalists also called”Angels” are
individuals with capital to invest into businesses which have potential to
strong growth. Often enough angels are willing to invest in smaller businesses
with growth potential. ”Angels” are usually very beneficial to businesses
because they are successful businesspersons and are prepared to help and give
advice. They also have contacts in the financial and business communities which
is always an advantage. It can be a hard decision for the business owner
because some ”angels” wish to have an equity position in the business before
contributing financially, which means that the business owner may lose control
over the business.|

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Going Public PLC
When the company have grown to an appropriate size or have valuable and
exciting business opportunity available to them “going public”, selling your
company shares to the public or even listing them on a stock exchange may be an
option. Which can give access to huge capital and at the same time increase the
value of the business owner’s shares which they retain. Some sources of finance
offer special benefits. Selling stock is among the fastest ways to get access
to a large amount of cash, and its money you’ll never need to pay back
directly. Internal sources of finance keep control within the company and don’t
subject you to interest payments on loans. ordinary shares and preference
sharesHND Assignment Help

Figure 1How finances are divided in diferent parts

Finance for Mr. T franchise (operated as sole trader) and for the franchise
holder (operated as a Public Limited Company)

There are different type of financial options for Mr. T franchise. Franchise is
when you bye into existing company for example McDonalds. Some franchisers
offer their own financial programs as a help or the company have partnership
with a particular lending company which can make it easier to gain funding.
Here are some financing options: Internal

• You can always go the
traditional way by borrowing money from friend and family or investing your
assets into the franchise. External
• You can get a loan from many
banks. If you can provide a strong business plan.
• Find business partner
SBA-Backed Financing,
these is one of the popular business loans and it can be obtained by those who
do not qualify for traditional financing options. There are several
innovative companies that will roll your retirement plan into a business loan.
There are no penalties associated with this type of retirement fund conversion.
This type of loan enables you to invest in a business without mortgaging your
home or using your property as collateral.

Mr. T franchise holder that operates as PLC can open the company to the public
and issue more shares.

1.2 The implications of diferent sources of finance

Banks/Credit unions

Every financial source has set of implications for example when you borrow
money from the bank you will need to pay certain amount of interest as well as
other agreements between lender and borrower, such as being penalized for late
payment. The interest is usually fixed by the debt holders.When borrowing from
credit unions the rules will be much the same as with regular banks, however
the rate of interest may be lower.

When company makes loss they still have to pay the interest. If Mr. T. fails to
pay interest, the debt holders will become creditors. In this case, franchisee
have to find methods, sell their assets to repay money to debt owners. If not
Mr. T will be sued and the director may end up in the prison.

Putting yourself into debt is not always the best option. Because by increasing
debt you are increasing risk and profit out of the company.

Assets/ Love money

Having personal savings and other asses make a great source of capital but the
drawbacks are that if you put your personal savings into a business venture you
could lose it all. Other assets options such as retirement accounts, placing
such assets at risk may not be good for you, especially if you’re approaching
retirement age and are running out of time to rebuild drained accounts.

When borrowing money from family members and you cannot repay the loan as
promised your family reputations as well as your financial reputation is at
risk. This risk should be taken in consideration when borrowing money from
family. As well as the responsibility of keeping the members involved, informed
and updated.

Government assistance
Top of FormBottom of Form| The disadvantages of government loans is that just
like other loans they come with interest rate that are typically far below what
you can get on your own. Unfortunately it’s not so easy to get government
assistance. Because it not available for every type of business. As well as the
budget issues from year to year may affect the availability of funds. Finally
government loan is still a loan and you will have to pay it back.|

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Venture capital ”angel investors”
With private investors, there will be a legal agreement between the buyer and
the seller; however, sometimes, these agreements are simply verbal contracts.
The implication of not having a written legal contract between both
parties can be serious when one side fails to live up to his or her obligations.

The best private investors will not give money to business people
until they have performed due diligence on companies; due diligence is the
process of checking financial statements, and measuring assets against
liabilities.

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Going public

If Mr T decides to go public he needs to consider to give certain element of
control over the company. As well as to take responsibility over a group of
shareholders who have partial ownership right. When you share the risk with
others, you’ll also have to share the profits.

Mr T must pay after tax when issuing new ordinary shares. Because ordinary
shares are not tax deductible. This means that when the main point of company
is net profit. MR T should consider about issuing how many shares or debts in
order to pay lowest tax and bring highest profit. When it comes to preference
shares, tax does not affect directly and just as ordinary shares this is paid
out from the earnings after tax.

In addition shareholders have something to say about the CEO of the company and
whether or not this person should stay in that position. For example Easy Jet’s
chief executive officer stood down after ten years and was replaces by former
RAC PLC CEO Andrew Harrison.

So when Mr T issues new shares, he needs to make sure that the percent of
shares he holds are still more than 50%. Because the more stake the share
holders hold, the more control of the company they have.

1.3 Advantages and disadvantages of the finance option, evaluate whether the
finance option is appropriate for franchise funding?

The good news for Mr T is that it’s easier for franchise companies securing
loans. Because of the established franchises that have a history of selecting
successful franchisees and a history of success. When choosing appropriate
source of finance factors need to be considered:

How much money is required?
* If the amount of money is large then it’s not realistic or available through
any sources.

Which option is the cheapest one?
* How much money that need to be paid to secure the initial amount? * How much
is the interest that has to be paid on the borrowed amount? * Cheapest form of
money to a company comes from its trading profits.

How big is the risk?
* If the franchise project has less chance of making profit then the risk is
higher than the one that does. * Potential sources of finance take this into
consideration and may not lend money to higher risk business projects, unless
if there is some agreement or guarantee that their money will be returned.

How long do you want to borrow the money for?
* Consider if you want to borrow for a long term or short term project and
therefore decide what type of finance company suites your needs better.

When it comes to Mr.T he could put in more internal profit by trying borrowing
some more money from family and friend. Because there is no interest rate
paying back and it’s more flexible. Nevertheless, if he could not access some
more internal profit chances are big that he could get a loan from a bank. Du
to his good savings account which is well over the 20 percent needed as start
capital. The loan should be short term so that the interest rate is as low as
possible. In addition the franchise Wimpy could help Mr. T choosing source of
finance.

Initial cost of Franchise: £13000
Training course costs: £1200
Deposit and initiallease payment for permises: £7500
Sundry cost:£5000
Sum: £38 700
Balance in savings account: £9500

Task 2

2.1 For each finance options analyse the various costs associated with each
option.

Assets/ Love money
* You should be prepared to put down about 20% of the cash you will need from
personal funds. * You must provide information about the performance of the
business to the people involved.

Banks /credit unions
* Interest rate is the main cost here.
* The single most important issue in landing bank financing is your credit
rating. You will need to present a complete loan package including a personal
financial statement, copies of personal tax returns for three years, and
verification of the source of your down payment.

Business partners/strategic alliances
* You will have to give away part of the profit.

Government assistance
* Interest rate is the main cost.

Going public
* By issuing shares you must pay the cost of providing shareholders with
information about the performance of the business.

2.2 Importance of financial planning.

As Alan Lakein said ” Planning is bringing the future into the present so that
you can do something about it now”.
Here are some importent factors to think about when planing finance:
Income
Its very importent for Mr T to manage his income more efficiently, specaly in
the start up face. Analysing income expenditure and budgeting in order to
increas cash flow.
Cash flow

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In order to generate cash flow in to the company careful tax planing is
important as well as budgeting and prudent spending. While increasing the cash
flow into the company it will be posibule to invest. Capital

Financial planning is a must to create balance between outflow and inflow of
funds so that stability is maintained.
Growth
Financial planing helps making gowth and expansion which helps in survival of
the company, long term. In addition financial stability reduces uncertainties
which helps the company to expand.

Poor cash management leads to negative consequences such as not being able to
make pay roll. Whith a financial plan that is structured to always have cash
over and not less, helps the business owner sleep better at night. It easier to
take advantages of opportunities that arise when you have capital. For example
to purchase investory from a supplier at temporarily reduced price.

2.3 Assess the information needs of different decision makers.

Different decision makers want different information. To be able to provide
everyone with corect information business use ratio analysis, that shows
relationship between two relevent items in the financial statement. Short term
lender prefers to know about Liquidity ratio of the business, companys ability
to pay its bills. Long term lenders want to know the measuring relationship
between proprietor’s funds and borrowed funds that indicate the degree of debt
financing in a company, Leverage ratio. Activity Ratio shows the effectivesness
of the company in utilizing its funds, its degree of efficiency as well as its
standard of performance, also known as efficiency and performance ratio.
Profitability ratio reflects the overall efficiency of the organization, its
ability to earn return on capital employed or on issued shares as well as
effectiveness of its investment policies.

From shareholders point of view, they generaly expect a reasonable return on
their capital as well as safety of their investment.

Figure 2 Ratio groups

Figure 3Business Ratio table

2.4 The impact of finance on the financial statements

Balance shit is a overwue of your assets as well as your liabilities, which
sums up your equity in your business. In the example you can see that balance
sheet is divided into two major sections. The first section gives you a clear
picture of your ”Assets”. The second part is ”Liabilities and Owners Equity.”

The order of a balance sheet is to go from the most liquid to the least
liquide.
For example you can see under the heading “current assets” and the first
heading is cash, because cash is the most liquid of your assets.
After cash comes receivables, money owed you from customers. When you receive
the money the receivable turns into cash. Since inventory is not as liquid as
either cash or receivables this falls below them. Next assets are property and
equipment.

Depreciation on a balance sheet is a non- cash expense and it shows that this
assets go down in value over time.

This kind of financial statement is called a “balance sheet” because the assets
always equal your liabilities and owners’ equity. Double-entry bookkeeping is
very practical. It serves as a check to make sure a transaction has been
properly recorded. For example if the first thing Mr T buy

Is a desk, he has assets of office equipment. If he paid cash, he don’t owe any
liabilities so the desk is called owners’ equity.

Looking at our balance sheet you can see under current liabilities, your
account payables as the first item listed. Accrued liabilities refers to
payroll taxes and sales taxes that usually may not be due for another month or
two.

Also under current liabilities is debt that is due within a year. So, the
current 12 months of payments for equipment would be shown as a current
liability. Following that we have long-term debt, which are items that are due
after the current year.

Following total liabilities is the section called “owner’s equity”
which is the owner’s interest in the business.
Task 3

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3.1 Analyse budgets and make appropriate decisions.

Budget states future financial projections of revenue, expenses and expected
profits.
When planing the budgeting for different enterprices, cost is divided into
variable
fixed and joint cost. Variable cost is out of pocket cost for input which is
always in a budget statement. Fixed cost is associated with building and equipment
investment. While Joint cost is usualy a fixed cost that is common to more than
one enterprice. For example depreciation for equipment used in business. There
are diferent types of budgeting sustems:

Enterprice budget
States the costs and income of the production for one type of product, during
one cycle of production.

Whole farm budget
Adds up the cost as well as the income from each enterprice budget to determen
total expenses and income for the company as a whole.

Partial budget
Shows the effect of a small change on the companys functune. Not counting in
the unaffected parts of the overall company’s budget. This budget is used as a
guide when making small decisions.

Cash flow budget
Shows expenses of the company over a fixed time. Provides information of
whether or not expected total cash income will be adequate to cover the
expenses. Cash flow budget can be useful when purchasing major product or
service.

Mr T Budgeting Wimpy

When setting up his budget Mr T can create appropriate decision bu using above
budgeting sustems as base. * By setting reasonable goals for each product.
* Calculating accurate cost for each products in the restaurant. * Figuring out
the brakeven price and net return for the restaurans each product to be able to
cover all the costs and make a profit. * By choosing the right management
strategy to help Wimpy achive production as well as price goals. * By comparing
the returns the company make from each of its products, helps to better assess
and plan the profitability for the whole restaurant. * Budgeting important
information for future planning and loan applications.

Figure 4Planing budget steps

3.2 Explain the calculation of unit costs and make pricing decisions

(Total fixed costs + Total variable costs) / Total units produced

You can see the cost per unit calculation above. It shows how fixed cost such
as building rent is added to variable cost, direct material and the number is
divided by the total number of units produced.

* Total fixed cost is remaining fixed it dose’n get effected by the production
units. * Variable cost is not fixed it varies in relation to either
production volume or services provided

For example Mr T cost per unit:
* Total variable cost: £ 5000
* Fixed cost: £7000
* Tatal dishes: 1000

(£7000 + £5000 )/ 1000 = £12 cost per unit

3.3 Assess the viability of a project using investment appraisal techniques.

Here are some investment apprasals:
* Consider whether an investment project is worthwile or not. * Is used for all
type of investment, from new machinery to a whole producton unit. * Managrs are
allowed to make a informed choice regarding the viability of the project.

Here are financial techniques of investment appraisal:
* All costs and different revenues can be forecast for future years. * Business
will be looking to miaximize profits.
* Some key variables like interst will not shift.

Ways of investment appraisal:
* Payback period
* Accounting rate of return
* Net present value

Payback period

Looks at how long it takes to pay back the initial cost of the investment and
how much revenue the assets will generate. For example if you buy a machine
that costs £50000 and you produce 50000 items that you sell for 50p each it
will take you two years to pay the initial investment. By knowing this you can
chose the shortest time to payback the initial investment.

Accounting rate of return
Compares the profit generated by the investment to the cost of the investment.

ARR = Average profit/initial cost of investment * 100

The figure in percent gives the business clear idea of the average rate of
return. It helps business to compare this figure to other alternative
investments.

Net present value

Theories and concept of human development and behavior
Discounting cash flow by accounting inflationary pressures as well as interest
rates. It helps you to understand how much you would need to invest now to earn
a certain amount in the future. You can compare what would happen if you
invested in other projects or saved.

Task 4

4.1 Discuss the main financial statement.
There are four main financial statements:
Balance sheet
Shows financial position at a given point in time.

Income statement
Shows revenues minus expenses for a given time and period ending at a specified
date.

Statement of owner’s equity
Also known as statement of retained earnings or equity statement.

Statement of cash flow
Summarizes sources and uses of cash, indicates whether enough cash is available
to carry on routine operations.

By analysing financial statements it helps to see that profits are being earned
on the invested capital in the business or not. As well as helpful to compare
the trends regarding various expenses, purchases and sales. By analysing the
trends and other analyses it provides the business with sufficient information
regarding actual growth potential of the company.

The financial statement helps to make comparative study regarding profitability
with the data of other companies. While the main purpose of financial analysis
is to add financial strength to the business. In addition analysis also helps
in taking decisions such as funds required for purchase of new machines and
equipments.

4.2 Compare appropriate formats of financial statements for different types of
business.

There are four financial statements formats.

* Balance sheet
* Income sheet
* Equity statement
* Statement of cash flow

Balance sheet
Balance sheets have to sections, assets and liabilities. This statemnt shows
how a companies income and output balances against each other. Balance sheets
look diferent and varie in complexity dipending on the size of business

Income sheets
Shows whether business made profit or lost money during speecific fiscal
period.
You can find two diferent types of income sheet, single and multipule step
sheet.
Where multistep sheet includes more detail information as compare to single
step.
Is usuful for smal as well as big business organisations.

Equity statement
Shows change in the company’s retained earnings such as equity statement. It
shows information on dividends, operational profits as well as losses.

Cash flow
Cash flow statement indicates the effect of the above statements on the
company’s cash flow. This statement is used usualy by bankers, accounting
stuff, investors and potential employees.

4.3 Interpret financial statements using appropriate ratios and comperisons,
both internal and external.

Different types of ratios
Profitability ratio
Shows the companie’s ability to generate returns on its sales, assets and
equity.
There are four types of profitability ratios:
1. Ordinary shareholders return funds: net profit after tax *100/ ordinary
share capital

2. Return on capital employed: net profit before tax and interest *100 / share
capital long term capital 3. Net profit margin returns: net profit before tax and
interest * 100 / sales

4. Gross profit margin: gross profit *100 / sales

Eficiency ratios

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Shows how well a company uses its assets and liabilities internaly.
There are four types of efficiency ratio:

1. Average stock turnover period: average stock held * 365 / cost of sales

2. Average settlement period for debtors: trade debtors * 365 /credit sales

3. Average settlement period for creditors: trade creditors * 365 / credit
purchase Fixed asset turnover: sales / fixed assets

Liquidity ratios

Shows the ability of a company to meet its short term financial obligaions.

Current ration: current assets / current liabilities

Current ration: current assets / current liabilities

Acid test ratio: current assets (excluding stock) / current liabilities

Operation cash flow to maturing obligations: operating cash flows / current
liabilities

Gearing ratios

Shows the relationship of owner’s equity to borrowed funds.

Gearing ratio: long term liabilities/ share capital + reserves + long term
liabilities
Investment ratios
The a relationship of gains from investment resulting from insurance operations
to earned premiums.

Different ratios make it easier to know the helth of the company as well as
comparing budget forecast, previous years ratios and other companies ratios.

Conclusion

Mr T will have to adjust his financial strategy with time when he gets more
experience. The good thing of being franchise is that he can always get support
from franchise holder. It helps to set SMART goals in budget and cash flow,
always being organized and keeping track with the financial progress and always
having financial security, Mr T can sleep better at night.

 

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