Managing Financial Resources and Decisions

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Introduction to Managing Financial Resources and Decisions

Finance is the basic need of an organisation to run a business. An organisation needs sufficient funds to achieve their organisational goals. Besides this, the important function of the organization is to manage funds because proper fund management will lead the company towards success and improper management will have negative impact on the working and efficiency of the company (Rigby, 2011). Thus, company must take proper measures for managing financial resources and it should exercise due care while taking decisions so that it will help the company to grow. Sweet Menu Restaurant Ltd. is a reputable restaurant in East London. Partners of the organisation are planning for expansion of business and for the same, they require funds. The Current project gives description about various sources available for fund raising, their implications, cost associated with them, what factors are required to be considered while taking decisions in selecting sources of finance. In addition to this, it also evaluates the financial statements including ratio analysis and takes the decision on the basis of study done above.

External sources of finance

Equity:Equity refers to capital of owners. Sweet manu can raise funds either through fresh issue of shares or by increasing existing share capital receiving amount from shareholders. Issuing shares in return entitling them a share in the earnings of the company or by entitling them the rights over payment of dividend before ordinary shareholders (Fridson and Alvarez, 2011).

Debt:Funds can be raised from financial institution or any third party by paying them certain financial cost for a definite period in the form of interest. These can be in the form of loans, debentures, bonds, borrowing from friends, etc., thus Sweet Menu Restaurant Ltd. use debt sources for raising funds (Magner and et. al., 2006).

Bank Overdraft:Bank overdraft is when banks give facility to its customers to withdraw amount more than available balance from their current accounts. A limit is fixed by the banker upto which the customer can overdraw from its account (Gudov, 2013).

Implications of Sources of Finance

Sweet Menu Restaurant Ltd. has various sources available to raise funds, but each source will have its different implication on  working and growth of the company and further it has its advantages and disadvantages (Gotze, Northcott and Schuster, 2015). Like, equity capital when increased will increase wealth of the company but it may make reduction in the per share earning., dividend to be distributed will be increased and Control of theSweet Menu Restaurant Ltd. may be in many new hands with increase in shareholders.

On the other hand, debt funds if used to raise funds will increase long term obligations of the company with increase in finance cost and will affect the profitability of the company. There is an obligation on the company to regular pay the finance cost otherwise additional cost may also incur.

While availing bank overdraft facility, customer can withdraw amount only up to the limit given by banker and it is a short term obligation which imposes interest on the company at a rate higher than the term loan interest rates.

Working Capital adjustments has its own implications as to make agree the creditors and debtors for delay/early payment is another difficult task as why will someone agree to delay its payment or make early payment (Vandyck, 2006). It will also have a negative effect on companies' relation with its debtors or creditors, also when stock level is reduced, storage cost will be reduced but company must also be very careful so that demand of the customers does not get affected.

Use of retained earnings  is another issue because shareholders have to give up their dividends to retain the same in business, as it is not easy for an individual give up their share of earnings. Sale of assets on the other hand might reduce productivity of the company although other cost are reduced like depreciation on such assets (Ilter, 2014).

Appropriate Source of Finance

Sweet Menu Restaurant Ltd. while selecting sources through which it can raise funds has to consider  advantages and disadvantages of it and it should also consider the impact which it will have on the business. As per the sources available to Sweet Menu Restaurant Ltd. and considering their implications mentioned in the above section, company should raise funds by taking secured loan from financial institution. It is because,  Sweet Menu Restaurant Ltd. has been in existence for years  and has maintained a good name, also asset position of the company is good and this will help the company in easily availing the loan from the financial institution (Bondt and et. al., 2010).

Company along with long term loans should avail the facility of bank overdraft from its bank by withdrawing more than the available balance. Although, interest is chargeable at much higher rate but there is no need to provide any security for availing services of bank overdraft and also company can adjust the overdraft amount at the end of every month.

Furthermore share capital as external source of finance is also appropriate source. It is because it helps management to arrange necessary ling term capital in order to expands business in the marketplace. It helps to increase capital of the firm so as to increase overall rate of return and meet organizational objectives in right manner on right time. On the other hand retained profit is also appropriate source as it does not generate any cost. However, opportunity cost is paid by corporation after investment of retained profit in other business activities company cannot have enough money for existing business activities.

Cost of Sources of Finance

Funds can be raised through various sources available to a company and each source carry a cost along with it whether it is cost of equity or any opportunity cost. At the time of issuing the equity share, the company is required company to pay dividend to its shareholders. BY considering this aspect, cost while raising funds through issue of equity will be the dividends required to be paid on such issue. When a company raises fund through debt sources available, whether through term loans or issue of debentures, it obliges a company to pay interest on the debt fund at a pre determined rate by the lender or by the debenture holder (Assibey, Bokpin and Twerefou, 2012). Retained earnings if used by the company to raise funds will also involve opportunity cost to the shareholders because profit will not be distributed to them as dividend.

Stock Level reduction involves cost equivalent to loss to the company if demand of the customers are not  met. In the given scenario, company chooses term loan and bank overdraft facility as the sources from which it can raise fund. When funds are raised by taking term loan from financial institutions, it poses an obligation on the company to pay finance cost in the form of interest to be paid over the loan period and related processing charges (Baker and Mukherjee, 2007). Same goes with Bank overdraft, company has to pay interest cost and high banking charges while availing the facility of the overdraft.

In addition to this, management  of Sweet Menu Restaurant Ltd. Need to pay dividend on issue of ordinary share or right share. On the other hand, retained profit will also create opportunity cost. It is because cost incur in one alternative lost the chances for the use of the same in another alternative. Owing to this, cost of financial resources need to be assessed in advance so as to determine growth ans success of Sweet Menu Restaurant Ltd. In the marketplace.

Importance of financial planning

Financial planning involves formation of different strategies so that financial assets of the company are used in the correct manner so as to meet the organisational goals. In addition to this it makes changes in the spending pattern, if company feels the need of the same to function in a better manner. Financial planning is nothing but pre planning as how and in what manner company will spend its funds to reach goals of the organisation (Flamholtz and Kurland, 2006).

Financial planning is very important to every organisation because pre planning forms a correct basis for decision taking and company can easily monitor results of such planning that either plan which is made is appropriate or modifications are required to be made in it.

Financial planning will help Sweet Menu Restaurant Ltd. to establish their organisational goals whether short term or long term. It will also help the company to monitor elements and areas which involve more cash flows and help the company to take proper actions so that cash outflows can be reduced. As company is thinking to start new business project, planning will help them to decide the amount of expenditure required to be incurred by the company so as to target large public by using the media advertisements, etc (Assibey, Bokpin and Twerefou, 2012).Financial planning helps the firm to form a proper capital structure. It also assist the company to decide suitable investment policy to invest in which it will generate more income as compared to other by involving less cost and will help companies to grow.

Financial planning helps a company to carry out its functions smoothly. On the basis of the financial planning done, all other financial activities can be checked for further modifications (Notes to the Financial Statements, 2014).Financial planning assist the company to utilize their funds in a proper manner by forming different policies so as to gain advantage over their competitors, even planning also aids the organization to manage their income so as proper tax planning can be done by the company to reduce the tax payment liability.

Information Needs of different decision makers

Financial Information of an organisation is required by various decision makers, besides owners and employees, there are many other individuals present like suppliers or Account receivables who are affected by  working and decisions undertaken by the company. They need information related to  company because in some or the other way, they are related to the organisation i.e. companies growth or survival will have an impact on them also (Lindholm and Suomala, 2007).

Owners are the ultimate decision makers of the organisation. They need information related to the company because they had invested their amount in the company and are entitled to the share in the earnings of the organization. With increase or decrease in growth and profitability of the company, their share will also vary  due to this aspect they need information of the company to know that whether is company is growing or not (Flamholtz and Kurland, 2006).

Employees are the individual who work within the organisation and for the organisation.  Employees need information so as to know that how the organisation is growing for which they are working because their growth is aligned with companies growth.

Suppliers are the persons who supply goods or any asset or anything to the company on credit terms i.e. payment is due to them (Baker and Mukherjee, 2007). They require information of the company to know that whether the company will be able to pay amount due to them.

Financial institutions include banks and other institutions who had lend certain amount to the company and in return, the firm needs to pay interest on the same (Cook and Ali,  2010). Thus, information is needed by these financial institutions so as to know that whether the company has sufficient liquidity and profitability to pay its interest obligations.

Impact of sources of finance on financial statements

Sweet Menu Restaurant Ltd. had decided to raise funds by taking term loan from financial statements and by availing bank overdraft facility. These sources carry elements which will have an impact on financial statements of the company i.e. profit and loss account and balance sheet of the company which is explained below.

Impact on Profit and Loss a/c

Term Loan and Bank overdraft both requires company to pay interest on them and processing charges (if any), which will be shown as operating expenses in P & L A/c.With increase in such expense, profit of the company will reduce which will further decrease the amount of dividends declared and retained earnings will also get reduced (Murphy and Yetmar, 2010)

Profit and loss account

Profit and loss account is statement which shows net profitability of the individual or company by reporting various expenses incurred and revenues earned from different sources over a period of time. In other words, excess of income earned over expenditure incurred is shown by profit and loss account. Profit and loss account is prepared on accrual basis i.e. expense and revenues are recorded as they incur irrespective of whether they are actually paid or received. It can be prepared monthly, quarterly or yearly (Assibey, Bokpin and Twerefou, 2012).

Balance Sheet

Position of all the assets, liabilities and equity of the company at a given point of time is shown by balance sheet, thus it is also known as the position statement. Position statement is prepared in a manner so as to fulfil accounting principle of Assets=Liabilities + Equities. This statement shows the net assets position of the company including fixed assets, current assets and investments against their obligations and owned capital, like long term debt, current liabilities, Equity capital. Balance sheet is prepared for a given date like 21 December, 2015 (Baker and Mukherjee, 2007).

Cash Flow Statement

Cash flow statement shows the net inflows and outflows from various activities namely operating, investing and financial activities over a period of time (Robbani and Bhuyan, 2010). Operating activities shows net cash flow from revenue generating items, investment activities show net flow from sale or purchase of fixed assets or investments while financing activities shows alteration in owner’s capital or long term debt. These are prepared for the same period for which income statement had been made.

Conclusion:

In accordance with the present study, it can be concluded that business organisations are required to make various decisions for their operational activities. In order to make viable decision, management of organisation is required to make use of suitable financial tools. Funds should be raised by using appropriate sources of finance by considering their advantages, disadvantages and related cost as these sources lay different impact on profitability of the company. Proper investment appraisal techniques should be used to evaluate different investment proposals and selection should be made on that basis. Forecasting the consequences on the basis of budgets prepared and taking proper measures for correction of the same.

References

  1. Booker, J., 2006. Financial Planning Fundamentals. CCH Canadian Limited.
  2. Dlabay, L. and  Burrow, J., 2007. Business Finance. Cengage Learning.
  3. Fridson, S. M. and Alvarez, F., 2011. Financial Statement Analysis: A Practitioner's Guide. 4th ed. Wiley.
  4. Gotze, U., Northcott, D. and Schuster, P., 2015. Investment Appraisal: Methods and Models. 2nd ed. Springer.
  5. Rigby, G., 2011. Types and Sources of Finance for Start-up and Growing Businesses: An Instant Guide. Harriman House Limited.
  6. Vandyck, K. C., 2006. Financial Ratio Analysis: A Handy Guidebook. Trafford Publishing.
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