Management of finance in an organizations is a very crucial task that need to be looked after by officials of business for long term sustainability of company in the market. Firm use to initiate these capital so that they are able to carry out smooth functioning with respect to their planning investment for future (Srinivasan, 2012). Proper management of funds also helps in identifying legal obligations that can occur on the amount of money borrowed from external sources. Finance is considered to be an important aspect while carrying out strategic decisions of organization operations. Even business can carry out effective management of budgeting concerning projects for gathering information that can be helpful in carrying out strategic decisions. Developing financial strategy in the business helps in understanding different needs of monetary resources within the enterprises (Tauringana and Afrifa, 2013). In the present study identification of various sources need to be carried out, so that organization is able to carry out proper fund raise for attaining effective financial stability. Research also recognizes implication concerning monetary decision that need to be carried out on the basis investment appraisal technique and financial information (Pratt, 2013) . Report will be looking after Kaia Plc one of the public limited company which is into manufacturing of street cleaning equipment. For the organization being a finance director decision need to be carried out concerning financing and viability of a new line of low emission street cleaning vehicles.
Setting out the main features of two long term and two short term sources of finance, including its main advantage and disadvantages
For smoothing functioning of a business there are various activities that management need to initiate concerning management of working capital, procurement of raw material, expansion of new business territory, development of new product, modification in the existing business etc (Gitman, 2013). There are various long term and short term sources that can be initiated by Kaia Plc in their organization for initiating new project within the business. However, there are various advantages and disadvantages concerning these sources. These aspects can be discussed as follows:
Long term sources
These are those sources which are borrowed by business for a longer period of time it can be for the period of one year. Initiating long term finance are entirely different from those concerning short term finance (Keller, 2013). These funds are generally initiated for carrying out expansion projects. Financing these kinds of sources are typical and may involve billions of dollars or pounds.
Issue of share capital- It is one of financial tool that is used by large business enterprise in order to raise capital from public for carrying out their long term projects. It is mainly carried out by management for the expansion of activities by company at a larger scale. Here, management of the business offers IPO that is initial public offer for raising funds from the market through public or investors. Number of shares issued to an investor is considered to be the ownership that is gained over an entity(Taticchi, Carbone and Albino, 2013).
Long term bank loan- This aspect can also be initiated by organization for raising funds from bank. In this respect firm need to promise that they will be paying out fixed out of installment and interest on the amount borrowed back to the banking institution for a set period of time (Menifield, 2013). Bank loan is carried out by management for meeting out organization working capital and long term business need.
Advantages and Disadvantages
Issue of share capital
The main advantage with respect to issue of equity financing are with respect to funds that are usually kept indefinitely. This is because on such funds there is no requirement with respect to payments, as dividends are paid only when the firm is able to earn profits in that particular period.
Disadvantages concerning this capital concerns that on the payment of dividend to shareholders business do not get advantage with respect to tax deduction (Norton, Larry and Kelly 2014) . IF there will be more of shareholders financing then there will be less control over the operations of the enterprise.
Long term bank loan
It is a source that can be easily accessed by enterprise for carrying out their functioning when compared with issues of shares. Even these funds helps organization to have tax benefits in their operation.
However, disadvantage that can be seen by adopting these funds from the market is that organization needs to submit collateral securities against issue of funds by the banks (Menifield, 2013).
Short term sources
These are the sources of finance which are facilitated by organization financers for seeking quick business opportunities that needs to be completed with a short span of time. The major highlight that can be drawn out of this finance is that it can be promptly available to businessman (Kinney and Raiborn, 2012). Short term business finance can be initiated by business for both new and existing businesses.
Overdrafts- It can be said as deficit that is financed by banks that has taken place all because of payments exceeding income with respect to organization current account.
Short term loans- This loan is carried out by organization for a period not more than one year. This loan is raised for a fixed amount for a specified period (Vice, 2013). This amount is drawn by business in full at its beginning of the period of loan and repaid within particular time or in defined installments.
Advantages and Disadvantages of Overdrafts
Business can initiate overdraft from the bank whenever they require it and it even do not cost anything apart from possibly a small fee. This fund help organization to make their payments in an appropriate manner and maintains proper cash flow (Siano and Confetto, 2011). It is a fund that can be arranged in an easy and quick making and also provides good cash flow backup with the minimum of fuss.
Disadvantage concerning this aspect concern interest and fees payments that is much higher when compared with loan rates. It is an aspect that is considered very expensive when compared with long term borrowing (Grieve, 2013). Even higher charges can be initiated by bank if business goes above the agreed overdraft limit.
Implication of different sources of finance
The management of Kaia Plc have selected issue of shares and different kinds of bank loans for attainment of corporate goals. So, implications of different source of finance are explained below:
Issue of share: In order to acquire funds through shares, the administration of business entity needs to consider several regulation and legal norms developed by public authorities, stock markets etc (Kinney and Raiborn, 2012). It influences management practices for issuing shares. It affects value of shareholder's capital of business entity in government records. By considering this source, manager has to face some kinds of financial implications such as underwriter's commission, stock market charges, dividend for shareholders, other legal charges etc.
Bank Loans: To assess for various business operations and investment, an organization also takes a variety of bank loans such as long term, short-term and overdraft facilities that leads both legal and financial implications on company. It increases liabilities of firm. In the process of acquiring bank loans, an organization needs to an efficient legal procedures in which long term loans are secured by property (Singh, Jain and Yadav,2012). Furthermore, Non payment of different kinds of bank loans leads bankruptcy and will be addressed as a defaulter of banks. In this process, management has to made some expenditure such as processing fees, legal charges, annual renewal fees as well as interest.
Recommendations concerning sources that must be used to finance the proposed investment
Kaia Plc is coming up with a new line of low emission street cleaning vehicles for that they are planning to raise £100million capital cost for the proposed investment (Menifield, 2013). In order to raise this capital company can use the sources such as issue of shares for the part capital and for other part they can make use of bank loan. Issue of share will help business to keep funds that are usually kept indefinitely. This is because on such funds there is no requirement with respect to payments, as dividends are paid only when the Kaia Plc is able to earn profits in that particular period. On the other hand, bank loan can also initiate by organization and can easily be accessed by enterprise for carrying out their functioning when compared with issues of shares. Even these funds helps organization to have tax benefits in their operation (Shastri, Deceased and Stout, 2011). These funds can be initiated in 50:50 ratio by the business so that they are not able to incur huge payments in the form of cost that they need to incur for the borrowed capital enhanced from the market.
Raising £100 million capital required cost for the proposed investment with half being equity and half debt and explaining impact decision would have upon the financial statements
In order to raise the capital of £100 million business is going to initiate this process by half being equity and half debt. This is going to have impact on the financial statement of Kaia Plc. If business is going to raise their capital in the form of debt then it affect can be seen in different financial statements of the organization. So, impacts of different sources of finance are explained below:
Impact on income statement: Kaia Plc has considered both sources of funds in which half being equity and half debt to raise of capital of firm. Debt raised by the business is going to affect the income statement as the interest payment will be present in the expenditure section of income statement (Singh, Jain and Yadav,2012). Along with this, The amount raised in the form of issue of share capital is also going to show its effect on different financial statements of the enterprise. It is going to affect the income statement of Kaia Plc in the form increment in value of expenditures.
Impact on balance sheet: This statement determines financial strengths of company by comparing assets and liabilities of firm. Si, debt raised will be shown on the liability side of this financial statement of Kaia Plc. In similar way, fund raising through shares also enhances the value of liabilities.
Cash flow statements: Due to increase in expenditures of company from raising funds through debt and shareholder, management has to deduct all expenditures from from the operating activity of this statement (Ojha,Gianiodis and Manuj, 2013). Along with this, it also influences flow of funds within cash flow statement.
Explanation regarding the concept of weighted average cost of capital
Weighted average cost of capital (WACC) can be defined as a rate that organization is expected to pay on average to the shareholders for financing its assets (Singh, Jain and Yadav,2012). It can also be said as a firm cost of capital. However, this concept is importantly not dictated by management. Moderately, it can be represented as a minimum return that an organization can initiate for their existing asset. This helps them in satisfying their creditors, owners and providers of capital.
Cost of different sources of finance:
In order to manage various business operations, an organization considers different sources of finance. In this regard, management has to made some certain expenditure. The cost of different sources of finance are explained below:
Share capital: In order to enhance capital of firm through share capital, organization has to pay underwriter's commission, stock market charges, dividend, legal charges etc (Srinivasan, 2012). The combination of different types of expenditure would be considered as overall cost of funding through shareholders.
Loans: In the process of assessing funds through bank loans, business entity has to follow systematic legal procedures in which management has to pay interest, legal charges processing fees.
Private lenders: If management of Kaia Plc considers private inventors for finance then management should manage cost of interest and other documentation charges.
Calculation with respect to payback period and net present value concerning investment appraisal technique
There are wide range of approach available that could be used by management to analyse profitability of investment along with risk factor. The assessment of payback period and net present value is mentioned below:
Net present value: It is great tool to analysis present value of future cash inflow that could be occurred in future from present investment decisions. In this process, present value of future cash inflow is evaluated on the basis of discounted price which is considered as per the inflation rate (Singh, Jain and Yadav,2012). It is great tool to examine profitability of investment. But, evaluation of profitability of project as per a nominal discounted rate is reliable in highly fluctuated market conditions.
Further it can be said that it is important for the organization to determine unit cost of the product based on the variable and fixed cost that they have incurred in manufacturing one unit of their product (Mao, 2012). For assessment of accurate unit, management has to consider two types of expenditure such as fixed cost and variable cost. Fixed cost includes all expenditure occurred in production process which are not altered as per the quantity of production. It includes expenditure made on equipment and land or building. On the other hand, variable cost consists all expenses made by organization that could be changed as per the production level such as raw material, labor hours etc. (Fogel and Schneider, 2011). In order to assess final cost of product, Kaia PLC needs to consider all expenditures associated with production and operations of goods in total cost. Further more, unit cost will be derived by dividing total cost of production from production quantity. Unit cost is one of the most important segment of company's pricing decisions. Along with profitability of company is also greatly influenced by unit cost.
In this regards, business can make use of cost plus pricing method for the calculation of unit cost. In this aspect price of a product is set above the cost of goods sold by adding certain margin of profit. It is also considered most effective pricing approach that helps organization in order to recover all expenditures from certain price along with efficient profit margin. This pricing approach has been found a very effective tool for avoiding lose.
Factors to be taken into consideration in account by an organization such as Kaia Plc when setting prices for their output
There can be various factors that need to be looked after by the Kaia Plc when setting out their output. These are described as follows:
It is important for Kaia Plc to maintain their cost as such that it is more than there break even otherwise organization will be in trouble. In the respect best thing that an organization can carry out is to sum up all their cost and divide it by number of hours (Srinivasan, 2012).
It is somewhat related to the cost. But it is very important for the business to know that they are generating enough profits and must be great the breakeven level.
If Kaia Plc is able to generate high demand for their product then they increase the price of their product. But if the product has got high competition in the market hen price need to be set out as per the industry standards to compete in the market.
Understanding the prices set by other organization is very difficult. However, it is important for the Kaia Plc to look around the market. It is important for the business to analyze prices that are set by different other competitor organization (Mao, 2012). If proper information will be available with respect to prices that are charged in the market then business will able to know that where do they set in the overall market?
Business strategy is considered to be one of the crucial aspect that makes a huge difference with respect to the price that organization charge from the market. Consumer will only be providing for the product to which they are satisfied concerning price and quality. It is important for Kaia Plc to pitch their product in a right way so that they are able to attract larger clients for their product.
Product provided to the clients also makes a huge difference with respect to the price that is charged by business in the market. It is important for Kaia Plc to adjust their price type and level of service for their clients (Fogel and Schneider, 2011).
Kaia Plc will be charging different prices from their clients. Such kind of practices are followed due to few reasons. It is because organization clients may require more effort, some of them may be riskier, some are repeat clients, and some wouldn't want to go near with a stick. Hence, under such a situation business can vary their price to meet out such factors.
Main trends and messages contained within the cash flow forecast
There are different kind of budgets prepared by management in order to manage various business operations strategies. These budgets help to manage future business activities along with allocation of funds for several management operations. It includes cash budget, operational budgets, master budgets, financial budget, etc (Altman, 2012). Cash flow budget budget evaluates liquidity position of company by examining inflow and outflow of activities for wide range of business operations. In similar way, operational budget includes revenue and expenses of company that has been occurred from core business. In addition to that A financial budget forecast that how a business receives and spends money on a corporate scale or limit by considering revenues from core business operation plus income and costs from capital expenditures. Apart from that, Master Budget is combination of various other budgets for particular time period (Mao, 2012). So, budgets are playing significant role on various decisions of Kaia Plc associated with liquidity management, profit enhancement, investment and financing as well as cost management.
Assessment of cash flow forecast of Kaia PLC
After analyzing the cash flow statement of Kaia PLC it can be interpreted that business was able to make good sale till the period of May. However, after this period in June sale of the organization started declining for that particular month. It indicates that business was able to maintain their sales and revenue for longer period of time and it was all because of increased demand of products of Kaia. Further, it has been observed that organization expenditure determines expenses of Kaia PLC. It indicates that with increment of sale business is expenses are also increasing for the periods (Nga and Yien, 2013). Organization faced the negative trend in the June period it was all because they have incurred very huge expenditure in this particular month. These expenses were majorly concerning business payment with respect to salaries and cost of raw material for the production process. Further, evaluation of cash flow forecast shows that management of the business was able to maintain their good closing balance in every month. But this balance was seen to be very low in the period of June as there was very high expenditure in that particular period. Above analysis indicates that business is able to generate high growth in their functioning but they also need to reduce their overall expenditure and cost concerned with the operation of business (Hill, 2014).
Importance of financial planning
Management of liquidity in business: Financial planning is termed as most significant part of business management that assists management in order to get ensure about liquidity of company by considering different approach such as working capital and short term debt (Altman, 2012). In this section, Kaia also formulates business strategies to cover shortfall and surplus of cash as per the business requirement.
Proper allocation of financial resources: This process helps manager to assess priorities of firm by focusing the long and short term goals. So, company can allocate different sources of funds for completion of various business requirements.
Management of finance for long duration plan: By assessing accurate information of current financial position, management can develop an efficient fiscal plan and schedules activities for selection and allocation of sources of finance. In this section, assets planing is also playing significant role to attain corporate objectives.
Survival of business in adverse market condition: It determines various supportive plan to primary business strategies for managing adverse market condition (Fogel and Schneider, 2011). In this, business entity manages financial-decision as per the market trends and financial position of company.
Identifying different groups interested in factory’s cash flow statement and their different interest in the originations activities
There are different stakeholder who are interested to look after the cash flow statement of the business. These are those officials who can influence the overall decision making of the organization. They can be categorized into two types which can be internal and external stakeholders. Such a categorization is carried out on the basis of their interest and concern that they lay down towards business (Fogel and Schneider, 2011). They go through these statements for entailing the information about the busi(Altman, 2012)ness activities, so that they are able to carry out effective decision making as shown underneath:-
Owner– A business owner looks after the cash flow statement in order to analyze the overall growth and profitability of the business. This statement will show them the overall inflow and outflow of cash that company incurs and will help in judging the financial performance of the entity during the period.
Manager- Management of Kaia Plc looks after the overall effective management and controlling of organization functioning that will help them to take the business towards the path of growth and success (Graham, Davey-Evans and Toon, 2012). Managers of business carries out their future forecasting decision based on the past cash flow statement.
Shareholders– They look after the cash flow statement to analyze the overall financial performance of business with respect to the cash flow that organization incurs in a particular financial year (Altman, 2012). Shareholders invest in business so that they are able to higher return on the amount invested by them in the organization. Hence, they look after this statement for judging and evaluating the overall performance of business.
Government- Business need to pay out the tax to the officials of government on the profit earned by them in a year. This statement is analyzed by government officials, so that they are able to analyze the correct profits of the company (Tauringana, and Afrifa, 2013).
Hence, they demand this statement to determine the overall tax liability of the firm.
Explaining why a company may be profitable but run into problems with its liquidity
Cash flow: Cash flow reflects inflow and outflow funds from various business operations during the months. It is evaluated by considering incomes and expenses of the business.
Profit: It calculates after deduction all the expenditures of the business from the total sales revenue in order to determine the final profit available to business.
This situation may arise in business where they are able to make profit but they are running out of problem concerning liquidity position of the organization. It may occur when debtor payable days are higher under such a situation amount gets locked with respect to the payment that need to be received by debtors. Further, it can also be due to creditor’s receivable days is lower. This shows that amount to be paid to the creditors of business is very short frequent payments need to be initiated by organization reducing the overall liquidity position of the business. Even it may be due to increased payment of interest that organization need to incur with respect to bank loan interest and payment made to debenture holders of the business (Fogel and Schneider, 2011). On the basis of different factors, it can be stated that profitability and liquidity of organization has been influenced by several internal and external factors. It increases the chances from which company may be profitable but run into problems with its liquidity.
Ratio analysis is calculated in order to understand the financial position of the company year after year. From the analysis of liquidity ratio for the period of 2013 and 2014 of Kaia PLC it can be said that business is able to maintain their current asset against the current liability as this ratio stands to be 1 for the period of 2014. This shows that company is in a position to meet out all the liabilities of the organization. This ratio helps in measuring the improvement with respect to current assets of the business. In the similar manner it can be seen that quick ratio of the Kaia PLC has also increased for the period of 2014. This aspect shows that company is in a position to meet out their payments in an appropriate manner (Financial Ratio Analysis, 2012). Furthermore, It can be stated that Kaia PLC needs to improve liquidity position of company by considering different kinds of short-term assets or investment as per the business requirement. With the help of this approach, organization can improve liquidity position along with good return.
From the evaluation of profitability ratio it can be said that gross profit of Kaia PLC in th period of 2014 has decreased when compared with 2013. This shows that organization cost of goods sold has increased for the period of 2014. Even the same reflection has been seen in the net profit of the organization which has decreased by the percentage of 6%. In the period of 2014 organization has recorded 38% net profit. In order to manage reduction in profit, business entity has to adopt various strategies to reduce cost and to increase sales that directly influences profitability of company. With the help of this, business would find positive trends in profit.
Purpose of different kinds off financial statements:
Income statement: The primary aim of income statements is to identify the value of net profit and net loss by deducting all expenditures occurred in several business from total income. It can be considered as a great to analysis profitability of company.
Balance sheet: The purpose of balance sheet is to examine the financial position of organization by considering all assets and liabilities of firm within single statements. This statements contains the value of current and non-current assets, loan value, amount capital and etc. With the help of this, Kaia PLC also examines financial strengths and business position.
Cash flow statements: It is a very effective tools to examine liquidity position of company. The aim of cash flow statement to analyze the liquidity of organization in which management of Kaia PLC can evaluate flow of cash through various activities such as operating, financing and investing.
The main difference between the financial statements of sole traders, partnerships and limited companies
Each and every organization has got their own individual financial statements that they need to prepare in accordance with some accounting standards. However, presently it has been seen that international organization need to follow global financial reporting standards (Bennouna, Meredith and Marchant, 2010). They have set out some standards in the preparation of the accounts in order to avoid confusion in the financial statement and it is named as International Financial reporting Standards (IFRS) (Managing financial resources, 2013).
Business operated by sole trader- It is the organization that is completely owned by one single person and all decision and activities are carried out by him. In this case sole trader prepares the account concerning income statement and balance sheet. Income statement is prepared for knowing the overall expense and profit that has been generated for a particular period. For sole proprietor, income statement can be termed as very quick and easy tool to manage financial records. Furthermore, this statement does not require detail knowledge of accounting principles. It is a very cost effective tool to keep systematic financial records.
Partnership- In this case partners prepare the partnership profit and loss account to indicate the overall profit that is contributed among different partners of the business (Way, and Jeanine Meyers, 2013). They also prepare Balance sheet for showing partners’ capital account amount at the end financial period. By using both tools, partnership organization can assess profitability of business along with financial position of business. Apart from that, it is also considered as a great tools for partners in assessment of percentage of profit along with acquisitions of funds for business expansion.
Limited company- These are those organization who prepare their accounts based upon the international accounting standards. In their case management of the business need to prepare profit and loss account, balance sheet and cash flow statement (Fogel and Schneider, 2011). By developing all kinds of financial statements as per the different norms of accounting, business entity can present financial position of company in front of different stakeholders such as government, shareholder, suppliers etc. Auditing is also carried out on the basis of structured financial statements.
From the above study it can be concluded that it is very important to manage the financial aspects of the organization to carry out effective strategic decision of the business. In order to select a project investment appraisal technique can be initiated by business which includes net present value and payback period. Even financial performance of business can be evaluated on the basis of ratio analysis.
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