Introduction to Financial Resource & Decision making
Managing of the financial resources of the company is an important function as finance is the key factor on the basis of which entire business runs. Appropriate and effective management of the business leads to effective accomplishment of its goals and objectives (Bhowmik and Saha, 2013). In the current report Next Plc is chosen as company to access the different sources of finance and skills which are required for decision making on the basis available financial information.
Further the report also includes the use of investment appraisal techniques and evaluation of financial performance of Next Plc. The company deals in the retail business of clothing, footwear and home products (Next Plc corporate, 2014). Next is listed on both London Stock Exchange and FTSE 100 and presently company operates more than 700 stores in many different countries of the world.
MANAGING FINANCE - PART 1
1.1 Sources of finance available to business
Next Plc can source the finance from internal and external sources of business. Internal sources of finance are availing the funds from within the organization. It can be accessed from the retain earning, selling of assets, working capital finance. But sourcing the funds from these areas can be used for smaller investments only as business cannot generate any huge amount of fund from its internal sources (Siano and et.al. 2010). The other option form which the Next can avail the funds are from external sources. Accessing the funds from these sources can be used for long term purpose.
Finance can be generating through bank loan and its overdraft facilities. Other source is from issue of shares in market through which company can access the large amount of finance from its investors. They can also avail the fund through issue of debentures in market and from this company has the option to generate the funds from both equity and debt market (Murphy and Yetmar, 2010). Company also has the option to create funds through assistance from government and also from its creditors and suppliers. External source is one of the best source from which business can generate a large amount of fund and can also use for longer term of period.
1.2 Implication of the different sources
Sourcing of funds from internal and external source has some implications in the business of the company. Generating the funds from the issue of shares will dilute the control of the company as it capital is increase. There will be increase in power of shareholders as they are also the owners of the business (Hansen, Mowen and Guan, 2009). On the other side issue of share will also increase the financial strength of the Next. At the time when the company avail the fund through banks and financial institutions, there will be chances of bankruptcy. The amount of loan is not paid on appropriate time or insufficient of fund will leads the business towards the bankruptcy (Flamholtz and Kurland, 2006). Generating the fund from debt will also require the business to pay their amount on installment basis. It will also affect on the liability of the company which may brings negative impact on the minds of stakeholders of organization.
1.3 Appropriate sources of finance for business project
Combination of funds that is accessing the finance from issue of shares and using of bank loan are the appropriate sources for business project. The reason behind using the funds from these external source is that the for the purpose of business project there is need of huge amount of fund (Nanda, 2004). Generating the fund from issue shares in the capital market will help the company to invest in its business projects. It will also increase the capital of the business. Next has to pay dividend to its shareholders at the end of every financial year. On the other side the sourcing the fund from bank loans will helps the business in future. Company does not have to pay the entire amount in collective way (Ho, Liu and Tsay, 2008). They have the option to pay this amount on installments. Combination of generating the fund for a business project is the best way for the investment in the business project.
2.1 Costs of different sources of finance
Availing the finance for the business involves different costs without which business cannot generate funds for its organization.
Financial Costs: Financial costs are incurred at the time when Next Plc will access the funds through issue of shares, fund from debts and banking organizations. Issue of shares in capital market will require the company to incur costs in the area of expenditure related to the issue of shares (Pitt, Collins and Walls, 2006). Another cost will incur at the end of year that is dividend, Next Plc has to pay dividend to its shareholders. In the similar manner funds avail through the banks or using of overdraft facility includes the costs in terms of interest. Company has to pay an amount of interests on its loan and overdraft value (Cullen, 2012).
Opportunity Costs: When the Next will access the fund from the retain earnings or from selling of assets, the company will have to incur opportunity costs. Using of the funds from retain earnings will impact on the business to utilize these funds in other projects ir during the time of any contingency (Pitt, Collins and Walls, 2006). Next will lose the opportunity to use their retain earnings in other projects of the business. Using of finance from revenue generated from sales will also affects on the liquidity position of the organization.
2.2 Importance of financial planning
Financial planning plays important role in an enterprise. It is with the help of such type of planning only an effective financial decision can be taken within an enterprise that helps in providing long terms benefits to the corporation (Gaskell and Ashton, 2008). With this regard, there are various benefits of financial planning is found out for the corporation named as Next PLC. It comprises of following:
With the help of financial planning tool like forecasted figures and budgeted plans focuses of an enterprise like Next PLC can be targeted towards the accomplishment of its objectives.
By using this aspect Next PLC can direct their control over the costs and expenditures of the business. This type of control will be proved as beneficial aspect for an enterprise. It is because by directing control over cost and expenditure of business the condition relating to the wastages of financial fund can be weed out (Ho, Liu and Tsay, 2008).
With the help of financial planning managers of Next PLC are able to assess surplus or deficit condition in relation to their cash budget which tends to provide tem guidance in relation to the management of their expenses in an efficient manner.
On the other hand by using financial planning approach managers of Next PLC are able to direct their decision in terms of making the selection of that project which tends to yield them higher rate on their investment. By using the context of financial planning corporation can make decision on the aspect regarding future expansion and growth (Murphy and Yetmar, 2010).
2.3 Assessing the different needs of different decision makers
Two basic type of decision maker identified and it comprises of following such as internal decision makers and external decision makers.
Internal decision makers are those persons that are associated with the internal affairs of the company (Stendardi, Graham and O’Reilly, 2006). The list of Next PLC internal decision makers comprises following such as specialists, managers and owners etc. Owners have a need to gather the financial information for their business. It is because with the help of this information internal decision makers are able to direct their decision regarding future investment plans. On the other hand, managers and employees have a need to gather information regarding financial performance of company which tends to enable then to make decision in relation to the purchasing of share of Next PLC.
In addition to this, external decision makers of Next PLC involves following such as shareholders, suppliers, banks and government etc. Government needed information for the purpose to analyze the liability of corporation in relation to taxation (Flamholtz and Kurland, 2006). Supplier requires information to assess firm capability for the payments of their services. Investors and banks needs are to identify the financial health of company which tends to enable them to make decision in relation to the investment on the product of Next PLC or not.
2.4 Impact of finance on financial statements of the company
At the time when the company access the finance from different sources this will make impact on its financial statements that is on income statement and balance sheet. If the Next Plc avail the finance from issue of equity shares in market than in income statement the expenses related to the issue if shares and dividend paid to shareholders will debited. It affects on the debit side or the profitability of the company (Gaskell and Ashton, 2008). In balance sheet the capital of the company will increase and on asset sides the bank balance will also increase. The capital of the Next will increase which affects on the liability side of the balance sheet. In the same way of the funds are generated through bank loans and issue of debt than the expenses of interest will increase in profit and loss account. Increase in interest expenses will also affects the profitability of the company (Lampe and Hofmann, 2013). In balance sheet side the liability and debts of the Next Plc will increase of finance is avail from bank and financial institutions. Funds generated from the bank, financial institution or from the suppliers of the company, it directly affects on the liability and debts of the business.
MANAGING FINANCE - PART 2
3.1 Analyzing the budgets and making appropriate decisions
Below the cash budget for the period of six months shows that the business will be able to maintain a surplus amount of cash in its every month. The increasing sales revenue of the company will help to maintain a good amount of surplus. On the basis of the proposed cash budget for the next six months, a business can takes its decision that they will efficiently manage their inflow and outflow of cash (Kieso, 2010). At the time of decision making the business has to focus on the debtor’s turnover period and creditor’s turnover period.
3.2 Explaining the calculation of unit costs and making pricing decisions on it
For calculating the unit costs of the product, there is need to determine the total cost, on the basis of which per unit cost for the product can be calculated. It is essential to calculate the variable and fixed cost as it helps to determine the cost incurred for producing the unit. Variable costs change as per the production level whereas fixed remain fixed as it does not change while there is fluctuation in production level (Drake and Fabozzi, 2012). Organization can make its pricing decision on the basis of the using different methods of pricing technique. By using the cost plus price method or mark-up method the business can determine it’s pricing. On the other side the business should also determine the breakeven level. It is that point where the business is at the position of no profit and no loss (Shahwan, 2008).
3.3 Evaluating the viability of the project by using investment appraisal technique
There are different techniques through which the viability and profitability of the project can be assessed by Next Plc at the time of selecting project from different alternatives.
Net Present value Method: By using the NPV technique Next Plc has to calculate the present value of the future cash inflow for the years till the project will generate inflow. After this the amount of initial investment is deducted to know the net present value of the project (Vance, 2002). On the basis of NPV method Machine A with highest and positive NPV is the best profitable and viable for the company.
Accounting Rate of Return: ARR is also one of the best techniques to select the profitable project for the business. In the methods Next Plc has to consider the amount of profit generate by the machines every year. On the basis of this the Machine with highest ARR value is profitable for the business and it was determine that Machine A will five 100% return in compare to Machine B.
Internal Rate of Return: In IRR method the present value of the cash inflow of the project is calculated at two different returns. On the basis of this the Machine A has 32% IRR and giver greater return in compare to Machine B, so company can chose Machine A (Hansen, Mowen and Guan, 2009).
Payback period: It is one of the simplest methods of investment appraisal technique. The project which has the lowest payback period is favorable for the company. This technique considers the time period in which the amount of investment recovered by the business.
4.1 Main Financial Statements
Financial Statements are comprised Income statement, Balance sheet and cash flow statement.
Income Statement or Profit and Loss Account: It contains the expenses and income of the business which are incurred and received during the year. The purpose of preparing this statement is to recognize the profits or loss of the business (Stendardi, Graham, and O’Reilly, 2006). It is used by management and owners of the business and also by the investors of the company to recognize the profitability.
Balance Sheet: Balance sheet is prepared at the end of the financial year and it comprised of capital, liability and assets of the organization. The total of assets side is to be equal to capital and liability of the business. The purpose of balance sheet is to determine the liability and financial strength of the business. It is also used by the stakeholders of the organization such as management, government, employees, shareholders, suppliers, banks etc. (Ho, Liu and Tsay, 2008)
Cash Flow Statement: It includes only the transactions which are related to the nature of cash and bank. They are categorized into cash flow from operating activities, investing activities and financing activities. It is mainly used by the internal management and financial analyst for the purpose of decision making.
4.2 Financial statements of different types of business
Sole Trader: The structure of the financial statements of the sole trader is based on simple format which includes only the income statement and balance sheet of the business. It includes the income, expenditure, liabilities and assets of the organization. Balance sheet can be prepared on horizontal or vertical basis (Gaskell and Ashton, 2008).
Partnership: In business of partnership the income statement includes the profitability of the business on the basis of the gaining share of partners. In this business the partners also prepares the partners capital account (Cullen, 2012). In the balance of partnership business the amount contributed by the partners is infer in accordance with their profit sharing ratio.
Limited Company. Companies have to prepare income statement, balance sheet, cash flow statement and compressive statement of income for their business. The structure of the balance sheet in the financial report of the business is always in horizontal form (Gaskell and Ashton, 2008). In addition to this companies also have to detail the notes for each separate account of their business.
4.3 Interpreting the financial statements by using the ratios
On interpreting the ratios of Next Plc for the last three years, the current ratio of the company shows that the company is effectively meeting their short term liabilities. The liquidity position of the business is at satisfactory level. In year 2013 it was decreased to 1.48 times as previously it was 1.54. The Quick ratio of the Next was increasing from last two years that is from 2011. It was 0.71 in 2011 and increased to 0.94 in 2013. This show that the ability of the company to converts its quick assets is very strong. On examining the Net profit ratio, it is examined that the company is generating a good amount of profit from its increasing sales as it is increased to 18.71%. The return on capital employed of the business is at its fluctuation position, but the amount invested by the investors is generating a good an amount returns on their investments (Lampe and Hofmann, 2013). It was due to increase in sales of the company and higher profitability. By interpreting the total assets ratio of Next, it was examined that the company is effectively deploying its total assets to generate sales revenue. It was similar in all the three years that is at 1.89. The debt equity ratio of the company shows that the debts and liabilities of the business are greater in compare to its equity capital in the year 2011 and 2012, but in 2013 this ratio was decline which shows that there was decline in the long term debt and loans of the Next Plc.
From the above study it has been concluded that at the time of sourcing the finance from different sources, business has to consider its implications and cost. This helps them to analyze that which source will is favorable for their organization. On the other side at the time of selecting the profitable project, the use of investment appraisal technique helps the company to select the best and profitable project. Interpreting of the financial performance of Next Plc indicates the company is at good position and moving towards the earning high profitability in its retail business.
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