The report has discussed the key factors of managing financial resources and decision making. Also the importance of managing cash inflows and cash outflows for a business has been highlighted. The key factors to be considered in preparing cash budgets and the process of preparing budgets has been discussed. On the other hand the purposes of the main financial statements produced by any business and how the format of these financial statements can vary with the size of the businesses have been evaluated. Also information needs of different users of financial statements have been assessed.
Different sources of finance available for a business have been discussed by considering different debt and equity financing options. The implication of the different sources of finance is explained using different examples. In addition the impacts on financial statements due to obtaining these sources of finance are further evaluated.
L01: Be able to make financial decisions based on financial information
According to the view by Anderson (2000), a cash budget is a financial plan that summarizes all estimated receipts and payments within a specific time frame. The cash budget for Yardley wood store can be calculated as follows based on the given case study.
|Plant & machinery cost||(780,000)|
|Additional equip cost||(350,000)||(160,000)||(105,000)||(105,000)|
|Net cash flows||(1,135,000)||(227,000)||328,000||328,000||573,000||573,000|
|opening cash balance||(1,135,000)||(1,362,000)||(1,034,000)||(706,000)||(133,000)|
|Closing cash balance||(1,135,000)||(1,362,000)||(1,034,000)||(706,000)||(133,000)||440,000|
When considering the amount of finance required in first six months of the operation, it is clear that at the beginning of the first few months there will be a serious requirement of cash requirement. As for an example in the 2nd month there is a cash requirement of 1,362,000 and then there after the cash position is turning a positive cash balance at the end of the 6 months. Therefore after 6 months the cash position would become positive and thus there won’t be any additional cash requirement.
According to the view by Bryson (2000, pp.l4-3-62), cash budget could be defined as an estimation of the cash inflows and outflows for a business or individual within a specific time frame. One of the main factors to be considered when preparing a cash budget is the changes in economic factors in foreseeable future. If there is any possibility of a financial crisis, then it would have a major negative effect on the cash flow predictions. Another main factor to be concerned is the sales forecasts where predictions about margins are equally important. Also generally businesses have their assumptions on various economic factors such as interest rates, exchange rates, economic growth rates, market share growth etc. where all cash flow planning would be based on those. As a result it is important to have more realistic assumptions which can be arrived using the advices given by business analysts.
Based on the view by Shen (2002, pp. 251-253), first important factor in preparing a budget is the income level of the organisation. He has further stated that when preparing a budget it is essential to focus on the net income, but not the gross income. On the other hand it is advisable to take every expense into the cash budget preparation. All monthly expenses which are expected to be spent on each month needs to be budgeted carefully. Another important factor in preparing a budget is achieving the cash balance. If there would be more income than expenses it will reflect a cash rich situation where as if there are more expenses than income, then it will be required to reduce expenses and possibly identify new ways of making money. If there is a possible cash deficit then the finance manager should evaluate the possible options to obtain finance to maintain the company operations without any interruptions.
Myers (2004, pp. 75-81) has stated that another important component to be looked at in preparing a budget is how to reach certain financial goals. Thus it is important to consider short term and long term cash flow targets when preparing a full cash budget. Also on the other hand it is essential to consider the accuracy of underlying data such as estimation of monthly cash receipts, seasonal factors, political factors, pattern of cash receipts from debtors in case of credit sales etc. On the other hand estimation of cash payments should be considered. Also the expected purchases in each month should be forecasted. That is if the firm intends to increase their stock levels, the annual purchases should be increased in proportion to the increase in stock level. Based on this the organisation needs to determine when the payment is to be obliged. The accuracy of these would ensure the accuracy of overall cash outflow forecasts. Apart from the regular expenses, the company needs to plan cash outflow for the other obvious expenses such as tax payments. Also it is important to consider contingency funds in the budget as well.
L02: Be able to make financial decisions based on financial information
According to the given scenario the pricing strategy used is the cost plus pricing method where a fixed percentage would be added on the top of the total unit cost. Global Manufacturing Company has added a 10% mark up on their total cost. The company selling price can be calculated as follows.
|Other direct expenses||15,000|
|Electricity and water||100,000|
|Plant and machinery||5,000,000|
|SP (10% markup)||59,289|
When making pricing decisions it is highly important to consider the unit cost of a single product and the expected profit margin. This is because then the company would be able to decide a more accurate price which will cover their total cost of manufacturing. On the other side it is also important to consider the competitor pricing strategies as well in order to offer a competitive price to the market which is not over-priced. Also if Global Manufacturing Company decides to practice a market penetrative strategy then they have to minimise their total unit cost and offer the product at a comparatively lower price compared to the other rivals. This would enable Global Manufacturing Company to achieve a super profit through increased no of units sold. Therefore deciding on unit cost is highly important when arriving at pricing decisions.
According to Crosby (2008) payback period refers to as the length of time required to recover the cost of an initial investment. The back period for the given projects based the scenario can be calculated as follows.
Plan A = 2 years + (12000/24000)
= 2.5 years
Plan B = 2 years + (25000/25000)
= 3 years
Plan C = 2 years + (18000/36000)
= 2.5 years
(a)(11) Net present value
According to Myers (2004), the net present value can be defined as the difference between the present value of cash inflows and the present value of cash outflows. In general terms the investments with higher positive NPV are considered to be financially viable. Thus the net present value of the given projects can be calculated as follows.
|Net cash flow||(60,000)||24,000||24,000||24,000||18,000|
Since the NPV is positive the given investment opportunity is financially viable.
|Net cash flow||(75,000)||25,000||25,000||25,000||25,000|
As the gibe project generates a negative NPV the investment is considered to be not financially acceptable based on the NPV guidelines.
|Net cash flow||(90,000)||36,000||36,000||36,000||27,000|
Based on the above NPV calculations the plan B is considered to be financially not viable due to its negative NPV (36,000). On the other hand plan A and C are considered to be financially viable. As the plan C generates a higher NPV which is 2556 more than the plan A, the plan C is recommended in the financial terms. But on the other hand there are other factors also to be looked at before making the final decision such as the risk level, the level of accuracy of the underlying assumptions such as discounting factor and the period etc.
The given financial analysis is based on the financial performance by Nokia.
According to the idea by Graiser (2004, pp.24-32), the purpose of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. When applied to the company Nokia, the purpose is to provide financial information to their prospective investors, managers, financial institutions, customers, employees etc. The analysis of financial statements would be critically important for the investors to make their investing decisions in purchasing shares. The format of these financial statements can vary with the size of the businesses. The Nokia has a very comprehensive financial statement due to their highly expanded business over different countries. Further they have shown the profit/ (loss) attributable to equity holders of the parent and non-controllable interests at the end of the financial statement.
Information needs of different users can be summarised as follows.
Ratio analysis is generally considered as a tool to carry out a quantitative analysis of the information in a company’s financial statements. On the other hand these financial ratios would enable a company to undertake effective planning and financial management.
The below financial ratios are calculated based on the 2012 financial information based on its official website. Nokia 2012 key figures are attached at the end of the appendix.
The financial performance can be analysed as using following ratios.
Gross profit margin = Gross profit/ Sales * 100
= 11,061,000 / 39,784,000 * 100
Net profit margin = Net profit/ Sales * 100
= 3,267,000 / 39,784,000 * 100
The financial position can be analysed using following ratios.
Current ratio = Current assets/ Current liabilities
= 27,526,000 / 10,370,000
Quick ratio = Current assets – Stocks/ Current liabilities
= 27,526,000 – 2,028,000 / 10,370,000
Gearing = Debt/ Debt + Equity * 100
= 6,798,000 / (6,798,000 + 10,628,000)
According to the view by Nutt (2002, pp.251-263), when selecting different sources of finance, it is essential to evaluate the future impact as well. There are two different sources of finance such as debt or equity finance. Generally equity finance is considered to be expensive than the debt financing due to its preliminary costs. On the other hand it is advisable to evaluate additional factors such as probable forecasted interest rates, requirement of a security or bank guarantee, the loan capital repayable terms, additional business disclosure requirements etc. It is possible to compare different sources of finance available as follows.
Based on the view by Pettinger (2000, pp.123-135), there are different financing options for a business such as using retained earnings, financing through a private bank loan , financing through institutional investors, venture capitalist investments, investing in debentures and share market etc. In general terms the government loans would have a benefit of ability to obtain concessionary interest rates by minimizing the finance cost. On the other hand obtaining finance from a venture capitalist would be comparatively disadvantageous due to them taking short term decision making in order to realise their investments within a shorter time frame. Also if obtaining finance from a bank loan (either medium term or long term) most probable there will be loan covenants which would add additional obligations and restrictions for the company. These would be as to requirement of obtaining approval for all major financing decisions made by the company such as share dilutions, additional loan facilities, changing company ownership, major investment decisions etc.
Implications of obtaining external funds can be summarised as follows.
• Influences on the business strategic decision making and business control – mostly by the private/institutional investors
• Significant hit on business bottom line – due to higher interest cost charges
• Requirement to obey additional rules and guidelines – loss of business control
• Restrictions on obtaining other financial services form the other financial institutions
The different sources of finance would have a considerable impact to the financial statements. As for an example obtaining finance from a bank institution would reduce the overall profitability due to the higher interest portions. Also obtaining external loans would increase the liability position of the balance sheet by affecting the gearing level (Alexander, 2000). On the other hand debt financing would increase the gearing level of the company by increasing the company risk level.
Based on the Lynch (2006, pp.87-95), financial planning can be defined as series of steps or goals used by an individual or business, the progressive and cumulative attainment of which are designed to accomplish a financial goal. On the other hand financial planning provides direction and meaning to your financial decisions. This would enable a company to plan out their existing resources in a more effective manner and to obtain the maximum usage. Also financial planning would enable to understand how each financial decision you make affects other areas of your finances. On the other hand this would help to review organisational short and long-term effects on their future objectives.
The report has identified different financing sources available for a company and the implications from each financing option have been evaluated. Based on the given discussion it is recommended to evaluate other related factors such as additional financial disclosure requirements, loan covenants, requirement of bank guarantees and securities etc. When analysing individual sales and cash budgets, it is advisable to re-consider the underlying assumptions and breakdown of individual budgetary items. It is recommended to evaluate different financial indicators such as gross profit margin, net profit margin, current ratio, quick ratio, gearing ratio etc. Also it is recommended to obtain debt financing more than equity financing because in general terms debt financing is considered to be cheaper than equity financing.
The significance of financial planning for a business has been discussed by evaluating the implication of the different sources of finance to corporates. In addition information needs of different decision makers have been assessed using different examples.
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Baum, A. and Crosby, N. (2008), Property Investment Appraisal, 3rdEdition, Blackwell DTZ (2009): Money into Property, pp.256-261
Bryson, J. and Anderson, S. (2000), Cash budget preparation, Public Administration Review, 60:2 pp.l4-3-62
Bryson, J., Cunningham, G. and Lokkesmoe, K. (2002), what to do when stakeholders Matter: The Case of Problem Formulation for the African American Men Project of Hennepin County Minnesota, Public Administration Review, 62:5 pp 568 -84
Graiser, A. and Scott ,T. (2004), Analysis of financial statements, The Secured Lender, Vol. 60 Issue 6, November/December, pp.24-32
Lynch, R. (2006), Corporate Strategy, Fourth Edition, Financial Times Prentice Hall, pp.87-95
Myers, H. (2004), Trends in budgeting and forecasting, European Retail Digest, spring, pp. 75-81
Nutt, P. (2002) , Why Decisions Fail, Avoiding the Blunders and Traps That Lead to Debacles, San Francisco, CA:Berrett-Koehler Publishers, pp.251-263
Pettinger, R. (2000), Investment Appraisal, A Managerial Approach, Palgrave Macmillan, pp.123-135
Shen, V. R. (2002), Projection of future resources and expected returns, Journal of Financial Review and resources, pp. (251-253)
Mansour, F. A. (2001), comparing cost accounting standards with existing accounting standards, Management Accounting, pp.37-42
The Nokia financial figures of year 2012 are attached herewith.