Managing Financial

Unit 2: Managing Financial Resources and Decisions

TABLE OF CONTENTS

1.1 Identify sources of finance pg2

1.2 Assess the implications of the different sources of finance pg3

1.3 Evaluate appropriate sources of finance for different business pg5

2.1 Analyze the cost of different sources of finance for business projects pg7

2.2 Explain the importance of financial planning for a business pg8

2.3 Assess the financial information needs pg9

2.4 Explain the impact of finance on the financial statements pg10

3.1 Analyze budgets and make appropriate decisions pg11

3.2 Understand and demonstrate the calculations for costing and pricing decisions pg12

3.3 Assess the viability of a project using investment appraisal technique pg14

4.1 Discuss main financial statements pg16

4.2 Compare appropriate formats of financial statements pg17

Ratio Analysis Report pg18

Conclusion pg 19

References pg20

Task 1- Information Pack

1.1 Identify sources of finance

Sole Trader

Sources of finance for a sole trader

1. Family and Friends

2.Personal Savings

3.Mortgage

4.Credit on trade

5.Overdraft

Partnership firm

Sources of finance for a partnership firm

1.Bank Loan

2.Sale of Asset

3.Personal saving

4.Working capital

5.Retained Earning

Public Limited Company

Sources of finance for a Public limited company

1.Debentures

2.Issuance of ordinary shares

3.Bank loan

4.Mortgage

5.Preference Shares

1.2 Assess the implications of the different sources of finance

Implications of the sources of finance

Sources of finance Features, strengths and weaknesses Conclusion

In different business type

1.Bank Loan Large amount could be financed.

Fixed interest

Risk of Loss of mortgagee Sole Trader

Long term source of finance

Partnership

Long term source of finance while burden of repayment is divided among partners.

Public Limited Companies

Provide tax shield as interest is deducted before tax.

2.Sale Of Asset Temporary source of finance

Reduces expansion of business

Handsome amount could be generated Sole Trader

Money could be gather for reinvestment in business expansion

Partnership

Sales of Unnecessary asset reduces extra burden on each partner.

Public Limited Companies

Depreciation cost will be reduced.

3.Issuance of ordinary shares An adequate amount can be generated

No of shareholders increase

Low Earning per share Public Limited Companies

Unlike debt Investment made by shareholders not to be repaid on later date.

4.Credit On trade Short term financing

Repayment required in short period Sole Trader

Sole trader can use the supplies to make money

Partnership

Supplies on credit allows partnership business to run without any interruption.

Public Limited Companies

Allows management to take time for repayment of supplies.

5.Personal Savings Increase risk and return

Ownership and voting rights enhanced. Sole Trader

Increases the probability of higher return.

Partnership

Decision power can be increased.

Public Limited Companies

May get an extra share in the firm and increase the voting rights.

1.3 Evaluate appropriate sources of finance for different business

Evaluation of sources of finance

Business Sole Trader Partnership firm Public limited company

Project Business expansion through opening a new branch in another town. Business expansion through an introduction of a new product in their current market. Business expansion in the international market

Sources of finance Owner’s equity

STRENGTH

1)Major amount of financing could be generated.

2)Reduce the amount of tax as tax is paid by all the owners.

3)Sharing of risk as it will lie on owners.

4)Expertise and idea sharing

5)Management responsibility

divided.

WEAKNESS

1)Division of profit

2)Decision making power reduces.

3)Difficult to regain sole proprietor status. Owner’s equity

STRENGTH

1)Require amount

Could be financed.

2) Division of risk

3) A new expertise can be gained by adding owners’ equity.

4) Tax is divided.

WEAKNESS

1) Risk of product failure.

2) High financing amount is utilize for research and development.

3) Difficult to find new partner

New shares

STRENGTH

1) Heavy amount could be get.

2) Liability of debt will be divided.

3) Tax liability per share will be reduced.

4) New investor for business growth and trust development.

5) Favorable in capturing international market.

WEAKNESS

1) Profit is divisible among shareholders.

2) Liability to be paid for preferred shareholders.

3) Decision power can be divided.

Debt

STENGTH

1)