Table of Contents Contents 1. sources of finance available to a business 1. Assessment of the implications of different sources 1.

Appropriate Sources finance for a business project 2.1 Assessment and Comparison of the cost of different sources of finance 2.2 Importance of Financial planning 2.3 Information needs of different decision makers 2.4 Impact of finance on the financial statements 3.1 Analysis of Budgets 3.2 Calculation of Unit costs and pricing decisions 3.3 Viability of a project 4.1 Purpose of the main financial statements 4.2 Different formats of financial statements for different types of business 4. Analysis of financial statements Using Appropriate Ratios References & Bibliography 1. Sources of finance available to a business Sources of finance For business development, operation and growth finance is important thing. It is considered as the major factor which that helps to make a business healthy. So, for every business it is important to manage its sources adequately. But getting the sources of finance is not that sort of easy task. Businesses get this finance through internal and internal sources. Internal sources of finance Business organizations find their financial help through diverse sources, among the sources internal finance is vital sauces that an organization finds through internally. Individual savings Sold money of the fixed Assets Gathered profits Organizations working capital Individual savings Individual savings is interchangeably known as personal savings, this savings can be from the organizations owners, managing partners and other stakeholders who can provide money at their demand. Personal saving is unexpected sources of finance that creates liability for the business. Gathered profits Gathered profit is type of profit which is still at the hand of the company and didnt distribute among the shareholders. When a company earns profit all portions of it are not distributed to the shareholders, there remains some portion. Such portion of the profit helps the organizations in its bad days. Basically, after distribution of the profit to the shareholders some portion remained and Page No. 02 06 06 08 09 09 10 10 11 13 15 15 18 21

that portion is strategically stored for the further usage of organizational development. Organizations working capital Organizations require money for its day to day activates. Such money is exclaimed as working capital. Working capital is described as current assets minus current liabilities. A financial manager needs to manage a healthy working capital to finance its bad days. Sold money of the fixed Assets Every company has several fixed assets, all fixed assets stands as visible as the fundamental assets for the company. Fixed assets can be used for the production process. An organizations factory, its machineries, equipments and other fixtures are considered as fixed assets. Fixed assets are the major phenomenon in the organization that works to produce companys assets. If fixed assets are surplus and if it is used then it can be sold. The sold money can be used as major sources of finance. The business organizations have some sorts of assets that are not always used in the production process. The organizations can use the assets for bad days.

External sources of finance The other major source of finance is external sources, that exist the outer sources excluding the own or self finance. Rather it includes the third parties who lend money to the organization. The sources are: Possession of capital Non-possession capital Possession of capital Possession capital is somewhat the ownership capital. It is the sum of the money which is gathered from the shareholders or the owners of the company. It can be funded at the very beginning or can be achieved through stock allocation. Stocks are based on some share which are: General or ordinary share Preference share

General or ordinary share The unit of investment that is considered as equity is shares of the company. General shares are achieved through shareholders and they are the big part of the companys investments. General shares or ordinary shares are the part of the companys investments that creates money for the company. General shareholders are the right holders who can vote for the managements selection and they can participate in the Annual General Meeting.

Preference shares Other than ordinary shares, preference shares are the type of share that have exact rate of dividends for them. Theses shareholders dividends are paid before ordinary shareholders. But these shareholders do not get the right to vote in its Annual General Meetings. Preference shares are a sort of the ownership share, these shares are also different kinds cumulative preference

share, redeemable preference, convertible and participatory shares. Non-ownership capital Non ownership capital is a type of share that does not provide any chance to participate in the selection procedure of the company. And they cannot influence in the management decisions. The major requisites of non-ownership are that it gives interest and some return. Different types of ownership capital are: Bank draft Bank Loan Hire and purchasing in non payment Lease finance Debentures Allowances & Grant Venture capital Discounting Invoice

Issuances of Debentures Debentures are of types of debt capital and it is carried from other people who are not the owners of the company, rather debenture holders are considered as the creditors of the organization. Debentures are only the interest holder who can get interest a year and they cannot get rights on voting. Companies issue debenture for a period of time and only issue it to get a healthy amount of money for the organization. Debentures are secured and unsecured, fixed and floating. Bank Loan Bank loans are amount of money that is borrowed from the bankers and the banking & financial institution organizations provide short and long term loans to the business. In the present market bank loans are the crucial sources of finance for the organizations. Lease finance Lease finance is a capital and asset acquiring technique for the business organizations. In this process the leasing organization provides assets to a business organization, after a period of time the organization gets the asset for their use. In this process the asset remains in possession of the leasing organization. The company who gets facility of lease finance pays rents the leasing assets within a stipulated period of time. There is another type of finance that is operating lease. Operating Lease is taken for the short term asset management and the lease do not provide long term value to them. It makes short term lingering risk for the company.

Venture capital Venture capital is the money which is accumulated in the initial stages of its upbringing. When a business starts to run it requires having some amount of money to launch it. Each and every business gets possibility of getting fall down and goes with some stormy situation. There are some venture capitals providing organization that provide capital to the new organization.

1. Assessment of the implications of different sources The cost of the source of finance Since, organizations are seen to take financial supports from different sources. These financial sources also cost differently. Organizations always try to have financial sources that can facilitate the firms best. External financing is always costly for the organizations rather than internal financing.

The gearing ratio of the business The ratio of debt capital and equity capital is the relationship that explains the gearing ratio. The ratio has important role to find sources of fund. If the gearing ratio is higher, the company does not require finding sources and if it is lower it need to take loans from different sources. The control of the business If a company adds new share with its existing pool, shareholders value tend to decrease. So companies are not agreed to create new more shares to get finance from that sources. They can find the chances to get opportunity from the third parties. Venture capital is the most needed external sources of finance.

1. Appropriate Sources finance for a business project Retained profits Advantages If an organization take opportunity from retained profits it need to pay back. It need not to pay interest It is used to leverage assets It need not require to pay issuance expense

Disadvantages Retained earnings do not make any cost except opportunity costs. Most of the companies do not get any retained earnings Sale of assets Advantages Selling fixed assets do not make any pay back It does not creates any interest It creates lot of money as long term capitals Disadvantages If fixed assets are sold it loses its existing productivity Fixed assets are not replaceable and cannot be gained in short terms

Ordinary share issue Advantages Ordinary share issuance creates no liability for the organization Ordinary shares provide dividend if company earns profit Ordinary shares are gained if gearing ratio is lower Disadvantages Issuing ordinary share requires time It also creates extra cost for a time span Loans Advantages Ant company can take large of bank loan at any time Loan can facilitate both in long and short period of time.

Disadvantages Its not easy to take loan as it requires collateral Loan creates highest interest among other financing sources It is mandated to repay within a stipulated time. Loan help to increase gearing ration

From the above advantages and disadvantages of the four sources of finance I think retained profits and loan are the most important sources of finance for the desired expansion of the company. Both of the sources are long term investment sources and therefore match with the term of the desired investment of the company.

2.1 Assessment and Comparison of the cost of different sources of finance Retained profits It has been already discussed about that retained profits creates opportunity costs. Such opportunity cost implies that company can uses it to others purchases. Sale of assets If any organization sells its fixed assets it decreases its products and services. Though it raises its finance it lacks productivity. Ordinary shares Ordinary shares inherits some issuance cost and shareholders find some dividends if company get any profit. Loans Loan makes some costs, as interest rate is higher in all parts of the world.

2.2 Importance of financial planning Companies should get financial planning and construct strategy for getting financial sources. The company which offers product needs to use its infrastructure and operating costs. To run such organizational expenses they require proper financial sources.

A financial plan requires the following materials: Its should need a financial statement Get to need different ratio analysis Building budget Making estimation on breakeven point analysis Framing different policies Finding sources of capital Planning for profit maximization

Financial managers need to have some points that are mentioned above; the concerned issues can enhance better profitability for the organization.

2.3 Information needs of different decision makers Different parties have interest with the organization and they influence in taking decision about business management. Personnel, suppliers, finance, shareholders and other stakeholders are key persons who can take part in planning of the organizational planning; in every organization there is team leader who leads the team. Financial organization needs information in running the organization and it requires disseminating the information to the parties. Every financial organization needs to have profitability and stability to run the organizational decisions. Different ratio analysis techniques and strategic implications can make the things difference. 2.4 Impact of finance on the financial statements Ordinary shares Ordinary shares are something to gather capital from the ordinary people. It is also called as equity capital. If more ordinary shares are included in the line of the company, the stocks are getting included with its existing shareholders. With ordinary share, preference shares holder needs to make dividend and they are shown in the balance sheet for tax adjustment. Sale of assets In balance sheet, sold fixed assets are shown in reduced formed. If the sales of the fixed assets ca can create profits and creates loss the accounts are displayed in the profit and loss account. Loan

Loan is a long term debt and these things are shown as the balance sheet in the liability side. The repayment of the loan is also reduced in the balance sheet. The interest is shown in the loss and profit account.

3.1 Analysis of Budgets Main problems in the sales budget of Northfield Components Ltd: In the sales budget it is found that during the first six mounts there was large gap between the actual sales and the forecasted sales in each month. And the most concerning issue is that this deviation is increasing month to month. Causes: This problem was happened due to lack of efficient forecasting of sales. I think sales were not forecasted considering the historical sales of the company and economic trend of the industry. Recommendations: This problem could be solved if the sales would be forecasted considering the historical sales pattern of the company and analyze the economic trend of the industry before forecasting the sales.

Main problems in the cash flow forecast of Northfield Components Ltd: The main problem in the cash flow forecast is that the accumulated cash balance is negative in each month. Causes: The main cause of this negative accumulated cash flow is large expenditures in the month of January and lesser amount of sales forecast compared to other month. And also there were mismatch in the rent & rates expenditures. Recommendations To solve this problem I think the some expenditure should be rearranged such as rent & rates could be paid at the end of each month instead of in advance quarterly. Sales forecast should be reorganized.

3.2 Calculation of Unit costs and pricing decisions Fixed costs: these costs are costs that do not change with the level of production. Variable costs: these costs are costs that change with the level of production such as labor and raw materials.

Break-even analysis: Through breakeven analysis the minimum sales volume are determined that are needed to cover all costs at a certain price level. Break-even point: The Level of sales at this point will cover all the company's costs, both fixed

and variable.

Example Suppose, selling price per unit of a product is $10 and variable cost is $4 and fixed cost is $ 24000 then the firm must sell (24000/10-4) =4,000 units to break even.

Different Costing Methods: Marginal Costing and Absorption Costing Absorption costing is a costing system which treats all costs of production as product costs, regardless weather they are variable or fixed. Marginal or Variable costing is a costing system under which those costs of production that vary with output are treated as product costs. Activity Based Costing Activity based costing is a method for assigning costs to products, services, projects, tasks, or acquisitions, based on- the activities that go into them and the resources consumed by these activities. Standard Costing This costing method records the production cost based on the predetermined standard. If the actual cost is lower than the standard cost there is cost efficiency in the production process. Pricing Methods Market led pricing In this pricing method the producer prices the product in accordance with the market that means the prices that competitors charge. For example, if the market price of a product is $ 10 then new producer of the same product will also charge $ 10 for per unit. Full Cost Pricing Under this method the price of a product is total cost plus certain profit. For example if the total cost of a product is $ 20 and the required profit is $ 2 per unit then the price will be $ 22. Marginal Cost Pricing Under marginal or variable cost pricing the price of a product is total variable cost plus certain profit per unit. For example, if the total variable cost of a product is $ 10 and required profit is $3 then the price will be $13 of that product. From these pricing methods it can be said that the full cost pricing method is most effective because it considers the total cost of the production. 3.3 Viability of a project NPV of Project A & B NPV= Total present value of cash flows initial outlay

Table: NPV of Project A & B

Payback period Payback period of the project A & B are shown here: Table: Cumulative Cash flow of project A & B

Internal rate of return (IRR) IRR of project A and B are shown here: IRR= Using microsoft excel sheet I got IRR for Project A is 24% IRR for Project B is 17.52% Accounting rate of return (ARR) Accounting rate of return (ARR) = Average net income/ Average investment Table: ARR of project A & B

Summary of the results of NPV, Payback period, IRR, and ARR Project A NPV 254655 Payback period 2.14 years IRR 24% ARR 45% Project B 121331 3.08 years 17.52% 38%

In the table it is seen that the results of all these four appraisal methods show project A is more attractive and viable compared to the project B.

4.1 Purpose of the main financial statements The main purpose of profit and loss account is to provide information regarding the profit (loss) and the main sources of profit (loss) of the organization. The main purpose of the balance sheet is to provide information regarding the financial health of the organization such as total assets and liabilities. The main purpose of the cash flow statement is to provide information about the main sources of cash inflow and outflow of the organization. 4.2 Different formats of financial statements for different types of business Format of Financial Statements In respect to the firms formation the organizations have different financial statements format and standards. If the organization is sole proprietorship, partnership or a public or private limited company each of these maintain several standards to make the financial statements. According to the standards of the organization, economic activity has different dimension, and to satisfy their requirements the standards can vary. The organization which is sole proprietorship in structure, they follow standard of GAAP. They prepare financial statements to measure the companys financial situation. The financial statement shows some situations that implies the economic condition. For them they maintain balance sheet and income statement of elucidating the profit or loss of the company. They make a statement of profit and loss based on International Financial Reporting Standard (IFRS) and GAAP. To compare the organizations statement with others these standards are require maintaining. If the rules are properly utilized then the organizations can compare with others. A unique financial statement shows the balance sheet, profit, income, outcome, loss statements. When a report is made first income statement is prepared, and then they need to make balance sheet where the peoples equity and liability is shown in the chart. The total statement is made only for the knowing economic condition of the company and it also shows some extent of comparatively. A limited companies financial statement can reflect on the present and existing assets, liabilities and assets and they must include sales, profits, income, costs and EPS. The limited companies and sole proprietorships financial statements are nearly same. There is also some difference

between public company and sole proprietorship financial statements.

The difference between a sole proprietorship and limited companies financial statement lies in the owners equity:

4.3 Analysis of financial statements Using Appropriate Ratios I have collected the financial statements of Sainsbury for the year 2011 & 2012 and also collected financial statements of Tesco for one year (2012) which is running business in the same industry to compare the financial performance of these two organizations. In the following part financial performance of Sainsbury are analyzed using some important ratios and also compared with its one key competitor Sainsbury and also with the industry average of the some ratios. Profitability ratio

Analysis and Comparison It is seen that Sainsburys profitability is lower than that of Tesco and also Sainsburys profitability is also lower than the industry average. Liquidity Ratio

Analysis and Comparison The current ratio of Sainsbury in 2011 was 0.58 that indicates the company had current assets of 0.58 against 1 of current liability. In 2012 its liquidity was increased to 0.64 against 1. The results of the liquidity ratios show that Sainsburys liquidity position is not as good as Tescos liquidity position and its liquidity is less than the industry average. Efficiency ratios

Analysis and Comparison It is seen that receivable turnover of Sainsbury was 0.016 times in 2011 and 0.012 times in 2012 that indicates its ability to collect cash from the accounts receivable is decreasing. In case of payable turnover it is seen that Sainsbury is getting more time to pay its suppliers. Inventory turnover of Sainsbury has been decreased from 24.55 to 22.47 in 2012. Compared to Tescos efficiency and industry average Sainsburys efficiency is not in satisfactory level. Leverage ratios

Analysis and Comparison It is seen that Sainsburys debt ratio was 0.52 in 2011 that indicates it financed its total assets by debt capital by 52%. This level of debt has increased to 54% in 2012. On the other hand it is seen that Sainsburys debt was 1.10 against 1 of equity in 2011 and increased to 1.19 in 2012. These results show that Sainsbury do not use too much debt like Tesco does. Sainsburys leverage position is consistent with the industry average.

Investment Ratio

Analysis and Comparison In the table it is seen that Sainsburys earnings per share is decreasing. In 2011 its EPS was 34.4 and in 2012 it decreased to 32 that indicate its financial performance is decreasing. Compared to the industry average its EPS is good but EPS of Tesco is higher than that of Sainsbury. So, Tescos stock is more attractive for investment.

References and Bibliography 1. Gitman L. J (2008). Principles of Managerial Finance (Eleventh edition), published by Pearson Education Inc. and Dorling Kindersley Publishing Inc. 2. Khan. M. Y and Jain. P. K (2010). Financial Management (Fifth edition), Tata McGraw Publishing Company, New Delhi. 3. Pandey. I. M (2009). Financial Management (Ninth edition),Vikas Publishing House, New Delhi.