Managing financial resources and decisions JS and CO

Managing fiscal resources and decisions JS and COJS and co is a medium sized retail merchant formed by two partners, James and Sainsbury, who ar running it in the UK since 1869. The retailer specializes in quality food products but it sells other non-food products as well. This club got very good success in the market from the past three years. During this discussion we ar going to discuss about this caller-out sources of pay, pay as a source, fiscal decisions, and financial military ope symmetryn.The broad pile of this company in our discussionP1 (sources of Finance)P2 (Finance as a resource)P3 (Financial decisions)P4 (Financial performance)P1 (SOURCES OF FINANCE)IDENTIFY THE SOURCES OF FINANCE AVAILABLE TO THE BUSINESSWhen a company is growing rapidly, for example when contemplating investment in capital equipment, its period financial resources may be inadequate. Few growing companies atomic number 18 able to finance their expansion plans from cash lead alone. They w ill therefore need to consider raising finance from other external sources. In addition, managers who ar looking to buy-in to a duty or buy-out a air from its owners may non aro function the resources to acquire the company. They will need to raise finance to achieve their objectives. there are a number of potential sources of finance to chance on the needs of a growing furrow Existing shareholders and directors bills Business angels Clearing banks ( all all overdrafts, short or medium term loans) Factoring and invoice discounting Hire purchase and leasing Venture capitalA key consideproportionn in choosing the source of new business finance is to strike a balance between equity and debt to ensure the funding structure suits the business.The main differences between borrowed money (debt) and equity are that bankers call for interest payments and capital repayments, and the borrowed money is usually secured on business assets or the psycheal assets of shareholders and/or directors. A bank alike has the power to place a business into administration or bankruptcy if it defaults on debt interest or repayments or its prospects decline.ASSESSING THE IMPLICATIONS OF DIFFERENT SOURCES.Financial institutions that transcend field of study boundaries and engage in such(prenominal) activities as extensive inter bank contracts, over-the-counter derivatives contracts, quit, bond, and syndicated loan issuance, and trading activities globally has led to stronger interconnections, innovation, and growth. While tighter interdependencies can increase the efficiency of the global financial system by smoothing credit allocation and risk diversification, they create also increased the potential for cross-market and cross-border disruptions to spread swiftly. In addition, financial innovations have enabled risk transfers that were not fully recognized by financial regulators and institutions themselves, and have complicated the respectment of counterparty risk, risk management, and policy responses. Although linkages across institutions have traditionally focused on solvency concerns, the current crisis reminds us of the relevance of liquidity spillovers, specifically that(1) Interconnectedness means difficulties in rolling over liabilities may spill over to the financial system as a whole and that(2) Rollover risk associated with short-term liabilities is present not only in the banking sector but, equally importantly, in the nonblank financial sector. Thus, it is essential to emend our apprehensiveness and monitoring of direct and indirect financial systemic linkages, including by strengthening techniques to assess systemic link-ages, and thereby feed to qualification systemic-focused supervision feasible.Four completing approaches to assess financial sector systemic linkages and focuses on this definition of systemic risk 2The network approachThe co-risk modelThe distress dependence matrixThe default intensity modelCHOOSING THE seize SOURCE OF FINANCE FOR THE BUSINESS.There are a number of ways of raising finance for a business. The typecast of finance chosen depends on the nature of the business. Large organizations are able to use a wider variety of finance sources than are smaller ones. Savings are an obvious way of putting money into a business. A small business can also borrow from families and friends. In contrast, companies raise finance by issuing shares. Large companies often have thousands of divergent shareholders.To gain extra finance a business can take out a loan from a bank or other financial institution. A loan is a sum of money lent for a given period of time. repayment is made with interest. The lender of money needs to know all the business opportunities and risks involved and will therefore want to see a detailed business plan. The lender may also want some form of security should the business run into financial difficulty, and may therefore prefer to result a secured loan.Another way of raising short-term finance is through an overdraft facility with a bank. The borrower is given permission to take out more from their account than they have put in. The bank fixes a maximum limit for the overdraft. Interest is charged on the overdraft daily.Businesses may also qualify for grants. Government and private specie are sometimes made available to businesses that meet certain conditions. For example, grants and loans may be available to firms setting up in rural areas or where there is game unemployment.Out comesBy this module I understood the different foresighted term and short term sources of finance with the implications of choice of one source over the other and any advantages and disadvantages of sources different sources of finance.P2 (FINANCE AS A RESOURCE)ASSESS AND COMPARE THE COSTS OF ABOVE MENTIONED SOURCES OF FINANCE.A company might raise new funds from the side by side(p) sourcesThe capital marketsi) New share issues, for example, by companies acquiring a stock market listing for the first timeii) Rights issues Loan stock well-kept earnings Bank borrowing Government sources Business expansion scheme funds Venture capital Franchising.Ordinary (equity) sharesOrdinary shares are issued to the owners of a company. They have a nominal or face value, typically of $1 or 50 cents. The market value of a quoted companys shares bears no kindred to their nominal value, move out that when ordinary shares are issued for cash, the issue price must be equal to or be more than the nominal value of the shares.Deferred ordinary sharesAre a form of ordinary shares, which are entitled to a dividend only after a certain date or if profits rise above a certain amount. Voting rights might also differ from those attached to other ordinary shares.Ordinary shareholders put funds into their companya) By paying for a new issue of sharesb) through retained profits.New shares issuesA company seeking to obtain additional equity funds may bea) An unquoted company wishing to obtain a Stock Ex mixed bag point of referenceb) An unquoted company wishing to issue new shares, but without obtaining a Stock Exchange quotationc) A company which is already listed on the Stock Exchange wishing to issue additional new shares. beg offING THE IMPORTANCE OF FINANCIAL PLANNINGFinancial be afterit is a process which presents before an individual, organization or even a country, the current financial position and the adjustments in the spending pattern, in order to meet the goals.Importance of Financial PlanningIt is important to plan finances in order to reap long term benefits through the assets in hand. The investments that one makes are structure properly and managed by professionals through financial planning. Every decision regarding our finances can be monitored if a proper plan is devised in advance. The following points explain why financial planning is important.Cash Flow Financial planning helps in increasing cash flow as well as monitoring the spending pattern. The cash flow is increased by undertaking measures such as tax planning, prudent spending and careful budgeting.Capital A strong capital base can be built with the help of efficient financial planning. Thus, one can think about investments and thereby improve his financial position.Income It is possible to manage income effectively through planning. Managing income helps in segregating it into tax payments, other monthly expenditures and savings.Family Security Financial planning is necessary from the point of view of family security. The various policies available in the market serve the purpose of financially securing the family.Investment A proper financial plan that considers the income and expenditure of a person helps in choosing the right investment policy. It enables the person to reach the set goals.DESCRIBE THE INFORMATION NEEDS OF DIFFERENT DECISION MAKERS.Commonly used indicators such as the gross national product (GNP) and measurements of individual r esource or pollution flows do not provide adequate indications of sustainability. Methods for assessing interactions between different sectoral environmental, demographic, social and developmental parameters are not sufficiently developed or applied. Indicators of sustainable development need to be developed to provide solid bases for decision-making at all levels and to contribute to a self-regulating sustainability of integrated environment and development systems.(a) To achieve more monetary value-effective and relevant data collection and assessment by better designation of users, in both the public and private sectors, and of their tuition needs at the local, provincial, national and international levels(b) To strengthen local, provincial, national and international capacity to collect and use multicultural information in decision-making processes and to enhance capacities to collect and analyze data and information for decision-making, particularly in developing countries(c) To develop or strengthen local, provincial, national and international means of ensuring that planning for sustainable development in all sectors is based on timely, reliable and usable information(d) To make relevant information accessible in the form and at the time required to facilitate its use.DESCRIBE THE IMPACT OF FINANCE ON THE FINANCIAL STATEMENTS.Financial statements (or financial reports) are formal records of the financial activities of a business, person, or other entity.All the relevant financial information of a business enterprise presented in a structured manner and in a form easy to understand, is called the financial statements. There are four basic financial statements proportion sheet also referred to as statement of financial position or condition, reports on a companys assets, liabilities, and Ownership equity at a given point in time.Income statement also referred to as Profit and Loss statement (or a PL), reports on a companys income, expenses, and profits over a period of time. Profit Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state.Statement of retained earnings explains the changes in a companys retained earnings over the reporting period.Statement of cash flows reports on a companys cash flow activities, particularly its operating, investing and financing activities.For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.OutcomeBy this module, I depict the costs of finance as a resource, how to make up a budget on the basis of given information and implication of failure to finance adequately.P3 (FINANCIAL DECIS IONS)ANALYZE BUDGETS AND MAKE APPROPRIATE DECISIONSHow much unbudgeted downside risk you should manageWorst-case scenario (given catastrophic losses) vs. regretThe value (and cost) of compliance with regulations (for example, SOX)Real Options The Value of Midcourse Corrections to ProjectsOne of the fundamental insights of modern financial possibleness is that options have value. The phrase We are out of options is surely a sign of trouble. However, because corporations (and other organizations) make decisions in a dynamic environment, they usually have midcourse options that should be considered in project valuationsThe Option to Abandon a project Has value if return (or savings) turns out to be lower than expectedThe Option to Expand a project Has value if return (or savings) turns out to be higher than expectedThe Option to Delay a project Has value if the underlying variables are ever-changing with a favorable trendThe Option to Outsource a project Has value if internal resource s dont have required experience and expertiseIn practice, companies sometimes have other choices. They can delay the decision until later, when more information is available. Or, they can call in outside help, even after having deciding not to do so at the outset. Such investment timing options can dramatically affect a projects estimated mean NPV and risk. Projects that can easily be change in these ways are more valuable than those that do not provide such flexibility. The more uncertain the outlook, the more valuable this flexibility becomes. prognosticate UNIT COSTS AND MAKE PRICING DECISIONS USING RELEVANT INFORMATION.Defining CostsThere are several types of costs to consider when distributeing a breakeven analysis, so heres a refresher on the most relevant.Fixed costs These are costs that are the same regardless of how many items you sell. All start-up costs, such as rent, insurance and computers, are considered fixed costs since you have to make these outlays before you sel l your first item. multivariate costs These are recurring costs that you truckle with each unit you sell.Setting a PriceThis is critical to your breakeven analysis you cant calculate likely revenues if you dont know what the unit price will be.psychological science of Pricing Pricing can involve a complicated decision-making process on the part of the consumer, and there is plenty of research on the marketing and psychology of how consumers perceive price. Take the time to review articles on pricing strategy and the psychology of pricing before choosing how to price your product or service.Pricing Methods There are several different schools of thought on how to treat price when conducting a breakeven analysis. It is a mix of quantitative and qualitative factors.The formula Dont worry, its fairly simple. To conduct your breakeven analysis, take your fixed costs, divided by your price, minus your variable costs. As an equation, this is defined asBreakeven Point = Fixed Costs/(Unit S elling Price Variable Costs)This calculation will let you know how many units of a product youll need to sell to break even.Above the breakeven point, every additional unit exchange increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits. As an equation, this is defined asASSESS THE VIABILITY OF A PROJECT USING INVESTMENT APPRAISAL TECHNIQUES.Learning OutcomeAssessment Criteria1. Understand the nature of accounting, accountability and stewardship at heart a business environmentUnderstand the nature and purpose of book-keeping and accounting and the difference between them.Be able toExplain the difference between book-keeping, financial accounting and management accounting.Identify different stakeholders and their interest in the financial position of the business.Explain how accounting can be used for planning, decision making and control.Be able toIdentify and describe the fundamental accounting concepts of going concern, accruals, consistency, prudence and true and fair.Identify the key elements of financial statements (income, expenses, assets, liabilities, capital) and describe their relationship exploitation the accounting equation.1. Understand the nature of accounting, accountability and stewardship within a business environment (continued)Identify the main financial statements and explain how they are compiled (Profit and Loss Account, Balance Sheet and Cash Flow Statement).Describe how financial accounts are regulated using accounting standards.2. Understand how financial statements can be analysed and interpreted to adjudicate the performance of a businessUnderstand how financial statements can be analysed and interpreted using ratio analysis so that stakeholders can judge the performance of a business.Be able toIdentify likely users of ratio analysis and explain how they might use the information.Calculate and interpret profitability rati os (gross profit, net profit, ROCE, asset turnover).Calculate and interpret liquidity ratios (current ratio, acid test ratio, debtor days, creditor days, stock turnover days).Calculate and interpret investment ratios (gearing, interest cover, simple EPS)Use ratio analysis to make comparisons between one business over time, two businesses or to compare results to industry standards.Explain the benefits and limitations of ratio analysis.3. Understand the importance of functional(a) capital maintenance (continued)Explain how creditors can be used as a source of finance and identify the costs of trade credit.Explain how the elements of working capital can be managed effectively to minimise borrowing and its associated costs.Understand how a cash flow forecast can be used to visit and manage future working capital requirements.Be able toDistinguish between cash and profit.Identify and understand the implications of non-cash accounting adjustments such as derogation and provision for bad debts.Prepare a simple cash flow forecast and identify periods of cash excess or cash shortage.4. Identify and assess different sources of funding available for businessUnderstand that there are a range of sources of finance available for businesses and those different types of finance are competent for different purposes.5. Understand and distinguish between costs based on their behaviourUnderstand that costs can be classified in different ways based on their behaviour.OutcomeBy this module I able to understand the different investment appraisal techniques and nature of long-term decisions.P4 (FINANCIAL PERFORMANCE)EXPLAIN THE PURPOSE OF MAIN FINANCIAL STATEMENTSThe three main financial statements areThe balance sheet-which reports a corporations assets, liabilities, and stockholders equity as of a point-in-time (e.g., as of midnight of December 31, 2009).The income statement-which reports a corporations revenues and expenses for a period of time, such as a year, quarter, mont h, 52 weeks, 13 weeks, etc.The statement of cash flows (or cash flow statement)-which provides information on the change in a corporations cash and cash equivalents during the same period of time as the income statement.The financial statements that are distributed outside of a company need to be prepared in accordance with generally accepted accounting principles (GAAP). For example, the cost principle generally requires that the balance sheet should report long-lived assets at cost minus accumulated depreciation. The matching principle requires that the cost of long-lived assets used in the business be allocated to various accounting periods in which they generate revenues or are used up.ANALYSES FINANCIAL STATEMENTS USING APPROPRIATE symmetryNS AND COMPARISONS, BOTH INTERNAL AND EXTERNAL.1. latest RATIO OR WORKING CAPITAL RATIOCurrent ratio may be defined as the relationship between current assets and current liabilities it is also known as working capital ratio.Current assetsC URRENT RATIO =Current liabilitiesYear ended2007-082006-072005-062004-052003-04Current assets(in crores)913.27233316141171913.27Current liabilities(in crores)1479994475336213Ratio0.622.3473.3973.4854.132InterpretationA current ratio of 21 is usually considered as ideal.If it is less than 2, then it means the company is not enjoying the adequate liquidity.In past five years it shows a decline in the ratios.2. QUICK RATIOFormula = Current Assets Inventory Prepaid ExpensesCurrent LiabilitiesInterpretationA quick ratio of 1 is considered ideal.In all the five years, it was above 1, where the funds can be properly employed.LEVERAGE RATIOS1. DEBT EQUITY RATIODebt-equity ratio, also known as External-Internal ratio is calculated to measure the relative claims of outsiders and the owners (i.e., shareholders) against the firms assets. This ratio indicates the relationship between the external equities or the outsiders funds and the internal equities or the share holders funds.Interpretation A DEBT EQUITY RATIO OS 21 IS IDEAL.IN 2004-06 THERE IS NO DEBT EQUITY RATIO.IN 2007 AN 2008 IT SHOWED A NEGLIGIBLE VALUE.2. PROPRIETORY RATIOIt is the ratio between shareholders equity and Total Assets.Formula= Shareholders EquityTotal Assets yrSHAREHOLDERS EQUITYTOTAL ASSETSRATIO2004125.3413090.0952005140.7116510.0852006285.1522570.1262007291.8033890.0862008298.6539870.074InterpretationA higher the proprietary ratio the better it isIn all the five years it is less than one.It shows sapless financial position of the business.3. INTEREST COVERAGE RATIOIt is the ratio between EBIT and InterestFormula = EBITInterestYEAREBITINTERESTRATIO200435520054102006499149920076936115.520088341364.15InterpretationThe higher interest coverage ratio the better it is.In 2004 there is no interest coverage ratio.In 2006, 2007 2008 it showed a with child(p) ration which indicates a greater safety ofOut comeBy this I understood the basis business and accounting terminology used and should be able to in terpret the information collected from financial statements using ratio analysis and could draw conclusions from it.CONCLUSIONSBy this module I understood the different long term and short term sources of finance with the implications of choice of one source over the other and any advantages and disadvantages of sources different sources of finance. By this module I identify the costs of finance as a resource, how to make up a budget on the basis of given information and implication of failure to finance adequately. By this module I able to understand the different investment appraisal techniques and nature of long-term decisions. By this I understood the basis business and accounting terminology used and should be able to interpret the information collected from financial statements using ratio analysis and could draw conclusions from it.