FINANCIAL DECISION MAKING

Managing Finance and Resources

PASSING CRITERION1

Task 1.1: Sources of Finance1

Task 1.2: Implications of Different Sources of Finance1

Task 1.3: Appropriate Sources of Finance2

Task 2.1: Costs of Different Sources of Finance3

Task 2.2: Importance of Financial Planning3

Task 2.3: Main Users of Financial Information4

Different Information Needs of Main Users4

Task 2.4: Impact of Finance4

Task 3.1: Cash Budget5

Task 3.2: Unit Costs and Pricing Decisions6

Part a6

Part b7

Task 3.3: Viability of the Project7

Payback Period (PP)7

Net Present Value (NPV)8

Recommendation9

Task 4.1 & 4.2: Appropriate Formats of Financial Statements9

Distinguishing Current and Fixed Assets10

Layout of Balance Sheet10

MERIT CRITERION11

Task M1: Advantages and Disadvantages of Investment Appraisal11

Task M2: Benefits and Limitations of Ratio Analysis12

DISTINCTION CRITERION12

Task D1: Use of Investment Appraisal Methods and Financial Planning12

Task D2: Use of Cost Controls13

Task D3: Limitations of Financial Planning13

REFERENCES14

Managing Finance and Resources

Passing Criterion

Task 1.1: Sources of Finance

Sources of Finance

Description

Bank Loan

Banking institutions provide a relatively cheap source of finance in the form of overdrafts and business loans. In the UK, banks such as Barclays, Benco and HSBC are commonly accessed sources to finance business operations.

Informal Loan/Own Capital

An informal loan from relative or close friend can be a potential source of finance for the new business. Contrary to this, businesses in the UK can be financed by own capital or seed capital by the owners of the business.

Share Capital

In the UK, share capital is one of the most common sources of finance for quoted companies. It offers sufficient liquidity and cash to run business operations. However, increased number of different shareholders results in diluted ownership of the business.

Government Grant Finance

Federal and state government provides assistance to businesses in the form of grants, loans and early growth funds. Such government support is not subject to revenue sharing and technical assistance rather it is provided as a government initiative to support businesses in the pursuit of new technology and R&D activities.

Bank Overdraft

In the UK, businesses are also provided with a banking facility named overdraft. It is a source of finance that helps businesses to meet short-term financing requirements of the firm. Nature and limit of bank overdraft may vary for different organizations depending upon their sales trend and cash flows.

Debt Factoring

A business can use its unpaid invoices as a source of finance. By this method, a business can sell its accounts receivable to an external entity in exchange of the agreed amount. It could either be based on resources or non-resources.

Table 1: Sources of Finance (Aswann, 2009, p. 3)

Task 1.2: Implications of Different Sources of Finance

Sources of Finance

Implication

Bank Loan

Bank loan provides an easy source of finance. A firm can acquire loan from the bank on different terms and conditions, for instance, pledging assets or equipment. In case, the business defaults to payback the borrowed amount; then the bank will overtake assets of the business in order to recover the loan payment. Hence, excessive bank loan or exploitation of credit consumption can become the cause of business liquidation of insolvency.

Informal Loan/Own Capital

In case of informal loan from a close friend or relative, the business might require to share a certain portion of business ...