FINANCIAL RESOURCES

Managing financial resources and decisions

Managing financial resources and decisions

Introduction

JS and co is a medium sized retailer formed by two partners James and Sainsbury, who are running it in the UK since 1869. The retail specializes in quality food products but it sells other non-food products as well. Due to the huge success for the last three decades, the partners of the JS and Co are wishing to increase the number of stores. They want to invest in different new products and operations in order to be benefited from its market name as well.

JS and Co is currently running only 107 stores spread all over UK and they now want to increase the number of stores to 175. They want to fulfill their plan within the next five years. JS and Co want to categorize their stores according to the requirements of the people. In busy official areas, JS and Co is wishing to open small stores where quality food products will be available at reasonable prices. A number of big stores are planned to be opened in areas where people could buy products for the requirements of the whole of the week. Consider the following problems JS and Co must face if it is to make a success of its new business plan.

JS and Co needs to draw some projected cash flow figures. It considers the following items from its current period cash flow to be the most significant:

'000

Revenues 235,000

Direct expenses 55,700

Admin and Selling expenses 80,000

Rental and other costs 17,500

Other expenses 27,000

 

Present

1 Year

2 Year

3 Year

4 Year

5 Year

No .of Stores

107

117

127

147

167

175

Revenues

235,000

256962.6

278925.2

322850.5

366775.7

384345.8

Direct expenses

55,700

60905.61

66111.21

76522.43

86933.64

91098.13

Admin and Selling expenses

80,000

87476.64

94953.27

109906.5

124859.8

130841.1

plus 35%

 

316048.1

323524.7

338478

353431.2

359412.6

Rental and other costs

17,500

19135.51

20771.03

24042.06

27313.08

28621.5

Other expenses

27,000

29523.36

32046.73

37093.46

42140.19

44158.88

plus 45%

 

89523.36

92046.73

97093.46

102140.2

104158.9

 

 

859692.2

908505.9

1006133

1103761

1142812

Sources of Finance

The sources of finance available to Coraonation Public Limited Co. are following:

1.Retained Earnings

2.Share Issuance

3.Trade Credit

4.Lease Financing

Merits & De-Merits of Sources of Finance

Retained Earnings

The merits of retained earning as a source of finance are as follows:

(i) Retained earnings is a permanent source of funds available to an organisation;

(ii) It does not involve any explicit cost in the form of interest, dividend or floatation cost;

(iii) As the funds are generated internally, there is a greater degree of operational freedom and flexibility;

(iv) It enhances the capacity of the business to absorb unexpected losses;

(v) It may lead to increase in the market price of the equity shares of a company.

Retained earning as a source of funds has the following limitations:

(i) Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends;

(ii) It is an uncertain source of funds as the profits of business are fluctuating;

(iii) The opportunity cost associated with these funds is not recognised by many firms. This may lead to sub-optimal use of the funds.

Share Issuance

Advantages of company: The advantages of issuing equity shares may be summarized as below:

•Long-tern and Permanent Capital: It is a good source of long-term finance. A company is not required to pay-back the equity capital during its life-time and so, it is a permanent sources of capital.

•No Fixed Burden: Unlike preference shares, equity shares suppose no fixed burden on the company's ...