MANAGING FINANCIAL RESOURCES AND DECISIONS

MANAGING FINANCIAL RESOURCES AND DECISIONS

Table of Content

Managing Financial Resources And Decisions1

P1 sources of finance1

Internal sources of finance1

Retained profits1

External sources of finance2

Traditional Sources of Finance2

Sources of Finance: Ownership Capital2

Internal Sources3

External Sources3

Assessing the implicating of different sources3

Choosing the appropriate source of finance5

P2 (Finance as a resource)5

Importance of financial planning6

Information needed for different decision making7

Impact of finances of financial statement8

P3 (Financial decisions)9

Budgets and appropriate decisions9

Access the validity of the project using investment appraisal technique10

P4 (Financial performance)11

Explain the purpose of main financial statement11

Liabilities12

Shareholder's equity (or  net worth, or capital)13

Assets are calculated the following way:13

Assets=Liabilities+Net worth13

Different format of financial statements13

Balance Sheet (Statement of Financial Position)14

References17

Managing Financial Resources And Decisions

P1 sources of finance

There are various sources of finance for the company. The source of finance should be chosen according to the situation and features of the project. Four sources of finance can be adopted. They are retained profit, bank loan, ordinary shares and venture capital(Andrew 2000: 12).

Internal sources of finance

Retained profits

Retained profits are the main source of finance for the company. "The reinvestment of profits rather than the issue of new ordinary shares can be a useful way of raising equity capital. There are no issue costs associated with retaining profits, and the amount raised is certain, once the profit has been made." Moreover, retained profits are owned by the company, it is can be used without waiting for receiving funds. (Ann 1992:1-9)

In the fierce competitive business environment, time is valuable for a new product. Successful companies always lead their competitors. Wheybridge retained profits are1,000,000, which is not enough to support this project, but it is can act as start-up funds. Meanwhile the company should seek for other finance sources.

External sources of finance

Traditional Sources of Finance

"The simplest and most common source of short-term finance is an unsecured loan from a bank. The firm can borrow and repay whenever it wants so long as it does not exceed the credit limit. The line of credit of Wheybridge is

1,000,000. Atrill and McLaney explain the advantages of bank loan to us:

Bank overdrafts represent a very flexible form of borrowing. The size of an overdraft can (subject to bank approval) be increased or decreased according to the financing requirements of the business. It is relatively inexpensive to arrange, and interest rates are often very competitive, the rate of interest charged on an overdraft will vary, however, (Ann 1992:1-9)according to how creditworthy the customer is perceived to be by the bank. It is also fairly easy to arrange- sometimes an overdraft can be agreed by a telephone call to the bank. In view of these advantages, it is not surprising that this is an extremely popular form of short-term financing.

Sources of Finance: Ownership Capital

This is the most common way (65 % in the UK) of new shares. Existing shareholders are offered the "pre-emptive" right to buy shares. They can sell the rights if they do not wish to take them up as they may wish to diversify their shareholdings. Ownership is not diluted and the pricing is ...