Management of finance is very necessary for the success of organizations. It helps to build image and growth potential of private sectors in the market as well as provides opportunities to expand itself in the new market with innovating strategies. Present study is about Fort Sport Ltd is a small private company specialized in supplying fitness products via online to ultimate customers. Report study about the sources of finance available for company with the help of cost comparison so that it can get higher return on the lower cost. Addition to this, it studies about the impact of loan and investment on the balance sheet as well as income statements.
There are various sources available for Fort Sport Ltd. It helps business for increasing its activity in the market with speed up in the production process.
Leasing companies- These companies provides technological assistance to Fort Sport Ltd. It helps firm by providing highly equipped technology which reduces cost because they do not have to pay initial higher amount. It assists firm in their financial burden (Yang and Niu, 2013).
Banks- It provides huge amount of money for meeting long term requirement of organization. They provides money on the basis of security and easily accessible for Fort Sport Ltd (Brotman, 2010).
Venture capital – It provides financial assistance by helping firm to expand their projects. Manage affair related to growth and increasing activities in the market related to new launch (Alam and Brown, 2006).
Small business administration-They offers various financing programs by offering loans on short term and long term basis. They inspects overall project of Fort Sport Ltd and then avail finance as per the requirements (Sources of Small Business Financing, 2014).
Trade credit- In this vendor and suppliers provides credit facilities which help Fort Sport Ltd to execute its new projects in the market. It is very helpful for small businesses because they can have easily access for required to material and other stock which helps to maintain their productivity (Huang and Wang, 2013).
Family and friends- Under this, Owner of business contacts with relatives who can provide sufficient amount of finance. It provides flexibility in interest rate as well as period of maturity so that can have lower financial burden (Bandyopadhyay and Saha, 2011).
Retained profit- It is arranged with Fort Sport Ltd itself. They kept this amount aside from the profit earned so that it is further invested in the operational activities of expansion (Zoubi and Al-Khazali, 2007).
Financial sources affect Fort Sport Ltd by various factors such as legal implication, risk of bankruptcy and dilution of control. By having loan facility firm has to fulfill various legal formalities and its credit rating also influence by the default in making payment of whole amount (Murphy and Yetmar, 2010). If Fort Sport Ltd does not perform well and become unable to pay its debt then banks takes over their assets for compensation. Many times it causes bankruptcy of firms because their assets ratio is not appropriate in meeting debt obligations. So Fort Sport Ltd needs to pay timely interest as well payment of principle amount on right time (Gaskell and Ashton, 2008).
Fort Sport Ltd has to choose appropriate finance on the basis of risk and profitability which ensures its success. These are as follows-
Leasing- It is good sources for enhancing productivity at lower cost. These companies provide required equipments and sources for expansion and growth of the organization. It helps to increase productivity by eliminating need to have higher initial outlay (Wang, Lai and Zhao, 2008).
Banks- It provides finance for meeting long term requirement on the basis of fixed interest rate. They are very advantageous to execute new projects of Fort Sport Ltd. It ensures long term finance assistance so that firm can properly develop in the market and generate revenue (Heberle and Christensen, 2011).
Family and friends- In this, owner get flexibility which helps to increase productivity with lower cost and risk. They provide finance for medium term which suits requirement of Fort Sport Ltd and it becomes able to repay the same by earning higher profitability.
Retained profit- It does not requires any kind of interest and charges to be paid. It is the best sources and Fort Sport Ltd has easy access to it (Rasid and et. al., 2011).
Thus these sources are the appropriate for supporting of Fort Sport Ltd which enables to increase its activities in the market and can establish with strong position (Kunc and Bhandari, 2011).
There are several cost involved in the finance which a firm has to pay timely. It increases overall cost for implementing project in the Fort Sport Ltd. These are as follows-
Interest- In this, Banks and other sources such as family, friends and relatives required to pay fix percent on agreed time. It the extra cost which Fort Sport Ltd has to pay other than principle amount taken. This rate varies as per the sources (Lapsley, Miller and Panozzo, 2010).
Transaction fee- It is charges in the leasing and small business administration. They follow various processes to give finance so Fort Sport Ltd has to incur transaction fee.
Maintenance and repair cost- Fort Sport Ltd has to bear for equipments and tools provided by leasing companies. Firm has to make those technologies up to date so that their flow of production can be maintained (Bloodgood, 2006).
Depreciation- It is fixed cost decreases value of asset so organization has to keep records of this and make provision which provides detail about the life of assets.
Opportunity cost- In this, Fort Sport Ltd looses opportunity to invest retains profit in existing business activities due to investing the same in expansion. So again it increases cost of finance for making arrangement for present operation (Dhanani and et. al., 2007).
Financial planning is very important for Fort Sport Ltd. It helps organization to provide right path and maintains it flow of production in effective manner. It is described in brief as follows-
Promote expansion- It provides blue print for future availability and access to finance so that Fort Sport Ltd plans for expansion and growth.
Increase profitability- It enables Fort Sport Ltd to achieve target rate of return and helps to control cost in better manner by providing various measures so that there is increase in overall profitability (Peng, 2008).
Better coordination- By planning about finance in advance all departments such as finance, marketing, production and sales works with better coordination.
Improved performance- With help of budget and other techniques Fort Sport Ltd plans for the proposed expenses and income. It assists teams and overall organization towards achievement of expected result so that they can greater profitability (Evans and et.al., 2012).
Optimum utilization of resources- Fort Sport Ltd uses various techniques for cost control by setting target of team of the basis of time and limited financial sources which ensures better utilization of resources and increase in the productivity.
Therefore financial planning is necessary for Fort Sport Ltd to managing its affairs effectively so that company gets success and marketplace (Bhaird, 2010).
Many people are engaged in the Fort Sport Ltd which affects its decision directly or indirectly and interested to know about its details. These are as follows-
Creditors- It plays major role for the continuous production of Fort Sport Ltd. They provide goods and services to firm by which it can maintain supply to ultimate customers via internet (Allen and Economy, 2011).
Customers- It comes under target market of Fort Sport Ltd to whom it offers fitness products. They are interested to know about new products and innovation as well as pricing, discount offered by company.
General public- It includes general communities as society, debt holders who have given finance to Fort Sport Ltd. They want to know about its profitability, operation and its growth so that they can ensures about their own well being (Thomas, G. H., 2010).
Government- In this, it wants to know about the practices and policies of Fort Sport Ltd with regards to fulfillments of social activities, timely payment of tax and ethical conduct of business.
Workers- They are directly engaged with Fort Sport Ltd and concern about their own salaries, promotion and growth. So they are interested to know about future of company, its growth potential and survival (Hardy, 2003).
Finance affects financial statements of Fort Sport Ltd to a great extent because loan increase the liabilities side which in turn increase expenses head of income statement. Income statements show details about the interest paid and repayment of loan so it increases expenses as well as decreases income of company. Investment activities like purchase of machinery, land building will increase the asset of company which is good for the Fort Sport Ltd. Along with this it affects income statement as well because it will again add to the cost of expense therefore they are greatly affected by the investment and loan (Allen and Economy, 2011).
In the above table recent loan has added which increase liabilities side and the fixed charges will deduct cash balance because it is paid by Fort Sport Ltd as £1500. In the other sense its repayment will decrease liability and increase expenses of income statement. Therefore it affects overall financial statement as well as its profitability (Yang and Niu, 2013).
From the above budget it is concluded that Fort Sport Ltd has good inflow of income but has variation in the income. Company has good control over its expenses as the result shows it has good profitability as well. From this firm can plan for its expansion and can enter into new market. Because it has good credit policy and performing very well so that by entering into new market it can capture market share and create competitive edge.
As per the given case there is 33.33% mark up on the cost price which is calculated as = (60*33.33%) +60= 80
There is return on capital employed as 20%= 10000*20%/ 500+60=64. Therefore firm can put prices as 64 on the basis of return on capital employed and can put 80 when considering profitability along with cost.
Following techniques are used for making appraisal of projects so that Fort Sport Ltd get greater profitability with lower cost and it can cover the cost involved with less time period.
Payback period- Under this Fort Sport Ltd will choose projects on the basis of time period (Payback method, 2014). It analyzes that how much time will required covering the initial investment which company has made. It is calculated as follows-
Here Fort Sport Ltd should choose Product B because it is giving higher Net present value which is beneficial for company.
Accounting rate of return methods- In this Fort Sport Ltd selects project on the basis of rate of return. The project which gives higher rate of return is accepted otherwise rejected. Under this Fort Sport Ltd should select product C to invest in the project because it is giving higher profitability than other two projects. Therefore firm will invest in this and will have greater revenue.
For acquiring finance from Bannatyne Group Head Office following information they would like to have so that they can come to know about the exact information and progress of the firm (Lapsley, Miller and Panozzo, 2010).They will require information about the financial statements of Fort Sport Ltd. These are explained as below-
Balance sheet-It gives details about the overall capital employed as well as asset of Fort Sport Ltd. It has two heads as liabilities and asset (Dhanani and et. al., 2007). Liabilities side comprises creditors, outstanding salaries, interest, dividend etc. In the head of asset the whole records are maintained related to land, building, cash and debtors (Peng, 2008). It is the main form by which any one can quickly come to know about company’s position about its liquidity and solvency (Kunc and Bhandari, 2011).
Income statement- Income statement provides details about income and expenses such as payment of interest, dividend, repayment of loan and other income organization get are mentioned under this. It is very helpful to know about the profitability of Fort Sport Ltd.
Trading profit and loss account- Under this, Fort Sport Ltd keeps records of sales, purchases, outstanding revenues, labor employed, salaries and wages paid. It is the basic data of firm in which its shows gross profit and net profit. It serves better for the requirement of calculating exact net profit (Peng, 2008). It also maintains records related to depreciation, income from commission, interest etc. Therefore these are the main financial statements which portray company’s image in front of other parties (Wang, Lai, and Zhao, 2008).
All business organizations maintain financial statements as per their requirement by which they can better serve to community as well as keeping their records in effective manner. Different organization follows different statements. These are as follows-
Sole trader- They maintain simple records because they do not have requirement to sever their shareholder and other communities. They have to keep records only for income and expenses incurred by them so they may not prepare balance sheet and cash flow statements (Heberle and Christensen, 2011).
Public limited company- Public limited company has to follow international financial reporting system so that it is necessary for them to keep record of all financial statements such as balance sheet, income statement and fund flow statement. It is very helpful to serve whole community to a large scale (Rasid and et. al., 2011).
Partnership firm- In this, they need to make profit and loss account at first because it describes information related to their capital as well as profitability and then they make income statements (Kunc and Bhandari, 2011). They maintain balance sheet as well so that they can make compassion with another companies regarding their performance. This way all business keeps records as per their requirement by which they can serve in better manner to community and can maintain ethical conduct at workplace (Peng, 2008).
From the above table it shown that XYZ ltd has current ratio as 1.51 which indicates that firm has capability to meet its obligation by paying debts on right time because generally 1 is good sign for company but company has more capability to run effectively with growth and potential (Hardy,2003). Table show that firm has lower return on capital employees as 26% it ensures that it is shareholder are not getting sufficient profitability. Net profit of XYZ Company is very low in comparison with the amount invested so firm must try to lower its cost and enhance productivity by which it can create competitive edge in the market and can have good command over profitability (Evans and et. al., 2012).
Management of funds and other resources are very important in private companies running at lower level. Present study concludes about the unit cost and pricing decision of firm by which it can better utilize its resources with minimizing cost and increasing margin. Further it give brief about the investment appraisal techniques in which it shows results on the basis of payback period and net present value method as well accounting rate of return . Addition to this, report give brief about the XYZ Company with the help ration and shows that company has lower profitability as well as lower return for the investors who invested in the firm.