In the present report, we will study appropriate sources of finance available for expansion by the Al Noor Hospitals Group Plc. Also we will ponder over the benefits and disadvantages of the each source of finance suggested and available. The cost of each source of finance will be identified above and how does it impact the financial statements of the company, i.e. the income statement, the balance sheet, and the cash flow statement. Later the concept of budget will be studied and its objectives of its use in business. Also, various techniques like NPV, IRR, and payback period analysis will be mentioned that the Al Noor Hospitals Group Plc can use to assess the viability of an investment decision. Finally using the financial statements of the company, various profitability, liquidity, efficiency, and investment ratios will be calculated.
Sources of finance are the ways from where the business can avail funds in order to run its daily operations as well as to plan and execute its expansion projects and ventures. Al Noor Hospital Plc has various sources of finance available to it for the expansion process. These are as follows:
1. Equity share capital: Al Noor Hospital plc can issue equity shares to the public and existing shareholders for raising the finances at a large scale (Lunt, 2009). This will help the company to raise a huge volume of capital with a lesser risk and discretionary dividend or interest payments based on the business profitability. But lower risk comes with the dilution of control as the equity shareholder can exercise the voting rights available to them as per the statute. This is a long-term source of finance without the redemption period. This also requires compliance with various laws like company law, income tax rules and registration with a stock exchange. The compliance procedures are time consuming as well as tedious.
2. Bank Loans: These are the easy as well as comparatively cheaper source to avail finance in comparison to other financial institutions or debentures and other sources. These are little risky sources of finance as they are secured against the business assets and thus limit its use as well. They don’t exercise any dilution of control except the use of asset. They are available on compliance with regulations and banking and insurance laws. Also, the financial statements documented should be duly audited (Millichamp, 2000).
3. Bank overdrafts: These are the short term sources of finance which facilitate the business to withdraw the amount in excess of its available balance and the interest is charged at the overdrawn amount only. These are the best form of finance to facilitate working capital requirements and routine operational expense of the business like salaries, maintenance, and repair of machinery and other furniture and equipments, etc. These are also very flexible as the overdraft limit can be determined depending on the business performance and also facilitate lenient repayment period. Only the demerit is that the interest rate charged on the overdrawn value is high and is comparatively higher than the other bank loans. It requires the submission of the financial statements portraying the profitable business position with the authorities of the bank in order to avail the overdraft facility and set a limit (Mott, 2008).
4. Lease: This is form of capital financing which enables the borrower or lessee to make the use of the asset without making the complete payment of the asset and without even obtaining the ownership. This also facilitates the criteria by enabling the borrower to make the payment of the cost in installments over the period of his choice. The disadvantage it has with it is that it can be availed with huge interest payment on principal value broken down into installments and also various agreements and documentation is required in the case.
5. Hire Purchase: This is a form of finance to purchase capital assets like machinery, fixed assets, etc. In this, the hire purchaser purchases the asset from the hire seller on certain terms and makes payment of the asset in installments (Waddington, 2000). The demerit is that the interest rate is higher than the other bank loans and capital financing and also restricts the use of the asset. Also, that it involves various agreements and regulatory documentation like insurance, contracts, etc. But the hire purchase interest is tax deductible for the hire purchaser bringing saving of the profits and also the option to return the asset and cancel the further installment payment.
6. Government grants: These are not actually the cash inflow but the benefit that comes from the regulatory authorities or government departments. These come in form of subsidies on tax payment, facilitating a license obtaining, cash grant in certain cases like charitable projects and ventures, subsidized property values like land or machinery, etc. This involves lot of tedious regulation compliance applicable to the business project or nature and type of grant availed (Goel, 2009).
Everything is available on payment of a price that means a cost for the purchaser. Thus there is a cost associated with every source of finance mentioned above. The payment of specific cost enables the borrower to enjoy the benefits of financing. Cost is thus the opportunity foregone to avail the funds or finances this can be of nature of cash or non-cash (Chakraborty, 2004). The specific cost and impact on the financial statements of above-mentioned sources of finance are as follows:
1. Equity share capital: The cost of the equity share capital is the amount of dividend paid to the share holders the value of profit sharing offered to them in the business profits earned. Also the cost is the dilution in the control of business decision making authority will are inferred on the shareholders like the appointment and removal of directors and right to inspects the financial statements and books at any time. Equity share capital form part of the owner’s equity in the balance sheet under the head liabilities with the mention of face value, share premium earned, and no. of shares. Also, the dividend paid to the share holders are shown as a deduction from the profits after taxes.
2. Bank Loans: The cost to avail a bank loan is the amount of interest paid on th value of loan obtained. The non-cash nature of cost includes various compliance procedures like audited financial statements, agreements, contracts, security of the assets rendered against loan in favor of the bank, income tax and banking laws and rules. Bank loans based on ther nature of short or long term are shown under the head of Long term liabilities i.e. loans and advances or the current liabilities of the balance sheet respectively. The amount of interest on the loan is deducted from the “Earning Before Interest and Taxes” (EBIT) in the Income statement, therefore, it is tax deductible in nature bringing in cost saving for the business (Pinto, and Venkataraman, 2011).
3. Bank overdrafts: These are charged for in terms of interest on the amount of overdrawn value from the bank account. The Bank overdrafts are shown as the current liability of the business in the balance sheet with the mention of the value of overdraft and the security against that. The amount of interest charged on overdraft is shown as deduction of financial nature i.e. financial cost from the EBIT i.e. “Earning Before Interest and Taxes” thus providing the tax benefit in this case as well. The costs of non-cash nature are: various regulatory compliance like agreements, asset securitization papers, audited financial statements, etc.
4. Lease: The cost incurred on obtaining lease over an asset is the lease rental charged in various modes like monthly installments. The leased asset is shown under the head Fixed Asset with the mention that it is leased and the security provided against that and the period of its maturity. The depreciation is duly deducted and then the net value of asset is shown in the balance sheet. The income statement shows the deduction of depreciation and the interest in the installment value and is deducted from the EBIT (Follett, 2011.).
5. Hire Purchase: For the hire purchase the purchaser has to pay the interest included in installment value against the asset purchased. The net value of asset after depreciation deduction is shown under the head Fixed Asset with the mention that it is hire purchase agreement between the vendor and the company and the security provided against it. The duration of the asset maturing its period of hire purchase agreement is also mentioned. The income statement shows the deduction of the interest and depreciation from the EBIT.
6. Government grants: The cost of government grant is as such nil. It is the cash inflow that is saved by the business on availing the benefit from certain government propositions and investment proposals. Thus the value of the start-up cost is the cost to avail that subsidy or grant. The value of the grant is recognized in income or loss on a systematic basis over a period for which it will facilitate the expenses of the business. The IAS 20 is applicable on it for the accounting purpose. Thus, the assets on which if it availed has to show the deferred income or deduction from its carrying value. The non-monetary nature of grants, like on land are to be accounted at the fair value of the land, s per IFRS (Greuning, Scott and Terblanche, 2011).
Budget is a quantitative representation of income and expenditure over a future period of time. A budget is normally spread over a specific period of time, which represents the most figurative approach to minimize and equal contribution of cost over different divisions for fixed period of time. Al Noor Hospitals is a health care division, whose works is directed towards providing Healthcare providers to London. Al Noor is a Public limited Company which is listed on the London stock exchange, has a market capitalization of 954.8 Million pounds in last year. The purpose of budget for this healthcare industry is to efficiently allocate costs and various services available to the consumers (Hulatt, 2005). It has grossed the highest IPO holder in 2013. The objectives of Budget:
Resource Allocation: Al Noor resources are diversely differentiated, a hospital consists of various divisions like clinical facility, technical support and administrative expenses. Budgets will help to provide an optimum allocation of resources. Efficient resource allocation will help to reduce unnecessary expenditures and also help to allocate the resources for unexpected emergencies. Inventory allocation will be efficiently managed. Thus it will improve the productivity of the hospital (Niles, 2010).
Planning: Planning budget is necessary as it will give figurative approach for the organization. Planning will help to oversee the strengths and limitations of the organization. Decision making is an essential part of an organization; this will make the organization to prepare long term and short term objectives. Al Noor hospital has to plan for the upcoming trends and need to employ right resources tom meet those objectives.
Review of Performance: Performance review is also necessary, because comparative study will give an evaluative approach for the organization. The review will reveal the areas which needs improvements. It is also help to summarize the gap between the actual budget and forecasted budget.
Investment Appraisal is a technique which is positioned to analyze the return on the invested capital for a future period on given parameters. Investment appraisal techniques are as follows,
Net Present Value: Net present value is also known as NPV. Net present value of Investment appraisal is used to determine the whether proposal is generating effective cash inflow over a given time period or not. On this basis the project is accepted or rejected (Glasby, 2012). The technique considers Time value of money, for this process this use discount factors as PV factors for the given projects, based on that the A set period of time is considered. During the years, the value of cash inflow is generated by the project is compared by the invested capital shows the eligibility of the projects successfulness.
Internal Rate of Return: Internal rate of return is used to compare and select projects. Discount rates are used to determine the expected cash inflow of the project for given years. The project hence is selected based on generation of higher cash inflows between projects. IRR is based on discounting techniques. Such Procedure is been used as a trial and error methods for ascertainment of expected cash flows. This practice is based on time value of money. It also helps to maximize the shareholders wealth (Howarth,2005).
Payback Period: Payback period is procedure to review the project durability judged on the basis of number of years required generating the return on the invested capital. The years are fixed in this method and the time period in which it will generate cash inflows. PBP is easy and simple to calculate, it also considers the time period of occurrence. It also has limitations as they neglect the time value of money, do not consider the salvage value for the project (Buchanan, 2004).
Average rate of return: Average rate of return or ARR. Average rate is based on the ascertainment on the accounting profit, but not on the cash flows. The practice is divided on the 2 levels, on Equal profits and unequal profits. The method is compared with a pre specified the rate of return. If the rate of return is more than the pre-specified return then is accepted or rejected.But this procedure also ignores the life of proposal too. The method also not includes the Salvage value of the project (Greener, 2009).
Financial statement of Al Noor can define as summarizing form of all financial transaction which is made by the company in whole financial year. There are three financial statements which are required for monetary reporting of the organization; these are as follows:
Income statement: This financial statement includes all financial transactions regarding income and expenses of the company. Major elements of incomes statement are revenue, sales, cost of goods sold, interest income, administration costs, salary cost, and other overhead costs of the Al Noor. This financial statement helps in analyzing profitability position of the organization.
Balance sheets: It is the comprehensive statement of the financial position of the company in terms of assets and liabilities. It includes total assets and liabilities and shareholder’s capital of the Al Noor. It helps in analyzing assets and inventory turnover of the company as well as liquidity and long term debt paying capability of the company.
Cash flow statement: It is a significant financial statement which helps in determining cash position of the company for managing all expenses of the organization. In includes various cash inflow activities of company such as interest income and cash in hand, etc. including this in comprises cash out flow activities of Al Noor, such as dividend payment, investment on plat and land, etc. It helps in managing cash inflows and out flows of the company.
Generally businesses are divided in three types, such as sole trader, partnership firm and limited liability organization. Each and every business needs to maintain appropriate financial statements as per the nature of business; these are as follows:
Sole trader: is that types of the business which is operated by the single owner with various employees. This organization needs to develop only income statement for financial reporting of the organization. They require communicating the information about the profitability of the organization in terms of performance of the company. Balance sheet statement and cash flow statements are not essential for sole traders.
Partnership firm: In the partnership firm all decisions regarding the business operations are taken by the all partners of the organization. This organization requires to develop only profit and loss account of the organization because for the financial reporting organization needs to shows the equal amount of profit and loss of each partner.
Limited Liability Company: needs to follow all international accounting standards for developing financial statements for financial reporting of the company. They need to develop income statement, balance sheet and cash flow statement of the company.
Profitability ratios: Al Noor has been in its good growth and development is showing, as in the previous year it has show good profitability margins from last year. It has shown 179546 from 161948 in 2013. So the net profit has been uprising from the last year by 19 %. Net profit is computed by the ratio of net profit to net sales, which will give the percentage of that net profit in the financial year of 2013.The operating profit has been increased from the last year, 37,720 to 32,524 in 2013.
Liquidity ratio: The liquidity ratios have been very successfully good it has been very promising, giving a 2.98 ratio of form the last year. The ratio is better than the ideal score of liquidity ratio. In this condition both current liabilities and current has been raised, the current assets has been up by 158082 to 187691. But the liabilities have also been 43428 to 60591 in 2013.
Efficiency Ratio: Under efficiency ratio the ratio has been boosted by 84% from the last year. The cash also been created from the last year, by has elevated from the last year. The cash has been 87,987 from 55000.
Investment ratio: The stock turnover ratio has also boosted to 5.87 which is also very better than last year. The hospital has been reduced from the last year, 2013 no bank loans were needed as there were adequate cash is available (Nolan, 2005). The retained also been very high, as they resorted to less retained earnings to 125174 from 121000 in 2013. They even raised share capital in this year of 18076 in 2013. But the total liabilities are very high compared to last year (Henderson, and Chalesworth, 2010).
The report has been prepared to summarize some of the most important aspect of the finance is the source of finance s and the interpretation of the performance of the company over a period of time and give a comparative study of the financial statements of a business concern. The business concern is a health care facility which is listed on LSE. Al Noor Hospital, which is a Dubai, based company, and providing health services in London. Al noor is a very famous name in UAE. The Health care facility is been very famous in the because of that they are the Highest shareholder in 2013. The report has tried to summarize the sources which are concerning the set up of business and what are costs associated with the sources of finances. How they are to employed and how they are beneficial to a company (Mclean, 2003.). A new business can emerge into great heights if right proportion of debt and equity mix can be considered. A combination of such finances will provide an effective capital structure for the business. The next part of the report has focused on the investment appraisal and interpretation of financial statements and calculation of financial ratios. The investment appraisal is been a very good practice to give an insight upon the return on the invested capital and the cash inflow generation keeping the PV factor as the discount rate (Petch, 2008).Financial ratio calculation is been given to provide an information on the performance of the company. The ratios are very much indicative of giving a crystal clear image for the external internal users to analyze the financial position of company, even company will be able to measure the areas of improvement and reduce gaps and hence maximize the shareholders wealth