Management of financial resources is the most important tool for successful running of business. Finance provides life blood for increasing performance with growth and expansion in future. Present study deals about managing sources in the new business by analyzing their cost which helps firm to select best sources. Further it gives details about the importance of financial planning which ensures growth, survival and achievement of objectives. Budget is also analyzed for measuring performance of firm with respect of specified time period which helps firm to achieve its long as well as short term goals. Addition to this, investment appraisal techniques have been used for having information regarding viability of projects chosen which ensures higher rate of return in short span of time.
These are arranged within firm for meeting requirements of short term finance for new startup. These are as follows-
Personal saving- It is owner’s own capital which he brings from his personal deposit or any other saving. Business has full control over this and duration of repayment can be stretched in this (Hinterhuber, 2008).
Bank overdraft- Business takes an overdraft facility which needs to pay interest at time and they can start their business with having sufficient finance to fulfill immediate requirement (Vimpari, Kajander and Junnila, 2014).
Bank loan- In this, company takes finance from banks and which needs to repay on agreed period. Business has to pay fixed interest amount on also on right time. It is very helpful for meeting long term requirement or helps in expansion and execution of new projects (Grewal and et.al., 2011).
Special financial institution-These provides large amount of money for starting new business. They are specialized to provide such types or services for promoting small or large scales new startup business (Valle and Gomes, 2014).
Leasing companies- It is very beneficial for new manufacturing business. Under this they can land, machinery equipment on renal basis. They option to purchase those equipment at the end of the agreement or to give that back (Siano and et. al., 2010).
Share capital- In this, company issue shares to general public and get huge amount from them for investing in the operation of new startup business (Orens and et. Al., 2009).
There are several factors which must be considered while implementing these resources in start up business as mentioned in case. Such as bank loan provides large amount for the execution of business but if business makes default in payment it is harmed (Milner and Rosenstreich, 2013). It affects credit rating of firm and future requirement of firm. Owner need to pay interest timely as well as repayment on agreed period whether firm earn profit or not (Daskalakis and et.al., 2013). If firm takes huge amount from banks and due to financial condition it become unable to repay the same till long duration then they takes their assets and declare company as bankrupt. In the same way personal saving is also good for present start up business but owner lose control over this when he invest the same for business purpose. Special financial institution helps to develop business to a great extent by assistant in all aspects such as technology, finance, expansion etc (Bhaird, 2010). But they impose various charges for providing services. Leasing companies takes legal action against firm if it fails to repay assets in good condition or does not pay the whole amount on maturity period. Thus these resources need to give proper consideration because it affects overall performance of company by affecting its future growth and expansion (Prince, 2008).
For buying new machines by start up business leasing is appropriate sources because it provides highly equipped technology on immediate requirement. It has several benefits such as acquiring equipments even in financial burden (Fakhfakh, Zouari and Zouari-Hadiji, 2012). It is very good source to meet requirement for long term. It assists firm to grow and expand itself with technological assistance. But they have to bear depreciation cost at large amount along with its maintenance cost (Hofmann and Lampe, 2013). Financial institutions are also appropriate sources because they promote overall development and expansion of projects by providing expertise in all aspects. Share capital provides secured money as permanent base because organization needs to pay profit to equity holders only when company has earned profit. But they interfere in corporation’s affairs and demands to get information of it financial statements. Firm gives voting right to them which affects it decision related to any activity (Burnell and Ware, 2007). Organizations get tax benefits also which in turn help company to increase its profitability and growth in long run. Therefore these are the appropriate sources for buying new machine in the new project execution (Evans and et.al., 2012).
There are various cost involved in the sources of finance which a new startup company has to bear. These are as follows-
Interest- Company has to pay timely interest for bank loan and overdraft. In this various institutes charges different types of rates such as simple interest, compound interest which in turn company incurred huge cost and it has to pay on right time otherwise it affect credit rating of firm (Peng, 2008).
Dividend- It is the amount paid to bond holder or preference share holder. It is necessary to pay whether company get benefit or not (Carroll, 2007).
Opportunity cost- In this business has to incur huge cost by investing retained profit in one option. It losses opportunity to invest the same for future business activities (Schulze, 2007).
Tax- Under this, firms get tax benefit by using bonds and other securities. It enables business to increase overall profitability and ensures growth in long run. Thus new startup business need to give proper consideration in the cost involved which helps to select appropriate sources of finance (Gautam, 2008).
Financial planning is very important task. It is the blueprint for execution of future activities so that new startup business can achieve target rate of return. It has following benefits-
Serves as guide to improve performance- Financial planning gives details about the future activities with the help of budget. In this, business tries to work as per the set criteria such investment in marketing activities, sales target on monthly basis (Adams, Litan, and Pomerleano, 2010).
Achieving goals- With the help of improved performance and less variation in expected and actual results firm achieves its target rate of return which leads to achieve long as well as short term goal (Gautam, 2008).
Promote growth and expansion- By managing affairs in effective manner with achieving targets on right time company promotes towards future expansion and growth which helps to increase in the profitability (Carroll, 2007).
Better coordination- It provides coordination among all departments such as finance, marketing, HR department which leads to give higher productivity at lower cost. It enhances sales as well as builds good relationship (Peng, 2008).
Build image of company- New startup firm with sound financial planning better contribute towards growth and satisfy customers in good manner which creates image of in the market with leading position. Thus financial planning helps to assists organizations to a great extent and enables it to work with excellence (Evans and et.al., 2012).
There are several parties who are directly or indirectly engage with new startup organization and affect its decision. These are as follows-
Share holders- It influence business to a great extent because they have voting right in a new startup company and affects all the decision related to any specific activity. They requires timely information related to financial statements of company so that they can company to know about their profitability (Burnell and Ware, 2007).
Government- Government imposed various laws rules and regulation which company has to follows and it requires timely payment of tax on the profit earned by the new startup company. So details of firms’ operations and expansion are observed by this (Hofmann and Lampe, 2013).
Customers- It is the most important part for which firm produces goods and services. So they are interested to know about pricing, new product development, innovation and expansion of company (Fakhfakh, Zouari and Zouari-Hadiji, 2012).
Suppliers- They want to know about the terms and conditions of firm related purchasing of raw material and other products and prices paid to them. It gives them information regarding future planning related to supply of raw materials (Bhaird, 2010).
Employees- These are directly connected with company. They are concerned about future growth and survival of firm by which they ensures about their own salaries, incentives and promotions. Thus these parties are interested to know about the details and performance of company (Daskalakis and et.al., 2013).
Finance has great impact on the financial statements of new startup company. It affects balance sheet by increasing liabilities side with increase in the debts such as bank loan, purchasing raw material on credit (Milner and Rosenstreich, 2013). By issuing share firm has to pay dividend and interest also so these also increase liabilities of organization. Higher short and long term obligations mismatch debt and equity which can create problems for corporations. It affects fund flow also, by paying debts outflow increase which in turn liability side decreases. On the purchase of asset again company’s outflow will affects because cash is moving outside from the business (Orens and et. al., 2009). Payment of dividend and interest minimizes profit of firm and increase expenses side of income statements. Therefore it affects all financial statements to a great extent and affects overall performance of new startup business as well as its profitability.
Analysis of budgeted profit and loss- From the given study it is observed that company incurred £18878 as cost of sales on the after tax profit of £7679. Firm pay for distribution of goods as £3481 and paid £2299 as tax amount. It shows that company has lower profit from higher investment so it should try to control over the expenses which enables it to increase overall profitability of firm. Easy electronic ltd should access to those sources which give tax benefits such as bonds and promote CSR activities. It helps it to create its worth as well.
Analysis of Cash budget- Budget is showing huge variation in the cash flow. Easy electronic ltd having £697 in July where as it get negative cash flow in October with large amount of £3047. In the month of December firm again getting negative cash flow of £593. It shows that firm is not utilization its resources optimally. Variable cost of corporation also need to control by providing tight supervision and control. Easy electronic ltd should improve its credit policy given to debtors so that they can maintain balance in its operation and it reduces requirement of lending financial sources. Payment of sales in cash should set upto 50% which ensures liquidity of firm.
Calculation of unit cost and prices of Easy electronic ltd are as follows along with changes in profitability and volume of sales-
So by the given case study reduction in current selling prices makes new prices of £ 49.6. It results in increase cost by 20% which leads to increase in the sales. From the calculation now 780043 units will be sold at £ 49.6.
Investment appraisal techniques provide estimation about the recovery of cost involved within specified time period and return along with. It helps to choose appropriate sources of finance. Here Net present valueand payback period method have taken to assess the viability of project given in case study.
Net present value method- In this, prevent value is calculated with the help of given factors so that Net present value is found. Here in this project Net present value is positive is shows that project should be accepted.
Payback period method- In this cash flows are cumulated and by this way it has shows that initial investment can be covered in 3year. It gives results on the basis of time period in this company can recovers cost involved in three months.
There are three types of main financial statement followed by company which comprises overall details related to firm. There are as follow-
Balance sheet- Balance sheet is the most important part which depicts all information related to company over a specified time period. It is comprises two heads which are described as follows-
Asset- It consists of assets owned by company such as land, building, machinery and cash in hand. It these are helpful for continuing production of firm because it is the way to build goodwill by ensuring creditors about their security (Orens and et. al., 2009).
Liabilities- It includes outstanding liabilities such as interest, salaries, lands, creditors, overdrafts etc. It is obligations for firm which they have to pay on specified time period.
Equity- It is they worth remains after paying all obligations by the assets. It is that part which owner contributes among them (Siano and et. al., 2010).
Fund flow- It keeps records of cash flows for a specified period and gives details about inflow and outflow of cash in various activities. It consists following three parts-
Operating activities- It includes records of cash from the basic operational activities of organization (Valle and Gomes, 2014).
Investing activities- It tells about the investment made for the expansion and growth of business by purchasing land and building or selling of old assets.
Financing activities- It includes transactions related to payment of interest, dividend or any types of long as well as short term debt. Income from issue of shares and another financing activities are also comes under this (Grewal and et.al., 2011).
Income statements- It keeps records regarding cash generated and expenses made by firm. It consist two heads as follows-
Income-It includes all types of income which business gets such as dividend, revenue from sales etc.
Expenses- It includes variable cost such as salaries, wages, rents, rates and taxes as well as depreciation (Vimpari, Kajander and Junnila, 2014).
Business keeps records of their accounts in several method and these are maintained as per requirement. Such sole proprietor makes simple records to provide information to owner of the business (Prince, 2008). They may or may not keep balance sheet as per their requirement simple statements are enough to keep records for their financial performance. Whereas Limitited Company need to maintained all financial statements such as balance sheet, income statement and fund flow statements (Bhaird, 2010). They are required to maintain all these otherwise it becomes very hard to analyze performance over the time as well as another organization (Milner and Rosenstreich, 2013). In case of partnership firm, they make emphasize on profit and loss account and it is prepared it first. It serves as best source for providing information related to contribution and profitability of all partners. They make statement of partner’s capital, income statements and profit and loss which mainly focus on their ratio of capital as well as income. Public limited company concentrates on the balance sheet because it the main sources of providing overall details regarding its operation over a certain period. They have to follow international financial reporting statement for preparing this otherwise it affects their performance. This way, different types of business follows several formats to keep or maintain transaction related to their activities (Carroll, 2007).
Ratio plays a vital role for measuring or analyzing overall performance of company with one another over a specified period. Interpretation is done as follows-
Profit margin ratio-WM Morrison Supermarket PLC is getting higher profit than previous years as 5. 36% where as J Sainsbury PLC has lower ration than previous years as 3.58% against 3.92% it shows that WM Morrison Supermarket PLC is better than given another firm. Both companies have lower profitability and shows their poor performance (Schulze, 2007).
Current ratio- In this both companies do not have sufficient amount of funds in hand to pay debts on time. WM Morrison Supermarket PLC has 0 .54 which is more than previous years where as J Sainsbury PLC has 0.65. It shows that J Sainsbury PLC is improving its position to meeting its short term obligation so that it can continue its operation in long run (Adams, Litan, and Pomerleano, 2010).
Liquidity ratio- WM Morrison Supermarket PLC has constant liquidity ration as 0.24 during two year whereas J Sainsbury PLC has greater liquidity or cash availability in company as 0.35 which is more than previous year. It shows that company has enough cash availability in hand for meeting operational requirements (Burnell and Ware, 2007).
Stock turnover ratio- In this, WM Morrison Supermarket PLC 25.83% which is greater than next year it shows that company does not have good growth and progress whereas J Sainsbury PLC 23.77% it is lower than previous so here both company has almost the position that they do not have enough potential to convert it stock into higher volume of sales (Evans and et.al., 2012).
Gearing ratio- Under this, WM Morrison Supermarket PLC has higher gearing ratio than previous years as 42.02 which is shows that company has appropriate portion of debts against equity they have. Whereas in case of J Sainsbury PLC, it has higher gearing ratio 66.18 which is very dangerous for firm so company should try use various strategies to increase profitability so that it can pay off its debts and maintain balance between debt and equity (Orens and et. al., 2009).
Finance it very important for operating as well all other activities related to profit, sales and expansion of business. Present study concludes about appropriate sources of starting new business and it has found that leasing, share capital and financial institutions are the best sources of finance. It explains about financial statements followed by different types of business and affect of finance on these. Addition to this, report compares between two firms on the basis of ratio which ensures their liquidity and profitability. Study also analyze about the budget and concludes that it should control over the expenses and ensures optimum utilization of resources.
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