Managing Financial Resources and Decision Planning in France

Question: Discuss about the Case Study for Managing Financial Resources and Decision? Answer: Identification of different sources of finance available to Green Supplies Ltd: Green Supplies Limited Company is a small private firm, engaged in the online business and supplies fitness products, especially ranges of sport goods and equipments. The Celtic Group is very much interested to invest into the expansion process of Green Supplies Limited. The company has already researched that all internet related businesses would be profitable in the near future. However, Green supplies should also explore other funding options and choose the best suitable one for this. The fund can be raised through the combination of internal and external sources of finance. The company could consider the internal source of finance like the balance of retained earnings because they are liquid. Retained earnings are the section of net income that Greens supplies has reserved so far and not paid out (Fraser, Bhaumik and Wright 2015). Another internal source of finance is the current assets of the company. Current assets are incorporating cash or anything, which can easily be convert ed into the liquid cash. If this internet business provider, for example, has stock holdings in other companies, that may be used as a source of finance and utilized it in the expansion process (Vuong 2014). However, if the company is not looking for quick business expansion, they can use their fixed assets as a source of finance as well. In addition, the personal savings are the backbone of many small businesses like Green Supplies Limited. If the company does not have the assets to invest, personal finance still can contribute to the business. Therefore, the company has few internal sources of finance: Owners investment (additional or start-up capital), retained profits, sale of stock, sale of fixed assets and debt collection (Lee, Sameen and Cowling 2015). Apart from these internal sources, there are many external sources of finance of Green Supplies. The money can be borrowed from bank at an agreed rate of interest over the specified time (Covas and Den Haan 2012). However, this can be expensive due to interest payments. For this concern, they can consider additional partners dealing for their new business expansion. The additional contribution by the new partner would be suitable for the small businesses. Here the company can consider the appropriateness of the new deal with the Celtic Group. Furthermore, leasing is another option for external source for finance (Corsatea, Giaccaria and Arntegui 2014). Leasing is like a renting an asset. Green Supplies can have the use of up to date equipments instantly. Other options like hire purchase or mortgage, which is a loan, secured on property can also be considered for long-term source of finance. Assessment the implications and consequences of different sources of finance: The portion of liquid amount, which comes from the owners own saving, is the most risk free internal source of finance. Retained profit is only possible when earnings made are ploughed back into the business. The legal consequence is less in case of retained earnings because there is no interest payable. In addition, the sale of fixed assets is a good suggestion to raise finance. Here, those assets are only considered which is no longer needed for an entity. Nevertheless, it is a slow method of raising finance. On the other hand, bank loan, the external source, can be costly due to high rate of interest. Sometimes bank may call for security on the loan. Bank overdraft may be considered as a funding option of the business of Green supplies is authorized to be withdrawn on its account. It indicates that they can still have the legal authority to write cheques, even if they do not have enough money in the account. However, this will be treated as short-term source of finance. If it used in short-term basis, then it would be cheaper than a bank loan. In addition, the dealing with additional company like The Celtic Group may dilute the control of the partnership because in that case, the profits will be split more ways. Moreover, the share issue option would also be considered for financing because this is suitable for a limited company where profits will be shared out as dividends to more shareholders. After taking this option, the company could face the changes of ownership. At the current situation, hire purchase and leasing option would not be suitable for Green supplies because both options are expensive. Generally, the assets of the company would belong to the finance company after leasing. Furthermore, this small company may face difficulties in case of making repayments. In case of funding through mortgage, the risk of repayment cannot be ignored. If company does not repay the amount, the property of Green supplies may be repossessed. In case of internal source of finance, Green Supplies limited should consider the owners investment or personal savings. This type of source of finance does not have to be repaid and thus, interest is not payable. However, Green Supplies owner can invest his fund, which is a limited source of finance. The amount of debt collection can also be used in this business expansion plan (Covas, F. and Den Haan 2012). The additional cost is not required in investing such finance. It is a part of the trading businesss natural operations. However, there is a risk that debts owned could go bad which cannot be repaid later. In case of external sources, issuing share would be the appropriate option for raising fund. A business does not bother about repayment but profits will be paid out as dividend to their shareholders (Fraser, Bhaumik and Wright 2015). It means Green supplies will earn after the amount received by the shareholders. However, issuing shares is the most appropriate source for long- term finance apart from the chosen internal sources. The chosen share issue option is the most suitable for raising finance for the concerned business expansion process. Green Supplies should not invest must for this. There is no interest is payable. Involvement of issuing more shares will be taken in the liability side of the balance sheet under the share capital. The share capital will be increased at the fiscal years end. The amount of loss or profit of sale of assets would be shown in the profit and loss statement whereas the interest should be recorded as expense in the income statement of Green Supplies Limited. Financial planning is required to take decisions regarding how much money to spend, on what to use according to the funds at Green Supplies disposal, in advance. A typical financial planning includes: i) Determination of sources of funds ii) It is required to identify the suitable policies for appropriate utilization and administration of funds (Lusardi and Mitchell 2013) iii) Ascertain the amount of finance required by the organisation for doing operation seamlessly (Arrondel, Debbich and Savignac 2013). Figure1: Importance of financial planning (Source: Board 2015) The financial planning process starts with determination of total capital requirement of Green Supplies by financial managers. Here the consultation of financial advisor is required. An effective financial planning incorporates the sales forecast of the business and other guidelines of the future period like to enhance its production capacity which indicates more long term funds into their financial plan (Gaskill, Van Auken and Kim 2015). Add to in sales and higher level of production will require higher working and fixed capital of Green Supplies. All these aspects need to take care by an effective financial planning process and ensure the success of the business in the long run. Therefore, financial planning helps to identify long-term and short-term financial goals and establish a fair plan to achieve those business objectives. Here are few significant reasons which will directly influence Green Supplies Limited to get its success. Income: It is impossible to manage income effectively without a proper planning (McKinney 2015). Managing it resourcefully helps the organisation to recognize how much money will require for tax payments, savings and other monthly expenditure. Cash flow: Improved cash flow position can be possible by carefully evaluating the spending patterns and expenses. Prudent spending, tax planning and cautious budgeting will help to keep a stable financial condition. Capital: By the indication of increased cash flows, financial advisor of Green supplies take a suitable decision regarding how to increase its capital. Financial security: Providing a security financially is essential part of the financial planning process (Gaskill, Van Auken and Kim 2015). Having the suitable coverage by insurance and guarding business operational activities of Green Supplies with the help of appropriate policies is an important step of the financial planning process. Cost control: With the help of financial planning, Green Supplies limited can take action from improving control of the entitys expenses. Assets: The real value of the assets needs to be determined with the help of effective financial planning process. The knowledge of allowing or not taking into the liabilities comes with the considerate approach through the finance. Financial planning will help to assemble assets that dont become a trouble in the future. Investment: An accurate financial plan considers the consequences of the business, understands the spending patterns and helps to identify the risk tolerance of any business (Elsas, Flannery and Garfinkel 2014). For future unforeseen events, the provision for some investments needs to be incorporate in the financial planning process which provides any business a high liquidity. Therefore, it is important to assess the financial planning effectively and ensure the success of Green Supplies Ltd maintaining all the above mentioned aspects of the financial planning. c) Equity finance or capital investment appears in the balance sheet as a component of net worth or owners equity (LeblebicioÄÅ ¸lu and Madariaga 2015). The portion of equity finance will be added up as an additional paid up capital. With this, the value of the business will increase so as the balance sheet figure of the organisation for a specified period. On the other hand, securing loans indicates that Green supplies are acquiring additional resources economically through incurring the obligations to creditors. It means that there is an increase in assets with consequent increase to the obligations of the business to others. CASH BUDGET for four months ending Sep 2015 Particulars June July August September Receipt: Beginning Cash balance 75000 -295000 -275000 -240000 cash sales 60000 70000 75000 85000 Debtors 550000 630000 770000 Tatal (A) 135000 325000 430000 615000 Payments: cash purchase 310000 450000 500000 520000 Creditors 55000 65000 60000 prepaid rent 30000 30000 Other expenses 75000 80000 90000 95000 repayment of loan 15000 15000 15000 15000 Tatal (B) 430000 600000 670000 720000 Closing balance (A-B) -295000 -275000 -240000 -105000 (Refer to excel) (Source: created by author) i) Selling price estimation 30% mark of cost = 325 pounds Therefore, Profit per unit(Sales-variable costs-fixed costs)= 325-250 pounds Profit per unit= 75 pounds For 550 units, the profit would be 75550= 41250 pounds ii) After 550 units, the fixed cost would be fully recovered. Therefore, selling price would be calculated only on variable cost selling price= 187.5 pounds per unit Profit=187.5-150= 37.5 per units Profit on additional 1500 units sold would be = 150037.5 pounds 56250 pounds (Refer to excel) (Source: Created by author) NPV calculation Particulars Project A Project B Project C Cash flow year 1 31815 45450 36360 year 2 37170 41300 41300 year 3 41305 37550 41305 year 4 44395 34150 44395 Total cash flow 154685 158450 163360 less: initial investment 130000 150000 190000 NPV 24685 8450 -26640 Payback period calculation Particulars Project A Project B Project C payback period (Initial investment/cash inflow) 0.840418 0.946671 1.163075 (Refer to excel) (Source: created by author) As per the calculation, project A would be recommended because project A has the highest positive NPV and it also has the minimum payback period to recover its cost of such investment. The main financial statements produced by a business are the balance sheet, cash flow statement, income statement and the statement of changes in shareholders equity (Healy and Palepu 2012). Financial statement represents the financial health of the business. Here the statement of financial position is displayed by the companys balance sheet. It is comprised with the total assets, liabilities and the balance of equity. The assets on the balance sheet are classified into current and fixed assets. With the figure of the shareholders equity in the liability side of the balance sheet represents the value of the business in a fixed period. The basic components of an income statement are expenses, profits and revenues. It this statement indicates that the business expenses exceed the revenues, and then it should be understood that the company incur losses during a specified period (Brigham and Ehrhardt 2013). On the other hand, the cash inflows and outflows of the business are recorded in the statement of cash flows where all the business activities are categorized into three parts. It included the operating activities, the financial activities and the investing activities. Therefore, the all items that affect the cash balance are listed in this statement. Lastly, the changes in owners equity or partners equity are recorded in the statement of owners equity for a particular period of time. The various patterns of financial statements (Income statement and balance sheet) are maintained for different types of business such as sole proprietorship, limited company and so on (Iacoviello 2015). Each business will have distinct economic sectors so different financial statements have been used to satisfy the unique format of those sectors. In the sole proprietorship business, the simple financial statement is followed because the report is just allocating for the owner of the company (Brooks and Mukherjee 2013). It may not require maintaining the income statement and the balance sheet because balance sheet show only one capital account which belongs to the individual owner. Here, the profit and loss account is sufficient for sole traders compared to the public limited liability company which will have to prepare following the principle of IFRS and GAAP (Srivastava and Mock 2013). It is required to maintain such standards while preparing such accounting statements of the compan y; otherwise it will not be possible to compare with other organisations (Bentley, Omer and Sharp 2013). For limited company, the liabilities, non-current and current assets, profits, sales, cost relating to income tax payable amount and the per share capital must be incorporated in their financial statements. Ratio calculation: Whole sale business Retail business Financial Ratios i) Gross profit margin(gross profit/sales) 27.27272727 26.66666667 ii) Net profit margin(Net profit/sales) 15.45454545 16.66666667 iii) Current ratio(current assets/current liabilities) 1.619354839 1.718644068 iv) Quick ratio(current assets- inventory/ current liabilities) 0.703225806 0.915254237 v) Gearing ratio(Total liabilities/ Total shareholder's equity or capital employed) 73.14814815 70.58823529 (Refer to excel) (Source: Created by Author) According to the general perspective, the wholesale business is generating more revenue compare to the retail business. The sales volume is much higher than the retail business and the gross profit margin also better than the other one. However, the financial ratios of both the businesses are shown different picture. The retail business is having a better liquidity position because both the current assets ratio and the quick ratio are better than the wholesale business. It means that the short term liabilities can easily be mitigated with the use of liquid assets of the retail business. In addition, a high gearing ratio means a great deal of leverage where the business is using debt to pay for its regular business operation (Kaplan and Atkinson 2015). In other words, a higher gearing ratio considered the fact that the business is risky. The retail business is less risky than the whole sale business. Therefore, more investors will be interested to invest into the retail business rathe r than the wholesale business. In this way, it has been found that the retail business is better option for investment compare the wholesale business. References: Arrondel, L., Debbich, M. and Savignac, F., 2013. Financial literacy and financial planning in France. Numeracy, 6(2), p.8. Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817. 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