Introduction to Managing Financial Resources
The concept of financial management is defined as the planning, directing, controlling and organizing of activities with respect to finance. This includes procurement as well as utilization of funds of organization. The role of financial management can be greatly viewed in the achievement of business goals as it ensures effective and efficient management of money. In the present report, management of financial resources has been discussed with respect to Sainsbury. The study entails to gain insight to the sources of finance that is available to business along with the cost attached to them. Further, it also includes the information that is required by different decision makers.
1.1 Sources of finance available to business
There are various financial sources which are available to business such as Sainsbury. These are as follows...
Internal Sources:- Such types of financial sources are raised by the business from inside. With the assistance of internal sources, the organization can meet its working capital requirements.
Sale of Asset:- By selling the assets that are non performing for the organization can raise finance. This assists it in meeting day to day requirements of funds in an effective manner.
Retained Earnings:- The amount of profit that is kept as the reserve by firm in order to meet the uncertainties can be used by Sainsbury for satisfying its financial needs. It acts as the suitable sources that are available with the business.
External Sources:- Such financial sources are raised from outside the organization. They are effective in meeting the long term financial requirements of business.
Bank Loan:- Under this, company can borrow funds from financial institutions with an aim to meet the long term business needs. For this, it is required to keep certain assets as security with the bank.
Issue of Shares:- Sainsbury can raise the funds by issue of shares to the public. For this, the shareholders of business make investment in the organization.
1.2 Implications of different sources of finance
There are certain implications of different sources of finance. This is in terms of financial, legal, dilution of control as well as bankruptcy. When the finance is raised through internal sources like sale of assets then in this case, Sainsbury loses its control over the asset which could have been used in the future. In addition to this, by using the amount of retained earnings, the firm dilutes its control over funds that are kept as the reserve for meeting future contingencies. It has been determined that there are financial and legal implications in case when the funds are obtained by business through external sources. When company raise finance through issue of shares then it has to make payment of interest otherwise the shareholders might take legal actions against the organization. For obtaining funds through bank loan, Sainsbury has to make payment of interest within specified duration of time. In case of default, legal actions can be taken by the financial institution. In case the bank is not able to recover the amount of loan from the asset that are kept as security then it can take over all the entire assets of the organization. Further, if it is not able to recover the amount through this then it declares the organization as bankrupt. This has an adverse impact on the reputation of organization in a significant manner.
1.3 Various sources of finance appropriate for business project
The appropriate sources of finance from the one discussed above are enumerated in the manner below...
Long Term Bank Loan:- It has greater benefits to business as it can be repaid by the organization within fixed interval of time. In addition to this, it is effective in assisting business in meeting its long term requirement for funds. However, in order to obtain funds through such source, Sainsbury is required to keep certain asset as security. Further, it has to make payment of interest on the amount of loan taken which increases its expenses.
Issue of Shares:- It acts as the source of finance that is permanent which is its biggest advantage. However, in order obtain funds from public; Sainsbury will have to make payment of dividend that would decrease its profitability to a significant level (Nobes, 2014).
Retained Earnings:- The major benefit in obtaining funds through this source is that, for such company, it is not required to make payment of any interest. In addition to this, it does not increase the liability of organization. However, the major demerit of such source is that a newly established firm cannot raise finance through this.
2.1 Costs of each sources of finance identified
There are certain costs associated with the sources of finance that have been identified. These have been enumerated as under...
Opportunity Cost:- When business obtains funds through internal source the cost attached with it is the opportunity cost (Altman, 2012). This is referred as sacrificing cost as the amount of retained profit could be used while fulfilling the future business requirements. This implies that opportunity has been lost in meeting the needs of next best alternative.
Cost of Interest:- In borrowing loan from bank, company like Sainsbury has to make payment of interest within fixed time interval. This increases the expenses of firm to a significant level.
Cost of Dividend:- When the firm obtains funds from public through issue of shares then for this, the cost attached is related with the payment of dividend. It has to be paid within specified time duration. This amount is paid from the profits of business and thus, increases its expenses.
2.2 Importance of financial planning
Financial planning is referred to as the procedure that assists in making determination of the amount of capital needed by the business. It includes development of financial policies with respect to procurement, investment as well as administration of organization financial resources. There is greater importance of financial planning within Sainsbury. This has been reflected as under...
Financial understanding:- Financial planning assists the business in understanding the new approaches related with budgeting as well as financial life style management. With the assistance of sound financial understanding the business can carry out evaluation of risk attached with various investment portfolios.
Effective Cash management:- There is greater significance of financial planning for Sainsbury. This is because it facilitates the firm in managing its cash. Through this the company can keep a track on its outflows and inflows (Maynard, 2013). Thus this assist the business in enhancing its growth to attain long term success.
Determine shortages and surpluses:- With the assistance of financial planning the company can make determination of the activities that needs immense amount of funds. Further it also investigates the activities that possess requirement of minimum finances. Thus this assists in making allocation of the financial resources with effectiveness.
2.3 Identification of information needs of external and internal decision makers
There are several decision makers of the business that are internal and external to the organization. Such posses greater requirement of the information so that they can carry out process of decision making. The decision makers with their information needs has been identified as below...
Internal Decision Makers
Financial Manager:- The financial manager of Sainsbury requires information about the profitability of the business. This is because it would act as an aid in taking decision regarding the expansion plan of the business.
External Decision Makers
Suppliers:- The suppliers of the firm possess requirement of the information with respect to financial health of the business. With the assistance of this they can take decision regarding whether to make delivery of the material or not. As this requires company to make payment for their invoices within specified term.
Customers:- The customers demand for the information related with brand image as well as goodwill of Sainsbury. This assist them in taking decision regarding whether to make purchase of the products and services from the firm or not.
Investors:- The require the firm to make payment of the dividend from the amount of profit earned by Sainsbury. For sch they require information about the financial health of organization which would help them in formulating decision regarding whether it would be beneficial to invest in a particular corporation.
2.4 Impact of finance on financial statements
There is greater impact of different financial sources on the statements of finances such as balance sheet and income statement. Such has been discussed in the manner below:
Long term bank loan:- In obtaining loan from bank the liability of the company increases. This affects the balance sheet of the firm (Siano, 2011). However the interest on the bank loan increases the expenditure of Sainsbury. This is reflected on the expenses side of the profit and loss account.
Issues of shares:- This source of finance increases the amount of capital with the organization. This is demonstrated on the liability side of the balance sheet. However the dividend that is required to be paid on issue of shares to public acts as an expense that reduces the profitability of Sainsbury. This is presented in profit and loss account.
Sale of asset:- Raising finance through such source has greater impact on the statement of finances. As such it reduced the asset of the firm that is reflected in balance sheet. Further the profit and loss incurred on sale of asset is included in income statement.
3.1 Main financial statements
There is existence of different financial statements that are prepared by business. This includes following...
Income Statement:- This account includes the direct and indirect expenses and income that are borne by the organization in a financial year. It reflects the net profit and loss of the company.
Cash Flow Statement:- This kind of financial statement reflects the inflow and outflow of the cash that is incurred by the firm on regular basis.
Balance Sheet:- It is also referred to as reflective statement that includes the assets and liabilities of Sainsbury on a specific year. This statement plays an effective role in demonstrating the financial health of the business.
3.2 Comparing appropriate formats of financial statements for different types of business
There are different formats of financial statements that are being prepared by several kinds of firms. Such as been compared in the manner below...
Profitability Ratio:- From the analysis of the ratio this has been determined that the profitability position of the company is sound in meeting its obligations in an effective manner. The net profit and gross profit ratio of the company in 2014 is maximum.
Liquidity Ratio:- The liquidity position of the company in 2012 was sound. This has declined in the year 2013 and 2014. This provides that the position of the company in order to meet its obligations has declined to a greater extend.
Efficiency Ratio:- The efficiency of the company is moderate. This provides that company has enough resources in order to meet long term contingencies. The inventory turnover as well as asset turnover ratio of the company is effective in all the years.
Gearing Ratio:- The gearing ratio of the company includes evaluation of its debt and equity as well as accounts receivable turnover. It presents the amount of money received by business on the investment made by it. In 2014 Sainsbury possess sound gearing ratio.
It can be concluded from the study that there is crucial role of financial management in increasing the growth as well as profitability of the business. It has been inferred from the study that there is existence of various internal and external sources of finance that assist the business in meeting its long term as well as short term needs. In addition to this it has been determined that financial position of Sainsbury is effective. Further from study it can be concluded that different financial statements are being prepared by varied kinds organization.
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