MANAGING FINANCIAL RESOURCES AND DECISIONS

Managing Financial Resources And Decisions

Table of Contents

Sources Of Finance3

Traditional Sources of Finance3

Sources of Finance: Ownership Capital3

Internal Sources4

External Sources5

Assessing the implicating of different sources5

Choosing the appropriate source of finance5

Finance as a Resource6

Importance of financial planning6

Information needed for different decision making7

Impact of finances of financial statement8

Financial Decisions9

Budgets and appropriate decisions9

Access the validity of the project using investment appraisal technique11

Financial Performance12

Explain the purpose of main financial statement12

Liabilities13

Shareholder's equity (or  net worth, or capital)14

Assets are calculated the following way:14

Assets=Liabilities+Net worth14

Different format of financial statements15

Balance Sheet (Statement of Financial Position)16

Managing Financial Resources And Decisions

Sources Of Finance

A company would choose from among various sources of finance depending on the amount of capital required and the term for which it is needed. Finance sources can be divided into three categories, namely traditional sources, ownership capital and non-ownership capital. (Lefley, 2007, 26-29)

Traditional Sources of Finance

Internal resources have traditionally been the chief source of finance for a company. Internal resources could be a company's assets, personal savings and profits that have not been reinvested or distributed among shareholders. Working capital is a short term source of finance and is the money used for a company's day-to-day activities, including salaries, rent, payments for raw materials and electricity bills.

Sources of Finance: Ownership Capital

Ownership capital is the capital owned by the shareholders of a company. A company can raise substantial funds through an IPO (initial public offering). These funds are usually used for large expenses, such as new product development, expansion into a new market and setting up a new plant. (Lefley, 2007, 26-29) The various types of shares are:

· Ordinary shares: These are also known as equity shares and give the owner the right to share the company's profits and vote at the firm's general meetings.

· Preference shares: The owners of these shares may be entitled to a fixed dividend, but usually do not have the right to vote.

Companies that are already listed on a stock exchange can opt for a rights issue, which seeks additional investment from existing shareholders. They could also opt for deferred ordinary shares, wherein the issuing company is not required to pay dividends until a specified date or before the profits reach a certain level.

Unquoted companies (those not listed on stock exchanges) can also issue and trade their shares in over-the-counter (OTC) markets. (Lefley, 2007, 26-29)

Internal Sources

Retained profit, sale of assets, reducing stocks, trade credit

External Sources

Personal savings, commercial banks, building societies, factoring services, share issue, debentures

Assessing the implicating of different sources

Structured finance instruments represent a form of securitization technology which can be defined by the characteristics of pooling of financial assets, delinking of the credit risk of the asset pool from the credit risk of the originating intermediary, and issuance of tranched liabilities backed by the asset pool. Tranching effectively accomplishes a "slicing" of the loss distribution of the underlying asset pool. (Lefley, 2007, 26-29)

Choosing the appropriate source of finance

Firms in the early stages of development can opt for venture capital. This option gives the financing company some ownership as ...