FINANCIAL ANALYSIS

Understanding the Concept of Sources of Finance

Introduction3

Discussion3

Task 1(Learning Objective 1)3

1.1. Sources of Financing available to a Business4

1.1.a. Internal Financing5

1.1.b. External Financing6

1.2. Implication of Sources of Financing7

1.2.a. Loan financing7

1.2.b. Equity Financing7

1.2.c. Debt Financing7

1.3. Evaluate the Appropriate Source of Financing for a Business Project7

Task 2 (Learning Objective 2)8

2.1. Cost of Capital (Cost Associated with the Financing)8

2.1.a. Cost of Debt9

2.1.b. Cost of Equity Capital9

2.2. Importance of the Financial Planning10

2.3. Impact of finance on financial Statements10

Task 3 (Budget)11

3.1. NPV (Net Present Value)11

3.2. Payback Period11

3.3. Internal Rate of Return (IRR)12

Task 4 (Financial Analysis)12

4.1. Overview of the Selected Company (Sainsbury)12

Financial Ratios of Sainsbury13

Investor Ratios13

Lender Ratios13

Shareholders Ratios14

Supplier Ratios14

Snapshot of Key Ratio14

Conclusion16

References17

Understanding the Concept of Sources of Finance

Introduction

In an economy, managing finance and financial decisions play an important role in the development of business environment. Organisations work hard to attain their set goals. All organisations or business entities are different from one another on the basis of their operations and organisational settings but one thing is common among them, and that is the requirement of finance. In business terminology, this required finance (money) is known as capital, and associated cost with this capital is termed as cost of capital (Armitaj, S., 2005, Pp. 32-69).

First part of this report examines different sources of finance available to an organisation and implications associated with each type of finance. In second part, cost associated with each financial source is discussed. Third part is dedicated at explaining the budget and its element. However, final or the last part is related to the financial planning and financial analysis of selected company.

Discussion

Task 1(Learning Objective 1)

When an organisation wants to grow or expand it requires considerable amount of money or to finance its projects or decisions. Organizations, on the other hand, are not large enough or profitable to finance their projects due to shortage of funds (a number of organisations do not posses capital in surplus amount). Therefore, acquiring this required amount of capital becomes the most challenging goal for an organisation. Organisation faces this issue of acquiring capital almost at all levels of project execution (Wikes, F., 1984, Pp, 30-69). Companies require this capital in order to purchase lands, equipment, infrastructure, and other assets and to pay for their human resource.

1.1. Sources of Financing available to a Business

In an economy, capital or money transfers from SSU (Surplus spending Units) to (DSU) Deficit Spending Units. SSU are the individuals or entities an economy that possess capital more than their requirements and are ready to lend or save their excess capital, whereas DSU are the individuals or entities that require capital or money to finance their investments or projects. Organisation can borrow the required capital from various sources. Selection of these sources is solely dependent upon the decisions and suitability of each organisation, there is no hard and fast rule about the selection of financial source. These source of finance are mainly classified into two broad categorise; internal financing and external ...