FINANCIAL DECISION MAKING

Managing Financial Resources and Decisions

Part A - Pass Criterion1

Q. 1.1: Alternative Sources of Finance1

Q. 1.2: Implication of Different Sources of Finance2

Ownership2

Control Mechanism2

Tax Effects3

Q. 1.3: Evaluation of Appropriate Sources of Finance3

Venture Capitalist3

Borrowings from Bank4

Sources of Government Funding4

Q. 2.1: Cost of Different Sources of Finance5

Bank Overdraft5

Informal Loan5

Issuance of Equity Shares6

Q. 2.2: Importance of Financial Planning6

Q. 2.3: Information Need of Different Decision Makers7

Creditors7

Customers7

Employees7

Government Agencies8

Shareholders8

Q. 2.4: Impact of Finance on Financial Statements8

Bank Overdraft8

Issuance of Shares9

Informal loan9

Q. 3.1: Analysis of Cash Budget10

Q. 3.2: Unit Costing and Pricing Decisions11

Q. 3.3: Project Viability via Investment Appraisal Techniques12

Payback Period12

Accounting Rate of Return (ARR)13

Net Present Value (NPV)14

Q. 4.1: Main Financial Statements14

Balance Sheet15

Income Statement15

Statement of Cash Flow15

Q. 4.2: Comparison of Appropriate Formats of Financial Statements16

Q. 4.3: Interpretation of Financial Statements for XYZ Limited16

Part B - Merit Criterion18

M1: Advise on Project Selection18

M2: Benefits and Limitations of Ratio Analysis18

M3: Appropriate Format of Cash Budgeting18

Part C - Distinction Criterion19

D1: Critical Evaluation of Investment Appraisal Methods19

D2: Implication of Cost Controls19

D3: Limitations of Financial Planning20

References21

Appendix23

Managing Financial Resources and Decisions

Part A - Pass Criterion

Q. 1.1: Alternative Sources of Finance

In the view of Barclays (2009, p. 1), a newly started business may seek financial support from seven main sources. These sources of finance may include:

Financial assistance from a venture capitalist(s) may allow to transform the idea into a newly start up business. Venture capitalist or a private equity investor may finance a new business at the cost of a defined ownership in the new business (Barclays, 2009, p. 1).

A new business may come into existence through borrowings from creditors such as banking institution. It may offer an easy and relatively cheap access to financial support.

A start up business may seek for business support organizations, which are designed to assist and help out new businesses via business planning and different training projects (Barclays, 2009, p. 1).

Commercial services such as asset financing may provide a source to finance a new business.

Personal savings and informal loans may act as the seed capital in setting up a new business (Barclays, 2009, p. 1).

Regional development agencies provide a reliable network of finance source for new businesses. It may support and fund new businesses at a regional scale via stimulating the strategy of business development.

On a local scale, a new business may look for grants and loan from local authorities in order to finance business operations (Barclays, 2009, p. 1).

Q. 1.2: Implication of Different Sources of Finance

A new business may seek financial assistance and support from a number of finance sources. However, each of these sources may have certain implications such as source control, ownership and tax effect on the newly set-up business and its operations.

Ownership

Different sources of finance may have varied concerns for ownership. For example, if a start-up business fails to pay off the due amount of informal loan it may urge the business to offer a specific portion of business ownership to that creditor (Barclays, 2009, p. 3). In another case, if a business defaults to pay off bank borrowings, the banking institution may have a legitimate claim over ...