MANAGING FINANCE

Managing Financial Resources and Decision

TASK 1: SOURCES OF FINANCE HNC1

Internal Sources of Finances1

External sources of finances2

Suitable Source of Finance - new Start up5

Suitable Source of Finance - LVMH Moet Hennessy5

TASK 2: FINANCIAL PLANNING6

Key aspects of Financial Planning6

Financial Decision Making7

Understanding Financial Statements8

TASK 3: CASH BUDGETING AND INVESTMENT TECHNIQUES11

Part 1: North Seaton Engineering Company11

Part 2: Total Costing Method12

Part 3: Investment Appraisal12

TASK 4: RATIO ANALYSIS14

REFERENCE17

Managing Financial Resources and Decision

Task 1: Sources of Finance HNC

In this task, the focus would about the information on sources of finances that are available for new and existing business. Beside this, what are their benefits and drawbacks and which source is most suitable for starting up new business and for existing business.

According to theories and researches, the following are the sources of finance available for start up business.

Internal Sources of Finances

These have been divided into five categories.

Owner's investment: Money that is invested by owners themselves in form of additional capital or start-up capital and its long term source of finance.

Advantages: No repayment, no interest or dividend payment

Disadvantages: Limitation on investment amount

Cost: No cost

Retained Profits: Companies that has been operating for more than a year can use this saving. This is a retained profit and is part of medium or long-term source of finance.

Advantages: No repayment, no interest or dividend payment

Disadvantages: Not for new business, due to plough back companies usually does not have enough amounts.

Cost: No cost

Sale of Stock: Selling an unsold or unnecessary stock and is part of short-term source of finance

Advantages: Fund can be raise immediately, holding cost of stock reduce.

Disadvantages: Reduction in stock price.

Cost: No cost

Sale of Fixed Assets: Selling unused or unnecessary fixed assets and is part of medium-term source of finance.

Advantages: Efficient utilization of assets.

Cost: No cost

Disadvantages: Slow means for raising finance and companies usually do not have excess assets.

Debt Collection: Company should immediate collect their debts from debtors and this is not so effective and considers being short-term source of finance.

Advantages: Improve receivable management and strong image in front of lenders

Disadvantages: Risk of bad debts (Moore, 2008, pp. 300-310)

External sources of finances

Finance is obtained from third party.

Business Angels: There are few high net worth individuals that invest in high growth business. This person just not only offers finance, but also their skills, contacts and experience.

Advantages: Offers large range of fund along with their expertise and have huge contact list which make operations easy.

Disadvantages: Partial interference and control over business operations, difficulty to search such people.

Cost: distribution of profit.

Bank Loan: Amount borrowed from bank on fixed rate.

Advantages: Instalment reduces burden, reliable at reasonable cost, interest payment of tax-deductible

Disadvantages: Penalty fees can be a burden and increase cost of loan, Limitation on borrowing, cash flow problem on high borrowing, require strong collateral.

Cost: Interest payment

Bank Overdraft: Withdraw extra amount from bank account and is part of short-term source.

Advantages: Flexible as it maintain cash flow as no cost is associated for certain time duration and it can be quickly arrange

Disadvantages: Cost ...