MANAGING FINANCIAL RESOURCES

Managing Financial Resources & Decisions



Financial Analysis and Decision Making

Introduction In this assignment, I will be arguing and understanding the concepts of financial planning and decision making. It will help us in identifying why, how and where to access the different sources of finance available to a business. Availability of finance is necessary for the company's development, operation and expansion. Management of finance plays an important role in the resource planning of an organization.

Requirement Number 1

1.1 Identify the sources of finance available to a business

There are different sources of finance available to a business. A business can finance its projects in a number of ways. The type or source of finance depends upon the nature of the business. Big corporations can use a large variety of finance sources as compared to smaller one. Firms need funds for their investments because all business does not have instant availability of money. Mainly sources of finance available to a business are classified into two broad categories; internal financing and external financing. Both kind of financing has their own pros and cons. Selection of financing source depends upon the circumstances faced by an organization (Paul, 2011, p. 89).

Internal Financing

Internal financing means funds and capital that comes from within a company. Internal financing provides companies a rapid access to funds. Internal financing requires firms to use accumulated profits as a source of money for new projects (investments), instead of distributing it among the shareholders of the company. Internal financing is dissimilar from external financing which involves new capital from outside of the company. Financial professionals consider internal financing as less expensive than external financing. Internal financing is cheaper because it does not involve any transaction cost. In addition, firms are not supposed to pay the taxes associated with dividends (Hitchner, 2011, pp. 50). Following are some advantages and disadvantages associated with the internal financing.

Advantages

Funds are instantly available,

There is not interest expense

No transaction cost associated with creditworthiness,

No pressure of 3rd parties.

Disadvantages

There is no increase in the capital

Less flexible than external financing

Losses are not subject to a tax deduction

Limited in volume

Following are the options available to Royal Mail for financing its projects from internal sources.

Reserves: Royal Mail can use its reserves such as pension reserves for raising capital for its new investment

Asset Swaps: Royal Mail can accumulate a good amount of capital by selling its property, equipment or other fixed asset.

Retained Earnings: Most of the internal financing take place with the help of retained earnings. Company does not declare earnings to its shareholders. Royal Mail can induct the amount of retained earnings in its investment.

External Financing

External financing means capital that Royal Mail collects from the external of the firm. It is different from an internal source of financing. There are different sources of external financing. There are different sources of external financing. Following are some sources of external financing (Paul, 2011, pp. 91-94)

Debt Financing: Firm can raise capital by issuing ...