Managing Financial Resources and Decisions







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Managing Financial Resources and Decisions - Shaping Your Future – A Vocational Scenario- Marks and Spencer

Introduction

The concept of finance revolves around financial literacy and financial education. Financial literacy deals with the ability of an individual to handle financial resources using his knowledge and expertise so as to ensure financial well-being long term. Financial education, on the other hand, can be described as the improvement of the knowledge with regard to financial products, services and concept so as to develop the ability to make informed decisions to improve the present and secure long-term financial well-being (Hung, Parker & Yoong, 2009). Finance in business is concerned with the decision-making process regarding the types of investments to be made and the methods of sourcing funds for such investments (McLaney, 2009). Businesses today are increasing turning towards financial analysis to make strategic decisions on the progress of the firm. Effective financial management is hence an absolute necessity needed to drive and sustain these businesses in the market. The direct result of an effective financial management is an efficient organisation with the requisite funds to carry out their business. Hence, identifying sources of finance and its management using finance function makes or breaks the success of a firm (Institute of Chartered Accountants in England and Wales, 2011; Martin Petry et al., 2013).

The report aims to identify possible financial sources for Marks and Spencer (M&S) with focus laid on the assessment of the implication and appropriateness of such funding and also analysing the required cost for the accruement of various financial sources so as to enunciate the role and need of financial planning. Appraisal techniques will be used to examine financial statements, accounting briefs, budgeting sheets and costs of the unit and also the information that is made available to the decision maker. An analysis using ratios will also be done to compare evidence of business type (external and internal) with interpretations of finance.

Task 1

1.1 Sources of Finance Available to M&S

Marks & Spencer, a leading retailer in the UK has an average of 21 million customers per week in all its stores. They currently have in their employ, 83,000 staff and 1200 stores worldwide (Marks and Spencer, 2015). For the year 2015, M&S showed a turnover of 4.1 billion pounds for general merchandise, 5.1 billion pounds for Food sector, 800.1 million pounds of online stores and 1.2 billion internationally (outside the UK) (Marks and Spencer, 2014).

The sources of finance available to M&S include short term, medium term, and long-term finance.

Short and medium-term finances

Trade credit: the concept of delayed payment to suppliers who have sold products to their clientele (Cunat & Garcia-Appendini, 2012).

Bank credit: Bank credit refers to relying on bank to fulfill short-term financial needs. These include finance bills, overdrafts, bills of exchange (Saidenberg & Strahan, 1999).

Leasing or hire purchase: refers to hiring or leasing of an asset to an individual over a defined period of time. It is also known as asset finance (Association of Chartered Certified Accountants, 2015).

Long term sources

Venture capital: venture capital is a high-risk long term source of finance that is used for funding a startup business or in the case of expansions of a company. It is a type of private equity (McKaskill, 2009). The advantage to the investor is that he acquires ownership interests in the firm (Covas & Den Haan, 2012).

1.2 Implications of the Different Sources

Short and medium-term finances

Trade credit: the main implication of commerce credit lies in the understanding of the monetary policy that is transferred to the business sector and also the health of finances of the company over the credit cycle or period. In the case of trade credit that is not interesting dependent, the total funding comes down which is not normally seen with bank credit (Fitzpatrick & Lien, 2013)

Bank credit:Banks play a critical role in the monetary transmission system. Bank credit systems are interesting dependent so when the rate of interest increases, the companies scale back the borrowing as the costs incurred may be high for short-term finance (Fitzpatrick & Lien, 2013; Morris & Sellon, 1995).

Leasing or hire purchase: different types of leases have various kinds of tax treatments. The implication here is that treatment for the capital allowance varies for which tax treatment must be taken into consideration for asset purchase financing ( ACCA, 2015).

Long term sources

Venture capital: an increase in the venture capital increases the expansion rate of the firm, number of employees and the overall turnover of the company (Samila & Sorenson, 2011). In the cases where a company uses all its generated case in other aspects such as in the event of a Research and Development Company then it cannot pay its interest payments such as the case of debts, in these cases, equity is the most viable option. In equity payment, if the company defaults the providers cannot aid in closing down the business, and also they do not expect cash returns in the short term, but rather dividends in the long term (ACCA, 2012).

Appropriate Sources of Finance for a Business Project:

The table below signifies the appropriate sources of finance by discussing the limitations and advantages of sources of funding.

Table 1: Limitations and benefits of sources of finance

Source of finance Advantages Limitations
Short term finances
They can be arranged on short notice and does not require extensive procedure Flexible as they can be raised easily and paid back if the need did not arise after all Noninterference with management and decision-making Renewal suggests that in some cases can be converted to long-term loans Payment of interest whether the company shows profit or loss Loans cannot be further raised on the asset until initial loan is cleared off Difficulty in borrowing when the company has suffered huge loss or in times of economic instability Uncertainty pertaining to acquiring short term loans Can be time-consuming as most short-term financiers insist on a legal binding.
Trade Credit No interest is payable Customized to needs of borrowers No security required Available only for raw materials or finished goods Payment to be made at the end of credit
Bank credit Available for any use as the borrower deems No need to pay at the end of credit; can be renewed Interest is payable Not customized to borrowers, based on existing grants and policies Security required
Leasing or hire purchase Much like a bank loan Cheaper than borrowing Expensive where startups are concerned
Long term finances
Long term finances are more beneficial to the company in the long run Flexibility in capital structure Tax saving on the interest of long term loans Payment of interest long term As a fixed maturity date Risky
Venture capital Faster growth and better profits Provides support to grow or expand Gaining connections in the industry Loss of managerial control (same as general equity) Compromises in internal decision-making process Milestones set for receiving capital; source is mostly intermittent
Sources: Adopted from Zickefoose (2014) Group of Thirty (2013) and ACCA (2011)

For the case of M&S, as it a large company, it may consider using venture capital for the purpose of expansion such as increasing their presence in online stores. And in the cases where the market is down or for when a new product is launched and tested in the market, trade credit will be the most viable option. Other forms may be used based on the discretion of M&S.

1.4 Appropriateness of Venture Capital for M&S

To: Management of the M&S

From: Finance Manager

Subject: Appropriateness of venture capital finance for M&S

Date: 08/12/15

Introduction

The report is developed with the view of explaining how venture capital is appropriate for M&S.

Venture capital is a sort of private equity that can be used in early development, starting up a company or even its expansion (European Investment Bank, 2001). In recent times, more and more private equity investors are seeking firms that use more innovative methods. They provide the company timely help in increasing their presence in terms of expansion. Further, venture capital investors are also aware that the return on investment is more long term and associated with the future profits of the company (McKaskill, 2009). Therefore, for M&S increasing their presence in the online market can prove to be efficient and profitable especially with the rise in the concept of online shopping

Conclusion

Hence, venture capital can arguably be the best source of finance to M&S in its present state.

Task 2

2.1 Costs of various Sources of Finance

All sources of finance come with an added short or long term cost to the company. The costs of different sources are discussed below.

Trade credit: Trade credit can be seen as cheaper than achieving bank credit as it is not usually taken with interest rates. It consists of a one part contract that is interesting free and a two-part contract that issues discounts to the client by the supplier (Fitzpatrick & Lien, 2013).

Bank credit: Bank credits of any kinds come with an added cost in terms of repayment based on interest. Furthermore, in loans of the larger sum the bank usually focuses on acquiring an asset as collateral in exchange for the credit. This too constitutes for the cost of the finance (Pouvelle, 2012).

Hire purchase or leasing are very similar to bank credits except that instead of receiving capital in terms of money their assets are leased out. Usually, leases are considered to be cheaper than bank credit due to interest rates (ACCA, 2011).

Venture capital: the cost of acquiring venture capital is lower than all other sources. However the compromise remains that the investor is given a position on the board and a portion overall profits are to be paid to the venture capitalist firm (McKaskill, 2009).

2.2 Importance of Financial Planning for M&S:

To: Management of M&S

From: Finance Manager

Subject: Importance of finance planning

Date: 8/12/15

Introduction

This is to enunciate the importance of financial planning

A business plan is always dependent on the financial plan so that the company may succeed. The financial plan consists of three components such as a balance sheet, income statement, and a cash flow forecast. All these three in conjunction with one other will help the business ascertain the needs of finance, how much to acquire and how to strengthen the company further. It can be said that the cash flow forecast is the most important in determining the financial overview of the enterprise. The lack of a financial plan will lead to more business failing (Small Business BC, 2015).

Conclusion

Hence, the implementation of a financial plan system is imperative to carry the company forward and enhance the returns for M&S.

2.3 Decision Makers information needs:

The concept of financial reporting includes financial statements, reports notes and all relevant information regarding the finances. The importance of financial reporting lies in the information that it provides about an organization. This information is the key to making decisions concerning the activities of the firm and measures to make the organization more efficient. In view of this, the stakeholders are the receivers of such information, and they include, managers, shareholders, employees and the board of directors (Australian Accounting Standards Board, 2001).

Board of directors: The information provided by them is mainly used to review all the past decisions that were made to benefit the firm in order to develop new ideas and methods to better the firm (AnsaldoSTS, 2006).

Board of directors: The information provided by them is mainly used to review all the past decisions that were made to benefit the firm in order to develop new ideas and methods to better the firm (AnsaldoSTS, 2006).

Manager: the manager ensures that all tasks as set by the board are carried out effectively. He also decides where the funds must be used and in what areas. He is also the deciding factor in whether the firm requires any funding at all. The management is responsible for bringing in new contracts and expanding to new ventures. Further, they also assess the performance output of the firm (Sunday & Somoye, 2011)

Employee: the employee organization relationship is one that relates to the salary earnings of the employee. The employee grades the organization and is a success based on receiving the salary wherein; they will view the financial reports with caution (Coyle-Shapiro & Shore, 2007).

Shareholders: the accounting information put forth to them is used by them to assess mainly if they are receiving maximum returns on their initial investments (Kostyuk et al., 2007).

2.4 Impact of Finance on the Financial Statements

The accruement of finance for a firm is always reflected in its financial reports. To illustrate; if the firm was to source funds, say through bank credit or equity then it shows that there is an influx of the cash flow in the balance sheets and also the income statement. This, in turn, indicates that the capital of the firm is increased that reflects in the statement of operations. Further any investment made by the firm is recorded as a non-current asset and the profits resulting from an alternate source of revenue in the account sheet (Noreen, Brewer & Garrison, 2011).

2.5 Presentation of balance sheet for M&S

Table 2: Balance sheet for M&S

Balance sheet (in £)
Fixed Assets
Fixed Assets 10,000
Accumulated depreciation 1000
Total fixed assets 9000
Current assets
Stocks 2500
Debtors 1500
Bank (12500+7000-1500) 18,200
Total current assets 22,000
Total assets 31,000
Liabilities
Creditors 3000
Loan 2000
Credit card 750
Total liabilities 5750
Total assets-liabilities 19750
Equity
Capital 2000
Retained profit 16250
Total equity 18250
Profit and loss Account
Interest on loan 1500
Net retained profit 16250
By profit 17750

Task 3

Budget Analysis

3.1.1 Analysis of Budget of M&S

Table 3: Budget of M&S

Cash Flow
Particulars July August September October
Opening Cash balance 50000 83,000 126,000 101,000
Add : Sales 150000 100000 125000 120000
Total 200000 183000 251000 221000
Less: Outflow
Cash Purchase 52,000 32000 74,000 82,000
Credit Purchase Payment 0 0 46000 20000
Rent 45000 0 0 0
Other Miscellaneous Expenses 10000 15000 20000 20000
Loan EMI 10000 10000 10000 0
Total Outflow (B) 117,000 57,000 150,000 122,000
Net Cash (Closing ) 83,000 126,000 101,000 99,000

For the calculation of profit, the loan of 7000 pounds was calculated as a liability with a charged fixed asset.

Calculation of Unit Costs and Make Pricing Decisions using Relevant Information

Table 4: Calculation of Unit Costs and Make Pricing Decisions using Relevant Information

Calculation of Markup & Profit
Particulars Amount
Total Direct Cost 20000
Fixed Cost 10000
Total 30000
Mark-up 9999.99999
Total Selling Price of 500 Unit 39999.99999
Per unit 79.99999998

The markup price has generated 33.33% to a capital of only 20%, thereby indicating that the markup price is appropriate. The cash budget for four months and the surplus thereof have been identified.

3.3 Viability of a Project Using Investment Appraisal Techniques

Table 5: Viability of a Project Using Investment Appraisal Techniques

Task 4

4.1 Main Financial Statements

Financial statements are made up of balance sheets and income statements. The former consists of liabilities, assets, receivable accounts and also the declaration of equipment and its worth. The liabilities are included in terms of the loans that need to be paid off. The balance sheet represents what position the organization is in the current period. The equity interest of a firm is thus measured from the balance sheet as a difference between the assets and the liabilities. On the other hand, the income sheet denotes what has been done by the organization. It indicates the performance of an organization in relation to its activities at a given time. This statement includes the expenses as well as the revenues which determine the net profit and net loss of the company (Manitoba, 2015).

4.2 Appropriate Formats of Financial Statements for Different Types of Business; A comparison

The main components or formats of the financial statement include a balance sheet, an income sheet, an equity sheet and a cash flow statement. The distinctions lie in the name wherein the balance sheet includes all that the company has while the income sheet includes the activities of a corporation to determine the total profit or loss. Changes in the equity that is determined by the asset over the liabilities and the changes in the equity are represented in the equity sheet. The cash flow statement determines the need to raise capital, how much capital to rise and the best way to source finance (Ding, Jeanjean & Stolowy, 2008). The size of the company determines what sheets they use. Bigger firms use all types for better clarity while a small business like traders may use only balance sheets.

4.3 Interpretation; Financial Statements using Appropriate Ratios and Comparisons, both Internal and External
PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED 30th SEPT 2013 (£)
Sales 800 Opening stock 0 Closing stock 300 Total 1100
Cost of goods sold 150
Gross Profit 650 Opening stock 0 To purchase 450 Total 1100
Wages 400 Total 420
Other Expenses 20
Net Profit 230
Balance Sheet
Fixed Assets
Current Assets 650
Stock 300
Debtors 100
Bank 280
680
Total Assets 1330
Equity and Liabilities
Share Capital 500
+Net Profit 230
Total equity capital 730
Non-Current Liabilities 150
Current Liabilities
Creditors 450
Total Equity and Liabilities 1330

4.4 Ratio calculation

Table 6: Ratio calculation and interpretations

S.No Ratio Formula Value Interpretation
1. Current ratio Current assets/current liabilities 1.51 Denotes that M&S can pay for short term liabilities
2. Acid test ratio Current assets stock/current liabilities 0.84 Measures the liquid assets of M&S to repay the short-term secured borrowings
3. Return on Capital Employed (ROCE) EBIT/Capital Employed 26.1% Denotes that capital has been efficiently used
4. Gross Profit Margin Gross profit/Revenue 81.3% High. Indicates that M&S can make reasonable profit
5. Net Profit Margin Net Profit/Sales 28.8% Net profit margin of 29% means that every, one dollar sale contributes 29 cents to the profits

4.5 Ratio differences

Current ratio and acid test ratio: The quick ratio gives an insight into whether a company can meet its short-term liabilities with its assets but they do not have current assets. Hence, quick ratio focuses on liquidity that relates to profitability (Vieira, 2010).

Gross profit and net profit ratio: Both measure to assess the overall stability of the company. Gross profit relates to net sales and shows the efficiency of management. Higher the gross profit, better the management (Tulsian, 2014).

Conclusion

To conclude the report critically analsyed the various financial sources available and along with their strengths and limitations. Subsequently, identified the best source that would be used by the Marks’ and Spencer. Further, the accounting analysis found that the business has enough cash that can be used efficiencly and therefore, the business in better position to handle the proposed project.

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