Pearson BTEC Level 5 HND in Business (QCF)Unit 2: Managing Financial Resources and Decisions (L5)Session:
Assignment Context and Business Scenario
Radisson Plc is a medium-size computer software manufacturing company operating in London. The company has recently acquired a long term contract to provide bespoke software for various companies around UK.
The Operations Manager believes that there are lots of opportunities to expand their operations and to increase their market share in the industry.
What you must do: Task 1:
A. Identify the appropriate sources of finance available for the selected business for its operations and assess the implication of different sources. [P1.1 and P1.2, M1]
B. Evaluate the appropriate sources of finance for the expansion plan of the above company. [P1.3, D1]
To achieve M1 you will have applied an effective approach to the evaluation of the appropriate sources of finance for the expansion project.
To achieve D1 you will provide a wide range of sources of finance and evaluate to draw conclusions to on the most appropriate sources of finance with justification.
The management of Radisson Plc is unsure about the capital structure of the company and asks for your advice about the cost of financing the expansion.
A. Analyse the cost of funding the project using equity versus debt finance and recommend your choice. [P2.1]
B. Explain the importance of financial planning and assess the information needs for financial decision making. [P2.2, P2.3
C. Explain the impact of suggested financing option on the financial statement. [P2.4, M2]
To achieve M2 you will have applied relevant theories and models to assess the cost of financing decisions
Investment decisions are the most important decisions that a company makes. They commit a substantial amount of money on making decisions which are likely to have a large impact on a company's performance over a long period of time.
A. Analyse the importance of budgets for variation and make appropriate decisions for Radisson Plc. [P3.1]
B. Explain how you would calculate unit cost and make pricing decisions based on appropriate information at the Radisson Plc. [P3.2]
C. Assess the viability of the expansion project using investment appraisal techniques such as the NPV.. [P3.3, D2]
To achieve D2 you should have demonstrated that substantial activities have been planned and managed to assess the viability of Radisson Plc’s expansion plan.
At the end of a company’s financial year, there are a number of procedures that need to be performed to ensure that the business’s finances are in order. Across all industries, the financial health of a company is measured against three major financial statements, namely Income Statements, Statement of Cash Flows and the Statement of Financial Position.
A. Identifying the appropriate sources of finance and its implications [P1.1 and P1.2, M1]
Radisson Plc is a medium-size operating firm and wants to explore its business. Any organization that is willing to expand its business needs to increase its market share by increasing its productions. The increase in production requires more funds for new equipment and resources. Managing the sources of finance requires an effective planning, controlling and a strong decision-making ability. The operation manager of the company should have these abilities to raise appropriate and sufficient finance for the business. Before opting for the expansion, the operation manager should analyze its possible outcomes. The shareholders should get sufficient dividend, the business survives for the long term, and cash inflow should be more than cash outflow and the business maintain it profits (Kelly, 2012, p.56).
The medium-term business organizations should focus on non-current assets for expansion. It should purchase more plants & equipment, land or furniture has to increase the production and strength of the business. The financial manager should budget and forecast about the expenses of assets. The manager should plan for raising the finance from internal or external sources, which is best suitable for the business.
Planning of financial sources follows controlling the raised funds. It is important that the raised funds are utilized at a proper place and assets are efficiently used. The financial manager should prepare a guideline for controlling of activities and how it can use efficiently so that it gives best outcomes. All the related financial information should be recorded properly and compared to the forecasted data to know the progress of the operations (Sargeant and Jay, 2014, p.96).
The planning and controlling follow financial decision-making ability for the implementation of successful expansion. The financial manager has to take financial, investment and dividend decisions. The manager should decide among the short, medium and long-term sources of funding understanding the need of the firm. It should classify the earnings that should be given as dividend or kept of investment or used for some other business purpose (Hsu and Ziedonis, 2013, p.770).
B. evaluating the appropriate sources of finance [P1.3, D1]
The expansion of business requires funds and there are large number sources of finance available. Therefore, a financial manager should choose an appropriate source that generates secure and sufficient funds for the business. The raising of funds can be classified in two ways according to the fundamentals; one is capital and another is credit. The raising of funds through capital means issuing shares to the owners of the business and credit means borrowing the money from banks or from other sources. The internal and external sources of finance are classified according to the origin (Caglayan and Demir, 2014, p.210).
Internal sources: the raising of funds from own business in known as internal sources of funding. It can be done by issuing of shares or reinvesting the profit of the business. The internal sources are classified in long and short-term finances.
Long term finances:
Retained earnings- It is the portion of income, which is retained by the owner instead of paying it out. It is the easiest source as it is the liquid assets of the company and available freely. The owners need not go with documentation or any legal procedure for the reinvestment of the funds. The dividends are tax-free as per the income tax rule that is why the owner enjoys tax benefits but the owner has a risk of loss of its own money if it suffers loss.
Short-term internal sources:
Current Assets- current assets are easily convertible in cash, so the owner can get easy funds of the expansion of the business.
Personal savings- it is the most convenient way to generate funds within business because the owner should not have to be dependent on the others.
Reduced inventory level- if the business has fewer inventories in the godowns than it will automatically raise finance for the firm but the managers should maintain a level otherwise; it will fail to meet its commitments.
External sources: As name indicates, it is raised from the other external sources. These funds are easily available but require internal cost control. The owner is responsible for the risks related to the funds and the management of the risks and funds.
Short term finances:
Bank overdraft- The firm can opt for extra money from the banks. The banks provide more than the account balance to the firms in case of emergency for a particular period of time (Peirson et al. 2014, p.150).
Invoice discounting- The firm can discounts its bills from banks and get money. It involves third party and borrowing is secured.
Long term finances:
Shares: the shares are categories into ordinary and preference shares. The owner can raise funds by issuing its shares to the shareholders. It is considered as secure way to raise the funds.
Borrowings- The firm can borrow term loans, loan notes or Eurobonds from banks on fixed or floating interest rates.
As per the above study about the sources of finances, it is recommended that the firm should opt for external sources of finance. The reason behind the decision is that it does not involve the internal sources as it is the most important part for the smooth running of the business. The internal sources can be used in case of emergency or when the company is suffering loss.