This is a solution of Scenario Assignment Help in which we discuss Developing business
In today’s scenario each and every person wants to start its own business assignment. As shown in the given scenario Freddy Patel wants to initiate its own business and wants some relevant suggestion regarding its financial activity. In this research report all the sources of finance which are available for a sole trader Freddy Patel, will be discussed and also analysed their implication to the new business which is going to be started. In this report the significance of the financial planning will be assessed and the required sources which are necessary for taking a proper decision regarding business operations management are identified. In order to manage the fund, it is suggested that Freddy Patel should prepare an organize cash budget. It is important to take proper decision regarding the prices of the products and that will also be discussed in this report. The comparison of ratios is done in order to identify the better position of the organization.
In this scenario Freddy Patel is a sole trader and wants to start a new business. For that purpose there are numerous sources available to him.
Bank overdraft –bank overdraft is a facility of providing funds by the bank to its customer. It is a credit extension from a particular financial institution when an individual’s bank account reaches to Zero. It is a facility in which a person can withdraw money from the bank even if its bank account has no money. Basically, in this source bank lends money to the customers. So, from this source Freddy Patel can borrow some money for stating its new business.
Preference Share –Preference share is the debt which is taken for the long period of time. These shares have a fixed dividend rate and which is decided at the time of its issue. The holders of preference share do not have rights of voting. It is also considered as the good source to get funds for the investment purpose.
Share capital –in order to initiate a business an individual needs a huge amount of money in that case this sources is very important as it provides fund for the long period of time. Share capital is acts like a fixed funds that can be used in the business operations.
Bank loan – It is another source of finance for the long period of time. Bank provides loan to the customers and he needs to pay the interest for that in instalment within a particular period of time. When taking loan form a bank an asset needs to be kept reserved with the bank as security.
Lease – This is the better source of finance. In this source an asset is owned by a person called as Lessor and the person who uses it called as lessee. A person who uses the asset would has to pay instalments accordingly, which is predecided and when the leasing time period comes to an end then lessee has to return the goods the Lessor back.
Debenture – it is a form of loan that is secured in opposition to a particular asset or the whole business’s assets. It has a fixed interest rate which must be paid at a fixed date.
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On the basis of given scenario, Freddy Patel wants to open a new business and for that business some sources of finance have been suggested above and here are the implications of these sources.
Share capital– It requires only business registration. In this source a person who gets funds has the possession to keep the profit and control ownership of the business. He becomes partners in the business profit and loss of the business.
Bank loan – For getting the funds through bank Loan requires legal documentation. It includes documents such as position of an asset, no dues, position of debtors and stock, etc. if the amount which is taken as a loan will not be payable on a given time then the deposited security will be retained by the bank.
Lease – leasing requires some legal documents having several terms and conditions which needs to be done between the asset owner and the business. Lessee continuously keeps paying the interest of the goods in equal instalment till then he uses the asset.
Debenture –In order to issue a debenture also requires some legal documentation. Freddy Patel needs to register its business for acquiring money. If the amount of debenture is not paid on time, then bank can get its fund by selling the organization’s assets.
Bank overdraft – it is the facility in which Freddy Patel can acquire the funds from the bank when it has nil balance in its account. There is some limit of the bank on the amount which could be withdrawn. This amount limit is to be set by the bank itself. On the basis of advantages and disadvantage its appropriateness is analysed.
Share capital – The feasibility and appropriate of this source can also be analysed with the help of its advantages and disadvantages.
Bank loan – If Freddy Patel uses this sources, then it leads to some positive as well as negative impact to the business.
Lease – leasing also has some positive and negative impact, that are described as below:
2.1 Analyse the costs of different sources of finance to a business like Freddy patel
Finance sources provides benefit to both the party who provides the funds and who gets the funds. Here is some analysis is done on the basis of cost of these sources.
Bank overdraft –If Freddy Patel acquires funds from this sources, then bank charges some amount of interest to Freddy. This source can be used when a person needs urgent funds as it has a higher rate of interest as compared to the other sources. There is no such Tax benefit of using this source.
Share capital – share capital is the fund which is owned by the organization’s owner. In this scenario Freddy Patel is the owner and if loss occurs in the business strategy will be beared by him only. If this sources is used by the Freddy then he must pay dividend as a cost for share capital. Divendend is provided to him after deducting all the expenses. If company generates no profit then no dividend is to be paid.
Bank loan – This is considered as the best source to Acquire fund to initiate new business. If this source is chosen by Freddy then he has to pay decided amount of money as interest every month. The amount of loan can be paid in instalment as well. The interest rate which is applicable on the loan is decided by the bank itself.
Lease –In this source of finance there are two party lesser and lessee. Lessee is the person who takes the asset on interest basis and lesser is the person who has the ownership of asset. Lesser gives the permission to the lessee to use his asset against some amount of money. The rate of rent is decided by the lesser which needs to be paid by the lessee till then he uses the asset.
2.2 Explain the importance of financial planning to a business like Freddy Patel
Money is considered as the most important part for starting any business. Without it any business operation can not be initiated. The prime factor is to generate the fund after generating it its planning in a proper manner is a difficult task which helps in generating revenue for the organization. Proper planning of finance includes various steps these are explained as below:
Fund estimation – Proper financial planning leads to arrange the funds in an organize manner. Fund estimation is an important task it decides the amount of money which is incurred in each activity. Proper planning of financing helps to evaluate the value of source.
Structure of capital – after deciding the fund source, structuring of capital needs to be developed that develops the estimation of what amount of money would be acquired from a particular source with the affect of which an organization can earn more revenue.
Proper fund allocation – The amount of money that has been raised is used in some other acitivity. Financial planning in a proper manner leads to funds allocation in an effective manner.
Evaluate the return – fund allocation is organised in that manner by which highest return could be acquired. The return must be equal and greater than the amount which is needed.
Management of cash – cash management is done in that manner by which each and every activity of the business remain with the appropriate fund. Money should not be wasted or missued. The situation of financial crisis can be generated if money is not used in a proper manner.
Financial performance assessment – An effective planning of finance ensures the amount of money is used in necessary activity. The reports should be made about the generated return on funds will help to improve the performance of the business.
2.3 Assess the information needs of different decision makers like freddy patel
In order to take a proper decision requires a relevant information regarding the person who is associated with the organization. Here are some information that is required by the company’s stakeholder before getting involved with it
Suppliers – suppliers wants to acquire the information about the credibility of the organization as for its payment. Supplers ensures about the company to make more delivery after assessing the stock details of the company.
Investors – investor requires to get the information about the rate of return that is included into the business. If organization fails to earn profit in that case investors will not get any profit also. The amount of money which is got by investor motivates him to make more imvestment in the organization.
Government – government requires to have the information regarding the profitability of organization, the benefit of tax which is acquired by the company. Government evaluates the activity of the organization if tax is to be filled timely by the organization as the benefit of Taxes is taken as granted and less quantum of tax is paid.
Competitors – it is important in present scenario to get the correct information regarding its competitor in order to measure its growth and development. If any company is successful then its reason is being evaluated and develops strategy to perform better than them.
2.4 Explain the impact of finance on the financial statements to a business like Freddy Patel
Evaluation of financial resources is the process of assessment of all financial activity. Financial statement includes all the sources of finance. Financial statement is bifurcated into two parts Assets and liability. Here are the impacts of sources described as below:
Debt impact – Debt is considered as the loan that make impact on the account of profit and loss , cash flow and on the balance sheet also. Debt cost is included in the account of profit and loss and deduct it as a profit charge. Debt influences the cash flow activity of the Freddy Patel.
Equity share impact – equity share is considered as the shareholders interest which is used for the liability purpose at first place and interest on the other. Equity share influences the financial statements balance only. When the shares are issued by the company then funds of shareholders in the balance sheet is increased by the affect of which the financial activity of cash flow is decreased or increased consequently.
3.1 Analyse budget and make appropriate decisions. Prepare the following monthly budget n behalf of Freddy, for the first 12 months; a sales budget, a production budget and a detailed cash budget, which shows each months’s net flow.
3.2 Explain the calculation of unit costs and make pricing decisions using relevant information.
3.3 Assess the viability of a project using investment appraisal techniques
Assignment – Part B
4.1 Discuss the main financial statements based on the annual reports and the ratios given in the previous section. Assess the compatative performance of WM Morrison Supermarkets PLC and J Sainsbury PLC for year 2014 and 2015
There are three parts of financial statement
Profit and loss statement – this statement is prepared to identify the Net profit. It includes all the indirect incomes and expenses. Account is credited all the income and debited all the expenses. Nominal account generally put into profit and loss account. If in P & L account the side of credit is more than the debit then the remaining amount is considered as Net Profit otherwise Net Loss. Net profit is shown in the balance sheet and sum up into the capital amount otherwise added to the reserve and surplus account.
Balance sheet – with the help of balance sheet position of an organization is evaluated in term of finance at the particular time. It is the precise form of all the financial activity performed within an organization. It has for parts equity share capital, net assets, current liability and current asset.
Cash flow statement –cash flow statement is dfferent from the balance sheet and income statement as in this statement the quantum of money which is outgoing and incoming in future and there entry is noted as credit, is not included.cash flow statement involves three main stages flow of cash from operating activity, from financial activity and from investing activity within a particular year.
4.2 Compare appropriate formats of financial statements for different types of business for the PLC’s above with that of Freddy Patel sole trader. Explain the differences and Explain why the Formats differ.
|Sainsbury and Morrison Plc||Freddy Patel ( Sole Trader)|
|PlC’s financial statement is made according to the standards of international financial reporting.||Financial statement is made according to the GAAP (generally accepted accounting principles) and the standards of accounting.|
|Better clearness and intelligibility is needed in preparing the PLC’s financial statements. It also requires more disclosures.||For the business of Sole trader requires not much disclosure.|
|Balance sheet and statement of income must be shown in vertical format.||Balance sheet and statement of income must have two column such as expenses side and income side.|
|In order to preparing a PLC’s financial statement a set of rules and regulation is needed on promptly. Financial statements of PLC’s involves change in equity statement, statement of income, statement of cash flow and balanace sheet.||
There is not such requirement that needs to be followed while preparing a financial statement for a sole trader. Its financial statement includes profit and loss account, balance sheet and balance of debtors and creditors statement.
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