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The management of business finance

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Introduction

In this unit I am going to show my understanding of the management of business finance. I will also investigate the sources of finance available to businesses and how to interpret the use of financial information for decision-making. Sources of Finance The core aim of any business is to survive, additionally, it may have other goals such as to make a profit or improve or expand the products or services it provides to satisfy stakeholders, either way, it will need to control its financial resources to do this. By collecting all the available financial information and recording it into various accounts, a business can assess how well it is performing. This is important both for a business internally as well as externally. Financial resources are needed throughout a company's life. The type and amount of finance depends on many factors e.g. type of business, the success of the firm, the economy of the state etc. There are two main types of financial resources that a firm needs. This is: o Capital Expenditure~ this is used for buying fixed assets where large sums of money are involved and needed but this is not used for buying property or new premises o Working Capital~ this is the money used for the day to day running of the business like petty cash When these means are not enough, or the business is not making a quick enough turnover for the business to expand, other sources of finance may be considered that are essential to fill that cleft. Short Term Sources (0-2 years) Short-term sources are usually to cover short-term orders or bulk orders that businesses take on that working capital can't cover and is needed for a brief period of time. These are: o Overdraft~ if a business spends more money then it has in its bank account, we say that it is overdrawn. Businesses usually have an arrangement with the bank whereby the bank will pay the extra money provided the business will pay them back in a fairly short period of time with interest. ...read more.

Middle

They're an asset to the business, so if the value of the building goes up, so does the value of the business. The disadvantages are if variable rate mortgage is taken out, if interest rates are high, so are repayments on the property. o Shares~ (see fig 1.1 for share process diagram) are an important source of finance for limited companies. A business selling new shares that entitle the shareholders to share in the control of the business. Each share gives the shareholder a vote on the direction of the company. The advantages to this method are the substantial amounts of cash that can be raised, can make directors and mangers work harder as they can be voted off the company. The disadvantages are only PLC's can issue shares to the public, some aspects of control are lost in this process and if the directors have a different idea to the shareholders in the direction the company should go in, it could lead to problems, particularly if shareholders own the bigger share in the organisation. o Venture Capital~ a group of people who join together and provide finance for new business that are just starting up. These individuals look for promising businesses and put investments into them. This is similar to share issuing. (See share for pro's and con's of method.) Section Two: Case Study I am advsing a small business called J.N Coolers that sells water dispensers with other benefits such as fruit juice compartments as to what sources in finace to use. The business is growing in size and needs to meet up with demands. I am going to look at the range of finance open to them, assess them and recommend a selected source explaining my reasoning for the choice. Small businesses (SMI's) can be defined as: o Companies not quoted on a stock exchange, o Owners are a few individuals, usually a family connection between the shareholders o The businesses is the only or main income for an individual The small businesses sector is vital in the UK economy. ...read more.

Conclusion

Cash is money current money the business has. So for example if Slookie get paid for an order by a customer that is cash that has come in, but this is not profit as with every order there is costs to be paid like rent, stock, staffing or paying creditors. Profit is however the money at the end of the financial year that is left taking away all expenses. The can be worked out by this simple equations: Income - Expenditure = Profit Below is an example of Abel Company Ltd balance sheet for 2001 showing the profit at the end of the financial year: Manager's decisions on taking on orders will differ depending on the current situation of the company. If for example, there is a profitable order, but the current cash flow of the organization is close to the red, the business may need to renegotiate the payment terms of the order or chase up debtors about payments. Question. When looking at this cash flow forecast, analyse whether the business should either: a) Ask Parker & Slate for monthly payments, one month after each delivery? b) Take out a short-term bank loan for the difference between the present overdraft and the required overdraft? Answer. It would be in the companies' best interests to a) Ask Parker & Slate for monthly payments, one month after each delivery looking at the current cash flow of the business it would make financial sense. Looking at the current cash flow, (see assignment sheet) Slookie would keep out of the red. The chart below shows the potential cash flow if payments are taken one month in advance as the business proposes in answer a: July August September October November Production �80.00 �80.00 �80.00 - - Cash In - �6,400.00 �6,400.00 �6,400.00 - Materials - �2,000.00 �2,000.00 �2,000.00 - Labour �1,600.00 �1,600.00 �1,600.00 - - Fixed Costs - - - �5,000.00 - Net Cash flow �1,600.00 �2,800.00 �2,800.00 �600.00 - Opening Balance �1,000.00 �600.00 �2,200.00 �5,000.00 �4,400.00 Closing Balance �600.00 �2,200.00 �5,000.00 �4,400.00 �4,400. ...read more.

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