Understanding the sources of finance available to a business

You will need to:

• identify the sources of finance available to a business

Focusing on “sources” you need to discuss internal sources, such as from revenue/sales income or selling off assets, and external sources such as loans from banks, development grants (eg from the EU), selling shares in the company, and in the case of a public sector organisation, allocated budget from government and the collection of local taxes.

• assess the implications of the different sources

There will be negative or positive implications for each of the above – for example if assets are sold the overall value of the organisation is diminished, and if loans are arranged then repayments must be made, and with certain sources of funds the “lender” will demand some influence over the organisation’s decisions.

• evaluate appropriate sources of finance for a business project

Select a project that is typical for your own organisation, or sector, or select a project which interests you. Then identify, and discuss the merits of, sources of funds appropriate for that project.

Section 2

Understanding the implications of finance as a resource within a business

You will need to:

• analyse the costs of different sources of finance

You will need to research this for each of the identified sources, but as a guide, there will be financial costs on some sources – mainly interest added to the amount, and constraints on pay- back timescales (a “pressure” cost). On others there will be the “cost” of loss of control – as would be the case with some loans, grants, and share issues.

• explain the importance of financial planning

In essence, without financial planning there is no way of being certain that the organisation can fund its own activities. You will need to give more detail on how this is done.

• assess the information needs of different decision makers

In the context of Managing Finance, you need to identify the decision makers inside an organisation eg managers and specialists operating at different levels, and external decision makers such as shareholders, funding organisations, the government – and discuss the differences in the amount and quality of (financial/accounting) information they need.

• explain the impact of finance on the financial statements

Here you need to describe how the influx of funds – eg loans, grants, share issue income, retained profits – can influence the appearance of the profit and loss account and the balance sheet, and you should also briefly mention how organisations must be transparent about this.

Section 3

Making financial decisions based on financial information. You will need to use an example either from your present employer, or you can use the published financial statements of companies such as British Airways, which are published on the internet.

You will need to:

• analyse budgets and make appropriate decisions

You will need to analyse a budget period of at least 6 months, and comment on the performance, the behaviour, over that period, and give your views on what action should have / could have been taken.

• explain the calculation of unit costs and make pricing decisions using relevant information
Unit costs are calculated in a similar way in most business sectors, as are pricing decisions – you will need to give the formula and explain the link between Unit Cost and Selling Price, and the importance of information on Fixed Costs, Variable Costs, and Break-Even Point.

• assess the viability of a project using investment appraisal techniques

From the finance point of view, projects need to be assessed for viability, to ensure that the project is properly funded and that it will be profitable. You need to (briefly) describe techniques such as NPV, DFC, Rate of Return, and IRR – and give a simple example of one of these being used.

*www.businesslink.gov.uk – Finance and Grants pages are an excellent source of information for this

Section 4

Evaluate the financial performance of a business. You will need to use an example either from your present employer, or you can use the published financial statements of companies such as British Airways, which are published on the internet.

You will need to:

• discuss the main financial statements

These are the annual accounts – the Profit and Loss Account (in some sectors knows as the Operating Statement, or Statement of Income and Expenditure) and the Balance Sheet – you need to explain what they contain, their purpose and importance, and who makes use of them.
• compare appropriate formats of financial statements for different types of business

Here you need to describe and compare the formats (structure, content, detail) of the main statements for different businesses – eg Self-employed, Partnership, Limited Company, Public Limited Company, Charity, Local Authority, State Owned.

• interpret financial statements using appropriate ratios and comparisons, both internal and
external

You will need to analyse at least 3 continuous years of the Profit and Loss Account and Balance Sheet (or equivalents) of your own organisation or an organisation that you can research (BA can be used, or a different organisation but only with your Tutor’s approval) – to identify a range of ratios and trends, and then to comment on those.

Comparison Ratios – such as Gross Profit to Sales of 1.25:1 – Net Profit to Sales 0.25:1
Trend Ratios such as the ratio of Net Profit to Sales, over each of a series of years (3 years is universally accepted as the minimum needed to identify a trend

Internal ratios are literally that – ratios comparing figures related to the organisation’s own
accounts only.

External ratios are either comparisons between that organisation and a different one – eg BA with Virgin Air – or compared with industry standards (most industries have “standard” ratios which are considered to be “safe” ones to aim for/achieve).