(GC01313)

Table of Contents

Introduction.

Task 1.

1.1        Sources of finance available to Softwood Ltd. to finance their expansion plan.

1.2        Assess the implications of the sources of finance identified above on the company.

1.3 Evaluate and recommend the most appropriate sources of finance for Softwood Ltd to raise finance for the expansion.

Task 2.

2.1 Analyze the costs of different sources of finance.

2.2. Importance of financial planning to Softwood Ltd.

2.3 Required information for decision-makers of Softwood Ltd.

2.4 Impact of financial sources on financial statements.

2.4.1 Impact of internal sources of finance on financial statement

2.4.2 Impact of external sources of finance on financial statement

3.1 Cash Budget from January 2015 to September 2015.

3.2 Cost of producing chair and suggested pricing strategy for Softwood Ltd.

3.3 Pricing Strategy.

3.4 Methods used/applied to evaluate the two suppliers.

Accounting rate of return (ARR)

Payback Period.

Net Present Value.

3.4 Recommendation to choose one to invest in.

Task 4.

4.1. Discuss the main financial statements of a company highlighting their structures, key components, and significances.

Balance Sheet

Income Statement

Retained Earnings.

Cash Flow.

4.2. Explain how financial statements differ in different types of businesses.

4.3. Analyze the financial performance of Softwood Ltd. for the year 2013.

Conclusion.

Bibliography.

Introduction

According to Atrill et al (2011), financial analysis is an important issue for an organization like Softwood ltd. This study conducts a report on financial analysis for Softwood Ltd.

The first section of the report includes various sources of finances, their importance to Softwood ltd, their possible costs and implication and impact on financial statements.  Cash and preparing a cash budget is the lifeblood in the issue of any business success. The second section of the report includes preparation of cash budget and forecasting from the given income statement forecast for Softwood Ltd. This section also applies some useful project appraisal methods to evaluate two given projects in order to select the best one to invest in. This part also elaborates shortcomings of the project appraisal methods with the probable recommended one and the rationale behind it. The third section of this report includes a ratio analysis on two years financial data of Softwood Ltd.

Task 1

1.1  Sources of finance available to Softwood Ltd. to finance their expansion plan

There are various sources of finance available found in the scenario of Softwood Ltd. These sources include bank loans, finance leases, hire-purchase agreements, etc. In addition, as MD is aware of other internal and external sources of finances available, the internal source of finance may include reduced inventories levels, delayed payment to trade payables, tighter credit control and retained profits, etc and the external source of finance may include ordinary share, preference shares, borrowing, securitization of assets, bank overdrafts, debt factoring, invoice discounting, etc.

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According to Atrill et al (2011), a term loan is a type of borrowing offered by banks and other financial institutions, which is usually tailored to the needs of the client business. A bank overdraft is used by the company to maintain the negative balance of bank accounts. Debt factoring is one kind of service from a financial institution know as a factor where debt factoring includes the factors which are taken over the business debt collection. Invoice discounting is the trade receivable which involves factor or financial institution which provide loan according to the percentage of the face value of the business’s credit sales outstanding.  Hire purchase is one kind of credit used to buy an asset where consumers pay by installments over an agreed period.

Retained earnings are the amount of profit which is not distributed among the shareholder is known as retained earnings. Retained earnings are used for another investment purpose. Ownership capital is capital that is collected from the investor in the market. It is collected on the basis of preference share, right share and ordinary share (Berkley, 2008). A company can expand its business by taking financial leases from leasing companies on the basis of financial, lease, and operational lease in the market (Berkley, 2008). According to Finnegan (2012), a company can gain certain capital by providing debenture on the basis of interest.

1.2 Assess the implications of the sources of finance identified above on the company

As Atrill et al (2011) note, the business may attempt to match the kind of borrowing with the nature of the assets held. In consequence, long-term borrowing might provide the finance for assets that form the permanent operating base of the business. Short-term borrowing can be helpful for postponing a commitment to take long-term borrowing. Short term borrowings have to be renewed more frequently than long-term borrowing. It will create problems when the business is in financial difficulties or in shortage of funds. Long-term borrowing may be risky because of high interest in comparison with short-term borrowing. However, other costs like arrangement fees, renewed fees for frequent borrowings should be taken into account. According to the scenario, for a bank loan, MD should be concerned about leaflet outline heading for various information of reliable forecast, where reliable and user friendly financial planning software could be used to save time and money.

According to Pander (2009), a company has to pay for its finance but is less in the case of retained earnings. According to Khan (2010), finance which is taking by issuing some bonds and debenture in the market increase the leverage ratios of a company. If a company has much leverage, it may have to face risk in the market.  When a company collects its resources or fund by providing share in the market, it controls becomes weaker but when a company collects its resources or funds by providing the debenture or bonds in the market it controlling power does get weaken in the market (Khan, 2010). Only the sources of debt capital result in financial risk to the company. If a company uses debt capital excessively the company may run into the financial distress risk that the risk of being bankrupt. Therefore, a company should not use debt capital excessively (Berkley, 2008)……

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