Introduction to Finance Assignment Help

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Qualification - OTHM Level 4 Diploma In Business Management

Unit Name - Introduction to Finance

Unit Level - Level 4

Unit Reference Number - M/616/2722

Assignment Title - Introduction to Finance

Unit Number - Unit 06

Learning Outcome 1: Understand sources of finance available to a business.

Answer: A business can tap into various sources of finance, broadly categorized as internal and external. Internal sources primarily involve funds generated within the business itself, such as retained earnings (profits not distributed to shareholders but reinvested in the company) and sale of assets (disposing of underutilized or non-core assets to generate cash). External sources, on the other hand, involve obtaining funds from outside the business. These can be further divided into debt and equity finance. Debt finance includes loans from financial institutions (like banks, which offer short-term and long-term loans), debentures or bonds (debt instruments issued to the public), and trade credit (suppliers allowing a period of time to pay for goods or services). Equity finance involves raising capital by selling ownership stakes in the company. This includes issuing ordinary shares (giving voting rights and a share in profits), preference shares (offering fixed dividends but generally no voting rights), venture capital (funding from firms specializing in high-growth startups), and angel investors (wealthy individuals providing capital for startups, often in exchange for ownership equity). The choice of financing depends on factors such as the business's stage of development, its financial health, the cost of capital, and the desired level of control.

Learning Outcome 2: Understand finance as a resource within a business.

Answer: Finance acts as the vital resource that underpins all aspects of a business's operations and growth. It's not just about having money, but effectively managing monetary assets and liabilities to achieve strategic objectives. As a resource, finance enables a business to acquire essential assets like equipment and machinery, manage day-to-day expenses, pay employees and suppliers, and invest in future growth opportunities such as research and development, market expansion, or new product lines. Effective financial management ensures the optimal allocation of these resources, whether it's through budgeting, forecasting, or strategic investment decisions. It also plays a crucial role in mitigating risks, maintaining liquidity, enhancing financial stability, and improving a business's creditworthiness, all of which are vital for long-term sustainability and profitability in a competitive market. Without robust financial resources and astute financial management, a business would struggle to function, adapt, or expand.

Learning Outcome 3: Be able to make financial decisions based on financial information.

Answer: Making informed financial decisions is paramount for a business's success and relies heavily on the accurate analysis and interpretation of financial information. This involves scrutinizing key financial statements such as the balance sheet, income statement, and cash flow statement. The balance sheet provides a snapshot of assets, liabilities, and equity at a specific point in time, helping assess solvency and financial health. The income statement reveals profitability over a period by detailing revenues and expenses, while the cash flow statement tracks the movement of cash, indicating liquidity and operational efficiency. By analyzing these statements, often in conjunction with financial ratios (like liquidity ratios, profitability ratios, and solvency ratios), businesses can identify trends, benchmark performance against competitors, and pinpoint areas for improvement. This data-driven approach allows management to make strategic choices regarding investments (e.g., whether to purchase new equipment or expand into new markets), financing (e.g., whether to take on more debt or issue new equity), and dividend policies (e.g., how much profit to distribute to shareholders versus reinvesting). Ultimately, sound financial decisions, rooted in comprehensive financial information, enable businesses to optimize resource allocation, mitigate risks, maximize returns, and adapt effectively to changing economic conditions.

Learning Outcome 4: Be able to assess the financial performance of a business.

Answer: Assessing the financial performance of a business involves a comprehensive evaluation of its financial health, efficiency, and profitability over a specific period. This is primarily achieved by analyzing key financial statements - the income statement, balance sheet, and cash flow statement - and calculating various financial ratios. The income statement helps gauge profitability by examining revenues and expenses, leading to metrics like gross profit margin and net profit margin. The balance sheet provides insight into a company's assets, liabilities, and equity, allowing for the assessment of solvency and liquidity through ratios such as the current ratio, quick ratio, and debt-to-equity ratio. The cash flow statement tracks the movement of cash, revealing how effectively a business generates and uses cash from its operations, investments, and financing activities. Beyond individual ratios, it's crucial to analyze trends over multiple periods (trend analysis) and compare the business's performance against industry benchmarks and competitors (benchmarking). Furthermore, qualitative factors like management quality, market conditions, and competitive advantages also play a vital role in providing a holistic view of financial performance. By integrating these quantitative and qualitative insights, stakeholders can gain a clear understanding of a business's past performance, current standing, and future prospects.

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Case Scenario

Assessment Task 1 - Discussion with a friend

Scenario

A friend of yours is eager to start his business (a Florist). Your friend has saved £10,000 but knows that a minimum of £30,000 is needed to start the business.

Instructions

You are to give advice to your friend regarding possible financial sources to raise the remaining £20,000.00 and explain what consequences will each option bring in terms of control and in terms of financial cost as well as the effect on the balance sheet, ultimately recommending one or 2 methods.

You should also explain to your friend that in order to obtain the necessary funds, the stakeholder (e.g. bank, investors, etc.) will need some information before releasing the fund, and explain to your friend what each stakeholder will need. Discuss also the importance of financial planning to ensure that the funds are properly utilise in the business.

You should make a table/notes for your friend to understand the options better.

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Assessment Task 2: Decision Making Exercise

Scenario
Mr. Neil Down owner of WoodyTrain, a toy store specialising in handcraft wooden train toys. Mr Neil wants to raise £20,000 by getting a new partner. He has prepared an income statement put together with his last budget to your attention as you expressed interest in being Mr. Down's partner.

Instructions

1. What poor decision(s) did Mr Down take?

2. Which line(s) should be changed for the following budget?

3. Knowing that the selling price of 1 train set is £15, what was the unit cost per train set

4. Given that Melissa and Doug makes a gross profit of £12.40 and a net profit of £1.20 per unit sold, what do you make of Mr. Down's results?

5. Knowing that it was Mr. Down's second year in business and that he started with a capital of £20,000 and made a Revenue of £212,460.00 and a loss of £5,870.45 on his first year, would you invest? Why/Why not?

6. What other financial statements would you need to see before making a decision? What would these documents tell you?

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