Understanding the Implications of Finance as a Resource Within a Business - Assignment Example

? understanding the implications of finance as a resource within a businessContents Analysis of the cost of different sources of finance 3 Explanation of the importance of financial planning 4 Assessment of the information needs of different decision makers 5 Explanations of the impact of financial statements 7 Reference 9 Analysis of the cost of different sources of finance Different types of business can hook up to different sources of finance. In order to initiate a business the primary requisite is to make adequate arrangements of finance. Individuals launch on to the banks for loan requests to initiate a business. Bank loan is long term loan and it is usually provided for starting a new venture. The banks and the individuals willing to start the start will move in a contract where the individuals agree to pay installments on monthly basis. The bank will also charge interests for the loan amount. The source of finance with the usual payment period of more than 15 years is regarded as the long term loan. This kind of loan is generally required for the expansion processes or buying a fixed asset. This kind of loan can be achieved from financial intermediaries. A fixed interest rate generally higher than the interest rate on bank loan is accrued in this type of loan. It is required to pay monthly instalments as well as the fixed interest rate. Another source of finance is the short term loan. This type of loan comprises of loan for short periods usually within 5 years. The financial intermediaries have the ability to provide such kind of loans and the contract requires the one taking the loan to pay the principle along with the agreed interest within the specific time period. Banks provides overdrafts and charge for its services (Hennessy and Whited, 2007, p. 1). The bank of England sets the rate of interest at which it provides loan to the financial institutions. The interest rate has the potential to affect the interest rates of the commercial banks, the prices of the financial assets and the rate of exchange which can affect the consumer as well as the business demand. Another mode of raising finance is retained earnings. The retained earnings can be increased by generating increased sales which will shed its impact on the profit level and can also be reinvested into the operations of the business (Food and Agriculture organization of the United Nations, n.d.). Explanation of the importance of financial planning Financial planning can be studied from both, individual point of view or from the point of view of a company. From the point of view of the individual, financial planning can be thought of as an integrated approach to ensure the well being of the individual under consideration (Diatax, n.d.). The importance of financial planning lies in the success of a business. For a company, financial plan refers to primarily to three financial statements i.e. balance sheet, income statement as well as the cash flow statement. The financial plan is created with the plan of the business and it can also refer to the projected income or expenditure for a division of a company or the company itself. The decision regarding the processes of cash flow and the estimation of total cash requirements is also taken into account in the financial plan. Financial planning acts as the backbone of a business and if any company operates without any financial planning it is likely to end up in financial distress or financial grip. If the company runs of the roadmap of solid financial foundation it is assumed that the organization will be able to provide a good act in the realm of payable accounts. The financial planning is helpful for the financial analysts to withstand the harder times and take advantage of the good times. A good and proper financial planning paves the way for the company when to deal with the outstanding debt as well as the rise in the operating costs. Every company should have a planned financial plan in order to anticipate the conditions of the future. The financial planning procedure helps a company to estimate or predict the upcoming period. Without the process of estimation it will not be able to possible for the company to judge whether the company is on the right path. Management of cash is an important tool for any organization to sustain. By the process of financial planning a company can translates its resources for the dry periods from the periods when resources were plentiful. The financial planning advices the owner to identify the expenditures that will bring about immediate improvements in productivity and enhance the efficiency of the market (Cooper and Worsham, n.d. p. 4). Assessment of the information needs of different decision makers The planning process can be analysed from the point of view of the owner of the business. The information needs for the decision makers has much value than simple estimation of the value of the business and the purchases of the life insurances that cover the due transfer taxes. The decision makers can be inclined to assess whether the time calls for restructuring of the business model that will take care of the ever rising competition and provide the considered organization a strong foothold. The decision makers may analyse the liquidity needs of the organization but such an analysis requires two initial considered to get addressed. The first one is repackaging and the second is redeployment. Repackaging procedure takes into consideration whether the ownership of the business must be restructured in order to facilitate an efficient tax transfer. Redeployment means whether the transfer technique undertaken is the appropriate one. The complex nature of the needs allows the different dimensions to be listed below. Urgency- Some emergency situation can arise in a business which requires quick yet well grounded decisions that will deal with the changing environment. The other is the non emergency situations that take into account the acquisition as well as strategic foresights. Coverage- Some situations may creep up with affects the entire organization. The decisions of the concerned authorities will cover the entire organization acting as the shield against the narrow but complicated problem. Required precision- A rough estimate of the situation is in some cases sufficient to assess the impacts. But in the rest of the cases the exact or the near-exact estimations are required. In order to estimate roughly decision makers take the help of the quick fix models. The quality of the information source and the reliability is considered in the accurate estimations. This dimension is somewhat related with the urgency dimension as that dimension also calls for quick and rough estimates rather than the time consuming exact estimates. Heterogeneity- The needs that are highly heterogenous requires mechanisms of information integration for source heterogeneity. For the procedure integration, transparent environments are required, for the input integration, convenient channels of communication are required. This dimension is correlated with the coverage dimension as some of the problems require the use of many sources of information, participants and procedures. Structuredness- The nature of the complex information needs is to be on the unstructured side but some of the problems can be more structured relative to others. The set of procedures is known beforehand in the area of mergers and acquisitions. An innovative business model that has been launched is considered as less structured. Associated Risks- The associated risk can be defined as the possible losses if the evaluation of the business prospects is incorrectly assessed. The situations associated with high risks require the utilities of procedures of risk estimation as well as the estimations of the different scenarios. In order to increase the reliability of the results, the results can be cross checked from multiple sources. The known and the needs of permanent nature are known as the common needs. The procedures of satisfaction are clear as well as programmed. A specific situation can give rise to special needs. Such needs require extra attention as well as structured analysis (Skyrius and Bujauskas, 2010, p. 4). Explanations of the impact of financial statements The formal record of the activities related to finance of a business or other entity is regarded as financial statement. Businesses are often involved in publishing the financial statements such as balance sheet, income statement as well as the statement of cash flows. The financial statements can shed its effects on the price of stocks. The financial statements are taken in consideration in the investment decision processes. If the financial statement presents situations that are better or worse than the anticipated performance, the price of the stocks can fluctuate accordingly. Decision makers compare the financial ratios to make the assumptions. Financial statements can also have its effects on how easily a business can attract financing. The financial statement is important if the company takes the initiative to attract loans. The lender will take the financial statements in consideration. Good financial numbers are important for a company to attract finance. The financial statements also have the capability to attract new investments. The company will distribute the financial statements among the investors while issuing new shares. The decision is then laid upon the potential investors if they are willing to invest in the organization by studying the financial statement. If the financial statement does not show flattering numbers, investors can move out by not investing in the aforesaid organization. The financial statements also have the potential to affect the other business. The whole industry can get affected if the leading company releases the financial statements. Again misleading financial numbers can shed negative outlook about the industry as a whole. The stock prices will go down for the other companies operating in the same industry (National institute of open Schooling, n.d. p. 1). Reference Food and Agriculture organization of the United Nations, n.d., Sources of finance. [online]. Available at: http://www.fao.org/docrep/W4343E/w4343e08.htm. [Accessed:11th May, 2012]. Daitax, n.d. The Importance of Financial Planning. [pdf]. Available at: http://www.dialtax.ca/pdf/the-importance-of-financial-planning.pdf. [Accessed:11th May, 2012]. Skyrius, R. and Bujauskas, V. 2010. A Study on Complex Information Needs in Business Activities. [pdf]. Available at: http://www.inform.nu/Articles/Vol13/ISJv13p001-013Skyrius550.pdf. [Accessed:14th May, 2012]. Cooper, R. and Worsham, C. n.d. The Financial Planning Process. [pdf]. Available at: http://www.theamericancollege.edu/assets/pdfs/fa262-class1.pdf. [Accessed:14th May, 2012]. Hennessy, C, and Whited, T. 2007. How Costly Is External Financing? Evidence from a Structural Estimation. [pdf]. Available at: http://faculty.london.edu/chennessy/assets/documents/STRUCTUREJF.pdf. [Accessed:14th May, 2012]. National Institute of open schooling, n.d. FINANCIAL STATEMENTS-II. [pdf]. Available at: http://www.nos.org/srsec320newe/320el15.pdf. [Accessed:14th May, 2012]. Read More