Financial Management

CONTENTS
Introduction......................................................................................................................................3

1.1. Financial Sources to Set up a new company............................................................................3

 Short Term Finance..............................................................................................................3

 Long Term Finance...............................................................................................................4

1.2. Sources of Finance to Run a New Business............................................................................4

2.1. Sources of Financial Guidance for Business Enterprises.......................................................5

3.1. A 12-month Cash Flow Forecast for Cash Management.......................................................7

4.1. Purpose of Budget for a New Business....................................................................................8

4.2. Compatible Budgets Plan.........................................................................................................9

5.1. Balance Sheet..........................................................................................................................10

5.2. Income Statement...................................................................................................................11

Conclusion.....................................................................................................................................12

References......................................................................................................................................13

INTRODUCTION
Financial management is helpful for both the business owners and managers. Their management
decisions result in achieving profits, managing cash flow and putting impact on the financial
condition of the company (Andersson, Manfredsson and Lantz, 2015). Business owners must
control and evaluate the day to day activities of the business. Reports of its operations are the
most crucial element of a business. Shareholders of the business must be provided with the
updated information about the return and security of their investments.

1.1. FINANCIAL SOURCES TO SET UP A NEW COMPANY

financial sources are the most important supporting element for a growing business. Year-long
operations can be done easily if the cash are properly managed at the beginning of the financial
year. So, sources of finance play a vital role segmenting into two parts:

 Short Term Finance

i. Grants:
A fixed amount of money that is received through different channels from the
government or NGOs. It is such kind of money that a firm does not need to pay
back.

ii. Loans:
Short term loans can be sanctioned from different financial organizations or
banks. Usually, these types of loans are based on certain condition that need to
maintain some rules (Brogan, 2015). Like other loans, the lender institution takes
the risk of the firm’s money repayment within the time and with proper interest.

iii. Savings:
Savings are the starting fuel for every business. Owner equity depends on how
much the owners have contributed and how much the shareholders have bought.
Savings support the whole company to start its operating activities while no loans
or grants have been received.

 Long Term Finance

i. Investors:
 Investors put their money into potential business to earn interest or dividend from
the business. Investment also supports the whole business to run properly if there
is any lacking in the operation costing.

ii. Shareholders:
Without owner’s equity the rest of the most funds are collected from selling the
shares of the particular organization. Shareholders are the partial owners of the
company. They share profit as well as losses.

iii. Loans:
Long-term loans help to grow small businesses from the very little state. Small
business owners can repay the long-term loans in a small portion every month that
puts less burden on their shoulder to carry.

iv. Venture Capital:

Venture capital is a form of private equity and a type of financing that investors
provide to start-up companies and small businesses that are believed to have long-
term growth potential. Venture capital generally comes from well-off investors,
investment banks and any other financial institutions.

1.2. SOURCES OF FINANCE TO RUN A NEW BUSINESS

 Bank Overdraft
An overdraft is an extension of credit from a lending institution that is granted when an
account reaches zero. The overdraft allows the account holder to continue withdrawing
money even when the account has no funds in it or has insufficient funds to cover the
amount of the withdrawal.
 Loans
Loans are the most common source of liquid cash that helps a firm to run smoothly
without any hindrance that reduces the growth rate of a certain company. Loans are
 repaid with the advancement of the business in the following months creating more ease
for the business owners.

 Trade Credits
A trade credit is an agreement or understanding between agents engaged in business with
each other that allows the exchange of goods and services without any immediate
exchange of money. When the seller of goods or service allows the buyer to pay for the
goods or service at a later date, the seller is said to extend credit to the buyer (Andersson,
Manfredsson and Lantz, 2015).
 Factoring
Factoring is a form of financing that helps companies with cash flow problems due to
slow-paying clients. It allows the business to finance invoices, which improves the
company’s working capital.

 Leasing
Property lease helps to build the structure if the company. A land where the business will
be operated is leased from other corporations to operate the business in a more tangible
way.

2.1. SOURCES OF FINANCIAL GUIDANCE FOR BUSINESS ENTERPRISES

 Enterprise Agencies
Enterprise agencies, set up by local companies, local authorities and others interested in
developing the economic life of the community, have taken a major role in advising and
guiding individuals who are starting their own small businesses (Collopy, 2012).
Enterprise agencies illustrate the growing importance of the concentration of effort within
a community based upon local resources.

 Trade Unions
The purpose of these unions is to look into the grievances of wagers and present a
collective voice in front of the management. Hence, it acts as the medium of
 communication between the workers and management (Brogan, 2015). Regulation of
relations, settlement of grievances, raising new demands on behalf of workers, collective
bargaining and negotiations are the other key principle functions that these trade unions
perform.

 Government & Local Council Websites

government put different rules and regulation into the website that the firms need to
maintain in case of pursuing business legally. Local council offices can be a good source
of hard copy of the regulation that should be abided by.

 HMRC
HMRC stands for Her Majesty's Revenue and Customs. HMRC is responsible for the
collection of taxes.

 Banks

A bank is a financial institution licensed to receive deposits and make loans. Banks may
also provide financial services, such as wealth management, currency exchange, and safe
deposit boxes.

3.1. A 12-MONTH CASH FLOW FORECAST FOR CASH MANAGEMENT

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Total
Opening 0 41,300 29,900 21,800 13,100 10,500 11,000 10,000 15,100 21,200 27,800 40,100
Balance

CASH
INFLOW
Sales 10000 15000 18000 20500 23000 26000 29000 31500 33000 37000 39000 45000 327000
Business 60000 0 0 0 0 0 0 0 0 0 0 0 60000
Loan
Total Inflows 70000 15000 18000 20500 23000 26000 29000 31500 33000 37000 39000 45000 387000

CASH
OUTFLOW
Rent 2900 2900 2900 2900 2900 2900 2900 2900 2900 2900 2900 2900 34800
Salaries 16250 16250 16250 16250 16250 16250 16250 16250 16250 16250 16250 16250 195000
Marketing 2250 2250 2250 2250 2250 2250 2250 2250 2250 2250 2250 2250 27000
Loan 0 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 22000
Repayment
Equipment 4000 0 0 4000 0 0 4000 0 0 4000 0 0 16000
Other 3300 3000 2700 1800 2200 2100 2600 3000 3500 3000 3300 3800 34300
Outgoings
Total 28700 26400 26100 29200 25600 25500 30000 26400 26900 30400 26700 27200 329100
Outflows

NET CASH 41300 -11400 -8100 -8700 -2600 500 -1000 5100 6100 6600 12300 17800 57900
FLOW

Closing 41300 29,900 21,800 13,100 10,500 11,000 10,000 15,100 21,200 27,800 40,100 57,90
Balance 0
(Here all financial data is presented in Pounds)

Table 1: Cash flow forecast Source: Author

Here it can be seen that cash inflows indicating the business loan the company received to
operate and grow. After one financial year, the company seems to have a net positive cash flow
of 57900 Pounds. It indicates the company’s well-maintained operations and budgets.

4.1. PURPOSE OF BUDGET FOR A NEW BUSINESS

 Forecasting
 Forecasting is a technique that uses historical data as inputs to make informed estimates
that are predictive in determining the direction of future trends.

 Resource Allocation
Resource allocation or resource management is the scheduling of activities and the
resources required by those activities while taking into consideration both the resource
availability and the project time.
 Motivation
Motivation helps to increase the employee output in an organization. It boosts the
eagerness of doing jobs more sincerely in an employee (Statisticalforecasting.com, 2020).
The more employees co-operate, the more smoothly the business will grow.

 Communication
Budgets help to maintain the communication with the suppliers throughout the whole
year. It creates more transparency among the owners and shareholders of the company.
proper communication increases the company’s goodwill of providing quality service or
product.

 Conflict Resolution

Conflict resolution can be defined as the informal or formal process that two or more
parties use to find a peaceful solution to their dispute. A number of common cognitive
and emotional traps, many of them unconscious, can exacerbate conflict and contribute to
the need for conflict resolution (Andersson, Manfredsson and Lantz, 2015).

 Target Setting
Budgets help to forecast the future growth and helps to prepare the firms actions
according to that. Firms vision achievement becomes such easier with the help of setting
new goal with the help of the proper budget plan. If the target is prepared according to the
budget, no excess expenses will occur and the most net income can be attained.

 Financial Control
 Financial control may be construed as the analysis of a company's actual results,
approached from different perspectives at different times, compared to its short, medium
and long-term objectives and business plans (Budget issues, 2011).

4.2. COMPATIBLE BUDGETS PLAN

 Staffing
The company will spend an average of 16,250 Pounds per month on the staffs and
employees. Salary payment in due time is one of the most important liabilities that a
company should pay off.

 Marketing
The company will perform different ATL, BTL, Campaigns, Cash Rebates etc. which
might cost a total of 27,000 Pounds throughout the year. These marketing activities will
bring the company in the limelight and increase its sales.

 Stock
Stocks for the shareholders can be issued if the company need more investment or liquid
money. This stock selling money will create less ownership but a large amount of
investment money.

 Office Supplies & Overheads

Equipment and other costings should be maintained within 34,300 Pounds for the whole
financial year to take all necessary actions.
5.1. BALANCE SHEET
(Here all financial data is presented in Pounds)

Assets  
Current Assets  
Cash 60,000
Sales 327,000
Inventory 57,900
Prepaid expenses 34,800

Total current assets $ 479,700

Fixed (Long-Term) Assets  
Long-term investments -
Property, plant, and equipment 16,000
(Less accumulated depreciation) (2,200)
Intangible assets
Total fixed assets $ 13,800
Other Assets  
Deferred income tax
Other
Total Other Assets $ -

Total Assets $ 493,500

Liabilities and Owner's Equity  

Current Liabilities  
Accounts payable
Short-term loans -
Income taxes payable 3,145
Accrued salaries and wages 195,000
Unearned revenue
Current portion of long-term debt 2,000
Total current liabilities $ 200,145
Long-Term Liabilities  
Long-term debt 38,000
Deferred income tax
Other 61,300
Total long-term liabilities $ 99,300
Owner's Equity  
Owner's investment -
Retained earnings 57,900
Other
Total owner's equity $ 57,900

Total Liabilities and Owner's Equity $ 357,345

 Common Financial Ratios  
Debt Ratio (Total Liabilities / Total Assets) 0.61
Current Ratio (Current Assets / Current Liabilities) 2.40
Working Capital (Current Assets - Current Liabilities) 279,555
Assets-to-Equity Ratio (Total Assets / Owner's Equity) 8.52
Debt-to-Equity Ratio (Total Liabilities / Owner's Equity) 5.17

Table 2: Balance Sheet, Source: Author

From the balance sheet, the current condition of the whole business can be easily seen. The
financial ratios indicate the performance of the whole financial year.

5.2. INCOME STATEMENT

Revenue  
Sales revenue 327,000
 
 
Total Revenues 327,000

Expenses  
Advertising 27,000
Bad debt  
Commissions  
Cost of goods sold  
Employee benefits  
Furniture and equipment  
Insurance  
Interest expense  
Rent 34,800
Research and development  
Salaries and wages 195,000
Other 34,300
  291,100

Net Income Before Taxes 35,900

Income tax expense  

  35,900

Total Expenses  
 Income from discontinued operations  
Effect of accounting changes  
Extraordinary items  

Income from Continuing Operations 35,900

Table 3: Income Statement, Source: Author

In the above table, the expenses that have been spent throughout the whole year is illustrated. It
shows the total net income derived from the business that will be used to pay the dividends to its
shareholders or owners.

CONCLUSION
If a business is about to start in a new place, the above-mentioned criteria of financial sources
and the sample financial budget forecast can have positive impact on the starting and growing
the new business.
REFERENCES
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