Financial Management Sources Funds London Woods

Assignment
Financial Management
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Table of Contents
INTRODUCTION .......................................................................................................................... 3
TASK 1:.......................................................................................................................................... 3
1.1: Sources of finance available to London Woods Ltd............................................................ 3
1.2: Impact of different sources of finance on London Woods Ltd............................................ 3
1.3: Appropriateness of different sources of finance for London Woods Ltd............................ 4
TASK 2........................................................................................................................................... 4
2.1: Cost associate with different sources and its impact on London Woods Ltd. ..................... 4
2.2: Importance of financial planning for London Woods Ltd................................................... 4
TASK 4........................................................................................................................................... 7
4.1: Financial Statements of the company.................................................................................. 7
4.2: Financial statement of a company and a sole trader ............................................................ 7
4.3: Ratio calculation .................................................................................................................. 7
CONCLUSION............................................................................................................................... 8
REFERENCES ............................................................................................................................... 9
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List of Tables
Table 1: PV of Machine A.............................................................................................................. 5
Table 2: PV of Machine B .............................................................................................................. 5

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INTRODUCTION
The existing business environment is very turbulent so corporate houses find it very
difficult in managing their financial statement. In such scenario, financial management plays
significant role for the companies for managing and organizing their financial data and
statements. In the following study different financial tools and techniques will be applied on the
London Woods company to analyze its financial performance which will help it in decision
making (Tektas, Gunay and Gunay, 2005).
TASK 1:
1.1: Sources of finance available to London Woods Ltd.
Different sources available to London Woods are:
The company can approach any bank for raising funds. Secondly, it can apply for
overdraft facility. Apart from bank, it can generate cash by issuing shares through stakeholder in
the market. Another source of funds is retained earnings. Trade creditors can also be a good
source of raising funds. Finally, the firm can generate funds through friends and family and angel
investors (Fairchild, 2002).
1.2: Impact of different sources of finance on London Woods Ltd.
Different sources of finances impacts any business in different ways. Suppose London
Woods Ltd. takes bank loan, it will be beneficial for the company as it is most safe and secure
source of raising funds, and in addition, cost of raising fund is also not very high as banks
charges nominal rate of interest. Moreover, the firm can take advantage of bank’s overdraft
facility. Apart from bank loan, retained earning can also proved to be a good source, as firm do
not have pay any kind of cost for this fund and it can be utilized at the time of emergency.
On the other hand, if organization goes for trade credit, it can tarnish the reputation of the
company as its suppliers and creditors will fell that the company is not having enough funds to
meet its short term obligations. But it has advantage also, it delays the repayment time. Finally,
although funds from friends and family do not carry any interest charges, but can affect the
relations if payments are not made on time (Carey, 2001).

1.3: Appropriateness of different sources of finance for London Woods Ltd.
Before raising finance from any source, the company must evaluate all the options
available to it. In case of London Woods Ltd, hire purchase can be the best option as; initially it
does not have to pay big sum. In this, the user can use the machine by paying regular small
installments to the owner of the machine. Once the contract period is over, the user can either
return the machine back to the owner or he can purchase it at discounted cost. To secure the
rights of both the side, a financial house is involved as mediator.
Apart from hire purchase, company can also go for lease agreement. Under this type of
agreement, the lessee, that is, the user can use the machine or other asset for a decided period by
paying regular installments against the use of the asset. In such agreement, ownership is not
transferred to the user; it remains with the owner only. Once the contract period is expired, user
has to return the asset back to the owner. The company can consider the above two methods
(Hussain and Gunasekaran, 2002).
TASK 2
2.1: Cost associate with different sources and its impact on London Woods Ltd.
Different kind of cost is associated with different sources of finance. If London Woods
Ltd. goes for bank loan, interest cost is associated with it. Whereas, if the company opts for hire
purchase or leasing, it will have to pay installments. On the other hand, if it issues shares in the
market, it will have to distribute dividends to its shareholders. Finally, for installation of the
machine also, it will have to pay some cost, it may be either fixed or variable (Squire and
Snyman, 2004).
2.2: Importance of financial planning for London Woods Ltd.
Financial planning is very important for all the business as it helps the company to
identify how much capital will be required by the firm to meet out the operational and other
expenses. By using financial planning tools and techniques London Woods Ltd. can take
decisions regarding deployment of funds and can also make investment decisions. Further, this
will help the organization to determine its short term and long term requirements of funds.
Moreover, the firm can come up with appropriate capital structure. The organization can manage
its cash flows by implementing some financial planning so as to make sure the company is

= ℎ 5
= ℎ
The cost of capital in the study is given between 10 – 12%. Let’s assume it to be 12%.
Table 1: PV of Machine A
Year Cash flows (000) £ PV factor @ 12% PV
1 800
800
800
400
100
0.893
0.797
0.712
0.636
0.567
7144000
6376000
5696000
2544000
567000
22,327,000
2
3
4
5
Total
NPV = = 22327000-2000000
= £ 20,327,000
As NPV is coming positive, company can put money on machine A.
Table 2: PV of Machine B
Year Cash Flow £ PV factor at 12% PV
1 5000000
5000000
5000000
5000000
1000000
0.893
0.797
0.712
0.636
0.567
4465000
3985000
3560000
3180000
567000
15,757,000
2
3
4
5
Total
NPV = 15757000-2000000
= £13,757,000
As NPV of this is also coming positive, company can purchase machine B also.

TASK 4
4.1: Financial Statements of the company
There are three main kind of financial statement for any company. These are cash flow,
income statement and balance sheet. Cash flow shows the flow of cash, both inwards and
outwards. Income statement shows the net profit or loss made by the company. It has two
elements; income and expenses. Finally balance sheet is very important statement and tells about
the company’s financial position. All the assets and liabilities are shown in the balance sheet
(Shim and Siegel, 2008).
4.2: Financial statement of a company and a sole trader
Company is formed when there are at least two or more person, whereas, sole trader is
the business owned and controlled by a single person. In company, all liabilities of the business
are on the name of company, whereas for sole trader, all the liabilities are owned by single
person. It is must for all the companies to follow GAAP for preparing financial sheet as it is used
by many person, on the other hand, the case is not same for the sole trader (Brigham and
Ehrhardt, 2011).
4.3: Ratio calculation
Net profit margin:
=
37
= 7.4%
499
It tells how much profit a company is making by spending a unit of money
Current Ratio:
=
154
= 79 = 1.94

CONCLUSION
After working on the above case, it can be concluded that it is very important for London
Woods Ltd. to have good knowledge of market and its customer and further it can manage its
funds properly by using financial management techniques.

REFERENCES
th
Brigham, E. F. and Ehrhardt, M. C. 2011. Financial Management: Theory and Practice. 13 ed.
Cengage Learning.
Carey, A. 2001. Effective risk management in financial institutions: the turnbull approach.
Balance Sheet. 9(3). pp.24-27.
Fairchild, R. 2002. Financial risk management: is it a value-adding activity?. Balance Sheet.
10(4). pp.22-25.
Flynn, D. K. Uliana, E. and Wordmald, M. 2012. Financial Management. 6th
ed. Juta and
Company Ltd.
Hussain, M. M. and Gunasekaran, A. 2002. Non-financial management accounting measures in
Finnish financial institutions. European Business Review. 14(3). pp.210-229.
Jonathan, B. 2010. Financial Management. Pearson Education India.
Shim, J. K. and Siegel, J. G. 2008. Financial Management. 3 ed. Barron's Educational Series.
rd
Squire, M. M. and Snyman, R. 2004. Knowledge management in three financial organisations: a
case study. Aslib Proceedings. 56(4). pp.234–242.
Tektas, A. Gunay, E. N. O. and Gunay, G. 2005. Asset and liability management in financial
crisis. The Journal of Risk Finance. 6(2). pp.135-149.
Webster, L. A. H. and et. al. 2007. Financial Management. Medical Group Management Assn.

Financial Management Sources Funds London Woods

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