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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Impact of finance on the projected financial statements:

Obtaining finance from different sources bring about a change in the financial statements.

To communicate financial data, the below were prepared. These helps to provide information relating business's activities.  

¬ Trading Account, Income Statement

¬ Profit & Loss Account

¬ Balance Sheet

¬ Cash-flow Statement

Owner\'s investment

¬ Owner\'s investment increases the value of equity in balance sheet.

¬ But the withdrawal by the owner is shown as deduction from the equity in the balance- sheet.

¬ The owner's investment Improves the gearing ratio

¬ Shown as cash inflow in the Financing Activities section of the cash—flow statement

Retained profits

¬ Increase the value of equity in Balance Sheet.

¬ Calculated in Appropriation of Profit Account and transferred to Balance Sheet.

¬ Improves the gearing ratio.

Sale of assets

¬ Sale of assets will reduce the value of fixed assets on the balance sheet.

¬ The profit or loss made on the sale of asset will be recorded in the profit and loss account for the year.

¬ The depreciation of the asset along with its original price will be removed from the balance sheet.

¬ Inflow of the cash through sale of assets is shown in Investing Activities section of the Cash- flow Statement.

¬ Improves the liquidity of the business.

Collection of debts

¬ Trade Debtors will be lowered in the Balance Sheet

¬ Improves the quality of receivables in Balance Sheet.

¬ Improves Cash from Operating Activities in Cash—flow Statement.

Trade creditors

¬ There will be increase in Trade creditors under Current Liabilities in the Balance Sheet.

¬ Level of Inventories will go up due to credit purchases.

Ordinary shares

¬ The issue of ordinary shares and preference shares increase the value of equity.

¬ If the issued price is greater than the nominal value of the share then share premium is created in the balance sheet.

¬ The number of shares issued are also displayed in the balance sheet and for preference shares, the rate of dividend is also shown.

¬ The dividends paid to the shareholders are recorded in the appropriation of Profit account after tax is deducted from net profit.

¬ Cash received from issuance of shares are shown in Cash from Financing Activities section in the Cash flow Statement.

¬ Company leverage will improve.


¬ Debentures are a type of debt capital.

¬ The value of debentures along with the rate of interest and the repayment date is presented in the equity and liabilities section of the balance sheet.

¬ The interest paid on debentures is reduced from profits before tax is charged in th Profit & Loss Account.

¬ Cash received from issuing debentures is shown in the Cash from Financing Activities section in Cash—flow Statement.

¬ Debt equity ratio will go up due to new borrowings.

Bank overdraft

¬ This appears in the balance sheet as a current liability since it is a short-term debt.

¬ The interest charges and bank overdraft fee if charged are deducted from the profit and loss account before tax is charged.

¬ Overdraft in the current account as at financial year end is seen as cash deficit at end cash balance in the Cash-flow Statement.

Bank loan:

¬ Loans are long-term debts and therefore come under long-term liabilities in the balance sheet. The loan when displayed on a balance sheet will usually contain information about the repayment date and the interest charged on the loan.

¬ Interest is charged in the profit and loss account as an expense before tax is deducted.

¬ Cash received through Loans is shown as Cash from Financing Activities in Cash Flow Statement.

¬ Venture capital

¬ This is an amount of money invested in the business as equity capital so comes under equity capital in the balance sheet.

¬ The return for venture capitalists is a share of profits which is recorded in the Appropriation of Profit account.

¬ Cash received as Venture Capital is shown as Cash from Financing Activities in Cash Flow Statement.

¬ Company leverage will improve.


¬ Leased asset is shown in the Asset side of Balance Sheet.

¬ Interest portion of the lease payment is charged against Profits in Profit & Loss accounts.

¬ Liability under lease is also shown by the equal amount in Long Term Liability side of Balance Sheet with only the current portion payable coming under Current Liability.

¬ A finance lease payment includes interest and principal repayment. The interest portion of the payment is included in the Cash Flows from Operating Activities section as a cash outflow. The principal portion of the payment is included in the Cash Flows from Financing Activities section as a cash-outflow.

Hire Purchase:

¬ Purchased asset is shown in Asset side of the Balance Sheet.

¬ It is also shown in the Long-term Liability side of the Balance Sheet with the current portion payable shown under Current liabilities.

¬ Interest is charged against income in Profit & Loss Accounts.

¬ The interest portion of the payment is included in the Cash Flows from Operating Activities section as a cash outflow.

¬ The principal portion of the payment is included in the Cash Flows from Financing Activities section as a cash-outflow.


¬ Mortgaged asset is shown in Asset side of the Balance Sheet.

¬ Liability is shown in the Long Term Liability side of the Balance Sheet with the current portion payable shown under Current Liabilities.

¬ Interest is charged against income in Profit & Loss statement.

¬ The interest portion of the payment is included in the Cash Flows from Operating Activities section as a cash outflow.

¬ The principal portion is included in the Cash Flows from Financing Activities section.

Needs of information:

¬ A business association produces an assortment of budgetary data that is useful in basic leadership, including: Profit and Loss accounts giving subtle elements of whether the business is making effective utilization of money related assets.

¬ Balance Sheet data giving points of interest of a business\' benefits and liabilities, and also the liquidity of the business.

¬ Sales and purchase data setting out specific sorts of exchanging and records with specific clients and suppliers.

¬ Information about the purchase of benefits and liabilities.

¬ Information about the wages paid out by a business.

¬ Information about expenses.

There are different types of parties interested in the information of the organization namely, internal and external parties. Information needs given by the business may vary in accordance with the party's needs.

¬ Internal Party: they have direct connection or holding on for the association. Ex Directors, proprietors and workers

¬ External Party: they are the partners or the individuals from public— financial specialists, clients, suppliers, groups, government, administrative establishments and so on.

Internal Users

External users

For decision making purpose relating to staffing, investment, financing, expansion, diversification and growth.

Investment decisions

Forecasting purposes

Tax purposes by government

Debt and liquidity management

To assess financial strength of the company

Employees bargaining

To understand the liquidity positions

Power such as wage increase, promotion and other incentives.

For lenders to verify business position in the market and efficient utilization of assets.

Table 3 - Information needs by different decision makers

(a) Investors:

¬ The suppliers of capital and their counsellors are worried with the danger intrinsic in, and return gave by, their ventures.

¬ They need data to help them figure out if they ought to purchase, hold or offer.

¬ Shareholders are additionally keen on data which empowers them to evaluate the capacity of the venture to pay profits.

(b) Employees:

¬ Employees and their agent gatherings are occupied with data about the strength and productivity of their managers.

¬ They are additionally keen on data which empowers them to evaluate the capacity of the venture to give compensation, retirement advantages and opportunity.

(c) Lenders/ banks:

¬ Lenders are occupied with data that enables them to figure out if their credits, and the interest joining to them, will be paid when due.

¬ Lenders/Banks look for more data about the organization when loaning cash for them to grow or for operations. Typically banks search for taking after data:

⎫ Gearing proportion of the organization

⎫ Profitability

⎫ Liquidity of the organization

⎫ Capacity to pay interest if the credits are taken

⎫ Fixed resources base to get the data about the securities accessible for the advance and so on.

d) Suppliers and other trade creditors:

¬ Suppliers and different lenders are keen on data that enables them to figure out if sums attributable to them will be paid when due.

¬ Trade leasers are prone to be keen on an enterprise over a shorter period than loan specialists unless they are reliant upon the continuation of the venture as a major customer.

(e) Customers:

¬ Customers have an interest for data about the continuation of an business, particularly when they have a long-term association with, or are reliant on, the venture.

(f) Governments and its agencies:

¬ Government and its offices are occupied with the allotment of assets and, in this manner, the exercises of business.

¬ They likewise require data keeping in mind the end goal to manage the exercises of business, decide tax collection strategies and as the premise for national wage and comparable insights.

(g) Public:

¬ Enterprises influence individuals from people in different ways. For instance, undertakings may make a considerable commitment to the neighbourhood economy from various perspectives including the quantity of individuals they utilize and their support of nearby suppliers.

¬ They are occupied with thinking about the operations of the business and the coherence of the business.

Long-term goals can be achieved through financial planning. Financial planning is a goal-oriented, framing objectives, policies and procedures, budgets regarding the capital activities.

¬ Adequate storages' must be guaranteed.

¬ Financial Planning helps in guaranteeing a sensible balance between outflow and inflow of assets with the goal that dependability is kept up.

¬ Financial Planning guarantees that the suppliers of assets are effectively putting resources into organizations which exercise budgetary arranging.

¬ Financial Planning helps in making development and extension programs which helps in long-run survival of the organization.

¬ Financial Planning provides lesser vulnerabilities with respect to changing business sector patterns which can be survived effectively sufficiently through assets.

¬ Financial Planning helps in guaranteeing stability and productivity by foreseeing and surveying dangers ahead of time.

¬ Good administration of pay

¬ Effective observing of money inflow and outflow.

¬ Good device for decision-making and protects the organizations resources

¬ Help to forecast the measure of outer financing required Help in business development and extensions activities that backing long-term survival of the business.

Functions of the plan:

¬ Wise and efficient use of resources.

¬ Business goals are focused.

¬ Distribute funds to business

¬ Combine human resources

Risk of not having a plan:

¬ Business will eventually fail without planning.  

¬ Everyday cash flows are not managed.

¬ Does not provide a vision on the future of the business.

¬ Accessing external financial support will be impossible.

¬ Marketing decisions cannot be taken.

¬ Cannot identify financial downturn.

¬ Cannot measure progress.

¬ Sales trends cannot be identified.

¬ Cannot manage profit and plan in accordance.

Financial planning for Mrs. Stephanie's business:

Financial planning is a crucial step for business especially the business which is expanding. In Mrs. Stephanie's business case she can know here stocks and sales which helps her to know her cash cow sales, poor dogs sales, star and question marks in her business. She can know her daily cash inflows and outflows so that the finance will be in control and savings will increase. Budgetary arrangement can be made easily. Important thing is it helps the business for developing and extension of resources so that the business can be survived for long-run. Financial planning can even help her to choose the best projects suited for the business.

Changing in business sectors affects the individuals business, not if the financial planning is done by helping business for lesser vulnerabilities. It gives a stability and productivity and prevents her business especially Stephanie's business is expanding so, using financial planning she can gives a stability in her business. In case of expanding Stephanie needs to buy resources for her business here financial planning will helps her to make good decision making and save her capital. Using financial planning Stephanie can predict her future budgeting and plan for her business. So, I strongly recommend  her to do financial planning and by this we can know how the financial planning is indispensable for business operations.

The cost of different sources of finance are explained as Tangible cost – e.g., Interest, dividends, opportunity cost e.g. loss of alternative projects when using retained earnings; tax effects.

The tangible costs are present in both internal and external financial costs.


Owner\'s Investment:

In owner's investment there is dividend in cash and scrip, the amount payable of dividends is up to the management. If the business, ask the shareholders in the form of new shares instead of cash then it is scrip dividends.

Information cost: Performance of the business will be shared with the shareholders when the dividend is paid.

Investment costs: There will be cost associated with the investment when the funds are not needed immediately until they are used.

External Finance costs:

Interest charges:

¬ Tax will be deducted from the debt capital.

¬ Interest may be fixed or variable.

¬ A variable rate is base rate of the bank and premium for profit.  

Initial arrangement fee:

To cover the lender's administrative cost for setting up a loan there will be an initial arrangement fee.

Commission fee:

There is a commission fee in case the business repaid the finance in advance and as well as the interest for the unpaid debt within period of time.  

Repayment of the loan itself:

When the repayment time the business need to pay the actual and interest.

Financial and non-financial costs:

¬ The borrower is required to provide the business's performance details regularly and this will be charged costs.

¬ Sometimes it will become a crisis when the business goes through loss, the lender may demand for immediate repayment of the finance which will leads to liquidation of business.

Opportunity cost:

¬ The opportunity cost is which, you will be charge when alternative action taken by you because of your first action.

¬ The interest money could be saved and can be spend in anything else, it can also be an income for business.

Selling and administrative costs:

¬ A business\' deals are just produced by bringing about costs.

¬ Dividends are an expense of held income and in addition an expense of offer capital. In the event that profits are not paid, shareholder\'s goodwill will be lost.

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