Fundamentals of Finance Assignment Sample

Introduction to Fundamentals of Finance Assignment 

Section 1: Financial Personal Statement and Budgeting

1.1: Hypothetical Budgeting Template

Figure 1: Budget Template

As per the above figure of the budget template, it can be determined that the total net worth for Mr X is calculated as GBP 14,450. From the above figure of monthly personal budget, it is determined that total income has been calculated as GBP 145,000. The corresponding figures of monthly income, other income and cash at hand or bank 90,000, 40,000, and 15,000. The corresponding figures of total expenses and liabilities totals to GBP 72,550 while total savings is calculated as GBP 72,450. Therefore, from the above figure of the budget template, it can be identified that a favourable net worth balance is expected to be earned by Mr X in July 2024. As per statements and opinions of Santo (2021), a favourable net worth balance for an individual allows optimum availability of financial reserves due to which future sustainability planning can be strategised methodically. 

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1.2: Relevance of Personal Financial Statement in Decision Making

The relevance of personal financial statements in decision making can be linked with key aspects including keeping track of expenses and bills as well as identifying potential possibilities through which financial health can be magnified. Following is the detailed individual discussion about the identified aspects relating to Mr X.

Keeping Track of Expenses and Bills

The personal financial statement is perhaps relevant to keep track of expenses and bills for Mr X in order to determine what proportion or quantity of savings is expected on a monthly or annual basis. The tracking of expenses and bills is crucial to contemplate progressive future financial planning due to which lump sum financial surpluses can be availed by an individual (Oktari, Sari and Rasuli, 2020).

Identifying Potential Possibilities through which financial health can be magnified

Identifying potential possibilities through which financial health can be magnified is also relevant for personal financial statements in decision making through which core areas of financial magnification can be located by an individual. This could include making multiple investments on systematic schemes or by fixing a particular amount in banks and recurring deposits due to which financial health magnification can be successfully accomplished.

1.3: Importance of Budgeting 

The importance of budgeting can be identified with respect to making future projections and to initiate a higher degree of financial control and these importances are individually discussed as follows.

Making Future Projections

Making future projections is the primary importance of budgeting which allows an individual to strategically determine what future financial targets must be achieved. According to Heald and Hodges (2020), future projections also account for setting realistic goals where availability and usage of resources by an individual are also factored. 

Initiating a Higher Degree of Financial Control

Initiating a higher degree of financial control is the second importance of budgeting which exercises supreme rights in favour of an individual to control spending as per their affordability. Consideration of removing redundant expenses is a viable proposition that can be exercised by an individual to avail a higher financial control.

Section 2: Terms and Principles of Loan

2.1: Business Introduction, and 5 W’s

Business Introduction

The business introduction is primarily determined by the entity name which is known as XYZ Ltd while its address of operations and operational headquarters are situated in Birmingham. The detailed business address for XYZ Ltd is identified as 29, Edgbaston Street, Birmingham. XYZ Ltd is primarily associated with the retail food chain industry where its business credentials predominantly involve offering dining food and non-alcoholic beverage services to its customers. The main products and services offered are local cuisines, International cuisines and non-alcoholic beverages including soft drinks, tea and coffee respectively. The ownership structure of XYZ Ltd is identified as a decentralised one in which decision-making authority is available with the owners. Subsequently, the organisational structure is further delegated into middle management and lower management in which important personnel including managers, staff, subordinates and other employees from the entire workforce mix.

A delegated or decentralised organisational structure is considered to be beneficial since each division’s overview is considered and importance is offered due to which higher productivity can be achieved by an organisation (Raziq et al. 2020). Other relevant information also involves the company’s future foray into offering other notable services that involves home delivery and dining services for special occasions. Consideration of forming suitable business collaborations with local and foreign organisations is also a relevant information for the future which XYZ Ltd intends to explore. Additional information also includes main sources of income in which a bulk proportion of revenue is generated from inhouse or takeaway sales of food and beverage items. The additional source of income is also identified to be government grants and subsidies received by XYZ Ltd at a one-time basis. 

5 W’s

The 5 W's associated with loan procurement by XYZ Ltd are classified into what, where, when, for whom and why. The what factor mainly establishes the need for XYZ Ltd to obtain a long-term loan of GBP 100,000 in order to facilitate business expansion for future concerns. As per views of Aramonte, Lee and Stebunovs (2022), long-term loans are perhaps considered to be the most common sources of funding in which main companies have the advantage of retaining complete ownership for future business progression planned. Where mainly establishes the location of exercising the loan procurement which is identified to be the business premises situated in Birmingham. When determines the actual date of procuring the intended loan which is estimated to be 13th October 2024. The when factor is also crucial to determine the existing loan terms and conditions that are needed to be obligated and fulfilled by XYZ Ltd in due course. The for whom factor of obtaining the intended long-term loan is mostly applicable for XYZ Ltd and its owners where the major focus is related with planning business growth and expansion. The need for the loan is crucial on part of XYZ Ltd for securing a bulk funding due to which extensive planning and implementation can be quickly brought on board to achieve targeted growth objectives.

2.2: Loan Repayment Plan and 5 C’s of Credit

Loan Repayment Plan

The loan repayment plan by XYZ Ltd will be mainly appropriated from three sources that include cash flow, retained earnings or profit and through sale of assets. The sale of assets is ideally the “Last Resort” for XYZ Ltd where it will be exercisable if shortage of funds is experienced from the other two sources. A majority of the total loan amount will be repaid from cash flow and net cash inflow balances in order to mitigate future difficulties for securing external credit. As stated by Omopariola et al. (2020), repayment of loans through cash flow is a viable approach exercised by companies due to which credit score and operational dynamics remain strong and sustainable. The remaining portion of the loan will be settled by XYZ Limited through retained earnings or profits in which operational surpluses will be utilised. 

5 C’s of Credit

The 5 C’s of credit are identified as capacity, capital, collateral, condition and character which are individually elaborated as follows. 

Capacity: Capacity defines the credibility of a company in terms of repaying loans within their stipulated deadlines.

Capital: Capital outlines the asset or investment likely to be mortgaged in order to secure loan funding.

Collateral: Collateral is identified as a security type guaranteed by the borrowee in order to obtain long-term loans (Dastile, Celik and Potsane, 2020).

Condition: Condition refers to landers identifying instances through which they can detect how the loan amount is to be used by the borrowee.

Character: Character predominantly outlines the previous or past track record of a company with respect to how repayment of loans has been managed.

2.3: Risk Analysis and Mitigation

Risks Associated with Loan

The main risks associated with procurement of a loan are classified into market, liquidity, operational, inflation and credit risks. Market risks associated with the loan are mainly related to difficulties faced by an organisation to repay due to external challenges including inflation and changes in customer tastes and preferences. Liquidity risks associated with a loan illustrate difficulties endured by an organisation mainly due to shortage of cash and cash equivalents. As per critical opinions of Huang et al. (2022), loan risks due to shortage of liquidity is a common phenomenon due to which credit rating and external stakeholder relationships of an organisation are hampered.

Operational risks are mostly associated with challenges faced by an organisation to effectively induce a high productivity which can be facilitated in favour of faster loan repayments. Operational risks are mostly identified to be internal factors due to which decision-making abilities of an organisation can be challenged in future. Inflation risks mainly elaborate increase in prices of generic commodities due to which a deficit in financial reserves is experienced by an organisation. As critically idealised by Chowdhury et al. (2021), increase in prices of commodities are further likely to affect credit features of an organisation due to which higher loan default risks can be committed.

Mitigational Steps

The main mitigational steps that can be exercised in order to prevent loan payment risks include consideration of budgeting and fixing a minimum threshold amount which must be maintained at all times. Both of these mitigational steps are expected to repay loans at their deadlines while simultaneous surplus of financial reserves and liquidity can also be enjoyed if both of these steps are implemented tactically.

2.4: Other Potential Funding Sources

Internal Sources

Internal sources of finance are identified as the primary other potential funding sources in which funds are mostly received from friends, family and from retained earnings. As per narrative of Nikolov, Schmid and Steri (2021), the main advantages associated with internal sources of financing include the ability to save time consumption on financing especially if a small investment scheme is considered. Disadvantages of internal sources of finance predominantly include lack of receiving a bulk proportion of funds as well as non-feasibility of this financing if a large investment scheme or size is to be discovered.

External Sources

External sources are identified as the second potential funding sources in which finances are received from crowdfunding, venture capital, private equity and government grants. Advantages of external sources predominantly include non-obligation of repaying funds procured from either external source by a company. As critically viewed by Nguyen and Canh (2021), disadvantages predominantly involve the obligation to part ownership of a company in favour of investors due to which absolute decision-making control of the parent company is downsized. Disadvantages also include potential conflicts and differences of opinion between investors and the company due to which reliable and viable outcomes of an investment remain absent.

2.5: Potential Impact of Taxation on Entrepreneurial Business

Positive Sides

The primary positive side of taxation on entrepreneurial business is associated with high tax reliefs and exemptions available for startup companies. In the UK, the government specifically offers a relief of upto 230% on research and development for new startups which can generate a higher scope for introducing more startup companies in the market (great.gov.uk, 2024). The additional positive sides of taxation on entrepreneurial businesses in the UK also involve the possibility of receiving high government grants and subsidies. A high proportion of government grants and subsidies is considered to be beneficial for new startup companies to secure a chunk funding proportion that can be strategically utilised in favour of business growth and expansion. 

Negative Sides

The primary negative side or disadvantage of taxation on entrepreneurial businesses in the UK is associated with reduction of profits experienced by entrepreneurs and organisations. The reduction of profits due to high taxation is likely to upset the morale of organisations due to which active participation in the associated industries is likely to reduce. The second negative side or disadvantage of taxation on entrepreneurial business in the UK is associated with low financial security available in order to contemplate future sustainability. Audretsch et al. (2022), critically illustrated and stated that availability of a low sustainable future for companies could induce passive industrial participation and existence due to which the overall economy of a nation is likely to suffer.

Reference List

• Aramonte, S., Lee, S.J. and Stebunovs, V., (2022). Risk taking and low longer-term interest rates: Evidence from the US syndicated term loan market. Journal of Banking & Finance, 138, p.105511. Available at: https://www.sciencedirect.com/science/article/pii/S0378426619300354
• Audretsch, D.B., Belitski, M., Chowdhury, F. and Desai, S., (2022). Necessity or opportunity? Government size, tax policy, corruption, and implications for entrepreneurship. Small Business Economics, 58(4), pp.2025-2042. Available at: https://link.springer.com/article/10.1007/s11187-021-00497-2
• Chowdhury, M.A.F., Meo, M.S., Uddin, A. and Haque, M.M., (2021). Asymmetric effect of energy price on commodity price: New evidence from NARDL and time frequency wavelet approaches. Energy, 231, p.120934. Available at: https://www.sciencedirect.com/science/article/pii/S0360544221011828
• Dastile, X., Celik, T. and Potsane, M., (2020). Statistical and machine learning models in credit scoring: A systematic literature survey. Applied Soft Computing, 91, p.106263. Available at: https://www.sciencedirect.com/science/article/pii/S1568494620302039
• great.gov.uk, (2023), Tax Relief on UK Businesses, Available at: https://www.great.gov.uk/international/content/investment/why-invest-in-the-uk/tax-incentives/#:~:text=Key%20benefits,schemes%20for%20businesses%20and%20investors [Accessed: 16 September 2024]
• Heald, D. and Hodges, R., (2020). The accounting, budgeting and fiscal impact of COVID-19 on the United Kingdom. Journal of Public Budgeting, Accounting & Financial Management, 32(5), pp.785-795. Available at: https://www.emerald.com/insight/content/doi/10.1108/JPBAFM-07-2020-0121/full/html
• Huang, H.H., Kerstein, J., Wang, C. and Wu, F., (2022). Firm climate risk, risk management, and bank loan financing. Strategic Management Journal, 43(13), pp.2849-2880. Available at: https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.3437
• Nguyen, B. and Canh, N.P., (2021). Formal and informal financing decisions of small businesses. Small Business Economics, 57(3), pp.1545-1567.Available at: https://link.springer.com/article/10.1007/S11187-020-00361-9
• Nikolov, B., Schmid, L. and Steri, R., (2021). The sources of financing constraints. Journal of Financial Economics, 139(2), pp.478-501. Available at: https://www.sciencedirect.com/science/article/pii/S0304405X20302282
• Oktari, Y., Sari, R.N. and Rasuli, M., (2020). The Effect of Budget Planning, Budget Implementation, the Competency of Human Resources and Understanding of Regulation on Village Financial Budget Absorption with Organizational Commitment as Moderating Variable. International Journal of Economic, Business & Applications, 5(1), pp.17-31. Available at:https://ijeba.ejournal.unri.ac.id/index.php/ijeba/article/view/44
• Omopariola, E.D., Windapo, A., Edwards, D.J. and Thwala, W.D., (2020). Contractors’ perceptions of the effects of cash flow on construction projects. Journal of Engineering, Design and Technology, 18(2), pp.308-325. Available at: https://www.emerald.com/insight/content/doi/10.1108/JEDT-04-2019-0099/full/html
• Raziq, M.M., Ahmad, M., Iqbal, M.Z., Ikramullah, M. and David, M., (2020). Organisational structure and project success: The mediating role of knowledge sharing. Journal of Information & Knowledge Management, 19(02), p.2050007. Available at: https://www.worldscientific.com/doi/abs/10.1142/S0219649220500070
• Santos, M., (2021). High net-worth attachments: emotional labour, relational work, and financial subjectivities in private wealth management. Journal of cultural economy, 14(6), pp.750-764. Available at: https://www.tandfonline.com/doi/abs/10.1080/17530350.2021.1952097

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