Managing Financial Resources and Decisions

Financial Resources Management PepsiCo

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Introduction to Financial Resources

An organization can manage, maintain and develop its economic condition with help of financial resources and information available to it. They help in making effective decisions within the company (Broadbent and Cullen, 2012). These resources are raised from different sources and used to take decisions regarding future planning of the organization. Funds are important in company as they facilitate business to maintain budgets and financial activities. Efficiently using these resources lead the company to take better decisions and maintain business as a whole (Correia and et.al, 2012).

In this report done for dissertation writing, the sources available to a company are analyzed with their implications decision making process. The second part of report consists of different costs associated with raising funds in the organization. Further it evaluates how financial decisions are taken in company with use of financial information. It also includes evaluation of different investment appraisal techniques and financial statements.

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Requirement of funds

Funds are needed for companies to carry out various activities of a business; they have to raise these funds from different sources (Paramasivan, 2009). There are large numbers of sources available for a company to acquire funds. Pepsi co. will raise finance from internal and external sources of finance.

Internal sources- Company can source its funds from internal resource; it includes retained earnings, sale of assets and reduction in working capital. This money is acquired by them from resources available to them inside the business only. Retained earnings are certain part of profit which is kept by company for business use (Ramachandran and Kakani, 2009). They can earn money by selling previous and outdated assets of their company; these assets are no longer used by them. To raise additional money they can reduce working capital to help business activities.

External sources- Short term, medium term and long term funds acquired by company from outside sources to the business are external sources of financing (Brennan and Solomon, 2008).

Company wants to raise funds for its business activities but they have to pay some cost on these available resources. They can generate finance from equity, bank loans and debenture; but in process of acquiring those funds they have to pay legal expenses and subscription fees to issue shares (Ramachandran and Kakani, 2010.). When company obtains money from loans and debt finance there is possibility of bankruptcy; in this situation banks sell securities to repay their loans before any creditors. Another effect of generating fund from hire purchase and leasing is that company has to pay some amount of money as initial payment. This is necessary to pay by all firms while considering finance through hire purchase and leasing. If company generates finance from trade credit they have to pay penalties in case of nonpayment on time. Suppliers can also file case for first payment when company is bankrupt (Cowton, 2004).

Types of costs to company

Raising finance from different sources is not easy for a company, as they have to pay cost for generating funds from them. There are various cost associated with each type of source used by companies; they have to pay interest, taxes and dividends for acquiring money from certain sources. These resources are as follows-

Interest on bank loans- When company raises funds from bank loans they have to pay interest on these loans. Different financial institutions also provide funds and charges interest on them. In case of bankruptcy they sell the property of company to repay their loans and it is done before any other creditors (Correia and et.al, 2012).

Dividends on equity finance- In case of financing through equity, the business has to pay dividends to its shareholders. They have to pay taxes on amount of dividend they paid to shareholder (Argouslidis, 2008).

Interest on hire purchase and leasing- Financing is when done on basis of hire purchase and leasing company has to pay interest with installments. And these installments are paid every month till the amount of asset is covered up. In case of lease, the customer can claim lease as a tax deduction (Ramachandran, and Kakani, 2009). But then also they have to pay huge interest on using these assets and in the end ownership of asset is transferred to original owner.

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Financial planning in PepsiCo

Financial planning in PepsiCo is very important as it manages activities of whole business and helps them to grow and expand (Shapiro, 2009). To attain the desired goals of organization they have to plan for financial activities; it includes managing financial resources, information and making effective decisions with them. The task of financial planning in PepsiCo involves this process-

Effective management of business needs financial information, on the basis of these managers takes decisions that are necessary for working of an organization. The finance department requires different types of information for making decision about investment and operating activities of their business. They make decisions regarding effective allocation of these resources and maintaining them for future development of company. Also they can apply control measures to reduce wastage of these financial resources. Marketing department can use these information in order evaluate cost of production and then compare them with competitors. Marketing managers need this information for making decision about expenses to be made for marketing activities of the product. They require maintaining the cost of advertising and selling the products in to increase the sales of its goods (Correia and et.al, 2012). Human resource department of PepsiCo needs this information to effectively facilitate process of recruitment, selection and training. They have to make decisions regarding appraisal of employees, bonus, and other financial rewards on basis of their performance. For this they require information of financial resources.

PepsiCo is going to start new business a new business for this purpose they require various sources for financing their business. They can generate sources through internal sources which include retain earnings, sale of old assets and reduction in working capital. Advantage of using retained earnings is that they don’t have to pay interest on it (Broadbent and Cullen, 2012). But in case of unproductive business this amount will be loosed by them. They can generate funds by selling old assets of company which are no longer used by them.

Finance can also be raised through external sources such as equity fund; which is generated by issuing funds to general public and issuing debentures also(Brennan and Solomon, 2008). But acquiring these finance have a disadvantage that company has to bear legal expenses and subscription charges. They can also generate finance from long term bank loans; firm requires paying interest on them and in case of bankruptcy banks will cease property of organization to repay its loan. Leasing and hire purchase can also be used by them to raise fund (Paramasivan, 2009). Because initial amount is paid and remaining amount is paid in instalments. But disadvantages associated to it are that ownership of asset is not transferred to user even though the overall payment is made.

Financial statements to maintain

PepsiCo has to prepare its financial statements according to the accounting principles and rules of accounting. They have to follow the rules and regulations made by International Accounting Standards (IAS) ( Shapiro, 2009). According to these rules and regulations every organization has to maintain financial statements and data in a proper format and then evaluate them to know the revenues earned by them in a financial year. The types of financial statements required to maintain by PepsiCo are-

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Business standards to maintain

However PepsiCo is a food and beverage giant and act as a participatory plant to produce various products. They need to administer a way in which they need to exhibit their accountability and transparency towards external parties (Ittelson, 2009.). The purpose of preparing financial statements will help both internal and external decision makers to employ various decisions for both short and long span of time.

But such necessity is not important for all kinds of business establishments. There are different types of business venture which follows different routes. There are 3 types of business types prevail, they are as follows:

Particulars Name of ratio PepsiCo
1. Liquidity ratio    
Current R. Current assets/ C. liab. 1.09
Quick R. Current assets- Inventories/ C. liabilities 0.68
Cash R. Cash+ Cash equiv./ C.L. 0.36
2. Long Term Debt    
Debt Equity   1.05
Debt ratio Total debt/ total assets 0.69
Times interest earned EBIT/ Interest expense 10.1
3.Profitability    
Net income/ Sales Net income /sales 0.09
Net income/ Assets Income/ total assets 0.08
4. Efficiency ratio    
A/c receivable T/o Net cr. Sales/ av. A/c rec. 9.30
Total asset T/o Sales/ Total assets 0.87
5.Market Measures    
P/E ratio Market value per share /EPS 17.67
EPS Income- Dividends on stock/Outstanding shares 0.51
DPS Sum of dividend- Special Dividend/ Outstanding shares 0.20

Performance analysis

PepsiCo’s financial performance has been analysed and they have brought forward various kinds of information. The financial ratio analysis will tell how they progressing in this tough business environment and how they are maintaining pace with other competitive companies like Coca-cola, this will also illustrate on the effects of how well they are performing in accordance with Benchmark companies. The PepsiCo’s ratios are divided in various parameters i.e. liquidity, market measures, efficiency, Profitability and debt measures (White, Sondi and Fried, 2003).

The liquidity ratios show that, how efficiently they are managing the liquidity of company. In other words, how well they are maintaining the liquid performance and working capital efficiency. The current ratio is 1.09, means they owning very proficient use of liquid or cash in the firm. The quick ratio says about the much more liquid state than the current ratio, where they will arrange higher cash in less time. The cash ratio shows how much cash they own over the liabilities, 0.36 to payout liabilities (Mumford, Schultz and Osburn, 2002).

The next ratio constitutes the long term debt responsibility; the debt equity ratio is above 1, means they owe more debt over the available equity. They are bringing in more external liabilities. But debt ratio shows that, they have range of 0.69, they have 40% to payout on 60% assets. This improves the efficiency on the company’s performance. Times earned show that how much asset they need to procure to payout the interest earned on the loan borrowed. They have a lower percentage of interest expense to payout.

Profitability ratio illustrates the total profitability of company. The total income is valued on different parameters to brought useful information, net income to sales is very much low (0.09), this shows that they are incurring more cost to produce a reasonable amount of sales. The next ratio is net income to assets. It represents the reliability of assets used to bring such sales proceeds (0.08).

The efficiency ratio shows, operational capability of company, debtors has been realised over the period. The ratio explains that they have arranged a 9% Account receivables over turnover, means 91% is cash sales. They have allotted a lower percentage of account receivables. The total asset to turnover, where the ratio lies in 0.87, they have earned higher percentage of sales over available assets. It helps to provide economies of scale (Taylor, 2012).

Market measures shows the reliability of company over the borrowings, The P.E ratio has been a rate of 17.67, it is very positive because they are earning better market value on the invested capital. Both EPS and DPS are also improved very much.

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Appropriateness of Capital budgeting Techniques:

From all the three techniques most favoured and useful technique is internal rate of return. In this technique, the tool reproduces more than one discounting factor and the factor is then computed against the lower rate to establish relational information on the appropriateness on the feasibility of the project. The comparative study is possible with IRR and not possible with any other tool (Murphy, 2000).

Particulars
July
Aug
Sept
Oct
Nov
Dec
Opening Bal.
90000

10800

0

13400

0

11700

0

14700

0

16800

0

Debtors
106000

11400

0

11800

0

12400

0

10400

0

96000
Total Inflow
196000

22200

0

25200

0

24100

0

25100

0

26400

0

Salary and wages 20000

20000

20000

20000

20000

20000

Other overheads 4000 4000 4000 4000 4000 4000
Electricity 0 0 20000 0 0 34000
Purchases (Inventory) 64000 64000 66000 70000 59000 54000
Total Outflow
88000 88000

13500

0

94000 83000

11200

0

Closing Balance
108000

13400

0

11700

0

14700

0

16800

0

15200

0

An assumed illustration will aid in providing best information from a cash budget of a company. The above table represents a 6month analysis of cash budget, where total outflow and inflow of cash has been summarised. The aim of populating cash budget will entail how company decides strategic decision on managing total cash flow in a business organisation. The cash budget is maintained from July- December. The Opening balance shows that, the former month has a reserve of cash of £90000. While sales proceeds are £106000 (Nofsinger and Varma, 2007). The total inflow has summed up to 196000 in July. The next section includes expenses where company has borne a list of outlay to earn those sales proceeds. This includes salary and wages, overheads, purchases and other fixed expenditures. The total outlay amounts to 88000. This clearly shows that in month of July they have incurred an amount of 108000 of income earned. The above table shows that, they have brought positive sales over short run.The cash inflow has increased dramatically over this period, in simple words increased at accelerating speeds. On the other expenditure has also been very good the company has kept a tight monitoring on the costs, that why the cost did not over pass the limits of £120000 in a month (Hansen, Mowen and Guan, 2009). This way they achieved positive cash flows.

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Conclusion

From the above report we can conclude that PepsiCo is doing very excellent in their industry, they are actually making up to the benchmark ratios. They are also conducting a series of investment appraisal techniques, to divest their capital and earn high returns. The report has also identified various patterns of financial statements used by different proprietor (John, 2013). The sources of funds and associated costs has also been explained which can be used by the organisation to meet the long term objectives.

References

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