Essay On Managing Financial Resources And Decisions

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ICON College of Technology and Management

BTEC Edexcel Level 5 in Business (QCF)

Unit – 2: Managing Financial Resources and Decisions (QFC. L4)

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Table of Contents

Introduction…………..…page .3

Task 1 (LO1) --- page .4

Task 2 (LO2) --- page .6

Task 3 (LO3) --- page .9

Task 4 (LO4) --- page .12

Conclusion……………...page

References.......................page

Introduction

For this assignment I chose to use and analyze the data from British Petroleum PLC annual reports.
BP PLC is a very profitable company, with large revenue and lots and challenging data available for analysis.

Company Overview

The company history started in 1908 in Persia as the Anglo-Persian Oil Company. BP PLC is now one of the largest integrated oil and gas companies in the world. The company’s headquarters are in London UK. BP employs over 85,000 people and operates in over 80 countries. Company’s cash flow as of the year ended, 31 December 2012, is $20.5 billion.

Task 1

During their lifetime, for a variety of reasons (e.g. acquiring capital asset or for the development of a new product) businesses must find and acquire finances to cover the cost of them. Usually, business developments are financed internally but in the case of the acquisition of new machineries capital may come from external sources. Today many businesses relay on short-term capital in the form of bank loans and bank overdraft as a cash flow cushion. These cushions have interest rates that may vary from organization to organization and according to purpose.

Depending on how is it obtained, sources of finance can be categorized in two ways:
1. Internal and,
2. External

Internal, a business can obtain funds from the issues of new shares to general public, rights issues, retained profits and sale of assets. This type of sourcing of financing is called Equity Financing. In 2012 BP has an issued share capital of $118,564 million, an increase by $6,678 m compared to financial year of 2011. They have invested heavily in joint ventures and associates and they have also invested in plant property and equipment.
Issues of new shares.
This source of finance is usually used enlisting the company on Stock Exchange. The process is called Initial Public Offering or a “flotation”. To do so the company must prepare the balance account and show profit to attract investors. The company must decide how many shares and at what value they will be sold for. With issuing new shares the company has access to a wider pool of potential investors; it could improve the company image and credit rating, which in turn will make debt financing easier and cheaper to obtain. Because shares can be bought and sold in small quantities and at any time investors can see opportunities, which will translate into selling more shares. However enlisting needs publicity which will cost money; there is also no guaranty that shares will sale and shares sold will produce significant loss of control and will increased the risk of losing ownership of the company.
Right issues. It is the issue of new share for cash to the existing shareholders. These shares are issued to existing customers at a discount rate (i.e. lower than the market rate). They cost less to issue as there is no need for publicity and there is no risk losing control of the company. But by asking shareholders to buy more may get the wrong impression that the company is not doing well and value of the share is diluted.
Retained profits. Is what remains after dividends and taxes are paid. The total value can be seen in the equity section of the BP’s balance sheet. The company gets to keep the money and reinvest in the business or pay off debts. Retained profits are a flexible source of finance, meaning the management has complete control on how, how much, when and where to use it while ownership is kept intact. But a loss making company
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