Managing Financial Resources Assignment - Softwood Ltd

Introduction

This Managing Financial Resources Assignment Softwood Ltd is specially designed to aid the learners in identifying and evaluating several sources of finance available to the firm. It can also help the learners in identifying the cost and several implications associated with each source of finance. Further this assignment will aid the learners to make the effective use of financial information in budgeting and pricing decisions. On completion of this unit learners will be profited as they will learn how to evaluate the financial performance of the business by using several financial tools and techniques.

Task 1

P 1.1 Identify the several sources of finance available to softwood limited for their expansion plan.

There are several internal and external sources of finance available for the softwood limited for their expansion plan. They are as follows.

• Internal sources of finance: Internal sources of finance for softwood ltd is as follows
• Personal savings: Personal savings of the owners of the firm is one of the vital sources of finance for the small businesses. This source of finance is not a burden on the company and so we can utilize this source of finance for the expansion purpose, if our earnings are not stable.
• Retained Earnings: Retained earnings are termed as the earnings of the firm, which are not distributed as dividends but are retained for the future requirements of the firm. We can also utilize this source of finance for the expansion purpose as being an internal source of finance; it is not a burden on the firm.
• Sale of assets: Firm can arrange funds for the expansion purpose by selling the unused assets of the firm. This will help to utilizing the blocked funds of the firm.
• External sources of finance: External sources of finance for softwood ltd are as follows.
• Bank loans: Banks do offer short term as well as long term loans to the firms at specific rate of interest. It is required to fulfill some of the formalities to obtain loans from financial institution like banks. If the earnings of the firm are stable, then we can utilize this source of finance for the expansion purpose.
• Trade credit: Trade credit is referred as the credit given by the suppliers of the firm. Mostly such credit is given for the short term and it helps in fulfilling the short term requirements of the firm. Soft wood limited can also utilize this source of finance for expansion purpose as it is not the burden on the firm.
• Leasing: Lease is an agreement between the lessor and the lessee, where the lessor allows lessee to vigilantly use the asset for the specific period. Softwood limited would require some assets for the expansion of the business, which can be taken on lease for specific period
• Hire purchase: Hire purchase is an agreement or the contract between the buyer and the seller, where the seller allows the buyer to make payments in installments. Ownership of the assets is transferred, when all the installments are paid. Softwood ltd can also purchase its assets on hire purchase to maintain liquidity in the firm. (Zeidman and Enberg ,1970).

P 1.2 Assess the implications of the sources of finance identified above on the company

There are several implications attached to the above sources of finance, they are as follows. (Tamari,1978).

• Retained earnings: This type of capital is not the burden on the company as it is not required to pay any interests or dividends on this type of capital. It is difficult to get the taxation relief on this capital, which is applied to borrowed capital.
• Bank loans: It is essential to fulfill some of the formalities to take loans from banks and it is required to pay regular interest on such loans. Additionally loans are required to be repaid at the pre decided interval.
• Leasing: It is essential to pay lease rents on regular basis under leasing contracts. Lease rents are basically tax deductible expenditure.
• Hire purchase: In Hire purchase agreement, the ownership is transferred only when all the installments are paid. It is possible that hiree can take the possession back, if the hirer fails to pay any installment.
• Trade credit: Trade credit helps in fulfilling short term requirements of the firm. This source of finance is not the burden on the firm and it does not dilute control in an organization.
• Sale of assets: If the funds are raised through the sale of unused assets then there is no risk of change of control in the firm. Additionally there is no requirement of paying any interest or dividend on such source of finance.

1.3 Evaluate and recommend the most appropriate sources of finance for softwood ltd to raise finance for expansion.

The most appropriate sources of finance for the softwood ltd for the expansion purpose are leasing and bank loans. For the expansion of its business, firm will require several assets, which can be taken on lease to maintain enough liquidity in the firm. As lease rents are tax deductible expenditure and so it is better totake assets on lease rather than buying it. For additional requirements, firm can take loans from banks as it is the cheap source of finance and the rates charged by the banks are comparatively lower than the loan taken from other sources. As the creditability of the firm is good, so it is possible to get the loans easily from the banks with fewer formalities. (Lowrie,1912).

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Task 3

P3.1 Prepare the cash budget from the above information for January – September 2015 and analyse how you manage the cash during that period

From the above cash budget statement, it is found that there is a deficit of cash in the month of February. The reason behind such deficit is the excess expenditure incurred during this month and no cash flows were received in this month. It is also found that though the company is allowing the credit period of two months, still the liquidity of the firm is not affected. Softwood Limited should take necessary steps to reduce its expenditure and to upsurge its revenues. From the above cash budget it is clear that the firm’s has enough cash flows to fulfil its short term requirements.

P 3.2 Calculate the cost of producing a chair if a customer orders 2000 chairs and suggest an appropriate pricing strategy for Softwood Ltd.  in the given business context.

Cost of per unit = £ 44500/2000= £22.25

It is essential for the Softwood Limited to analyse its costs before deciding its pricing business strategy. The price per chair should include the cost of manufacturing chair and the profit. The price should be such that it is benefited both to the consumers and the firm and so company should try to cut off its manufacturing expenses. It would be appropriate for Softwood Limited, if they apply Cost plus pricing strategy. In this strategy the company can measure the cost of production and various other expenses. Company should also consider the market prices before deciding its price per unit.

3.3 Using appropriate investment appraisal methods on the information given, recommend an appropriate machine for Softwood Ltd. Explain your decision

Abc ltd

                                                                                      XYZ LTD

Proposition: It is clear from the above report that Softwood Limited should purchase the machine from ABC Ltd as because the return calculated on NPV is higher of ABC LTD than of XYZ LTD.

Task 4

4.1 Discuss the main financial statements of a company highlighting their structures, key components and significances.

Financial Statements are prepared to ascertain the profit of the firm. Financial statements help the stakeholders of the firm to know the financial position of the firm. There are basically four main financial statements, they are as follows.

1. Income statement
2. Balance sheet
3. Cash flow statement
4. Statement showing changes in equity

• Income statement: Income statement is also referred as profit and loss account. All the expenses and revenues of the firm are recorded in this statement. Expenses are recorded on the debit side of income statement, while revenues are recorded on the credit side of this statement. This statement aids the firm in ascertaining profit and losses for the specific period.
• Balance sheet: Balance sheet is prepared to know the financial position of the firm for the specific period. All the Assets and liabilities of the firm are recorded in balance sheet. On the assets side fixed assets as well as current assets are recorded, while on the liabilities side, equity capital, long term loans as well as short term loans are recorded. Balance sheet aids the managers as well as the stakeholders of the firm to make important decisions.
• Cash flow statement: Cash flows statement is prepared to identify the cash inflows and outflows of the firm for the specific period. Cash flow statement aids in identifying the liquidity of the firm at different intervals. In this statement cash outflows are deducted from cash inflows and at the end deficit or surplus is ascertained.
• Statement showing changes in equity: This statement is prepared to know the variation in the equity funds. In this statement equity funds and dividend paid are recorded and the balance amount is carried forward to the liabilities side of balance sheet.

4.2 Explain how financial statements differ in different types of businesses.

Financial statements for different types of businesses like sole proprietorship, partnership and company differ from each other. Let us check out the financial statements prepared by diverse types of businesses.

• Sole proprietorship firm: In sole proprietorship there is only one owner, who needs to ascertain the financial information of the firm. Mostly profit and loss account is prepared by the owner of the firm to ascertain the profit and loss of the business. Balance sheet is optional account for such type of business.
• Partnership firm: In partnership firm there are more than one owner’s, who needs to ascertain the financial information of the firm. The financial statements prepared by such firms are income statement, balance sheet and partner’s capital account. Income statement is prepared to ascertain the profit and loss of the firm, while balance sheet is prepared to identify the financial position of the firm. Partner’s capital account is prepared to identify the partner’s liability at the specific period.
• Company: Company needs to follow some specific rules and regulations for the preparation of financial management statements. It is required by the company to prepare its financial statements with respect to the GAAP principles. According to the regulating bodies of a country, a company has to maintain the following books of accounts: a) Balance Sheet b) Income Statement c) Cash Flow Statements

4.3. Analyse the financial performance of Softwood Ltd. for the year 2013 with the help of following financial ratios

a) Gross Profit Margin: Gross Profit Margin= Gross Profit/ Revenue *100

Presentation of Gross profit Margin statement for two years.

b) Net profit Margin: Net Profit Margin = Net Profit/ Revenue * 100

Presentation of Net profit Margin statement for two years. The net profit margin of the company has upsurged in the year 2013 as compared to the year 2012 that implies that the profit earning capacity of the concern has increased.

c) Return on Capital Employed: Return on Capital Employed = Earnings before Interest and tax/ Capital Employed *100

d) Asset Turnover Ratio: Asset Turnover Ratio: Sales or Revenues/ Total Assets

Presentation of Asset Turnover Ratio for two years. The asset turnover ratio of the organization behaviour has grown in the year 2013 as compared to 2012 that implies that the company has been able to gain more income from its assets in the year 2013 than 2012.

e) Current Ratio: Current Ratio = Current Asset/ Current Liabilities

The liquidity position of the concern has declined in the year 2013 as compared to 2012.

f) Quick Asset Ratio: Quick Asset Ratio = (Current Asset – Inventory)/Current Liabilities

The quick assets ratio also speaks that the position of liquidity of the concern has diminished in the year 2013 as compared to 2012.

g) Stock Days

Stock Days = 365/Stock Turnover
Stock Turnover = Cost of goods sold/ Inventory

h) Debtor Days

Debtor Days = (Yearend trade debtors/ Sales)*365

Debtor days shows how quickly the debtors of a company are paying off their dues. The debtors’ days of the concern have declined in the year 2013 that implies the frequency of cash collection from the debtors has grown in the year 2013 as compared to 2012.

i) Debt equity ratio

Debt Equity Ratio = Total Debt/ Total Equity

Presentation of Debt Equity Ratio for two years. The debt- equity ratio speaks that the company has employed less amount of debt in the year 2013 as compared to the year 2012 (Tamari, 1978).

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References

Zeidman, P. and Enberg, H. (1970). Financing corporate growth. 1st Ed. New York: Practising Law Institute.
Tamari, M. (1978). Financial ratios. 1st ed. London: P. Elek.
Lowrie, S. (1912). The budget. 1st ed. Madison, Wis.: Wisconsin State Board of Public Affairs.
Kennedy, R. and McMullen, S. (1973). Financial statements; form, analysis, and interpretation. 1st ed. Homewood, Ill.: R.D. Irwin.
Götze, U., Northcott, D. and Schuster, P. (2008). Investment appraisal. 1st ed. Berlin: Springer.
Engelson, M. (1995). Pricing strategy. 1st ed. Portland, OR: Joint Management Strategy.
Horngren, C. (1981). Introduction to financial accounting. 1st ed. Englewood Cliffs, N.J: Prentice-Hall.

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