Unit 2 Managing Financial Resources & Decisions Assignment Copy

Introduction

Unit 2 managing financial resources & decisions assignment copy require adequate amount of finance for the purpose of processing different set of activities and strengthening the market share. Finance is the essential need for business organisation in order to process their business. In the absence of finance they are not able to process their routinely activities. Planning is required in order to make effective use of available finance. Budgets also get prepared in order to make adequate use of finance and attain set goals. Financial statements maintain a proper record of routinely transactions and helps in getting adequate level of information from it.

Task 1

1.1 Identify the sources of finance available to a business

Arda is looking for business start-up and for this purpose they require £250,000. There are various sources from where they get arrange their funds. Below are some sources getting discussed such as: -

• Bank loan: Arda contact the  financial management  or bank for getting adequate level of finance in order to support their business start-up. They borrow the funds from bank and against the use of money they pay interest amount at fixed rate (France, et. al., 2016).
• Leasing: Arda choose this option to get the required equipments without making any capital expenditure. Lessor transfers the right to use of equipment to lessee but ownership of equipment remains with lessor only.
• Retained earnings: The sum of reserve funds or retained profits with the business gets utilised at the time of requirements. It is the internal and effective source of finance.
• Hire purchase: Arda also opt this option as under this they purchase the desired equipment and make payment in the instalments in effective manner. Small instalments are made in respect to pay out the price of the hired equipment (France, et. al., 2016).

1.2 Assess the implication of the different sources

The implications are as follows such as: -

Source	Legal	Risk	Finance	Control
Bank loan	Lots of legal implications in the form of formalities.	Risk factor is high as failure of repayment of loan leads towards bankruptcy.	Desired amount get arranged with the help of it.	Control remains with the ARDA only as they pay interest over loan amount.
Leasing	Legal contract is made.	Moderate level of risk is associated with it.	Desired equipment gets arranged.	Control remains with the ARDA only as they pay regular rentals.
Retained profit	No legal implication is made as they use own money	There is no risk is available	Sufficient funds get arranged.	Control remain with the Arda as they utilise their own money
Hire purchase	Legal agreement is made between seller and buyer.	Moderate level of risk is associated	Require equipment is arranged.	Control remains with the ARDA only as they pay rentals on regular basis.

1.3 Evaluate the appropriate sources of finance for a business project

The appropriate source of finance for a business project is discussed as follows such as: -

Source	Description	Advantages	Disadvantages
Bank Loan	Arda took loan from banks for the amount of £125,000.	They get tax benefit with the payment of interest. Sufficient funds get raised. Increase the market reputation and creditability.	Failure of need payment leads to bankruptcy. Need to make regular payments of interest and instalments.
Leasing	Asda arrange the required equipments of amount £125,000.	It didn’t make capital expenditure. Small rentals  need to be paid	Failure of payment discontinues the agreement between lessor and lessee. Failure of payment damage their brand image in market.

2.1 Analyse the costs of different sources of finance

The cost of different soruces gets divided in to two parts such as:

• Cost of equity: The sum paid over the equity capital to the shareholders gets termed as cost of equity. Mainly it is termed as dividend that paid to shareholders.
• Cost of Debt: The sum paid against the short term or long term debt in the form of rentals or interests and these get termed as cost of debt (Corsatea, et. al., 2014). The sources chose by Arda is debt sources and interest or rentals paid over it get termed as cost of debt. For bank loan they need to pay interest on regular basis and for the lease they need to pay rentals for regular basis (Corsatea, et. al., 2014).

Task 2

2.2 Explain the Importance of financial planning

Financial planning means making plans for the purpose of utilising the available finance in effective manner without creating a situation of lack of finance. Arda get effective level of importance from the financial planning and some of them get discussed below such as: -

• It helps in making adequate level of savings
• It segregates the available finance as per the priorities of the activities.
• It helps in making effective level of use of their available finance.
• It prepares them for the emergency situation as they utilise finance in systematic manner.
• It helps in maintaining adequate level of funds
• The outflow and inflow of cash get maintained in adequate manner with the help of it.
• They make effective decisions with the use of it related to investment or business expansion.
• It helps in getting stability and increase profitability (Caglayan & Demir, 2014).

2.3 Assess the information needs of different decision makers

There are different stakeholders demanded for the different kind of information for the purpose of their decision making. Various set of information’s along with stakeholder gets discussed below such as:

• Strategic information: The set of  information and knowledge  that get utilised for the purpose of preparing different strategies, policies and setting goals for business termed as strategic information. This set of information make inclusion of information related to their profitability, liquidity, financial position, overall performance and many more. The top level management make demand of this information set (Serrasqueiro, et. al., 2011).
• Tactical information: The set of information that get utilised for preparing effective plans in order to attain the set target of the business organisation. This set of information make inclusion of information related to the variance analysis, master budget and many more. The middle level of management gets instructions from the top level management in order to attain the set targets (DE Franco, et. al., 2011).
• Operational information: The set of information that get utilised for executing the activities in systematic manner for the purpose of attaining set targets. This set of information includes the information related to the financial planning, budgets, and many more. The lower level or operational level follows the instructions from their middle level management to achieve the set targets (Serrasqueiro, et. al., 2011).

2.4 Explain the impact of finance on the financial statements

The financial statements get impacted with the inflow as well as outflow of the finance. Arda gather the finance from two different sources that effective impact their financial statements. The impact over financial statement gets discussed below such as: -

• Balance sheet: This statement records the summary of different accounts and utilised for the purpose of evaluating the financial position of the organisation. With the inflow of finance there is effective impact is noted down over balance sheet such as there is increase in the assets side with the increase in the head of cash and bank balance along with equipments. Along with this liabilities side also shows increment in it as there are two heads such as bank loan and lease increase their total amount. In this manner their assets as well as liabilities get increase with the same amount of £250,000 (Du & Girma, 2012).
• Income statement: - This statement records transaction related to the expenditures and income. By opting lease and loan option there is effective increase in the total debt. Over bank loan Arda is paying regular interest and for lease they are paying regular rentals. These both transactions increase the share of expenses and lower down the profit share (Du & Girma, 2012).

4.1 Discuss the main financial statements

The set of financial statements prepared by the organisation include income statement or profit and loss account, cash flow statement, balance sheet, notes and statement of change in equity. These statements get discussed below such as: -

Name of statement	Description
Income statement	There are various transactions related to the income and the expenditure of the organisation. These transactions get recorded properly under this statement and after a set period of time it get utilised for evaluating earned profit or loss.
Cash flow statement	There are various transactions are made into cash or having liquid fund transactions. These transactions get recorded under different categories and need to be evaluated for getting closing cash balances.
Balance sheet	There are various balances of different sections available get recorded under this statement. It provide summary of the sections and provide effective view. It provides overview of financial position.
Notes	The set of various statements that gets prepared for the purpose of disclosing information related to various transactions.
Statement of change in equity	This statement is prepared for the purpose of recording different activities related to change in the equity and different activities related to the equity.

4.2 Compare appropriate formats of financial statements for different types of business

In business market different organisation are performing their activities and these organisations having different kind of financial statements. These financial statements get discussed below such as:

Base	Sole proprietor	Partnership	Company
Ownership	Proprietor is the only owner of the business.	Partners are the owners of the business.	Shareholders are the owners of the business.
Number of owner	There is only one person is owner of business.	The number get varies from 2 to 20 but not more than 20 members.	There are lots of owners of the company.
Decision making	All business decisions are taken by the sole proprietor.	All business related decision making  taken by the partners of the business organisation.	Board of directors of the business organisation took all the business related decisions.
Income statement	They prepare this statement to record their revenues and expenses and in the end of the financial year they utilise this statement to measure their earned profit.	They prepare profit and loss appropriation account to evaluate profit and loss as well as share it among partners.	They prepare profit and loss account to record their revenues and expenditure, make evaluation of it for getting adequate information and showcase information to the interested stakeholders.
Cash flow statement	This statement is not prepared by sole proprietor.	This statement is not prepared by partnership.	They prepare this statement as they need to record transactions related to their liquid funds to put adequate control over it.
Balance sheet	This statement is prepared to maintain adequate record of business related assets and liabilities.	They prepare this statement in order to show their capital invested and other assets, liabilities.	They prepare this statement for the purpose of showing their financial position to their interest stakeholders.
Notes	This statement is not prepared by sole proprietor.	The number of statements prepared is few for forecasting detailed information.	There are various transactions that require detailed information and they need to provide them as it helps in decision making.
Statement of change in equity	This statement is not prepared by sole proprietor.	This statement is not prepared by sole proprietor.	They have equity capital invested in their business and with this effect they have to prepare this statement.

Task 3

Part A: - Prepare a flexible budget that will be useful for management control purpose. Analyse the budget and make appropriate decisions. (3.1)

Budget: 

 

Analysis: According to the above prepared flexible budget it is analysed that they are fail to perform as per the set budget. If they perform according to the set budget then they didn’t attain high loss. By looking at the calculated variances it is clearly evaluated that they attain -£1000. As per the results it is clearly observed that they are failing over their labour and other overheads as both get over expensed as compare to budgeted expenses. Management need to make effective level of improvement in these sections if they need to attain positive balance or profits (Karanovic, et. al., 2010).

Part B: - Explain the calculation of unit costs and make pricing decisions using relevant information (3.2)

Unit cost calculations: -

Particulars	Cost	Percentage increase	New cost
Direct material	£8	3%	£8.24 [(8* 3%) + 8)]
Direct labour	£7	4%	£7.28 [(7* 4%) + 7)]
Variable factory overhead	£4	3%	£4.12 [(4* 3%) + 4)]
Variable selling overhead	£2		£2
Total variable costs	£21		£21.64

Total variable cost (new) = total units * new variable cost
= 60,000 * 21.64 = £1,298,400
Total cost = Total variable cost + total fixed cost
Total fixed cost = fixed cost of production + fixed cost of selling & administration
= 70,300 + 73,100 = 143,400
Total fixed cost = £143,400
Total cost = £1,298,400 + £143,800 = £1,442,800
Profit before tax is 18% so £1,442,800 * 18% = £259,524 added to the total cost in order to get the total price such as: -
= £1,442,800 + £259,524 = £1,701,324
Now, price per unit = £1,701,324 / 60,000 units = £28.36
Price/unit = £28.36/ unit

Pricing decision: Pricing decision follow the cost plus pricing method and for this method all the available costs such as variable costs and fixed costs along with adequate share of profits get included. By adding all these costs effective price of product is realised and helps in getting adequate share of profit after deducting tax from earned sales revenues (Karanovic, et. al., 2010).

Part C: - Assess the viability of a project using investment appraisal techniques (Net present value (NPV), internal rate of return (IRR) and Payback period).

Calculation of NPV: -

Year	Cash flows	15% DR	PV of C.I.
0	-20,000	1	-20,000
1	8,000	0.87	6,960
2	10,000	0.756	7,560
3	6,000	0.658	3,948
4	4,000	0.572	2,288
		NPV	756

NPV = Total PV of C.I. – Initial Investment
= 20,756 – 20,000 = 756
NPV = 756 (Hall & Westerman, 2013)

Calculation of IRR: 

IRR = LDR + [{NPV at Lower rate / (NPV at Lower rate –NPV at Higher rate)} * (HDR – LDR)]
= 15% + [{756/(756 – 380)} * (16% - 15%)]
= 15% + 2.01%
= 17.01% or 17%
IRR = 17% or 17.01% (Mendes-da-Silva & Saito, 2014)
 Calculation of Payback period: -
= 2 + [(20,000 – 18,000)/ 6,000]
PBP = 2.33 years or 2 years & 4 months

Conclusion: The project is easily opted because it is less risky and renders adequate level of profits. The internal rate of return is also effective that helps in choosing this project (Mendes-da-Silva & Saito, 2014).

Task 4

4.3 Interpret financial statements using appropriate ratios and comparison, both internal and external. Calculate and evaluate the following ratios: -

Calculation of ratios: -

Interpretation of calculated ratios: -

Name of ratio	Industry ratios	Results	Interpretation
Current ratio	1.4	1.27	They fail to attain the set average of industry as it shows that they fail to maintain adequate level of funds with them.
Quick ratio	0.85	0.69	They fail to attain the industry’s average ratio as they are far behind from it. It shows that they are not having adequate level of liquid with them.
Gross profit	38%	30%	The ratio of industry is much better than their results. They are not making effective sales in order to meet their industry’s average ratio.
Net profit	6.05%	4.17%	They fail to attain the ratio of their industry. it shows that they are not having effective operational efficiency to make adequate use of their funds.
Inventory turnover	125 days	122 days	They make adequate level of sales as their inventory gets turned within 122 days whereas industry required 125 days.
Accounts receivable	105 days	97 days	They effectively collect their debts from market as the time taken by them is around 97 days whereas their industry requires 105 days to collect their debts.
Accounts payable	200 days	365 days	They are not paying their debts as per the set industry ratio. Because as per the industry ratio is 200 days whereas they took 365 days to make payments of their debts.
Return on capital employed	14.50%	13.16%	They are also falling here also as industry ratio is 14.50% whereas they attain return at the rate of 13.16% which is effectively lower than industry ratio.
Asset turnover	4	1.40	They ratio set by industry is much far away from the attained results which shows that they are utilising their assets in adequate manner.

Conclusion

In the end it is concluded that Arda chose two options such as leasing and bank loan in order to arrange the required funds and equipments. They make use of the financial planning for the purpose of making effective use of their gathered finance. They prepare adequate financial statements that provide effective set of information for the purpose of decision making. Crunch makes use of investment appraisal techniques to measure the profitability of the available project so that they chose adequate project for their purpose. Ratio analysis is made over the  finance and funding  of electrical engineering business in order to make effective comparison with the industry performance.

References

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