Unit 2 Managing Financial Resources Decisions Assignment - Hardwood

Introduction

Business necessary and important requirement is to arrange adequate level of finance to support their routinely activities. Harwood Ltd evaluates their growth and showcase to increase their interest to expand their business and this require huge amount for investment. In below Unit 2 Managing Financial Resources Decisions Assignment Hardwood available sources of finance get discussed along with its implications. Only raising finance is not sufficient it become essential to make adequate use of it. For this purpose  marketing planning  and budget system will discussed. Ratio analysis is also discussed as it helps in making adequate level of comparison with the industry performance.

Task 1

1.1. Identify the sources of finance available to Hardwood Ltd. (AC1.1)

Hardwood Ltd. shows interest in expanding their business and for this purpose they face requirement of huge finance. There are various sources are available for raising finance and some of them get discussed below such as: -

Sources	Description
Bank loan	Hardwood ltd. borrows the funds from bank at agreed rate of interest for a specific period of time.
Equity share capital	Hardwood Ltd. makes issuance of the shares in order to increase the ratio of capital for the purpose of their business expansion plan. This source helps in making effective and strong base of finance.
Bank overdraft	Hardwood Ltd. gets adequate support from their bank as they get overdraft facility. This source is available for short period of time.
Hire purchase	Hardwood ltd. gets the required equipment without paying any capital amount against the equipment. They pay small amount for once and the remaining amount paid in the form of instalments. At the end of instalments they get the ownership of the equipment.
Leasing	Hardwood ltd. renting an asset without paying capital amount for the purpose of making purchase of it. They sign legal agreement with the lessor and agree to pay regular rentals. At the end of agreement equipment is get returned to the owner as he only transfer the right to use.
Retained profits	It is the saving made by the organisation for the purpose of dealing with emergency situation. Hardwood Ltd. makes use of their retained profits in their business expansion plan.
Sale of fixed assets	No longer needed machinery get sold by the Hardwood Ltd. in order to arrange funds. This source is able to arrange moderate amount for them.

1.2. Assess the implications of the sources of finance you have identified above in Task 1.1. (AC1.2)

The implications of above discussed sources of finance are as follows such as: -

Sources	Legal	Control	Risk	Finance
Bank loan	Lots of legal formalities are imposed by bank.	They get interest on regular basis. So they didn’t get control in organisation.	The risk factor is huge.	Bank provide desired amount against security.
Equity share capital	Lots of legal formalities are imposed by the government.	Shareholders become owners and with this effect they get controllership.	There is no risk	Equity capital helps in getting huge finance.
Bank overdraft	Lots of legal formalities are imposed. By bank	They get high rate of interest. No control is diluted	There is huge risk.	Reasonable share get arranged.
Hire purchase	Legal contract is signed between buyer and seller	Rentals are paid so no control gets diluted.	There is no such risk.	Adequate share of finance get arranged with the help of it.
Leasing	Legal agreement is signed between lessor and lessee.	Control remains with the Hardwood.	Risk factor is low.	Adequate share of finance get arranged with the help of it.
Retained profits	There is no legal implication.	Hardwood didn’t share their control	Risk factor is equal to zero.	Adequate share of finance get arranged.
Sale of fixed assets	No  legal contract  and implication is implied over it.	Control remains with the Hardwood.	There is no risk	Low amount get raised regularly

1.3 Evaluate and recommend appropriate sources of finance for the proposed purchase of plant and machinery by Hardwood Ltd. (AC1.3) 

For Hardwood ltd. the appropriate share of finance is discussed below such as: -

Source	Description	Advantage	Disadvantage
Bank loan	Hardwood Ltd. go for the bank loan against their available securities. They took loan at the interest rate of 9%.	Small instalments need to be paid. It provide tax relaxation benefit	It makes the financial source bit expensive due to interest amount. Hardwood ltd. need to render security against the loan amount.
Equity share capital	Hardwood ltd. need to purchase plant and machinery and it requires huge finance for this purpose they issues shares at the rate of £1.00 each.	There is no need to repay this amount. There is no fixed interest is paid over it.	Ownership get diluted with number of shareholders. Profits should be divided in the form of dividend.
Retained profit	Hardwood ltd. also makes use of their retained profit in their business expansion plan.	The amount used didn’t need to be repaid. There is no additional cost is associated with it.	It reduces the balance of emergency finance.

Task 2

2.1. Analyse the costs of the different sources of finance identified in task 1.1 above. (AC2.1)

Different sources of finance having different kinds of costs associated with it and get termed with different names. The cost of different sources is getting discussed below such as:

In case of equity finance: - Cost of equity finance is realised when Hardwood pay the dividend to their shareholders. The part of dividend is not so high but the expectations of shareholders are high as they are owners of the company. It is denoted as follows such as
Ke = D/P0
Or Ke = D0 (1 + g) / P0 + g (Barth, et. al., 2013)

In case of debt finance: - Cost of debt finance is realised when Hardwood took loan from bank or issue debentures. In both the cases they need to pay the effective interest amount for a specific period of time. Increase in debt amount lead to increase in the financial risk for Hardwood ltd. It is denoted as follows such as: -
Kd = i/P0
Kdnet = i(1-T) / P0 (Barth, et. al., 2013)

In case of Preference share: - Cost of preference share is realised when Hardwood pay the dividend to their preference shareholders as they get interest at fixed rate of dividend. They get dividend preferentially and its formula is as follows such as: -
Kp = D/P0 (Blanco, et. al., 2015)

In case of lease finance: - Cost of lease finance is realised when Hardwood pay the interest to the lessor. The rentals get fixed in their legal agreement (Blanco, et. al., 2015).      

2.2. Explain the importance of financial planning to Hardwood Ltd. (AC2.2)

Financial planning: Plans that get prepared by the management in context to make maximum utilisation of their available finance. This methods utilised by them in order to prepare effective policies and rules related to their finance (Bird, et. al., 2014). Hardwood Ltd. also makes use of financial planning and its importance gets discussed below such as: -

• Hardwood Ltd.  management make effective decisions with the use of it.
• Hardwood ltd. management put adequate level of control over their flow of cash as they use it in planned manner.
• Hardwood ltd. makes use of it in eliminating unnecessary cost that helps in increase in their available funds.
• Management of Hardwood Ltd. utilise it for forecasting and estimating the requirement of capital in near future.
• It helps the Hardwood Ltd. management in making effective savings.
• With the use of financial planning Hardwood Ltd. utilise their available income in effective and efficient manner.
• Management of Hardwood Ltd. becomes much capable in order to deal with the emergencies (Simoncic, et. al., 2013).

2.3. Assess the information needs of different decision makers of Hardwood Ltd. (AC2.3)

Organisation having different stakeholders that are interested in activities that performed by them. In the same manner Hardwood ltd. also having some stakeholders that demand or access their information for making their decisions such as: -

• Shareholders: - They access the information related to their profitability & liquidity in order to make decision whether they hold their share or buy more or sell them. They also access the information in order to know the probability of getting the dividends from Hardwood Ltd (Alin-Eliodor, 2014).
• Employees: - They access the information related to profitability, liquidity and financial position in order to evaluate their stability. They also evaluate various terms such as their remuneration or bonuses and many more.
• Banks and other lenders: - They access the information related to the profitability, financial position and liquidity as they are they provide funds to them and with the help of it they evaluate their solvency. With the help of information they measure whether they get their money back or not.
• Suppliers and vendors: - They access the information related to the liquidity and financial position as they provide materials and other supplies on credit. They evaluate the situation whether they get their amount or not (Puri, 2014).

2.4. Explain the impact of finance on the financial statements of Hardwood Ltd. (AC2.4)

Hardwood ltd. is having 9% long term loan amounting £925,000 that shown under their liabilities side in balance sheet. In order to make expansion of their business they took more loans that also increase their loan amount. It directly increases their total liability. With the increase in the loan amount there is effective increase in the interest amount that also impact their income statement as it lower down their profit ratio. Hardwood ltd. is having equity share capital of £420,000 or 42,000 shares of £1.00 each. In order to raise funds they issue shares that increase their equity share capital and overall it increases the liabilities as it get recorded under liabilities side. They also pay dividend over their share capital that get recorded under income statement as operating expenditure and with this effect there is effective reduction is noted down in their profit amount (Caglayan & Demir, 2014). Lastly they make use of their retained profits that lower down their cash as well as ratio of their retained funds. This transaction lowers down the liabilities as well as assets amount. It doesn’t put impact over their income statement as it didn’t attain any kind of cost with it (Schmidlin, 2014).

Task 3

3.1 Using the information in Section A prepare and analyze the cash budget for Hardwood for the 6 months April – Sep 2015. (AC3.1)

Budget: -  The report that gets prepared for the purpose of estimating the revenues and expenditure for a specific period of time and it get reviewed and re-evaluated periodically. The objectives behind preparing budget are as follows such as: -

• Planning: Budget is prepared for the purpose of making effective plan related to the use of their available resources in order to attain the growth and development for their business organisation (Saxena, 2015).
• Coordination: It helps in enhancing the coordination among the employees and the management. With the use of it coordination gets enhanced and it helps in reducing unnecessary cost.
• Resource allocation: Budget helps in making effective allocation of the in hand resources. They make maximum and best utilisation of their available resources.
• Performance review: Budget also get utilised for the purpose of making review of their overall performance. At the end actual results get compared with the budgeted results and helps in measuring the overall performance (Saxena, 2015).

Cash budget: -

Particulars	April	May	June	July	Aug	Sep
Estimated cash receipts	‘000	‘000	‘000	‘000	‘000	‘000
From credit customers	270	270	270	270	270	275
From cash sales	0	0	0	0	0	0
Total cash receipts	270	270	270	270	270	275
Estimated cash payments
To suppliers of goods	80	80	80	95	95	100
To employees (wages)	85	85	85	85	85	85
Fixed Expenses	35	35	35	35	35	35
Other overheads	25	26	27	28	29	30
Purchase of new machinery				700
Total Payments	225	226	227	943	244	250
Net surplus/(deficit) for month	45	44	43	-673	26	25
Opening cash balance	15	60	104	147	-526	-500
Closing cash balance	60	104	147	-526	-500	-475

Analysis: - The budget gets prepared in order to forecast or estimate the revenues and expenditure of six months (April to September). In the first three months the revenues shows the increment trend but after that there is huge deficit attained by Hardwood Ltd. As per the earned revenues by making sales Hardwood Ltd. is able to attain revenues with increasing trend. But in the month of July they purchase Machinery by  decision making  cash payments. This transaction results into cash deficit as they made capital expenditure out of their liquid funds (Roper & Ruckes, 2012). All activities or processing is effective enough as their revenues shows increasing trend with the increase in the expenses also. It is suggested that Hardwood Ltd. need to make their capital expenditure with the use of various other sources such as taking bank loans, lease or hire purchase. By choosing out of these options Hardwood Ltd. makes small payments such as instalment to repay their loan amount, rentals for leasing and instalments for hire purchase (Roper & Ruckes, 2012).

3.2 Explain the calculation of unit cost and make pricing decisions using the information in Section A.(AC3.2)

Unit cost calculation: -

Particulars	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Total
Purchase	80,000	80,000	80,000	80,000	95,000	95,000	100,000	105,000	715,000
Labour	75,000	75,000	85,000	85,000	85,000	85,000	85,000	85,000	660,000
Other variable expense	25,000	25,000	25,000	26,000	27,000	28,000	29,000	30,000	215,000
Total	180,000	180,000	190,000	191,000	207,000	208,000	214,000	220,000	1,590,000

Calculation of total cost, profit margin and Price per unit

Particulars	Cost / units
Total variable cost	£1,590,000
Total budgeted unit	10,000 units
Unit cost	£159/ unit
Fixed cost	210,000
Total cost (TVC+ TFC)	£1,800,000
Profit margin	10%
Profit (1,800,000 * 10%)	180,000
Total Price (Total cost + profit)	£1,980,000
Per unit price (1,980,000/10,000)	£198.00

{Profit margin is assumed at 10% as it is not provided}

Analysis: - For calculating the unit cost of furniture all available variable costs get add up. To get per unit cost total variable cost gets divided by the number of units and it is attained as £159 per unit (de Souza, & Lunkes, 2016). To set up the price of the furniture at which it is make available to the customers all the variable cost, fixed cost along with profit margin. For getting profit 10% margin is set and when all amount get add up the total price is attained. In order to get the price of the furniture it gets divided by the total unit cost and it is attained as £198.00 (de Souza, & Lunkes, 2016).

3.3 Assess the viability of the project identified in Section B using the Investment Appraisal techniques of Payback [P/B], Net Present Value [NPV], Internal Rate of Return [IRR] and Accounting Rate of Return [ARR]. To do this you should perform the relevant calculations and explain the results. (AC3.3)

NPV calculations: -

Machine A
Year	Cash Inflow	Discount rate	Discounted CI
1	900	0.909	818.1
2	800	0.826	660.8
3	600	0.751	450.6
4	100	0.683	68.3
5	50	0.621	31.05
			2028.85

NPV for Machine A = Discount cash inflow – initial investment
Discounted cash inflow = £2,028.85
Initial investment = £2,000.00
Now the NPV = £2,028.85 - £2,000.00 = £28.85 (Adkins & Paxson, 2014)

Machine B
Year	Cash Inflow	Discount rate	Discounted CI
1	200	0.909	181.8
2	300	0.826	247.8
3	700	0.751	525.7
4	850	0.683	580.55
5	950	0.621	589.95
			2125.8

NPV for Machine B = Discount cash inflow – initial investment
Discounted cash inflow = £2,125.80
Initial investment = £2,000.00
Now the NPV = £2,125.80 - £2,000.00 = £125.80 (Adkins & Paxson, 2014)

Payback period calculations: -

Machine A

Payback Period Calculation

2 + (2,000 - 1,700)/600

2 + (300 / 600)

2 + 0.5

2.5 years

 

Machine B

Payback Period Calculation

3 + (2,000 - 1,200) / 850

3 + (800/ 850)

3 + 0.94

3.94 years

Average rate of return calculation as below: -

Formula of ARR = (Avg. income / Avg. initial investment) * 100

ARR for Machine A
Average income	490
Average initial investment	2000
Calculation	(490/2000) * 100
ARR	24.50%

 

ARR for Machine B
Average income	600
Average initial investment	2000
Calculation	(600 / 2000) * 100
ARR	30%

Internal rate of return calculation is as follows: -

Machine A

Machine A
Year	Cash Inflow	Discount rate 10%	Discounted CI	DR 8%
1	900	0.909	818.1	0.926	833.4
2	800	0.826	660.8	0.857	685.6
3	600	0.751	450.6	0.794	476.4
4	100	0.683	68.3	0.735	73.5
5	50	0.621	31.05	0.68	34
			2028.85		2103

(Adkins & Paxson, 2014)

IRR	LDR + [{Lower rate NPV / (Lower rate NPV - Higher rate NPV)} * (HDR - LDR)]
	8% + 103 / (103 - 28.85) * 10% - 8%
	8% + 103 / 74.12 * 2%
	8% + 2.78%
	10.78%

Machine B

Machine B
Year	Cash Inflow	Discount rate 10%	Discounted CI	DR 8%
1	200	0.909	181.8	0.926	185.2
2	300	0.826	247.8	0.857	257.1
3	700	0.751	525.7	0.794	555.8
4	850	0.683	580.55	0.735	624.8
5	950	0.621	589.95	0.68	646
			2125.8		2269

(Adkins & Paxson, 2014)

IRR	LDR + [{Lower rate NPV / (Lower rate NPV - Higher rate NPV)} * (HDR - LDR)]
	8% + 269 / (269 -125.80) * 10% - 8%
	8% + 269 / 143.20 * 2%
	8% + 3.76%
	11.76%

Definitions of investment appraisal techniques calculated above such as:

• Net Present Value: It is the present value of the sum of money in context to its future value when this amount gets invested with compound interest. Or in general terms it is the difference between the present value of all cash inflows and present value of cash outflows. This technique is used by the management to evaluate the profits related to the investment. High ratio of NPV denotes high profits and vice versa (Adkins & Paxson, 2014).
• Pay-back period: It is that time period that is required for the purpose of recovering the made investment with the help of activities in the form of regular cash inflows or profits. Lowest period shows that investment or project is less risky and vice-versa.
• Average rate of return: It is also denoted as the accounting rate of return. This technique is utilised for the purpose of calculating return that get generating from the earned revenues with the effect of investment made. The time value of money didn’t get considered under it (Adkins & Paxson, 2014).
• Internal rate of return: This technique is utilised for the purpose of getting such rate at which the net present value related to all cash inflows become zero. This technique measures the attractiveness related to the project or investment made (Adkins & Paxson, 2014).

As per the calculations the attained results are show below along with the preferences such as: -

Particulars	Results of Machine A	Results of Machine A	Preference
NPV	£28.85	£125.8	Machine B
IRR	10.78%	11.76%	Machine B
ARR	24.50%	30%	Machine B
PBP	2.5 years	3.94 years	Machine A

Analysis of the results and conclusion: As per the results shown in the above table it is observed that Machine B is much effective as compare to the Machine A as it provide high profits along with high rate of returns whether it is internal or average rate of return. But as per the payback period it is analysed that Machine B is risky deal as it took almost 4 years to recover the invested amount but it provide high profits (Adkins & Paxson, 2014). So lastly it is concluded that Machine B is preferred over the Machine A on the basis of the NPV or profitability and rate of returns.

Task 4

4.1. Discuss the main financial statements of a company by outlining the purpose, structure and main sections of the Income statement, Balance Sheet and cash flow statement (AC4.1)

Financial statements: The statement that get utilised for recording financial activities for a specific period of time and also get utilised for extracting adequate information. Financial statement also get utilised for the purpose of measuring their financial position, their overall performance and liquidity information (Robinson, et. al., 2012). The main financial statements make inclusion of three statements such as income statement, cash flow statement and balance sheet.

Income statement: - It is also denoted with the name of “Profit & loss account”. This statement is particularly utilised for recording the activities related to the income and expenditure made by them during the specific period of time. This statement get utilised for the purpose of evaluating efficiency of earnings. This statement is utilised by management to compare their past year’s performance with current year performance (Robinson, et. al., 2012).

Balance sheet: - It is also denoted with the name of “Statement of Financial Position”. This statement provides brief or summarised overview of organisational assets, contract liabilities  and shareholder’s equity. Balance sheet figures are matched in such a manner (Grimm & Blazovich, 2016):
Liabilities + Equity capital = Assets
This statement provide summary of all the assets, liabilities and equity capital at the end of specific time period (financial year).

Cash flow statement: - This statement is utilised for the purpose of recording movement of liquid and equivalent funds (inwards and outwards) for a specific period of time. Management prepare this statement because it help them out in getting effective information related to the utilisation of their liquid funds and helps in putting adequate control over the unnecessary use of liquid funds. This statement categorise the activities in three different segments such as operating activities, investing activities and financing activities (Grimm & Blazovich, 2016).

4.2. Compare appropriate formats of financial statements for different types of business (AC4.2)

All organisations whether it is sole proprietor or partnership or company prepare financial statement as per their need. The format of financial statement varies from organisation to organisation and these differences get discussed below such as: -

Sole proprietorship	Partnership	Company
This organisation attains only one owner and that get termed as sole proprietor. Owner prepares profit and loss account to measure the profit or loss for the specific period of time. To make record of their cash transactions some of sole proprietor prepare petty cash book.	There are 2 or more (less than 20) partners are there in one organisation that perform together after signing legal agreement. They prepare income statement, balance sheet and partner’s capital account and simple format is followed by them during the preparation of these statements.	Shareholders are termed as the owner of the Company. But all business related decisions are taken by Board of Directors. They follow the guideline and principles rendered by GAAP and IFRS while preparing their financial statement whether it is income statement or balance sheet or cash flow statement or other statement. They follow these statements in order to avoid the legal issues as by following rendered principles and guidelines they make fair representation of the transactions and provide detailed information related to their business transactions.

4.3. Interpret the Financial Statements of Hardwood Ltd [presented in Section C] by calculating and commenting on the nine ratios listed below for 2014 and 2013 and compares these with Industry averages shown in the table below:

Ratio calculations: -

Ratio interpretation is as follows: -

Ratio	2013	2014	Industry Ratio	Interpretation
ROCE	26.19%	41.43%	35%	Hardwood Ltd. increases their efficiency in order to make effective use of their capital employed. In 2013 they are not attaining effective returns but in 2014 they enhance their overall efficiency that improves their ratio as compare to industry ratio.
Operating profit	4.96%	6.72%	13.6%	Hardwood ltd is failing to attain the industry set ratio although it showcase improvement in their operational efficiency as their ratio get improved.
Gross profit	45.83%	49.42%	40%	The revenues earned by Hardwood Ltd. are effective enough as they are far better than their industry ratio in both years.
Operating asset	1.11	1.26	1.5	They fail to make effective use of their operating asset in both the years. They enhance their efficiency to utilise their operating assets as there is increase in ratio in 2014 as compare to 2013.
Current ratio	1.98	1.65	2	The ratio shows downfall in the year 2014 as compare to 2013. With this downfall they not able to attain the adequate funds as per the set requirement of their industry.
Quick ratio	1.10	0.70	1.5	The ratio shows downfall in the year 2014 as compare to 2013. With this downfall they not able to attain the adequate liquid funds as per the set requirement of their industry. In both years they showcase inefficiency but in 2014 the ratio is just half that need to be improved otherwise they face problems related to liquid funds.
Stock days	62 days	54 days	75 days	They are much effective performer in selling their inventories. In the year 2014 they enhance their efficiency as ratio get lower down. It shows they make effective high sales.
Debtors days	31 days	29 days	30 days	In 2013 they are failing to meet the industry ratio but they improve their efficiency and collect their debts in much better period as compare to their set industry ratio.
Capital gearing	1.41	1	1	In 2013 they attain high ratio as compare to the industry ratio but in 2014 they manage to become equal to their industry ratio. It reflects their efficiency of utilising their finance.

Conclusion

In the end it is concluded that Hardwood ltd. prefer the bank loan, equity share capital and retained profit. With the help of these sources they get adequate level of finance and required equipment. With the use of financial planning and budget system Hardwood Ltd. make diversified and effective use of their available finance. Hardwood Ltd. also makes use of investment appraisal techniques such as NPV, IRR, ARR and PBP to evaluate the available projects and chose adequate project for their purpose. Hardwood evaluate their performance with the help of ratio analysis as they compare their overall performance with industry performance.

References

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Unit 2 Managing Financial Resources Decisions Assignment Hardwood discussed available sources of finance with its implications, We are posting free units solutions so scholars can explore the our  Assignment Help in UK  and get review the quality of our work.