Unit 2 MFRD Planning Assignment

Introduction

Finance is the available sum of liquid funds that get utilised for supporting routinely expenditures. Arda require funds for starting new business and in order to get the funds they evaluate different sources. It is very important to manage the available finance and for this purpose there are different methods are available such as financial planning, budgets and many more that get discussed below. Financial planning is important for business and its importance get discussed below. Different financial statements are prepared by the  business organisation  and these statements get discussed below in the report.

Task 1

1.1 Identify the sources of finance available to a business

Arda is going to start new business and for this purpose they require £250,000 as they need to purchase new equipments and other necessary items. They review various sources of finance to arrange their adequate amount. Some of these sources get discussed below such as: -

External Sources
Sources	Description
Bank loan	The adequate sum of finance arranged from the financial institutions or banks termed as loan. Financial institutions or banks grant adequate amount of finance against some sort of security that easily cover up the amount in case of bankruptcy.
Hire purchase	Adra get the required equipments by facilitating the option of hire purchase. As per this option they get the equipment and the amount of equipment paid in various instalments in the form of small instalments.
Leasing	For beginners this option is much effective as they took the equipments or physical items on lease. Lessor charge the rent against the use of the equipment and provide them right to use of the equipment.
Internal sources
Sources	Description
Retained profits	Business organisation attains some reserve funds or savings out of their profits and these funds get utilised for the purpose of business expansion or any other activities (in case of emergency to support business activities).
Sale of assets	Business some time sold out their un-used equipments or replaces them with new ones. By selling these equipments they release their blocked money.

1.2 Assess the implication of the different sources

Different financial sources having different implications such as: -

Sources	Legal	Risk	Control	Finance
Bank loan	Bank imposes legal formalities to safeguard their money.	The risk factor is high as there is requirement of repaying that amount.	Bank get interest over their amount rendered as they don’t get share in controllership.	Huge sum of finance is arranged through it.
Leasing	Legal contract is made between lessor and lessee related to time period, rentals and other terms & conditions	The risk factor is moderate as with the failure of rent payments they close the deal and took back their respective equipment.	Lessor gets rentals against the use of equipment and with this effect they didn’t get any controllership in business.	Equipments of capital expenditures get arranged at small rentals.
Hire-purchase	Legal agreement is made between buyer and seller related to the number of instalments and other terms & conditions.	The risk factor is moderate as they took the equipment back with the failure of the payments.	They become creditor for organisation due to which they didn’t attain controllership in organisation.	Equipments of capital expenditures get arranged at small and regular instalments.
Retained profits	No legal implication as organisation makes use of their own earned money for their betterment.	The level of risk is zero as they utilise their money.	No share of control.	Adequate share of funds get raised.
Sale of assets	No legal implication is made as they sold out their assets.	The level of risk is zero as the assets get sold legally.	Control remains with the organisation as they make sales of their assets.	Small amount get raised.

1.3 Evaluate the appropriate sources of finance for a business project

All sources discussed above render effective benefits but Adra need to get the effective source of finance and these sources get discussed below such as: -

• Bank loan: - Adra get the funds amounting £125,000 from the bank against adequate security. Bank charge interest at the rate of 8% over the amount they provide to Arda. Arda agrees to pay the loan amount in 5 years and pay regular monthly instalments.

Advantages	Disadvantages
Adra get the tax relaxation facility by paying interest over the loan amount.	Risk factor is high as in case of payment failure it leads towards bankruptcy.
It enhances the creditability in the market.	High penalties against the late the payments or payment after due date.

• Leasing: - Adra choose leasing as second option for arranging required equipments or non-current assets for their new business. Adra comes into contract with the lessor in order to pay the rentals for the fixed period of time and for that period they are eligible to use the equipment.

Advantages	Disadvantages
Available finance get utilised in diverse ways.	Regular rentals need to be paid.
Capital amount can’t get blocked with the purchase of equipment.	Failure in rental payment leads to damage their image.
Variety of equipment get arranged to support business activities.	Rentals need to be paid even after attaining loss.

2.1 Analyse the costs of different sources of finance

There are two types of costs related to different sources of finance such as: -

• Cost of Equity: - The sum paid over the equity capital in the form of dividend gets termed as the cost of equity. This cost lower down the total profits earned by the business organisation.
• Cost of Debt: - The sum paid over the debt capital in the form of the interest or rents get termed as the cost of debt. This cost effectively lower down the earned profit of the business organisation (Peters, et. al., 2011).

Adra arrange the finance with the help of their debt capital as they took loan from bank and also chose leasing option for arranging required non-current assets. They pay interest at the rate of 8% over the amount taken from bank and pay set rentals against lease (BenDavid-Hadar, 2014).

Task 2

2.2 Explain the Importance of financial planning

It is a systematic process of estimating the required capital, frame financial policies in context to the procurement, investment and administration of the available funds.

Objectives of financial planning are as follows such as: -

• With the use it management determine the capital requirements.
• It helps in determining capital structure.
• They become able to prepare financial policies.
• It provides adequate level of support in ensuring the available financial resources get utilised fully and in their best manner (Ahmed & Bruce, 2014).

Importance of Financial planning in context to Arda such as: -

• It helps in ensuring adequate level of funds
• It helps in making adequate level of balance between the inflow and outflow of finance.
• It helps in getting stability.
• It attracts the investors in order to make adequate investments in their business organisation (Ahmed & Bruce, 2014).
• It helps in preparing for the emergency situations and reduces the chances of its happening.
• It focuses over growth and development programs that help in their long term survival.
• It helps in making maximum utilisation of the available  financial resources  (Ahmed & Bruce, 2014).

2.3 Assess the information needs of different decision makers

Different decision makers demand for different set of information that get discussed below such as: -

Information type	Description
Strategic	This set of information is required for the purpose of defining goals and priorities, identifying and evaluating available opportunities in order to prepare themselves uniquely to compete with their competitors. Information related to profitability, liquidity, financial position, variance analysis and many more get utilised for this purpose.
Tactical	This set of information is utilised for the purpose of allocating resources and implementing the set plans made by top level management. They prepare alternative plans in order to perform the activities in effective manner. Master budget and other reports get utilised for this purpose.
Operational	This set of information related to the day-to-day operations of the business organisation. It helps in putting adequate level of control over the operations and executing activities in adequate manner. Financial planning, budgetary control and many more get utilised for this purpose.

2.4 Explain the impact of finance on the financial statements

The inflow and outflow of finance put adequate level of impact over their financial statements and it get discussed below such as:

• Balance sheet: - The inflow of finance put effectively level of impact over balance sheet as it increases the various balances and overall balance of balance sheet get increased with the amount of £250,000. The major impact put over the cash & bank account as it get increased with the £250,000 and total assets get increased by the same. On the other side there are various heads get formed such as bank loan and leasing of £125,000 each. The final impact shows that there is increase of £250,000 in total but it gets segregated into two parts.
• Income statement: Due to the debt financing there is effective increase in the operating expenses as they need to pay interest and rentals over their arranged funds. They need to pay the regular interest and rents for the specific period of time and with this effect the ratio of their earned revenues get decreased and there might a possibility of getting loss or low profits (Riedl & Srinivasan, 2010).

2.5 Discuss the main financial statements

The main financial statements that commonly prepared by all business organisations whether they are small or large in size get discussed below such as: -

Statement	Description
Income statement	Under this statement all the operating and non-operating transactions related to the revenues and expenditure get recorded under it and get utilised for the purpose of evaluating overall profitability of the business organisation.
Cash flow statement	This statement is prepared in order to showcase the impact of transactions over the cash and cash equivalent and break down the analysis into three different activities such as operating, financing and investing.
Balance sheet	This statement summarizes the assets, liabilities and equity capital of the shareholders at a specific point of time. It provide the status of their financial position and helps in evaluating the overall performance of business organisation.
Notes	These are adjustments that need to be made in order to provide detailed information related to the different accounts and transactions.

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

Business organisation run in different formats and these organisations prepare their financial statements in different kind of formats.

These formats get discussed below along with three different types of business organisation such as: -

Basis	Sole proprietor	Partnership	Public company
Owners	There is one owner of the organisation and termed as sole proprietor.	There are 2 or less than 20 partners termed as	There are number of owners of the company as per their investment made.
Decision making	Owner makes all the business related decisions	Partners conduct a meeting and took decisions.	Board meetings get conducted in which Board of directors took business related decisions.
Profit and loss account	This statement is prepared only to measure the earned profits or losses for the specific time period. And owner follows the horizontal format while preparing this statement.	This statement is replaced by the profit and loss appropriation account in which they evaluate the profit or loss and make distribution of it among partners. They follow the horizontal format while preparing their financial statement	They make this statement to measure the profitability status during the financial year and they follow the vertical format prescribed by IFRS guidelines.
Balance sheet	This statement is normally prepared by the owner to make record of their assets and liabilities. While preparing it they follow the horizontal format.	They prepare this statement to record their assets and show their capital invested. They follow the horizontal format while preparing it.	They record all their assets and liabilities along with the equity capital. They make use of vertical format while preparing it.

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)

Flexible budget: -

Analysis: -

The above is flexible budget for the Crunch for the month of September. By comparing the flexed budget results with actual results it is determined that they are failing to attain the set targets. As per this flexed budget they are having high losses as compare to it. As per actual results they attain loss of £1000 which is higher than flexed budget loss by £200.

To enhance their performance and earn profits with the help of their activities they need to improve their labour skills and put control over their variable overheads. Due to these sections they are not able to attain desired results and ended with complete with loss (Roper & Ruckes, 2012).

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

Calculation of Unit cost: -

Particulars	Cost	Percentage increase		Calculation		New cost
Direct material	£8	3%		8* 3% = 0.24		£8.24
Direct labour	£7	4%		7* 4% = 0.28		£7.28
Variable factory overhead	£4	3%		4* 3% = 0.12		£4.12
Variable selling overhead	£2					£2
Total variable cost/ unit	£21					£21.64
Particulars			Calculation		Cost
Total variable cost			60,000 units * £21.64		£1,298,400
Fixed cost
Fixed cost of production			£70,300
Fixed cost of selling & administration			£73,100
Total fixed cost			£70,300 + £73,100		£143,400
Total cost			£1,298,400 + £143,400		£1,442,800
Profit margin			18% * £1,442,800		£259,524
Total price			£1,442,800 + £259,524		£1,701,324
Price per unit			£1,701,324 / 60,000 units		£28.36

Total variable cost = £1,298,400

Total fixed cost = £143,400

Total cost = £1,442,800 (£1,298,400 + £143,800)

Profit margin at 18% = £259,524

Total price of 60,000 units = £1,701,324 (total cost + profit margin) (£1,442,800 + £259,524)

Price per unit = £28.36 (£1,701,324 / 60,000 units) (Simon , et. al., 2011)

Pricing decision: The management of Creative Company make use of the cost plus pricing method for the purpose of setting final prices of the product. By following this method they include all available costs (such as variable costs and fixed costs) along with profit margin to set the prices. By doing this they become enough capable to earn adequate amount of profits even after paying tax amount from their sales and other operational expenses (Simon , et. al., 2011).

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

NPV is calculated below: -

NPV	Total present value of Cash inflows - Initial investment
Total PV of CI		20,756
Initial investment		20,000
NPV		756

IRR is calculated as below: -

Internal rate of return

15% + [{756/(756 – 380)} * (16% - 15%)]

15% + [{756/(376)} * (1%)]

15% + [{2.01) * (1%)]

15% + 2.01%

17.01%

Or

17%

IRR = 17% or 17.01%

Payback period is calculated as below: -

Pay-back Period

2 years + [(20,000 - 18,000)/6,000]

2 years + [2000/6,000]

2 years + 0.33

2.33 years

Or

2 years & 4 months

Analysis:

As per the results it is observed that the project is effective because it is less risk  research project  as the initial investment get recovered easily in the time period of 2 years and four month. Along with this it renders adequate level of profit at the completion of this project and lastly the IRR is slightly high as compare to the set rate of cash flow.

Now it is concluded that project must be accepted and processed as it renders effective profits as well as less risky (Adkins & Paxson, 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: -

Ratio interpretation: -

Name of ratio	Industry ratios	Results
Current ratio	1.4	1.27
Interpretation
Electrical engineering business is not able to meet their industry ratio as they attain 1.27 whereas their industry ratio is 1.4. It shows that they are lacking over maintaining adequate level of funds with them to meet out their liabilities.
Name of ratio	Industry ratios	Results
Quick ratio	0.85	0.69
Interpretation
The industry shows the requirement of maintaining a ratio of 0.85 to meet out their short term liabilities and in this ratio Electrical engineering business is failing as they are out of liquid funds and attain only 0.69 as a ratio.
Name of ratio	Industry ratios	Results
Gross profit	38%	30%
Interpretation
The industry averages that companies need to earn revenues at the rate of 38% but Electrical engineering business is not able to attain the ratio as they able to earn revenues at the rate of 30% only.
Name of ratio	Industry ratios	Results
Net profit	6.05%	4.17%
Interpretation
The industry set the ratio of getting net profit from their activities but due to lack of operational efficiency Electrical engineering business is not able to attain the set criteria and falling short to it by 1.88%.
Name of ratio	Industry ratios	Results
Inventory turnover	125 days	122 days
Interpretation
The average time period of inventory turnover set by the industry is 125 days and due to effective sales or efficiency they sold out their inventory within in 122 days. It shows they are enough capable to sold out their inventory.
Name of ratio	Industry ratios	Results
Accounts receivable	105 days	97 days
Interpretation
The average time of collecting debts from market as per the industry is 105 days but they are efficiency enough in gathering their debts because their total collection period is only 97 days they took 8 less days to gather their debts from market.
Name of ratio	Industry ratios	Results
Accounts payable	200 days	365 days
Interpretation
The average time period set for paying debts is 200 days according to the industry but they are paying their debts in 365 days or in one year. They took 165 more days as compare to their industry.
Name of ratio	Industry ratios	Results
Return on capital employed	14.50%	13.16%
Interpretation
The rate of return over capital employed is set by the industry as 14.50% as companies need to make effective use of their capital but Electrical engineering business is not able to get return at that rate.
Name of ratio	Industry ratios	Results
Asset turnover	4	1.40
Interpretation
The industry ratio is 4 of using assets in order get return but Electrical engineering business are not capable enough to make use of their assets as they attain ratio of 1.40.

Conclusion

Arda tends to open new business and for this purpose they are looking for £250,000 and this amount is arranged from bank and opting leasing option. To manage this amount in adequate manner they follow financial planning. Different forms of financial statements get prepared for the purpose of recording different transactions preformed on daily basis. The format of these financial statements gets varies from organisation to organisation. Crunch prepare budget to make adequate utilisation of their available resources and attain set targets. They also evaluate the project with the use of the available investment appraisal techniques such as NPV, IRR and pay-back period. Ratio analysis is such analysis that get utilised for the purpose of evaluating the overall performance of the organisation along with this it help in making adequate level of comparison with the industry ratio.

References

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