This ECB Business Finance Assignment is a part of unit 2 named Management of Financial Resources and Decisions of the course BTEC Level 5 HND Diploma Business. This assignment is given in the Eastend Computing and Business College. About this unit:
This unit is about learning the ways in which Finance is managed within a business organisation. By studying this unit the learners will learn how to evaluate the different sources of finance, compare the ways in which these are used and will learn how to use financial information to make decisions and have to do business finance assignment. They will also learn factors that will influence decisions for pricing, investment, budgeting and techniques for the evaluation of financial performance.
There will be four tasks corresponding to four learning outcomes to assess students achieving all the Learning Outcomes. Each task will comprise a few questions to cover the assessment criteria. Assessment criteria students are expected to achieve will be indicated in brackets besides each question by the letters AC 1.1, AC1.2, etc. for pass criteria. Merit and Distinction grades will be given on some part of the assignments. The candidate may choose to present his/her work in written short essay form or through power point presentation as directed in the body of the assignment.Task 1 – Finance as a Resource Scenario :
As a student of HND in Business you have been looking for a suitable job in finance or Accountancy to apply your newly acquired knowledge of financial management into practice. You have had experience working in financial services firms and you would be particularly interested in a role which involved working with and advising local businesses. Eventually you were able to get a job with a large firm of accountants as a Business Finance Advisor. This is a new area of service for the company who have, traditionally, concentrated upon accountancy and auditing services.As a starting point, the senior partner in the company suggests that you put together:
- An information pack for new and existing businesses which Identifies the sources of finance currently available. The pack should be aimed at the full range of business types – new and old, large and small – and for new business start-ups and those wishing to expand.
- Assesses the implications of each source including the relative advantages and disadvantages to the business, the legal aspects, the costs and the suitability for purpose.
- Provide three case-study examples for businesses. These should include a small business start-up, a large business expansion and small group of people who are looking to buy up an existing medium-sized company. Finance sources should be carefully matched to needs.(AC 1.1 to 1.3)
The company are planning to put together a series of seminars for local businesses, covering a variety of finance-related topics. These include:
- Event 1 - Raising finance for business
- Event 2 - Financial planning for new businesses
- Event 3 – Financial decision making
- Event 4 - Financial statements – understanding the profit and loss account and balance sheet. It is your job to plan the events and put together materials for the delegates. This will involve:
- Event 1 – Power point presentation materials to supplement the information pack which has already been prepared. (AC 2.1)
- Event 2 – A two page briefing paper which summarises the key aspects of financial planning. (AC 2.2)
- Event 3 – A short briefing paper which highlights the types of financial information required for decision making purposes – and who within the business might need it. This should also be supplemented by brief power point slides.(AC 2.3)
- Event 4 – A sample profit and loss account and balance sheet with explanatory notes explaining what the key items are – with particular reference to the finance sources and their related costs.(AC 2.4)
You are asked by your line manager to take on the role of the Financial Accountant who recently left your company on a temporary basis. On the first day of your joining the post of Financial Accountant the Directors present you with two budgets prepared by the departed financial accountant. You are given the cash flow forecast for the twelve months from January 2008 (Table-B) and the sales budget covering the twelve month period from July 2007 to June 2008 (Annex-A) – the first six months of which include actual sales figures and variances between budgeted and actual sales. The directors are concerned about the likely cash deficits shown in the cash flow forecast and the sales performance from July to December 2007. They are also concerned that they are very unlikely to meet their budgeted sales targets for January to June 2008. With this in mind they ask you to:
- scrutinise at the cash flow forecast and the sales budget and identify the main problems that ABC Manufacturing is faced with.
- Identify the likely causes of the problems and how they might be remedied and avoided in the future.
- Make recommendations for improving the cash flow situation with a view to minimising the cash deficit or, possibly, generating a cash surplus.
- Make recommendations for resolving the issues highlighted in the sales budget and decide what approach should be taken in relation to the January to June budget.
|Month||Monthly budget||Cumulative Budget||Actual Monthly||Actual Cumulative||Variance|
- Look at the Sales Budget and identify the main issues for ABC Manufacturing Ltd.
- Identify the likely causes of those problems.
- Identify ways in which those problems could have been avoided.
|Rent & Rates||56,000||56,000||56,000||56,000|
|Light & Heat||55,000||55,000||55,000||55,000|
|Monthly Deficit / Surplus||-192,000||49,000||9,000||-2,000||-43,000||-36,000||8,000||14,000||4,000||28,000||19,000||-36,000|
|Accumulative Deficit / Surplus||-192,000||-143,000||-134,000||-136,000||-179,000||-215,000||-207,000||-193,000||-189,000||-161,000||-142,000||-178,000|
You are required to present your findings and recommendations in a formal written report to the Directors of ABC Manufacturing Ltd. (AC 3.1)
Under this business finance assignment, You are hired as a junior management accountant in ABC Engineering Ltd. The company is considering two alternative business projects each of which involve an initial investment of ? 450,000. In your role as a management accountant you are asked to advise the Directors which of the two projects would be the more financially viable.
Project ‘A’ involves the introduction of modern, hi-tech machinery into the company’s main production unit. This will result in significant increases in output and substantial savings in production and maintenance costs. This in turn will result in a net increase in turnover to the company of:
Year 1 - ? 180,000
Year 2 - ? 230,000
Year 3 - ? 280,000
Year 4 - ? 120,000
Project ‘B’ involves an increase in the company’s marketing activities. The Directors would employ one of the region’s most prestigious marketing companies to manage a massive national campaign. They feel that business could be increased without, necessarily, updating production processes. In is anticipated that the net effect of their campaign would bring in additional annual turnovers of:
Year 1 - ? 60,000
Year 2 - ? 120,000
Year 3 - ? 250,000
Year 4 - ? 250,000
As management accountant, you are asked to carry out a full investment appraisal of the two projects. In order to fully assess the pros and cons of the two alternatives you decide to employ a number of appraisal techniques:
- Payback period.
- Accounting rate of return.
- Net present value.
- Internal rate of return.
For calculation purposes, you assume that the cost of capital will remain fairly static at around 6% per annum over the four year period. Your appraisal should be presented in the form of a written report to the Directors and include all financial computations and a summary of the conclusions which can be drawn from the results of the appraisal – including recommendations as to which project should be taken on board. (AC 3.3)
The Directors of ABC manufacturing Ltd are very concerned about the company’s current costing and pricing policies. They are also anxious to find out which products are going to be profitable or otherwise in the future. With this in mind the Directors ask you to carry out a full costing and pricing review across the company’s product range and an assessment of the break-even figures for each item currently manufactured by the company.
One of the most popular products is Machine X. You ascertain that the following costs are incurred in the production of each unit:
- Material costs - ?52.50
- Labour Costs - ?35.75
- Variable Overheads - ?10.20
The fixed costs of running the factory where the Machine X is produced amount to ?120,000 per annum. The current selling price of the machine is ?120. You decide to use the Machine X as the model for all your forthcoming calculations and decide to present your information in the following order:
- The contribution per unit and the contribution/sales ratio.
- The break-even point in unit and sales value.
- A break-even chart for the product.
- The margin of safety per unit and in sales value (unit sales for 2008 are expected to be 7,500).
You also decide to calculate the profit or loss at various sales levels (e.g. 5,000, 8,000 and 10,000 units) and indicate what the following changes will have on the break-even point:
- A ?5 increase or decrease in the selling price.
- A ?5,000 increase or decrease in fixed costs.
- A ?5 increase or decrease in material or labour costs per unit.
All the above information regarding the Machine X should be presented in the form of a brief report showing the relevant financial material in tabular/graphical format supported by relevant text.
Two customers have recently placed large orders for the Machine X at substantially discounted prices. The Directors ask you to calculate the likely impact that either of these orders would have on the company’s profits. They are new customers and their business would push the sales levels well above the anticipated demand of 7,500:
- Southwood Electricals – an order for 500 units at a discount of 15% on the normal selling price.
- Westbrook Engineering – an order for 1000 units at a discount of 25% on the normal selling price.
You are asked to produce a computation for each order illustrating the likely impact on the profits for the Machine X and a memorandum to the Directors making recommendations as to whether they should accept or reject either of the orders. The Managing Director has indicated that financial issues may not be the only consideration. (AC 3.2)
Task 4 – Analysing Financial Performance
Following your recent experience in financial services you decide to move on. After a while you secure employment with the well-known management consulting firm Mancons Ltd. Your role is Training and Development Assistant and this involves the induction and training of new audit and accountancy trainees. You are also responsible for their continuing professional development. This involves running in-house training courses and liaising with local colleges and universities to arrange longer periods of training for audit and accountancy personnel.
There is normally a large intake of new trainees in September with a variety of school, college and university leavers looking to embark on a career in accountancy. You decide to put together an introductory programme for the new starters which covers:
- Accounting terminology – which includes an overview of the types of accounting records
- Financial statements – the form and structure of the main financial statements and the differences between the different types of business. All the new starters have been enrolled on accountancy courses at their local colleges so you decide not to cover the mechanics of double-entry book-keeping or the actual preparation of financial statements.
In preparation for the three two-hour introductory sessions you need to put together a series of handouts for the trainees which explain:-
- The books of prime entry – including the use of the terms ‘debit’ and ‘credit’, accounts and ledgers and the purpose and use of trial balances and final accounts like Income Statement, Balance Sheet and Cash Flow statement. (AC 4.1)
- The format, structure and purpose of the main financial statements – profit and loss accounts, balance sheets and cash flow statements; and
- The differences between the financial statements of different businesses – sole traders, partnerships, limited companies, and non-profit making. (AC 4.2)
You also need to put together some examples of the different final accounts formats for illustration purposes.
In this business finance assignment your role as Training and Development Assistant you are sometimes required to run update training for established personnel within the organisation. There has recently been a move towards helping clients to monitor and appraise the performance of their businesses. This has been quite successful and you have been asked to train some of Manco’s staff in the interpretation of financial statements. This will involve assessing, for example, business profitability, liquidity, efficiency and investment performance. In preparation for this session you are using the example from a real organisation of your choice for example Sainsbury’s or Tesco etc need to:
- Obtain the financial statements of a selected organisation for example Sainsbury’s or Tesco etc - covering a two-year period.
Using the financial statements and key accounting ratios you need to:
- Analyse the financial performance of the selected organisation over the two year period
During the session you will present your delegates with copies of the financial statements of a selected organisation for example Sainsbury’s or Tesco etc, an explanation of the key accounting ratios and a report which analyses organisational performance. (AC 4.3)
Use accounting ratios to analyse and assess the profitability, solvency/liquidity and asset utilisation of the business over the two years.Balance sheet terminology
- Balance sheet:The financial statement that presents a snapshot of the company’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).
- Assets: All the things a company owns in order to successfully run its business, such as cash, buildings, land, tools, equipment, vehicles, and furniture.
- Liabilities:All the debts the company owes, such as bonds, loans, and unpaid bills.
- Equity:All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock.
Another key Equity account is Retained Earnings, which tracks all company profits that have been reinvested in the company rather than paid out to the company’s owners. Small businesses track money paid out to owners in a Drawing account, whereas incorporated businesses dole out money to owners by paying dividends.Income statement terminology
- Income statement:The financial statement that presents a summary of the company’s financial activity over a certain period of time, such as a month, quarter, or year. The statement starts with Revenue earned, subtracts the Costs of Goods Sold and the Expenses, and ends with the bottom line — Net Profit or Loss.
- Revenue:All money collected in the process of selling the company’s goods and services. Some companies also collect revenue through other means, such as selling assets the business no longer needs or earning interest by offering short-term loans to employees or other businesses.
- Costs of goods sold:All money spent to purchase or make the products or services a company plans to sell to its customers.
- Expenses:All money spent to operate the company that’s not directly related to the sale of individual goods or services.
Management of Financial Resources and Decisions-Solution of Business finance AssignmentTask 1
1.1 Identify different sources of finance available to a business.
As a Business Finance Advisor of a large firm of accountants, different sources of the finance are to be identified which are presently available for the business which are old or new, big or small or for the start-ups.
Finance is like the blood for any organisation. Without finance nothing can be managed in the business and it is on the foremost priority of any organisation to manage the finance and its sources for the business to manage all the expenses and operations of the business. There is variety of sources of finances available for the business, which is:
- Internal Sources:
There are two types of internal sources of finance:
- Short term Sources
- Long term Sources
- Equity Share Capital: These are the funds raised by the general public for the business. It is a long term source of finance which provides the required amount of funds to the business to continue its workflow and for the smooth operations. When equity shares will be issued in the organisation, it determines the effective flow of operations.
- Asset Sale: An organisation can raise finance by selling the unused assets and this will help in carrying out the tasks of the organisation smoothly. (Greenwood & Hanson, 2010) It is a short term source of finance.
- Retained Earnings: The business can raise the finance from the part of its own earnings or profits which are known as Retained Earnings. At the time of requirement, the part of the profits can be used by the company for its effective flow of work but it needs an approval of the board of members. (Berk & Peter, 2011)
- Venture Capital: The companies which are growing at a good rate and have enough potential in the future are financed by some investors and the profits of the business are also shared by those investors for a definite period. This is known as venture Capital.
- External sources:
There are two types of internal sources of finance:
- Short term Sources
- Long term Sources
- Bank Loan: Whenever companies are in the need of finance, they can take loans from the banks for a long period of time and the interest is to be paid by the business to the bank on the agreed rate.
- Bank Overdraft: Bank overdraft is an external source of finance which allows the business to withdraw the money which is more than the limit. In case of emergencies or the critical requirements, bank overdraft can be used and high rates of interest are to be paid on bank overdraft.
- Creditors: The creditors of the business provide funds at a high rate of interest if compared to the bank.
- Debentures: The debentures can be issued to raise the funds for the smooth operations of the business. It is like taking loan from the public and paying regular interest to them at a fixed rate.