Assignment on Managing Financial Resources & Decisions

Assignment on Managing Financial Resources & Decisions

Introduction 

The Assignment on Managing Financial Resources & Decisions aim is to provide learners with an understanding of where and how to access sources of finance for a business, and the skills to use financial information for decision making.

Task 3

3.3 Project Appraisal

Need of Investment appraisal techniques: A sound business operation involves the  marketing planning  and execution of strategies in a manner that could help in generating a wealth for the organisation. The planning process is a very scientific process as it involves rationale judgement along with logical basis. The choice of implementing a decision to do or abstain from doing something in purview of an organisation is majorly concerned with creation of a positive wealth for the organisation. Thus, financial management suggests the use of various investment appraisal techniques that facilitate the process of evaluation of a proposal in regard to the organisational requirements. The, investment appraisal methods cannot be a replacement to the rationale judgement of management, but they certainly helps in making that judgement more sound. (Lumby.S 1988).

The decision making consists of different stages:

1. Planning
2. Identifying the alternatives to be considered.
3. Appraising the options and selecting the best one with regard to the organisation's needs.
4. Implementing the decision.
5. Reviewing the selected investment project (Langdon K 2002)

The various investment appraisal techniques suggested by it are,

1. Net Present Value (NPV): The NPV technique is one of the most tried and tested investment appraisal technique. The NPV is the quantificational representation of the increase in firm’s wealth upon undertaking an investment proposal. As par the suggested norms for making a choice under NPV technique, it is advisable to accept a proposal if it has a positive NPV, in case of more than one proposal the one with maximum NPV should be chosen.
2. Internal Rate of Return (IRR): Internal rate of return is the investment appraisal technique which is used for analysis of project viability. The IRR is the rate at which discounted cash inflows are expected to equalling the discounted cash outflows. The general suggested guideline states that, when an IRR is greater than the discount rate of the organisation than it may be chosen, and one with an IRR less than discount rate should anyways be rejected.
3. Payback Period: It is another populist measure of investment appraisal. The payback period denotes the time that shall be taken to recover the total funds invested in a project. It represents the time in which the total cash inflows will be equal to the total cash outflows. A project with a short payback period is considered attractive as they allow managers to recuperate their investment quickly and give them more flexibility to reinvest these funds in future.
4. Accounting rate of return (ARR): It measures the percentage return the project would generate over its lifetime. It helps in inter organisation valuation like measures of the performance of projects and subsidiaries within the organisation. ARR is very much similar to the payback period method but the important difference is that it tends to favour decision with higher risk whereas payback period is a moderate one.

In the scenario where Fort Sports limited is having an investment proposal to consider the production of new products. The management is definite to be in a state of dilemma as to which one to choose and which one to leave. In situation like these an investment appraisal  data analysis  serves the best purpose, and is being done underneath,

3c. (i)  Computation of Payback period

Payback Period (Product 'A') = 2year + 50000-37500 =  25000

= 2year + 0.5

= 2.5years

Payback Period (Product 'B') = 2year   + 50000- 47500 =  23750

= 2year   +   0.11

= 2.11years

Payback Period (Product 'C')  =  3year   +  50000 – 47500 = 25000

= 3year   +  0.10

= 3.10years

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(ii) Computation of Net Present Value

Net Present Value =  Present Value of Cash Inflow   -  Present value of Cash Outflow

Product 'A'  =  73607.5 – 50000

= 23607.5

Product 'B'  =  75263.75 – 50000

=  25263.75

Product 'C'  =  57032.5 – 50000

=  7032.5

(iii) Computation of Accounting Rate of Return

ARR =  (Average Cash inflow after tax) x  100

Average Investment

Product 'A'  =  23750 X 100

(50000/2)

=  95%

Product 'B' 23750 X 100

25000

95%

Product 'C' 18125 X 100

25000

72.5%

Comment: It may be seen that the Net present value generated by each products are,

• Product A – Production of product A with the given cost and revenue estimation over the period of time is expected to generate a NPV of £23607.5.
• Product B- Production of product B with the given cost and revenue estimation over the period of time is expected to generate a NPV of £25263.75.
• Product C- Production of product B with the given cost and revenue estimation over the period of time is expected to generate a NPV of £7032.5.

Hence going by the principal of  decision making  under NPV i.e. choose the project that gives the highest positive NPV. Ford Sport Ltd may consider production of Product B, which is expected to generate the highest revenue.

Similarly, the Pay back periods of the individual products are as follows,

• Product A – As par our computation, the production of product A at the given cost and revenue estimation over the period of time shall be ploughing back its investment in a period of 2.5 years.
• Product B- As par our computation, the production of product A at the given cost and revenue estimation over the period of time shall be ploughing back its investment in a period of 2.11 years.
• Product C- As par our computation, the production of product A at the given cost and revenue estimation over the period of time shall be ploughing back its investment in a period of 2.5 of 3.1 years.

As the standard of decision making for payback period, being the duration of recovery of initial investment. It shall be advisable for Fort Sports ltd to produce Product B as it is generated to plough back its investment in the shortest time amongst the other alternatives available to the organisation.

Task 4

4.1. The main financial statements

Financial statements for an organisation are the clear reflections of the entities operations for a given period. Financial statements for a company are a great source of information for varied stakeholders as they proved a basis to ascertain the past, analyse the present and plan for the future. The financial statements of a company comprise of:

1. The balance sheet: The balance sheet is a statement formatted representation of the net assets held and the net liabilities owed by an organisation. The balance sheet contains the status of fixed and current assets and long & short term liabilities and the shareholders fund.
2. The Trading & Profit and Loss account: The profit and loss account is a representation of the revenues generated by the organisation and the costs incurred in order to earn the same amount. (Pike and Neale 2005)
3. Cash flow statement: Cash generated and the profits earned are not co existent as they both may vary in actuality. Hence a cash flow statement facilitates the representation of the cash only transactions of the organisation and the outcome i.e. inflow or the outflows out of the operation during a given period in time.Since, it is important to maintain a healthy cash status in order to manage liquidity risk factors. The cash flow statement depicts the following vital information.

1. Cash from operating activities: It depicts the cash generated from business operations.
2. Cash from investing activities: It depicts the cash generated from the investing activities like buying or selling of assets.
3. Cash from financing activities: The cash generated from activities like issue and redemption of shares and debentures, repayment of long term etc. are depicted under this head. 

4.2 Formats of Financial statements for different types of business

The financial statements are a major source of  information and knowledge  for a large number of organisational stakeholders. Financial statements depict the image of direction of business operations in a fiscal. These are in fact a primary source of information for a varied range of stakeholders therefore, the preparation of financial statements is regulated and its format is prescribed by different statues in UK. For an instance in UK a listed company is required to prepare its financial statements in the format prescribed by the UK GAAP’s and the Companies act, 2006. The requirement to present the statements in a format depends on the class and size of the organisation. Namely,

1. Listed Company: A company listed on the stock exchange has certain more leverages and it also has some more regulations to be adhered to.These organisations are accountable to a large mass of stakeholders and thus are highly governed by applicable statues. A listed company is expected to prepare the following records as its financial statements,

• Income statement
• Statement of changes in equity
• Cash flow statement
• Accounting policies and notes
• Annual Report

An annual report includes following in general,

• Financial statements
• Auditors report
• Five year summary of key financial data
• Stock prices(High or low)
• Management discussion and analysis

2. Partnership Firms: A partnership firm is a form of business where several parties join hands together for conducting business operations with mutual agreement to benefit each other. There does not usually exist any specified format for preparation and presentation of financial statements by any specific statue as such for partnership firms. They may choose to prepare a general trading and profit/loss and the addition or depreciation of profit and losses are made from the partner’s capital. (Rice 2011)

3. Sole Proprietorship Firms:A sole proprietorship firm is managed by one person in general and he conducts the business with being responsible for all acts of the business. They are usually smaller in size as well as the level of operations. Being smaller size and to help the sole proprietor with ease of carrying the business they are not covered under any specific regulation prescribing the format for preparation of their financial statements.  A sole proprietorship firm is free choose to prepare a trading account which reflectstheir revenues/income on one side and expenses on the other, to ultimate achieve the profit/loss earned during the period.

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