Assignment on Managing Financial Resources and Decisions

Assignment Managing Financial Resources Decisions

Assignment on Managing Financial Resources and Decisions

Introduction

Organisation whether it is new or existing all of them require adequate amount of finance for running their operations and daily routinely activities. All organisations arrange their funds from different sources. In front of organisational management managing available finance is big challenge and for this purpose they make use of different tools and techniques such as financial planning, different type of budgets. With the help of these tools they also manage their other available resources. They utilise different project evaluation technique in order to evaluate the benefits of the available projects. Performance evaluation is required to make improvements and make adequate changes in their processing.

Task 1

1.1 Identify the sources of finance available to a business

Sources of finance help business in developing and growing them. There is variety of sources of finance available with the ARDA business. These are classified as:

External Sources 

  • Bank Loan: External sources primarily includes the outstation liabilities like bank loans where collateral securities are required and are convenient for business as per the market channels of borrowing.
  • Leasing: Another source for external source of finance is leasing where the securities are leased out and are utilized as per the terms decided between the lesser and lessee. This is also one of the prominent medium in gathering the source for finance (France, 2016).

Internal sources

  • Retained Profits: In the internal sources there are retained profits which are retained with the business as with the profits for the following years and are used at the time of requirements or contingencies.
  • Sale of fixed assets: There is another source which is sale of fixed assets where ARDA organisation can sell its fixed assets to raise the funds and can utilize that. It is also one of the convenient options without having an external liability (France, 2016).

Assignment Managing Financial Resources Decisions

1.2 Assess the implication of the different sources

The implication of the sources of finance such as:

Sources

Legal

Control

Risks

Finance

Bank loan

It is legally represented and have proper legislations over default.

Banks or external parties

Payment risks at the time of default, interest risks.

It can be financed over collateral securities.

Leasing

It is legally represented buthas no proper legislations over default.

External parties

Payment risks at the time of default.

It can be financed over collateral securities.

Retained Earnings

These are company’sself-earnings and hence they have whole control over it.

Company or Organization (Board of Directors or owners)

No risk.

No finance or security required.

Sale of Fixed Assets

This is also the company self-decision and hence they can control this funds accordingly.

Company or Organization (Board of Directors or owners)

Less valuation risk.

Legal documents of ownership or title are required.

1.3 Evaluate the appropriate sources of finance for a business project

Every company must use an appropriate model based on the type of project they are huddling. It is so because every organization operates in different situation and economic conditions.
Similarly ARDA should raise the 250,000 pounds from the Bank Loan and Leasing option where they need to provide a limited interest as well as they can be secured for their future for a long time.

Sr. No.

Option

Amount

1.

Bank Loan

125,000

2.

Leasing

125,000

Success of an operation, the long-term viability of business and its performance depends on continuous sequence of collective and individual decisions taken by managerial team and every those decisions has economic impact on an organization.

Objectives of Sourcing of funds - Financial Planning ensures availability of funds in time. It works to know and determine that firm does not raise unnecessary resources. It works to frame financial policies for long term as well as short term. Financial Planning ensure optimum utilization of resources. Financial resources plans to achieve the object of profit as well as wealth maximization (Bhattacharya & Londhe, 2014).

4.1 Discuss the main financial statements

The main financial statements are discussed below such as: -

  • Income statement: The statement that allows the management to make record of their incomes and expenses of one year. It helps in evaluating the earned profits or losses for a financial year (Berrington, et. al., 2012).
  • Cash flow statement: The statement that allows the management to make record of their cash flows (inflow as well as outflow) so that they get the net cash balance in the end of the year and helps in recoding in their balance sheet.
  • Balance sheet: The statement that allows the management to make record of their available assets and liabilities to show adequate level of balance in them. It shows that they have equal assets and liabilities and also helps in getting their financial position in the end of their financial year (Berrington, et. al., 2012).
  • Statement of change in equity: The statement that allows the management to make record of changes in the equity balance. This statement is prepared because it helps in measuring changes in equity balance in adequate manner.

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

The comparison is made below such as:

Basis

Sole trader

Partnership

Company

Owner

Sole proprietor is the owner.

Number of partners are owner

Shareholders are owner of company

Decision making

Owner took all the decisions

Partners took all the decisions

Board of directors are appointed and they took all the decision making

Balance sheet

In order to prepare they follow horizontal format.

In order to prepare they can follow any format such as horizontal as well as vertical.

For companies IFRS render vertical format and they have to follow it in effective manner.

Profit and loss account

They follow horizontal format in order to prepare this statement.

They prepare profit and loss appropriation account instead of this statement

They follow the IFRS guidelines before preparing this statement

Cash flow statement

They didn’t prepare it.

They follow the vertical format for preparing it.

They follow the vertical format provided by the IFRS.

Notes

They didn’t prepare it.

They prepare working notes but they are very few.

They prepare this statement as per the IFRS guidelines.

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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 is as follows such as: -

Particulars

Flexible budget

Actual

Variance

F or UF

Sales

700

700

 

 

sales

14,000

14,200

200

F

 

 

 

 

 

Variable cost of sales

 

 

 

 

Direct Material

5600

5,200

-400

F

Direct Labour

2800

3,100

300

UF

Variable overhead

1400

1,500

100

UF

total

9800

9,800

0

-

 

 

 

 

 

Contribution

4,200

4,400

200

F

Fixed costs

3,500

5,400

1900

UF

Profit/loss

700

-1,000

1700

UF

Analysis: - As per the flexible budget prepared it is analysed that make effective sales and make effective use of their material. But they are not able to make effective use of labour and other variable overhead. The major difference is put by the fixed cost as it is much higher in actual situation.
Management need to take care of their labour efficiency and other variable expenditures in order to perform their activities in effective manner. They also need to lower down their fixed cost so that they increase the chances of their profits (LaMantia, 2014).

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

Calculation of unit cost: -

Direct Material                            

£8

3%

£8.24

Direct Labour                           

£7

4%

£7.28

Variable factory Overhead

£4

3%

£4.12

Variable Selling Overhead           

£2

 

£2

Total variable costs                     

£21

 

£21.64

Total variable cost = 60,000 Units * £21.64 = £1,298,400
Total fixed cost of production = £70,300
Total fixed cost of selling & administration = £73,100
Total cost = £1,298,400 + £70,300 + £73,100 = £1,441,800
Profit is 18% before tax = £1,441,800 * 18% = £259,524
Total price is £1,441,800 + £259,524 = £1,701,324
Price per unit = £1,701,324 / 60,000 = £28.36 (LaMantia, 2014)

Pricing decision:- Crunch makes use of the cost plus pricing method for the purpose of pricing under this method they include all the costs such as variable costs, fixed costs and the profit in it. With the help of this they set adequate prices for their product so that they earn adequate amount of profit even after deducting tax amount from it (LaMantia, 2014). 

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% discount factor

PV of C.I.

0

-20,000

1

-20,000

1

8,000

0.87

6960

2

10,000

0.756

7560

3

6,000

0.658

3948

4

4,000

0.572

2288

 

 

NPV

756

NPV = Total cash inflow – Initial investment
= 20,756 – 20,000
NPV = 756. (Roper & Ruckes, 2012)

Calculation of IRR: -

Year

Cash flows

15% discount factor

PV of C.I.

16% discount factor

PV of C.I.

0

-20,000

1

-20,000

1

-20,000

1

8,000

0.87

6960

0.862

6896

2

10,000

0.756

7560

0.743

7430

3

6,000

0.658

3948

0.641

3846

4

4,000

0.572

2288

0.552

2208

 

 

NPV

756

 

380

IRR = Lowest discount rate + [{NPV at lower rate/ (NPV at lower rate – NPV at higher rate)} * (higher rate – lower rate)]
= 15% + [({756/ (756 – 380)} * (16% - 15%)]
= 15% + [({756/ 376} * (1%)]
= 15% + 2.01%
Internal rate of return = 17.01 % (de Souza & Lunkes, 2016)

Calculation of Pay-back period: -
= 2 + [(20,000 – 18,000) / 6,000]
= 2 + 0.33
= 2.33 years

Conclusion: - The project is yielding effective profits and the invested amount is recovered in 2.33 years that shows that it is not so risky to make investment in it. There is adequate flow of funds and at the end of 4th year it provide adequate positive sum out of their initial investment. The project is profitable and can be preferred (de Souza & Lunkes, 2016).

Task 4

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

Calculations of Ratios: -

S. No

Ratios

Calculations

Results

Industry avg.

1

Current ratio

 

 

 

 

Current assets / current liabilities

30,500/24,000

1.27

1.4

 

 

 

 

 

2

Quick/acid test ratio

 

 

 

 

Quick assets / current liabilities

16,500/24,000

0.69

0.85

 

 

 

 

 

3

Gross profit ratio

 

 

 

 

(Gross profit/ sales) * 100

(18,000/60,000) * 100

30.00%

38%

 

 

 

 

 

4

Net profit ratio

 

 

 

 

(Net profit / sales )* 100

(2,500/ 60,000) * 100

4.17%

6.50%

 

 

 

 

 

5

Inventory turnover

 

 

 

 

(inventory/cost of goods sold) * 365

(42,000/14,000) * 365

121.67

125

 

 

 

 

 

6

Accounts receivable

 

 

 

 

(avg. accounts receivables/Net credit sales ) * 365

(60,000/16,000) * 365

97.33

105

 

 

 

 

 

7

Accounts payable

 

 

 

 

(avg. accounts payable/ Total credit purchases) * 365

(24,000/24,000) * 365

365

200

 

 

 

 

 

8

ROCE

 

 

 

 

EBIT / net assets

(2,500 / 19,000) * 100

13.16%

14.50%

 

 

 

 

 

9

Asset turnover

 

 

 

 

Net sales/ Avg. total assets

60,000/43,000

1.40

4

Ratio interpretation: -

S. No.

Ratio

Results

Industry Avg.

Interpretation

1.

Current ratio

1.27

1.40

They maintain funds in the ratio of 1.27 but they are much behind from their industry average ratio. There is a difference of 0.13.

2.

Quick assets ratio

0.69

0.85

They attain effective liquid funds in the ratio of 0.69 to meet out their current liabilities but they are not able to attain their industry average ratio of 0.85 and there is a difference of 0.15.

3.

Gross profit ratio

30%

38%

With the help of sales they attain profits at the rate of 30% but as compare to their industry average ratio they are much behind from it and the difference is of 8%.

4.

Net profit ratio

4.17%

6.50%

They make adequate use of their earned revenues in meeting their operational expenditure and get net profits at the rate of 4.17% but they are not able to meet their industry average ratio of 6.50% and there is a difference of 2.33%

5.

Inventory turnover

122 days

125 days

The make effective sales in one financial year and with the effect of these they their inventory turnover ratio is 122 days whereas industry average ratio is 125 days. They attain effective ratio in order to sell out their inventory.

6.

Accounts receivable ratio

97 days

105 days

The time period attained by them in order to collect their debts from market is 97 days whereas their industry average is of 105 days. They are much effective in debt collection from their respective market.

7.

Accounts payable ratio

365 days

200 days

The time period attained by them in order to make payments of their credit purchases is 365 days on the other hand industry average is of 200 days only.

8.

ROCE

13.16%

14.50%

They get effective return over their capital employed at the rate of 13.16% but while comparing it to their industry average they fall short by 1.34%.

9.

Asset turnover

1.40

4

They utilise their assets in order to get adequate revenues and their ratio is 1.40 but they are not getting returns according to their industry average as their ratio is 4.

Conclusion: Electrical engineering business strategy is falling short in order to maintain adequate level of liquid funds with them along with this they also fall short in getting effective returns as well as profits. In order to enhance their profit share and liquid funds they need to improve their operational activities and ratio of sales so that they get effective profits and become able to maintain adequate level of liquid funds (Bujaki & Durocher, 2012).

Conclusion

Arda utilise two different sources of finance in the form of bank loan and hire purchase for the purpose of data collection. The amount arranged is not too small and for managing it adequately they make use of financial planning. The arranged finance put adequate level of impact over their financial statements as assets as well as liabilities in the form of liquid funds and debts. Crunch prepares flexible budgets to make evaluation of their actual performance in effective manner. They make use of the different project evaluation technique such as NPV, PBP and IRR to evaluate the available project benefits. Ratio analysis is made for the purpose of evaluating their financial performance as compare to their industrial performance.

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