Unit 2 MFRD Assignment Hardwood Ltd

Unit 2 MFRD Assignment Hardwood Ltd

Introduction

Finance is the essential requirement of the business organisation and without they are not able to perform single activity. Hardwood ltd. is facing requirement of huge finance. Various sources of finance will get discussed along with their implications. There are various techniques also get discussed to manage them in effective manner. In Unit 2 MFRD Assignment Hardwood Ltd investment appraisal techniques also get discussed as it helps in selecting favourable and profitable investment option.

Task 1

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

Financial resources are money available to a business for spend in a form of cash or credit. Before starting a business, entrepreneur needs financial resources to succeed.

The sources of finance available to Hardwood Ltd are:

Internal sources

• Owner Investment: is money from your pocket from your personal savings. It is the fresh investment made by the owner and it doesn’t create any liability over business.
• Retained Profit:means you are already in business and you can use your profit by investing or reinvesting. Adequate amount get saved by them out of their earned profits to utilise them during the emergency situation.
• Sale of Fixed: Assetsis an unwanted asset (e.g. machine, vehicle, office building) that you can sale to have your capital and to start up a business. It helps in releasing the blocked money as well as space to make better utilisation of it (Nishizawa, 2011).

External sources

• Bank Loan: is an amount of money that is borrowed at an agreed rate of interest for a period of time. Bank renders money against the handsome amount of securities. They took securities to safeguard their money and in case of failure they sold out these securities and recover their money.
• Bank Overdraft is a facility to take more money: There is a prior agreement with the account holder. This source get utilised in the emergency situation to meet out their routinely expenditure (Nishizawa, 2011).Additional Partners is a partnership or a sole trader who will come with money to invest. The  financial management  or profits associated with this source attract the number of investors and suitable investor can be approached to get investment.
• Share Issue: is a company that makes new sharers. Huge finance gets arranged by selling the organisational ownership to the public. Interested individuals purchase the shares and make effective investment in the ownership of the business organisation.
• Venture Capital: is when someone is willing to invest in your company by becoming shareholder and get a percent. They are the huge financers that attain huge capital with them and by getting investment from these provide strong base of finance (Nishizawa, 2011). is like renting a vehicle or property (assets). This asset will never be yours. For a certain time period required equipment or asset took on lease and pay small rentals against it. After the set time period lease get over and equipment or assets get returned to the owner.
• Hire Purchase: is when you hire an asset for a period of time and pay regular payments. After the completion of set time period they become owner of the asset. is a long term loan usually for a period of 25 to 30 years. Once all repayments are made the property will become yours (Nishizawa, 2011).
• Trade Credit: is assets that will be paid later. It is the short term of finance where they get time period of few months to make payments of credit amount.
• Government Grants: is to support people and small business. Government render adequate amount to them in order to promote them so that they run their business activities and perform effectively. is when you sale your product to a client and the Invoice is send to the factoring company and you receive cash in advanced. The factoring company collects full payment from your customer. Factoring is when you sale your products on credits.
• Franchising: is when the owners sell the rights to their business logo, name and corporate identity to the third party operators. Example of franchise business: McDonalds, Subway (Nishizawa, 2011).

Task 1.2: Assess the implications of difference sources of finance on a business (AC1.2)

Implications of different sources like Bank Loan and Overdraft (External sources) or Own Investment (Internal source) any of this financial sources it will affect a business in four ways:

• Financial implications: you have to pay an interest which it will affect your business.
• Legal implication: is when you borrow money from the Bank and sign a loan agreement, you will be responsible for the repayment. You are legally bound and the Bank can sale your assets to recover the loan (Willem van Gelder, et. al., 2012).

Control implications: source of finances:

• Shareholders in your company, because you need money.
• If you reduce the ownership, you lose control.

Risk implications are when you put your business at danger, risk. For example:

• Bankrupt – if you cannot pay your bills, loan your business will be sold out.
• Liquidation – sold out, the Bank will advertise to sale your business.

Task 1.3: Evaluate appropriate sources of finance for a business project (AC1.3)

Briefly explain the factors which a company may wish to consider when selecting appropriate sources of finance.

• The amount of money needed: For a large amounts of funds needed, can be used Debentures source. Debenture holders is a form of a medium to long term loan,at a fixed rate of interest.
• The urgency of funds: The urgency of the funds is based on how quickly the money is required for the business. Some finance resources are quicker and others like issuance of sharers it takes time (Peters, et. al., 2011).
• The cost of the source of finance: For any source of finance, Internal or External source - it is a cost. Internal sources of finance like Owner investment or Retained profit are cheaper than external sources.
• The risk involved: Risk is danger, for example if you don’t pay your bills or Bank Loan you are at risk of Bankrupt and the business will be sold out.
• The duration of finance: The duration of finance can be for short-term, medium-term or long-term.If you want to buy a house, you can go for a long-term finance by applying for a mortgage.
• The gearing ratio of the business: The gearing ratio describes a financial ratio that calculates debt capital to the capital of a business. If the geared is high, then firms are reluctant to provide loans (Peters, et. al., 2011).
• The control of the business: For example, don’t go for venture capital or Issue sharers because it will affect the control of the business. The venture capitals will have control over your business and management responsibilities (Peters, et. al., 2011).

The below sources of finance that I will consider being appropriate for Hardwood Ltd would be:

• Share issue: is a long term source of finance and involves more sharers. The advantages for the company are that doesn’t need to be repaid and there is no interest. But along with this the major disadvantage is that their ownership gets dissolved with shareholders and decision making power transferred in the hand of board of directors.
• Bank loan: is a source that the bank will borrow an amount of money at an agreed rate set for a period of time. The advantage of taking loan is that it doesn’t dissolve the ownership and paid interest amount provide relaxation in tax amount. On the other hand the major disadvantage is loan amount must repaid after a set period of time (Dusuki & Bouheraoua, 2011).
• Leasing: is an option for Hardwood Ltd to obtain assets. For this external source will be involved payments spread over for a period of time. The main advantage of this source is it provides required equipment on small rentals. But the major disadvantage is it must get paid on regular basis.
• Retained profit: is when you are already in business and use your profit by investing or reinvesting. It doesn’t create any liability over the business organisation but it reduces the balance of the emergency funds (Dusuki & Bouheraoua, 2011).

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Task 2

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

There are few cost of different sources of finance are available such as:

• Cost of debt: - When the amount is paid in the form of interest over the bank loan or issues debentures then it is termed as cost of debt. Bank loan and debentures is considered as debt because they get repaid after a set period of time.
• Cost of equity capital: - When the amount is paid in the form of dividend over the equity capital is termed as cost of equity capital. Dividend is taken out of profit and gets paid to shareholders as they are owners of business organisation.
• Cost of preference share: - When the amount is paid in the form of dividend over the preference share capital is termed as cost of preference share. Dividend is taken out of profit and gets paid to shareholders (Amir, et. al., 2012).

Task 2.2: Explain the importance of financial planning to a business (AC2.2)

What is financial planning?

Financial planning is a process of putting in place your objectives, policies, procedures, programmes, budget. It will involve identifying goals and objectives. Financial planning is when you set your priorities right.

• Budgeting is a part of a plan and you need to set how you spend your money.
• Monitor and review your plan at least yearly and make adjustments when needed.
• Review/Revise, you have to look at your plan again and again and do something to getsomething.
• Assess current market situation
• A financial plan will ensure wide and efficient use of resources
• By planning your finances to meet your goals and objectives you will gain control and have much greater confidence.

Importance of financial to Hardwood Ltd:

• Financial planning it will help Hardwood Ltd with every day management cost. A good financial planning will help to allocate funding to business and to integrate  human resources . The business is more likely to fail without a financial planning and it can quickly identify a financial downturn. It helps prioritize spending, it helps to plan and manage profit and it helps with in marketing decisions (Amir, et. al., 2012).
• The business needs to assess current market situation.
• Financial planning will help Hardwood company to ensure stability and profitability by predicting and assessing risk in advance.
• It helps in estimating the requirement of the capital required in the near future.
• It provides the adequate balance between the cash flows (inflow and outflow).
• It helps in making effective utilisation of their available financial resources.
• It makes proper and adequate allocation of their available financial resources.
• Financial planning helps in making effective investments.
• It helps in reducing the lack of available finance.
• It provides effective and adequate capital structure.
• It enhances the operational activities in effective manner.
• Financial planning builds effective communication and coordination within the Hardwood ltd. (Amir, et. al., 2012)

Task 2.3: Assess the information needs of different decisions makers. (AC2.3)

Task 2.4: Explain the impacts of finance on the financial statements of a business (AC2.4)

Balance sheet is a snap shot picture that shows the financial position of a business and shows the followings:

• Assets – the things that you have for example machines, buildings
• Liabilities – is what you owe to others: creditors, bank
• Capital are the money invested in the business

The profit and loss account:

• Profit & Loss is used as a statement for internal and external reporting
• In this statement a company's income, expenditures, and profits over a period of time are reported.
• The sale and different costs incurred during the processing state are included in these.
• The cash flow statement

Cash flow is a financial statement of two things:

• Incomings cash/earnings
• Outgoings of cash

Task 3

Task 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 management prepare in order to allocate the available resources in adequate manner so that it get utilised in effective manner. With the help of it available resources get utilised maximum and helps in getting desired outcome.

Objectives of budget are as follows: -

Below is the prepared cash budget: -

• Analysis of above budget: The above prepared budget shows the flow of cash (inflow and outflow). In the first three months they are performing extremely good as their revenues shows increasing trend and balance shows surplus amount. With the effect of this in the month of July they made capital expenditure which results in overall deficit amount. The cash payment of capital expenditure impact their cash balance and they get deficit balance. Except this capital expenditure they are performing effectively as they attain increasing trend in their revenue earned (Hsu & Ziedonis, 2013).
• Suggestions: - Hardwood Ltd. need to purchase the new machinery with the other available options such as leasing, hire purchase or bank loan instead of purchasing in cash. The capital cash payment affects them badly as they attain negative cash balance and they are paying out of their earning revenues. By taking it with the help of other debt sources they easily attain the machinery as well as pay the amount in small rentals or instalments (Hsu & Ziedonis, 2013).

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

• Unit cost: The cost which get incurred for the purpose of manufacturing the product.
• Profit margin: It is adequate margin or revenue for which product is produced. It helps in attaining growth in the market.
• Price per unit: It is the amount that gets paid by the customer for the purchase of the product. (Olawale, et. al., 2010)

Provided data:

Unit cost, profit margin and price per unit is calculated in the below table:

• Decision: Management use the cost plus price method to set the price of the product. To set the prices of product all available costs (variable and fixed costs) get add up simultaneously along with the adequate amount of profit in it. This helps in earning adequate share of profit which helps in attaining growth in market (Olawale, et. al., 2010).

Task 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: - This technique of investment appraisal techniques helps in evaluating the overall profitability rendered by the project or investment after the end of the project period.
• ARR: - This technique helps in evaluating the rate at which they return or earned revenues get measured.
• IRR: - This technique helps in evaluating the rate at which the net present value become equal to zero.
• PBP: - This technique emphasises over the period in which invested amount get recovered effectively. Its show the risk factor associated with the investment or  research project  (Saxena, 2015).

Calculation of NPV for Both machines is as follows: -

Initial investment is 2000

NPV = = Discounted cash inflow – Initial investment

NPV for machine A

= 2028.85 – 2000

NPV = 28.85

NPV for machine B

= 2125.80 – 2000

NPV = 125.80 (Saxena, 2015)

Calculation of Payback period for both machines is as follows:

Calculation of ARR for both the machines is as follows:

Calculation of IRR for both the machines is as follows: -

Machine A

Machine B

Results and preference:

Analysis: As per the above results Machine B is looking more profitable. Machine B is selected over machine A because machine B renders high rate of return and high profits as compare to the Machine A. (Champathed & Chansa-ngavej, 2015)

Task 4

Task 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)

These statements get discussed below such as: -

• Income statement: - Most of companies also denoted it as profit and loss account as this is utilise by the management for the purpose of recording the activities related to the income and expenditure made by them for a specific period of time. Management further utilise it for the purpose of evaluating the overall profitability and helps in evaluating their efficiency in attaining revenues from their activities (Archer, et. al., 2010).
• Balance sheet: - As per the guidelines of the IFRS it is denoted as the statement of financial position as it provides the summarised information related to their position of finance. Management record their attained assets and liabilities below this statement and utilise it for evaluating their overall position. The balance of their assets and liabilities get recorded under it and make effective presentation in the summarised format (Archer, et. al., 2010).
• Cash flow statement: - This statement is prepared as per the guidelines rendered by the IFRS. This statement is specially prepared for the purpose of recording the activities related to the flow of cash whether it is outflow or inflow. This statement is segregated into three parts such as operating, investing and financing activities. The logic behind segregating into three parts is to provide detailed information related to the cash flows. This statement utilised by the management to put adequate level of control over the use of the available cash funds and also utilise in evaluating their liquidity (Archer, et. al., 2010).

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

There are lots of business organisation are performing in the market and all are based on different formats. With the effect of their base they prepare their financial statements in different formats. In the below table different organisation get differentiated along with their different format of financial statements such as: -

Task 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 calculation is as follows such as: -

Interpretation of ratios is as follows: -

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Conclusion

In the end it is conclude that Hardwood ltd. raises the finance from the different sources and to manage these funds they make use of financial planning. They prepare cash budget to allocate the funds and provide systematic process of processing the things. They utilise the investment appraisal techniques such as NPV, ARR, IRR and PBP to evaluate the effectiveness of the available machines. In the end to evaluate the performance of Hardwood ltd. ratio analysis is performed and as per this it is evaluated that they need to make effective improvement in their operational activities to attain profits and liquid funds.

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