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DESCRIPTION

Program

BTEC Higher National Diploma in Business

Unit Number and Title

Managing Financial Resources - Softwood Ltd

QFC Level

Level 4

Introduction

This Managing Financial Resources AssignmentSoftwood Ltd is specially designed to aid the learners in identifying and evaluating several sources of finance available to the firm. It can also help the learners in identifying the cost and several implications associated with each source of finance. Further this assignment will aid the learners to make the effective use of financial information in budgeting and pricing decisions. On completion of this unit learners will be profited as they will learn how to evaluate the financial performance of the business by using several financial tools and techniques.

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Task 1

P 1.1 Identify the several sources of finance available to softwood limited for their expansion plan.

There are several internal and externalsources of finance available for the softwood limited for their expansion plan. They are as follows.

  • Internal sources of finance: Internal sources of finance for softwood ltd is as follows
  • Personal savings: Personal savings of the owners of the firm is one of the vital sources of finance for the small businesses. This source of finance is not a burden on the company and so we can utilize this source of finance for the expansion purpose, if our earnings are not stable.
  • Retained Earnings:Retained earnings are termed as the earnings of the firm, which are not distributed as dividends but are retained for the future requirements of the firm. We can also utilize this source of finance for the expansion purpose as being an internal source of finance; it is not a burden on the firm.
  • Sale of assets:Firm can arrange funds for the expansion purpose by selling the unused assets of the firm. This will help to utilizing the blocked funds of the firm.
  • External sources of finance: External sources of finance for softwood ltd are as follows.
  • Bank loans: Banks do offer short term as well as long term loans to the firms at specific rate of interest. It is required to fulfill some of the formalities to obtain loans from financial institution like banks. If the earnings of the firm are stable, then we can utilize this source of finance for the expansion purpose.
  • Trade credit: Trade credit is referred as the credit given by the suppliers of the firm. Mostly such credit is given for the short term and it helps in fulfilling the short term requirements of the firm. Soft wood limited can also utilize this source of finance for expansion purpose as it is not the burden on the firm.
  • Leasing:Lease is an agreement between the lessor and the lessee, where the lessor allows lessee to vigilantly use the asset for the specific period. Softwood limited would require some assets for the expansion of the business, which can be taken on lease for specific period
  • Hire purchase:Hire purchase is an agreement or the contract between the buyer and the seller, where the seller allows the buyer to make payments in installments. Ownership of the assets is transferred, when all the installments are paid. Softwood ltd can also purchase its assets on hire purchase to maintain liquidity in the firm. (Zeidman and Enberg ,1970).

P 1.2 Assess the implications of the sources of finance identified above on the company

There are several implications attached to the above sources of finance, they are as follows. (Tamari,1978).

  • Retained earnings:This type of capital is not the burden on the company as it is not required to pay any interests or dividends on this type of capital. It is difficult to get the taxation relief on this capital, which is applied to borrowed capital.
  • Bank loans:It is essential to fulfill some of the formalities to take loans from banks and it is required to pay regular interest on such loans. Additionally loans are required to be repaid at the pre decided interval.
  • Leasing:It is essential to pay lease rents on regular basis under leasing contracts. Lease rents are basically tax deductible expenditure.
  • Hire purchase:In Hire purchase agreement, the ownership is transferred only when all the installments are paid. It is possible that hiree can take the possession back, if the hirer fails to pay any installment.
  • Trade credit:Trade credit helps in fulfilling short term requirements of the firm. This source of finance is not the burden on the firm and it does not dilute control in an organization.
  • Sale of assets:If the funds are raised through the sale of unused assets then there is no risk of change of control in the firm. Additionally there is no requirement of paying any interest or dividend on such source of finance.

1.3 Evaluate and recommend the most appropriate sources of finance for softwood ltd to raise finance for expansion.

The most appropriate sources of finance for the softwood ltd for the expansion purpose are leasing and bank loans. For the expansion of its business, firm will require several assets, which can be taken on lease to maintain enough liquidity in the firm. As lease rents are tax deductible expenditure and so it is better totake assets on lease rather than buying it. For additional requirements, firm can take loans from banks as it is the cheap source of finance and the rates charged by the banks are comparatively lower than the loan taken from other sources. As the creditability of the firm is good, so it is possible to get the loans easily from the banks with fewer formalities. (Lowrie,1912).

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Task 3

P3.1 Prepare the cash budget from the above information for January – September 2015 and analyse how you manage the cash during that period

Statement of cash budget

Particular

Jan

Feb

March

April

May

Jun

July

Aug

Sept

Receipt

         

Manager

6,000

3,650

620

1,840

1,650

1,340

3,130

9,155

10,965

Received from debtors

-

-

4,500

4,500

4,500

6,750

6,750

6,750

6,750

Total Receipt

6,000

3,650

5,120

6,340

6,150

8,090

9,880

15,905

17,715

Payment

         

Labours Payment

1,200

1,200

1,200

1,920

1,920

1,920

1,800

1,920

1,800

Raw material cost

750

750

1,000

1,450

1,450

1,600

1,525

1,600

1,500

Other variable expenses

400

600

600

840

960

960

920

940

920

Fixed Expenses

-

480

480

480

480

480

480

480

480

Capital Expenditure

-

-

-

-

-

-

4,000

-

-

Total Payment

2,350

3,030

3,280

4,690

4,810

4,960

725

4,940

4,700

Cash surplus/deficit

3,650

620

1,840

1,650

1,340

3,130

9,155

10,965

13,015

From the above cash budget statement, it is found that there is a deficit of cash in the month of February. The reason behind such deficit is the excess expenditure incurred during this month and no cash flows were received in this month. It is also found that though the company is allowing the credit period of two months, still the liquidity of the firm is not affected. Softwood Limited should take necessary steps to reduce its expenditure and to upsurge its revenues. From the above cash budget it is clear that the firm’s has enough cash flows to fulfil its short term requirements.

P 3.2 Calculate the cost of producing a chair if a customer orders 2000 chairs and suggest an appropriate pricing strategy for Softwood Ltd.  in the given business context.

Statement of Cost production

 

Particular

Amount(£)

Direct labours

10,000.00

direct material

20,000.00

variable cost

10,000.00

Fixed cost

 

Administrative  exp

2,500.00

other fixed expenses

2,000.00

Total Cost

44,500.00

 

Cost of per unit = £ 44500/2000= £22.25

It is essential for the Softwood Limited to analyse its costs before deciding its pricing business strategy. The price per chair should include the cost of manufacturing chair and the profit. The price should be such that it is benefited both to the consumers and the firm and so company should try to cut off its manufacturing expenses. It would be appropriate for Softwood Limited, if they apply Cost plus pricing strategy. In this strategy the company can measure the cost of production and various other expenses. Company should also consider the market prices before deciding its price per unit.

3.3 Using appropriate investment appraisal methods on the information given, recommend an appropriate machine for Softwood Ltd. Explain your decision

Abc ltd

Year

Cash Flow(£)

DF @10%

Present Value(£)

0

(4,000,000.00)

1.000

(4,000,000.00)

1

1,400,000.00

0.909

1,272,600.00

2

1,500,000.00

0.826

1,239,000.00

3

1,600,000.00

0.751

1,201,600.00

4

1,000,000.00

0.683

683,000.00

5

500,000.00

0.621

310,500.00

5

500,000.00

0.621

310,500.00

Net Present Value

1,017,200.00

                                                                                      XYZ LTD

Year

Cash Flow(£)

DF @10%

Present Value(£)

0

(3,500,000.00)

1.000

(3,500,000.000)

1

1,300,000.00

0.909

1,181,700.000

2

1,400,000.00

0.826

1,156,400.000

3

1,500,000.00

0.751

1,126,500.000

4

1,000,000.00

0.683

683,000.000

5

500,000.00

0.621

310,500.000

Net Present Value

958,100.000

Proposition:It is clear from the above report that Softwood Limited should purchase the machine from ABC Ltd as because the return calculated on NPV is higher of ABC LTD than of XYZ LTD.

Task 4

4.1 Discuss the main financial statements of a company highlighting their structures, key components and significances.

Financial Statements are prepared to ascertain the profit of the firm. Financial statements help the stakeholders of the firm to know the financial position of the firm. There are basically four main financial statements, they are as follows.

  1. Income statement
  2. Balance sheet
  3. Cash flow statement
  4. Statement showing changes in equity
  • Income statement:Income statement is also referred as profit and loss account. All the expenses and revenues of the firm are recorded in this statement. Expenses are recorded on the debit side of income statement, while revenues are recorded on the credit side of this statement. This statement aids the firm in ascertaining profit and losses for the specific period.
  • Balance sheet:Balance sheet is prepared to know the financial position of the firm for the specific period. All the Assets and liabilities of the firm are recorded in balance sheet. On the assets side fixed assets as well as current assets are recorded, while on the liabilities side, equity capital, long term loans as well as short term loans are recorded. Balance sheet aids the managers as well as the stakeholders of the firm to make important decisions.
  • Cash flow statement: Cash flows statement is prepared to identify the cash inflows and outflows of the firm for the specific period. Cash flow statement aids in identifying the liquidity of the firm at different intervals. In this statement cash outflows are deducted from cash inflows and at the end deficit or surplus is ascertained.
  • Statement showing changes in equity:This statement is prepared to know the variation in the equity funds. In this statement equity funds and dividend paid are recorded and the balance amount is carried forward to the liabilities side of balance sheet.

4.2 Explain how financial statements differ in different types of businesses.

Financial statements for different types of businesses like sole proprietorship, partnership and company differ from each other. Let us check out the financial statements prepared by diverse types of businesses.

  • Sole proprietorship firm:In sole proprietorship there is only one owner, who needs to ascertain the financial information of the firm. Mostly profit and loss account is prepared by the owner of the firm to ascertain the profit and loss of the business. Balance sheet is optional account for such type of business.
  • Partnership firm:In partnership firm there are more than one owner’s, who needs to ascertain the financial information of the firm. The financial statements prepared by such firms are income statement, balance sheet and partner’s capital account. Income statement is prepared to ascertain the profit and loss of the firm, while balance sheet is prepared to identify the financial position of the firm. Partner’s capital account is prepared to identify the partner’s liability at the specific period.
  • Company:Company needs to follow some specific rules and regulations for the preparation of financial management statements. It is required by the company to prepare its financial statements with respect to the GAAP principles. According to the regulating bodies of a country, a company has to maintain the following books of accounts: a) Balance Sheet b) Income Statement c) Cash Flow Statements

4.3. Analyse the financial performance of Softwood Ltd. for the year 2013 with the help of following financial ratios

a) Gross Profit Margin:Gross Profit Margin= Gross Profit/ Revenue *100

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Turnover/ Revenue

2590000

2217000

Gross Profit Earned

1280000

1016000

Gross Profit Margin%

49.42%

45.83%

Presentation of Gross profit Margin statement for two years.

b) Net profit Margin:Net Profit Margin = Net Profit/ Revenue * 100

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Turnover/ Revenue

2590000

2217000

Net Profit

264000

198000

Net Profit Margin%

10.19305%

8.93099%

 

Presentation of Net profit Margin statement for two years. The net profit margin of the company has upsurged in the year 2013 as compared to the year 2012 that implies that the profit earning capacity of the concern has increased.

c) Return on Capital Employed:Return on Capital Employed = Earnings before Interest and tax/ Capital Employed *100

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Non- Current Asset

1735000

1635000

Current Asset

992000

966000

Total Assets

2727000

2601000

Current Liabilities

600000

427000

Capital Employed

2127000

2174000

Profit before Interest and Tax

379000

284000

ROCE %

17.819%

13.063%

 
Presentation of Return on Capital Employed for two years. The return on capital employed ratio tells us that the company has earned an increased return from the investment in the capital in the year 2013 as compared to the year 2012.

d) Asset Turnover Ratio:Asset Turnover Ratio: Sales or Revenues/ Total Assets

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Total Assets

2727000

2601000

Turnover/ Revenue

2590000

2217000

Asset Turnover Ratio%

0.9498%

0.8524%

 

Presentation of Asset Turnover Ratio for two years. The asset turnover ratio of the organization behaviour has grown in the year 2013 as compared to 2012 that implies that the company has been able to gain more income from its assets in the year 2013 than 2012.

e) Current Ratio:Current Ratio = Current Asset/ Current Liabilities

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Current Asset

992000

966000

Current Liabilities

600000

427000

Current Ratio

1.6533

2.2623

 

The liquidity position of the concern has declined in the year 2013 as compared to 2012.

f) Quick Asset Ratio:Quick Asset Ratio = (Current Asset – Inventory)/Current Liabilities

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Current Asset

992000

966000

Inventory

512000

496000

Current Liabilities

600000

427000

Quick Asset Ratio

0.800

1.101

 

The quick assets ratio also speaks that the position of liquidity of the concern has diminished in the year 2013 as compared to 2012.

g) Stock Days

Stock Days = 365/Stock Turnover
Stock Turnover = Cost of goods sold/ Inventory

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Cost of Goods Sold

1310000

1201000

Inventory

512000

496000

Stock Turnover

2.559

2.421

Days

365

365

Stock Days

142.656

150.741

 
The stock day as calculated for the two years implies that the mobility of the stocks of the concern has increased in the year 2013 as compared to 2012.

h) Debtor Days

Debtor Days = (Yearend trade debtors/ Sales)*365

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

Trade Receivables

200000

190000

Turnover/ Revenue

2590000

2217000

Days

365

365

Debtor Days

28.1853

31.2810

 

Debtor days shows how quickly the debtors of a company are paying off their dues. The debtors’ days of the concern have declined in the year 2013 that implies the frequency of cash collection from the debtors has grown in the year 2013 as compared to 2012.

i) Debt equity ratio

Debt Equity Ratio = Total Debt/ Total Equity

 

Years

Particular

2013

2012

 

Amount(£)

Amount(£)

   

Debt

925000

1146000

Ordinary Shares

420000

420000

Retained Earnings

782000

608000

Debt Equity Ratio

0.76955

1.11479

 

Presentation of Debt Equity Ratio for two years. The debt- equity ratio speaks that the company has employed less amount of debt in the year 2013 as compared to the year 2012 (Tamari, 1978).

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References

Zeidman, P. and Enberg, H. (1970). Financing corporate growth. 1st Ed. New York: Practising Law Institute.
Tamari, M. (1978). Financial ratios. 1st ed. London: P. Elek.
Lowrie, S. (1912). The budget. 1st ed. Madison, Wis.: Wisconsin State Board of Public Affairs.
Kennedy, R. and McMullen, S. (1973). Financial statements; form, analysis, and interpretation. 1st ed. Homewood, Ill.: R.D. Irwin.
Götze, U., Northcott, D. and Schuster, P. (2008). Investment appraisal. 1st ed. Berlin: Springer.
Engelson, M. (1995). Pricing strategy. 1st ed. Portland, OR: Joint Management Strategy.
Horngren, C. (1981). Introduction to financial accounting. 1st ed. Englewood Cliffs, N.J: Prentice-Hall.

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