Juel_Set_7_MFRD 23.3.16.doc

London School of Science & TechnologyQualification Unit number, title and Level

Pearson BTEC Level 5 HND Diploma

in Business (QCF)

UNIT 2:

Managing Financial Resources and

Decisions

Level 4

Student name and ID number Assessor name

Mohamad Hassan

Date issued Completion date Submitted on25th January 2016 8th May 2016 by 5:00pm

Internal Verifier Dr George Panagiotou

Assignment title Managing Financial Resources and Decisions

Instructions

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You must NOT submit a paper copy or email of this assessment to any member of staff at LSST.Learner Declaration

Unit 2: Managing Financial Resources and Decisions - January 2016 1

London School of Science & TechnologyI certify that the work submitted for this assignment is my own and research sources

are fully acknowledged.

Student signature: Date:


London School of Science & Technology

Introduction

The management of the financial decision and the resources is very much important for the business

organization. This report deals with these facts. How the firms can collect funds from the different

sources, the impact of financing on the different segments, the determination of the products price,

the investment appraisal techniques, the performance measurement of the firms all are discussed in

the report.



Task 1

Q.1 Three sources of finance that ABC Ltd. can use to expand its business and

give a brief explanation of each (1.1)

Every business organizations need financing for conducting its business. It is the most important task

of the business. Financing indicates raising the funds or resources for conducting the business.

There are many sources of financing. It can be internal sources that indicate collecting funds from the

inside of the country. It can be the external sources that indicate collecting funds from the outside of

the country. The external sources can be again the long term, short term and medium term basis.

These are discussed here:

Internal sources of collecting funds:

Retained earnings:

It indicates the remaining funds or profits after providing the all expenses including dividend of the

company. If the firm is a growing business its retained earnings would be very high and it can be an

useful sources for the organizations. The ABC Ltd. can also raise funds from this source.

Sales of existing assets:


London School of Science & TechnologyThe sales of the existing assets can be the other source. It helps the organization to raise funds but it

can have the negative effect on the market. The market or the stakeholders think that it has no other

sources of financing and the company would not seem viable.

Cut down stock levels:

The company such as ABC Ltd. can also raise funds by using this factor or source. In this source the

inventory level can be reduced and the saved money can be provided to the organizational

operational purpose (Brigham, and Gapenski, 2010).

Internal sources of collecting funds:

Long term source:

The sources of duration of these funds are ten years or more. The cost of raising these funds is

higher than the other sources of funds.

Bank loans: the company can take loans from the banks for the loan term basis. It needs to provide

interest against the raising or borrowing funds. The banks often seek collateral for the borrowing

money.

Issuing Debentures:

The firm can also issue debentures with a specific price to the capital market for generating funds for

the business. The firms that are public limited company and are listed with the capital market can

raise funds for the purpose. It can help the business firms to raise funds when the requirement is

huge (Brigham, and Gapenski, 2010).

Issuing Shares:

The firm can also issue share with a specific price to the capital market for generating funds for the

business. The firms that are public limited company and are listed with the capital market can raise

funds for the purpose. It can help the business firms to raise funds when the requirement is huge.

Medium term source:

Leasing: Unit 2: Managing Financial Resources and Decisions - January 2016 5

London School of Science & TechnologyThrough leasing the firms can collect funds for operation. In this system the firm can use the desired

property for a specific time period against the payment of instalment (Horrigan, 2010). However it can

acquire the assets after the lease agreement by paying some additional money.

Hire purchase:

In this system the organization can buy the goods or assets by making the payment on instalment

basis to the account payables. This can be the other sources of financing.

Short term source:

Bank overdraft:

Here the firms can take loans from the bank to meet up its daily expenses. But the cost of raising

funds is higher in terms of this.

Bank loans: the company can take loans from the banks for the loan term basis. It needs to provide


money.

Creditors:

The business organization can collect funds from the creditors to meet up its short term financing

funds. They can delay the payment to their supplier to meet up this requirement (Horrigan, 2010).

Factoring:

When the business organization needs funds for the urgent time basis then the funding can be

another source of financing. Here the firms sell their accounts receivable to the bank for collecting

funds in terms of money. Often the bank pays some less money over the account receivables to

cover the potential loss.


London School of Science & TechnologyQ.2 A report to the director assessing the implications of your chosen sources

of finance, together with a choice of the most appropriate source to be adopted

and analyzing the costs of theses finance options (1.2, 1.3, 2.1)

A report on the implications of chosen sources of finance and the appropriate source of financing is

shown below:

7th March, 2016

The Board of Director,

ABC Ltd.

Subject: The implications of chosen sources of finance and the appropriate source of

financing.

Dear Sir,

In the complicated business world there are many sources available for the company. But it would be

a prudent decision if the company can make the effective source of financing and all the financing

sources have an implication on the business. The business organization needs to evaluate the

effective sources and based on this it should take the most appropriate sources of finance.

The implications of chosen sources of finance:

Retained earnings: it is a source of internal financing. However it can be the financing option for the

company. But it can create the agency conflict between the shareholders and managers. The

shareholders seek the additional dividend that can reduce the amount of the retained earnings and if

the retained earnings are reduced the available funds of the organization can be decreased.

Issuing Shares: the firm can collect huge amount of funds by issuing shares to the general public.

But however the issuance of the shares may dilute the control of the company. The shareholders


London School of Science & Technologyhaving the majority of the shares of the firm can control or influence the management of the company

(Brigham, and Gapenski, 2010).

Issuing debentures: the firm can collect huge amount of funds by issuing debentures to the general

public. But however the issuance of the debentures may impose additional rules and regulations to

the company and it may avoid the company for taking further actions.

Bank loan: the company can take loans from the banks for the loan term basis. It needs to provide


money. If the company may not have the adequate assets to keep as collateral it may be less

attractive to conduct financing using this source as it increase the cost of raising funds.

Long term debt: the debt is good for the company. But it is very much difficult for the company to

seek for the proper capital structure of the company. If the combination of the debt and equity for the

firm is good or optimal then the value of the firm increase but if the combination of the debt and equity

for the firm is not good or sub-optimal then the value of the firm may decrease. Again if the amount of

debt is increasing in the organization then it can reduce the credibility of the firm.

Factoring: Here the firms sell their accounts receivable to the bank for collecting funds in terms of

money. Often the bank pays some less money over the account receivables to cover the potential

loss. If the accounts receivable turnover is very high and the company has a doubt on the collection

then it would be a better decision for the firm to go for the factoring. In this situation the factoring can

be non-recourse factoring.

The appropriate source of financing:

In the above section the influences of the different sources of finance is discussed. And in this section

the appropriate source of financing is discussed. Here to select the appropriate source of financing

the company should consider the cost of raising funds select the sources that are the least costly.


London School of Science & TechnologyWhile the firm can take loan or issuing debt, it has to pay interest for this loan or debt. And the

interest can reduce the profit of the firm. However the interest is tax deductable and for this reason

the firm can get tax advantage in this regard. It may reduce the cost of financing.

When the firm issues shares or stocks either the common stock or preferred stock it may reduce the

retained earnings of the firms as the firms need to pay dividend on the issuing shares. The dividend

is not tax exempted. So it may increase the cost of raising funds. However the costs of equity are

costlier than the cost of debt.

Based on the discussion it can be considered that the firm can go for the debt financing. But if the

source is not available then it can go for the equity financing. However in terms of financing the firm

can consider the opportunity costs of the collection of funds.

However the ABC Ltd. has an opportunity for expansion. If the firm cannot raise funds from the

appropriate sources it may increase the costs of capital and also reduce the profitability of the

investment project. So this aspect should be taken with a great care or consideration.

From,

Juel

Finance officer

Date: 7th March, 2016.



Task 2

A) A “cash flow forecast for ABC Ltd (3.1)

A forecasted cash flow is the statement that is prepared by the company to make a prediction of the

cash outflow and the cash inflow of the company. It is prepared by the company to make the better

use of the resources.

The forecasted cash flow is given below:

In this statement the cash inflows such as sales are added with the beginning balance and by

deducting the cash outflows the ending balance is £45000 in the month of September. The credit

purchase paid, the rent, overhead expense and loan repayment are considered as cash outflow.


London School of Science & TechnologyB) The importance of financial planning for viable business decision making

(2.2)

The financing decision is very much important for the company. It affects the various aspects or

factors of the company. The success of the company depends largely on the prudent financial

planning.

The company should plan how much they need to generate fund, the costs of funds, and the maturity

period of the funds and so on (Johnson, 2012). Besides this it should also select the most profitable

investment source for ensuring the better resource management. Based on the proper financial

planning the stability of the business performance or in terms of the financial aspect can be ensured.

The wastage of the funds can be reduced and also the agency conflict between the debt holder and

the shareholders, the shareholders and the managers, the managers and the debt holders can be

managed.



Task 3

Q.1 The unit price based on both costing methods and select the price (3.2)

If the firm is a manufacturing company then the production costs and the price of the products should

be determined by the company sincerely. The production costs can be increased if the purchase of

the raw materials can be increased and it may lead to the increase product price. And if the price of

the product is increased it may have two effects. The first effect is it can increase the revenue of the

firm and the other effect is it can reduce the demand of the product as the price of the products

seems higher costly (Johnson, 2012). And due to this the revenue can be adversely affected. There

are many methods available for pricing the products or costing the products. In this report the mark

up and return on employed capital method are used for costing. These methods are discussed here:

£Costs Per meter £

Total Direct Cost 250,000 500Fixed Cost 75,000 150Total Cost 325,000 650Mark Up 35%Mark Up Price 438750 877.5

Items For total meters Cost per meters

Desired Profit = (£100,000 x 0.25) £25,000 £50

Add: total cost £325,000 £650Price of products £350,000 £700

The mark up method:

Here the total direct costs are £250000 and total fixed cost costs are £75000. By adding these costs

the total costs would be £325000. Here the mark up percentage is 35% and by adding the mark up

costs the total mark up price is £438750. And the mark up price is £877.50.

The return on employed capital method:


London School of Science & TechnologyHere the employed capital is £100000 and the return on capital employed is 25%. So the desired

profit is £25000 (100000*.25). And by adding the profit to the total costs the total price of the product

would be £350000. And the cost per meter is £700.

So it can be considered that for Class A+ glass the price of the product for cost per meter is £877.50

using the mark up method and £700 using the return on employed capital method.



Task 4

Q.1 Calculation and analysis of the appraisal tools (3.3)

After finishing the financing activity the firm should select where to invest the funds. The investing

source should be the most profitable source. And in order to select the most profitable source the

firms such as the ABC Ltd. should consider the project or investment appraisal techniques. Here the

net present value, payback period and the accounting rate of return is analyzed to analyze the most

profitable projects.

Payback Period:

It measures the time period that can be required for collecting the investment capital from the

particular project. The formula of the payback period:

Payback period= the full recovery period + uncovered amount/ total cash flow of the following year.

The payback period of the three projects is:

Year Cash inflowsCumulative Cash Flow Cash inflows

Cumulative Cash Flow Cash inflows

Cumulative Cash Flow

Y-0 -100 -100 -100 -100 -100 -100Y-1 20 -80 20 -80 5 -95Y-2 30 -50 40 -40 15 -70Y-3 40 -10 45 5 30 -40Y-4 15 5 35 40 30 -10Y-5 5 10 20 60 50 40Pay back period 3.67 2.89 4.40

Germany Italy Switzerland

If a project has lower payback period it indicates that the project can cover the initial investment

within the short period of time and the rest of the amount is the profit of the project. Here the project

Italy has the lower pay back period of 2.89 years. The lower the payback period the more beneficial it

is for the company and vice versa (Palmer, 2013). So it can be considered that the project Italy is the

most viable for the investment purpose. Similarly the project Switzerland has the higher payback


London School of Science & Technologyperiod 4.40 years. So it can be considered that the project Switzerland is not viable for the investment

purpose. For the same reason the project Germany is not viable for the investment purpose.

Accounting Rate of Return:

The accounting rate of return measures the percentage of the return coming from the investment. It

does not consider the time value of money (Palmer, 2013). The formula of the accounting rate of

return (ARR) is ARR: average return/ average investment. The ARR of the three projects is:

Net Cash flow £Net Cash flow £

Net Cash flow £

Investment 100.00 100.00 100.001 20 20 52 30 40 153 40 45 304 15 35 305 5 20 50

Cost of Capital 10% 10% 10%Net Present Value 169.43 201.25 173.65Average Return 22 32 26Accounting Rate of Return 22% 32% 26%

Here the ARR is highest for the project Italy and the percentage is 32%. The higher the accounting

rate of return the more viable the project is and vice versa. So it can be considered that the project

Italy is the most viable for the investment purpose. Similarly the project Germany is not viable for the

investment purpose as the ARR is lower 22%.

Net Present Value (NPV):

It considers the time value of money. It is the mostly used method of the investment appraisal

method. It considers how much the project earns cash inflow to cover the cash outflow. If the net

present value is positive then it can be viable for the investment purpose (Palmer, 2013). The formula

of the net present value is: NPV= cash outflow- present value of the cash inflow.


London School of Science & TechnologyYear Germany Italy Switzerland

Net Cash flow £ Present Value of

cash Flow

Net Cash flow £

Present Value of

cash Flow

Net Cash flow £

Present Value of cash

FlowInvestment -100.00 -100.00 -100.00

1 20 18.181818 20 18.18 5 4.5454545452 30 24.793388 40 33.06 15 12.396694213 40 30.052592 45 33.81 30 22.539444034 15 10.245202 35 23.91 30 20.490403665 5 3.1046066 20 12.42 50 31.04606615

Cost of Capital 10% 10% 10%Total Present Value

of cash Flow86.38 121.37 91.0180626

Net Present Value -13.62 21.37 -8.98

Here the project Italy has the positive net present value and the other project has the negative net

present value. So it can be considered that the project Italy is the most viable project for the

investment purpose.



Task 5

Q.1 The purpose of Income Statements and the Balance Sheet (4.1 and 4.2)

There are many financial statements especially four that are prepared by the company. And the

overall situation of the company can be identified by the financial statements.

The purpose of Income Statements:

Income statement indicates the amount of the revenue or the expenses as well as net profit at a

specific time period (Palmer, 2013). All the revenue and expense accounts are placed in this

segment. The stakeholder can identify the profit condition of the company based on the income

statement. Again the revenue generates condition of the company as well as the expense

management condition of the company can be known by this financial statement. The sample of the

income statement is given below:

There are many formats of preparing the income statement. Again the preparation of the income

statement may vary in terms of the different business condition.


London School of Science & TechnologySingle step income statement: here the expenses are deducted with the revenue. No breakdown of

the expenses and revenues are shown here.

Net Revenues

$120,000

Total Expenses

($100,000)

Net Income $20,000

ABC Ltd.Income Statement

(Single Step)

Multi step income statement: here the breakdown of the revenue and the expenses are shown.

RevenueSales $100,000

Interestincome

$20,000

Net Revenues

$120,000

ExpensesCost ofgoods sold

($80,000)

Advertising expense

($15,000)

Interest expense

($15,000)

Administrative expense

($4,000)

Total expenses

($104,000)

Net Income $16,000

ABC Ltd.Income

Statement(Multiple Step)


London School of Science & TechnologyThe balance sheet indicates the financial condition of the business such as the ABC Ltd. It reflects

the assets, liability and the equity condition of the business at a specific time period.

The purpose of Balance sheet:

Through the balance sheet the stakeholders can inform about the asset, liability and equity condition

of the firm. How much the firm is effective in terms of using its resources can be known by this

statement. The quality of the asset, liability and equity can be known through this. The sample of

balance sheet is given below:

There are many formats of preparing the balance sheet. Again the preparation of the balance sheet

may vary in terms of the different business condition (Seitz, 2010).

Account format: it indicates the asset accounts on the right sides and the liability and equity

accounts on the left sides.



Liabilities & EquitiesAmount Assets AmountLiabilities Current

AssetsAccounts Payable5200Utilities Payable3964

Unearned Revenue1000Interest Payable 150Notes Payable20000 Cash 20430

Accounts Receivable

5900

Office Supplies

4320

Prepaid Rent

24000

Total Current Assets

54560Total Liabilities

30314 Non-current assets

54560

Common Stock

100000 Equipment

80000

Retained Earnings

3236 Accumulated depreciation

-1100Total noncurrent assets

Shareholders’ Equity

103236

Total 133550 Total 133550

ABC ltd.Balance Sheet (Account Format)

Report format: it represents the assets, liability and equity accounts in the statement.



£Motor

Vehicles100,000

Buildings ######

Total Fixed Assets

1,100,000

Current Assets:

Stock 125,000Debtors 115,000Bank 125,000Total Current Assets

365,000

1,465,000Current Liabilities:

Creditors

130,000

Bank Overdraft

18,000

Total Current Liabilities

148,000

Long Term Liabilities:Bank Loan (payable in 5years)

200,000

1,117,000

Financed By:Capital 1,062,000Net Profit

55,000

Net Equity

1,117,000

Fixed Assets:

£

Total Assets

Total Assets -Liabilities


London School of Science & TechnologyQ.2.1 The information needs of different decision makers and stakeholders (2.3)

There are many people related to the company directly or indirectly known as stakeholders. The

stakeholders require different kind of information. The different stakeholders are directors, managers,

employees, stockholders, debt holders and so on.

The internal information of the company is mostly known by the managers, directors, employees and

so on. They should know about the internal strength, weakness, opportunity and threat of the firm.

They should take decisions by considering these aspects. The other information is also needed by

the external stakeholders (Seitz, 2010). The debt holders wish to know how much the firm is capable

to make the payment of the company. The suppliers also wish to know this. The shareholders want to

know how much they can earn as a form of dividend from the company. The profit condition and the

sustainability condition of the business firm should be known by the stakeholders so that the related

parties can take their investment decision effectively.

Q.2.2 The impact of finance on the financial statements (2.4)

Financing is the core activities of the business. This activity has much impact on the business. All the

financial statements are affected from this activity. Unit 2: Managing Financial Resources and Decisions - January 2016 22

London School of Science & TechnologyThe impact on income statement:

When the firm such as ABC Ltd. makes payment of their borrowing funds as a form of interest

payment it can reduce the profitability of the firm. Again when the firm such as ABC Ltd. makes

payment to their shareholders as a form of dividend it can reduce the retained earnings of the firm.

Besides this the firm can generate revenue when they make investment.

The impact on balance sheet:

When the firm raises funds through the issuance of the equity it can increase the assets sides by

increasing the cash amount and also it can increase the equity amount by increasing the number of

shares. When it raises funds by using debt it can increase the assets and liability sides of the balance

sheet at a time (Wilkes, 2010).

Q.3 Evaluation of the business performance (4.3)

The performance of the business organization such as ABC Ltd. needs to be evaluated with the

frequent time interval basis to measure the success of the business. It can be analyzed by using


London School of Science & Technologysome ratios such as current, acid test and so on ratios. The performance of the business over the

years as well as against its competitors can be measured through this.

Current ratio (365000)/148000=2.47Acid Test ratio (365000-125000)/148000=1.62ROCE (£55,000 / £1317500)* 100 = 4.1%Gross profit margin (£600,000/ £750,000) * 100 = 80%Net profit margin (£55,000 / £750,000) * 100 = 7 %

The current ratio: it measures the liquidity of the firm. If the firm has more liquid asset it can ensure

the liquidity of the firm. The formula of the ratio is:

Current ratio= current assets/ current liability

In 2015 the current ratio of the company is £2.247. It indicates that the company has 2.247 current

assets to meet up its current liability of £1. The liquidity of the firm has increased in this year.

The acid test ratio: it measures the liquidity of the firm. If the firm has more liquid asset it can ensure

the liquidity of the firm. The formula of the ratio is:

Acid test ratio = total current assets – prepaid expense- inventory/ current liability- bank loans.

In 2015 the current ratio of the company is £1.62. It indicates that the company has £1.62 current

assets to meet up its current liability of £1. The liquidity of the firm has increased in this year.

Return on capital employed: it measures how much the firm can generate profits by using its

employed capital. The formula of the ratio is:

Return on capital employed: net profit/ total debt+ total equity.

The ratio is 4.1%. It indicates that the company can make this amount of return by using it total

employed capital. The ratio falls below slightly than the past year.

Gross profit margin: it indicates how much the firm generates profit through its revenues after

deducting the cost of goods sold. The formula of the ratio is:

Gross profit margin: gross profit/ sales.

This ratio is 80% in the recent year. It is better than the past year 2014. Unit 2: Managing Financial Resources and Decisions - January 2016 24

London School of Science & TechnologyNet profit margin: it indicates how much the firm generates profit through its revenues after

deducting the all the expenditures. The formula of the ratio is:

Net profit margin: net profit/ sales.

This ratio is 7% in the recent year. It is not better than the past year 2014. It indicates the cost of the

firm is increasing in the recent year (Wilkes, 2010).



Conclusion

The business organization needs to take prudent decision about the proper financial planning. The

success of the business largely depends on this aspect. For this reason the business often forecast

about its resource usage in the future period. Besides this the financial statement and the ratios

analysis of these factors can help the organization in a better way about its lacking and strength so

that it can take corrective action to improve itself to achieve the sustainable development.



Reference

Brigham, E. and Gapenski, L. (2010). Financial management. Chicago: Dryden Press.

Brigham, E. and Houston, J. (2010). Fundamentals of financial management. Fort Worth: Dryden

Press.

Clark, J., Hindelang, T. and Pritchard, R. (2012). Capital budgeting. Englewood Cliffs, N.J.: Prentice-

Hall.

Deakin, E. and Maher, M. (2011). Cost accounting. Homewood, Ill.: Irwin.

Holland, J. and Torregrosa, D. (2011). Capital budgeting. [Washington, D.C.]: Congress of the U.S.,

Congressional Budget Office.

Horngren, C. (2012). Cost accounting. Englewood Cliffs, N.J.: Prentice-Hall.

Horngren, C. (2014). Management and cost accounting. London: Prentice Hall Europe.

Horrigan, J. (2010). Financial ratio analysis. New York: Arno Press.

Johnson, R. (2012). Capital budgeting. Belmont, Calif.: Wadsworth Pub. Co.

Johnson, R. (2011). Financial management. Boston: Allyn and Bacon.

Nicholson, J. and Rohrbach, J. (2010). Cost accounting. New York: Ronald Press Co.

Palmer, J. (2013). Financial ratio analysis. New York, N.Y.: American Institute of Certified Public

Accountants.

Paramasivan, C. and Subramanian, T. (2011). Financial management. New Delhi: New Age

International (P) Ltd., Publishers.

Seitz, N. (2010) Capital budgeting and long-term financing decisions. Chicago: Dryden Press.

Vanhorne, J. (2011). Financial management and policy. Englewood Cliffs, N.J.: Prentice-Hall.

Wilkes, F. (2010). Capital budgeting techniques. London: Wiley.




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