Aims of the Assignment-
Business organization makes use of financial resources to support their activities or transactions on regular basis. Finance is such resource that is limited in nature and must get utilized in effective manner. Proper planning is always needed to make adequate and get maximum use of it. Different sources are available to gather the finance for business purpose but it raise debt ratio for organization. Financial planning and budgeting is use for the purpose of using existing finance in effective manner. The in-flow of finance also affects the different financial statements which discussed below. Different techniques are use for evaluating the available projects and these are also discussed. Various measures take in to make evaluation of the organizational performance.
Table of Content.
- Task 01- Understand the sources of finance available to a business
- Identify the sources of finance available to a business
- Assess the implications of the different sources
- Evaluate appropriate sources of finance for a business project
- Task 02- Understand the implications of finance as a resource within a business
2.1 Analyse the costs of different sources of finance
2.2 Explain the importance of financial planning
2.3 Assess the information needs of different decision makers
2.4 Explain the impact of finance on the financial statements
- Task 03 – Be able to make financial decisions based on financial information
3.1 Analyse budgets and make appropriate decisions
3.2 Explain the calculation of unit costs and make pricing decisions using relevant information
3.3 Assess the viability of a project using investment appraisal techniques
- 4. Task 04 – Be able to evaluate the financial performance of a business
4.1 Discuss the main financial statements
4.2 Compare appropriate formats of financial statements for different types of business
4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.
Task 01- Understand the sources of finance available to a business
- Identify different sources of finance available for Leeds Garments assessing implications of obtaining finances through those identified sources (AC 1.1, AC1.2)
There are various sources are available for the requirement of getting adequate share of finance in order to start new business management.
|1.||Bank borrowings||Most effective way to raise financial funds is getting funds from bank against their securities/Assets. For this Bank charge adequate interest rate over it.|
|2.||Equity capital||To get finance the foremost followed option is issuing equity shares as it make arrangement of adequate amount of finance. It dilutes the ownership but it make thread base of finance to conduct operational activities.|
|3.||Debentures||To get large amount of finance and having no intention to share the ownership they make issuance of the debentures. It didn’t create any dilution of control as it is a kind of debt that taken from the public.|
|4.||Factoring||Management has discounted the accounts of receivables from the financial institutions in which small part get deducted from it and remaining balance get paid to them.|
|5.||Leasing||Management arrange the capital nature equipment by the help of the leasing and against it they pay small amount as rentals as a charge of using the equipment.|
|6.||Hire Purchase||Management go for the hire purchase as they took the required equipment and make payments in the small amount installments. This is made on regular basis within the market as the equipment is not having capital investment.|
|1.||Retained profits||Owner makes use of the savings or reserve funds of their organization for the business requirements. This is the amount which saved by the management to support the organization in emergency situations.|
|2.||Sales||The regular sales also render adequate level of support in arranging required financial support to the business organization. “Main Source of income may be the sale”|
|3.||Sales of assets||The sale of assets is the temporary source of getting finance as it is not possible to make sales on regular basis.|
|4.||Debt collection||Organization make sales on credit basis for a specific time period (30days, 60days ect) after that they make collection of their debt balances from market.|
|5.||Owner’s Investment||Proprietor of the business organization makes investment out of their savings or from taking personal credit.|
Implication of the different sources –
|Bank borrowings||Bank always put adequate legal implications to safe guard their money||Most of the legal implications shows high risk||Desired amount get raised||Payment of interest removes the control dilution.|
|Equity capital||Government imposes effective legal implication in order to make legal issue of shares.||The risk is low.||Large amount of finance is arranged.||Shares issued against control and it lead towards control dilution.|
|Debentures||Government imposes effective legal implication in order to make legal issue of debentures.||The risk is high.||Large amount of finance is arranged||It is the one kind of debt and debt didn’t dilute the control.|
|Factoring||Legal processing is indirect by the financial institutions||Risk is low||sufficient amount get arranged||Ownership of accounts receivable get transferred there is no dilution takes place.|
|Leasing||Legal contract between lessor and lessee.||Risk is ZERO||Required equipment or items required capital investment get arranged at small rentals.||Equipments take on rentals basis. so that is dilution of control|
|Hire Purchase||Legal agreement between buyer and seller||moderate level of risk encountered||Required equipment or items required capital investment get arranged at small installments.||Purchase` of required items and payment made on installment basis. Not dilute the control.|
|Retained profits||There are No legal implications||No Risk||Sufficient share of finance get arranged.||Savings get utilized with NO control of diluted.|
|Sales||No legal implications presents.||ZERO Risk||expenditure get meet in routinely||Sale means regular activity and it doesn’t lead to dilution of control.|
|Sales of assets||No legal formalities are followed.||There is no risk is associated with it.||Capital revenue can made only for once.||Controllership remains with the owner only asset get sold to others.|
|Debt collection||Some legal restrictions in the form of collecting funds from debtors.||High risk.||Moderate share of revenues get arranged through this source.||Owner attains the ownership and it didn’t get diluted with others.|
|Owner’s Investment||No legal implication||No risk||Sufficient share of amount get arranged.||Control remains only over the owner|
- Evaluate appropriate sources of finance that could be selected in order pursue an expansion strategy and to overcome the issues that are present at Leeds Garments (AC 1.3)
The sources that gets preferred for taking adequate level of finance for a business project chosen is as follows such as:
|Bank Loan||Leeds garment took loan from the bank to start their business.|
|Leasing||They arrange the required equipments such as machinery, furniture & fittings on lease instead of making capital expenditure over them.|
|Owner’s investment||Owner makes investment out of his savings.|
Task 02- Implications of finance as a resource within a business (Covers LO 02 and AC 2.1, 2.2, 2.3, 2.4)
2.1. Analyze the costs of different sources of finance available with Leeds Garments according to task 1.1. (AC2.1)
There are two different types of costs identified which linked with the different sources of finance –
- Cost of Debt (kd): – The Sum paid against the use of the debt sources of finance get denoted as the cost of debt. This cost make inclusion of the amount paid in the form of interest or rentals related to different sources
- Cost of Equity (ke): – The Sum paid over the invested amount in the form of share purchase get denote as the cost of equity. This cost makes inclusion of the amount that gets shared with the shareholders in the form of dividend.
Different sources that interested for raising finance are the owner’s capital, leasing and bank loan. Owner’s capital is not managing any cost as it is the savings of the owner. For leasing they pay rentals as per the set agreement terms and conditions on the other hand they pay interest at the rate over the amount borrowed from the bank (Blanco, et. al., 2015).
2.2. Explain the importance of financial planning for Leeds Garment in a situation like the above scenario; especially to manage day to day finance management and when starting a new venture. (AC2.2)
Financial planning: It is the process of estimating the requirement of capital and also determines their available competition. It also get utilized for the purpose of framing financial policies for different purposes such as procurement, investment and administration of their available financial funds (Bird, et. al., 2014).
- Determine capital requirements: –It gets utilized for the point of determining the capital requirements for the short term as well as long term.
- Determine capital structure: – It get utilize for the principal of determining adequate form of capital structure as it determine the proportion of capital required for the business activities.
- Frame financial policies: This helps in building policies that helps in putting sufficient level of control over cash and cash equivalents, organization has borrowings and lending
- Make optimum utilization of financial resources: – It helps in making diverse and effective use of available financial resources.
- It helps in making effective and adequate use of the available finance.
- There is effective balance is made among the flows of cash (inflow & outflow)
- It manages the available funds effectively and makes it attractive so that investors make investment in the organization.
- It set the growth and expansion plan so that company gets run for a longer time period.
- Organization becomes efficient to make maximum use of their available financial resources.
- It prepare for dealing with the emergency situations.
- It provides stability to the business
2.3. Assess the different financial information needs for the decision makers of Leeds Garments. (AC2.3)
There are various decision makers that demand for various information for their decision making process.
Operational information: – The information that get utilized for the point of supporting or executing the operations in adequate manner. The operational level management utilizes it in order to execute the activities so that they achieve the set objectives of the business organization. The information takes out from the financial planning or budgets get utilized effectively
Tactical information: –The information that get utilized for the reason of making effective plans for achieving their set targets. The middle level management gets set targets from upper level management and to meet these targets they utilize this set of information. Information makes inclusion of variance analysis and more.
Strategic information: – The information that utilized by the upper level management as they make use of it for the aiming of preparing policies, set rules and other effective measures for the betterment of the business organization. There are different information get utilized for this purpose such as profitability, liquidity, financial performance and many more
2.4. Explain the impact of different finance sources on the financial statements of Leeds Garments (AC2.4)
The inflow of finance put direct impact over the various financial statements and that impact get discussed below in effective manner such as: –
- Balance sheet: –There is large amount of financial inflow from different sources that directly impacts the cash and bank balance as it get increased subsequently. With the inflow of finance only one head get impacted under assets i.e. “Cash & Bank Account”. On the other hand there are different heads get created under liabilities side such as owner’s capital, bank loan and leasing with different amount as it create debt for the organization. In the end both sides get increased (V, B.I., et. al., 2013).
- Income statement: – The in-flow of finance from different sources create adequate amount of debt for them and they pay cost over these debts. The payment of cost of debts leads to increase in the operating payments that directly lower down the overall revenues. With the increase in payments it results into decrease in overall operating profits.
In this manner there is direct impact put over the statements as overall both side of balance sheet get increased with the same amount. On the other hand it increases the payment ratios that lower down the amount of operating profits (V, B.I., et. al., 2013).
Task 3 Financial decisions based on financial information covers LO 03 and AC 3.1, 3.2, 3.3)
3.1. Leeds garments manufacture a single product. The budgeted sales for the 6th period are for 10000 units at a selling price of £100 per unit. Other details are follows
- Two components are used in the process of manufacturing each unit
|Component||Number of units required||Unit cost of each component (£)|
- Stocks at the beginning of the period are expected to be as follows
4000 units of finished goods at a unit cost of £ 52.50
Component XY: 16000 units at a unit cost of £ 1
Component WZ: 9600 units at a unit cost of £0.50
- Two grades of employees are being used in manufacturing of each unit
|Employee grade||Hours per unit||Labor rate per hour (£)|
- Factory overhead is absorbed into unit costs on the basis of direct labor hours. The budgetary factory overhead for the period is estimated to be £ 96000
- The administration, selling and distribution overhead for the period has been budgeted at £ 275000
- The company plans a reduction of 50 percent in the quantity of finished stock at the end of the period 6, and an increase of 25 percent in the quantity of each component.
3.2 Using the above information calculate the production cost per unit.(AC3.2)
3.3 Prepare following budgets for the next period as a forecasting tool. (AC 3.1)
a) Sales budget
b) Production quantity
c) Material usage
d) Material purchase
e) Direct labor
f) The budgeted profit and loss account
Analyze above mentioned budget statements by using appropriate tools and state what appropriate decisions can be taken by the Management of Leeds Garments. (AC 3.1)
3.4. The management of Leeds garments requires a forecasted view for their new investment over the factory yet to be open. Management is asking you to evaluate the plant and equipment cost of the new factory to be. As per the forecasts it would cost £ 1,000,000 up to the point of implementation. It would last for five years and it would then be sold for £ 50,000 end of the fifth year. Cash inflows for future of the plant can be elaborate as follows
|Year 01||£ 2,000,000|
|Year 05||£ 2,000,000|
Depreciation of the plant is done by using straight line depreciation method.
Tax dues for following years can be elaborated as follows and tax will be paid on 1st of June following each year.
|Year 01||£ 40,000|
|Year 02||£ 70,000|
|Year 03||£, 100,000|
|Year 05||£ 10,000|
You are required to advice the feasibility of the investment by using investment appraisal techniques such as payback period, discounted payback period, accounting rate of return, Net Present value and decide the effective Internal Rate of Return.(Consider cost of capital as 12%) (AC3.3)
Task 04. Evaluation of financial performance of a business (Covers LO 04 and AC 4.1, 4.2, 4.3)
4.1. Discuss main types of financial statements which are being used in organizations such as Leeds Garments. (AC4.1)
The main financial statements that get prepared by the organization get discussed below such as: –
|Income statement||Income statement make inclusion of the activities related to the operating and non-operating revenues and expenditure in the organization. This statement is get use further for the reasons of evaluating profitability of the business organization for the financial year.|
|Cash flow statement||Cash flow statement records the activities related to the liquid funds and its equivalents to show he impact over it. These activities get recorded in three different forms of activities such as operating, investing and financing. This statement is use by the management to put effective control over the use of liquid funds.|
|Balance sheet||Balance sheet is prepared in order to record all their assets and liabilities and provide summarized overview of all accounts. It gets use for the principal of evaluating the organizational performance.|
|Notes||There are number of statements get prepared for the aiming of rendering detailed information related to the different accounts. These statements provide effective adjustments of the different accounts.|
|Statement of change in equity||This prepared by the organizations to make enough record of change in their equity capital and also provide effective information related to changes occurred in it.|
4.2. There are different types of businesses i.e. sole trader, partnerships, limited liability companies, franchise businesses, etc. Compare appropriate formats of financial statements to be used in different types of organizations (LO4.2)
Organizations are based on different formats as per their base and nature. These organisational formats are having their different formats of preparing their financial statements. These organizations and different formats of financial statements get discussed below such as: –
|Basis of difference||Sole Proprietorship||Partnership||Company|
|Business owner||Only single owner of the business and it termed as “Sole proprietor”.||The numbers of owners are more than one called as partnership business. And all owners get termed as Partners.||The numbers of owners are more and many of the investors make investment in the business. All owners get termed as shareholders.|
|Capital share||The capital is invested by the owner only and the amount is small.||Moderate capital amount is invested by the partners in the documented ratio.||Huge finance is invested by the shareholders as per their will.|
|Treatment of profit or loss||Owner is the single person that enjoys the profit or bears all losses.||Partners share the profit according to their profit sharing ratio.||Board of Directors issue the dividend for their shareholders to share their profits.|
|Income statement||Owner prepares this statement in horizontal format to measure their profits or losses of the financial year.||They prepare profit and loss appropriation account to measure their overall profits or losses in order to share them in their profit sharing ratio.||They prepare vertical format of this statement for the principal of measuring their overall profitability in order to take effective decisions on the base of their earned profits or losses.|
|Cash flow statement||Owner didn’t prepare this statement as there is no such need of preparing it.||Partners didn’t prepare this statement.||They focus over preparing this statement in vertical format as with the use of it they control over liquid funds and make effective use of it.|
|Balance sheet||Owner prepares the statement to record their assets and credits.||Partners prepare this statement to record the set of assets and show the share of their capital.||This statement is prepared by following IFRS guidelines and it is prepared for the aiming of evaluating financial Management of the organization.|
4.3. Following are the Income statement and the statement of financial position of Leeds Company for the year ended 31st march 2014. You are required to interpret the figures given on the statements using appropriate as suggested in the following section (AC4.3)
It get concluded that for the start-up of new business entity funds can be raised with the help of bank loan, retained profits and leasing options. These are effective sources that provide adequate support in gathering finance for business purpose. Financial planning is get utilized in effective manner that helps in managing available finance and make effective use of it for the growth and development of the business. Budget is also prepared by Leeds Garments in order to make diversified use of their available finance and by using investment appraisal techniques they evaluate the benefits of the available project. Different formats are followed for preparing different financial statements such as vertical format and horizontal format.
Adkins, R. & Paxson, D. 2014, “Stochastic Equipment Capital Budgeting with Technological Progress: Stochastic Equipment Capital Budgeting with Technological Progress”,European Financial Management, vol. 20, no. 5, pp. 1031-1049.
Ahrendsen, B.L. & Katchova, A.L. 2012, “Financial ratio analysis using ARMS data”, Agricultural Finance Review,vol. 72, no. 2, pp. 262-272.
Baker, H.K. & English, P. 2011;2013;, Capital Budgeting Valuation: Financial Analysis for Today’s Investment Projects, 1. Aufl.;1; edn, Wiley, Hoboken.
Barth, M.E., Konchitchki, Y. & Landsman, W.R. 2013, “Cost of capital and earnings transparency”, Journal of Accounting and Economics, vol. 55, no. 2-3, pp. 206-224.
Bird, C.L., ?ener, A. & Co?kuner, S. 2014, “Visualizing financial success: planning is key”, International Journal of Consumer Studies, vol. 38, no. 6, pp. 684-691.
Blanco, B., Garcia Lara, J.M. & Tribo, J.A. 2015, “Segment Disclosure and Cost of Capital”, Journal of Business Finance & Accounting Management , vol. 42, no. 3-4, pp. 367-411.
Bradshaw, M., Callahan, C., Ciesielski, J., Gordon, E. & Kohlbeck, M. 2010, “The American Accounting Association’s Financial Reporting Policy Committee’s Response to the Preliminary Views on Financial Statement Presentation”, Accounting Horizons, vol. 24, no. 2, pp. 279.