Sources of Finance and Decision Making

Assignment front SheetQualification Unit number and title

Business 02. Managing Financial Resources and DecisionsStudent name Assessor name

Muhammad Waleed Ahmad Khan

Mehreen Haroon

Date issued Completion date Submitted on

15th October 2015 15th December 2015 15th December 2015

Assignment Title Sources Of Finance & Decision Making

LearningOutcome

LearningOutcome

AssessmentCriteria

In this assessment you will have the opportunity to present evidence that shows you are able to:

TaskNo.

Evidence(Page no.)

LO1 Understand the sources of finance available to a business

1.1 identify the sources of finance available to a business

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1.2 assess the implications of different sources

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1.3 evaluate appropriate sources of finance for a business project

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LO2 Understand the implications of finance as a resource within a business

2.1 analyze the costs of different sources of finance

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2.2 explain the importance of financial planning

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2.3 assess the information needs of different decision makers

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2.4 Explain the impact of finance on the financial statements

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LO3 Be able to make financial decisions based on financial Information

3.1 analyze budgets and make appropriate decisions

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3.2 explain the calculation of unit costs and making pricing decisions using relevant information

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3.3 Assess the viability of a project using investment appraisal techniques

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LO4 Be able to evaluate the financial performance ofbusiness

4.1 Discuss the main financial statements

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

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Student Name:Waleed Ahmad SOURCES OF FINANCE

AND DECISION MAKING

Assessor Name:Mehreen Bakht

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4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.

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Learner declarationI certify that the work submitted for this assignment is my own and research sources are fully acknowledged.

Student signature: Date:

TASK 1- SCENARIO 1


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In task 1 identify and evaluate the different sources of finance, which are available to the group of professionals, discussing the legal and financial implications of the finance resource.

Cash that is needed for starting up a business activity is called business finance. Finance is needed from beginning to the end of the business. From establishing a business to running it and then expanding it’s activities. From buying assets to running day-day operations like paying daily wages or buying raw materials etc. There are numerous sources that a startup business would need and it is important for a business owner to be aware of these financial sources so you can outline which source is suitable for your business. The internal and external sources that a business can look upon are:

Retained profit Sales of assets Bank loans Bank overdrafts Leasing Hire purchase Working capital management Public deposits Partnership Trade credit Government grants

Retained profit: is when a company is trading profitability, some of its profits will be taken in tax by the government and some of it is almost paid out of the owners or shareholders. One of the major advantages of retained profit is that is does not have to be paid back since it is a long-term finance. Secondly, there is no set obligation of interest or installment payments. Thirdly, as there is no added equity to be issued, there is no strength of control and ownership in the business. Biggest disadvantage of retained profit will be that the profits of a small business may be too near to the ground to be of any use. For e.g. gym and health center is a newly formed business so they cannot apply this source of finance as they have no previous trading history and no retained profits are available currently.

Sales of assets is another one of the sources of finances, this means when conventional companies sell their assets that are no longer fully working to raise cash. Its advantage is that is can save a large number of space as old assets are no longer present. Also, it makes superior use of the business’ capital. Its major drawback is that it is time consuming because the business might not find an appropriate buyer


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particularly if the assets are old. Secondly, new businesses will not have any old assets to sell.

Bank Overdraft means that the amount raised can vary from day to day, depending on the particular needs of the business, the bank allows spending more money from their account than is actually in it. Its advantages are that it is the most easily arranged and flexible of all sources of finance. It is also cheap, as the company only has to pay interest on the amount overdrawn at any one time. The disadvantages are that the bank can ask for the overdraft to be repaid at whatever time they want to and with the short notice. Secondly, the interest has to be paid as well. It also cannot be used to finance long-term assets. As for this organization it’s not very feasible because an overdraft can cause financial cost, which right now this partnership cannot afford, bank overdrafts can be financially convenient with its high interest rate, which is normally charged every day. (Stimpson and Farquharson, 2010)

Hire purchase is a form of credit for purchasing an asset over a period of time in form of monthly payments. The biggest benefit of hire purchasing to a business is that it avoids making large initial cash payment to purchase the item/asset. The drawback would be that since the interest rates are very high. It may be better to take out a bank loan. Secondly, a cash deposit needs to be paid at the start. But as for the given scenario, hire purchase can be used to buy gym equipment and the price can be paid in the form of installments; no burden on the partners. (Stimpson and Farquharson, 2010)

Leasing involves no down payment from the buyer to the seller but asset is acquired for a particular period of time against the monthly rent payable to use the asset and a part of cost. The first gain would be that the company would not have to spend a lot of money on buying the asset. Secondly, the firm will be able to easily update their equipment. Thirdly, the leasing company will be taking care of maintenance and replicating the damaged asset. Its biggest weakness would be that in the longer term, leasing would be more expensive than actually purchasing the equipment.

Bank loan is one of the most important sources of finance; it is where a business borrows money from a bank for a limited period. It is usually used to buy fixed assets, for e.g. machinery and buildings etc. Advantages are that the business can plan ahead without any difficulty, as the interest rate is fixed. Also, larger businesses can get lesser interest rates, as they are more consistent. Disadvantages are that the smaller companies will have to pay higher interest rates and the interest needs to be paid at any cost. Collateral is needed, means that if the business fails to repay the loan, the bank will be firm that it sells its property. In the case of a sole trader, the owner might lose their possession. So for this partnership this will be another huge financial cost if they’re planning a big loan for purchasing the gym equipment, the bank will take longer in checking if they will be able to repay the bank loan since interest rate is the first thing in the loan agreement.


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Working capital management is an attempt to have only the required amount of working capital in a business, so that it would not face problem of having too much or too low working capital. The advantages would be, when a company reduces its working capital-capital is released, which acts as a source of finance for other uses. It also enables a concern to face business crisis in emergencies such as depression. Its disadvantage would be that the return of investment would fall short with the shortage of working capital.

Public deposits in sources of finance means when a company raises its short and long-term finances by inviting the public to deposit their savings with their company. It’s beneficial because acquisition of investment through public payments is very easy. Also, it does not weaken the control of shareholders. Since the rate of interest waged on a public deposit is secure, the company can easily play trading on equity. It’s disadvantages maybe that they are not very certain and realistic forms of financing. Public deposits are accessible for a very small amount of time only. Since the deposits are not secured, the management may waste the deposits.

Trade credit is a short term, external source of finance, it used when a business buys raw materials or takes any services or other goods from another business but delays the payments of bills. Its suppliers or creditors are giving the services without taking immediate payments; so then the supplier becomes a trade creditor means someone to whom the business owes money. It is very flexible; the amount of credit replicates the value of business done with a supplier. It is also less costly; trade creditors don’t charge interest on the amount outstanding, unless the payment is delayed beyond the given time. Its downside is that trade credit is available only to those companies that have a good track record of paying the money on given time. Also, for a new business, it is very difficult to finance working capital through trade credit.

Additional partners in source of finance are when you add partners to the company to raise its capital. It is suitable for partnership business as the new partners can contribute extra capital. Its good thing is that is doesn’t have to be paid back as well as no interest in payable. Its downside is that the profits will be split more ways. Also the diluting control of partnership will be involved.

Government grants, as a source of finance is when government organizations offer grants to businesses, both new and established. Usually certain conditions apply, such as where the business is located. Its advantage is that it doesn’t have to be paid back. These grants can be significant and give your organization immediate reliability and public exposure. Government grants are usually on a reimbursement system, so if you are a cash-strapped organization, you might face hardships and it automatically falls in the drawbacks. Government grants also come with requirements to spend the funds allowing to a complex set of regulations and laws by the government.

Mortgage is a long-term source of finance, it is loan secured on property and repaid in installments over a period of time. The business will own the property once the final payment has been made. Its biggest advantage is that it is very long term. Gives the business a long time to repay the money. Disadvantages are that this is an


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expensive method compared to buying with cash. Also if the company does not keep up with the payments, the property could be repossessed. Interest needs to be paid as well.

Debt factoring is a short-term finance and is when a business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company. A business can raise finance by collecting the debts from the debtors. Also, the companies that only deal in cash do not have any debtors. Its upside is that no additional cost in getting this finance, it is part of the businesses’ normal operations. Major drawback is that there is a risk that debts owed can go bad and cannot be repaid.


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TASK 2 – SCENARIO 1

Explain the importance of financial planning for business organizations.

Financial planning is getting arranged for a business on the undertaking of picking how the organization will perform its key objectives. Conventionally, an organization makes a monetary course of action quickly after the vision and targets have been achieved. The money related strategy defines each of the exercises, assets, mechanical assembly, and materials that are depended upon to complete an organization's visions and targets in a timeframe.

Financial planning generally opts the strides or the systems utilized by an individual or business, which makes a go for satisfying the cash, related destinations or to pull in with specific circumstances, which requires wisdom. A budgetary strategy for any business or connection can offer bearing to the managers to comprehend whether they can perform the given targets or not. The vital thing is that it should be done in a way so that it offers the manager some help with settling on choices that provides financial success of the association. Financial coordinating relates to the entire money is related to book keeping of an affiliation. Each of the point of interest, exercises, materials, and gear's that are incorporated to perform an association's goals and moreover the time frame is elucidated in financial planning. It recognizes the framework for achievement by ensuring that the destinations that have been set are either achievable or not when seen from a financial perspective. By adding to a financial strategy, the profit related targets are set viably by the CEO for the connection and prize the staff for meeting the destinations inside of the given spending game plan.

It is important for the developers of the housing estate to withdraw a good financial plan in order to cover the costs of the building, the cost of the bar, swimming pool, spa, sauna, healthcare center, gym instructor, physiotherapist, dietician, heating and the cost of lighting. In order to achieve the completion of the project, they are required to meet the needs of a good financial plan and managers. They should aim to provide bonuses to their staff once they have achieved there given tasks.


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TASK 3 - SCENARIO 1

What factors should be taken into consideration when deciding the member fee to be charged from the resident members?

When fixing the values of your products, the specific organization must look at the price related to developing the particular products or services. This kind of pricing includes both varying along with established costs. For this reason, nevertheless fixing the values, the specific organization must manage to recover both varying along with established costs. However, while fixing the values within the stock, the specific affiliate marketer must consider the specific goals within the organization. Just as one case in point, if the objective of a firm is to have a growth on the return on investment, then it might charge a higher price, in case the goal would be to receive a significant market share, then it might demand lesser price. Demand must be regarded ahead of figuring out the particular price.Whenever setting any products’ cost, marketers need to consider the different aspects which can be the outcomes regarding company’s selections and steps. Most of these aspects usually are in the control of the management of the company and if required could be alerted. And as for the new health clubs and other membership-oriented firms use several pricing strategies to have a better customer services.

Pricing Strategies:• Price skimming• Price penetration• Competitive pricing• Cost plus pricing• Discriminatory pricing• Psychological pricing

Price skimming: ‘’setting a high price for a new product when a firm has a unique or highly differentiated product with low price elasticity of demand.’’ (Stimpson and Farquharson, 2010)

Price skimming is the technique that is used to sell any product at an excessive price. This can be applied as soon as any brand-new solution can be unveiled out there as soon as joining price skimming an organization can be decreasing higher unit sales, which it can win from reducing prices. As soon as the competitor enter the market, the organization that's been employed directly into price skimming has to decrease the price ranges, this technique is used by the companies to recover the cost of development.


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Price skimming is the technique involving selling any product at excessive price? This can be applied as soon as any brand-new solution can be unveiled out there as soon as joining price skimming an organization can be decreasing higher unit sales, which it can win from reducing prices. As soon as the competitor enter the market, the organization that's been employed directly into price skimming has to decrease the price ranges, this technique is used by the companies to recover the cost of development. To keep this going for a longer period of time suppliers have to generate a solid brand image for which the buyers are willing to pay better rates. There are a lot of benefits of price skimming, one of it is that it facilitates the organization in recovering research and development cost of a particular product involving brand new item which attracts the customers more. Gym and health center can use this strategy in such in a way that they could make their residents think that the equipment’s they’re offering will be modern as well as this is the reason they are getting an increased value for better quality goods as well as development of these product.

Price Penetration: ‘’setting a relatively low price often supported by strong promotion in order to achieve a high volume of sales’’ (Stimpson and Farquharson, 2010)

When a new product or service is launched, to attract the buyers, firms are likely to undertake penetration-pricing strategy because they're planning to use mass marketing and achieve a bigger market share. Since the prices will be low, customers will buy more products and be aware of the low prices as compared to the competitors. And if the product gains its targeted market share then the prices can slowly be increased. The intention of the organization using penetration pricing can drive competitors out of the marketplace, so the company can sooner or later charge a boost in the prices with minor fear of price competition from the competitors left in the market. It can also achieve enough market share that the seller can lower down its manufacturing costs due to very large production or purchasing volumes. This strategy gives its best during the phase of the product’s growth since the product has already occupied a positive image in the market. The advantages of price penetration are that there will be an entry barrier for competitors if the company continues with its price penetration, possible new entrants to the market will be deterred by the low prices. It is also possible to accomplish the dominant marketplace with this particular method, though the penetration pricing may have to continue for a long time in order to drive away a sufficient number of competitors to do so. The gym and health center organization can use this in such a way that they’re new in the market and attract the residents positively by setting the prices of the gym a little cheaper but it can be vice versa as the residents might think the management is not providing them with the quality equipment and services.

Competitive pricing: ‘’a firm base its price upon the price set by its customers’’ (Stimpson and Farquharson, 2010)


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Competitive pricing is when a seller uses its competitors’ prices as its benchmark and instead of considering customers demand or setting their own cost for a product. This is applicable on the organizations selling similar products, since services can vary from business to business even though the characteristics of merchandise keep on being equivalent. This type of pricing strategy is generally used once a price for a product has reached on a balanced level, this normally happens when a product is in the market for a longer time, this often happens when there are many alternatives for the product. One particular advantage of competitive-based pricing is that it eliminates selling price rivalry which could cause destruction for the company. Another advantage is if you have a reasonably strong comprehension in your product’s high quality, target audience and cost of production using this method will most likely by no means cause personal bankruptcy. Disadvantage of competitive pricing is that by replicating your current market’s prices will lead to missing a lot of opportunities and also misplaced revenue, in case you think you’re achieving a lot. The purpose of your business is always to make best use of income and also revenue. It would not be a great idea for gym and health organization to adopt this pricing strategy since its newly formed business, the professionals should set their own prices for the gym’s services.

Psychological pricing: psychological pricing utilizes your buyer's psychological reaction to increase sales. By means of pricing products strategically, a firm may well enhance sales without drastically minimizing its prices. For instance, a higher price is actually more likely to encourage sales. Considering a number of factors inside developing the psychological pricing strategy to get the ideal final results. One of the advantages of the particular psychological prices approach assists you to construct an impact of this brand devoid of generating substantial changes for the item. Simply revising the price structure can make the item all of a sudden appear to be the best bargain on the market or even increase the high-class item for the top choices. The disadvantage of it is that it may be hard for the cashier to calculate whenever fractional costs are employed, as well as to make change for such purchases. That is a smaller amount of a trouble whenever credit card and also other sorts of digital repayments are employed. (Small Business - Chron.com, 2015)


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Discriminatory pricing: pricing strategy that charges its customers diverse costs for the same item or services. In immaculate price discrimination, the seller will charge every client the greatest value that he or she is willing to pay. In more regular types of price discrimination, the vender spots clients in gatherings in light of specific properties and charges every gathering an alternate cost. Basic aims of this pricing strategy are gaining higher profits, extra revenue, and improved cash flow and use up spare capacity. The advantages of this strategy are that the firms will be able to increase revenue. This will enable firms to stay in business for example by offering different prices in peak and off peak periods. Firm will be able to attract more consumers offering lower prices during off peak period enabling the firm to stay in business. Its disadvantage is that a few consumers may question value separation particularly those purchasers that need to pay higher costs. (Economicshelp.org, 2008)

Cost plus pricing: There is a big difference between costs and price. Costs are the expenses of a firm. Price is the amount customers are charged for items. A business can make a profit only if the price charged eventually covers the costs of making an item. One way to try to ensure a profit is to use cost plus pricing. For example, adding a 50% mark up to a sandwich that costs £2 to make means setting the price at £3. The drawback of cost plus pricing is that it may not be competitive. (Bbc.co.uk, 2016)Cost plus pricing is setting the costs of products and administrations. Under this methodology, you include the immediate material cost, labor cost, and overhead expenses for an item, and add to it a markup rate (to make an overall revenue) to determine the cost of the item. It furthermore pays an arranged benefit notwithstanding the expenses brought about. Its advantage is that it can be easily used to determine a product price. It is assured of f having its costs reimbursed and making a profit so any contractor will accept this method for a contractual agreement with the customer, thus there is no risk of loss in this contract. Its disadvantage is that if a company sets a product price on the basis of cost plus pricing and its competitors are charging different prices than them, it leaves a huge impact on the company’s market share and profit. It might end up giving away profits by charging less or it might achieve minor revenues by charging more.

Discriminatory pricing: Business firms operating in competitive markets are not restricted to charging only one price for their product. These firms may find that by charging different customers different prices for a common product may actually increase the profits of the firm. This charging of different prices for a particular good is known as Price Discrimination and is very common in various markets around the globe. (Digitaleconomist.org, 2016) Discriminatory pricing generally eludes as various costs being charged for giving the same administrations relying upon territorial monetary circumstances. To procure and hold every single conceivable continue from every penny that a shopper spends in a definitive objective of any organization and it is prepared by utilizing unfair evaluating. The real point of preference is that it additionally creates income, which makes them empower to stay in the business that generally would have been made


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misfortune. Offering lower costs amid off crest period empowering the firm to stay in business pulls in more purchasers. The purchasers that need to pay higher costs might question value segregation this evaluating plan is generally connected on exercise centers or spa clubs and in the given situation experts can make utilization of this procedure by giving an offer, for example, half markdown for families yet not for a solitary individual or 20% rebate for initial ten individuals in such way biased estimating can be misused.


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Describe the information needs of the owner and lender involved in this investment decision.

An owner is an individual or entity that claims a business element trying to benefit from the successful operations of the organization. Initially, a business owner must a strategist or a principal organizer. To comprehend the new business, and the resources and techniques it makes sense to begin with a strategy for success and showcasing arrangements. You’ll need to do research, planning and writing to develop a plan, and hope to return to and transform it as required.

Most organizations need start-up funding to get set up and develop their items and administrations. Contingent upon the business, a few proprietors can bootstrap and begin with a littler spending plan. Different endeavors require a little business advance to reserve costs for retail space, office hardware and procuring representatives. You'll likewise need to set up and keep up business financial balances, installment handling, records payable and records receivable, and charges. Whether you are simply beginning or hoping to develop, banks and loaning organizations can be thorough in their loaning survey rehearses. The absolute necessities that the bank would be searching for in this situation would be that they have adequate resources, money related stores and individual insurance to continue business variances and still pay off their advance. As a current entrepreneur, he should demonstrate that he has strong income, adequate to reimburse the credit. New organizations need confirm that they have a reputation of gainfulness and accomplishment in a comparative business try. A loan specialist will audit the individual financial record, particularly if the organization does not have a reputation of creating income.

Most entrepreneurs require a bank credit at some time, and applying for one includes a great deal more than rounding out research material. In addition to other things, they have to consider the condition of their own and business accounts, how they're going to reimburse the credit, and the amount of cash they really require. Before drawing nearer the bank, the businessperson needs to ensure that they have a decent handle on the amount of money they really require. The most ideal approach to decide this is to make a month-to-month income projection. Likewise, what should be ensured is that they incorporate their obligation reimbursement arrangement in those projections.


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At the point when paying special mind to an advance, the agent needs to see whether he is allowed to pay the credit off right on time with no punishment. A few states permit loan specialists to charge prepayment punishments, in which case he ought to attempt to arrange a tradeoff. It's something a great many people don't prefer to consider, but in the occasion of their passing, an unpaid business advance can influence their families. A great many people think, on the off chance that they bite the dust, the bank is in a tough situation, yet that is not genuine, legitimate moves can be made against them. (Small Business - Chron.com, 2015)


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Draw up a cash budget given the information above.

Cash Budget:

June July August September October NovemberOpening balance

(35,000) (10,450) 40,750 34,000 7900 (5900)

Cash inflowSales revenue 230,000 320,000 250,000 140,000 120,000 110,000

Total inflow 195,000 30,950 290,750 174,000 127,900 104100

Cash OutflowPurchases 135,000 180,000 142,000 94,000 75,000 66,000Admin {2} 40,000 41,000 38,000 33,000 31,000 30,000Selling 22,000 24,000 28,000 26,000 21,000 19,000Taxation - - 22,000 - - -Finance 5000 5000 5000 5000 5000 5000Shop fitting - 14,000 18,000 6000 - -Credit card {1}

3450 4800 3750 2100 1800 1650

Total Outflow

205450 268800 256750 166100 133800 121650

Closing Balance

(10450) 40750 34000 7900 (5900) (17550)


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The cash budget contains an itemization of the projected sources and uses of cash in a future period. This budget is used to ascertain whether company operations and other activities will provide a sufficient amount of cash to meet projected cash requirements. If not, management must find additional funding sources.The inputs to the cash budget come from several other budgets. The results of the cash budget are used in the financing budget, which itemizes investments, debt, and both interest income and interest expense.

The cash budget is comprised of two main areas, which are Sources of Cash and Uses of Cash. The Sources of Cash section contains the beginning cash balance, as well as cash receipts from cash sales, accounts receivable collections, and the sale of assets. The Uses of Cash section contains all planned cash expenditures, which comes from the direct materials budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. It may also contain line items for fixed asset purchases and dividends to shareholders. (Accountingtools.com, 2016)


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You have been asked to assess the viability of the project using investment appraisal techniques (ARR, NPV, IRR and PAYBACK) and advice Flapjack plc. whether they should produce the skateboards or sell the manufacturing rights to the sports company.

Sales Revenue Collection2011 SALES UNIT MAJOR OTHER INFLOWTOTAL SALES

2000 1000 1000

@50/unit @50/unitREVENUE £50,000 £50,000 100,0002012TOTAL SALES

4000 2000 2000

@60/unit @60/unitREVENUE 1000X£60 =

£60,000£120,000

10% discount 1000X£54=£54,000

234,000

2013TOTAL SALES

10,000 5000 5000

@70/unit @70/unitREVENUE 1000x£70=

£70,000£350,000

10% discount 4000x £63=252,000

672,000

2014TOTAL SALES

6000 3000 3000


£70,000£210,000

2015 2000x£63=126,000

406,000

TOTAL SALES

4000 2000 2000


70,000£140,000

1000x£63=63000

273,000


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Variable=>Outflow

Year Units Variable cost/unit Total V.C (£)2011 2000 £40 80,0002012 4000 £40 160,0002013 10,000 £40 400,0002014 6000 £40 240,0002015 4000 £40 160,000

Depreciation

Initial year = 0 (150,000)

Scrap Year = 5 25000-----Inflow

Depreciation Cost – scrapLine of asset

£150,000- £25000 5

=25000

Fixed cost = cash outflow

2011 75,000-25000 50,0002012 75,000-25000 50,0002013 75,000-25000 50,0002014 75,000-25000 50,0002015 75,000-25000 50,000

4. Year 0= (15,000)

Year 5= 15000—Inflow


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Cash Flow

YEAR INFLOW OUTFLOW CASHFLOW2010 - 150,000+15000 (165000)2011 100,000 80,000+50,000 (30,000)2012 234,000 160,000+50,000 240002013 672,000 400,000+150,000 222,0002014 406,000 240,000+50,000 116,0002015 273,000

2500015000

160,000+50,000 103,000

Calculate NPV

NPV = Cash flow x discount factor

Year Cash Flow (£) Discount factor 8% Present value (£)0 (165,000) 1 165,0001 (30,000) 0.926 27,7802 24000 0.857 20,5683 222,000 0.794 176,2684 116,000 0.735 85,2605 103,000 0.681 70,143

NPV at 8% = 165,000-(27,780+20,568+176,268+85,260+70,143) = 215,019

Payback Period

Year Cash Flow (£) Cumulative cash flow (£)0 (165,000) (165,000)1 (30,000) (195,000)2 24000 (219,000)3 222,000 (441,000)4 116,000 (557,000)5 103,000 (660,000)

IRR L + NPVL (H-L) NPVL – NPVH


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Year Cash Flow (£) Discount factor 2%

Present value (£)

0 (165,000) 1 165,0001 (30,000) 0.980 29,4002 24000 0.961 23,0643 222,000 0.942 209,1244 116,000 0.923 107,0685 103,000 0.905 93,215NPV at 15%: 165,000-(29,400+23,064+209,154+107,068+93,215) = 296,759

NPV 2% 296,759NPV 8% 215,019

L + NPVL (H-L) 2 + 215,019{15-2} NPVL – NPVH 296759-215019 = 23.78

ARRAverage Profit x 100% Average capital

Average Profit = Total cash flow– Total depreciation Life of project

270,000- 250,0005=54000

Average capital Employed=Initial investment + scrap value 2

165000+25000+15000 2 = 102500

Average Profit x 100% Average capital54000 x 100% = 52.68%102500


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Net Present Value (NPV): it is the net benefit or loss in present value terms from an investment opportunity. It represents the surplus funds, which are available to the investor because of taking the project. Any project with a positive NPV is accepted and any project with a negative NPV is rejected. When given an opportunity to choose a project, we should consider taking the one with the higher NPV.

The following is the formula for calculating NPV:

WhereCt = net cash inflow during the period tCo = total initial investment costsr = discount rate, andt = number of time periods

Internal Rate Of Return (IRR): it is the rate of return in which the NPV = 0.It is the rate of return that the certain project is expected to achieve. If the IRR is greater than the cost of capital, the project should be accepted, we should always prompt for projects with higher IRR.

Where:Ct = net cash inflow during the period tCo= total initial investment costsr = discount rate, andt = number of time periods

Average Rate Of Return (ARR): ARR represents the average profit from the project as a percentage of the average investment. Projects that have an ARR above the defined minimum are viable.

Payback Period: it tells that how long in terms of years and months does it take to recover the investment. We should compare the payback period to the company’s maximum return time allowed, if it is higher then the project is viable.

Payback Period = Cost of Project / Annual Cash Inflows


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Calculate for Osprey ltd, for both years the following ratios (to one place of decimals):

I. Operating Profit MarginII. Net Profit Margin

III. Asset Turnover RatioIV. Return On Capital EmployedV. Current Ratio

VI. Quick Assets RatioVII. Receivable Collection Period

VIII. Gearing Ratio (debt to capital employed)


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RATIO’S 2011 2012

OPERATING PROFIT MARGIN

Operating Profit x 100%Net sales

914 x 100%9482

= 9.6%

1042 x 100 %11365

= 9.2%

NET PROFIT MARGIN

Net profit before tax x 100%Net sales

892 x 100%9482

= 9.4%

961 x 100%13943

= 8.4%

ASSET TURNOVER

Sales ÷ Capital employed [1]

948211033

=0.85

1136513943

=0.81RETURN ON CAPITAL EMPLOYED

Profit before tax x 100%Capital employed[1]

892 x 100%11033

= 8 %

961 x 100%13943

= 6.9%

CURRENT RATIO

Current assetsCurrent Liabilities

4926 x 100% 1508

=3.3 : 1

7700 x 100% 5174

= 1.5 : 1QUICK ASSET RATIO

Current assets – StockCurrent Liabilities

4926 – 23861508

=1.6 : 1

7700 – 34205174

= 0.82 : 1

RECIEVABLES COLLECTION PERIOD

Debtors x 365Credit Sales

2540 x 3659482

= 98 Days

4280 x 365 11365

= 137 days

GEARING RATIO

Long-term Liabilities x 100%Capital employed[1]

1220 x 100% 11033

= 11 %

3675 x 100% 13943

= 26.3 %


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The asset turnover ratio is a productivity proportion that measures an organization's capacity to create sales from its advantages by contrasting net deals and normal aggregate resources. At the end of the day, this proportion indicates how effectively an organization can utilize its advantages to produce more sales.

Current ratio measures the ability of an organization to pay its bills in the near-term. This implies an organization has a restricted measure of time with a specific end goal to raise the assets to pay for these liabilities.

The quick assets ratio is a measure of how well an organization can meet its fleeting money related liabilities. Otherwise called the acid test proportion. A speedy proportion of 0.5 would propose that an organization could settle half of its present liabilities promptly. Quick asset ratio varies from current ratio in that those present resources that are not promptly convertible into money are prohibited from the computation, for example, stock and conceded duty credits since transformation of such resources into money may take impressive time. It shows the current assets that can be readily converted into cash.

The gearing ratio measures the extent of an organization's obtained assets to its value. This ratio demonstrates the money related danger to which a business is subjected, subsequent to extreme obligation could prompt budgetary challenges. A high gearing ratio speaks to a high extent of obligation to value, and a low gearing ratio speaks to a low extent of obligation to value.

Analysis: Working overall revenue implies that the amount of cash you are making from any organization. In the given situation OSPREY PLC Company was making 9.6% benefit in 2011 which was gainful for the organization where as in 2012 just 9.2% benefit was being made which can antagonistically influence the organization. In 2011 the net deals were recorded less when contrasted with 2012 albeit working benefit was less in 2011 compare to 2012 that put an awful effect on the last result. Endeavors ought to be made to build deals and moreover, expanding working overall revenue.


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TASK 8 - SCENARIO 4

You have to discuss the main financial statements and explain the impact of financial statements

Financial statements are a collective data of reports of the firm’s financial position and cash flow. They help in determining if a business can generate enough cash, the sources and the uses of the cash. They also help in determining if the firm has the ability to pay back its debt. Financial statements are composed reports that measure the financial quality, execution and liquidity of an organization. Financial Statements mirror the money related impacts of business exchanges. There are four main types of financial statements: Balance sheet, income statement, cash flow statement and the statement of changes in equity.

Balance sheet represents the financial statement of a substance. It has three main elements, the assets, and the things a firm owns for i.e. machinery, store, cash etc. The second element of a balance sheet is liability. It is something, which the business owes for i.e. money to the banks and creditors. The third element is the equity it is what the business owes to its proprietors. This speaks to the measure of capital that remaining parts in the business after its advantages are utilized to pay off its exceptional liabilities.

Income statement is also known as the profit and loss statement, it reports the profits and losses of a firm over a designated period of time. It is comprised of two elements; income and expense. Income is what the business has earned over the time for i.e. sales revenue etc. Expense is the total cost which is spent by the business over time in i.e. salaries, rents etc.

Cash flow statement is the report, which shows the movement of the cash of the firm and the bank balances over a specified period of time. It has three main elements, operating activities, investing activities and the financial activities. Operating activity determines the cash flow from the primary activities of a business. Investing activities determines the cash flow of the purchase and sale assets for i.e. the purchase of a new land. Whereas the financial activities determines the income produced or spent on raising and reimbursing offer capital and obligation together with the installments of interest and profits.

Statement of changes in equity determines the movement in the owner’s equity over a specified period of time. It can be derived from the following elements; the net profit and loss and reported in the income statement, the capital issued or repaid, dividend payments, profit or loss directly in the equity for i.e. revaluation surpluses and the last element is the effects or changes made by the accounting policy or the correction of accounting errors.


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Compare appropriate formats of financial statements for different types of business organizations.

There are many types of businesses; sole trader, partnership, private limited company, public limited company etc.

“Partnership is a business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibility.” (Stimpson and Farquharson, 2010)

Limited company is a privately owned business whose proprietors are lawfully in charge of its obligations just to the degree of the measure of capital they contributed.

There are many differences between the financial statements of a partnership and limited companies. In partnership there is more than one capital record. The quantity of capital record relies on upon the quantity of accomplices in the Partnership concern. Whereas in a limited company, Shareholders funds that involve numerous classes like offer capital, held profit, other income and capital stores. In partnership the profit and loss is divided between the partners capital account according the agreed ratio. Unlike partnership, which has taxation on every individual, limited company is imposed tax as a separate legal entity. The income statement of the partnership shows how the profit and loss is divided among the partners, where as in a limited company the statement of changes in equity shows the capital, profit, revenue and other capital interests annually. The balance sheet of a partnership shows the balance of the capital amount of each partner agreed under owner’s equity. Besides the income statement and the balance sheet, a Statement of Partner’s Equity is also made to show the changes in equity of each partner annually.


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Statement Of Changes In Owner’s Equity:

(Abrugar, 2012)

Income Statement Of Partnership:


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(Learnaccounting's Weblog, 2007)

Sole trader: A sole trader business structure is a person trading as the individual legally responsible for all aspects of the business. This includes any debts and losses, which can't be shared with others. Is simple to set up and operate. Gives you full control of your assets and business decisions. Requires fewer reporting requirements and is generally a low-cost structure. Has unlimited liability, all your personal assets are at risk if things go wrong. Your assets can be seized to recover a debt. (Business.gov.au, 2016)

Statement Of Changes In Owner’s Equity:

(Farmriskresources.com, 2016)


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Income statement of sole trader:

(Dl.groovygecko.net, 2016)


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BIBLIOGRAPHY

I. Stimpson, P. and Farquharson, A. (2010). Cambridge international as and A level business studies coursebook. Cambridge: Cambridge University Press.

II. Small Business - Chron.com, (2015). What Is Psychological Pricing?. [online] Available at: http://smallbusiness.chron.com/psychological-pricing-11862.html [Accessed 13 Dec. 2015].

III. Economicshelp.org, (2008). Benefits of Price Discrimination | Economics Help. [online] Available at: http://www.economicshelp.org/blog/306/concepts/benefits-of-price-discrimination/ [Accessed 13 Dec. 2015].

IV. Small Business - Chron.com, (2015). Tasks & Responsibilities of a Small Business Owner. [online] Available at: http://smallbusiness.chron.com/tasks-responsibilities-small-business-owner-23718.html [Accessed 13 Dec. 2015].

V. Bbc.co.uk, (2016). BBC - GCSE Bitesize: Pricing strategies. [online] Available at: http://www.bbc.co.uk/schools/gcsebitesize/business/marketing/productpricerev1.shtml [Accessed 25 Jan. 2016].

VI. Digitaleconomist.org, (2016). Price Discrimination. [online] Available at: http://digitaleconomist.org/pd_4010.html [Accessed 25 Jan. 2016].

VII. Accountingtools.com, (2016). Cash Budget - AccountingTools. [online] Available at: http://www.accountingtools.com/cash-budget [Accessed 25 Jan. 2016].

VIII. Abrugar, V. (2012). How to Make a Statement of Changes in Owner's Equity | Business Tips Philippines. [online] Businesstips.ph. Available at: http://businesstips.ph/how-to-make-a-statement-of-changes-in-owners-equity/ [Accessed 25 Jan. 2016].

IX. Learnaccounting's Weblog, (2007). Partnership - Example of Income Statement and Balance Sheet, Part 1 of 3. [online] Available at: https://learnaccounting.wordpress.com/2007/12/21/three-most-common-types-of-small-businesses-–-sole-proprietorship-partnership-and-private-limited-company/partnership-example-of-income-statement-and-balance-sheet-part-1-of-3/ [Accessed 25 Jan. 2016].

X. Business.gov.au, (2016). Sole trader | business.gov.au. [online] Available at: http://www.business.gov.au/business-


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topics/business-structures-and-types/business-structures/sole-trader/Pages/default.aspx [Accessed 25 Jan. 2016].

XI. Farmriskresources.com, (2016). [online] Available at: http://www.farmriskresources.com/images/default-source/default-album/statement-of-owner-39-s-equity-for-c-amp-d-farms.png?sfvrsn=0 [Accessed 25 Jan. 2016].

XII. Dl.groovygecko.net, (2016). [online] Available at: http://dl.groovygecko.net/anon.groovy/clients/kaplan/AlexILS/ACCAWIKI/ACCA_F3_HTML/Images/ACCAF3_CH2_img003.gif [Accessed 25 Jan. 2016].


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Sources of Finance and Decision Making

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