Managing Financial Resources and Decisions - Essay Example

Managing Financial Resources And Decisions By Task A Cash Budgets from 1st July to 30th September July August(£) September(£) October(£) November(£) December(£) Opening Balance 5,000 11,100 25,200 29,300 14,000 23,100 Revenue – 30% Advance 10,500 7,500 4,500 4,500 9,000 10,500 Revenue- Remainder 19,500 27,500 20,500 11,500 21,000 24,500 Recoverable Printing Costs (80% x £2,000) 1,600 1,600 1,600 1,600 1,600 1,600 Expenses (£10,000-£2,000) (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) Wages (12,500) (12,500) (12,500) (12,500) (12,500) (12,500) Rates - - - (2,400) - - Insurance (3,000) - - (3,000) - - Interest - - - (5,000) - - Printing Costs (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) Closing Balance 11,100 25,200 29,300 14,000 23,100 37,200 December appears to be the best month to purchase the asset booking facility.

The main reason behind this decision is that we have a high cash balance at the end of August, numerically £37,200. Even if we make the purchase here, we would have sufficient amount of cash to stay liquid in business. Budgeting has greatly helped me in taking my decision. Clearly after looking at the budgets I couldn’t have decided to purchase the machinery in any month before December. Assuming I had purchased the machinery in October then I would have been left with a cash deficit of £1,000 (£14,000-£15,000).

Having a negative cash means by no means is good for a business. Subsequently, I would have to go for over draft facilities to finance my operations and pay interest on it, which further adds to cost. Therefore is best to purchase the machinery with our own finances rather than going for an overdraft and paying interest on it. Task 1 – B Cost of materials per batch = £58 Cost of mixing = £100 Cost of packaging = £100 Total Overheard Per Month: Mixing Packing Canteen Factory 2250 1125 1125 Service 3750 1875 1875 Total 6000 3000 3000 There are 120 batches per month.

Absorption of total overheads Mixing Packing Canteen Absorption 50 100 391 Total overheads per batch = £541. Now adding the material and total labor cost, we get cost per batch as = 541 + 58 + 100 + 100 = £799 To determine a selling price, a subsequent amount or margin needs to be added to cost. 20% of cost would be a good margin. Hence the cost per batch would be £799 + (20% x £799) = £958.8 Task 1 – C Years 0 1 2 3 4 5 Initial Investment(£) (400,000) Revenue(£) 120,000 140,000 180,000 210,000 250,000 Depreciation(£) = (400,000-50,000) / 5 (70,000) (70,000) (70,000) (70,000) (70,000) Other Costs(£) (25,000) (35,000) (45,000) (55,000) (60,000) Resale(£) 50,000 Opportunity Cost(£) (20,000) (20,000) (25,000) (25,000) (25,000) Net(£) (400,000) 5,000 15,000 40,000 60,000 145,000 Discount Factor (12%) 1 0.893 0.797 0.712 0.6355 0.

567 Discounted Present Value (£) = Net x Discount Factor (12%) (400,000) 4,465 11,955 28,480 38,130 82,215 Discount Factor (5%) 1 0.952 0.907 0.864 0.823 0.784 Discounted Present Value (£) = Net x Discount Factor (5%) (400,000) 4,760 13,605 34,560 49,380 113,680 i NPV = Sum of discounted cash flows (at 12%) NPV = - 400,000 + 4,465 + 11,955 + 28,480 + 38,130 + 82,215 NPV = (£234,755) ii Year 1 Cash flow = 5,000 Year 2 Cash flow = 15,000 (200% increase from last year) Year 3 Cash flow = 40,000 (167% increase from last year) Year 4 Cash flow = 60,000 (50% increase from last year) Year 5 Cash flow = 145,000 (Increase will be calculated after lessening 50,000 since it’s a one off item = 145,000 – 50,000 = 95,000) (50% increase from last year) Assumption: The cash flow increases by 50% in the upcoming years.

Year 6 Cash flow = 90 x 150% = 135,000 Year 7 Cash flow = 135,000 x 150% = 202,500 Payback Period = -400,000 + 5,000 + 15,000 + 40,000 + 60,000 + 145,000 + 135,000 = 0 Hence payback period for the investment is 6 years. iii ARR = Average Profit / Investment ARR= ((-145000/5)/400000) x 100 ARR= -7.25% iv IRR: L= 5% , NPV (L) = (£193,535) H = 12%, NPV (H) = (£243,685) IRR = L + (NPVL/NPVL-NPVH)(H-L) IRR = -22% Considering all the above information, the project is not worthwhile. The project gives us a negative present value of £234,755 and even within the four given years, the initial investment cannot be recovered.

Other than that the project requires an IRR of 22% to breakeven. Whereas the current return is mere 7.25%. A return of more than 12.5% is required if this project is to be considered. This project should be dropped right ahead. Task 2 - Question 1 Financial statements consist of five components namely statement of financial position, statement of comprehensive income, statement of changes in equity, cash flow statement and notes to the accounts. There are different formats of financial statements for different types of businesses.

A basic comparison could be done between the financial statements of a company and a sole trader. If we compare the income statements of the two types of businesses, there are a lot of things that are different between them. To start off, a sole trader’s income statement would never mention of dividends as there are no other shareholders in a sole trader. However, the income statement of a company would have a separate figure for dividends as there are a lot of stake holders in a company. Other than that, companies usually have many different types of reserves in their accounts like general reserve, revaluation reserve, capital redemption reserve etc.

Such kinds of reserves usually aren’t found in sole trader businesses. Another important factor is that in the case of a sole proprietorship there in no difference in accounts between personal money and business money as all what is belongs to the sole proprietor himself. In such a case money can be taken anytime from business in terms of drawings. However, the case is much different when it comes to companies. Companies are separate corporate bodies and its shareholders cannot draw money from it whenever they want to.

They are only entitles to a fix salary (if they are employed by the company) and to a share of profits in terms of dividends. Companies also have a lot of reserves in their equity portion of the balance sheet whereas generally there aren’t all such reserves in the case of a sole trader’s accounts. Task 2 - Question 2 2010 2009 Net profit percentage 164 / 1480 *100 = 11.08% 120 / 1270 * 100 = 9.45% Gross profit percentage 760 / 1480 * 100 = 51.35% 644 / 1270 * 100 = 50.71% Interest cover 176 / 12 = 14.

6 times 132 / 12 = 11 times Current ratio 376 / 262 = 1.44 : 1 335 / 145 = 2.31 : 1 Acid test ratio 212 / 262 = 0.81 : 1 245 / 145 =1.69 : 1 Increase in sales = 210 / 1270 * 100 = 16.54% Debtor days 188 / 1480 * 365 = 46 days 130 / 1270 * 365 = 37 days Creditor days 142 / 794 * 365 = 65 days 70 / 600 * 365 = 42 days Both the net profit and gross profit percentage for the company has grown over the years. The increase in gross profit percentage can be attributed to purchase of cheaper raw materials for the production of goods.

It is possible that bulk purchase discounts may have been achieved. On the other hand the net profit percentage has also increased. The increase can be attributed basically a decrease in expenses (even though comparatively the expenses have increased, they have increased in a lesser proportion then by how much sales has increased). The interest cover has also grown to 14.6 times in 2010 as compared to 11 times in 2009. This explains us that the company now has greater funds to pay back its interest from its profit.

However, the current ratio shows an alarming position. It has gone down from 2.31: 1 in 2009 to just 1.44: 1 in 2010. The ratio has mainly increased due to the increased in the figure of current liabilities. Current liabilities increased from 145 in 2009 to 262 in 2010, thereby damaging the current ratio. As far as acid test ratio is concerned, it has also fallen down from 1.69:1 to 0.81:1. This tells us that too much money is tied up in stock. The company might face liquidity problems due to it as it takes a while to sell stock and generate money.

Even though sales have increased by 15.54% over the year, both the debtor days and the creditor days have increased. This shows signs of weak working capital management. The increase in debtor days can be attributed to an inefficient collection team. Bulk payment discounts should be offered to attract early payments. On the other hand the creditor days have also increased from 42 to 65 days. This might clearly be a working capital management technique. The company is probably holding back cash to help with the company’s cashflow.

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