UNIT 2:Managing Financial Resources and Decisions

Division of Business
Course: HND Level 5  Business (management)
Year: 2014/15
Student Name:
UNIT 2:Managing Financial Resources and Decisions
Lecturers Name: Mr CM Tan
Date Issued: 15th of September 2014
Completion Date: 16th of January 2015
           Fail               Pass             Merit             Distinction
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
P11
P12
P13
P14
P15
P16
M1
M2
M3
D1
D2
D3
Learning Outcomes:1 Understand the sources of finance available to a business 2 Understand the implications of finance as a resource within a business 3 Be able to make financial decisions based on financial information 4 Be able to evaluate the financial performance of a business.
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EDEXCEL BTEC Level 5 HND Business
Unit 2: Managing Financial Resources and Decisions


Task 1(LO1: 1.1, 1.2,1.3)

You are a young entrepreneur, willing to launch an ambitious business project. You are required to understand the sources and availability of finance for a business organisation

You have been asked to identify a range of sources of finance available to open your business these can include raising funds through a combination of finance areas. Please identify at least three sources (1.1). 

You should also assess the implications of your choices: What are the legal, financial and dilution of control implications (percentage ownerships); risks of bankruptcy. (1.2)

After assessing the possible sources of finance you must choose a source(s) that would be appropriate for your business project (1.3)
 You need to include the following in your answer
  • Advantages and disadvantages of different sources;












Task 2 (LO2: 2.1, 2.2, 2.3,2.4)

ANALYSE the finance costs of your chosen sources of finance for your business project. (2.1)

With reference to the financial planning of your project, you will need to explain why financial planning is important for the success ofyour idea.(2.2)

ASSESS the different information needs for each decision makerswithin your project: Identify and assess the information that is needed for a range of decision makers? (2.3)

Using the table below, complete a balance sheet for accounting purposes: you should clearly indicate how different types of finance and their costs would IMPACT on the financial statements of the business. 


Assets
                  £
Fixed Assets
10000
Accumulated Depreciation
1000
Total Fixed Assets
9000
Current Assets
Stock
2500
Debtors
1500
Bank
12500
Total Current Assets
16500
Liabilities
Creditors
3000
Loan
2000
Credit card
750
Total Liabilities
5750
Equity
Capital
2000
Retained Profit
17750

Task 3 (LO3: 3.1, 3.2, 3.3)

Task 3.1 ANALYSE budgets and make appropriate decisions

3.1A Produce a personal budget of your own finances AND make decisions from this budget.

3.1B The Simmons Company is planning to request a line of credit from its bank. The following sales forecasts have been made for parts 2014 and 2015.

                                   £
May 14                  150,000
June 14                 150,000      
July 14                  300,000
August 14              450,000
September 14       600,000
October 14            300,000
November 14         300,000
December 14            75,000
January 15             150,000

Collection estimates obtained from the credit and collection department are as follows:
Collected within the month of sale, 5 percent: collected the month following the sale, 80 percent; collected the second month following the sale 15 percent.






Payments for labor and raw materials are typically made during the month following the month in which these costs are incurred. Total labor and raw materials costs are estimated for each month as follows:

                                £
May 14                  75,000
June 14                 75,000
July 14                  105,000
August 14             735,000
September 14       255,000
October 14           195,000
November 14         135,000
December 14          75,000

General and administrative salaries will amount to approximately £22,500 a month: Lease payments under long term lease contracts will be £7,500 per month; depreciation charges will be £30,000 a month; miscellaneous expenses will be £2,250 a month; income tax payments of £52,500 will be due in both September and December; and a progress payment of £150,000 on a new research laboratory must be paid in October.
Cash in hand on July 1 will amount to £110,000 and a minimum cash balance of £75,000 will be maintained through-out the cash budget period.

Prepare a cash budget for the last 6 months of 2014 and ANALYSE this making decisions.









Task 3.2Explain the calculation of unit costs and make pricing decisions using relevant information.

Scenario
Luxury Ltd is a small perfumery selling luxury oil based perfumes

Its costs for 500 units are as follows:

Total Direct Cost                     £25,000
Fixed Cost                                £10,000
Total Cost                                £35,000

Luxury is currently reviewing its selling prices and is considering cost-plus pricing based on:
Either a 33.33 % mark-up on cost price (i.e. profit is 33.33 per cent of cost price)

Or a 20 % return on capital employed. The company has capital employed of £50,000.

Discuss the best option for Luxury Ltd, you can justify this with the option that produces the most revenue or base your answer on other considerations that could affect the supply and demand.

Calculate the unit price based on both costing methods, and select the price you think is most appropriate.  Explain why you think it is the appropriate price. You may round up your figures to nearest £1 when calculating your answers. (3.2)






Task 3.3Assess the viability of a project using investment appraisal techniques.

In a new strategy aiming to diversify its products range Imad’s luxury Ltd has been presented with 3 new product opportunities.  You have been asked to identify which product the company should produce and sell. 

You need to use the Payback Period and Net Present Values (NPV) for each of the products.  Based on the table below, identify which new product (A, B or C) you would select for manufacturing and selling by the organisation.

Yr.
Product A
Product B
Product C
0
Investment  £80,000
Investment  £150,000
Investment  £80,000
1 Cash Inflow
£35,000
£30,000
£40,000
2 Cash Inflow
£35,000
£45,000
£40,000
3 Cash Inflow
£40,000
£75,000
£20,000
4 Cash Inflow
£50,000
£75,000
£25,000
Total
£160,000
£225,000
£125,000

The estimated cost of capital is 10% per annum. None of the projects will have any residual value at the end of the 4 years and there is no depreciation.

Note –The discount factors are as follows:
Year 1 = 0.909
Year 2 = 0.826
Year 3 = 0.751
Year 4 = 0.683

To assist Fort Sport Ltd to make a decision you are required to calculate the following for each of the three projects. (3.3)
•        Payback period
•        The accounting rate of return (ARR)
•        The net present value (NPV)


Task 4 (LO4: 4.1, 4.2, 4.3)

Scenario

You have been asked to prepare a report for the Managing Directors of JG Ltd. They will attend the Wahabou PLC Group Head Office to meet with key decision makers in the venture capitalist department. They have asked you to provide them with an explanation of the Trading Profit and Loss Account,the Balance Sheet and Cash flow.  (4.1)

Compare appropriate formats for financial statements for different business organisations. That is, compare the balance sheets formats and also compare the income statements/profits and loss accounts formats, between a sole trader and a limited company. (4.2)

Luxury Ltd runs a chain of small shopsand you have just receivedextractsfor the  period  ending 31th December 2014.


















Summarised Balance Sheet at 31st December 2014

£000 £000
Fixed Assets                  2,600

Current Assets
Stock 600   
Debtors                              900        
Bank   100
                   1,600
Trade creditors800

                                                                    800
                                                 3,400
Debenture stock                                      1,400
                                                2,000


Capital reserves
Ordinary share capital                               1,000
(£1 shares)
Preference share capital                               200
Profit and loss account                                 800
                                                                    2,000         
                  










Summarised Profit and loss account for the year ending 31st December 2014

£000
Sales                                                      6,000
Cost of sales (including purchases)            4,500
Gross Profit                                              1,500
Admin and distribution costs                     1,160
Trading profit                                              340
Debenture interest                                        74
Profit before tax                                          266
Taxation                                                      106
Profit after tax                                            160
Preference dividend                                      10
Profit available for ordinary shares               150
Ordinary dividend                                          10
Retained profit                                            140


You are required to calculate the following accounting ratios for Ltd:

•     Current ratio
•     Acid test ratio
•     Return on capital employed (ROCE)
•     Gross profit margin
•     Net profit margin

For each ratio, include the formula and INTERPRET the financial statements using the ratios above also COMPARING these with Industry standards for internal and external ratios. (4.3)













The pass criteria




In order to achieve a merit or distinction grade, a candidate must do the following:



Merit descriptors
Indicative characteristics
M1 Identify and apply strategies to find appropriate solutions
To achieve M1, research and discuss the benefits and limitations in the use of ratio analysis for decision-making. (Task 4)

M2 Select / design and apply appropriate methods / techniques
To achieve M2, you will use suitable techniques to explore the nature of each finance option; this includes the advantages and disadvantages of each option. You should successfully argue the benefits of your choice of financing and highlight why your choice is fit the company future plans. Present your answer clearly in a report format.  (Task 1)

M3 Present and communicate appropriate findings
To achieve M3, you will identify the risks and benefits of issuing shares in a new company and determine under what circumstances you may give away controlling interest within the business.   (Task 1)

         










Distinction descriptors
Indicative characteristics
D1 Use critical reflection to evaluate own work and justify valid conclusions
To achieve D1, justify the use of investment appraisal techniques and other financial planning methods in the process of strategic investment decision making for a business. (Task 3)

D2 Take responsibility for managing and organising activities
To achieve D2: Critically evaluate the limitations of financial planning. (Task 2)

D3 Demonstrate convergent /lateral /  creative thinking
To achieve D3, explain the differences (and the importance of this differentiation) between:
·         Current and acid test ratios
·         Gross profit and net profit (Task 4)
.










Merit descriptors
Indicative characteristics
Identify and apply strategies to find appropriate solutions
·         Effective judgments have been made to evaluate functions and processes for Microsoft corporation
·         Various goals and objectives and areas of responsibility using various models (PERT, Critical Path Analysis etc)have been explored
·         An effective approach to study and research has been applied to study operational plans and outcome suggested.
Select/design and apply appropriate Methods/techniques
·         Relevant theories and systems for evaluating
·         Organisational performance have been applied
·         A range of methods and techniques have been applied
·         A range of sources of information has been used to explain and arrive at objectives, measurable achievements and goals.
·         The selection of methods and techniques/sources has been justified
·         The design of methods/techniques has been justified to achieve Organisational standard of quality and references have been made to TQM /ISO etc
Present and communicate appropriate findings
·         The appropriate structure and approach has been usedalong with Coherent, logical development of principles/concepts for the Royal Mail
·         A range of methods of presentation have been used tocarry out risk assessments using Health & Safety legislation and regulations
·         Structure and systemic review along with presentationhas been used to contribute to overall clarity of assignment

Distinction descriptors
Indicative characteristics
Use critical reflection toevaluate own work andjustify valid conclusions
·         Conclusions have been arrived at through synthesis of ideas and have been justified with an example and comparison with re to Microsoft Corporation
·         The validity of results has been evaluated using definedgoals and objectives for Microsoft & Royal Mail withexamples
·         Self-criticism of approach has taken place for MicrosoftCorporation
·         Realistic improvements have been proposed againstdefined characteristics for success of Finance Departmentof Royal Mails with definitive plans and examples
Take responsibility for managing and organizing activities
·         Autonomy/independence has been demonstrated while giving examples of specific measurable, achievable and
goals for organisations in the assignment brief.
·         Substantial activities, projects or investigations have beenplanned, managed and organized to form a managementteam and an operational plan has been proposed
·         Activities have been managed and relevant outcomes of the quality models like ISO/TQM have been defined and used in the report
·         The unforeseen has been accommodated while preparing a report for showing wider implication of the proposed changesin the organisation management.
·         The importance of interdependence has been recognizedand achieved
DemonstrateConvergent
/lateral/creative thinking
·         Ideas have been generated and decisions taken
·         Self-evaluation has taken place with re to Task 4
·         Convergent and lateral thinking have been applied with re toTask 4.1 & 4.2
·         Problems have been solved with re to task 4.2
·         Innovation and creative thought have been applied with re toTask 4.4
·    Effective thinking has taken place in unfamiliar contexts

Resources

Textbooks
Dyson J R – Accounting for Non-Accounting Students(Financial Times/Prentice Hall, 2007) ISBN: 9780273709220

Journals and newspapers
The financial and mainstream press can provide useful background reading, and can also be a useful source of case studies and financial information. Copies of published financial reports are available from companies themselves, or via The Financial Times(a free online ordering service is available).

Websites
The professional accounting bodies all have websites with lots of useful
information and links.
www.aat.co.uk  The Association of Accounting Technicians
www.bized.co.ukBized provides a selection of teaching and learning resources
www.ft.com  The Financial Times







Submission Guideline


·         Work should be referenced
·         Sources should be acknowledged fully by referenced books, journals used and URL visited
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·         1.5 Line spacing
·         Reference at the end of the assignment
·         All paragraphs should be aligned in justified mode
·         The guided word limit is between 2500-4000 words



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