Course: HND Level 5 Business (management) Year: 2015/16
UNIT 2: Managing Financial Resources Decisions (MFRD)
Date Issued: 28th of September 2015 Completion Date: 4th of January 2016
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 HND Business (management)
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 of finance that is suitable to your chosen type of business. (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 evaluate sources 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;
· Suitability for your business project to justify your choice of sources;
· Different opinions of others;
· Your own opinion to conclude the evaluation
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 of your idea.(2.2)
ASSESS the different information needs for decision makers within 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. (2.4)
Assets £ Fixed Assets 10000
Accumulated Depreciation 1000
Total Fixed Assets 9000
Total Current Assets 16500
Credit card 750
Total Liabilities 5750
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 6 monthly personal budget of your own finances and then state the strengths and weaknesses of your budget AND make decisions from this budget.
3.1B The Simmons Company is planning to request a line of credit from its bank. The following figures are provided to the bank with the hope of strengthening their application.
Extracts of Sales figures (budgeted and actual) for some months over 2 financial years
2014/15 Financial Year 2015/6 Financial Year
Budgeted (£) Actual (£) Budget (£) Actual (£) May 150,000 150,000 150,000 160,000
June 150,000 160,000 180,000 180,000
July 300,000 310,000 320,000 320,000
August 450,000 450,000 450,000 460,000
September 600,000 600,000 610,000 620,000
October 300,000 350,000 320,000
November 300,000 280,000 300,000
December 75,000 75,000 80,000
January 150,000 150,000 160,000
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 labour and raw materials are typically made during the month following the month in which these costs are incurred. Total labour and raw materials costs are estimated for each month as follows:
£ May 15 75,000
June 15 75,000
July 15 105,000
August 15 735,000
September 15 255,000
October 15 195,000
November 15 135,000
December 15 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 1st 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 in making decisions.
Task 3.2 Explain the calculation of unit costs and make pricing decisions using relevant information.
Luxury Ltd is a small perfumery selling luxury oil based perfumes
It’s 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.
Luxury Ltd chooses the method that provides the highest return. The company has capital employed of £50,000.
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 3.3 Assess 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.
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 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 a detailed discussion paper on major components 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 shops and you have just received extracts for the period ending 31th December 2014.
Summarised Balance Sheet at 31st December 2014
Fixed Assets 2,600
Trade creditors 800
Debenture stock 1,400
Ordinary share capital 1,000 (£1 shares)
Preference share capital 200
Profit and loss account 800
Summarised Profit and loss account for the year ending 31st December 2014
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
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 Luxury 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)
MERIT CRITERIA ONLY
In order to achieve Merit, students must achieve all the Learning Outcomes plus M1, M2 and M3
M1 Identify and apply strategies to find appropriate solutions. M2 Select/design and apply appropriate methods/ techniques. M3 Present and communicate appropriate findings
To achieve M1, research and discuss the benefits and limitations in the use of ratio analysis for decision-making. (Task 4)
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 fits the company future plans. Present your answer clearly in a report format. (Task 1)
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 CRITERIA ONLY
In order to achieve Distinction, students must achieve all the Learning Outcome, all merits plus D1,D2 and D3
D1. Use critical reflection to evaluate own work and justify valid conclusions. D2. Take responsibility for managing and organizing activities.
D3. Demonstrate convergent/lateral/creative thinking.
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)
To achieve D2: Critically evaluate the limitations of financial planning. (Task 2)
To achieve D3, explain the differences (and the importance of this differentiation)
· Current and acid test ratios
· Gross profit and net profit (Task 4)
The pass criteria
Dyson J R – Accounting for Non-Accounting Students (Financial Times/Prentice Hall,
2007) ISBN: 9780273709220
The financial and mainstream press can provide useful background reading, and can also be 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. The Financial Times and other daily newspapers which contain a business section and market reports
The professional accounting bodies websites with lots of useful information and links.
www.aat.co.uk The Association of Accounting Technicians
www.bized.co.uk Bized provides a selection of teaching and learning resources www.ft.com The Financial Times business sections
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