Unit 2 Managing financial resources and decisions





Course: HND  Level 5 Business (management)                                     Year: 2015/16

Student Name:

UNIT 2:  Managing Financial ResourceDecisions (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
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 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.

Scenario
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 Imads 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 yoto  provide them with 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




£000                  £000
Fixed Assets                                                    2,600

Current  Assets
Stock                                        600
Debtors                                    900
Bank                                        100
1,600
Trade creditors                       800

  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 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

Merit Criteria
M1     Identify and apply strategies to find appropriate solutions. M2     Select/design and apply appropriate methods/ techniques. M3     Present and communicate appropriate findings



Merit one
To achieve M1, research and discuss the benefits and limitations in the use of ratio analysis for decision-making. (Task 4)

Merit two
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)

Merit three
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

Distinction Criteria
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.



Distinction one
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)



Distinction two
To achieve D2: Critically evaluate the limitations of financial planning. (Task 2)

Distinction three






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)




The pass criteria











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




Journals Periodicals
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


Websites
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



Submission Guideline

·    Work should be referenced

·    Sources should be acknowledged fully by referenced books, journals used and URL visited
·    All work should be word processed, font size of 12 and font style of Times

New Roman/Arial

·    Subtitles of the assignment should be in the font size of 14

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·    Spell check the document and read thoroughly for grammatical errors

·    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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