Managing Finance

| June 20, 2015

Paper, Order, or Assignment Requirements

 

all information and instructions are in the handout
aiming for a merit

 

Assignment brief
Assignment title Managing Financial Resources and Decisions
 

TASK 1

 

 

Scenario

 

You have recently been appointed as a finance manager at accountancy firm. The senior partner of the firm wants you to prepare a Formal Report about the information for new and existing businesses.

 

Your report should include;

 

  • The identification of different sources of finances available to businesses with advantages and disadvantages for each source. (1.1)

 

  • Assessment of different implications associated with sources of finance discussed above and the analysis of costs associated with them. (1.2, 2.1)

 

  • Evaluation of suitable sources of finance to a company of your choice; justifying the reasons why each source of finance is appropriate for that company and why the other sources of finance are not applicable. (1.3)

 

(This provides evidence for assessment criteria’s 1.1, 1.2 , 1.3, 2.1)

 

Hints:

Range of sources: sources for different businesses; long term such as share capital; retained earnings; loans; third-party investment; short/medium term such as hire purchase and leasing; working capital stock control; cash management; debtor factoring

 

Implications of choices: legal, financial and dilution of control implications; bankruptcy

 

Choosing a source: advantages and disadvantages of different sources; suitability for purpose e.g. matching of term of finance to term of project

 

TASK 2

 

 

Scenario

 

The company is looking to put together a series of seminars for local businesses, covering a variety of finance-related topics. It is your job to plan the events and put together materials for the delegates. This will involve writing a formal report including the following information.

 

 

In the report you should;

 

  • Explain the financial planning and its importance for any business. (2.2)

 

  • Assess different types of financial information required to different stakeholders for decision making purposes. (2.3)

 

  • Provide Profit And Loss Account and balance sheet with notes explaining how the different types of finance and their costs appear in these statements. (2.4)

 

 

 

(This provides evidence for 2.2, 2.3, 2.4)

 

 

Hints:

 

Finance costs: tangible costs e.g. interest, dividends; opportunity costs e.g. loss of alternative projects when using retained earnings; tax effects

 

Financial planning: the need to identify shortages and surpluses e.g. cash budgeting;

implications of failure to finance adequately; overtrading

 

Decision making: information needs of different decision makers

 

Accounting for finance: how different types of finance and their costs appear in the financial statements of a business; the interaction of assets and liabilities on the balance sheet and on international equivalents under the International Accounting Standards (IAS)

 

 

TASK 3

 

Part 1

 

The Financial Accountant of North Seaton Engineering Company has recently resigned and left his post with immediate effect. The Directors decide to advertise for a replacement but realize that the recruitment process may take up to three months. In the short term they decide to bring in a financial consultant to tide them over until a permanent appointment is made. You are asked by your line manager to take on this role – initially for three months.

 

On your first morning in early January 2012 the Directors present you with two budgets prepared by the departed financial accountant. You are given the cash flow forecast for the twelve months from January 2012 and the sales budget covering the twelve month period from July 2011 to June 2012 – the first six months of which include actual sales figures and variances between budgeted and actual sales.

The directors are concerned about the likely cash deficits shown in the cash flow forecast and the sales performance from July to December 2011. They are also concerned that they are very unlikely to meet their budgeted sales targets for January to June 2012.

 

Sales Budget –  North Seaton Engineering CompanyLtd. – July 2011– June 2012

 

Month Monthly

Budget

CumulativeBudget Actual Monthly Actual Cumulative

 

Variance

 

July 230 000 230 000 215 000 215 000 (15 000)
Aug 230 000 460 000 220 000 435 000 (25 000)
Sept 270 000 730 000 245 000 680 000 (50 000)
Oct 265 000 995 000 235 000 915 000 (80 000)
Nov 265 000 1 260 000 237 000 1 152 000 (108 000)
Dec 300 000 1 560 000 270 000 1 422 000 (138 000)
Jan 200 000 1 760 000      
Feb 300 000 2 060 000      
Mar 300 000 2 360 000      
April 300 000 2 660 000      
May 250 000 2 910 000      
June 260 000 3 170 000      

 

 

 

Cash Flow Forecast for a new business– North Seaton Engineering CompanyJan 2012– Nov 2012(Thousands of pounds)

 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Brought forward 40
Sales 200 300 300 300 250 260 300 260 300 325 265 265
Total income 240 300 300 300 250 260 300 260 300 325 265 265
Purchases 150 140 135 135 140 130 135 145 140 140 145 145
Wages 55 55 55 55 55 55 55 55 55 55 55 55
Rent & rates 56 56 56 56
Light & heat 55 55 55 55
Advertising 2 2 2 2 2 2 2 2 2 2 2 2
Insurances 55 52
Equipment 50 10 10 10
Vehicles 20
Directors’ salaries 22 22 22 22 22 22 22 22 22 22 22 22
Motor expenses 11 11 11 11 11 11 11 11 11 11 11 11
Sundry expenses 11 11 11 11 11 11 11 11 11 11 11 11
Total expenditure 432 251 291 302 293 296 292 246 296 297 246 301
Monthly deficit/surplus (192) 49 9 (2) (43) (36) 8 14 4 28 19 (36)
Accumulative deficit/surplus (192) (143) (134) (136) (179) (215) (207) (193) (189) (161) (142) (178)

 

 

With this in mind they ask you to:-

 

  • Analyse the cash flow forecast and the sales budget of North Seaton Engineering Company and identify the main problems.

 

  • Identify the likely causes of the problems and how they might be remedied and avoided in the future

 

  • Make recommendations for improving the cash flow situation with a view to minimizing the cash deficit or, possibly, generating a cash surplus

 

  • Make recommendations for resolving the issues highlighted in the sales budget and decide what approach should be taken in relation to the January to June budget

 

You are required to present your findings and recommendations as a formal Report to the Directors of Northfield Components Ltd.

 

 

(This provides evidence for assessment criteria 3.1)

 

Part 2

 

Information concerning Magic and Sparkle company’s  single product is as follows.

 

Usual selling price £ 15 per unit
Variable Production cost £ 1.20 per unit
Variable Selling Cost £ 0.40 per unit
Fixed Production Cost £ 40 000
Fixed Selling Cost £ 20 000
Full capacity 10,000 units
Current capacity  8 000

 

Z Plc has approached the business and requested to purchase 1500 units of our company’s product and has offered a price of £14 000. Should this one off contract be accepted?

 

(This provides evidence for assessment criteria 3.2)

 

Part 3

 

The Directors of North Seaton Engineering Company are considering two alternative business projects of each involve an initial investment of £ 450,000. In your role as financial consultant you are asked to advise the Directors which of the two projects would be the more financially viable.

Project ‘A’ involves the introduction of modern, hi-tech machinery into the company’s main production unit. This will result in significant increases in output and substantial savings in production and maintenance costs. This in turn will result in a net increase in turnover to the company of:

 

Year 1 – £ 180,000

Year 2 -£ 230,000

Year 3 -£ 280,000

Year 4 -£ 120,000

 

Project ‘B’ involves an increase in the company’s marketing activities. The Directors would employ one of the region’s most prestigious marketing companies to manage a massive national campaign. They feel that business could be increased without, necessarily, updating production processes. It is anticipated that the net effect of their campaign would bring in additional annual turnovers of:

 

Year 1 -£ 60,000

Year 2 -£ 120,000

Year 3 -£ 250,000

Year 4 -£ 250,000

 

Financial consultant, you are asked to carry out a full investment appraisal of the two projects. In order to fully assess the pros and cons of the two alternatives you decide to employ a number of appraisal techniques:

 

  • Payback period
  • Net present value

 

For calculation purposes, you assume that the cost of capital will remain fairly static at around 6% per annum over the four year period. Your appraisal should be presented in the form of a Formal report to the Directors and include all financial computations   and a summary of the conclusions which can be drawn from the results of the appraisal and relevant calculations– including recommendations as to which project should be taken on board.

 

(This provides evidence for assessment criteria 3.3)

 

TASK 4

 

Part 1

 

Discuss and compare the different formats of financial reports for sole traders and Companies.

 

(This provides evidence for assessment criteria 4.1 and 4.2)

 

Part 2

 

Victular is a public company that would like to acquire (100% of) a suitable company. It has obtained the following draft financial statements for two companies, Grappa and Merlot. They operate in the same industry and their managements have indicated that they would be receptive to a takeover.

 

Income statement  for the year ended 30 September 2013

 

Grappa                       Merlot

‘000                             ‘000

 

Revenue                                                                     12,000             20,500

Cost of Sales                                                  (10,500)                       (18,000)

 

Gross Profit                                                                 1500                            2500

 

Operating Expenses                                       (240)                            (500)

Finance Cost – loan                                                     (210)                            (300)

-overdraft                                            nil                                 (10)

-lease                                      nil                                 (290)

 

Profit Before Tax                                                           1,050                           1,400

 

Tax                                                                              (150)                            (400)

 

Profit After tax                                                            900                              1,000

 

Statement of Financial Position as at 30 September 2013

 

Non-Current Assets

Property ,Plant and Equipment                                  9,400                           7500

Current Assets :

Inventory                                                                     2000                            3600

Trade Receivables                                                      2,400                           3700

Bank                                                                            600                              nil

———————————————————

Total Assets                                                              14,400             14,800

 

Equity & Liabilities

Ordinary shares of 1$ each                            2,000                           2,000

Property Revaluation Reserve                                   900                              nil

Retained Earnings                                                      2,600                           800

—————————————————————-

Total Equity                                                               5,500                           2,800

 

Non-Current Liabilities                                            4,800                           6,300

Current liabilities

Bank overdraft                                                            nil                                 1,200

Trade Payables                                                           3,100                           3,800

Government Grant                                                     400                              nil

Finance Lease obligation                                            nil                                 500

Tax                                                                              600                              200

————————————————————–

Total Current Liabilities                                               4,100                           5,700

 

Total Equity and Liabilities                              14,400             14,800

 

The following ratios have been calculated for Grappa and can be taken to be correct:

 

Return on year end capital employed (ROCE) 2012: 13.60%  2013: 12.3%

 

Net asset (total assets less current liabilities) turnover 2012: 1.1 times 2013: 1·2 times

 

Gross profit margin 2012: 14.10 2013: 12·5%

 

Operating profit margin 2012: 9.50% 2013 : 10·5%

 

Current ratio 2012 : 1.1:1 2013 : 1·2:1

 

Closing inventory holding period 2012 : 72 days 2013 : 70 days

 

Trade receivables’ collection period 2012: 80 days 2013 : 73 days

 

Trade payables’ payment period (using cost of sales) 2012 : 100 days 2013 : 108 days

 

Gearing: 2012: 40% 2013: 35%

 

Interest cover: 2012: 5 times  2013: 6 times

 

Calculate  for Merlot the ratios equivalent to all those given for Grappa and assess the relevant performance of both companies in order to advise Victural in their acquisition decision in no more than 800 words. You are also required to do the  internal analysis of Grappa, using ratios provided.

 

(This provides evidence for assessment criteria 4.3)

 

 

 

 

Reading lists

 

Textbooks

Sufficient library resources should be  available to enable learners to achieve this unit.

Particularly relevant texts are:

 

Cox, D. and Fardon, M. — Management of Finance (Osborne Books, 2003) ISBN: 1872962238

 

Dyson, J. R. — Accounting for Non-Accounting Learners (Pitman, 2003) ISBN: 0273646834

 

Journals  and newspapers

The financial and mainstream press can provide useful background reading, and can also be auseful 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).

 

 

 

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