Managing Financial Resources and Decisions

Managing financial resources
Individual
Contents
1.
INRODUCTION...................................................................................................... 3
SWOT Analysis............................................................................................................ 4
PEST Analysis............................................................................................................. 6
Goals.......................................................................................................................... 8
2. Financial reports..................................................................................................... 9
Balance sheet.......................................................................................................... 9
Profit and Loss Account......................................................................................... 10
Year-end balance sheet......................................................................................... 11
Cash Flow statement............................................................................................. 13
3. Investment appraisal........................................................................................... 14
Investment timeline.............................................................................................. 15
PP(paybackperiod)................................................................................................ 16
NPV (net present value)........................................................................................ 16
DPP( Discount payback)........................................................................................ 16
ARR(Average rate of return)..................................................................................17
IRR(Internal rate of return).................................................................................... 17
Ratio Analysis........................................................................................................ 18
Gross Profit ratios.................................................................................................. 18
4. Sources of Finance................................................................................................ 19
Choosing the Right Source of Finance...................................................................21
Internal and External Finance................................................................................22
Internal sources..................................................................................................... 22
External sources.................................................................................................... 23
Best financing option............................................................................................. 24
5. Impact by obtaining the bank loan.......................................................................25
Financial reports after loan.................................................................................... 26
Profit and loss statement....................................................................................... 27
Cash flow statement (Year 1)................................................................................ 28
Conclusion and Recommendation............................................................................ 30
Appendix.................................................................................................................. 32
Cash Flow statement for Year 2............................................................................. 32
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Cash flow statement for Year 3..............................................................................33

Ratios analysis...................................................................................................... 34
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1. INRODUCTION
As the one of the best and broad minded andbuilding the business building owner MR Samson
de Silva wanted to begins a pharmacy to satisfied health need of the people who live in the
village ,he is the certificate holder for conducting pharmacy and he is the person who process
modern business talent to begin a business in the above mention field.
Among the high price drug selling centers in the town this pharmacy will provide better service
lower income level village people, not only MR Samson the Silva the rural village people also
reef the benefits from the expected business.this grand opportunity will save very important time
factor as well as hardly earn money in the hand of under privileged people in the village.
The people live though out the world are suffering from various type of the business therefore
this is the best opportunity to invest money and provide a great humanitarian service on behalf of
the general public
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SWOT Analysis
SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are
internal factors whereas opportunities and threats are external factors. Basically a SWOT
analysis distinguishes between where your organization is today, and where it could be in the
future.
STRENGHTS
background with business experience
sufficient amount of capital.
The owner is training and certificated person.
Having a suitable place for the business.
WEAKNESSES
Lack of experience employees.
Difficult to finding a quality helpers
Problems of having distribute.
Changes in the price levels.
OPPURTUNITIES
higher chance of Expanding the firm to additional area.
Villages havent pharamercy in this area.
Private dispensary and veterinary service are in this area.after 4.30 private medical
dispensary are open.
Poor bus service ,from village to town in the evening.
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THREATS
Big competition between western and medicine and ayuruwedic.
Villages run after the herbal medicine
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PEST Analysis
PEST analysis stands for "Political, Economic, Social, and Technological analysis" and
describes a framework of macro-environmental factors used in the environmental scanning
component of strategic management.
POLITICAL
Political vary, for example frequently government change stability of government. Rules
and regulations often known as loan policies, labor laws, and tax policies are highly
influenced among firms.
ECONOMICAL
Economic factor can be determine based on the rates of inflation, stage of the business
cycle, interest rates, exchange rates, and disposable and flexible income among various
segments of the population.
SOCIAL
As we converted our living system in to western pattern we have completely forgotten

our indigenous food system cooking methods and the life depend on agree cultural
background as the result of that we eat lots of western foods and the fast foods as well as
oil for cooking with this blind following system our young generation have become
unhealthy people before the reach in to the maturity .
We can see people line up infront of the channeling centers for western medicines,doctors
also prescribe number of drugs introduce by medical representative and produse by the
multinational companies.
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TECHNOLOGICAL
Using new computerized methods will help the business maintain their records, customer
attendance and financial system in a proper way.
Now under the present open economy system there are lots of low quality local goods in the
market under the this situation even the health minister declared to media conference,there are
nearly 14 companies with in our country those who important distribute quality drugs within the
country ,therefore people have big hesitation in purchasing drugs for their decisions. They dont
have trust on drugs stoles in the country therefore we hope to established a pharmacy within high
goodwill to the rajyaosusala.
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Goals
These are our goals
Selling the high quality drugs using the drugs name avoiding the brand name
Now in the drug business they charge high rate for even low quality drugs under the brand
name, even the doctors use the brand name avoiding the drugs name ,therefore we should explain
this to our customers from the explosion.
Provide the opportunity for the customers to fulfill their health need from the close
market with the trust.
Usually customer hesitate to buy certain types of drugs under the brand name ,they are paying
high price therefore it will be relief to them.
To avoid the long queue
In the town areas people have to stay in a long queue to buy their drugs wasting their valuable
time because of the congestion we can provide our service to them without wasting their time not
only that but also we can expos clearly the different of the prices.
When we fulfill the above mention goals we can create a competitive market to the RAJAY
OSU SAL providing competitive service
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2. Financial reports
Balance sheet
R &R pharmacy
balance sheet as at 1/1/2012
Current assets
Cash and bank
120,000
Opening stock
200,000
Key money
200,000
Inventory
300,000
Fixed Assets
820000
100,000
Furniture building and fittings

100000
Total assets
920000
Capital & Long term Liabilities

Capital
920,000 920000
Total capital and liability
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9200000
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Profit and Loss Account

For the year ended 31/12/2012
Sales
1,200,000
(-) Cost of Sales

Opening Stock
200,000
(+) Purchases
500,000
(-) Closing Stock (10% from purchases)
(50,000)
Gross Profit
(750,000)
450,000
(-) Other expenses

Depreciation
10,000
Telephone
15,000
Electricity Bill
35,000
Salary
96,000
Advertising
8,000
Maintenances
7,000
279000
Net Profit
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171000
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Year-end balance sheet

R & R pharmacy
Balance Sheet as at 31/12/2012
Original
Current Assets
Closing stock (10% from purchases)
Cash and bank
Key money building
Fixed Assets
Furniture and fits
Total Assets
Liabilities
Value
Depreciati
on
g Value
50,000
909000
200,000
10,0
100000
00
50,000
Creditors (10% from purchases)

Capital & Long term Liabilities
Capital
Remainin
920,000
279000
1159,000
90,000
1,249,000
50,000
1199000
Retained earnings
1,249,000
Total capital and liabilities
Balance sheet notes

Depreciation
Furnitures and fits 10%
Creditors
Assuming 10% from purchases
Closing stock
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Assuming 10% from purchases
Cash Flow statement

R & R Pharmacy
Cash Flow Statement for the year ended 31/12/2012
(2nd and 3rd year cash flows in Appendix)
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Cash Inflows
3.
Sales (Cash)
1,200,000
Capital
620,000
(-) Opening cash and bank
(120,000)
1,700,000
Cash Outflow
Purchases (cash)
450,000
Telephone Bill
15000
Electricity Bill
35000
Salary
96000
Advertising
8000
Maintenance
7000
300000 (911000)
Inventory
Net Cash flow
789000
Opening cash and bank equivalent
120000
Closing cash and bank equivalent
909000
Investment appraisal
This
the
planning
process
used
to
determine
whether
an
organization's
long
term investments such as new machinery, replacement machinery, new plants, new products, and
research development projects are worth pursuing. It is budget for major capital, or investment,
expenditures.
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These are the formal methods used in investment appraisal techniques,

Traditional methods
Payback Period
Accounting Rate of Return (ARR)
Discounting Methods
Discounted Payback Period
Net Present Value (NPV)
Profitability Index (PI)
For R & R pharmacy, Ive decided to use payback period, discounted payback period, accounting
rate, return capital employee known as (ROCE) and Net present value (NPV).
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Investment timeline
Cash Flows
AMOUNT TO BE RECOVERED
(1,421,600)
Year 0
Year 1
(632,600)
789,000
Year 2
161,630
794,230
Year 3
962,331
800,701
According to the forecasted cash flows (from the cash flow statements) the timeline for the
investment can be derived as follows.
794,230
789,000
789,000
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800,701
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PP(paybackperiod)
The Payback period for this project is 1 year and 1 month. According to the payback period it
can be considered a good investment because it is lower than the standard payback period (2.5
years).
Finding the Present value of cash flows is needed in order to calculate some non traditional
techniques (NPV,IRR, DPP). Therefore the amount to be recovered will be adjusted according to
these values.
PV of Cash Flows
AMOUNT TO BE
RECOVERED
Year 0
(920,000)
(1,421,600)
Year 1
788,211
(633,389)
Year 2
792,643
159,254
Year 3
798,303
957,557
NPV (net present value)

NPV is the best method becauseit measures shortfalls of cash flow. The typical method of using
time value of for long term appraisal projects. The Net present value for the project is LKR
955,827. The NPV has to be a positive value in order to be considered as a profitable investment
and not a negative one. Our NPV is a positive value, therefore it can be considered as a good
investment.
DPP( Discount payback)

Discount payback period is, Time that will take to pay the initial investment. This technique is
easy to calculate but the time value of money is not considered. The Discounted payback period
1 year and 0 months. This is calculated according to the Present value of the cash flows,
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therefore it can offer us a more accurate description of this aspect as it considers time value of
money.
Our DPP is still lower than our standard payback period, so the DPP considers this a good
investment.
ARR(Average rate of return)

It is a comparison of the profits generated by the investment with the cost of its investment. Here
the Average annual profits are divided by the average amount of money invested in assets that
produce the profits
The ARR of the project is 86.37%. This is higher than the standard ARR required, which is 60%.
IRR(Internal rate of return)

IRR = r1 +
NPV 1 (r2 - r1)

NPV 1 - NPV2
This calculated IRR for the project is 68% and the rate of interest is 10%. This means the safety
margin in between 10% and 68% is very wide. So our investment can be considered a low risk
project.
If u invest 100 rupees u can earn 30 rupees as profit.
ROCE
Net Profit after tax
Capital
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279000
920000
30.33%
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Ratio Analysis
Financial ratios are a valuable and easy way to interpret the numbers found in financial
statements. It can help to answer serious questions such as whether the business is carrying
excess debt, whether customers are paying according to terms, whether the operating expenses
are too high and whether the companys assets are being used properly to generate income and so
on. In other words ratio analysis may provide the all the important early warning indications that
allow you to solve your business problems before your business gets destroyed by them. It also
enables the business owners to spot trends in a business and to compare its performance and
condition with the average performance of similar businesses in the same industry.
Gross Profit ratios

The gross profit ratio for this project is 38%. This means the company can receive more sales for
the capital invested.
(Ratios calculated in appendix)
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4. Sources of Finance
Businesses have various way of hoist money. Huge organizations are capable of using a broad
variety of finance sources than the smaller ones. Choosing the right kind of finance is very
important to the nature of the business. Savings are an obvious way of putting money into a
business. Currently companys main way of raising finance is by issuing shares. Following are
the financial sources available to a business.
Personal Savings
Entrepreneur using his/her own money to start the business are known as personal savings. The
advantage of personal savings is, it is easy and quick. And also it has a least risk. Gain finance
from this source has no or less cost. This is the ideal business for long term; this is an appropriate
source of finance because it has a least risk.
Leasing
Contract between the leasing company and the customer is known as leasing. Cost of obtaining
maybe high. Various assets can be taken such as buildings and motor vehicles etc... The cost of
obtaining is high when compared with personal savings. And the lesser owns the asset until the
payments are settled.
Retained Profit
The accumulated portion of profits which is not distributed among the owner. To start the
business this source of finance cannot be used but it can be used after the first year. This is also a
quick and easy source of finance. And here too the cost of obtaining is very low and this can be
used in the long run.
Bank loan
Cost of obtaining a bank loan maybe high. Capitalist has to repay the loan with an interest. If the
business will continue for a longer period then the loan can be obtain for long term.
Overdrafts
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Overdrafts are a short term loan can be obtained by keeping the bank balance as a security. Cost
of obtaining finance from this source maybe costly since the bank will charge an interest on
overdraft.
Ordinary Shares
Form of right to its owner to share in the profit of the company (dividends) and to vote at general
meetings of the company. This source of finance is high in cost but it is suitable to use if the
business is a large scale and if it requires a high capital. Ordinary shares can only be issued by a
company. Sole traders and partnerships cannot issue ordinary shares.
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Choosing the Right Source of Finance

A business needs to assess the different types of finance based on the following criteria.
Amount of money required
A large amount of money is not available through some sources and the other sources of finance
may not offer enough flexibility for a smaller amount.
How quickly the money is needed

The longer a business can spend trying to raise the money, normally the cheaper it is. However it
may need the money very quickly (say if had to pay a big wage bill which if not paid would
mean the factory would close down). The business would then have to accept a higher cost.
The cheapest option available

The cost of finance is normally measured in terms of the extra money that needs to be paid to
secure the initial amount the typical cost is the interest that has to be paid on the borrowed
amount. The cheapest form of money to a business comes from its trading profits.
The amount of risk involved in the reason for the cash

A project which has less chance of leading to a profit is deemed more risky than one that does.
Potential sources of finance (especially external sources) take this into account and may not lend
money to higher risk business projects, unless there is some sort of guarantee that their money
will be returned.
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Internal and External Finance

Internal finance comes from the trading of the business.
External finance comes from individuals or organizations that do not trade directly with the
business e.g. banks.
Internal finance tends to be the cheapest form of finance since a business does not need to pay
interest on the money. However it may not be able to generate the sums of money the business is
looking for, especially for larger uses of finance.
Examples of internal finance are:
Day to day cash from sales to customers.
Money loaned from trade suppliers through extended credit.
Reductions in the amount of stock held by the business.
Disposal (sale) of any surplus assets no longer needed (e.g. selling a company car).
Examples of external finance are:
An overdraft from the bank.
A loan from a bank or building society.
The sale of new shares through a share issue.
Internal sources
The internal sources of finance are as follows:
Personal sources
these are the source of finance that the entrepreneur invest.His/her own money.
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Share capital invested by the founder

These are the money that comes from the shares of the capital which we invested.
External sources
Loan capital
This can take several forms, but the most common are a bank loan or bank overdraft. Bank
provide this for the money that we have in the bank.
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Best financing option

Finding an appropriate financing option is one of the vital aspect that keep the organization
growing high or in the meantime it could be the right opposite. Main criteria selecting a financial
option we should look upon is the risk and the reliability. Looking back at financial statement we
took into consider bank loan would be the best option.
Documents needed to obtain a loan from a bank
Loan application form

Salary slips
two Guarantors statements
Guarantors salary slips
Information about the bank accounts
Information about bank accounts in other banks
Photocopy of National ID of the applicant
Other relevant documents.
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5. Impact by obtaining the bank loan

According to the statement after taking the loan the cash balance decreased because of the
interest rate had to be compensated but still the pharmacy runs at compatible net profit which
allow it to take a much a bigger loan next year and expand the business in to an additional area
and also Mr Samson de silva can diversify its business in order to gain more profits in the future.
Bank loan which was taken to the benefit of the business hasnt had a negative impact. through
using the loan shop can still maintain it profit and looking at the statement it shows that
obtaining a bank loan is not risky if the person knows how to handle it by taking the amount
needed for the organization and deciding right time period to pay it back is vital, at the end of the
day bank do expect to give more loans to firms which provide profits and their willing to help
them since it will lift their financial stability as well. Bank loans are fund raisers for any
organization its in the entrepreneurs hand to use profitable manner or if the bank loan had been
miss used the consequences will be elevated for the firm.
After obtaining a bank loan entrepreneur should be able balance the operational activities within
the organization obtaining a loan and by means of money in a mischievous way will rise the
expenses of the firm and reduce it profits then it will much harder to pay its interest to the bank
which will take the firm to a non-profitable shop. So it is essential to manage the loan in a
balance manner especially regarding operational activities in order to cut the extra costs which
will lead to a non-income firm. For the pharmacy the assumption of taking a bank loan of Rs
100,000 due to the high demand for medicine . Planting this firm near a private dispensary will
reach high demand loan was taken speculating the supply was low and to increase the sales to
equal the demand.
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Financial reports after loan

Balance sheet
Balance Sheet as at 31/1/1
Rs.
Rs.
Assets
Fixed Assets
Furniture and fits
100000
Current Assets
Cash at hand
Closing stock (10% from
purchases)
Key money building
909000
50,000
200,000
Total Assets
1,259,00
0
Capital and Liabilities

Current liabilities
Creditors (10% from purchases)
-50,000
Long term Liabilities

Loan
100000
Capital
Capital introduced
Retained earnings
Total Liabilities and Equity
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820,000
389000
1,259,00
0
Individual
Profit and loss statement
Profit and loss statement as at 31/1/1

Sales
1,200,000
(-) Cost of Sales

Opening Stock
200,000
(+) Purchases
500,000
(-) Closing Stock (10% from purchases)

Gross Profit
-50,000
-750,000
450,000
(-) Other expenses

Depreciation
10,000
Telephone
15,000
Electricity Bill
35,000
Salary
96,000
Advertising
8,000
Maintenances
7,000
Interest paid
10000
181,000
Net Profit
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269,000
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Cash flow statement (Year 1)

Cash flow statementas at 31/1/1
Cash Inflows
Sales (Cash)
Capital
1,200,000
620,000
-120,000
1,700,000
Cash Outflow
Purchases (cash)
450,000
Telephone Bill
15000
Electricity Bill
35000
Salary
96000
Advertising
8000
Maintenance
7000
Inventory
Interest paid (Note 1)
300000
10000
-921000
Net Cash flow

779,000
120,000
899,000
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Note 1
Bank loan: 100,000
Interest rate: 10%
Interest paid = 10,000
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Conclusion and Recommendation

Appraisal Technique
Calculated Figures
Standard /
Acceptable Figures
Accounting Rate of Return (ARR)
86.27%
60%
Net Present Value (NPV)
955.827
Discounted Payback Period
1 year
By considering the above table it is appropriate to invest in this business because the Net Present
Value shows a positive figure and the discounted payback period is 1 year which means the
amount that is invested will be paid back after one year.
A bank loan was taken to finance this business and as an effect of this the net profit has been
reduced. It is recommended to reduce the amount taken as a loan and increase the amount of
personal savings in order to increase the net profit.
It is recommended to use a computer software package to derive the financial statements more
accurate and also it is appropriate to have a research and take the information than making
assumptions. Then it will be more appropriate and accurate.
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References
www.pppnetwork.com/?
view=The_Importance_Of_Financial_Planning&mid=1563&mid=1563
tutor2u.net/business/gcse/finance_choosing_right_sources.htm
www.combank.lk/newweb/info/184?oid=73&lm=
lecture notes
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Appendix
Cash Flow statement for Year 2
Cash Inflows
1,26
0,000
Sales (Cash)
Capital
620,000
(120,000) 1,760,00
Cash Outflow
Purchases (cash)
Telephone Bill
Electricity Bill
Salary
Advertising
Maintenance
Inventory
472,500
16,050
37,450
102,720
8,560
7,490
321,000
Net Cash flow
794,230

120,000
914,230
Fixed cost increase by 5%

Variable cost increased
by 7%
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(965,770)
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Cash flow statement for Year 3
Cash Inflows
Sales (Cash)
1,323,00
0
Capital
620,000
(120,000) 1,823,000
Cash Outflow
Purchases (cash)
Telephone Bill
Electricity Bill
Salary
Advertising
Maintenance
Inventory
494,500
17,174
40,072
109,910
9,159
8,014
343,470
Net Cash flow
800,701

120,000
920,701
Fixed cost increase by 5%

Variable cost increased by 7%
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(1,022,299)
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Ratios analysis
ARR
Average Annual Net

Income
Investment
794,644
920,000
86.37%
ACID Test
Total Current assets
Inventories
Total current liabilities
115900
0
50,000
50,000
22.18
Gross Profit
450,00
0
1,200,0
00
38%
Gross profit
Sales
BM K- 18
Page 34

Managing Financial Resources and Decisions

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