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 BM K- 18 Page 1

Managing financial resources

Individual

Cash Flow statement for Year 2 .............................................................................................................. 32 Cash flow statement for Year 3 .............................................................................................................. 33 Ratios analysis ......................................................................................................................................... 34

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Managing financial resources

Individual

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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opportunities. STRENGHTS  background with business experience  sufficient amount of capital.  Private dispensary and veterinary service are in this area.  Poor bus service . Strengths and weaknesses are internal factors whereas opportunities and threats are external factors.  Difficult to finding a quality helpers  Problems of having distribute.after 4.  Having a suitable place for the business.30 private medical dispensary are open.Managing financial resources Individual SWOT Analysis SWOT stands for strengths. Basically a SWOT analysis distinguishes between where your organization is today.  Villages haven’t pharamercy in this area.18 Page 4 .from village to town in the evening. weaknesses.  The owner is training and certificated person.  Changes in the price levels. OPPURTUNITIES  higher chance of Expanding the firm to additional area. and threats. and where it could be in the future. WEAKNESSES  Lack of experience employees. THREATS BM K.

18 Page 5 .  Villages run after the herbal medicine BM K.Managing financial resources Individual  Big competition between western and medicine and ayuruwedic.

and disposable and flexible income among various segments of the population. interest rates.doctors also prescribe number of drugs introduce by medical representative and produse by the multinational companies.18 Page 6 . stage of the business cycle. labor laws. for example frequently government change stability of government.Managing financial resources Individual PEST Analysis PEST analysis stands for "Political. Economic. Social. We can see people line up infront of the channeling centers for western medicines. and Technological analysis" and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. ECONOMICAL  Economic factor can be determine based on the rates of inflation. 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 . POLITICAL  Political vary. and tax policies are highly influenced among firms. BM K. Rules and regulations often known as loan policies. exchange rates.

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.Managing financial resources TECHNOLOGICAL  Individual Using new computerized methods will help the business maintain their records.18 Page 7 . They don’t have trust on drugs stoles in the country therefore we hope to established a pharmacy within high goodwill to the rajyaosusala.therefore people have big hesitation in purchasing drugs for their decisions. BM K.there are nearly 14 companies with in our country those who important distribute quality drugs within the country . customer attendance and financial system in a proper way.

even the doctors use the brand name avoiding the drugs name .18 Page 8 .they are paying high price therefore it will be relief to them. When we fulfill the above mention goals we can create a competitive market to the RAJAY OSU SAL providing competitive service BM K.  Provide the opportunity for the customers to fulfill their health need from the close market with the trust.therefore we should explain this to our customers from the explosion. Usually customer hesitate to buy certain types of drugs under the brand name .Managing financial resources Individual 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.  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 exposé clearly the different of the prices.

000 820000 Fixed Assets Furniture building and fittings 100.000 100000 Total assets 920000 Capital & Long term Liabilities Capital Total capital and liability 920.000 200.Managing financial resources Individual 2.000 200.18 Page 9 .000 300. Financial reports Balance sheet R &R pharmacy balance sheet as at 1/1/2012 Current assets Cash and bank Opening stock Key money Inventory 120.000 920000 9200000 BM K.

000 7.000 (50.000 1.000 Net Profit 279000 BM K.000 500.000 8.200.18 Page 10 .000 35.Managing financial resources Individual Profit and Loss Account For the year ended 31/12/2012 Sales (-) Cost of Sales Opening Stock (+) Purchases (-) Closing Stock (10% from purchases) Gross Profit (-) Other expenses Depreciation Telephone Electricity Bill Salary Advertising Maintenances 10.000) (750.000 171000 200.000 15.000 96.000) 450.

249.000 10.000 1159.Managing financial resources Individual Year-end balance sheet R & R pharmacy Balance Sheet as at 31/12/2012 Origina l Value Current Assets Closing stock (10% from purchases) Cash and bank Key money building Fixed Assets Furniture and fits 100000 Total Assets Liabilities Depreciat ion Remainin g Value 50.000 BM K.249.18 Page 11 .000 1199000 Retained earnings 279000 Total capital and liabilities 1.000 909000 200.000 Capital & Long term Liabilities Capital 920.000 90.000 Creditors (10% from purchases) 50.000 50.000 1.

Managing financial resources Balance sheet notes Depreciation Furniture’s and fits 10% Creditors Assuming 10% from purchases Closing stock Assuming 10% from purchases Individual BM K.18 Page 12 .

700.18 450.000) 1.000 (120.000 15000 35000 96000 8000 7000 300000 (911000) 789000 120000 909000 Page 13 .Managing financial resources Individual Cash Flow statement R & R Pharmacy Cash Flow Statement for the year ended 31/12/2012 (2nd and 3rd year cash flows in Appendix) Cash Inflows Sales (Cash) Capital (-) Opening cash and bank 1.000 Cash Outflow Purchases (cash) Telephone Bill Electricity Bill Salary Advertising Maintenance Inventory Net Cash flow Opening cash and bank equivalent Closing cash and bank equivalent BM K.000 620.200.

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. and research development projects are worth pursuing. expenditures. new products. discounted payback period.18 Page 14 . Investment appraisal This the planning process used to determine whether an organization's long term investments such as new machinery. These are the formal methods used in investment appraisal techniques. replacement machinery. It is budget for major capital. BM K. or investment. return capital employee known as (ROCE) and Net present value (NPV). new plants. I’ve decided to use payback period.Managing financial resources Individual 3. accounting rate.

000 794.230 800.701 789.18 Page 15 .421.630 (632.230 Year 3 800.600) AMOUNT TO BE RECOVERED (1. 962.Managing financial resources Individual Investment timeline Cash Flows Year 0 Year 1 789.331 161.000 BM K.000 Year 2 794.701 According to the forecasted cash flows (from the cash flow statements) the timeline for the investment can be derived as follows.600) 1 2 3 789.

211 792. The Discounted payback period 1 year and 0 months. DPP( Discount payback) Discount payback period is. Our NPV is a positive value. Finding the Present value of cash flows is needed in order to calculate some non traditional techniques (NPV.254 957. According to the payback period it can be considered a good investment because it is lower than the standard payback period (2.421.5 years). BM K. This technique is easy to calculate but the time value of money is not considered.600) (633.303 (1.557 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. DPP). Therefore the amount to be recovered will be adjusted according to these values. This is calculated according to the Present value of the cash flows. PV of Cash Flows AMOUNT TO BE RECOVERED Year 0 Year 1 Year 2 Year 3 (920. The NPV has to be a positive value in order to be considered as a profitable investment and not a negative one.18 Page 16 .389) 159. Time that will take to pay the initial investment.827.000) 788.643 798.IRR. therefore it can be considered as a good investment.Managing financial resources Individual PP(paybackperiod) The Payback period for this project is 1 year and 1 month.

Managing financial resources Individual therefore it can offer us a more accurate description of this aspect as it considers time value of money.37%. which is 60%. ARR(Average rate of return) It is a comparison of the profits generated by the investment with the cost of its investment. IRR(Internal rate of return) IRR = r1 + NPV 1 (r2 . ROCE Net Profit after tax Capital 279000 920000 30. If u invest 100 rupees u can earn 30 rupees as profit.r1) NPV 1 . This means the safety margin in between 10% and 68% is very wide. This is higher than the standard ARR required. 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. Our DPP is still lower than our standard payback period. So our investment can be considered a low risk project.18 Page 17 . so the DPP considers this a good investment.33% BM K.NPV2 This calculated IRR for the project is 68% and the rate of interest is 10%.

whether the operating expenses are too high and whether the company’s assets are being used properly to generate income and so on.Managing financial resources Individual Ratio Analysis Financial ratios are a valuable and easy way to interpret the numbers found in financial statements. whether customers are paying according to terms. (Ratios calculated in appendix) BM K. It can help to answer serious questions such as whether the business is carrying excess debt. This means the company can receive more sales for the capital invested.18 Page 18 . 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. 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. Gross Profit ratios The gross profit ratio for this project is 38%.

. The cost of obtaining is high when compared with personal savings. Cost of obtaining maybe high. Currently company’s main way of raising finance is by issuing shares. 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. Following are the financial sources available to a business. it is easy and quick. And also it has a least risk. Sources of Finance Businesses have various way of hoist money.18 Page 19 . The advantage of personal savings is. 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. And here too the cost of obtaining is very low and this can be used in the long run.Managing financial resources Individual 4. 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.  Bank loan Cost of obtaining a bank loan maybe high.  Overdrafts BM K. Various assets can be taken such as buildings and motor vehicles etc.  Personal Savings Entrepreneur using his/her own money to start the business are known as personal savings. 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. If the business will continue for a longer period then the loan can be obtain for long term. Huge organizations are capable of using a broad variety of finance sources than the smaller ones. Capitalist has to repay the loan with an interest. This is the ideal business for long term. Gain finance from this source has no or less cost..

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.Managing financial resources Individual Overdrafts are a short term loan can be obtained by keeping the bank balance as a security.18 Page 20 . Cost of obtaining finance from this source maybe costly since the bank will charge an interest on overdraft. BM K.  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. Ordinary shares can only be issued by a company. Sole traders and partnerships cannot issue ordinary shares.

Potential sources of finance (especially external sources) take this into account and may not lend money to higher risk business projects. 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). BM K. unless there is some sort of guarantee that their money will be returned. The cheapest form of money to a business comes from its trading profits.18 Page 21 . 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. How quickly the money is needed – The longer a business can spend trying to raise the money. 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. 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.Managing financial resources Individual Choosing the Right Source of Finance A business needs to assess the different types of finance based on the following criteria. The business would then have to accept a higher cost. normally the cheaper it is.

Disposal (sale) of any surplus assets no longer needed (e. banks.18 Page 22 .His/her own money. External finance comes from individuals or organizations that do not trade directly with the business e.g. Internal finance tends to be the cheapest form of finance since a business does not need to pay interest on the money. A loan from a bank or building society. Money loaned from trade suppliers through extended credit. Internal sources The internal sources of finance are as follows: Personal sources these are the source of finance that the entrepreneur invest. selling a company car).Managing financial resources Individual Internal and External Finance Internal finance comes from the trading of the business. However it may not be able to generate the sums of money the business is looking for.g. Reductions in the amount of stock held by the business. The sale of new shares through a share issue. BM K. especially for larger uses of finance. Examples of external finance are:    An overdraft from the bank. Examples of internal finance are:     Day to day cash from sales to customers.

BM K. Bank provide this for the money that we have in the bank. External sources Loan capital This can take several forms.18 Page 23 . but the most common are a bank loan or bank overdraft.Managing financial resources Individual Share capital – invested by the founder These are the money that comes from the shares of the capital which we invested.

BM K. Main criteria selecting a financial option we should look upon is the risk and the reliability.Managing financial resources Individual 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.18 Page 24 . 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 Guarantor’s 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.

000 due to the high demand for medicine . Bank loan which was taken to the benefit of the business hasn’t had a negative impact. 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. BM K. 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 100.18 Page 25 . 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.Managing financial resources Individual 5. 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. 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. 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 loans are fund raisers for any organization it’s 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.

259. 100000 Current Assets Cash at hand Closing stock (10% from purchases) Key money building Total Assets Capital and Liabilities Current liabilities Creditors (10% from purchases) Long term Liabilities Loan Capital Capital introduced Retained earnings Total Liabilities and Equity 820.000 100000 -50.Managing financial resources Individual Financial reports after loan Balance sheet Balance Sheet as at 31/1/1 Rs.259.000 389000 1.000 909000 50.000 BM K. Assets Fixed Assets Furniture and fits Rs.000 1.18 Page 26 .000 200.

000 35.000 -50.000 10000 181.000 1.000 96.Managing financial resources Individual Profit and loss statement Profit and loss statement as at 31/1/1 Sales (-) Cost of Sales Opening Stock (+) Purchases (-) Closing Stock (10% from purchases) Gross Profit (-) Other expenses Depreciation Telephone Electricity Bill Salary Advertising Maintenances Interest paid 10.000 500.000 BM K.000 8.200.000 7.18 Page 27 .000 15.000 -750.000 450.000 Net Profit 269.000 200.

200.700.000 -120.000 Cash Outflow Purchases (cash) Telephone Bill Electricity Bill Salary Advertising Maintenance Inventory Interest paid (Note 1) Net Cash flow Opening cash and bank equivalent Closing cash and bank equivalent 450.000 120.000 1.000 899.000 620.000 BM K.18 Page 28 .Managing financial resources Individual Cash flow statement (Year 1) Cash flow statementas at 31/1/1 Cash Inflows Sales (Cash) Capital (-) Opening cash and bank 1.000 15000 35000 96000 8000 7000 300000 10000 -921000 779.

18 Page 29 .000 Individual BM K.Managing financial resources Note 1 Bank loan: 100.000 Interest rate: 10% Interest paid = 10.

Managing financial resources Individual Conclusion and Recommendation Appraisal Technique Calculated Figures Standard / Acceptable Figures Accounting Rate of Return (ARR) 86. BM K. 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. A bank loan was taken to finance this business and as an effect of this the net profit has been reduced.27% 60% Net Present Value (NPV) 955. Then it will be more appropriate and accurate. 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.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.18 Page 30 .

18 Page 31 .htm  www.combank.com/?view=The_Importance_Of_Financial_Planning&mid=1563&mid=1563  tutor2u.Managing financial resources Individual References  www.pppnetwork.net/business/gcse/finance_choosing_right_sources.lk/newweb/info/184?oid=73&lm=  lecture notes BM K.

760.500 16.000 (965.000) 1.450 102.050 37.000 Capital (-) Opening cash and bank Cash Outflow Purchases (cash) Telephone Bill Electricity Bill Salary Advertising Maintenance Inventory 620.Managing financial resources Individual Appendix Cash Flow statement for Year 2 Cash Inflows Sales (Cash) 1.490 321.230 Net Cash flow Opening cash and bank equivalent Closing cash and bank equivalent 120.18 Page 32 .560 7.000 (120.260.720 8.230 Fixed cost increase by 5% Variable cost increased by 7% BM K.000 914.000 472.770) 794.

159 8.072 109.000 494.000) 1.18 Page 33 .014 343.500 17.823.910 9.470 (1.022.000 920.Managing financial resources Individual Cash flow statement for Year 3 Cash Inflows Sales (Cash) 1.299) 800.701 Net Cash flow Opening cash and bank equivalent Closing cash and bank equivalent 120.701 Fixed cost increase by 5% Variable cost increased by 7% BM K.000 Capital (-) Opening cash and bank Cash Outflow Purchases (cash) Telephone Bill Electricity Bill Salary Advertising Maintenance Inventory 620.174 40.323.000 (120.

18 Page 34 .37% ACID Test Total Current assets Inventories Total current liabilities 1159000 50.200.Managing financial resources Individual Ratios analysis ARR Average Annual Net Income Investment 794.18 Gross Profit Gross profit Sales 450.644 920.000 22.000 50.000 86.000 1.000 38% BM K.