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ASSIGNMENT SUBMISSION FORM

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Student Name

Georgiana Bianca Patrascan

Student ID

P1029583

Assessor Name

Joel Barima

Qualification

Pearson BTEC Level 5 HND Diploma Business

Unit Number & Unit Title

Unit 2 MFRD

Assignment Title

Managing Financial Resources and Decisions

Date of Submission

11.01.2016

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Signature: Georgiana Bianca Patrascan Date: 11.01.2016

Managing Financial Resources and Decisions

Contents
INTRODUCTION.......................................................................................................................................3
TASK 1........................................................................................................................................................4
1.1

Identify the source of finance available to Hardwood Ltd...........................................................4

1.2 Assess the implication of different sources........................................................................................5


1.3

Evaluate appropriate sources of finance for a business projects...................................................6

TASK 2........................................................................................................................................................8
2.1 Analyse costs of different sources of finance.....................................................................................8
2.2 Explain the importance of financial planning to Hardwood ltd..........................................................8
2.3 Assess the information needs of different decision makers of Hardwood Ltd....................................9
2.4 Explain the impact of finance on the financial statements of Hardwood Ltd...................................10
TASK.........................................................................................................................................................11
3.1 Analyse budgets and make appropriate decisions............................................................................11
3.2 Explain the calculation of unit costs and making pricing decisions using relevant information......12
3.3 Assess the viability of a project using investment appraisal techniques...........................................13
TASK 4......................................................................................................................................................16
4.1 Discus the main financial statements...............................................................................................16
4.2 Compare appropriate formats of financial statements for different types of businesses...................16
4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external
............................................................................................................................................................... 17
CONCLUSION.........................................................................................................................................21
4

Bibliography..............................................................................................................................................22

INTRODUCTION
For organisation finance become an essential element as it gets used for various purpose. In the
absence of the finance organisation is not able to run their business activities smoothly and in
order to manage their available finance they follow financial planning. With the help of the
financial planning they prepare effective budgets.
In this paper we will discuss over the Hardwood Ltd. as they require finance in order to make
business expansion. For this purpose we will discuss over the financial sources along with
financial planning and its importance for Hardwood Ltd. We will also discuss effectively over
the financial statements and impact of finance source over it. We will discuss about the
functionality of the Hardwood Ltd. with the help of the ratio analysis.

TASK 1
1.1 Identify the source of finance available to Hardwood Ltd.
Hardwood Ltd. tends to expand their business and for this purpose they require huge finance. For
this purpose we make effective discussion over the available financial sources such as:
Internal Sources (short and long term sources):
Equity Share Capital: Hardwood Ltd. issue ordinary shares for public in order to raise funds.
They didnt need to repay this amount till liquidation and they have to pay dividends over the
equity capital. It provide effective strong financial base (Berk & Peter, 2011).
Sale of Assets: Hardwood Ltd. effectively sold out their unused assets in order to release their
blocked amount. They effectively raise small amount and meet their routinely expenses.
Retained Earnings: Hardwood Ltd. took major part of their profits into reserves for the purpose
of reinvestment or expansion. It is denoted as the safest source of finance.
External Sources (Short term and long term sources):
Bank Loan: Hardwood Ltd. took loan from bank in order to raise required finance. This facility
is provided by bank to existing as well as new entrants also. They need to pay interest over the
loan amount (Bouare, 2009).
Bank Overdraft: Bank provides this facility to their reputed customers only and under this
facility customers is entitled to withdraw amount more their savings to an extent. Bank charges
high interest rates against the overdraft amount. Hardwood Ltd. avail this facility in the
emergency situation in order to meet their routinely expenditure.
Creditors: Hardwood Ltd. took credit from the market instead of banks. They get short term
finance and they pay high rate of interest. This facility get used in order to meet the daily
routinely expenditure (Easley & O'Hara, 2010).

Leasing: Hardwood Ltd. took required equipment on lease and make use of their available
finance in other activities to attain desired results. Right of use get transferred but the ownership
remains with the owner only. They have to make regular payment of rentals.
(Blumer, 2012)

1.2 Assess the implication of different sources


Source of

Dilution

Risk

Legal

Financial

finance
Bank loan

No dilution of control

High rate of risk is

Proper legal

Huge finance gets

associated

procedure is

raised with the

followed in order

help of it.

High rate of risk is

to get loan.
Set legal

Adequate amount

associated

procedures

get raised

followed

effectively which

effectively

get used in

Bank

Control didnt get diluted

Overdrafts

emergency
Equity

Control get diluted with

Low rate of risk is

Legal obligations

situation.
Huge finance gets

share

the shareholders

associated

followed

raised with the

effectively with

help of it.

the issue of shares


There is no legal

Small amount get

obligation is

raised effectively

Sale of

No dilution of control

There is no risk

assets

required in order
Retained

Control remains with the

The risk factor is

to sale assets.
Few legal

Effective savings

earnings

organisation only

low

obligations

made internally

followed as
approval from
board members is
Creditors

Control didnt get diluted

There is no risk in

required
Few guidelines

Effective short

this factor

followed

term finance gets

effectively

raised.
8

Leasing

No dilution of control
takes place.

There is no risk

Set legal

Effective financial

procedure

support gets

followed

attained.

effectively

(Garry, 2013)
1.3 Evaluate appropriate sources of finance for a business projects
Hardwood Ltd. chose adequate and appropriate source of finance in order to make expansion
such as:
Bank Loan: They took bank loan in order to raise 50% of required finance in an effective
manner for long duration.
Advantages:

Organisational control didnt get diluted


They get tax deductions on the payment of interest amount (Fields, 2011)

Disadvantages:

Need to pay regular instalments


Need to repay the loan amount after a period of time

Equity Share Capital: They issue equity shares in order to raise 25% of required finance for a
long duration.
Advantages:

It provide strong financial base


The amount didnt need to repay till liquidation (Shanke, 2010)

Disadvantages:

Organisational control get diluted with shareholders


They didnt get tax deduction facility over the dividend paid.

Leasing: They took required equipment or raise 25% of remaining required amount for a long
duration period.
Advantages:

Available finance gets used for other purposes also.


Finance didnt get blocked with the capital purchases.

Disadvantage:

Need to repay after set period of time.


Regular instalments need to pay even they attain losses (Turley, 2012).

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TASK 2
2.1 Analyse costs of different sources of finance
Hardwood Ltd. has to consider different sources of finance for satisfying overall needs of
the business. The company can take bank loan for long period of time and satisfying its financial
needs such as for expansion etc., but could be expensive to pay interest. Missed payments could
bring court action and closure of the business.
Unless payment is later than agreed, Trade Credit has no cash cost.
Sale of assets it is a good way to raise financing from an asset that is no longer needed
but can be a slow method of raising financing.

2.2 Explain the importance of financial planning to Hardwood ltd.


Financial planning: Hardwood Ltd. prepares financial planning in order to make adequate use of
their available finance so that they didnt face financial crisis. They also make use of this into
budgeting process and decision making process. Its importance in context to the Hardwood Ltd.
is as follows such as:

They become able to manage their revenues and expenses.


They make efficient use of it in various activities such as investments, tax planning, etc.
They attain adequate amount of cash inflow as there is increase in their revenues.
They get control over their activities and reduce unnecessary expenses.
They make use of it in the decision making process to make effective business expansion
They effectively make adequate use of their finance so that they didnt face financial
crisis (Vassalow).

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2.3 Assess the information needs of different decision makers of Hardwood Ltd.
Hardwood Ltd. prepares their financial statements in an effective manner which gets used by
various interested stakeholders such as creditors, banks, investors, shareholders, etc.
Cash Flow Statement: Under this statement Hardwood Ltd. record their inflow and outflows of
cash for a specific period of time. They make use of this statement in order to make adequate use
of their available cash and avoid unnecessary outflow of cash. It further gets used by the
interested stakeholders such as banks, government, investors, etc. to make their decisions (Wang
GJ & Baptiste, 2010).
Profit and Loss Account: Under this statement Hardwood Ltd. record their revenues and
expenses for a specific period of time. They make use of this statement in order to know about
their profitability for that period. It further gets used by the interested stakeholders such as banks,
government, investors, etc. to make their decisions.
Balance Sheet: Under this statement Hardwood Ltd. record their assets and liabilities for a
specific period of time. They make use of this statement in order to know about their financial
position for that period. It further gets used by the interested stakeholders such as banks,
government, investors, etc. to make their decisions (Wrap, 2012).
2.4 Explain the impact of finance on the financial statements of Hardwood Ltd.
The impact of finance over the financial statements of Hardwood Ltd. gets discussed below such
as:
Equity Share: With the issue of share there is huge inflow of cash take place. With this effect
there is subsequent increase in the assets along with liabilities due to this their balance sheet get
impacted. They need to pay dividend over the equity amount. With the inflow of cash and
outflow of cash in the form of dividend put impact over the cash flow statement. Profit and loss
account also gets impacted with the payment of dividend as it increases the expenses (Barnes,
2010).
Sale of Inventory: With the sale of the inventory there is effective inflow of cash which
effectively impact the cash flow statement. There is increase or decrease in the assets side as it
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depends on the fact whether inventory get sold for profit or loss. With this fact profit and loss
account as it may increases the revenues or expenses. With these effects it put effective impact
over balance sheet as well as on profit and loss account.
Bank loan: By taking bank loan there is huge inflow of cash take place. With this effect there is
subsequent increase in the assets along with liabilities due to this their balance sheet get
impacted. They need to pay interest over the loan amount. With the inflow of cash and outflow of
cash in the form of interest put impact over the cash flow statement. Profit and loss account also
gets impacted with the payment of interest as it increases the expenses (Berk & Peter, 2011).
Retained Profits: Hardwood Ltd. took out major part of their profits and put it into reserves for
the purpose of business expansion or reinvestment purpose. It also increases the equity which
shows the impact over the balance sheet.

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TASK
3.1 Analyse budgets and make appropriate decisions
Budget: It is such report having estimated figures in for future activities in order to get the
desired results. It helps in effective planning and it includes sales volume, revenues, costs and
expenses, etc. under it.
Objectives of budgets such as:
Planning: Budget is prepared for planning purpose and with the help of it available resources get
used in adequate manner.
Controlling: It also gets used in making effective control over their activities. It provide set path
to execute the assigned tasks (Curtis, 2010).
Performance evaluation: It gets used for the purpose of performance evaluation as the actual
results compared with the budgeted results.
Motivation: If assigned work gets completed as per the set budget then employees feels
motivated.

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Cash Budget for Hardwood for 6 months April to Sept 2015.


(Note all the figures in the table above
are in 000)
April
Estimated cash receipts
From credit customers
From cash sales
Total cash receipts
Estimated cash payments
To suppliers of goods
To employees (wages)
Fixed Expenses
Other overheads
Purchase of new machinery
Net surplus/(deficit) for month
Opening cash balance
Closing cash balance

May

June

July

Aug

Sep

270
0
270

270
0
270

270
0
270

270
0
270

270
0
270

275
0
275

80
85
35
25

80
85
35
26

80
85
35
27

95
85
35
29

100
85
35
30

225
45
15
60

226
44
60
104

227
43
104
147

95
85
35
28
700
943
-673
147
-526

244
26
-526
-500

250
25
-500
-475

Analysis: As per the analysis of budget it is observed that Hardwood Ltd. is attaining effective
returns but they have negative balances in month of July, August and September. The reason
behind this negative cash balance is cash purchase of new machinery in July, for 700.000. The
impact of overdraft interest can be too expensive from July.
Decision: Hardwood Ltd. has to take bank loan and then make purchases of new machinery. The
benefit of doing this is to reduce overdraft interest and they make effective use of their available
cash for other activities. They get tax deductions on the payment of interest amount. They earn
effective revenues so that they meet out the requirement of making payment of instalment
amount (Curtis, 2010).

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3.2 Explain the calculation of unit costs and making pricing decisions using relevant
information
Unit Cost: It is such cost which is necessary to calculate to know about the products actual cost
which get used in the decision making process. Various costs such as variable cost, fixed costs,
etc. get used to calculate unit costs. With the increase in the units produced unit costs gets
decreased and vice-versa.
Calculation of unit cost for Hardwood
Costs

Purchase

Labour
Variable
expenses

Fixed expenses

April

80,000

85,000

25,000

35,000

May

80,000

85,000

26,000

35,000

Total cost

June

July

Aug

Sept

Cost

95,000

95,00
0

100,00
0

105,00
0

555,000

85,000

85,00
0

85,000

85,000

510,000

27,000

28,00
0

29,000

30,000

165,000

35,000

35,00
0

35,000

35,000

210,000
1,440,00
0

Budgeted
Output-Units

10,000

Cost per unit

144.00

Per unit cost of product is 144.

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Hardwood Ltd. considers various factors for setting pricing of products such as:
Step1: They consider all variable cost.
Step 2: Fixed cost get divided among total number of units produced.
Step3: Add-up feasible amount of profits in the price.
Cost of Product: It is important to calculate cost of product to know about the products actual
cost. While calculating cost of product various costs get considered such as:
Fixed cost: This cost remains constant for whole period and divided equally among the units
produced (Turley, 2012).
Variable cost: This cost keeps on fluctuating and during the production period it keeps on
changing.
Other costs: There are various costs indulged into it such as transportation cost, insurance
charges, etc.
Cost plus pricing: In order to set price this is effective price. According to this method all
available cost get included which get incurred in the production process and then add-up
adequate amount of profit margin which is feasible.
Hardwood Ltd. effectively use of this method in order to fix prices for their products so that they
attain effective market growth along with this they earn adequate amount of profits (Armitage,
2010).

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3.3 Assess the viability of a project using investment appraisal techniques.


Calculation of Machine A and Machine B having Initial Investment of 2,000

Yea
r
1
2
3
4
5

Machine A
Cash
Discount
Inflow
rate
900
0.909
800
0.826
600
0.751
100
0.683
50
0.621

Discounted
CI
818.10
660.80
450.60
68.30
31.05
2028.85

Yea
r
1
2
3
4
5

Machine B
Cash
Discount
Inflow
rate
200
0.909
300
0.826
700
0.751
850
0.683
950
0.621

Discounted
CI
181.8
247.8
525.7
580.55
589.95
2125.8

(Clinton, Merwe, & Anton, 2009)


Net present value = Total cash Inflow Initial Investment
Machine A = 2028.85 2000 = 28.85
Machine B = 2125.80 2000 = 125.80
Pay Back period
Machine A = 2+ (2000-1700)/600 = 2.5 years
Machine B = 3+ (2000-1200)/850 = 3.94 years
(Berry, 2012)
Avg. rate of return = avg. income / avg. initial investment * 100
Machine A =490/2000 * 100 = 24.50%
Machine B = 600/2000 * 100 = 30%

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Accounting rate of return


Year
Cost of machine
1
2
3
4
5
Total cash inflow
Less Total Depreciation
Total Profit
Average Profit per annum
Average Investment:
[2,000 +0 / 2]

Machine A
2,000
900
800
600
100
50
2,450
-2,000
450
90

Machine B
2,000
200
300
700
850
950
3,000
-2,000
1,000
200

1,000

1,000

9%

20%

ARR

Investment appraisal techniques are as follows:


Average Rate of Return: It is the return over the initial investment after sales. As per the
calculations ARR of Machine A is 24.50% which is lower than Machine B as its ARR is 30%.
Machine B is Preferred.
Payback Period: It is such period in which initial investment gets recovered by the organisation.
As per the calculations PBP of Machine A is 2.5 years which is lower than Machine B as its PBP
is 4 years Machine A is Preferred. (Garry, 2013)
Net Present Value: It is the variance of the present value of inflow and present value of outflow.
As per the calculations NPV of Machine A is 28.85 which are lower than Machine B as its NPV
is 125.80. Machine B is Preferred.
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TASK 4
4.1 Discus the main financial statements
The main financial statements of Hardwood Ltd are as follows:
Profit and Loss Account: It is also known as Income statement. Under this statement Hardwood
Ltd. record their revenues and expenses for a specific period of time. They make use of this
statement in order to know about their profitability for that period. It further gets used by the
interested stakeholders such as banks, government, investors, etc. to make their decisions.
Cash Flow Statement: Under this statement Hardwood Ltd. record their inflow and outflows of
cash for a specific period of time. They make use of this statement in order to make adequate use
of their available cash and avoid unnecessary outflow of cash. It further gets used by the
interested stakeholders such as banks, government, investors, etc. to make their decisions
(Bouare, 2009).
Balance Sheet: It is also known as statement of financial position. Under this statement
Hardwood Ltd. record their assets and liabilities for a specific period of time. They make use of
this statement in order to know about their financial position for that period. It further gets used
by the interested stakeholders such as banks, government, investors, etc. to make their decisions.

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4.2 Compare appropriate formats of financial statements for different types of businesses.
There are lot many firms functioning in the present era. Every firm have their own nature and
according to their nature they prepare financial statements in an effective manner. The main
types of firms get discussed below such as:
Sole Proprietorship Firm: This type of firm run by the single owner and denoted as Proprietor.
No legal license is required in order to open this type of firm. Owner is entitled to bear all the
liability as well as he also enjoys the whole profits. In context to financial statements they
prepare balance sheet and profit and loss account (Shanke, 2010).
Limited Company: This type of firm run by the Board of Directors and having numbers of
owners who denoted as shareholders. There are legal obligations is required in order to open this
type of firm. Owner attains limited liability of share. They prepare financial statements as per
company loan and accounting standards. In context to financial statements they prepare cash
flow statement, profit and loss account and balance sheet.
Partnership Firms: This type of firm runs by the 2 or more partners (not more than 20
partners). They prepare partnership agreement in order make record of their terms and conditions
to operate the business activities in an effective manner including their profit sharing ratio. In
context to financial statements they prepare cash flow statement, profit and loss account and
balance sheet (Barnes, 2010).

4.3 Interpret financial statements using appropriate ratios and comparisons,


both internal and external. Calculation of ratios such as:
2013

2014

PROFITABILITY

GP %[margin]=

PBIT
OP % = S

GP
1016
S x 100 = 2217 x100 =45,82%
284
x 1 00 = 2217 x 100 = 12,81%

GP %[margin]=

PBIT
OP % = S

GP
1280
S x 100 = 2590 x100 =49,42%
379
x 1 00 = 2590 x 100 =14,6%
21

PBIT
ROCE = Ce

284
x 100 = 1028 1025 x 100

=13,85%

PBIT
ROCE = Ce

284
x 100 = 1028 1025 x 100

=18,95%

LIQUIDITY

CR =

CA 845
CL = 427 =1,19
CR =

QA 470
QL = 427 =1,10
QR=
QA= CA I = 845 -375 = 470

CA 675
CL = 410 =1,64

QA 285
QL = 410 =0,69
QR=
QA = CA I = 285

EFFICIENCY

OATR =

S 2217
OA = 2053 =1,1
OATR =

R( Debtors ) x365 190x365


S
R(Debtors)Days =
= 2217 =31
days

St[ Inventory]x365 365x375


Cgs
SDR =
= 1201 =114 days
INVESTMENT

D 1025
GR = E = 1028 =1

S 2590
OA = 2000 =1,29

R(Debtors)Days =

R ( Debtors ) daysX 365 =


S

225 X 365 =32 days


2590

St[ Inventory]x365 390x375


Cgs
SDR =
= 1310 =108 days

22

D 798
GR = E = 1202 =.66

GP Gross Profit
S Sales
OP Operating profit
ROCE- Return On Capital Employed
PBIT Profit before Interest & Taxes
CR Current Ratio
QR Quick Ratio
QA Quick Assets
CL Current Liabilities
OATR Operating Assets Turnover Ratio
OA-Operating Assets
R(D)days Receivable (Debtors)days
SDR Stock Days Ratio
Cgs -Cost goods sold
CE Capital Employed
GR -Gearing Ratios

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Interpretation of ratios:
Return on capital employed: It was assessed that Hardwood has a lower return on comparing
this ratio with the industry averages. In 2013 it was 13.85% and in 2014 it was increased and has
given the return of 18.95%.
Operating profit: In 2013, the operating profit of Hardwood was 12.81% which is low. In 2014,
operating margin of business was 14.6%. As per ratios there is increase in their profit share as
compared to last year but they are still behind in comparison to industrys standard ratio.
Gross profit: This ratio is calculated to know about the efficiency of company to get revenues
from their sales. As per the ratios there is effective increase in the revenues earned as compared
to the last year as well they effectively earn revenues in comparison to the industrys standard
ratio. The relationship between gross profit and sales of company in 2014is that this ratio of
Hardwood has increased from 45.82% to 49.42%. Gross profit margin of company was also
better when it measured with average gross profit margin of industry which was 40%.
Operating asset turnover ratio: Operating asset turnover ratio of industry is 1.5 times and in
both the year that is in 2013 and 2014, Hardwood has low turnover that is 1.1 and 1.29. It reveals
that business assets have not achieved higher sales.

Current ratio: It indicates about liquidity position of the company. In 2013 current ratio of
business was 2 times and in 2014 the current assets of Hardwood have decreased. Because of
that, ratio declines to 1.64 as well.
Quick asset ratio: In 2013, quick assets of Hardwood was 1.10 times and in 2014 it is 0.69
times. This ratio calculated to know about the liquidity of company. As per the ratios there is

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effective decrease in their liquidity in comparison to last years ratios as well as they didnt meet
the standard ratio of industry.
Stock days: In 2013 the stock days of Hardwood was 114 days and in 2014 it was 108 days. This
reveals that efficiency of the company was improved but it shows that performance of company
is poor as well when it is compared with industry rates which is 75 days.

Debtor days: This ratio calculated to know about the capability of company to collect their
debts. As per the ratios there is increase in the efficiency in comparison to the previous years
ratio as well as they meet their industry standard ratio. In 2013 was 31 days and in 2014 it was
32 days.
Gearing ratio: Gearing ratio has gone down from 1.0 in 2013 to .7 in 2014 which is less than the
industry average of 1. They ffectively meet the standard ratio of industry.

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CONCLUSION
After the whole discussion I conclude that for business expansion purpose Hardwood Ltd.
choose the adequate source of finance and effectively follow the financial planning in context to
make adequate use of it. With the flow of finance their financial statements get impacted
effectively and these financial statements get used by various decision makers for making
effective decisions in an effective manner. In order to make effective use of available cash they
prepare budgets and perform their activities accordingly. They perform ratio analysis in order to
get to know about their present performance by comparing previous performance. They make
use of investment appraisal techniques in order to choose best machine from the given options.

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