Contents

Executive summary:..............................................................................................................................1
Availability of sources of finance and costs of sources of finance: (LO 1.1 and 2.1)............................1
Internal sources of finance of British Airways:.................................................................................2
Share market:.................................................................................................................................2
Retained earnings:.........................................................................................................................2
External sources of finance:...............................................................................................................2
Long term Bank loans:...................................................................................................................2
Bank overdrafts:............................................................................................................................2
Mortgage loans:.................................................................................................................................3
Hire purchase:................................................................................................................................3
Sources of finance evaluation: (LO 1.2)................................................................................................3
Different sources of finances for different sectors of investment: (Lo 1.3)............................................3
Importance of financial planning at the time of investment: (LO 2.2)...................................................4
Cash budget:......................................................................................................................................4
Payback period:.................................................................................................................................4
Information needs for different decision maker: (LO 2.3).....................................................................5
Management:.....................................................................................................................................5
Labour Union:...................................................................................................................................5
Banks:................................................................................................................................................5
Shareholders:.....................................................................................................................................5
Impact of finance on financial statement:..............................................................................................6
Income statement:..............................................................................................................................6
Balance sheet:....................................................................................................................................6
Equity:...............................................................................................................................................6
Cash Budget for the Project: (LO 3.1)...................................................................................................6
Unit cost calculation methods and selling pricing decisions for British Airways: (LO 3.2)..................8
Unit costs calculation formula:..........................................................................................................8
Evaluation of two projects: (LO 3.3).....................................................................................................9
ARR for project X:............................................................................................................................9
Project B:.........................................................................................................................................10
Explanation of main financial statement of British Airways: (LO 4.1)................................................10
Explanation of financial statement: (LO 4.2).......................................................................................11
Interpretation of financial statement: (LO 4.3)....................................................................................12
Recommendation:................................................................................................................................12
References:..........................................................................................................................................13

Executive summary:
Every organisations need to plan for finance and determine about the profit at
the time of decision making process for a new investment. It mainly depends on
the type of the organisation and final goal for the organisation. It is because
some organisations want to maximise their profit from the investment and some
charity organisations want to stay in no profit any loss point from their
investment. For both situation the organisation need to take decision on the base
of quantitative method and on the base of qualitative methods as well. Both
methods are essential for the organisation to consider at the time of decision
making process for investment.

In this report the reporter will show the way the organisation can take decision
for investment on the base of quantitative method. Therefore the reporter of this
report has chosen an organisation which is British Airways. British Airways is
one of the highlighted public limited organisations into the UK. This report
would be done for British Airway’s new investment. British Airways has
branches in different airports in different parts of the world. This report would
be done by assuming that, the organisation wants to open a new branch in a new
airport. This report will determine about the sources of finance that available for
investment and will suggest the organisation to adopt appropriate sources of
finance for the investment. In addition their report will interpret British
Airways’ financial statement to determine about their financial position and
capability to invest for a new project. In addition an investment appraisal will
take place to determine about project and two projects’ evaluation would be
shown in this report as well.

Availability of sources of finance and costs of sources of finance: (LO 1.1

and 2.1)
As a large organisation British Airways can get different sources of finance for
their investment. It is important for the management of British Airways to
determine the sources of finance on the base of the costs of finance. It would be
helpful for them to maximise their profit. On the other hand, the investment to
open a new airport is high and therefore multiple sources of finance are required
for this investment. Sources of finance of British Airways can mainly divide by
two groups. Those are internal sources of finance and external sources of
finance.
Internal sources of finance of British Airways:
As a public limited organisation the organisation can collect capital from share
market and retained earnings. Those sources could be count as internal sources
of finance as those capitals comes directly from the organisation.

Share market:
British Airways can earn capital by issuing new share for their new project. This
would be easy way to earn capital but the organisation needs to determine about
the costs of the capital as well. British Airways shareholders has right to get
profit from their investment. As a result the organisation needs to pay profit to
their shareholders as dividend if they use capital from shareholder’s equity
(Kaplan, 2012).

Retained earnings:
Retained earnings are the capital for investment that organisation gets after
giving dividend from the profit. Literally retain earning is the money of the
organisation’s shareholders. Organisation do not gives all profit to their share
shareholders. They issues dividend which is part of the profit and rest of the
profit they keeps to reinvest into the business. Therefore British Airways need
to pay their profit if they use retained earnings for their investment (Kaplan,
2012).
External sources of finance:
External sources of finance is the finance that organisation gets from other
organisations as loans. Therefore British Airways need to determine about the
costs of the loans at the time of collecting finance from those organisations.

Long term Bank loans:

British Airways can collect long term bank loans at the time of collecting
capital for investment. However the organisation needs to determine about the
rate of interest that they have to pay for the loans. It is because high rate of
interest increases the finance costs of the investment which reduces the profit
from the investment as well (Kaplan, 2012).
Bank overdrafts:
British Airways can use bank overdrafts to carry the expenses of the business.
However in that situation it could be suggested that, they need to payback the
overdraft as soon as possible. It is because overdraft interests come higher than
long term loan’s interest (Kaplan, 2012).
Mortgage loans:
Banks get mortgage loans to buy fixed assets. Normally British Airways can get
mortgage loans from Banks as well. However to get mortgage loans the
organisation need to pay a down payment and interests as well. On the other
hand the advantages of mortgage loan is they can payback the mortgage loans
by instalment and it could be by long term basis (Kaplan, 2012).

Hire purchase:
Hire purchase is a kind of loan for the machinery. Normally in hire purchase the
organisation can hire large machinery by paying a simple down payment. After
a certain period of times the ownership of those machineries could be changed
to British Airways. This is a good option for British Airways but they might
have to pay high price for the machinery (Kaplan, 2012).

Sources of finance evaluation: (LO 1.2)

From the above statement it is clear that, every sources of finance has different
types of costs. By looking at that point it could be said that, the organisation can
look at the costs of courses of finances and they can chose cheap sources of
finances for the investment. It would be helpful to control their finance costs as
well.

Therefore it could be said that, British Airways can give priority to use their
internal sources of finances first and then they can use their external sources of
finances. It would be helpful for them to maximise their profit (Flight
global2013).

Different sources of finances for different sectors of investment: (Lo 1.3)

To open a branch in a new airport requires large investment. Therefore one
sources of finance would not be enough to cover all finances for investment.
Therefore the organisation needs to use different sources of finance for different
sectors at the time of using capital for the business.
British Airways can use their internal sources of capital to pay for their hire
purchases and mortgages down payment. It will help them to get large amount
of loans from hire purchases and mortgages (Kaplan, 2012).

On the other hand, the organisation can use mortgages loans to buy their fixed
assets which could be lands and buildings. In addition they can use hire
purchases facilities to get machineries and planes for their new branch. It would
be helpful for them to reduce initial investment for their new project at the
beginning of investment and in long term period they can pay back the loans as
well.

In addition it could be expected that, it takes certain time of period to start

making profit from the investment. The organisation can use their bank
overdraft facilities to pay for their expenses (Kaplan, 2012).

Importance of financial planning at the time of investment: (LO 2.2)

It is important for every organisation to determine about financial outcome from
the business at the time of decision making process for their new investment.
Financial planning would be helpful for the organisation to determine about
that. British Airways can use different methods at the time of investment
appraisal to determine about the outcomes from the business and on the base of
that they can evaluate between two projects and chose the best project for them.
The organisation can use capital budget methods and produce cash budget at the
time of plan for finance for their new investment. Payback period method would
be helpful for them to determine the about the period that the organisation need
to get back their initial investment.
Cash budget:
Cash budget is the method that organisation use to determine about their
expected cash inflow and cash outflow for their new investment. It helps them
to look on the period that the project needs to start making profit as well.
Different cash outflows also shows into the cash budget and management get
change to review those sectors in terms of control the expenses (Sangster,
1993).
Payback period:
Payback period is the method of capital budgeting. With the help of payback
period the organisation can estimate the period that the project will take to
payback their initial investment. It helps the organisation to determine about
their sources of finance as long payback period refers to pay large number of
interests. British Airways can use payback period method to determine about
the viability of two projects and compare the projects on the base of that
(Sangster, 1993).

Information needs for different decision maker: (LO 2.3)

Different decision makers of British Airways need different types of
information for new investment. It is important for the management of British
Airways to consider different types of stakeholder’s opinions at the time of
decision making process for the investment. It would be helpful for the
organisation to invest in an appropriate project from where they can get their
expected outcomes.
Management:
Management of British Airways takes final decision at the time of decision
making process for new investment. At the time of taking final decision the
management collects different information and on the base of that they
determine about their decision. Their information includes outcome from the
projects, different stakeholders’ expectations from the project, availability of the
resources for the project etc (Kaplan, 2012).
Labour Union:
Labour union of British Airways looks on the policy of the new investment.
They also look on the forecasts of the labour that the organisation need for their
new project and they takes decision on the base of budget for the employees,
salaries for the employees etc (Kaplan, 2012).
Banks:
Banks give loans and mortgage facilities for British Airways. Banks look on the
possible outcome from the project, investment appraisal report, and the
organisation’s balance sheet to determine that British Airways is capable to pay
back the loan if they cannot make profit from their investment. Bank’s opinion
is important for management of British Airways as they get finance from them
for the investment (Kaplan, 2012).
Shareholders:
Shareholders of British Airways look on the new investment and outcome from
the investment. On the base of that they buy share which counts as capital for
the investment. Therefore it is important for British Airways to publish their
investment plan to the public to become attracted in front of the shareholders
(Kaplan, 2012).

Impact of finance on financial statement:

As a public limited organisation it is requirement for British Airways to publish
a financial statement for the public. Stakeholders of British Airways look on the
organisation’s financial statement to evaluate the financial performance of the
organisation. In addition financial statement is helpful different decision makers
who are related with the organisation. British Airways mainly follows
International Accounting standard (IAS) format to prepare their financial
statement. It helps the users to understand the financial statement easily.

IAS recommended the public limited organisations to put their finance in three
parts into their financial statement. Therefore British Airways put their finance
in three parts into their financial statement.
Income statement:
Income statement of British Airways shows their income which comes from
sales and different types of expenses as well. As a result management of the
organisation can review the expenses and take steps to control the expenses as
well. On the other hand, at the end of the income statement the organisation puts
their net profit which helps the decision maker to evaluate the organisation’s
performance on sales and expenditure (Kaplan, 2012).

Balance sheet:
Balance sheet of British Airways shows the organisations’ all kind of assets and
liabilities. It helps different Banks and lenders to determine the organisations’
assets and liabilities and capability to pay back their loans. In addition
management of British Airways can identify their less useful fixed assets and
sell those assets by using Balance sheet (Kaplan, 2012).

Equity:
Equity statement of British Airways mainly shows the organisation’s
performance at their share market. It is because in here the organisation shows
share price, share premium price, shareholder’s equity, retained earnings and
dividend. As a result this part of financial statement is useful for shareholders
and decision makers (Kaplan, 2012).
Cash Budget for the Project: (LO 3.1)
Organisations create cash budget to find out the expected cash flow for the
project. It helps them to set up the strategy for the project as well and different
departments of the organisation set up their activity according to cash budget as
well. Management of British Airways can look on the project’s cash budget at
the time of decision making process to determine cash inflow and cash outflow
of the project for next six month and that would be helpful to determine the
organisation’s standing after six months as well.

“Cash budget for the month July to December 2010

JUL AUGUS SEPTEM OCTOBE NOVEMBE DECE

Y T BER R R MBER
£000 £000 £000 £000 £000 £000
Cash
inflow
Cash
375 525 575 615 635 650
Sales
Cash
outflow
Purchase
100 250 260 280 300 320
s
Ticket
office 5 5.5 6 6.3 6.4 6.6
expenses
Admin
110 120 124 130 136 140
expenses
Bank
overdraft 5 5 5
charge
Loan
100 100
payment
Total 340 360.5 395 416.3 542.4 366.6
Profit/los
50 164.5 180 198.7 92.6 283.4
s
Balance (315) (265) (100.5) 79.5 278.2 370.8
 brought
down
Balance
carried (265) (100.5) 79.5 278.2 370.8 654.2”
down
(British airway financial statement 2009/10)

From the cash budget it is clear that, after 6month of the project, British
Airways will make £654200 from the project. Organisation can take steps on
the base of that to take decisions for the project.

Unit cost calculation methods and selling pricing decisions for British
Airways: (LO 3.2)
British Airways need to follow a formalized formula at the time of setting up
the price for selling the products and services. It would be helpful for the
organisation to set up relevant price which would be helpful for them to gain
competitive advantages. British Airways need to follow a formalized formula to
calculate the unit costs of the products and on the help of that unit cost they can
take steps to find out the selling price of the products and services.
Unit costs calculation formula:
British Airways can follow unit costs calculation formula at the time of
calculating their unit costs. They can follow the following formula to determine
their unit costs for the project.

Unit cost =Total ¿ cost +Total Variable cost ¿ be produced ¿

Tatal number of unit ¿

In addition they need to find out the selling price of the product by using the
unit costs. For that they can use margin or mark up formula. In that situation it
could be recommended that, the organisation can use Margin formula to find
out the selling price of the products.

(rajasikaran and lalitha 2011).

(Cost∗mark up percentabe )+ Cost

Selling Price=
1

In addition it is also important for the organisation to determine the unit that
they have to sell at least in term of avoiding the loss from the project. British
Airways can use breakeven point per unit formula to do that. They can follow
the following formula to find out their breakeven point per unit.
¿ cost
Break even point per unit=
Selling Price −Variable cost

(rajasikaran and lalitha 2011).

British Airways need to apply the above formulas at the time of decision
making process for their new investment. It would be helpful for them to take
appropriate decisions for the project.

Evaluation of two projects: (LO 3.3)

British Airways can use capital budgeting methods to determine the viability of
the projects and on the base of that the organisation can take decision for
investment. In that situation it could be recommended that, British Airways can
consider two possible projects for investment and evaluate those projects to find
out the best project to invest.

In addition it could also be suggested that, British Airways can use Average
Rate of Return formula to determine the viability of the project.

ARR for project X:

Average annual operation profit
ARR= ∗100 %
Average investment on earn t h at profit

Total cas h flows £ (205000+205000+200000+170000+ 80000)

=
Priod of life 5

=£172000

Depreciation calculation by using straight line method:

£ 700000−£ 60000 ( Residual value )

=£ 128000. (Kaplan 2012).
5

Operating profit for project X: (£172000-£128000) = £44000.

Cost of machinary + Residual value

Average investment =
2
£ 700000+ £ 60000
=£ 380000
2

£ 44000
Therefore, AAR= £ 380000 ∗100 %

=11.57% (Approximately) (Kaplan 2012).

Project B:
The organisation needs to use same formula for project B.

Annual profit:

( 130000+ 130000+ 180000+ 230000+220000 )

=£ 178000
5

£ 170000
Project B’s annual profit = =£ 136000
5

Annual average profit after depreciation: (£178000-£136000) = £42000

700000−20000
Average investment = =£360000.
2

Therefore,

£ 42000
AAR= ∗100 %=11.66 %
£ 360000

Project B’s AAR outcome is better than Project A. On the base of that it could
be said that, Project B is much viable than project A (Kaplan, 2012).

Explanation of main financial statement of British Airways: (LO 4.1)

British Airways follows a formalized formula to process their financial
statement. It has already been shown that, British Airways has 3parts into the
financial statement where they put their financial performance. In addition they
put another part of their director’s statement. In there the director of British
airways summarise the whole financial performance and shows their steps on
the base of the financial performance.
Into the income statement their format to show the finance is, Revenue minus
revenue related expenses equal to gross profit. After that they deduct operating
expenses from Gross profit. As a result they get operating profit. Finally they
get profit after taxation and interest by deducting financial expenses and
taxation from their operating profit (active accounting 2004).

Into their Balance sheet they put noncurrent assets and add net current assets
with it. They calculate net assets from current assets minus current liabilities. In
addition they deduct long term liabilities to find out the net assets of the
organisation.

Into the equity part they mainly show their activity in the share market. In there
they put their net profit and divide that to issue dividend and retained earnings.
In addition they shows their share equity, share premium, etc in this part of the
financial statement (CPA 2014).

Explanation of financial statement: (LO 4.2)

British airways follow IAS formula because they are public limited organisation
and it is their requirement to follow the international method which would be
acceptable for all kind of users. However there are other kinds of organisations
who provide other kind of financial statement. Soul trader is one of the
appropriate examples of that.

Soul trader runs their business by using their own capital or by borrowing
money from other organisations. However they do not have share into the share
market. Therefore it is not mandatory for them to publish financial statement by
following any particular formula. They produce financial statement for their
own use.

Into the soul trader’s financial statement the organisation put profit and loss
account and balance sheet. They show revenue minus expenses into their
balance sheet which shows their net profit. On the other hand into their balance
sheet they show capital, and liabilities in one part and assets and net profit in
other parts of financial statement (Kaplan 2012).

Interpretation of financial statement: (LO 4.3)

It is essential for the organisation to interoperate their financial statement to
determine about their financial performance for a particular financial year.
British Airways can use ratio analysis formula to determine the financial
performance from different angles of the balance sheet. Different users can use
different types of ratio analysis formula to find out the organisation’s financial
performance from different angles. Some of the example of ratio analysis
formula is as follows,

Ratio and formula 2011 £000 2012 £000 Comments

ROCE (Return on capital 679∗100 −139∗100 British
6828 ¿ 6749
employed) ¿ Airways
=2.05%
Profit before tax∧interest =9.94% done better
ROCE= ∗100
Capital employed
in 2011
than 2012
Gross profit∗100 518∗100 233∗100 Gross profit
Gross profit margin=
Sale 9987 10827
in 2011 is
=5.18% =2.15%
better than
2012
Current Assets 2774 2634 Both year’s
Current ratio=
Current Liabilities 3683 4398
current ratio
=1.32:1 =1.66:1
is not good

From the above example it is clear that, by using ratio analysis formula the user
can evaluate the organisation’s financial performance between two years or with
other organisation’s financial performance. It helps the users to determine the
organisation’s financial position as well.

Recommendation:
Management of British Airways is liable to bring success from their new
investment. Therefore it would be helpful for them if they use investment
appraisal method to evaluate the projects and chose the best project to invest.
On the other hand, the organisation’s management can evaluate their financial
statement as well and chose best sources of finance in terms of maximizing the
profit. By that way they can reach to their success of investment.

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