Assignment ON

MANAGING FINANCIAL PRINCIPLES & TECHNIQUES

Submitted to: (Ms. Vivian)

Submitted By: (.....................................)

MANAGING FINANCIAL PRINCIPLES & TECHNIQUES

Table of Contents ABSTRACT..................................................................................................... 4 PURPOSE OF THE ASSIGNMENT......................................................................4 BACKGROUND............................................................................................... 5 INTRODUCTION.............................................................................................. 5 TASK-(1) THE COST CONCEPTS IN DECISION MAKING PROCESS........................5 1.1 THE SIGNIFICANCE OF COSTS IN PRICING STRATEGY..................................6 1.2 THE COSTING SYSTEM THAT PROVIDES A PROFIT MARGIN OF 10% AT A SELLING PRICE.............................................................................................. 6 1.3 THE ABSORPTION COSTING SYSTEM FOR SETTING SELLING PRICE..............7 THE ABSORPTION COSTING (1.2) SYSTEM STEPS INVOLVED WITH VARIOUS STEPS SUCH AS ..........................................................................................7 1.3 (A) HOW THE ABSORPTION COSTING AFFECT MANAGEMENT DECISION MAKING ON REDUCTION PRICE.......................................................................8 1.3 (B) PROPOSAL FOR IMPROVEMENTS IN ABSORPTION COSTING...................9 TASK-(2) THE FORECASTING TECHNIQUES TO OBTAIN INFORMATION FOR DECISION MAKING.......................................................................................10 CONTRIBUTION FOCUSED TO THE PROFIT GENERATED ON INDIVIDUAL PRODUCTS. THEREFORE IT IS USED TO DETERMINE HOW MUCH QUANTITY NEEDS TO BE SOLD TO COVER BOTH VARIABLE AND FIXED COSTS..................11 CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT VARIABLE PRICE PER UNIT........................................................................................................... 11 CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT VARIABLE PRICE PER UNIT........................................................................................................... 12 THEREFORE CONTRIBUTION = 21280 12089 = 9,191................................12 TASK-(3) BUDGETARY TARGETS....................................................................13 3.1 BUDGETARY TARGEY FOR SALES REVANUE OF POUND 1500 AND 3200......13 3.2 MASTER BUDGET FOR APRIL TO JULY @ OF 2% INCREASE E IN SALES OF EACH MONTH............................................................................................... 14 ................................................................................................................... 14 3.3 COMPARISON BETWEEN PREDICTED BUDGET AND APRIL11 ACTUALS........15 3.4 EVALUATION OF BUDGETARY MONITORING PROCESS FOR PEODUCTION AND SALES BUDGETS .........................................................................................15 TASK-(4) RECOMMENDATIONS IN COST REDUCTION AND MANAGEMENT PROCESS..................................................................................................... 17

4.1THE PRESENT ECONOMIC DECLINE AND CUSTOMER SPENDING POWER.......17 4.2 COST REDUCTION PROCESS AND APPROPRIATE COSTING METHODS..........18 4.3 EVALUATION OF THE POTENTIAL USE OF ACTIVITY BASED COSTING..........18 TASK-(5) FINANCIAL APPRAISAL TECHNIQUES FOR STRATEGIC INVESTMENT DECISIONS................................................................................................... 19 5.1 INVESTMENT DECISIONS IN VARIOUS PROJECTS.......................................20 THE DISCOUNTED CASH FLOW AT THE COST OF CAPITAL AND THE EFFECT ON PRESENT VALUE SHOWS THE RELATION LIKE ..............................................23 5.2 & 2.2 VARIOUS SOURCES OF CAPITAL......................................................23 5.3 RECOMMENDATIONS OF THE VARIOUS PROJECT INVESTMENTS.................25 5.4POST AUDIT APPRAISAL TECHNIQUES.......................................................25 TASK-(6) INTERPRETATION OF FINANCIAL STATEMENTS FOR PLANNING DECISION MAKING.......................................................................................25 6.1 FINANCIAL VIABILITY OF MARKS&SPENCER .............................................26 6.2 RATIO ANALYSIS OF MARKS & SPENCE FINANCIAL REPORTS ....................26 6.2.1 RATIO ANALYSIS OF MARKS & SPENCE ................................................27 6.3 RECONMENDATIONS ON THE STRATEGIC PORTFOLIO OF MARKS & SPENCER ................................................................................................................... 28 CONCLUSION...............................................................................................29 BIBLIOGRAPHY............................................................................................29

ABSTRACT
This assignment demonstrates the cost concept in pricing strategy, forecasting techniques to obtain the information for decision making and budgetary process of an organization. In addition it deals with recommending the cost reduction techniques and management process in organizations. Furthermore it deals the financial appraisal techniques to make strategic investment decisions and interpret financial statements for planning and decisions making process, besides that analyzing the sources of capital for the organizations.

PURPOSE OF THE ASSIGNMENT

The objective of this assignment is to analyze the cost concepts and decision making in pricing strategy, design suitable pricing system and suggest the costing system for pricing and proposal for improvements, application of forecasting techniques in production, preparation of production and sales budgets,

assessing the ratios and make recommendations on the strategic portfolio.

BACKGROUND
MARKS & SPENCER Ltd, the giant supermarket chain decided to manufacture and sell low cost lunch boxes focused to sell international students in London. On these circumstances they have consulted with PJ Consulting and by the request of the line manager conducted this activities and prepared this report and submitted.

INTRODUCTION
The role of both managing finance and applying cost concepts in manufacturing process are significant to the organizations for the successful launching and branding of the product among competitors and financial control and success of the organization. In addition the application and use of financial appraisals let organization to take wise decisions on long term investments. The cost reduction and cost control leads the organization survives financially sound.

TASK-(1) THE COST CONCEPTS IN DECISION MAKING PROCESS

Refers to (Business Dictionary, 2013), In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs (such as those incurred in acquisition of an income-generating asset) are expenses. Therefore the cost has a monetary value and effect that involved with the production or providing services and each element involved has a cost effect such as, effort, material, resources, time and utilities consumed, risks incurred and opportunities in production and delivery of goods or services. In addition, the cost can classify various ways based on the nature and requirement of the decision making likewise, by element, by function, by behaviour, by controllability and by normality. There are expense centre, profit centre and investment centre in an organization.

1.1 THE SIGNIFICANCE OF COSTS IN PRICING STRATEGY

The general principles for profit maximising cost are, opportunity cost, comparison of costs and benefits also instrumentalism. The cost classification can be done in different ways, therefore a classical classification shown below. The costs can be classified in to two categories such as 1. Manufacturing cost - direct material, direct labour, management and overhead expenses and prime versus conversion costs 2. Non manufacturing costs selling and distribution and administrative expenses There are various other costs like, variable costs, fixed costs, standard costs The decision making cost classifications are Differential costing it differs between alternatives and it also called incremental costs Opportunity costs - it is the potential benefit given up by the choosing one alternative over another Sunk costs it is the cost already happened and not can change any decision now or in future.

1.2 THE COSTING SYSTEM THAT PROVIDES A PROFIT MARGIN OF 10% AT A SELLING PRICE
The costing system is an accounting system that established to monitoring an organizations costs and to provide managerial information in operations and performance. The pricing decision must cover the costs and ensure all the costs recovered and included the required profit, moreover it must be competitive. The following costing systems can perform according to the nature and necessity of the organization. Standard costing it is based on setting particular standards for each production activity and process and these standards agreed among those interested within the organization and it represent normal and reasonably efficient manufacturing performance. Absorption costing it is a full costing or complete absorption method that ensures all manufacturing costs are recovered in production process, such as it covers the direct

and indirect labor cost also the variable and fixed overheads. Managerial costing In this method the costs have different behaviors when the production or sales volume changes. Therefore in marginal costing, the behavior of the connected cost is measured rather than the origin and measures the relative effects not than total costing. It compares and decides the change in cost that happened when the output volume change by per unit and it quantified by total variable cost for a single unit, for example. FIG-1

Machine Hourly Rate This method adopted in production made in machines

1.3 THE ABSORPTION COSTING SYSTEM FOR SETTING SELLING Price The absorption costing (1.2) system steps involved with various steps such as
Identifying and list accurate assessment of all costs in the business Classify it into categories of cost All direct cost allocate into manufacturing output Allocate indirect cost into individual service departments Re-allocation of costs from production services to production departments Establish a correct overhead rate Absorb direct and indirect costs into product

1.3 (A) How the absorption costing affect management decision making on reduction price
The declines in the financial environment and price reductions in the outlets demands various pricing strategies in Marks & Spencer, therefore the various absorption costing methods can practice by managers in the organization, such as Absorption rate The absorption rate or recovery rate is the method to apportion overheads to a product or services and it based on the direct material and labor or machine production hours or units of outputs or also percentage of the product sales price. When producing large range of different products with overall production cost, there is close relation with products and the overhead cost, therefore the absorption cost will be: direct material /total overhead Percentage of the selling price This method used when products are sold out through different outlets, such as a sales force, retailer chain stores online sales or through agents. Therefore in this case there is different discount from the list price and this method useful to establish the maximum production cost of a product by using list price of a competitors product and work reverse. For example FIG-

2.

Rate per Unit It allocates the separate proportion of the total overhead costs to every finished product therefore all overhead costs will absorbed by the total of whole produced products. Fig-3

Percentage of the manufacturing costwhere the products have a similar nature It is straight forward to add a certain administrative and selling overheads. FIG-

It used when, or similar price. percentage for 4

1.3 (B) Proposal for improvements in absorption costing

The absorption costing system argues that it covers all the costs or complete absorption, such as prime cost and overhead expenses. When establish an allocation of overhead costs rate, consider how the product reached the customer, there may be distributors and mediators and their cost may differ and the discount rates and if it through the online sales the advertisement cost may vary rather than the traditional method of advertising. If it is sell through own hyper markets, the overhead costs may vary. On those circumstances the overhead expenses calculation can make like how much effort and space used for the product to reach the customers. If in case like Marks & Spencer, the lunch boxes displayed in a area and the labor and space factor to be considered when fixing the selling price.

Therefore it will let to compete the market and when financial declines and periodic discount offers. If clearly focus to the improvement of absorption costing, if consider the overhead allocation in such a manner or concept gives strength to this system of costing method in a deep more wide coverage. This provides the organization to compete with competitors and play in the market without any financial risk, but it provides the strength to compete and long term financial success.

TASK-(2) the forecasting techniques to obtain information for decision making

Decision making is the significant part of management and managing finance financial forecasting and timely well considered decision lead organizations to financial success. The financial decision making models like cost benefit analysis decides quantitatively whether to go and break even analysis determines whether a product becomes profitable or not, besides that the NPV and IRR decides whether to invest and cash flow techniques tests the viability of the project .

Lunch Box Production Cost and Anticipated Revenue Decisions

D a te Ap ri.1 1 Ap ri.1 1 Ap ri.1 1 Ap ri.1 1 Ap ri.1 1 Ap ri.1 1
Am ount() (+ P a rtic u la rs va riatio n / -) v a ria tion( % )% Ma teria l 0 .9 0 3 .0 0 0 .0 2 7 0 L a bou r 0 .6 5 0 .5 0 0 .0 0 3 3 O v erh ea d s 0 .1 5 2 .0 0 0 .0 0 3 0 Ad m in .O v er H ea ds 0 .2 2 1 .5 0 .0 0 3 3 T ota lp er u nit c os t 1 .9 2 S ellingp ric ep er unit 2 .9 9 Ma rg inp er u nit 1 .0 7 (%of p er u nit m a rg in) 5 5 .7 3 S a les unitsinAp ril 7 0 0 0 T ota ls a lesinp ound s 2 0 9 3 0

1 1 -Ma y (+ ) (-) (+ ) (+ )

Ap ri.1 1

V a ria tedp ric e 0 .9 2 7 0 0 .6 4 6 7 5 0 .1 5 3 0 .2 2 3 3 1 .9 5 0 1 3 .0 4 1 .0 8 6 8 5 5 .7 3 7 0 0 0 2 1 2 5 8

The percentage of margin in both cases 55.33 April selling price/unit April per unit cost Therefore per unit margin Therefore percentage of margin = 2.99 = 1.92 = 1.07 = 55.73%

If consider the +/- variation in May11 Total cost per unit Add 55.73% of per unit margin Therefore the May 11 per unit Selling price

=1.9501 = 1.09 = 3.04

Contribution

focused to the profit generated on individual products. Therefore it is used to determine how much quantity needs to be sold to cover both variable and fixed costs.

Contribution per unit = selling price per unit variable price per unit
Therefore the selling price per unit = 2.99 Total direct variable expenses per unit = material + labor + overhead = 0.90+0.65+0.15 = 1.70 That is, total variable cost per unit = 1.70 Total fixed expenses cost per unit = 0.22 So, contribution per unit = 2.99 1.70 = 1.29 OR Contribution per unit x number of units sold = 1.29 x 7000 = 9030 OR Contribution = Total sales total variable cost Total sales = total units x selling price Variable cost = variable cost x total number of item sold = 1.70 x 7000 = 11,900 Selling price per unit = 2.99 Total units sold = 7000 Therefore total sales = 2.99 x 7000 = 20,930 Contribution = 20930 11,900 = 9030

Contribution as per May-11 Variations

Date Apri.11 Apri.11 Apri.11 Apri.11 Particulars Material Labor Overheads Admin. Over Amount () 0.90 0.65 0.15 0.22 (+/-) variatio n (%) 3.00 0.50 2.00 1.5 %variat ion 0.0270 0.0033 0.0030 0.0033 11-May (+) (-) (+) (+) Vitiated price 0.9270 0.64675 0.153 0.2233

Apri.11 Apri.11

Apri.11

Heads Total per unit cost Selling price per unit Margin per unit (% of per unit margin) Sales units in April Total sales in pounds

1.92 2.99 1.07 55.73 7000 20930

1.9501 3.04 1.0868 55.73 7000 21258

Therefore the selling price per unit = 3.04 Total direct variable expenses per unit = material + labor + overhead = 0.9270+0.64675+0.153 = 1.727 That is, total variable cost per unit = 1.727 Total fixed expenses cost per unit = 0.2233

Contribution per unit = selling price per unit variable price per unit
So, contribution per unit OR Contribution per unit x number of units sold = 1.313 x 7000 = 9,121 OR Contribution = Total sales total variable cost Total sales = total units x selling price Selling price per unit = 3.04 Total units sold = 7000 Total sales = 3.04 x 7000 = 21280 Variable cost = variable cost x total number of item sold = 1.727 x 7000 = 12,089 = 3.04 1.727 = 1.313

Therefore contribution
Comparative study Table

= 21280 12089 = 9,191

Contribution as per April-11 and after variation in May-11

Particulars Total units sold

April-11 May-11 7000 7000

Selling Price per unit Direct Variable Expenses Fixed Expenses Cost Per Unit Contribution Per Unit Total Value of the Contribution Total Value of the Variable Cost Total Sales Value Percentage of Margin TASK-(3) BUDGETARY TARGETS

2.99 1.7 0.22 1.29 9030 11900 20930 55.73

3.04 1.727 0.2233 1.313 9121 12089 21280 55.73

Refers to (ecommerce-now.com, 2001)(cited from CIM), The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous expansion of actual with budgeted results, either to secure by individual the objectives of that policy or to provide a basis for its revision'. Budgetary targets are established by the organizations as a boundary for to spend how much to a specified area in a department or competency environment and it should be a guide line for the operations to be function to stay within the maximum target of effort spent, moreover it organizes the issue in a system integrated within the management control methods. The budget aims to plan, monitor, and control, besides that it ensures the departmental efficiency and monitor managerial efficiency. 3.1 BUDGETARY TARGEY FOR SALES REVANUE OF POUND 1500 AND 3200 To meet the budgetary target of gross sales revenue of pound 1500

The per unit selling price of in May 11 Therefore to meet pound 1500 That is

= 3.04 = 1500/3.04 = 493.43 = 493 units

If required to generate a gross revenue of pound 3200 Per unit selling price May 11 Total target sales revenue Therefore 3200/3.04 = 3.04 = 3200 = 1053 units

3.2 MASTER BUDGET FOR APRIL TO JULY @ OF 2% INCREASE E IN SALES OF EACH MONTH

Selling price/unit in May11 Monthly Increase April- 11 Actual sales Total Monthly Revenue

3.0 2 % Increased sales 4 up to July(each month 2% April MAY JUNE JULY 7000 7140 21706 7283 22140 7428 22583

D ate Apri.1 1 Apri.1 1 Apri.1 1 Apri.1 1 Apri.1 1 Apri.1 1

Particulars Am ount( ) (+ va ria tion1 1 -May / -)v a ria tion(% )% Material 0 .9 0 3 .0 0 0 .0 2 7 0 (+ ) L abour 0 .6 5 0 .5 0 0 .0 0 3 3 (-) Overheads 0 .1 5 2 .0 0 0 .0 0 3 0 (+ ) Adm in. Over H e ads 0 .2 2 1 .5 0 .0 0 3 3 (+ ) T otal per unit cos t 1 .9 2 S e lling price per unit 2 .9 9 Marg in per unit 1 .0 7 (%of per unit m arg in) 5 5 .7 3 Apri.1 1 S a les unitsin April 7 0 0 0

V ariated price 0 .9 2 7 0 0 .6 4 6 7 5 0 .1 5 3 0 .2 2 3 3 1 .9 5 0 1 3 .0 4 1 .0 8 6 8 5 5 .7 3 7 0 0 0

Production Schedule@2% increase and sales forecast

Production Schedule@2% increase Budgeted sales quantity Add desired ending inventory Total required quantity less beginning inventory April 7000 7140 MAY 7140 7280 JUNE 7280 7428 JULY 7428 7577 15005 7428 Augus t 7577 7729 15306 7577 Sep t.

14140 14420 14708 7000 7140 7280

Required production Budgeted sales quantity Selling Price Per Unit Total Sales in Pounds

7140

7280

7428

7577

7729 772 9

7000 2.99

7140

7280

7428

7577 3.04 23034 .08

3.04 3.04 3.04 21705 22131 22581.1 20930 .6 .2 2

3.3 COMPARISON BETWEEN PREDICTED BUDGET AND APRIL11 ACTUALS The April-11 sales indicates that, sold out 7000 units at a selling price of pound 2.99 per unit with a profit margin of 55.73%. The variable cost was 1.7 and fixed cost was 0.22 with a contribution per unit of 1.29. May-11 also an anticipated sales units of 7000 with a change in fixed and variable costs. So out of that the element labor has reduced and other elements has an increase, therefore the selling price increased and fixed at 3.04 with the profit margin of 55.73, therefore in that case the contribution per unit increased up to 1.1313. The detailed comparison shown on below table Comparative study Table
Contribution as per April-11 and after variation in May-11

Particulars Total units sold Selling Price per unit Direct Variable Expenses Fixed Expenses Cost Per Unit Contribution Per Unit Total Value of the Contribution Total Value of the Variable Cost Total Sales Value Percentage of Margin

April-11 7000 2.99 1.7 0.22 1.29 9030 11900 20930 55.73

May-11 7000 3.04 1.727 0.2233 1.313 9121 12089 21280 55.73

3.4 EVALUATION OF BUDGETARY MONITORING PROCESS FOR PEODUCTION AND SALES BUDGETS Refers to (civicus, 2013), A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that

will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what you will need in monetary terms to do your work. The budget is vital tool for any organization, besides that it is essential to monitor the finance of the organization. Therefore monitor the income and expenditure to control or to be in target and essential to report it to authorities and also prepare projections and financial decisions.

Production budget

Production budget follows after the sales budget and it predict the required quantity to be produced during the budgetary period to cover the sales quantity to be produced during the budgetary period to cover the sales quantity and predicted closing stock quantity. The production quantity calculated as Budgeted sales in units............................ Add desired ending Inventory................ Total required quantity........................... Less Beginning balance inventory........... Required production quantity................ 2000 600 -------2600 400 -------2200

An example shown in Fig-4

Sales Budget
Refers to (Accounting for Management, 2013), A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time.

The sales budget is the beginning point of to prepare a master budget and the other elements in master budget such as, production, purchase, inventories and expenses that depend of affect it in different ways. A typical example shows in Fig-5

TASK-(4) RECOMMENDATIONS IN COST REDUCTION AND MANAGEMENT PROCESS Sold out each units in a desired margin of profit - The confirmation of desired margin of profit ensures the financial earning, but control the fixed expenses to not run over the targeted production cost. To stay in the competitive market, the selling price should be competitive, therefore to sustain, new fair methods to be practiced in production and fixed expenses such as Material can purchase and manage in alternative sources or material management can reduce the cost some extent. Labor cost to be rethinking with fair norms and can utilize alternative source like emerging countries manpower if it not affect the cost of production negatively. Delegation of responsibility easy with matured HR, so the variable administrative overhead and fixed overhead allocation can reduce, therefore it reduces the waste of resources and can save cost of production. 4.1THE PRESENT ECONOMIC DECLINE AND CUSTOMER SPENDING POWER

When economic declines are happening in the economy, obviously it affects the purchasing power or spending power of the public and customers. Therefore, on such a situation the products can provide with a discounted price. The discount may affect the desired margin of profit, therefore to sell each profit in a desired profit of margin, new methods or solutions and also tactics to be practiced.

4.2 COST REDUCTION PROCESS AND APPROPRIATE COSTING METHODS

The purchasing power may change, when the price of material increase or decrease as in inflation increase or decrease, as in inflation increase or decrease. In real better high income, that is higher purchasing power and the real income refers to the income adjusted for inflation. The indexing of real values of salaries, wages, and pensions will help to calculate and understand the real value and practice the discounted prices. The purchasing power and consumer price index reflects in consumer confidence and these data and information helps to decide the price cuts to deals the situation. (Boundless, 2013) 4.3 EVALUATION OF THE POTENTIAL USE OF ACTIVITY BASED COSTING Refers to (Investopedia, 2013) An accounting method that identifies the activities that a firm performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods. All costs are not possible to assign in this method, such as management and salaries and other office overheads to a specified product manufactured, therefore it has no popularity. It is useful when a business has lots of overheads and it is not make any sense for custom production environments and cost drives drive costs. The following example shows the Activity based costing and without it.

TASK-(5) FINANCIAL APPRAISAL TECHNIQUES FOR STRATEGIC INVESTMENT DECISIONS Refers to Business Dictionary, An evaluation of the attractiveness of an investment proposal, using methods such as average rate of return, internal rate of return (IRR), net present value (NPV), or payback period. Investment appraisal is an integral part of capital budgeting, and is applicable to areas even where the returns may not be easily quantifiable such as personnel, marketing, and training. (Business Dictionary, 2013) Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital budgeting project depends on an analysis of the cash flows generated by the project and its cost.(Mark A. Lane, 2002 - 2013 ) The capital budgeting followed some basic rules for financial appraisals, those are-

PAYBACK PERIOD
It is the period of time to recover from the investment project to recouped the initial investment and used to capital investment decision making rule and it mentions that all the capital investment has a specified period of payback and it should be a specified period of years or accepted years of period.

NET PRESENT VALUE (N.P.V)

It shows the expected impact of the invested project on the value of the firm on the capital budgeting project. A positive value

should be accepted in N.P.V and it shows the increase of value of firm and mutually exclusive projects, the highest positive N.P.V will be accepted. It means that it calculated present value of the inflows and deducted the present value of the investment projects cash outflows.

INTERNAL RATE OF RETURN - IRR

Refers business finance, The Internal Rate of Return (IRR) of a Capital budgeting project is the discount Rate at which the Net Present Value (NPV) of a project equals zero. The IRR Decision rule specifies that all independent projects with an IRR greater than the Cost of capital should be accepted. When choosing among mutually exclusive Projects, the project with the highest IRR should be selected (as long as the IRR is greater than the cost of capital). (Business Finance Online, 2002-2013) When considering the investment project , the decision will consider the various factors such as , availability of capital, sources of the capital and cost of it, life time of the project, cash flows and payback period, capital allowances, grants and taxations, the residual value of the asset and sensitivity analysis like sales volume, sales price, operating costs and capital expenditures.

The equations used for Capital Budgeting

(Net Present Value)

(Internal Rate of Return)

(Pay Back Period)

5.1 INVESTMENT DECISIONS IN VARIOUS PROJECTS The investment decision on a new project will be considered that, whether it generates cash flows for compensate the cost of capital or not, if it not covers, the value of company not changing positively. If it generate more than the cost of capital, on that case increase the value of company and if not generate more than that of cost of capital, it means that it reduces the value of company.

Cash Flow Statem ent Year 0 1 2 3 4 5

TOTAL C.F

PROJECT 1
(90,000)
20000 30000 40000 20000 20000 110,000.00

Cumulativ e C.F
(90,000)
(70,000) (40,000) 20,000 40,000

PROJECT -2
(90,000)
10000 20000 40000 60000 50000 120,000.00

Cumulative C.F
(90,000)
(80,000) (60,000) (20,000) 40,000 90,000

NPV and IRR for project 1

NPV and IRR for project - 2

Payback Period, NPV, IRR Summary Table

Project s PROJEC T1 PROJEC T2 Investment 90,000.00 90,000.00 Payback Period 3 3.33 NPV 4303.57 29846.59 IRR 13.932 21.697

NPV (+) (-) Project s PROJEC T1 PROJEC T2

DECISION Accept Reject Investmen t NPV 90,000.00 90,000.00 4303.57 29846.59

%
4.78 33.16

Therefore the project 2 is recommended.

Cash flow Cash flow symb ol = Cost of capital Cost of capital Company value No change

Cash flow Cash flow

> <

Cost of capital Cost of capital

increase decrease

The discounted cash flow at the cost of capital and the effect on present value shows the relation like 1. Positive value = project returns more than the cost of capital 2. Negative value = project returns less than cost of capital 3. Zero value = project returns cost of capital
Earning Based Measures 1 2 3 ARR NPV IRR Risk Based Measures 1 2 3 4 Pay Back Period Gearing BEP Sensitivity of estimated(a)Taxation(b)Inflation(c)Capital Rationing

NPV (+) (-)

DECISION Accept Reject

5.2 & 2.2 VARIOUS SOURCES OF CAPITAL

There are various sources of capital and it classified into internal and external sources as mentioned in the Table.1 TABLE 1

Internal sources 1 Own money 2 Sale of personal property 3 Retained profit

External sources Ownership capital 1 Ordinary shares 2 Preference shares Non ownership capital 1 2 3 4 5 Debentures Bonds Bank Loans Overdraft Hire purchase Leasing Trade Credit Venture Capital Factoring Franchising

4 Sale of assets and lease back 5 Cheque discounting 6 Working capital Arrangemen t

6 7 8 9 1 0

There is internal capital and external capital sources and the external sources consist of ownership capital and non ownership capital. The entrepreneur can contribute own money such as from his personal fund as capital, it may arise from sale of personal property or other belonging like land, house, precious metals or vehicles. The retained profit can also used if an emergency arises, cheque discounting is also practice to manage the urgency, besides that the wise management of working capital provides a source to generate fund. The ownership capital like ordinary shares and preference shares can issue and the can use it without any interest or financial charges. The non ownership capital like debentures can issue for long term and also mortgage debentures can also be considered. The bonds can issue to public with a steady rate of interest for a long term. The bank loans with a flat rate also suits, besides that overdraft from external sources through bank with daily basis interest rate can consider too. The hire purchase like giving an initial deposit to the seller and buy a high cost asset, rawmaterial or plant and avoid other costly than this fund can be also practiced.

Financial leasing and operating leasing or grants from local governments, trade promotion agencies or government agencies or trade credit or more credit period to settle the invoices also considered. The venture capital like money invested by private parties with designed rate of interest and run up to agreement period or factoring of invoices or signed work agreement contracts with effect of the interest rate of concerned bank. Franchising is another source of raising capital and it bring to practice like allow an external party to run the same type of business under the same flagship and can collect the franchise money. In addition in new generation environment, there are various other situations exist to raise the fund like credit. 5.3 RECOMMENDATIONS OF THE VARIOUS PROJECT INVESTMENTS The various organizations have different aspects that affected in legal terms, authority and bankruptcy. The rules and regulations connected with the concerned government and all organizations have its own responsibility and obligations to legislature, stake holders and government, besides that it has its own advantages and disadvantages also limitations when implementing the external and internal capital or fund. 5.4POST AUDIT APPRAISAL TECHNIQUES Post audit is the comparison between actual incomes yielded in a capital project with predicted income in appraisal techniques. Therefore the investment decision making is significant in organizations. The expenditures in the investment project and the operating capability of organization also the ability to face the changing environment decide the long term operations of organization. The level of productivity at a maximum required to run the long term investment projects. The post audit and appraisal required to understand the performance and level of quality and performance in the production of the organizations. TASK-(6) INTERPRETATION OF FINANCIAL STATEMENTS FOR PLANNING DECISION MAKING The financial statements of an organization provide the historic financial data and information. The financial statements consists of detailed and accurate record of assets and liabilities, income statement and cash flow statements. These are quantitatively written records and explain the financial status of an organization. Therefore, the historical performance of the organization's information available to the stakeholders It is constructed in a standardized format and financial based historic records. The use of financial statements used to recognize why there is no excess fund available, is the financial entity sound or

not, is there any possibility to generate funds and is there any funds available to meet the predicted demand.

Methods of Financial Analysis

The financial analysis based on the performance is the comparison of financial ratios of solvency, profitability and growth. Past performance compared with past records of same firm Future performance compared with mathematical and statistical techniques Comparative performance compared with organizations in the same industry

6.1 FINANCIAL VIABILITY OF MARKS&SPENCER The financial viability of an organization consists of an assessment of the viability, stability and profitability of an organization or a subsidiary or an individual project. The information that used to make assessment is available from the financial statements. The viability study decides whether to continue the operations in whole or part, make or purchase decision of material, acquire rent or lease of machineries, increase the working capital or not and invest or lend capital. The following elements are also examined by the financial analysis process such as Profitability based on income statement Solvency based on balance sheet Liquidity based on balance sheet Stability based on income statement and balance sheet 6.2 RATIO ANALYSIS OF MARKS & SPENCE FINANCIAL REPORTS Interpreting the financial statements consists of conducting the rearrangement of data to a format to get the information to appraise the performance, activities, financial soundness and stability and growth of the organization. The analysis measures the overall performance and gives attention if required in any a particular area, besides that, it evaluate the flow of funds to understand the ability to generate fund and requirement of fund. The ratio analysis in terms profitability, risk, growth and return derived and advantages gained on application of funds such as return on investment. There are various financial ratios and examples of such ratios are as follows Operating cycle

Liquidity Profitability Activity Financial leverage Shareholders ratio Return ratio

6.2.1 RATIO ANALYSIS OF MARKS & SPENCE

Liquidity Ratio Current ratio = current assets / current liabilities = 1520.20/1890.50 = 0.804126 Quick ratios liabilities = current assets - inventory/current = 1520.20 - 613.20/1890.50 =0.479767 Net working capital to sales ratio = current assets current liabilities/sales =1520.20 1890.50/9536.60 = -0.03883 Profitability ratio Gross profit margin = gross income/ sales = 523.0/9536.60 = 0.054841 Operating profit margin = operating income/ sales = 852.07/9536.60 = 0.089347 Net profit margin = net income/ sales = 288.70/9536.60 = 0.030273

Efficiency Ratios
Efficiency ratios are used to analyze the organizations assets and liabilities usage in internally and it analyses how efficiently it manage the receivables, repayment of liabilities, the quantity and

usage of the equity, besides that the usage of s\inventory and machinery. The common ratios of efficiency ratios are Accounts receivable turn over Fixed assets turnover Sales to inventory Sales to net working capital Accounts payable to sales inventory turn over

1. Accounts Receivable Turnover Ratio = Net Sales / Average Gross Receivable

= 9536.60/281.40 = 33.88984 (It indicate the liquidity of receivables) 2. Fixed assets turnover ratio = net sales / net fixed assets = 9536.60 / 5633.0 = 1.692988

(It measures the capacity utilization and the quality of fixed assets) 3. Accounts payable turnover ratio = purchase / average accounts receivable = 77.20 / 281.40 = 0.274343 (Purchases = closing stock opening stock = 613.20 536 = 77.20) (Indicate the liquidity of the firms payable)

6.3 RECONMENDATIONS ON THE STRATEGIC PORTFOLIO OF MARKS & SPENCER

The portfolio strategy acquire the lasting change in performance by focusing to drive share holders return in present and in future and make positioning the organization to create value. The corporate portfolio works on balancing the risk diversification, short term gains, long term share holders value by optimizing allocation of resources, products lines and other initiatives. The strategic portfolio recommendation based on the lowvolatility strategies such as 1. Long only minimum- variance portfolio and 2. Minimum variance- - portfolio These strategies uses advanced optimization and statistics techniques for hedging against that of estimation risk of associated models, therefore get consistency good risk adjusted return than market indexes.

CONCLUSION
Managing Finance with decision making process of cost concepts allows to control the market by fair price, when competition and financial fluctuations take place, besides that it let control the cost of production and overall performance of an organization. The forecasting techniques allow managers not only to take acceptable decisions but also lead the organization profitably. The both budgetary process and cost reduction techniques allow to control over the expenses and smooth flow of management process of organization. The interpretation of financial statements allows recognizing the financial soundness and the changes required areas of the organizations functional process.

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