Managing Financial Resources and Decisions

Title

Evaluate the Financial Performance of a Business

Submitted to

Submitted by

Date

Grafton College of Management Sciences

 TABLE OF CONTENTS

LEARNING OUTCOME 1 1

TASK 1: IDENTIFY DIFFERENT SOURCE OF FINANCES 1

TASK 2: IMPLICATIONS OF THE SOURCES OF FINANCES 1
TASK 3: EVALUATE DIFFERENT SOURCES OF FINANCE 3

LEARNING OUTCOME 2 5

TASK 1: ANALYZE THE COST OF DIFFERENT SOURCE OF FINANCE 5

TASK 2: IMPORTANCE OF FINANCIAL PLANNING 5
TASK 3: FINANCIAL INFORMATION FOR THREE MAIN DECISION MAKERS 6
TASK 4: STUDY OF INCOME STATEMENT 6

LEARNING OUTCOME 3 8

TASK 1: ANALYSIS OF INCOME STATEMENT 8

TASK 1 (A): PREPARATION OF CASH BUDGET 8
TASK 1 (B): THE DEBTORS AS ON 31-12-15 9
TASK 1 (C): THE CREDITORS AS ON 31-12-15 9
TASK 1 (D): TOTAL AVAILABLE CASH AND BANK BALANCE AS ON 31-12-15 9

TASK 2: ANALYZE THE FINANCIAL DATA OF GENERAL SPORTSWEAR 9

TASK 2 (A): CALCULATE THE UNIT COST OF THE PRODUCT 10
TASK 2 (B): SELLING PRICE FOR A PRODUCT 10
TASK 2 (C): WHAT FACTORS TO BE CONSIDER BEFORE FIXING PRICE 10
TASK 2 (D): DETERMINE THE SELLING PRICE 10

TASK 3: ASSESS THE VIABILITY OF A PROJECT 11

LEARNING OUTCOME 4 15

TASK 1: EVALUATION OF GENERAL SPORTSWEAR FINANCIAL STATEMENT 15

TASK 1 (A): BALANCE SHEET 15
TASK 1 (B): PROFIT AND LOSS ACCOUNT 16
TASK 1 (C): CASH FLOW STATEMENT 16

TASK 2: ANALYZE THE FINANCIAL DATA OF DIFFERENT COMPANIES 17

TASK 2 (A): LIMITED COMPANY 17
TASK 2 (B) SOLE TRADER 18

TASK 3 (A): ASSESS THE FINANCIAL RATIOS 18

TASK 3 (B): COMPARATIVE JUDGMENT FOR GENERAL SPORTSWEAR 19
Leaning Outcome 1: Understand the Different Source of Finance to a Business

Task 1.1: Different Sources of Finance available to General Sportswear

General Sportswear is a private limited company, owned by the family members, currently facing
liquidity crunch and heavy o/d and creditors’ dues. The company also aims to expand its business
to compete in the market. In this critical financial situation, I suggest the Director of Finance for
General Sportswear to use these sources of Finance.

Long Term Source of Finance

1) Owners’ savings
2) Debentures
3) Leasing

Short Term Source of Finance

1) Overdraft facility
2) Loan from Friends and Family

Task 1.2: Implications of Different Financial Sources

It is the impact on the business for using the particular resource of fund. Implication can be
Negative or Positive. Negative or Adverse effect on the business and Positive or Favorable effect
should be measured carefully. The source having more high positive factors is selected for
business.

1) Owners’ Savings
Owners’ own money and saving is most suitable option for any business which is afraid to
use debt. Since, the Owners’ of the General Sportswear feel apprehensive to use debt loans
they must bring in investment from home, this investment required no interest payments
and ensures privacy of investment. The only risky effect of this investment is that if
business do not perform well it will cause the owners’ loss of their savings.

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2) Debentures
A debenture is a document that either creates a debt or acknowledges it, and it is a debt
without collateral. A debenture is like a certificate of loan or a loan bond evidencing the
fact that the company is liable to pay a specified amount with interest and although the
money raised by the debentures becomes a part of the company's capital structure, it does
not become share capital.

3) Leasing
It’s a form of contract between the two parties, the lessor and the lessee. The lessor buy
and provides the asset to the lessee according to its requirement. In return the lessee pays
a certain amount of rent for the certain amount of period and then becomes the owner of
that asset. Financing and operating are the two types of leases.

4) Overdraft Facility
In this source of finance a bank allows a firm to take out more money than it has in its bank
account. It’s a convenient source which help the company without any profit sharing with
the bank. This is an arrangement under which a bank extends credit limit to maximum
amount which current customer can make withdrawals. It’s a revolving loan and interest is
only charged when the overdraft debit is made. However, the lender can cancel this facility
at any time without any prior notice. General Sportswear

5) Loans from Friends and Family

If you’re lucky, friends and family members might be the most lenient investors of the
bunch. They don’t tend to make you pledge your house, and they might even agree to sell
their interest in your company back to you for a nominal return.

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Task 1.3: Evaluate Three Different Sources of Finance

1) Overdraft Facility

Advantages

1) It’s a bank loan facility available at a very small cost. It does not effects your cash flow.
And bank allows to avail it at any time.
2) No profit sharing with the bank.
3) Multiple loans options
4) Tax benefits on bank loans

Disadvantages

1) One may face heavy charges if the set period of payment passed.
2) Bank has authority to dismiss the draft at any time without any reason or bank policies
changed.

2) Leasing Facility

Advantages:

1) affordable cost of using an asset

2) the contract can be terminated at will

Disadvantages:

1) it’s not easy for lessee to recover the expense as equity

2) Land value appreciation cannot benefit lessee
3) The payment of instalments could be a problem for lessee

3) Loans from Friends and Family;

Advantages:

1) Family and friends may let you use their money in courtesy or may charge little interest.

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 2) Family and friends easy to convince them than a bank or lessor.

3) Family and friends may not be interested to know your business conditions than the other
investors.

Disadvantages:

1) If anything goes wrong this could strain the close relationships

2) Family and friends may want their money back before the arranged terms, whereas banks
and other lenders have more stability.

By evaluating these sources the Director of Finance can convince the owners’ that the sources of
finance such as leasing and bank draft will help to stabilize the company by as well as aid them
to expand their business. They have an established business and by bearing little cost can resolve
their financial issues and compete in market.

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Learning Outcome 2: Implications of Finance as a Resources within a Businesses

Task 2.1: Cost of Different Financial Sources for General Sportswear

1) Personal savings has opportunity cost attached to it.

2) Bank Overdraft have associated cost in form of bank processing fees and interest expense
etc.
3) Debentures’ cost a company its processing fees, interest and listing fees etc.

Task 2.2: importance of financial planning

Financial planning is very important to any business because;

1) It helps to understand cash flows of the business.

2) It brings stability to the business
3) It shows sources of finances to the companies.
4) It forecast the financial position of a business.
5) Financial reports are a good way to monitor the business.

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Task 2.3: Three Main Decision Makers and Financial Information

1) Owners’
Using the information the shareholders can understand the firms present financial condition.
They can know about the security of their capital, solvency, earning per share, their annual
turnover etc. so that they can take decision whether to invest or not in the company.

2) Management Authority

They are the large user of the income statement and financial position. Using it they can
forecast about the firm, can control the unnecessary expenses, direct the firm and coordinate
the total job.

3) Expected Investors

By using the data about income statement and financial position statement, investors can
understand about the security of their investment, administrative skills, their expected return
and the ability to the liabilities.

Task 2.4 (a): Different Types of Finance and their Cost in Financial Statements

Financial statement of a business represents the complete financial status of a business. The
balance sheet represents two sides; what company owns (Assets) and what company has to pay
(liabilities). Different type of finances and cost appear in various heads such as current assets
(cash, market securities, notes receivable etc.), tangible assets, fixed assets, liabilities, current
(notes payable, dividend payable) and long term liabilities.

Task 2.4(b): The Interaction of Assets and Liabilities

The basic and crucial business decision involve interactions among the assets and liabilities. What
a company need to invest and how much it can invest. IAS requires management to consider the
definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and
expenses in the Framework. Its aim is to provide reports comparable to international standards.
There were two basic differences between UK Accounting Standards and International
Accounting Standards:

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1) The difference exist because of the prevailing situations are different in UK and the rest of
the world so it does not always deal with the same accounting problems.
2) The IAS issue a more generalized solution of a problem so it compliance internationally.
While UK accounting system provides a very specific solution to a problem.

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Learning Outcome 3: Financial Decisions based on Financial Information
Task 3.1(a): Preparation of Cash Budget for General Sportswear
Cash Budget for Jul 15- Dec 15

Jul 15' Aug 15' Sep 15' Oct 15' Nov 15' Dec 15'

Receipts
From Debtors 65000 65000 65000 75000 75000 75000
Cash 6500 6500 6500 7500 7500 7500

Total 71500 71500 71500 82500 82500 82500

Payments
Cash Purchase 2800 2800 2800 3100 3100 3100
Payment to Creditors 28000 28000 28000 31000 31000 31000
Power, Light, & Heat 1000 1200 1200 1200 1200 1200
Telephone & Postage 125 125 125 125 125 125
Rent & Rates 7920 9504
Insurance 3960 4752
Salaries 15400 15400 15400 15400 15400 15400
General Expense 600 600 600 600 600 600
Drawing 1200 1200 1200 1200 1200 1200
61005 49325 49325 66881 52625 52625
Net Cash flow 10495 22175 22175 15619 29875 29875
Cash & Bank Balance
B/F 98600 109095 131270 153445 169064 198939
Cash & Bank Balance
C/F 109095 131270 153445 169064 198939 228814

Task 3.1 (b): The Debtors as on 31-12-15

The debtors were 75,000 as on 31-12-15.

Task 3.1(c): The Creditors as on 31-12-15

The creditors stands on 31,000 as on 31-12-15.

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Task 3.1(d): The Total Available Cash and Bank Balance on 31-12-15

The total available cash and bank balance was 228,814 as on 31-12-2015.

Task 3: Analysis of Financial Data of General Sportswear

Task 3.2(a): Calculate the Unit Cost of the Product

Material 50,000£

Labor 60,000

Fixed 50,000

Variable 12,500 (0.50/unit)

Selling fixed 25,000 + variable 15,000 (212,500)

Per unit cost 212,500/25,000 = £8.5/unit

Task 3.2 (b): Selling Price

GP = 60% of sales

SP £25,000 = £531,250

=£ 21.25

GP = 318,750

Rough Working

Selling price = GP + cost

X = 60/100x + 212,500

100x – 212,500 = 60x

21,250,000 = 40x

X = 534,250

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Task 3.2 (c): What Factors to be considered before Fixing a Price

There are various factors which a company must consider before making a pricing decisions. These
are as follows;

1. Pricing objectives
2. Product cost
3. Government regulations
4. Market trend
5. Competitive products
6. Demand and Supply of a Product

Task 3.2 (d): what will be the selling price for 20,000 units?

GP and sales price for 20,000 units

GP = 318,250

CGS = 207,000

SP= 52,525

SP 26.263/unit

CGS Calculations

Material £ 50,000

Labor 60,000

Selling and administrative cost

Fixed 25,000

Variable (0.6/unit) 12,000

= 207,000

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 SP= GP + 207,000

SP = 308,250 + 207,000

20,000 = 525,250

Per unit SP= 26.263

Task 3.3: Assess the viability of a project

1) Pay Back Period

It is the length of time taken to repay the initial capital cost of the project. It gives greater
weight on cash flows generated in earlier years and requires information on the returns the
investment generates. E.g. A machine costs £600,000 if it produces items that generate a profit
of £5 each on a production run of 60,000 units per year its Payback period will be 2 years.

German Based

Payback period = initial investment / annual cash flow

= 200,000/60,000

=3.33 years

Years Net cash flow Cumulative CF

0 - 200,000 - 200,000

1 60,000 -140, 000

2 60,000 -80,000
Pay Back period three years and three
months and 10 days.
3 60,000 -20,000

4 60,000 +40,000

5 60,000 +

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USA based Technique

Years Net cash flow Cumulative CF

0 - 250,000 - 250,000

1 100,000 -150,000

2 90,000 - 60,000

3 80,000 -60,000

Three years and approximately eight months

4 40,000 + 20,000

5 20,000 +

2) Accounting Rate of Return

A comparison of the profit generated by the investment with the cost of the investment. The
higher the rate of return, the higher the project is ranked.

German Based

ARR = average return / initial investment

= 60,000/200,000

= 0.3 or 30%

USA Based

ARR = average return / initial investment

=66,000/250,000

=0.264 or 26.4%

German based techniques are better in this case.

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3) Internal Rate of Return (IRR)
It seeks to identify the rate of return that an investment project yields on the basis of the
amount of the original investment remaining outstanding during any period, compounding
interest annually.

German based

0 - 200,000

1 60,000

2 60,000

3 60,000

4 60,000

5 60,000

Invested = - 200,000

Total inflow = 300,000

Net cash flow = 100,000

IRR= 15.226%

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USA Based

0 - 250,000

1 100,000

2 90,000

3 80,000

4 40,000

5 20,000

Invested = - 250,000

Total inflow = 330,000

Net cash flow = 80,000

IRR = 12.95%

German based techniques are best in all of these cases.

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Learning Outcome 4: Evaluate the Financial Performance of a Business

Task 4.1: Discuss the main Financial Statements of General Sportswear

1. Balance Sheet:

Balance Sheet, presents the financial position of an entity at a given date. It is comprised of
the following three elements:

Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery,
etc.).

Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc.).

Equity: What the business owes to its owners. This represents the amount of capital that
remains in the business after its assets are used to pay off its outstanding liabilities. Equity
therefore represents the difference between the assets and liabilities.

General Sportswear:

The balance sheet of General Sportswear represents fixed assets that consists of premises,
Equipment and Vehicles.

In FY- 13 the Premises values £ 680,000 after accumulated depreciation of £ 120,000. Equipment
of general sportswear value £ 26,000 after the charge of depreciation of £ 16,000. And Vehicles
Value £ 9,000 after the depreciation cost of £ 9,000.

In FY- 14 the Premises values £ 670,000 after accumulated depreciation of £ 130,000. Equipment
of general sportswear value £ 22,000 after the charge of depreciation of £ 20,000. And Vehicles
Value £ 13,000 after the depreciation cost of £ 11,000. There is an addition in the vehicles of £
4,000.

The current assets of the general sportswear consists of £ 73,500 which are contributed by cash,
bank stocks, debtors and Investment in FY-13

In FY-14 the current assets of the subject are £111,000 which shows an increase of £ 37,500.

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 2. Profit and Loss Account

Income Statement, also known as the Profit and Loss Statement, reports the company's
financial performance in terms of net profit or loss over a specified period. Income Statement
is composed of the following two elements:

Income: What the business has earned over a period (e.g. sales revenue, dividend income,
etc.).

Expenses: The cost incurred by the business over a period (e.g. salaries and wages,
depreciation, rental charges, etc.)

Net profit or loss is arrived by deducting expenses from income.

General Sportswear:

The income statement of general sportswear Profit & Loss statement for FY 2013-14 comprises
of the following accounting heads:

 Sales 600,000
 Cost of Sales 250,000
 Gross Profit 350,000
 Operating Expenses 196,600
 Net Profit before Tax 140,500
 Net Profit after Tax 91,325

3. Cash Flow Statement

It shows the movement of cash and bank balances over a period. It is divided into three heads;

Operating Activities: shows the primary activities of a business.

Investing Activities: shows the purchase and sale of assets other than inventories

Financing Activities: tells us how cash is generated or spent

All cash or bank related item will be recorded in cash flow statement, this will include:

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  All Payment in cash or through bank
 All receipt in terms of cash of through bank,

Task 4.2: Different Types of Organizations

Limited Company:

There are different types of companies – public limited or private limited. The primary concern
with this form is limited liabilities. The term ‘limited liability’ means that the owners of such
companies are required to finance the business only up to an agreed amount. Once they have
contributed that amount they cannot be called on to contribute any more, even if the company gets
into financial difficulties.

Sole Trader:

The term ‘sole trader’ is rather misleading for two reasons: ‘sole’ does not necessarily mean that
only one person is involved in the entity; manufacturing and service entities may also be organized
as sole traders.
The main requirement is that only one individual should own it. The owner would also be the main
source of finance and he would be expected to play an active part in the business. These companies
operate on a very informal basis and making little distinguish between personal and professional
matters. Sole traders do not follow any specific accounts reporting legislation.

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TASK 4.3(a): Financial Statement Analysis General Sportswear.

Key Ratios

Gross profit Margin (%) 59.81% 58.33%

NPAT Margin (%) 16.33% 15.22%
Current Ratio 1.91:1 0.96:1
Quick Ratio 0.96:1 0.40:1
Debtors Turnover Ratio 24 days 14 days
Stock Turnover Ratio 7 days 4 days
Assets Utilization Ratio 66% 74%

Task 4.3 (a) (Internal Analysis)

Profit ability Ratio:

The gross profit margin of the subject has slightly decreased in FY-14 as compared to previous
year. In FY-14 company earns GP margin of 58.33% as compared to 59.81% in FY-13. The sales
of the subject has increased but the cost of sales increased more than the previous year proportion.

The Net profit of the subject has also decreased in FY-14 to 15.22% as compared to 16.33% in
FY-13 the operating expenses of the subject increased by £ 18,400 mainly on account of salaries
and rent and rates.

Liquidity Ratio:

The current ratio of the subject is below the industry standard in which is 0.96: 1 and 1.91:1 in Fy-
14 and 13 respectively. The liquidity position of the subject is not quite stable as per the figures
attained the performance of the subject is not up to industry standards.

Asset Utilization Ratio:

The company’s asset utilization ratio is 74% in FY-14 which shows that the subject can earn £ .74
of a pound of the assets company held and it is it low from industry standards.

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Task 4.3(b): (External Analysis)

General sportswear is having better gross profit margin as compared to its competitors. The net
profit margin is bit low in the financial years under review. The liquidity position of the general
sportswear is not good as compared to its competitors and also below the industry norms. The
subject has good stock turnover and debtor’s turnover as compared to its competitors and it’s in
between the range of industrial standards.

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