Purpose of this assignment
This assignment is designed to give learners an opportunity to demonstrate achievement of all the module learning outcomes. In doing these learners will identify sources of finance available to a business, assess implications, analyse costs, evaluate appropriate sources, and explain their impact on the financial statements.
They will assess information needs, analyse and explain the importance of budgets, explain cost calculations and use investment appraisal techniques. Learners will also have an opportunity to show understanding of financial statements, and evaluate financial performance of a business.
Scenario Case Study: Hardwood LtdHardwood Ltd is a medium-sized private limited liability company producing furniture for the retail sector and private homes for the last 6 years, mainly catering for the domestic market.The business was initially set up by 3 young carpenters. They have shown an exceptional understanding with each other as a result the business has been growing steadily over the years. Given the past business successes, growing brand name and the loyal customer base the promoters think that now is a good time to expand the business. Their intention to expand is also backed by a growing enquiry for their furniture from some overseas buyers. Their main ability and skills are in design and production of furniture; however, other business functions such as marketing, administration and sourcing materials at the best prices are poorly developed as none of the three are skilled in these business processes.Recently, they have appointed a young and energetic John Mathew as the Managing Director (MD) to study and manage the business as it expands. He has several year experience managing a fast moving consumer goods manufacturing business.Their preliminary study has suggested that for the proposed expansion they need increased production capacity and functionality, so will need additional investment in machinery and tools.John was excited to learn the range of finance available in the market to his company which has a good track record. Hehas already had a preliminary talk with a bank manager who was encouragingand even suggested to prepare adetailed financial plan and forecast in order to apply for a bank loan. John was also aware that Hardwood Ltd. could also explore for other sources of finance. For example many equipment suppliers have tie ups with financing companies offering financing options like lease, hire purchase etc. As such, each source of finances have different implications and bear different borrowing costs.
Section A
As part of the expansion plan of Hardwood Ltd included setting up a separateproduction unit for contemporary designed furnitureexpected to start production in 2015. John wanted to ensure sufficient funds were available to finance the expansion based on current assumptions. The following information is availableForecast of income and expenses for Feb Sep 2015 are as follows:
Feb Mar Apr May Jun Jul Aug Sep
Sales 270 270 270 270 270 275 280 300
Purchase 80 80 80 80 95 95 100 105
Labour 75 75 85 85 85 85 85 85
Other variable
Expenses 25 25 25 26 27 28 29 30(Note all the figures in the table above are in 000)1. Customers are given 2 months credit.
2. Purchases are paid after 1 month.
3. Labour costs are paid in the month incurred.
4. Other variable expenses are paid in the following month.
5. Fixed expenses of 35,000 per month are paid in the following month.
6. Purchase of new machinery costing 700,000 is scheduled for July.
7. Other financial information are:
a. Budgeted Cash balance on 1st April is 15,000.
b. Manufacturing output for the period 1st April to 30th Sep is budgeted at 10,000 units.
c. Depreciation from 1st April 30th Sep of80,000 is not included in the Fixed Expenses above.
Section B
The proposed expansion required the purchase of new machinery. Two machines were identified as suitable from an operational viewpoint, with outlay and other relevant cashflows over the expected 5 year life of the two machines is as follows:Machine A- Cost of machine is700, 000 and the scrap value at the end of 5th year is estimated at 100,000.
Machine B- Cost of machine is 700, 000 but the scrap value at the end of 5th year is estimated at 10,000.
Cost of finance is estimated at 10% p.a. The life of machines is 5 years in both cases.
Years Operating cash flows Machine A Operating cash flows Machine B
1 200 225
2 200 210
3 200 200
4 200 170
5 200 100
Section C
Analysis of historic financial statements gives an insight into the companys financial standing by revealing information about recent profitability, liquidity and gearing [financial leverage]. This will be highly relevant to prospective investors in the business, in addition to any budget that may be available. The most recent two years income statement and balance sheet are summarised below
Income Statements 2014000 2013
Sales
Cost of sales
Gross profitOperating expenses
Profit before interest and tax
Interest
Net profit before taxIncome tax
Profit after taxRetained profit brought forward
Retained profit carried forward 2,590
(1,310)
1,280(901)
379(115)
264(90)
174608
782 2,217
(1,201)
1016(732)
284(86)
198(88)
110498
608Balance Sheet 2014 000 2013 000
Non Current Assets:
Freehold property cost
Equipment cost
Depreciation
Current Assets:
Inventory (stock)
Trade receivables (debtors)
BankLess: Current Liabilities
Trade Payables(creditors)
OverdraftNet Working Capital
Operating AssetsLess: Long Term Liabilities
9% Long term Loan
Net Assets
1,170
1,015
(450)
565
1,735390
226
60
1020400
10
410
265
2,000
(798)
1,202
1,170
675
(210)
465
1,635375
190
280
845321
106
427
418
2,053
(1,025)
1,028
Equity
420,000 ordinary 1 shares
Retained Profit
Shareholders Funds
420
782_
1,202
420
608_
1,028
Task 33.1 Using the information in Section A prepare the cash budget for Hardwood for the 6 months April Sep 2015. Analyse this budget and make appropriate decisions.(AC 3.1)3.2 Explain the calculation of unit cost of furniture and make pricing decisions using the information in
Section A(AC3.2)3.3 Assess the viability of the project identified in Section B using the Investment Appraisal techniques of Payback [P/B], Net Present Value [NPV], Internal Rate of Return [IRR] and Accounting Rate of Return [ARR]. To do this you should perform the relevant calculations and explain the results.(AC3.3)
To achieve M2 demonstrate the use of a range of appropriate methods and techniques like investment appraisal tools, cost and pricing and budgeting to deal with the problems and get appropriate solutions.
To achieve D1demonstrate that decisions on capital investment, pricing and cash management are made through in-depth analysis of the information, merits of the tools used and well justified on the context of the businesses.Task 44.1. Discuss the main financial statements of a company by outlining the purpose, structure and main sections of the Income statement, Balance Sheet and cash flow statement.(AC4.1)4.2. Compare appropriate formats of financial statements for Unincorporated [e.g. Sole Trader] and Incorporated [e.g. Private Limited Company] businesses. (AC4.2)4.3. Interpret the Financial Statements of Hardwood Ltd [presented in Section C] by calculating and commenting on the nine ratios listed below for 2014 and 2013 and compare these with Industry averages shown below.(AC4.3)Industry Averages
i) Return on Capital Employed 15%
ii) Operating Profit % 13.6%
iii)Gross Profit 40%
iv) Operating Asset Turnover Ratio 1.1v) Current Ratio 2
vi) Quick Asset Ratio 1.5vii) Stock Days 75
viii) Debtors Days 30ix) Gearing Ratio. 1.0Evidence checklist Summary of evidence required by student
Task 3 Preparation of cash budget, calculation of unit cost and applications of investment appraisal tools and analyse the results to make the appropriate business decisions.
Task 4 A report describing key financial statements and interpreting their results with the help of the suggested ratios in the assignment brief.
3. Be able to make financial decisions based on financial information 3.1 analyse budgets and make appropriate decisions
3.2 explain the calculation of unit costs and make pricing decisions using relevant information.
3.3 assess the viability of a project using investment appraisal techniques
4. Be able to evaluate the financial performance of a business
4.1 discuss the main financial statements
4.2 compare appropriate formats of financial statements for different types of business
4.3 interpret financial statements using appropriate ratios and comparisons, both internal and external
Achievement Summary
Qualification Pearson BTEC Level 5 HND Diploma in Business Assessor name
Unit Number and title Unit 2 Managing Financial Resources & Decisions Student nameLO3 Be able to make financial decisions based on financial information
3.1 analyse budgets and make appropriate decisions
3.2 explain the calculation of unit costs & make pricing decisions using relevant information
3.3 assess the viability of a project using investment appraisal techniques
LO 4 Be able to evaluate the financial performance of a business
4.1 discuss the main financial statements
4.2 compare appropriate formats of financial statements for different types of business
4.3 interpret financial statements using appropriate ratios & comparisons, internal &external
Higher Grade achievements (where applicable)
Grade descriptor Achieved?(tick) Grade descriptor Achieved?(tick)
M1: D1:
M2: D2:
M3: D3: