This is a solution of MFRD-UNIT2-Managing Financial Resources and Decisions that describes about Developing business
MFRD-UNIT2-Managing Financial Resources and Decisions
Unit Title Managing Financial Resources and Decisions | Unit Code MFRD-UNIT2 | Date Issued 20/01/2014 | ||
Student Name | Student ID | Date to Receive 11/04/2014 | ||
Team Leader Arun Chalise | Internal Verifier Name Joel | |||
Lecturer |
MFRD-UNIT2-Managing Financial Resources and Decisions:Rules and regulations:
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MFRD-UNIT2-Managing Financial Resources and Decisions:Learning Outcomes and Assessment Criteria.*
Outcomes | Assessment Criteria for Pass | |
To achieve each outcome a learner must demonstrate the ability to: | ||
1 Understand the sources of finance available to a business | 1.1 identify the sources of finance available to a business | |
1.2 assess the implications of the difference sources. | ||
1.3 evaluate appropriate sources of finance for a business project | ||
2 Understand the implications of finance as a resource within a business | 2.1 analyse costs of different sources of finance | |
2.2 explain the importance of financial planning | ||
2.3 assess the information needs of different decision makers | ||
2.4 explain the impact of finance on the financial statements | ||
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 |
*Please see the Assignment Evaluation Sheet for Merit and Distinction criteria
Case Study :Softwood Ltd
Softwood Ltd is a medium-sized private limited liability company producing furniture for the retail sector and private homes. Currently it employs 50 staff and has been in business for the last 6 years, mainly catering domestic market.
The business management was set up by 3 young carpenters, Billi kid, Bengazy and Lee Jones. They have shown the exceptional understating with each others 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 have realized that it is the best time to go for expansion. Their intention to go for expansion is also backed by a growing enquiry for their furniture from some overseas buyers as well. Whilst their ability and skills to design and produce the furniture is largely undiminished, other business functions such as marketing, administration and sourcing materials at the best prices are not well integrated as neither are particularly skilled in the professional 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 years experience managing a fast moving consumer goods manufacturing business.
Their preliminary study have suggested that for the proposed expansion and to attract foreign buyers they need to modernize their operation and invest some money in new equipment and tools. While the successful businesses have increased the company’s capital base and have provided attractive returns to promoters,thecompanyneed much more capital to expand as per the plan.
John was excited to learn the range of finance available in the market to his company which has a good track record. Healready 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. He did receive some leaflets, with outline headings for various information that are required for a reliable forecast. He also recommended for a reliable and user friendly financial planning software which could save time and money.However, John was aware that Softwood Ltd. could also explore for other internal as well as external sources of finances available.Many equipment suppliers in the market have tie ups with financing companies and offer very flexible financing options like lease, hire purchase etc. As such, each sources of finances bear different borrowing costs, so it is the duty of MD to highlight them to the promoters so the most prudent decisions could be taken. Following the meeting with the bank manager John alsofelt the need to collect the rightinformation to prepare the realisticfinancial forecast.
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Section A
A part of the expansion plan of Softwood Ltdincluded setting up a separateproduction unit for contemporary designed armchairs for exports which is expected to start production in January 2015. John wanted to ensure a good cash management for this unit as he did not want any hiccups for the company’s first ever export venture. So he gathered information to prepare a cash budget for the future as follows:
Selling Price per unit isexpected to be £45.
The manager will be given cash of £6000 on the first of Jan 2015 to start up the unit.
Sales in units (chairs)
Jan | Feb | March | April | May | June | July | August | Sept |
100 | 100 | 100 | 150 | 150 | 150 | 150 | 150 | 120 |
Customers payfor goods two months after they have been sold.
Production in units (chairs)
Jan | Feb | March | April | May | June | July | August | Sept | Oct |
100 | 100 | 100 | 160 | 160 | 160 | 150 | 160 | 150 | 120 |
- £12 per unit direct labour payable the same month as production.
- Raw material cost £10 per unit, 75% paid for one month after the goods are used in production and the remainder 2 months after the goods are used in production.
- Other variable expenses are £6 per unit; two-thirds of this cost is paid for in the same months as production and one-third, the month after production.
- Fixed expenses of £480 per month, paid one month in arrears.
- Capital expenditure on new office equipment isbought and paid for in July costing £4000.
Section B
The proposed unit expected to produce the export quality chairs and their costs are estimated as following:
Direct Labour £5.00 per unit
Direct materials £10.00 per unit
Variable Production Overheads £5.00 per unit
Fixed Costs estimated @ annual capacity of 12,000 units
Administrative overheads £2500.00
Other Fixed costs £2000.00
Section C
The proposed expansion and the modernization of the current operation entailedpurchase of a new modern plant for seasoning of wood. Cost of finance is estimated at 10% p.a. Following two suppliers have been shortlisted based on their quotations and future cash-flows:
ABC Ltd
Cost of machine is£ 4,000, 000 and the scrap value after 5 years’ life is estimated at £500,000 as this is a well known brand.
Year Cashflow (£ 000)
1 1400
2 1500
3 1600
4 1000
5 500
XYZ Ltd
Cost of machine is 3,500,000. Life of machine is 5 years.
Year Cashflow (£ 000)
1 1300
2 1400
3 1500
4 1000
5 500
Section D
Finally, John decided to study the previous financial statements of Softwood Ltd. Analyzing historical statements gives the insight of the company’s financial standings through the information about the existing profitability, liquidity and the financial leverages. This also provides the platform for drawing up any future plan for the company. John realizes the very limited financial knowledge of the promoters so decided to explain the basics of the financial resources statements before analyzing the company’s financial statements.
He hadpast two years’Income Statement and Balance Sheets available to analyze.
Income Statements £000
2013 2012
Turnover 2590 2,217
Cost of sales ( 1310) (1,201)
Gross profit 1280 1,016
Operating expenses (901) (732)
Profit before interest and tax 379 284
Interest (115) (86)
Net profit before tax 264 198
Corporation tax (90) (88)
Profit after tax 174 110
Retained profit brought forward 608 498
Retained profit carried forward 782 608
Balance Sheet £ 000
2013 2012
Non current assets:
Freehold property – cost 1170 1,170
Equipment – cost 1015 675
– depreciation (450) (210)
565 465
1735 1,635
Current assets:
Inventory (stock) 512 496
Trade receivables (debtors) 200 190
Investments 280 280
992 966
Current liabilities:
Trade payables (creditors) 350 321
Bank overdraft 250 106
600 427
Net Working Capital 392 539
Total Net Assets 2127 2,174
Financed by:
9% long-term loan 925 1,146
Share capital and reserves
420,000 ordinary £1 shares 420 420
Profit and loss account 782 608
1202 1,028
2127 2,174
Requirements
Task 1
- Identifythe various sources of finance available to Softwood Ltd. to finance their expansion plan.
- Assess the implications (financial, dilution of control, legal and bankruptcy etc.) of the sources of financeidentified above on the company.
- Evaluate and recommend the most appropriate sources of finance for Softwood Ltd to raise finance for the expansion.
(Covers AssessmentCriteria 1.1, 1.2 &1.3)
Task 2
2.1. Analysethe costs of different sources of finance as identified in task 1.1 above.
2.2. Explain the importance of financial planning to Softwood Ltd.
2.3. Explain what information are required for decision makers of Softwood Ltd.
2.4. Explain the impact of the sources of finance on the financial statements of Softwood Ltd.
(Covers Assessment Criteria 2.1,2.2, 2.3 &2.4)
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Task 3
3.1. Prepare the cash budget from the above information for January – September 2015and analyze how you manage the cash during that period.( ReferSection A to complete this task).
3.2. Calculate the cost of producing a chair if a customer orders 2000 chairs and suggest an appropriate pricing strategy for Softwood Ltd. in the given business context.(Refer Section B to complete this task).
3.3 Using appropriate investment appraisal methods on the information given, recommend an appropriate machine for Softwood Ltd. Explain your decision.( ReferSection C to complete this task). (Covers Assessment Criteria 3.1, 3.2 & 3.3)
Task 4
4.1. Discuss the main financial statements of a company highlighting their structures, key components and significances.
4.2. Explain how financial statements differ in different types of businesses.
4.3. Analyze the financial performance of Softwood Ltd. for the year 2013 with the help of following financial ratios:( Refer Section D to complete this task).
a)Gross Profit Margin b) Net Profit Margin c) Return on Capital Employed d) Asset Turnover Ratio e) Current Ratio f) Quick Asset Ratio g)Stock Days h)DebtorsDays and i) Debt Equity Ratio .
(Covers Assessment Criteria 4.1, 4.2 &4.3)
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