This is a solution of MFRD-UNIT2-Managing Financial Resources and Decisions that describes about Developing business

MFRD-UNIT2-Managing Financial Resources and Decisions

 MFRD-UNIT2-Managing Financial Resources and Decisions:Rules and regulations:

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• General guidelines for submission of coursework: Read More : Unit 8 Legislation And Ethics In Travel And Tourism Sector

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MFRD-UNIT2-Managing Financial Resources and Decisions:Learning Outcomes and Assessment Criteria.*

*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)

Customers payfor goods two months after they have been sold.

Production in units (chairs)

1. £12 per unit direct labour payable the same month as production.
2. 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.
3. 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.
4. Fixed expenses of £480 per month, paid one month in arrears.
5. 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) 

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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