2.

1 Financial costs of chosen sources of finance

Bank Loans
Over drafts
An over draft is a loan that a company takes from a bank or whatever other
monetary organization. In the event that a company has a bank account with
a bank and it takes out more cash from the bank account then the sum which
is really present in the bank account it is brought an over draft. Banks offer
diverse levels of over draft points of confinement relying upon the kind of the
bank account and the cash present in it. A few banks dont request interest
on the over draft up till some timeframe, after which premium is charged.
(Fardon, 2005)
Term Loan
Term loans are loans obtained from a bank which are pay back with interest
over a for the most part drawn out stretch of time i.e. one to ten year yet at
times it can be much more than that. Terms loans could have either an
altered interest arrangement or a drifting interest arrangement. Fixed
premium plan are in which a settled measure of premium is pay back to the
bank for the span of the advance. Then again gliding premium changes as
per the conditions in the business sector. Little business favor terms
advances in light of the fact that it is much less demanding to pay back an
loan over a drawn out stretch of time expecting they can continue expanding
their income, henceforth they are an appealing method for raising capital if
the entrepreneur is readied to take the risk included.( Hiro, 2010)
Leases
In lease the leasing organization purchases the asset and the asset is then
given the business to its utilization. Not at all like a contract buy the
responsibility for resource stays with the renting organization. The business
pays a rent all through the renting period. The renting firm is known as the
lessor and the client as renter or lessee. Renting is of two sorts, to be specific
Finance rent and Operating lease. (Hiro and Sofat, 2010)
Fund Lease
This is the place the tenant's regular installments include up to no less than
90% of the aggregate estimation of the resource.

Operating Lease
This lease does not keep running for the full existence of the asset and the
renter is not at risk for the full estimation of the benefit. The remaining risk is
obtained by the lessor.
Own capital
Own capital if accessible, is the most ideal method for financing a business.
There is no loan to pay back, no interest to pay and in addition no compelling
reason to reply to another person. The main issue with own capital is that it
is generally restricted, so it is mostly suited for sole-proprietorship where
constrained financing is required. Own capital is likewise suited for little
organizations, which implies they are not responsible to banks. This is
otherwise called self-fund or vehicle account. At the point when selffinancing, organizations appear to be more cautious and computing of their
cash. Individual resources can likewise be sold to raise money for auto
account. (Hussain, 1996)
Government Grants
Governments offer grants to new organizations. These grants more often
than not have a few terms and conditions joined to them. New organizations
are beneficial to an administration in light of the fact that they build
livelihood and create charge. Subsequently most government offer new
organizations by offering them some assistance with granting. The
government particularly offers awards to extends in regions that are in meed
of financial advancement. The demerits of government grants is that they
require a considerable measure of printed material and organization. These
grants are entirely observed on the grounds that they leave of tax-payers
amount. (Watson and Head, 2010)

2.3
Type
decisions
Strategic
decisions

Tactical
decisions

of Who
makes What decisions to make
the decisions
Directors/owne Strategic decision are long haul in their effect.
rs
They as a rule influence and shape the heading
of the whole business and are generally made
by the senior chiefs. For an illustration, senior
administration in an hotel needs to settle on the
strategic choice of holding or selling off a
business unit. Along these lines the data
required to settle on this choice would be, long
haul turnover/offers of the specific business unit
against the possible economic situations.
(Business Essentials, 2007)
Managers
Tactical decisions manage executing systems of
the company and for the most part made by the
middle administration. Tactical decisions of an
hotel business might be, whether to open the
hotel early and close late. Middle administration
would require data on likely client numbers to
settle on the choice of opening the hotel for
more. (Fardon, 2005)

Operational
decisions

Employees

The choices made relating with everyday

running of the business are called operational
decisions and the obligation of settling on these
choices lies with the assistant or middle

managers. For instance, the choice to order

more chicken than pork for one week from now
in a hotel is made by the assistant
management. They would require data on the
stock and the week by week offers of the hotel.
(Hiro, 2010)

Annual report
An annual report is a complete report on a Organization's activities all
through the preceding year. Annual reports are proposed to provide
shareholders and other concerned people information on the Organizations
activities and economic performance.

Source: www.tata.com
Financial Statements
Income statement
The income statement is one of the three essential budgetary statements
used to evaluate an organizations execution and money related position
.The statements outlines the expenses and revenues generated by the
organization over the whole reporting period.
Balance sheet
A balance sheet is a depiction of a business budgetary condition at a
particular flash in time, for the most part at the end of a close period. A
balance sheet includes liabilities, assets, and stockholders' or proprietors'

equity. Liabilities and assets are isolated into short-and long haul
commitments including cash records, for example, money market, checking ,
or government securities. (Hiro, 2010)
Cash flow statement
Cashflow statement is the budgetary statement that measures the money
produced or utilized by an organization as a part of a given period.

Task 3
3a
Budget
An estimation of the income and expenditure over a predefined future
period. A financial plan can be made for a man, family, groups of individuals,
business, government, nation, multinational association or pretty much
whatever else that profits.
Cash Budget
Description

Period
ending
July
2015
50000

Opening Balance B/f

Cash Inflows:
Sales
150000
Cash Outflows:
Cash Purchases
52000
Credit Purchases (2 months
credit)
Rent
45000
Other expenses
10000
Loan repayment
10000

Period
ending
August
2015
83000

Period
ending
Septemb
er 2015
126000

Period
ending
October
2015
101000

100000

125000

120000

32000

74000
46000

82000
20000

15000
10000

20000
10000

45000
20000

Net Cash Flows

83000

126000

101000

54000

Closing Balance C/f

83000

126000

101000

54000

Utilisation of cash surplus

A money surplus is the money that surpasses the money required for
everyday operations. How you handle your money surplus is pretty much as
vital as the administration of cash into and out of your income cycle.
Two of the most common uses of extra cash are:
paying down your debt
investing the cash surplus

3b
Cost plus Pricing
Total Direct Costs
Fixed Costs
Total Costs

20000
10000
30000

Number of units produced = 500

Therefore cost per unit = 30000 500
= 60 per unit
Mark-up Option
Mark-up is 33.33% on cost
= 60 x 33.33%
=20
Selling Price = 60 + 20 = 80
Profit = 20 x 500 = 10000
Return on Capital employed option
Return required = 20%
Capital employed = 10000
Therefore return = 2000

On 500 units
Return per unit = 2000 500 = 4 per unit
Selling price = 60 + 4 = 64
Choose higher selling price which is 80
It gives 10000 return
Company should choose 80 if they want to increase the profitability but if
there is competition then they can choose 64.
3c
Description
Investment
Cash Flow 1
Cash Flow 2
Cash Flow 3
Cash Flow 4
Total CFs

Prod A
50000
20000
17500
25000
32500
95000

Prod B
50000
23750
23750
23750
23750
95000

Prod C
50000
20000
15000
12500
25000
72500

Payback Period
Prod A = 20000 + 17500 + (1250025000) = 2 yrs. 6 mths
Prod B = 23750 + 23750 + (2500 23750) = 2 yrs. 2 mths
Prod C = 20000 + 15000+ 12500 + (2500 25000) = 3 yrs. 1mth

Net Present Value

PRODUCT A
Year

Cash Flow

Discount Factor

Present Value

-50000

-50000

20000

0.909

18180

17500

0.826

14455

25000

0.751

18775

32500

0.683

22197.5

Total Present
value

73607.5

Net
Present
Value

23607.5

PRODUCT B
Year

Cash Flow

Discount Factor

Present Value

-50000

-50000

23750

0.909

21588.75

23750

0.826

19617.5

23750

0.751

17836.25

23750

0.683

16221.25

Total Present
value

75263.75

Net
Present
Value

25263.75

PRODUCT C
Year

Cash Flow

Discount
Factor

-50000

-50000

20000

0.909

18180

15000

0.826

12390

12500

0.751

9387.5

25000

0.683

17075

Present Value

Total Present
value

57032.5

Net
Present
Value

7032.5

Accounting rate of return (ARR)

Total Cash Total
Flows
Investment

Net
Cash ARR
Flow
per
year
45000/4 = 11250/50000*
11250
100 = 22.5%

Product A

95000

50000

Product B

95000

50000

45000/4
11250

= 11250/50000*
100 = 22.5%

Product C

72500

50000

22500/4
5625

= 5625/50000*1
00 = 11.25%

Company should select Project B as it is more profitable and pays back

quickly.

4.1
Explain the purpose of income statement and balance sheet
Why these financial statements are prepared?
The purpose behind financial statements is investment analysis utilizing the
Balance Sheet (money related position), Income Statement (productivity)
and Cash Flow Statement (working, financing activities, and investing) of an
organization.
Financial statements or fiscal statements are utilized by shareholders,
officials, workers, potential lenders, investors for example, banks or sellers,
and whatever other individual or establishment that needs to examine an
organization. (Business Essentials, 2007)
Organization Financial Statements
The Balance Sheet shows a preview of assets, total assets (book value) and
liabilities of an organization at a particular point in time (i.e. Dec. 31, 2014).
It is the perfect accounting statement for breaking down the money related
position of a person or organization.
The Income Statement gives the incomes, profits, and expenses of an
element over a particular timeframe (quarterly or yearly).
The Cash Flow Statement indicates where an elements money is
originating from and where it is going to. This statement isolates the income
from operations, financing activities, and investing in a consolidated
articulation.
Capital is part of equity and represented under shareholders equity section.
Company raises the capital by issuing shares and it receives cash. For capital
invested the shareholders require return which is called dividends. Dividends
are paid from the after tax profits in income statement.

4.2

A business that is carried on by a sole proprietorship is owned by one person,

who also usually runs and manages the business. There may or may not be
people working in the business these are referred to as employees of the
business
and
the
owner
is
the
employe

Legal
requiremen
ts

Sole trader
The sole proprietorship
gets all benefits and is
lawfully required to
hold up under and
fulfill all misfortunes
personally.
Is easy to set up and
work.
Gives you full control
of your advantages
and business choices.
Requires less reporting
necessities and is for
the most part an ease
structure. (Hiro and
Sofat, 2010)
Permits you to utilize
your individual Tax File
Number (TFN) to lodge
tax

Partnership
An organization
includes two or more
individuals going into
organizations together
so as to make a profit.
There are no lawful
necessities of framing
an association, yet
accomplices like to
sign a Deed of
organization.
The Deed of
partnership includes:
partners names
partners addresses
responsibilities of
partners
The share of each
partner
Rights of the partners
Duration of the
partnership
(Fardon,2005)

Limited company
A limited company
under UK law is one
registered
at Companies
House. It must
operate within
the Companies Act
2006 and is
governed by its
own articles of
association.

Articles of
Association
Memorandum of
Association
Directors and
Company Secretary
Debt
Registered office
Insurance
requirements
Accounting
requirements
Website
requirements
Business stationery
requirements

AGM requirements
Structure

A sole trader is the

simplest form of
business structure.
It is generally simple
and cheap to begin
and keep up.

an association of
people or
entities running a
business together, but
not as a company.

The private Limited

Company
structures allow
for new shares to
be issued to
incoming investors,
so accommodating
Angel or Private
Equity investors

Income Statement
Statement of Partners'
Capital
Balance Sheet

Balance Sheet
Income Statement
Statement of Cash
Flows
Retained Earnings

Numerous sole traders

select to trade under
their own name
Types of
Financial
statements

Balance Sheet
Statement of Financial
Performance
Statement of changes
in owners equity
Statement of Cash
Flows

Publication
of F.S.

press release
Use Twitter
Use Facebook
Set up a website
Start a blog
Email marketing
Convert your
customers into
promoters

Start a blog
Email marketing
Convert
customers
Use Twitter
Use Facebook

Email marketing
Convert your
your customers into
promoters
press release
Use Twitter
Use Facebook
Set up a website
Start a blog

4.3
Ratio

Calculation

Interpretation

Current Ratio =
Current assets / Current Current
Liabilities
680/450
=1.51:1

This
ratio
measure
ratio
= liquidity, because it is
less than 2:1, hence
there may
not be
sufficient money to pay
the bills. Lower cash on
hand (less than 2:1)
may not be able to pay
bills
Acid Test Ratio=
Lower than the ideal of
(Current
assets
Acid ratio = 680- 1:1, the organization
inventory)/
Current 300/450
may be able to pay
Liabilities
= 0.84:1
expenses and bills.

ROCE=
Net
Profit/Capital
Longterm liabilities

Net Profit margin=

Net profit/sales*100

Gross Profit Margin=

Gross profit/sales*100

References

ROCE = (230/ 880) * Higher Profitability is

+ 100
better; get 26%P
= 26%

Net profit = (230/800) Higher profitability is

*100
better and for every
= 28.75%
pound of sales the
profitability after taking
into account all the
expenses is 28.75 p.
Higher profitability is
Gross
profit
= best, for every pound
(650/800) * 100
of sales,
profit is
= 81.25P.
Taking
into
81.25%
account the goods sold
only.

Business Essentials - Unit 2 Managing Financial Resources and Decisions:

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Business Essentials: Managing Financial Resources and Decisions2009 by
BPP Learning Media
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Gorchels, L. (2006) .Product Managers

Handbook. United Street: The

McGraw-Hill Companies.
Hiro, P. and Sofat, R. (2010) .Basic Accounting. Delhi: PHI Learning Pvt Ltd.
Hussain, A. (1996).Business Finance. Nairobi: East African Educational
Publishers Ltd.
IM Activity Pack: Managing Financial Resources: Project Planning and
Financial Control4 March 1999 by John Cullen and Mick Broadbent
Managing Financial Resources (Managing Universities & Colleges: Guides to
Good Practice) 1 November 2001 by Thomas
Measuring and Managing Operational Risks in Financial Institutions: Tools,
Techniques, and other Resources (Wiley...18 December 2000 by Christopher
Lee Marshall
Watson, D. and Head, A. (2010) .Corporate Finance. (5th. ed.).Essex: Pearson
Education Limited.