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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Business Management Assignment: Managing Financial Resources and


Mr. John Opoku


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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Table of contents
Executive summary Introduction
Chapter I ...
1a.) Sources of finance 1b.)Source of finance situation 1c.) Important of finance plane for living wood 1d.)Help for Decision making 5 6-7 7 7

Chapter II .
2a.) Ratio calculate 2b.) Deferent between other finance statements 3-11 11

Chapter III
3a.) Nature and purpose of material and labour 3b.) Calculate material and labour 3c.) Comment on variances calculation 12 13 14

Chapter IV ..
4a.) Breakeven Points 4b.) Contribution to sales 4c.) Target Profit 4d.) Target Profit 4e.) Payback/ARR/Net present value/ internal rate 15 15 15 15 16-18

Chapter V .
5a.) Cash budget 19

Chapter VI
6a) Financial Strategies 20


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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Executive Summary
In this repot author will describe that medium sized private liability Furniture Company to identify source of finance available in company and calculate and analyses. Also author will analyses financial sources in the ratios and variances. Overall author will try to create good financial plane for Living wood company by identifying deferent kind of weakness and strength.

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Chapter I 1.1 Introduction:

The business world is currently facing a plethora of pressures in terms of finding credit to finance their business. Currently there is a great short fall in money in the markets. As a result most companies and fighting to stay afloat. The business world is facing the biggest credit crunch since the late 1940s.

In this report the Living wood furniture Retail Company will be taken as an example to show the sources of financing available for businesses, implications of finance as a resource within a business, make financial decisions based on financial information and analyses and evaluate the financial performance of a business.

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

1a.)Identify the sources of finance available to Living wood

Finance plays an important part of modern business world. Financial resources are every business success point. Without a financial backup whole company will be unproductive. There are two main finance types in business that are long term and short term finance. The definition of Short term financial sources is that a company that will able to gain finance in a shorter time. They are, bank loans, over drafts, trade credit, leasing, credit cards. Loan term financial sources are Bank loans, Share capital, Debentures, Asset sales, Venture capital, owners capital. When it comes to living wood same financial sources are help to living wood authore will mention some of important finance for living wood, - its good idea for the living wood because this case study

-Getting lease

they describe about getting two machines but financial manager told that they dont have money to buy it so getting lease is better to boost the production. -Credit facility from the supplier - ask the supplier from credit, -Issues shares - Living wood is the small private limited company the

shareholders can bring in capital by issuing the shares. -Bank loan - Living wood get over from their current situation and because of

their previous profits the management will be able to get a good reply from their bank. -Bank Overdraft - Living wood careful about inters and before going to like this

financial source should think they have ability to pay over draft.

Figure 1: Sources of financing for SMEs, SMEs survey report 2008

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon 1b.)Why would some sources of finance be more appropriate or better in some situation than the others?

When financial comes to business there are two types of major sources that are internal and external, Internal sources: Sales of capital Working capital Personal servings Retained profits External sources: * Ownership capital * Non-ownership capital

Because of this deferent sources of finance style some situation better than other situation. Its same as Living wood for an example, taking loans or debentures will be a good idea than getting shares for living wood because if taking loan monthly payment or interest fixed it good for Living wood. The urgency of funds

The Cost of source of finance

The Control of the business

The Amount of money need

The Risk involved

The gearing ratio of The business

The duration of finance

Figure 2: To method of identify finance situation, Field work.

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

When taking source of finance for living wood this type of section management should identify then they can understand which finance situation better for each time for the Living wood

1c.) Why is financial planning important to Living wood? Financial planning takes on a critical role for business owners. In the current situation for Living wood need good financial plan because in the organization everyone has a deferent ideas so no one dont have common ideas to expand the company because of this main reason need financial plane for Living wood.

For the Living wood financial plan most important because anybody can see it from profit and loss account that the company is able to make a profit of only 7.41%.and if the buy new machine buy borrowing the funds for which the cost of capital to the company may range in between 10% to 12% may bring down living wood profit as compared to the last year.

1d.) How does it help decision making

Financial planning help in decision making and management can know various sources of funds on companys profitability and give a more clear vision.

In Living wood two owners is, to make their mark at the global market. But the problem that they are having is the lack of technology and the experience. The author believes that by keeping a good financing planning, and when their profits are high they can react as fast as they can and enhance more business.

Another reason of keeping financial planning is the team members can get a clear picture of the company also they can share their ideas on the other hand it will be help to tack a decian about company for the management.

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Part 2
2a.) Ratio Calculate and analyse of 2007 and 2008

Liquidity Ratio

Current Assets Current Liabilities

Acid Test Ratio

Current asset-stock Current Liabilities

The figures show that the cover for current liabilities has improved slightly in year 2. Current assets were increased by 17% and current liabilities were increased by 47% between two years. These figures show a business has cash or near cash available to settle its short-term liabilities. A business is solvent if its assets are more than adequate to meet its external short-term and long-term liabilities.

The ratios indicated that it has dropped from 1.09:1 to 0.84:1 between two years. On the other hand Living wood doesnt have sufficient funds to pay their creditors.

2007 1 Liquidity Ratios 1.1 Current Ratio 154 79 = 1:1.9 181 116

2008 =1:1.56

Acid Test 1.2 Ratio

154-68 79


181-83 116


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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Return Capital employed = Net profit before interest and tax Capital employed Gross profit Sales x 100 x 100

Net Profit Margin

The figures increase from 7.4% in year 1 to 8.47% in year 2 reflects the net profit between the two years and changes in the level of expenses and sales. According to

the figures, sales were increasing by 20% and net profit was increasing by 38% between two years. Net profit margin rose because of the sales increase by (20%). This ratio indicates overall profitability. In Living woods case it has improved from 20% to 26.84% between two years. Although Living wood has improved its assets utilization from 2.7 to 3.17, this advantage has been completely off settled by the increase from 7.4% to 8.47% in the net profit before interest and tax ratio.

2 Profitability ratio Return on capital 2.1 Employed

37 185

x 100 =


51 190

x 100 = 26.84%

2.2 Net profit margin

37 499

x 100 =


51 602

x 100 =


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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Productivity/Activity Ratio = Sales Capital employed

The calculations show that Living woods utilized its net assets more effectively in year 2 than in year 1. An alternative way of expressing the results of the calculation is to say that the net assets employed generated sales 3.17 times and 2.7 times greater than their own value or that each 1 of net assets produced 3.17 and 2.70 worth of sales, respectively, showing the improvement in utilization between the two years.

3 Productivity / Activity Ratio Asset Turnover 3.1 Ratio 499 185

2.7 times

602 190

3.17 times

Efficiency Ratio

Debtors Average sales per day

In year 2, debtors took only one day to pay their accounts from the date they were invoiced, a small improvement on the year 1 situation. (4 days) Living wood shows the excellent management procedures for collecting debt.

Efficiency 4 Ratio Debtors Collection 4.1 Period

6 499/365

4.38 days

2 602/365

1.21 days

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Financial Gearing Ratio

= Long term loans Capital employed

x 100

The figures shows that both years have identical amounts of total finance but year 1 has a low geared ratio (29.7%) and year 2 has a high geared ratio (31.6%)

5 Financial Gearing Ratio 5.1

55 189


60 241


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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Part 3 Material price variance 3a.) Nature Change in price per unit, Material Usage variance Chang in quantity Consumed per unit of Output


Quality of input purchased And evaluate terms

Quantity and quality of output

labour price variance Nature Change in labour rate per hour

labour usage variance change in labor rate per unit

Purpose -

To evaluate personnel department In terms of their recruitment pattern As compared to standard

To evaluate production department in terms of quantity produced.

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon 3b.) Material Variances Direct Material Total a) Variance

(Standard Cost - Actual Cost)

(240 x 108 - 26,400)

480 A

Direct Material Price b) Variance

(Standard Price - Actual Price)Actual Quantity

(9 - 10) 240

240 A

Direct Material Usage c) Variance

(Standard Quantity - Actual Quantity) Standard Price 2,160 F

(12 x 240 - 2,640) 9

Labour Variances a) Labour Total Variance = (Standard Cost - Actual Cost) 2,232 A

(240 x 60 - 16,632)


Labour Rate Variance

(Standard Rate - Actual Rate)Actual Hours 1,512 A

(6 - 6.60) 2,520

c) Labour Efficiency Variance

(Standard Hours - Actual Hours) Standard Rate

(10 x 240 - 2,520) 6

720 A

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

3c) Comment on variances calculated Total material variance standard cost Actual paid =25920 =26400 =480 (A)

Total labour variance Standard rate Actual paid =14400 =16632 =2232 (A)

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Part 4 a) Selling price 5 / variable cost 12 / Fixed cost 5400 BEP in unit = Fixed cost Unit contribution = 5400 (15-12)

= 1800 unit

BEP in sales Value

= Fixed cost Unit cost

x selling price

5400 3

x 15

= 27,000

4b.) Contribution for sales =

contribution Sales 3 15 20 %

x 100

x 100

4c.) Target Profit

= Fixed cost + Target Profit Unit contribution = 5400 + 8400 3 = 4600 unit

4d.) V/Cost =13 / FC =600 / SP = 15 Target profit = 6000 + 9000 2 = 7500 unit

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon 4e.) Machine- A Year Net cash flow 12% Discount rate Present value 20% Discount rate 0 1 2 3 4 5 -2,000 800 800 800 400 100 1.000 0.893 0.797 0.712 0.636 0.567 NPV -2,000 714 637 569 254 57 231 1.000 0.833 0.694 0.579 0.482 0.402 NPV - 2,000 666 555 463 193 40 -83 Present value

Machine- B Year Net cash flow 12% Discount rate Present value 20% Discount rate 0 1 2 3 4 5 -2,000 500 500 500 500 100 1.000 0.990 0.980 0.971 0.961 0.951 NPV -2,000 495 490 485 480 95 45 1.000 0.893 0.797 0.712 0.636 0.567 NPV - 2,000 446 398 356 318 57 -425 Present value

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Internal Rate of Return Machine A

= X + (Y X)

a (a + b)

X- Lower discount rate used / Y= higher discount rate used = 12 + (20 12) 231 (231 + 83) = 12 + [8 (231 / 314)] = 12 + [8 (0.735)] = 12 + 5.88 = 17.88 % Internal Rate of Return - Machine B = X + (Y X) a (a + b)

= 1 + (12 1)

45 (45 + 425)

= 1 + [11 (45 /470)] = 1 + [11 (0.096)] = 1 + 1.056 = 2.06%

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Accounting Rate of Return = Annual income Investment Machine A 800 + 800 + 800 + 400 + 100 = 2,900 2,000 = 900/5 = 180/2,000 x 100 = 9% Machine B 500 + 500 + 500 + 500 + 100 = 2,100 -2,000 = 100/5 = 20/2,000 x 100 = 1% x 100

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Part 5 5a.) APR 3000 MAY 1400 JUN JUL AUG SEP OCT (1630) (2410) (5510) (7440) (8550) NOV (9600) DEC (10,715)

Opening balance Sales Receipts Total receipts Payments Direct labor Raw Materials 75% 25% Variable cost 2/3 1/3

2500 3000 1400 870

2500 90




3750 (5850)

3750 (6965)

(3010) (3690) (4800)











750 250

750 250

900 250

1200 300

1200 400

1125 400

1200 375

400 -

400 200

400 200

480 200

640 240

640 320

600 320

640 300

600 320

Fixed cost Capital expenditure Total payment Closing balance 1600



480 2000














1400 (1630) (2410) (5510) (7440) (8550) (9600) (10715)


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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Part 6 6.1 The financial strategies of Living wood The author will describe financial strategies by using SWOT concept. It is the most using theory in the modern business world. SWOT concept include,

Figure 3: SWOT Image sources: First the author will review strength of living wood strength mean positive areas of Living wood finance are: The other strength point that the Living wood has is the reduction of current liabilities. T he author describes that it has reduced by a good margin. When liabilities like loan and debenture are in a low amount the company can enhance new machines, technology to the company to gain more profits. In this Living wood company has few weaknesses that are production capacity, Problem with production quality etc, many customers complaining about Living wood quality of product author high light that its the main weakness for living wood.

Threats, the author highlight that the new competitors have come to the business area and they are offering a wide number of products than the Living Wood this might be a serious problem for the future.

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon Conclusion: Starting up a business is exciting but involves many risks. To over come all problems and achieve greatness is a challenge but can be done through good financial planning. As seen in IKEA PVT, a good financial structure will always make the company strong. But before any business is going to start up it is a must to do market research.

As seen in IKEA, the furniture that is produced is expensive. This is because they are marketed for the high class society of

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Managing Financial Resources and Decisions 105649/Nipuna Weerakoon

Business and economics.,(2010) Source of finance for business[Online] [Accessed 24 April 2010] CIBS wood Gundy.,(n.d) Financial Planning Solutions[online] [Accessed 26 April] Collier, P, (n.d) Accounting for managers, (2ND edition), Gt Yarmouth, England.

HRM Advice., (2008)SWOT[online] [Accessed 1 May 2010] Reuvid., J(2009)Start up & run your own business (7th Edition),Kogan page limited, UK Westwood.,J(2006)How to write a marketing plane (3rd Edition)Kogan Page., UK

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