Financial Management

Main Body

Estimations and assumptions

As Mr Danial is a retired employee of a chemical firm and got £730000 at the retirement in a lump sum amount. After getting retired Danial is planning to be a part of retail industry of France by selling rose oil there which is going to be imported form Bulgaria. For this purpose a financial managers have been asked by Danial to analyse the sensibility of the new business idea and its viability. While preparing final accounts, cash budget and conducting sensibility analysis various figures are assumed. A detailed financial plan is also being conducted for the client in order to make sure that it won't result in monetary disaster (Dunham-Taylor, 2014)(.

It has been assumed that demand of bottled rose oil will be increased with 70 bottles per month and at the end of the year it will reach to 820 and then remain constant for remaining five years. With the increment of 70 bottles each month the transactions will also be increased by 5% for the same time period. It has also been assumed that 16 kilograms rose oil will be purchased by Danial from Kazanlak Oils which an established producer of rose oils in Bulgaria. Other assets such as copyright which was taken from KO are also shown in balance sheet amounting £721838 are estimated by the financial manager while formulating final accounts (Cornwall, Vang and Hartman, 2016).

Justifications: These assumptions are made as they are required to formulate the financial plan. As it was mentioned by the client that in first month 50 bottles are going to be sold and at the end of the year it will meet the full level of demand which is 800 units. It has been assumed that it will increase by 70 bottles per month to meet that level. Rate of transaction is being assumed as it is required for sensitivity analysis because it shows the relationship between two variables that are dependent and independent (Fredrick, 2013).

Break even analysis

Break even analysis: It is a technique which is used to determine that point where the organisation or a business may reach to a level that may result in the situation of no profit and no loss. It shows relationship between fixed cost and contribution per unit or profit margin ratio (Break even analysis,2019). A calculation of break even point for Mr Danial's business is as follows:

Selling Price = £45

Selling units = 5220

Total sales = £243300

=5220*45 + 240*35

= £234900+8400

= £243300

Rent = £850 per month

= 850*12+3

= £12750

Salary = £33400

Employee = £15500 each yearly

= £15500*2

= £31000

Assistant = £200 per month

= £200*12

= £2400

Packing material = 5220*5.50

= £28710

Shipping Charges = 5220*8.20

= £42804

Commission = 1.3% of 234900

= £3054

Decoration Expenses = 240*0.80

= £192

Carriage inward = 230*12

= £2760

Break even point (Units) = Fixed cost / Contribution per unit

= 60150/31.76

= 1893.89

= 1894 units (approx.)

Fixed cost = £60150

Contribution per unit = Contribution margin / unit sold

= 165780/5220

= 31.76 (approx.)

Break even Sales = Fixed cost / P.V ratio

= 60150/68.14%

= £88274.14

= £88274 (approx.)

P.V ratio = Contribution / Sales *100

= 165780 / 243300 *100

= 68.14%

The above analysis dictates that Danial is required to sale at least 1894 bottles per year in order to recover all the costs and the total amount of sales should be £88274.

Profit and loss statement and balance sheet for first year

Profit and loss statement: All the incomes and expenses of a business are recorded in this statement and then net profit or loss is calculated for a specific time period. Only non operating expenditures and revenues are showed in P & L. It guides the managers to assess that they are generating profits or bearing losses. It is also used in financial decision making process by internal and external stakeholders (Dener and Young (Sandy) Min, 2013). If all the relevant and appropriate information is transcribed in this account then it may help outsider parties to make investment in the business projects. When accurate data is not recorded in P & L then it is not possible for them to analyse actual position of business. Expenses like salaries, depreciation, rent, interest paid, postage, legal charges etc. and incomes like commission received are considered as the part of this account. A profit and loss statement for Danial is as follows:

From the above profit and loss account it has been analysed that at the end of first year Danial may acquire a profit of £32428. Gross profits for the same period are £91064. Total sales for first year is 243300 which includes cash sales to Nina and other sales to the market. Purchase for the same period is £155376 which is based on an estimation of buying 16 kilogram of rose oil in France. The accounts is showing that the business may survive in the market and Danial can establish it successfully in France (Zimmerman and Roberts, 2012).

Balance Sheet: It is also known as statement of financial position in which all the assets, liabilities and equities are recorded in order to analyse fiscal status of a business. It helps the internal stakeholders to analyse weakness of the organisation and then form strategic decision to deal with it. Machinery, furniture, cash, investments, stock, bills receivables, debtor etc. are considered as assets. Share capital, retained earning etc. are recorded in equities and creditors, loans, advances are treated as liabilities. A balance sheet for Danial is as follows:

The above balance sheet shows that Danial have invested £730000 in the business which is considered as the capital and total capital also includes net profits if £32428 that are carried forward from profit and loss account. Danial have also planned to take a loan of £75000 which is shown in the liability side of the balance sheet. Machinery of £450, refrigerator of £8500 and Equipments of £5200 have been purchased by Danial in first year hence all of them are shown in the assets side of balance sheet. Cash of £64540 is taken from the monthly cash flow and it is the closing balance of last month. Stock of £36900 (820*45) is kept as Danial is willing to maintain a stock of four weeks. Balance amount of £721838 is considered as copyrights as the client have taken the rights for six years from Kazanlak Oils which is producer of pure rose oils in Bulgaria (Odoyo, Adero and Chumba, 2014).

Monthly cash flow

All the cash related transactions are recorded in this statement. It may guide the organisation to assess closing balance of cash at the end of the year. It is very important for all the business to formulate it so that detailed information can be recorded about organisation's transactions. It also helps to assess that the business is generating cash for the financial year or not (Degeorge and et. al., 2013). A monthly cash flow for Danial is as follows which is based on the sensibility analysis:

From the above cash flow it has been analysed that at the end of the year Danial will have a closing balance of cash which is £64540. In starting there is no opening balance because it is new business idea. Nina have planned to buy 20 boxes from Danial each month and the payment is going to be made on the next month hence in first month there is no payment is made by Nina. The selling price for each box which is having one bottle of rose oil is £35.

Sales to Nina= £35*20 =£700

Sales in france is based on the sensitivity analysis in which in first month the sales is 50 bottles and it is increasing with 70 bottles per month. At the end of the year it has reached up to 820. All the units are taken from the table below and per bottle selling price is £45. There is no information is provided regarding purchase of raw material hence it is distributed in all the months on an average basis (Cleere, 2012). As in each moth 20 bottles are going to be sold by the Danial to Nina hence the amount of decorative paper is calculated as follows:

20*£0.80 =16 per month.

Cahrges of hiring people were £15500 and all of them are recorded in each month on an average basis.

Sensitivity analysis: It is a tool which is used by most of the business to analyse relationship between two variables that are dependent and independent. A sensitivity analysis for Danial is as follows:

It has been assumed that if demand increases with 50 bottle per month then transactions are going to be increased by 5% per month and at the ned of the year the organisation will reach to the sales of 820 bottles per month (Bodnar and et. al., 2013).

From the above table it has been analysed that at the end of first Mr. Danial may sale 5220 bottles of rose oil and the total amount of transaction for the demand of 5220 will be £795856.33. With the increment of demand sales will also get increased and it results in enhanced incomes. Sales is increasing by 70 bottles per month and transactions are enhancing by 5% per month (Taani, 2012).

Conclusion

From the above project report it has been analysed that financial management is the process of assessing viability and success of a business idea. There are various tool that can be used by finance manage of the businesses. These are sensitivity analysis, estimation, profit and loss account, balance sheet, cash flow etc. All of them may guide the entrepreneurs and owners to make strategic decisions for the organisation.

Recommendations

As analysed from the above report the business is highly sustainable in the market but Danial have planned to keep its sales constant from second year. It has been recommended that import of Rose oil should be increased by Danial as it may result in higher profits and incomes for future period.

Critical Reflection

I have been asked from Danial to prepare a financial plan for the the business idea of him in which he has planned to import rose oil from Kazanlak Oils, producer of rose oil in Bulgaria. I have analysed the attractiveness of the business with the help of different methods of financial management such as sensitivity, break even analysis, cash flow, profit and loss statement and balance sheet. Various data which is taken by me is based on assumptions and estimation. It includes the increment in the demand of customers by 70 bottles per month, enhancement in transactions by 5% per month and the amount of copyright which is shown in balance sheet of Danial. He has provided me all the relevant information regarding the business idea and the other information is collected by me from different sources such as internet and computers.

As it is a new business idea and is have also analysed that it will be profitable for Danial because it is resulting in a good profits form him so I have recommended him not to limit the sales at 820 bottles.

References

• Bodnar, G. M. and et.al., 2013. Risk Management for Italian NonFinancial Firms: Currency and Interest Rate Exposure. European Financial Management. 19(5). pp.887-910.
• Cleere, H., 2012. Introduction: the rationale of archaeological heritage management. In Archaeological heritage management in the modern world (pp. 27-46). Routledge.
• Cornwall, J. R., Vang, D. O. and Hartman, J. M., 2016. Entrepreneurial financial management: An applied approach. Routledge.
• Degeorge, F. and et.al., 2013. Analyst coverage, earnings management and financial development: An international study. Journal of Accounting and Public Policy. 32(1). pp.1-25.
• Dener, C. and Young (Sandy) Min, S., 2013. Financial Management Information Systems and Open Budget Data: Do Governments Report on Where the Money Goes?. The World Bank.

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