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Introduction To Finance

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Introduction

Finance can be defined as the monetary resources that are required by all the business entities in order to execute business operations. For all the organisations it is very important to manage funds appropriately so that business goals such as profit and sales maximisation could be achieved (Brealey and et.al., 2012). If managers in companies are not able to manage it properly then it create problem of of lack of financial resources which interrupt execution of business activities. This report is based upon analysis of different topics such as various corporate codes which can help to prevent corporate scandals, advantages for an organisation of registering as s sole trader etc. Along with this, formulation of different budgets, calculation of various costs and different investment appraisal methods are also covered under this report.

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QUESTION 1

a. Various corporate governance codes which may prevent corporate scandals and collapses

Corporate governance: It can be defined as the collection of different types of rules, regulation and principles that are imposed by legal authority of a country for all the business entities that are executing business in a country. For all the companies it is very important to comply with them in order to ignore corporate scandals and collapses. Some of its codes are as follows:

Organisation for economic cooperation and development principles: It states that all the business entities or corporations are required to follow specific guidelines that are made for financial reporting and auditing. With the help of it possibility of corporate scandals can be reduced because it can help to keep track record of operations which will be beneficial for business activities (Frino, Hill and Chen, 2015). It adds different features to the final accounts such as transparency, full disclosure etc.

Stock exchange listing standards: According to this code of corporate governance it is very important for a company who is offering shares to public to list itself on a registered stock exchange. With the help of it corporate collapses could be reduced because it will help to decrease the possibility ot governmental interference in business operations.

b. Advantages for an organisation of registering as a sole trader

If an organisation register itself as a sole trader then there are various benefits for it to that enterprise. All the advantages of it are as follows:

  • If a company is registered as a sole trader then the owner will be the only boss and power of decision making is not required to be shared with other partners of people within the organisation.
  • In sole traders owner keeps all the profits so if an organisation is registered as a sole trader then all the profits could be kept by single person who is the owner of business.
  • A sole trader business could be established easily due to lack of limitations of recording, reporting and legal structures (Gitman, Juchau and Flanagan, 2015). And the organisations structure is also not required to be followed in this type of business as a single person executes all the business activities.
  • If an organisation gets registered as a sole trader then there is one main benefit of it to the company is that there is no legal implication regarding sharing information with public regarding business activities.
  • The business structure of a sole trader could be changed easily because if the owner plans to expand business in future then it could be done easily.

QUESTION 2

Budgetary Information from Z Ltd. (Given):

Particulars

 

£

Production Output

40000 units

5

Labour Hours (Skilled)

2 (hrs per unit)

18

Labour Hours (Unskilled)

1.5 (hrs per unit)

9

Expenses

35% of total labour cost

Fixed Costs for period

10000

a. Preparing Production Budget for the period:

Particulars

Units

£ per unit

£

Total Cost

40000

5

2000001

Add: (Skilled) Labour Cost

40000

18

1440000

Add: (Unskilled) Labour Cost

40000

9

540000

   

32

2180000

Add: Expenses

40000

9.45

693000

Add: Fixed Costs

40000

0.25

10000

Budgeted Production Cost

40000

72.075

2883000

1-Since there is no information provided regarding the units of opening stock or closing stock, it has been assumed that the £5 per unit is related to materials utilized in production of such output.

A production budget is one which is a comprehensive statement which details out a complete break-down of given information in the form of units of products manufactured by a particular organisation (Melicher and Norton, 2013). Utilizing this information, it has been ascertained that the total per unit production cost for the budgeted output is £72.075 which in monetary terms amounts to £2883000. Thus, one can say that the total unit cost incurred by Z Ltd. in the production of 40,000 unit for the next period is £72.075 per unit.

b. Calculation of Target Selling Price:

Particulars

Units

£ per unit

£

Total Cost

40000

7.25

290000

Add: (Skilled) Labour Cost

40000

26.1

2088000

Add: (Unskilled) Labour Cost

40000

13.05

783000

   

46.4

3161000

Add: Expenses

40000

25.12

1004850

Add: Fixed Costs

40000

0.3625

14500

Total Cost of Sales

40000

104.51

3723600

Utilizing the two tables prepared earlier in this section, the aforementioned table has been formulated. This table includes the ascertainment of Target Selling Price that must be taken into account by marking up the unit costs by 45%. Hence, the expenses worth £3723600 is ascertained as 35% of the total labour cost, that is, £2871000 (=£2088000+£783000). On the other hand, the Fixed Costs worth £0.3625 per unit is ascertained by marking up the unit fixed costs by 45%. Through this process, the targeted selling price per unit for the 40,000 units of output produced is £104.51.

c. Preparing a statement of Cash Budget of Z Ltd. of four months:

Given Information:

Second Month

60% of the unit price

Third Month

30% of the unit price

Fourth Month

10% in the fourth month

Finished Units Purchased

40000

Particulars

January

February

March

April

 

£

£

£

£

Purchase of Finished Units from Supplier

2883000

2883000

2883000

2883000

Payment to Supplier for:

January

-

1729800

864900

288300

February

-

-

1729800

864900

March

-

-

-

1729800

April

-

-

-

-

Total Budgeted Cash

2883000

4612800

5477700

5766000

As per the information given in previous table, the above Cash Budget has been prepared. In order to ensure simplicity of calculations, it is assumed that the month initiates on the first of January. Another assumption that has been taken while preparing this budget is that the Finished Units purchased by Z Ltd. from its suppliers are 40,000 at £72.075 per unit on a monthly basis. Keeping this in mind, the payments made for the purchases have been shown for each purchase between the periods January and April. For instance, the 60% of the unit price paid to the supplier for January Purchase is allocated to February. On the other hand, the purchase of finished units made in February and other consecutive months have their 60% share payment allocated to March and other consecutive months.

d. Disadvantages of using Zero-based Budgeting System:

In the context of given case scenario, Z Ltd. has been utilizing various budgetary information in order to control costs of production while maximising profit. Keeping this mind, various drawbacks of using Zero-based Budgeting System have been advised to its management which have been discussed as under:

  • Time Consuming as it includes initiating of planning of all functional costs from scratch at the beginning of each financial period (Ross, Westerfield and Jaffe, 2013).
  • Since it includes complete refurbishing of functional costs, higher number of manpower is required to formulate the ideal Zero-based Budget for the company.

Thus, adoption of this system would result in incurring of excessive costs for Z Ltd. as well as expertise to explain the inclusion or exclusion of cost related to each task.

QUESTION 3

Given information:

Particulars

Costs

Cost of 1 month

Annual rent

15000 Yearly

1250

Marketing cost

3000 Quarterly

1000

IT

2 Per consultation

250

Energy drink

1.25 per consultation

156.25

Labour

10 per consultation

1250

Consultation charges

18 per consultation

2250

a. Calculation of total fixed costs per month

Particulars

Amount

Rent (15000 / 12)

1250

Marketing expenses (3000 / 3)

1000

Total fixed expenses

2250

b. Calculation of variable cost per month

Particulars

Amount

IT cost (125 * 2)

250

Energy drink (125 * 1.25)

156.25

Labour cost (125 * 10)

1250

Total variable expenses

1656.25

c. Calculation of contribution per month

Particulars

Amount

Charges per consultation (125 * 18)

2250

Less: Variable expenses

 

IT cost (125 * 2)

250

Energy drink (125 * 1.25)

156.25

Labour cost (125 * 10)

1250

Contribution per month

593.75

d. Break even number of consultations required per month

Break even point in number = Fixed cost/ contribution per unit or consultation

= 2250 / (593.75/125)

= 2250 / 4.75

= 473.68 or 474

e. Strengths and weaknesses of cost volume profit analysis

Cost volume profit analysis: It can be defined as a technique which is used by business entities to determine their contribution which is remaining after deducting all variable expenses from sales or revenues. The contribution is firstly used to recover all the fixed costs and then the remaining amount is considered as profits for the organisation (Schwienbacher and Larralde, 2012). Main objective of using it is to determine relationship between profit, volume and cost of specific business units. With the help of it ability of an organisation to generate profits could be measured. In other words it could be defined as a planning process which is used by managers for the purpose of forecasting future volume of production, sales, costs and profits which could be acquired in future. There are various strengths and weaknesses of this technique which are as follows:

Strengths:

  • Cost volume profit analysis help top level executives to formulate strategic decisions for future by helping them to determine value of actual expenses and incomes which has taken places for a specific time period. With the help of it they will be able to make strategies in which they can plan to enhance overall profitability of organisation.
  • With the help of cost volume profit analysis detailed information of organisation's activities could be gathered. It can guide managers to forecast future sales, profits and losses which may take place in upcoming period of time.
  • It helps to find break even point for the organisation so that it can be determined that when amount of units are required to be manufactured in order to cover all the expenses and investments that are made in business.
  • It is considered as the base of plans that are made for various purposes such as marketing, budgeting etc.
  • As it guides managers to forecast future sales and revenues so it can also help them to make budget according to requirements of organisation.

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Weaknesses:

  • Cost volume analysis can result in different human errors because for managers it is not possible to record information in a precise way and if detailed data is recorded in books then it can result in human errors (Shoup, 2017).
  • As it is based upon projection and future is uncertain so it is not possible to trust the projections to make appropriate business decisions.
  • It taken number of units in to consideration to project costs and revenues for future period but it could not be the only driver to forecast the same.

QUESTION 4

a. Various Funding Options in terms of Debt and Equity available to the entrepreneur

Funding Options related to debt and equity help in reducing costs and providing flexibility to the available working capital with the entrepreneur. In the context of given case scenario, the solicitor invests £1,000 from her savings. She aims to accumulate the rest of the capital from external funding options which have been discussed as under:

Type of Funding Option

Advantages

Disadvantages

Angel Investing

Prove to be less risky than debt financing as this investment is not required to be paid back in event of bankruptcy (Van Der Wijst, 2013).

Loss of complete control of the start-up itself.

Bank Loans

Available as a fixed source of funding for a fixed term including interest payments.

This option requires collateral security which can result in forfeiting of the asset in the event of bankruptcy.

Personal Sources of Income

Cheap source of Finance as the entrepreneur is already having a fixed source of income through her other business venture. Thus, resulting in time-saving too.

May result in decline of retained funds for that business which has been undertaken by the solicitor.

b. Key Differences between discounted and non-discounted methods of investment appraisal

For any organisation, investment appraisal methods play an important role as they help in measuring the feasibility and viability of a project that is considered as a potential opportunity for the enterprise. Due to this reason, a company may apply various discounted and non-discounted methods of investment appraisal. Discounted techniques of investment appraisal are those which ascertain Future Cash flows by discounting them using a certain figure, usually Weighted Average Cost of Capital (WACC) to determine their present day values. These include calculation of NPV, IRR of the projects (Yescombe, 2013). On the other hand, the Non-Discounted methods of investment appraisal are ones which derive cash flows on their current values. Mostly these include determination of Payback period as well as Accounting Rate of Return.

Thus, the key difference between the two is the utilization of discounting factor to derive present value of the given future cash flow figures.

Conclusion

From the above project report it has been concluded that finance is an element which is required by all the business entities to conduct operational as well as executional activities. With the help of it long as well as short term goals could be achieved by utilising monetary resources appropriately. If an organisation is not able to manage funds properly then it can leave negative impacts on operational efficiency. There are various techniques which could be used to determine actual status of the company these are cost volume analysis, investment appraisal techniques etc. Companies can also formulate budgets such as production so that actual cost of business activities could be analysed.

References

  • Brealey, R. A. and et.al., 2012.Principles of corporate finance. Tata McGraw-Hill Education.
  • Frino, A., Hill, A. and Chen, Z., 2015.Introduction to corporate finance. Pearson Higher Education AU.
  • Gitman, L. J., Juchau, R. and Flanagan, J., 2015.Principles of managerial finance. Pearson Higher Education AU.
  • Melicher, R. W. and Norton, E. A., 2013.Introduction to finance: Markets, investments, and financial management. John Wiley & Sons.
  • Ross, S. A., Westerfield, R. and Jaffe, J. F., 2013.Corporate finance(pp. 353-54). McGraw-Hill/Irwin.
  • Schwienbacher, A. and Larralde, B., 2012. Alternative types of entrepreneurial finance. InThe Oxford Handbook of Entrepreneurial Finance.
  • Shoup, C., 2017.Public finance. Routledge.
  • Van Der Wijst, N., 2013.Finance: a quantitative introduction. Cambridge University Press.
  • Yescombe, E. R., 2013.Principles of project finance. Academic Press.
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