MOD003319 Business Finance

TASK 1

i)

Profitability can be defines as the profit earning capacity of the organization. Profit ca be explained as the amount left after paying all the expenses. In addition to this, without profitability none of the business can survive for the long period. This can be measured by considering income and expense of the company. The profitability of the organization can be measures with the help of income statement. In order to attain the profitability of the firm, there are different methods are available for the business. Whereas, the profits can be calculated with the help of four methods such as net profit margin, gross profit margin, comparative expense analysis and profit by statements. In addition to this, net profit margin can be calculated with the help of revenue less expenses. On other hand, gross profit margin can be calculated by deducting sales revenue minus cost of goods sold. In addition to this, comparative expense analysis helps in identifying the percentage of the data related with two years. All these methods helps an organization to address the profits of the company (Budgeting, 2013).

In context to above, cash flow statement is a document which depicts the inflow and outflow of the cash in an accounting year. It mainly consist of three activities like operating, investing and financing activities. In operating activities there are different activities includes such as receipt form the sales of loan, payment to the supplier etc. It can be said that, operating activities are the one which is based on transaction related to the operations of the business. It also includes all the items which are related with gain or loss of the business. In context to this, investing activities are those which are used for the investment purpose of the business. If any investment is done in the business then it is included in investing activities. The examples of the same are purchase and sales of assets (Broadbent and Cullen, 2012). In addition to this, payment related to mergers and acquisition is also comes under this head. In context to this, financing activities are the one in which the cash flow is done with the help of investors. The examples of the same are purchase of shares and dividend paid. However, this can be concluded that, cash flow and profitability are distinct with each other. In order to calculate the cash flow of the company there are two methods. It consist of direct and indirect method are considered to measure the amount of cash flow statement. The effect of profitability can be analysed with the help of profit and loss account. The effect of cash flow statement is on the balance sheet (Drechsler and Natter, 2012).

ii)

The motive of working capital management is to identify the continuous working of the company operations. With the help of this concept a firm can evaluate its sufficiency to meet both the short band long term expenses. However, the stated organization can measure its working capital by deducting current liabilities from current assets. If the working capital of the company is good then it sates that cash convertible efficiency of the company (Chazi, Terra and Zanella, 2010). The positive working capital of the company defines the ability of continuous operations. It can also be said that the time taken by the business to convert the assets into cash. The shorter the cycle the better the position of the company and vice versa. In addition to this, working capital financing can be done with the help of different methods such as lines of credit, trade credit, factoring and short term loans. The working capital of the company can be positive or negative where the firm needs to analyse the optimum level. As per the case study the working capital of the company is not that good. This concept helps the company to identify its operating efficiency. The working capital of the company can be managed with the help of certain techniques and tools which are given below (Chazi, Terra and Zanella, 2010).

Cash management: It is necessary for the organization to identify the cash availability of the company. For the same, the management needs to take care of the cost and expenses. This should not be increased on the daily basis.

Inventory management: This is the most important area where the firm is required to focus on the management of the inventories. For the same, the organization needs to adopt the inventories control methods such as just in time and economic order quantity. These methods will help the management to make a proper data of the raw material used and remained (Drechsler and Natter, 2012).

Debtors management: This is the next tool which should be adopted by the company. Here the firm needs to focus on the credit policy of the organization. The management needs to focus on managing discounts and allowances. This will help the company to make an effective management of the debtors (Annual Report and Accounts for 2015).

Short term financing: The company can adopt the short term financing process so that it will be able to meet out its operational expenses on daily basis.

Iii)

1. Manage working capital actively throughout the organization – the company can improve their working capital by way of proper management flow and right strategy plan (Anderson and et. al., 2015). Thus, it is only possible by circulating proper fund flow within the organization.
2. Considering the alternative funding – The alternative funding is the most important factor which is helpful in worse situational (Bazerman and Moore, 2012.). This fund arranges by enterprise by using long term planning. It collected with small portion an used when it is needed.
3. Pay supplier at appropriate time period – any of the organization supplier play a important role because he provides good as organization nature (Broadbent and Cullen, 2012), further, this person also provide credit to enterprise when they needed, therefore, when enterprise pay to supplied at specific time period then its make a good image of company in the mind of supplier (Kaplan and Atkinson, 2015). Thus, they are also ready to supplier good even in enterprise face a worse condition.

Mange stock activity – Maintenance of stock activity is important because it is indicated to undertaking for whole operation with proper manner (Moynihan and Pandey, 2010). Therefore, the activity of stock at every level is important for manage working capital. In addition, it is highlighted to on pinpoint area to management for situation which may arise in future time period.

1. Manage payment process more effectively – in the modern time period, every organization focus on online mode payment because it is more accurate, reliable and recorded item (Siano, Kitchen and Giovanna Confetto, 2010). Every payment should be cashless for proper management of fund. Even in organization payment should be online by using system.

2. Distributing of responsibilities – the responsibilities must be serve to different person in organization further, particular person will be liable for specific work only. It is liable to person completing work (Raising capital: Equity vs. Debt. 2009).
3. Internal audit – This is the universal concept for every organization for check their books of account with proper manner. Further, this method, help to detect fraud and error arise during transaction (Anderson and et. al., 2015). Therefore, when every would be reliable and accurate then working capital will manage with proper manner.
4. Enterprise resources planning – it is one of the software program application which has used within the organization for manage whole undertaking operation (Bazerman and Moore, 2012). This system has operated by every department for every transaction. So that accuracy of transaction has been maintained. Therefore, ultimately it helps to manage each transaction.
5. Six segama rules – it is scientifically proved rules which exhibit that organization must considered on 0% defect (Broadbent and Cullen, 2012). Further, chances of error must be null.
6. Access current position - The management should be considered the past data and record for analysis of current position of enterprise (Kaplan and Atkinson, 2015). It is because of it shows the actual position of organization with proper manner. So that, on basis of past record management assumed some idea for strategy (Moynihan and Pandey, 2010).
7. Track of performance – knowing of performance is necessary because when it is known then it is easy to known that what action should be taken for manage working capital (Siano, Kitchen and Giovanna Confetto, 2010).

TASK 2

I)

Capital budget process is important in every organization because it helps to manage it with scientific manner (Raising capital: Equity vs. Debt. 2009). Therefore, for the maintenance purpose, organization has various option to choose. There is mainly five stage is under followed for managing capital budgeting.

1. Identify and evaluate potential opportunities – for the purpose of capital budgeting, it is necessary to evaluate the initial opportunities for organization with proper manner (Anderson and et. al., 2015). Therefore, enterprise should focus on various option and find out the appropriate option as their business need and requirement (Bazerman and Moore, 2012). Along with, it should link with future need as well for better capital
2. Estimate operation and implementation cost – the higher authority should also be considered for operation cost as well as implementation cost (Buhovac, 2014). It is necessary for taking right decision with appropriate method and techniques. Therefore, only focus on cost of assets is irreverent if operating and implementation cost is much higher during operation (Epstein and Buhovac, 2014). Generally, finance management check it by using comparing method.
3. Estimate cash flow benefits – Management should be focus on long term benefits on capital assets. Therefore, they should also consider on benefits which arise in future time period. The profitability must be divided in estimate year (Raising capital: Equity vs. Debt. 2009). Along with, they should also evaluate cost recover time period. In last, brief analysis of recovery of cost provide the mathematical review which gives appropriate suggestion for long term benefits.
4. Assess risk – The risk factor in the organization is most considerable thing because of earlier preparation is necessary for protecting from any tragedy (Siano, Kitchen, and Giovanna Confetto, 2010). On the other hand, management should also prepare for alternative in their strategy because of this protect from any of the risk to enterprise.
5. Implementation – management should implement the plan by reviewing every considerable thing. Along with, he should discuss with higher authority and related department.

Method are as follows-

• Net present value method – this type of method has based on value analysis with particular time period (Moynihan and Pandey, 2010). Therefore, total value of revenue and cost has converted in to present value for particular time period. This method has based on money value which has reduced particular time basis (Kaplan and Atkinson, 2015). Its main objective is to provided present value of capital investment for purpose of showing net value.
• Internal rate of return – it shows investment efficiency with scientifically method (Buhovac, 2014). Further, cost of capital investment in company works out to be more than the Internal rate of return value, the whole project would be rejected. On the other side, vice versa situation emerged.
• Profitability Index – This method is based on calculation of value per unit of capital investment (Moynihan and Pandey, 2010). On the other hand, it is also identified by ratio between investment and profit investment ratio. Thus, it is simply a compared ratio with invested amount and profit amount.
• Pay back period – this method is mostly based on net present value method, further, it shows recovery investment in particular time period (Siano, Kitchen, and Giovanna Confetto, 2010). Investment funds amount for future time is analysis by the analyzer with focusing various factor. Apart from this, it is totally based on standard assumption which may probably to not correct 100% (Epstein, and Buhovac, 2014.). but it may provide appropriate information to take decision.
• Real Option Analysis – this method provide the data which is based on real data (Bazerman and Moore, 2012). Further, this shows option for investment and shows every cost and factor link with investment. Therefore, management choose real option as their company situation.

II)

As per the given case scenario, EyeWatering Inc should focus on following of factor is as under:

• Investment – management of EyeWatering Inc should check on cost of both the investment. Further, there call of the Assassins Part XXIII is required more investment than Coalmining & Oil Extraction. In addition, different of 4 billion pound investment.
• Recovery time period – both of the investment gives different time where both has recovers. Where Call of the Assassins Part XXIII takes a 2-4 year for recovery whole amount. On the other hand, Coalmining & Oil Extraction, takes 4-5 year for recovery (Anderson and et. al., 2015). But different may be vary on the basis of amount of Investment.
• Useful life - Management should be considered useful life of capital assets because it shows the long term benefits. Further, if it is good then management opt as accordingly (Broadbent and Cullen, 2012.). On the other hand, long term benefits should be considerable for choosing any of the assets. Thus, assets provide short term benefits is not considerable for investment.
• Index value – for propose of find out the present value of assets, index value must be considered (Kaplan, and Atkinson, 2015). Management required the estimate index value on which 'present value can be evaluate with proper manner.
• Graphical representation – For the purpose of easy undertaking , graphical representation is necessary because of it shows the real situation which management should be considerable. It is generally used in real option method for purpose of comparing of two assets.
• Depreciation – it is the most important thing which management have to considered while analysis of both assets (Siano, Kitchen and Giovanna Confetto, 2010). Therefore, every value for different year are calculated after deducting depreciation value.
• Revenue – Management must be focusing on this factor for taking decision making. Every organization is based on profit. Therefore, manager choose capital assets on the basis of revenue earned.

iii)

It can be assessed that implementing both real option method and present value method is suitable for firm to examine the effectiveness so that success can be attained. Through using such method it assists in making effective decisions and thus analyse that EyeWatering Inc helps in making effective decisions regarding investment within different proposal and selecting the most suitable so that good amount of return can be gained (Broadbent and Cullen, 2012). From the given case it can be identified that cited business plans to invest within two different projects i.e. Call of the Assassins Part xxiii and Coalmining & Oil Extraction in regard to select the most suitable option for EyeWatering Inc and thus which among them could give high return in small time period.

Business aims to invest at least $ 10 million in Call of Assassins Part xxiii and thus expects that return will be obtained in next 2-3 years and machine will remain in well condition for 2-4 years after launching the product. While, business aims to make investment of $ 6 million in Coalmining & Oil Extraction and aim to gain fairly return in next 1-2 years which is very short time duration (Anderson and et. al., 2015). Thus, it would benefit firm in increasing the profitability of firm in market. However, the machine will run for around 4-5 years which is also high as compared to Call of the Assassins Part xxiii. Thus, it could be assessed that through carrying put comparison between two different machines, EyeWatering would like to invest in Coalmining & Oil Extraction business as it is requiring low investment and giving high return over a small time period. Further, machine will also run for long time period and will get obsolete in future. Therefore, it is essential for business to make effective decision and thus implement real option method and present value method so that its life can be identified as well as decision could be made in regard to implement the results that selecting Coalmining & Oil Extraction business for investment is crucial as it assists in gaining high return over a small time period.

Conclusion

It can be concluded from the study that business finance needs to be assessed effectively in regard to carry out wide range of activities and thus helps in solving the problems faced within firm. The main purpose behind preparing business finance report is that it assists in assessing the main different between financial statements and thus evaluate the business performance in market. Further, it identifies that EyeWatering Inc aims to take decision in regard to invest within Coalmining & Oil Extraction because here investment of $ 6 million is required that will be gained in 1-2 years and also the machine will run for around 4-5 years in future.

References

• Ahmed, A., 2010. Global financial crisis: an Islamic finance perspective. International Journal of Islamic and Middle Eastern Finance and Management.3(4). pp.306-320.
• Anderson, D. and et. al., 2015. An introduction to management science: quantitative approaches to decision making. Cengage Learning.
• Bazerman, M. and Moore, D. A., 2012. Judgment in managerial decision making.
• Brigham, E. F. and Houston, J .F., 2012. Fundamentals of financial management. Cengage Learning.
• Broadbent, M. and Cullen, J., 2012. Managing Financial Resources. 3^rded. Routledge.
• Broadbent, M. and Cullen, J., 2012. Managing financial resources. Routledge.
• Chazi, A., Terra, S. R. P. and Zanella, C. F., 2010. Theory versus practice: perspectives of Middle Eastern financial managers.European Business Review. 22(2). pp.195-221.
• Drechsler, W. and Natter, M., 2012. Understanding a firm's openness decisions in innovation. Journal of Business Research.65(3).pp.438-445.
• Epstein, M. J. and Buhovac, A. R., 2014. Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.

UPTO50%

Avail The Benefit Today!

To View this & another 50000+ free

Enter Email

Submit