Managing Financial Resources for Specialty Fine Food and Drink Contract

This assignment discusses the sources of financing accessible for a business and evaluates the implications and costs of the identified financing sources. It also recognizes finance as an important resource for the business project and analyzes the costs of the financial sources identified. The assignment further explains the significance of financial planning and details the financial planning assumed. It identifies and assesses the information requirement by the internal and external decision takers and justifies the impact of finance on the financial statements. Finally, it derives financial decisions from the identified financial information.

ASSIGNMENT
TOP308 - UNIT 2 MANAGING FINANCIAL RESOURCES
STUDENT NAME:
STUDENT ID:
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
LO 1: Sources of financing accessible for a business......................................................................3
AC 1.1 Identification of the financing sources accessible by a business........................................3
AC 1.2 Assessment of the implications or the inferences of the identified financing sources........4
AC 1.3 Evaluation of the suitable financial sources for the business project..................................5
LO 2: Recognition of finance as an important resource for the business project............................6
AC 2.1 Analysis of the costs of the financial sources identified.....................................................6
AC 2.2 Explanation on the significance of financial planning and details of financial planning
assumed............................................................................................................................................6
AC 2.3 Identification and assessment of the information requirement by the internal and external
decision takers.................................................................................................................................7
AC 2.4 Justification of the impact of finance on the financial statements......................................7
LO 3: Deriving financial decisions from the identified financial information................................9
AC 3.1 Analysis of project cash and budgets for appropriate decision making..............................9
AC 3.2 Calculation of unit costs and determination of pricing decisions based on relevant
information....................................................................................................................................10
AC 3.3 Assessment of the viability of the contract through various investment appraisal methods
and necessary recommendations....................................................................................................11
Task 2.............................................................................................................................................12
LO 4: Evaluation of the financial performance of J Sainsbury Plc...............................................12
AC 4.1 Discussion of the significant financial statements............................................................12
AC 4.2 Description and comparison of the financial statements with respect to different types of
businesses......................................................................................................................................13
Conclusion.....................................................................................................................................15
Reference list.................................................................................................................................16
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Introduction
Management of the financial resources has been one of the most significant tasks over the ages
for entities for undertaking business activities successfully. The government of the United
Kingdom has put forward an arena of opportunities for the small business firms to work on the
contracts of the central government in the country. For the purpose of the given assignment, a
contract on ‘Specialty Fine Food and Drink’ has been chosen from the contract finder
(Contractsfinder.service.gov.uk. 2017). Further, analysis of the financial sources and
implications and costs involved in accessing the chosen financial sources have been presented in
the assignment in order to assess the overall impact on the financial statements. Financial
budgets and investments appraisal techniques are implemented to assess the viability of the
chosen contract. In the last section, an analysis of the financial statements of J Sainsbury Plc has
been presented to evaluate the financial performance of the company.
Task 1
LO 1: Sources of financing accessible for a business
AC 1.1 Identification of the financing sources accessible by a business
In order to undertake the contract of ‘Specialty Fine Food and Drink’ in the UK, it is important
to identify and assess the availability of the financial resources for the business. Initial
investment will of £ 200000. Therefore, the bid will not exceed £ 300000 for the chosen contract.
With respect to the financing context, the entrepreneur has £ 20000 to invest in the business. For
the purpose of the entrepreneurship business the different financial sources available are internal
and external sources of finance.
Internal Sources
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The internal sources of finance have been identified as retained earnings, saleable value of the
assets and working capital for the business. First, the retained earnings are identified as an
available source of finance for the business as it is the profit used in the business after
distributing the dividend to the shareholders or the providing a return to the owners. Second,
another important internal source of financing for the business is the ‘sale of assets’. The
proceeds from the ‘sale of assets’ are usually used for funding the capital requirements of the
business (Armstrong et al. 2010). Third, reduction in the working capital requirement by the
adjusting the account payables or account receivables ensures reduction in working capital
obligation and therefore, the funds meant for working capital can be employed for other
financing obligations.
External Sources
The external sources of finance available to a business are owners’ contribution, bank overdrafts,
trade creditors and long term loans. Owners’ contribution has been identified as the money
invested by the owner or the shareholders’ in order to commence and continue the business.
‘Bank overdraft’ is a source of funding provided by the banks in order to fund the short term
obligations of a business (Beyer et al. 2010). The persons that provide business materials on
credit basis have been identified as trade creditors and are a source of external business funding.
In addition, long term loans provided by the banks or the financial institutions are a source of
external funding requiring the business to payback the principal amount with interest on
maturity.
AC 1.2 Assessment of the implications or the inferences of the identified
financing sources
Implications of the internal sources
The internal sources of finance have multiple insinuations in the form of advantages and
limitations. The benefits of accessing the internal sources of finance are immediate availability of
capital, absence of interest payments at regular intervals and controlling procedures with respect
to creditworthiness of the business. Other benefits are, third party influence is not present giving
the owners more flexibility and freedom to pursue the business (Brigham and Ehrhardt, 2013).
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However, certain limitations of the internal sources of finance are absence of tax benefits and
limited capital expansion.
Implications of the external sources
Through the use of external sources of funding, businesses are provided with the opportunity of
investing the internal sources of finance in other profitable business investments providing
higher return. In addition, access to external financing sources provides growth opportunities that
the business would not be able to fund on its own. However the limitation of external funding is
dilution of ownership and the fixed interest payments to be provided to the investors.
AC 1.3 Evaluation of the suitable financial sources for the business project
For the business project undertaken through the contract named, ‘Specialty Fine Food and Drink’
it is observed that the suitable financial sources for the business project will be in the form of
external and internal sources. External sources in the form of Owners contribution, long term
loans, bank overdraft and trade creditors are recommended for the business. Owners contribution
to the extent of £ 20000 will be provided in the business. The remaining capital will be financed
through long term loans availed from the banks and financial institutions as the business do not
have a very high contribution from the entrepreneur (Gov.uk. 2017). For the purpose of the long
term loans the business the loan will be secured by the asset to be purchased with the loan
amount identified as ‘primary security’. The loan has been identified as a fixed obligation for the
business. ‘Bank overdraft’ facilities should be implemented as external sources of finance in
order to cater the short term funding requirements.
The internal sources of financing to be availed by the business should be in the form of retained
earnings, working capital management and sale of assets. By using the retained earnings as a
source of finance the business will be able to generate increased level of operational flexibility
and freedom (Broadbent and Cullen, 2012). In addition, various explicit cost in the form of
floatation cost, interest and dividend are not present. Through efficient management of the
working capital cycle the funds can be utilized for other business needs. In order to cater certain
long term finance needs the business may sell off certain assets or equipments used in the
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business previously but not in use in the current scenario for the purpose of undertaking
investments in the business.
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LO 2: Recognition of finance as an important resource for the business
project
AC 2.1 Analysis of the costs of the financial sources identified
Through ages it has been observed that the lifeline of any business have been identified as the
‘capital’ for the business. For obtaining the capital for the business it is important to identify and
assess the costs associated with the sources of financing. With respect to the internal sources of
financing it has been observed that in case of retained earnings certain amount of opportunity
costs are present. Financing through sale of assets involves the costs of repairing and maintaining
the assets and the cost of depreciation. In context to the external sources of finance, the costs
associated with the owners or shareholders contribution are in the form of dividend paid to the
shareholders (Katz and Green, 2009). The costs involved in the long term bank loans are in the
form of interest payments that is required to be paid through installments along with the principal
amount. In addition, in order to avail the bank loan the business is required to provide a
guarantee or security to the bank so that in the event of any failure to repay the loan amount the
bank can exercises ownership on the property secured against the loan.
AC 2.2 Explanation on the significance of financial planning and details of
financial planning assumed
Financial planning is identified as the process of analyzing and setting up a detailed course of
action in order to undertake and perform the financial activities involved in a business. Financial
planning helps in managing the income and expenditure of the business effectively thereby
monitoring the cash outflows and inflows of the entity successfully. By increasing the cash flow
the business is able to generate higher amount of capital and investments for itself. Thereby,
resulting in overall improvement of the financial position of the business. Financial planning
helps in assessing the liabilities associated with a particular set of assets and improve the
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liquidity position of the business (Siano et al. 2010). For the business project under
consideration, appropriate financial planning in the form of assessment of the available financial
resources, projected budgets, implementation of investment appraisal techniques and analysis of
the costs have been undertaken in order to formulate a suitable business plan for the project.
Through the analysis of the costs the expenditure to be incurred by the business are determined.
Formulation and analysis of the projected budget helps in determining the expected expenditure
and income of the business in the future (Sullivan, 2009). Through investment appraisal
techniques the viability of the contract undertaken is determined in order to assess the
investments options in the future.
AC 2.3 Identification and assessment of the information requirement by the
internal and external decision takers
For the purpose of pursuing the business activities successfully, the internal and external decision
makers of the business require diverse form of financial information. The internal decision
makers in the form of the management, owners and the employees require financial information
in order to undertake the activities of the planning, scheming, controlling and decision making
process. The internal decision makers require financial information in the form of accounting
information and managerial information (Lusardi, 2012). The external decision makers
comprising of creditors, customers, investors and regulatory authorities require information for
the purpose of investing in the company, availing the services of the company and protecting the
interests of the stakeholders of the business. The creditors of the business need accounting
information in order to assess the credit worthiness of the entity.
AC 2.4 Justification of the impact of finance on the financial statements
The main reason behind preparing and presenting the financial statements are the sources and the
activities related to financing. In order to identify, assess and analyze the performance of the
financing options undertaken the financial statements are prepared (Santos and Elliott, 2012).
Any form of increase or decrease in the finance availed in the business directly creates an impact
on the financial statements of the entity.
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Influence on the financial statement by the various identified sources of
finance
Finance and financing activities have a significant or major amount of impact on the financial
statements of an entity. Different activities of financing have concurrent impact on the financial
statements namely income statement, balance sheet and the cash flow statements. It has been
observed that items or components such as sales, capital of the owner, expenses, cost and
borrowings creates an impact on the financial statements. As and when companies undertake
transactions simultaneously the items of the financial statements are affected. Taking the items of
the income statement and the balance sheet an analysis is presented henceforth (Hoitash et al.
2009). When a business undertakes the activities related to sales, the income statement is directly
affected thereby increasing the revenue and net profit of the entity. On the balance sheet the
revenue generated in the income statement is reflected through the accounts receivables.
Financing activities in the form of capital generation through issue of shares are reflected in the
balance sheet while the dividend provided to the investors from the profit generated creates an
impact on the income statement by decreasing the retained profits.
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LO 3: Deriving financial decisions from the identified financial information
AC 3.1 Analysis of project cash and budgets for appropriate decision making
Projected Cash Budget
Projected Cash Budget
January
(Amount £)
February
(Amount £)
March
(Amount £)
April
(Amount
£)
May
(Amount
£)
June
(Amount
£)
Opening
Balance 1000 -4680 -3160 -1540 180 1650
Income
Cash Sales 4000 4700 4900 4800 5000 5200
Credit
Sales nil 700 900 800 400 500
Loan 7000 nil nil nil nil nil
Total
Income 11000 5400 5800 5600 5400 5700
Expenditu
re
Rent 800 800 800 800 800 800
Electricity 80 80 80 80 30 30
Purchases 5600 1900 2000 1800 1900 1800
Wages 1200 1100 1300 1200 1200 1200
Equipment
s 9000 nil nil nil nil nil
Total
expenditur
e 16680 3880 4180 3880 3930 3830
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Net Cash
flow -5680 1520 1620 1720 1470 1870
Closing
Balance -4680 -3160 -1540 180 1650 3520
Projected Sales Budget
Projected Sales Budget
January
(Amount £)
February
(Amount £)
March
(Amount
£)
April
(Amount
£)
May
(Amount
£)
June
(Amount
£)
Units 500 510 520 530 550 550
Sales Price 8 10.59 11.15 10.57 9.82 10.36
Cash Sales 4000 4700 4900 4800 5000 5200
Credit Sales nil 700 900 800 400 500
Total
Estimated
Sales 4000 5400 5800 5600 5400 5700
AC 3.2 Calculation of unit costs and determination of pricing decisions based
on relevant information
Calculation of Unit cost
Item (Amount £)
Steak 2
Vegetables and other ingredients 1
Labour 2.5
Overheads 2
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Cost of meal 7.5
Mark up cost (20%) 1.5
Vat (20%) 1.5
Price of meal 10.5
Depending on the cost determined the pricing decision has to be undertaken. In the current
context, ‘mark up pricing’ have been undertaken to determine the average price of the meals to
be provided by the ‘Specialty Fine Food and Drink’ business.
AC 3.3 Assessment of the viability of the contract through various investment
appraisal methods and necessary recommendations
Year Cash inflows (In pound) Discounting factor @ 10% Present value of cash inflow
0 -2000000 1 -2000000
1 650000 0.909 590850
2 550000 0.826 454300
3 350000 0.751 262850
4 480000 0.683 327840
5 455000 0.621 282555
6 255000 0.564 143820
Total Present value from cash flows 2062215
Less: Initial Investment 2000000
Net Present Value 62215
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Interpretation: As per the initial investment to be made in the project the cash inflows of the 6
years have been presented along with the Net Present Value of the project which is £ 62215.
Task 2
LO 4: Evaluation of the financial performance of J Sainsbury Plc
AC 4.1 Discussion of the significant financial statements
Cash flow statement: In order to evaluate the liquidity position and leverage of an organization,
statement of cash flow should have to be prepared by the financial analyst for interpreting the
financial result appropriately. Main factors of this financial statement are cash flows from
investing activities, cash flows from financing activities and operating activities. These factors
can help to evaluate the closing balance of cash flows that can lead to analyze liquidity position.
Statement of Financial position: It has been considered that statement of balance sheet is the
main financial statement prepared by financial analysts and accountants containing assets,
liabilities and stockholders equity (Healy and Palepu, 2012). In a balance sheet total assets and
total liabilities should have to be equalised properly as per the accounting rules and regulation
from which annual result can be evaluated.
Comprehensive income statement: Income statement of an organization is considered as an
important financial statement from which the business analyst or project manager can interpret or
analyze the annual report of the company for a particular period of time appropriately. Main
aspects of income statements are gross profit, operating expenses, earnings before interest and
tax and profit after tax from which financial performance and growth level for a period can be
evaluated effectively.
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AC 4.2 Description and comparison of the financial statements with respect to
different types of businesses
In has been observed that firms and businesses functioning within the business environment have
prepared and presented the financial statements according to the business operations of the
entity. Depending on the nature and size of the business the structure, details and the content of
the financial statements are presented. Through the balance sheet, assets and liabilities of the
business are presented while the income statement encompasses the incomes and expenses of the
business. It has been observed that the presentation and preparation of the balance sheet varies
with the nature and size of the business (Fridson and Alvarez, 2011). Business entities operating
multiple units prepare the multi step income statements whereas small businesses prepare single
step income statements. Depending on the nature of business such as sole proprietorship,
partnership or company the financial statements are presented. It is noticed that the financial
statement prepared by the sole traders and the partnership organizations are simpler than that of
the financial statements prepared by the companies. Further, the public limited companies are
required to abide by the International accounting standards and the International Financial Report
Standards (IFRS) while making appropriate disclosures about the financial operations of the
business. The financial statements of the small organizations focus on the profits only while the
financial statements of the larger entities are required to provide financial reports encompassing
multiple items related to finance.
AC 4.3 Interpretation of the financial statements of J Sainsbury Plc using
suitable ratios
Ratio Analysis of J Sainbury PLC
Formula
(in million of
GBP) 2016
(in million of
GBP)2015
Liquidity Ratios
Current Ratio Current assets/Current liabilities 0.66 0.64
Current assets 4413 4421
Current liabilities 6720 6923
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Acid test ratio
(Current assets - inventories)
/Current liabilities 0.51 0.49
(Current assets -
inventories) 3445 3424
Current liabilities 6720 6923
Profitability
Ratios
Operating Income
Margin Operating Income/Net Sales 3.01 0.34
Operating Income 707 81
Net Sales 23506 23775
Net Profit Margin Net Profit/Net Sales 2.33 -0.30
Net Profit 548 -72
Net Sales 23506 23775
Return on Assets Net Income/Total Assets 0.03 -0.01
Net Income 471 -166
Total Assets 16973 16537
Efficiency Ratios
Asset Turnover Net Sales/Total Assets 1.38 1.44
Net Sales 23506 23775
Total Assets 16973 16537
Leveraging ratios
Debt ratio Total liabilities/Total assets 0.62 0.67
Total liabilities 10608 10998
Total assets 16973 16537
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Earning Per share
EPS Net Earnings/ Number of Shares 0.22 0.15
The comparative ratio analysis of J Sainsbury Plc indicates that the company has a mediocre
liquidity position as the current ratio and the quick ratio of the company are quite low when
compared against the standard liquidity ratios. Further, the operating profit margin and the net
profit margin of the company are quite low (Fernandes et al. 2014). However, it observed from
the financial ratios that the company has improved its financial performance in the year 2016 in
comparison to the previous year 2015. In addition the debt ratio of the entity at 62% and 67% is
considered to be very high in comparison to the standard debt ratio which is considered to be
around 15% or less.
Conclusion
From the research assignment it is inferred that the business project of ‘Specialty Fine Food and
Drink’ to be undertaken in the UK have to be commenced assessing the necessary finance
options provided in the report. The business option appears to be viable which has been
determined through the investment appraisal technique. Further, the entrepreneur is required to
assess the pricing decision depending on the cost analysis of the products to be offered through
the business presented in the report. In addition an financial analysis of J Sainsbury Plc is
presented which indicates the financial position of the entity in the current scenario.
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