Concept of Financial Management: Doc

Financial
Management

EXECUTIVE SUMMARY
This project report is based on the concept of financial management in which a person
Danial is willing to establish a new business venture with the amount of €730,000. The business
plan includes the import of Rose oil form Bulgaria to France. The retired person have asked to
conduct financial management for the new idea with the help of assumptions and estimations.
For this purpose various aspects have been analysed including sensitivity analysis, cash flow
statement, profit and loss account, balance seep, break even and financial viability analysis etc.
At last a reflection related to overall analysis is also being provided. At the end a reflection is
also being provided regarding the attractiveness of the business idea. A recommendation
regarding enhancing import from Bulgaria is also being provided to Danial. It has been
recommended to Danial that if he is willing to achieve profits around 35000 then goods should
be imported from other country. It has also been suggested to Danial to enhance the sales from
70 bottles per month so that its transactions can also be increased by 5%. It will be beneficil to
reach at the level of selling 800 bottles per year.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Break even analysis................................................................................................................2
Profit and loss statement and balance sheet for first year......................................................5
Monthly cash flow..................................................................................................................8
CONCLUSION..............................................................................................................................14
RECOMMENDATIONS...............................................................................................................15
Critical Reflection................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Financial management can be defined as the process of planning, controlling, organising
and monitoring financial resources that are available within an organisation. It can be conduced
with the help of different elements such as final accounts, ratios, sensitivity analysis etc. It is
very important for all the business entity to conduct financial management on yearly basis so that
overall profitability and performance of business can be assessed (Grant, Ponsford and Bennett,
2012). In this project report a retired person Danial who is recently retired and got €730,000 in
lump sum payment, is planning to establish a retail business of rose oil. It is going to be sold in
France and imported from Bulgaria. In this assignment various topics are discussed for financial
management of Danial. These are sensitivity, break even, financial viability analysis, formulation
of cash flow statement, P & L account and balance sheet.
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%
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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). All the assumptions
are made because these are required to complete the tasks that are discussed in case study. Total
requirement of rose oil is estimated around 16 kilograms because total sales will be 5220 bottles
and stock of next month will be 820. Total bottles that are required in first year are 6040. each
bottle is having 2.5 grams. So the total requirement rose oil will be 15100. the demand can
fluctuate so the estimated rose oil which should be purchased from Bulgaria is 16 kilograms.
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:
Particular £
2

Sales 243300
less:- Variable cost
Packing material (28710)
Carriage inward (2760)
Shipping charges (42804)
Commission (3054)
Decoration Exp. (192) 77520
Contribution 165780
less:- Fixed cost
Rent (12750)
Salary (33400)
Web Development Exp. (7500)
Research (6500) 60150
Profit 105630
Selling Price = £45
Selling units = 5220
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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
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= £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
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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:
Trading and P&L Account
Particular £
Sales (5220*45 + 8400) 243300
Closing stock 36900
Total 280200
Less:
Opening stock (16*9711) 155376
Carriage inward 2760
Direct labour 31000
Gross profit 91064
Add:
Discount received 51274
Less:
Salary (200*12) 2400
Rent (850*15) 12750
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Packing material (5.50*5220) 28710
Website development exp 7500
Research Exp 6500
Shipping charges (8.20*5220) 42804
Commission (234900*1.3%) 3054
Interest paid 6000
Decoration exp. (0.80*240) 192
Net profit 32428
Note: 9711 pound is the value of 19000 bulgarian lev on the date when the profit and loss
account is generated.
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
7

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:
BALANCE SHEET
Liabilities £ Assets £
Capital
730000 Machinery 450
Add: - Net profit
32428 762428 Refrigerator 8500
Equipment 5200
Loan 75000 Cash 64540
Closing stock 36900
Copyright 721838
837428 837428
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
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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). The amount of loan which mentioned in the balance sheet
is being provided in the case study in which Danial is planning to take a loan from bank.
Copyrights are the main requirements that are important to operate business in other country and
Danial have to pay an amount of 721838 pound to the government of the country as a fee of
copyrights. If the business in not operated by Danial then it is possible that this money can be
saved and invested in other options such as shares or debentures or other securities.
Monthly cash flow
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:
Particular
First
mon
th
Secon
d
mont
h
Thir
d
mon
th
Fort
h
mont
h
Fifth
mont
h
Sixth
mont
h
Seven
th
mont
h
Eight
h
mont
h
Nint
h
mont
h
Tent
h
mon
th
Eleven
th
month
Twelf
th
mont
h
Opening
balance 38327
2783
0
1990
9
1456
4
1179
5 11602
1398
5
1894
4
2647
9 36590 49277
9

Receipts:
Sales to
Nina 700 700 700 700 700 700 700 700 700 700 700
Sales in
France 2250 5400 8550
1170
0
1485
0
1800
0 21150
2430
0
2745
0
3060
0 33750 36900
Loan
7500
0
Total (A)
7725
0 44427
3708
0
3230
9
3011
4
3049
5 33452
3898
5
4709
4
5777
9 71040 86877
Payments
:
Purchase
of raw
material
1325
5 13255
1325
5
1325
5
1325
5
1325
5 13255
1325
5
1325
5
1325
5 13255 13255
Rent 850 850 850 850 850 850 850 850 850 850 850 850
Security
deposit of
rent 2250
Refrigerat
or 8500
Filtering 5200
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and dosing
equipment
Research 6500
Shipping
charges 410 984 1558 2132 2706 3280 3854 4428 5002 5576 6150 6724
Charges of
hiring
people 1292 1292 1292 1292 1292 1292 1292 1292 1292 1292 1292 1292
Machine 450
Delivery
assistant 200 200 200 200 200 200 200 200 200 200 200 200
Decorative
paper 16 16 16 16 16 16 16 16 16 16 16 16
Total B
3892
3 16597
1717
1
1774
5
1831
9
1889
3 19467
2004
1
2061
5
2118
9 21763 22337
Closing
balance(A
-B)
3832
7 27830
1990
9
1456
4
1179
5
1160
2 13985
1894
4
2647
9
3659
0 49277 64540
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
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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.
Yealy cash flow:
Particular Amount
Opening balance 269302
Receipts:
Sales to Nina 7700
Sales in France 234900
Loan 75000
Total (A) 586902
Payments:
Purchase of raw material 159060
Rent 10200
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Security deposit of rent 2250
Refrigerator 8500
Filtering and dosing equipment 5200
Research 6500
Shipping charges 42804
Charges of hiring people 15504
Machine 450
Delivery assistant 2400
Decorative paper 192
Total B 253060
Closing balance(A-B) 333842
From the above table it has been analysed that total cash which is going to be acquired by
Danial in upcoming period will be 333842 pounds.
Six years cash flow:
Particular Amount
First year
Second
year Third year Forth year Fifth year Sixth year
Opening balance 269302 333842 286330 231168 170157 103849
Receipts:
Sales to Nina 7700 7700 7700 7700 7700 7700
Sales in France 234900 432000 432000 432000 432000 432000
Loan 75000 Nil Nil Nil Nil Nil
Total (A) 586902 773542 726030 670868 609857 543549
Payments:
Purchase of raw
material 159060 384000 384000 384000 384000 384000
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Rent 10200 10200 10200 10200 10200 10200
Security deposit of
rent 2250 Nil Nil Nil Nil Nil
Refrigerator 8500 8500 8500 8500 8500 8500
Filtering and
dosing equipment 5200 5200 5200 5200 5200 5200
Research 6500 9800 10200 15700 14200 12500
Shipping charges 42804 45320 48790 45871 51236 52458
Charges of hiring
people 15504 21400 25000 28400 29500 31400
Machine 450
Delivery assistant 2400 2600 2780 2648 2980 3240
Decorative paper 192 192 192 192 192 192
Total B 253060 487212 494862 500711 506008 507690
Closing
balance(A-B) 333842 286330 231168 170157 103849 35859
From the above table it has been analysed that at the end of sixth year Danial will receive
profit of 35859 pound.
Analysis of financial viability:
Present value:
Year
Cash
inflow PV Factor
Present
value
1 333842 0.909 303462
2 286330 0.826 236509
3 231168 0.751 173607
4 170157 0.683 116217
5 103849 0.621 64490
6 35859 0.565 20260
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914546
Net present value: Present value – initial investment
= 914546- 795856
= 118690
Payback period:
Year Cash inflow
Cumulativ
e cash flow
1 333842 333842
2 286330 620172
3 231168 851340
4 170157 1021497
5 103849 1125346
6 35859 1161205
Formula: Years before full recovery+ unrecovered cost at start of the year/ cash flow
during the year
=2+ 55484/286330
=2.19
Recommendation: From the above analysis it has been suggested to Danial that the
amount of his total investment will be recovered in 2.19 years. If he is willing to recover the
amount in less time then he should enhance the investment. After six years the present value of
the business will be 914546 so Danial should continue the business as he will attain higher
profits and good returns on the investment.
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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 (Eddie Mclaney and
et.al., 2018). 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).
Months Demand Transactions
First month 50 50000
Second month 120 52500
Third month 190 55125.00
Forth month 260 57881.25
Fifth month 330 60775.31
Sixth month 400 63814.08
Seventh month 470 67004.78
Eighth month 540 70355.02
Ninth month 610 73872.77
Tenth month 680 77566.41
Eleventh month 750 81444.73
Twelfth month 820 85516.97
Total 5220 795856.33
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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). It is estimated because for sensitivity analysis two variable are
required that are dependent and independent. Sales is dependent variable and transactions are
independent. Both of the figures are estimated to conduct a sensitivity analysis. This analysis
helps to shows that the funds that are required for the business will be around 795856.33 pound.
The sensitivity analysis would be beneficial for the organisation in order to determine the sales
which is required to be made by the company in future to achieve its targets. This analysis has
helped Danial to estimate units that could be made in upcoming period by him.
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. It has also been recommended to Danial to enhance the investment to recover
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