Financial Analysis Using Data Mining

This assignment delves into the application of data mining techniques for financial analysis. It covers topics such as break-even analysis, sensitivity analysis, and understanding cash flow statements. Students are expected to demonstrate their knowledge of these concepts and apply them to real-world financial scenarios.

FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Summary of all the assumptions.................................................................................................1
Break- even analysis...................................................................................................................4
Profit and Loss and Balance sheet statements.............................................................................6
Monthly cash flow for the first year of operation.......................................................................7
Annual Cash Flow Statement ...................................................................................................12
A clear explanation, of how much cash the venture will need to get started............................14
Sensitivity Analysis...................................................................................................................17
Suggestions to pay upfront fees to Clearcut supplier................................................................20
Recommendations.....................................................................................................................21
Reflection of the Analysis.........................................................................................................22
CONCLUSIONS.......................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
Financial management refers to the planning organising, directing and controlling of the
monitory resources of the organisation in such a manner that it helps in achieving the goals and
objectives of the organisation. This function is directly associated to the top level management.
Financial activities of the organisation includes utilization and procurement of the organisational
funds. Elements of financial management includes various types of decisions that are -
investment decisions that includes fixed assets known as capital budgeting, investment in current
assets known as working capital; financial decision that includes finance related decisions that
are raised from various resources; dividend decision that includes decision related to the
distribution of net profits. The objectives of financial management are to ensure adequate and
regular supply of funds to the organisation, create wealth for the business, generate cash,
adequate return to the shareholders, optimum utilisation of funds, safety on investments and to
plan a sound capital structure.
Functions of financial management are estimation of capital requirement, to determine
capital structure, choice of sources and investments of funds, distribution of surplus profits, cash
management and financial controls. Management of the organisation need to ensure the
availability of funds at the time of meeting business requirements. Short term requirements of
business includes stock, equipments, cost of sales and employees. Long term need includes
increase in assets.
In the below study accounting for financial management is done for Nancy who is willing
to start her own venture of carved wooden ornaments in UK. She is been retired from services
with an amount of £325000 and is willing to start a new business with this amount. The below
report providing full analysis of its financial activities as per the information provided by her.
The report includes break even analysis, income statement and balance sheet, cash flow
statement for monthly as well as yearly and also the sensitivity analysis of its financial
information.

Summary of all the assumptions
Assumptions:
In the absence of information, following assumptions have been made:
 All the amount which she received from her past services has been invested in this
venture because she was not willing to take loans from bank and financial institutions.
 In the below calculation it is been assumed that the in plinths and presentation cases are
expenses of variable in nature for Nancy because these were purchased only for the
purpose of sales to Jeremy.
 Plinths and presentation cases are required only for her friend's Jeremy demand.
 All the Calculations below are based on per month figures.
 It has been Estimated that the 1st month sales through online is 35 units with an average
selling price of £120 per unit and sales to Jeremy throughout the year was 50 units at an
average selling price of £85 per unit.
 Online sales and sales to Jeremy has been merged.
 As per the market demand, it seen in the trend that the online sales of Carved wooden
ornaments has been increased by 20%.
 Nancy approached her financial advisor for her business and asked her financial advisor
to make an estimated project for her business, which stated that she need more amount to
invest other than she received from her past service, therefore, she found it necessary to
borrow £50,000 .
 For the purpose of annual calculations, sales are taken as constant. Sales is 35 + 50 i.e. 85
per month throughout the year.
 Purchases from clear cut are based on the orders that Nancy get. She purchases only that
much amount of units for which she gets order.
 For the purpose of balance sheet, Profit after tax has been considered.

 All the figures are rounded off to the nearest zero and approximated amount has been
considered.
 For the purpose of sensitivity analysis, increase in input variable that is customer traffic
at online websites is taken as 10% on monthly basis.
 It is been assumed that Nancy further has not invested the available cash as she needed
that for her working capital.
 It is the policy of bank to remit the Sales revenue of the month of march at the last day of
the month i.e. at 31st march 2017.
Estimates:
Following estimates are determined from the study:
Increase in demand can cause change in following:
 Increase in purchase from clear cut
 Increase in freight charges
 Increase in sales revenue
 Increase in Credit card charges
Through sensitivity Analysis we have found the following estimates:
Customer traffic growth Unit Price Sales Volume Revenue Revenue Increase
0.00% 120 35 4200 0.00%
10.00% 120 38.00 4559.94 8.57%
20.00% 120 41.26 4950.73 17.87%
30.00% 120 44.79 5375.00 27.98%
40.00% 120 48.63 5835.64 38.94%
50.00% 120 52.80 6335.76 50.85%

60.00% 120 57.32 6878.73 63.78%
70.00% 120 62.24 7468.24 77.82%
80.00% 120 67.57 8108.27 93.05%
90.00% 120 73.36 8803.14 109.60%
Break- even analysis
A point where total sales of a company covers its expenses is Break- even Point for any
company. Break even analysis includes examination and calculations of margin of safety for an
organisation, based on associated costs and revenues collected. Break even analysis is used to
determine economic level of sales to cover total fixed assets as it analyses different price levels
at different levels of demand. To determine break- even point or break- even sales following
three variable must be known:
 Fixed Costs: Those expenses or costs which are independent of the sales volume are fixed
costs. Example- rent, salary, etc.
 Variable Costs: costs that are directly related to sales are variable costs. For example:
costs that are directly attributable to manufacturing cost.
 Selling price: selling price of the product.
Break even point is a key financial analysis tool that is used by business owners and
mangers. This analysis is for the internal users i.e. for managers only because the calculations are
often not to be disclosed to the external users. It uses the fixed cost that is relative to profit
earned. A company having low fixed cost will also have low break even point and vice versa. It
deals with a concept of contribution margin of the product (Aswal, Kumar and Gupta, 2014).
Contribution margin is calculated by deducting total variable cost from total selling price of the
goods.
For calculations of break even sales all the fixed expenses are divided by the contribution
margin percentage (Break Even Analysis, 2017). The formula is:

Fixed expenses / contribution margin percentage
one must be aware of the few issues of break even analysis before relying upon it:
 Contribution margin may vary month to month. If the company practices of selling
different mix of products with different margins then the resultant margin will probably
change for the entire business (Borgonovo and Plischke 2016).
 Fixed costs are based on historic cost. Actual expenses may differ from historic numbers.
Calculation of break- even point for 1st month for Nancy for her small retail of carved wooden
ornaments:
Particulars Amount (£)
Total sales (120*35 + 85*50) 8450
Less: variable costs
Packing and shipping expenses (85*8) -680
Credit card charges (8450*1%) -84
Buy-in plinths (50*3) -150
Presentation cases (50*4.50) -225
Contribution Margin 7310
Contribution margin ratio = contribution margin / sales
contribution margin ratio = 7310.5 / 8450
Contribution margin Ratio = 86.51%
Break even sales = fixed expenses / contribution margin ratio
break even sales = 1216.67 / 86.51%
Break even sales = 1406.4

working note:
 Calculation of fixed costs
Rent of room 350
Interest on borrowings 166
Salary to assistant 700
TOTAL £1216
 Interest on borrowings: 50000 *1% / 12
Profit and Loss and Balance sheet statements
Profit and Loss statement at the end of 1st year
Particulars Amount(£)
Income
Sales 217238
Expenses
Purchase 103107
Air freight 37125
Packing and shipping 11083
Credit card charges 2172
Interest charge 2000
In- plinths 1800
Presentation cases 2700
Preliminary expenses written off 900
Rent (350*12) 4200
Salary (700*12) 8400

Profit before tax 43750
Tax @ 30% 13125
Profit after tax 30625
Balance Sheet at the end of 1st year
Particulars Amount (£)
Assets
Non-current assets
Racks 1250
Electric router 1900
Website 3000
Fictitious assets 3600
Suspense A/c 9366
Current assets
Cash and bank 386509
Total Assets 405625
Equity and Liabilities
Capital 325000
Add: profit 30625
Loan 50000
Total Liabilities 405625
Working note:
statement of increase in online sales by 20%
units total revenue

35 4200
42 5040
50 6048
60 7258
73 8709
87 10451
105 12541
125 15049
150 18059
181 21671
217 26005
260 31206
166238
Sales to Jeremy = 50*85*12 = 51000
Total sales revenue= 166238 + 51000 = 217238
Monthly cash flow for the first year of operation
Particulars April May June July
Augu
st
Septe
mber
Octob
er
Nove
mber
Dece
mber
Janua
ry
Febru
ary
Marc
h
Beginning
Cash
32500
0
35451
6
35257
2
35079
9
34922
8
34790
1
34686
7
34618
5
34592
3
34616
8
34701
9
34859
9
Add:
Loan
Receipts 50000 0 0 0 0 0 0 0 0 0 0 0
Sales 8450 9290 10298 11508 12959 14701 16791 19299 22309 25921 65712

receipts*
Cash
available
37500
0
36296
6
36186
2
36109
7
36073
6
36086
0
36156
8
36297
6
36522
3
36847
7
37294
1
41431
1
less: disbursements
operation
cost* 1917 1917 1917 1917 1917 1917 1917 1917 1917 1917 1917 1917
Material
purchases* 4414 4778 5214 5738 6366 7120 8024 9110 10413 11976 13852 16103
freight
expenses* 1590 1720 1877 2066 2292 2564 2889 3280 3749 4312 4987 5798
packaging
and
shipping* 280 336 403 484 581 697 836 1003 1204 1445 1734 2080
credit card
expense* 42 50 60 73 87 105 125 150 181 217 260 312
Salary to
assistant 700 700 700 700 700 700 700 700 700 700 700 700
Rent 350 350 350 350 350 350 350 350 350 350 350 350
Loan
interest 167 167 167 167 167 167 167 167 167 167 167 167
purchase
presentation
cases* 225 225 225 225 225 225 225 225 225 225 225 225
purchase
plinths* 150 150 150 150 150 150 150 150 150 150 150 150
automated
electric
router 1900 0 0 0 0 0 0 0 0 0 0 0

website
developmen
t 3000 0 0 0 0 0 0 0 0 0 0 0
Rack
purchased 1250 0 0 0 0 0 0 0 0 0 0 0
Research
expenses 4500 0 0 0 0 0 0 0 0 0 0 0
Total
disburseme
nts 20484 10393 11064 11869 12834 13993 15384 17052 19055 21458 24341 27801
Net cash
available
35451
6
35257
2
35079
9
34922
8
34790
1
34686
7
34618
5
34592
3
34616
8
34701
9
34859
9
38650
9
Working notes:
April May June July
Augu
st
Septe
mber
Octob
er
Nove
mber
Dece
mber
Janua
ry
Febru
ary
Marc
h
Material purchases
carvings to
Jeremy 50 50 50 50 50 50 50 50 50 50 50 50
carvings for
UK 35 42 50 60 73 87 105 125 150 181 217 260
cost$ per
carvings 130 130 130 130 130 130 130 130 130 130 130 130
Total 11050 11960 13052 14362 15935 17822 20086 22803 26064 29977 34672 40307
Less:53%
discount 5857 6339 6918 7612 8445 9446 10646 12086 13814 15888 18376 21363

total cost per
month ($) 5194 5621 6134 6750 7489 8376 9441 10718 12250 14089 16296 18944
$1 = £0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85
total cost per
month (£) 4414 4778 5214 5738 6366 7120 8024 9110 10413 11976 13852 16103
freight expenses
Per 10
carvings ($) 220 220 220 220 220 220 220 220 220 220 220 220
10 10 10 10 10 10 10 10 10 10 10 10
per carving
($) 22 22 22 22 22 22 22 22 22 22 22 22
carvings 35 42 50 60 73 87 105 125 150 181 217 260
carvings for
Jeremy 50 50 50 50 50 50 50 50 50 50 50 50
total freight
expenses per
month ($) 1870 2024 2209 2431 2697 3016 3399 3859 4411 5073 5868 6821
$1 = £0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85 0.85
total freight
per month
(£)= 1590 1720 1877 2066 2292 2564 2889 3280 3749 4312 4987 5798
Sales receipts*
selling price
per
carving(£) 120 120 120 120 120 120 120 120 120 120 120 120
total sales of 35 42 50 60 73 87 105 125 150 181 217 260

carvings
total selling
price (£) 4200 5040 6048 7258 8709 10451 12541 15049 18059 21671 26005 31206
selling price
of remaining
carvings(£) 85 85 85 85 85 85 85 85 85 85 85 85
remaining
carvings 50 50 50 50 50 50 50 50 50 50 50 50
selling price
of remaining
carvings(£) 4250 4250 4250 4250 4250 4250 4250 4250 4250 4250 4250 4250
total selling
price (£) 8450 9290 10298 11508 12959 14701 16791 19299 22309 25921 30255 35456
packaging and shipping
per carving
cost (£) 8 8 8 8 8 8 8 8 8 8 8 8
Total
carvings 35 42 50 60 73 87 105 125 150 181 217 260
total cost per
month (£) 280 336 403 484 581 697 836 1003 1204 1445 1734 2080
credit card expense
1% of sales 42 50 60 73 87 105 125 150 181 217 260 312
Operation cost
per year cost 23000 23000 23000 23000 23000 23000 23000 23000 23000 23000 23000 23000
months in 12 12 12 12 12 12 12 12 12 12 12 12

year
per month
cost 1917 1917 1917 1917 1917 1917 1917 1917 1917 1917 1917 1917
loan interest
loan
amount(£) 50000 50000 50000 50000 50000 50000 50000 50000 50000 50000 50000 50000
interest rate
per annum
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
4.00
%
interest
amount per
annum(£) 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000
month in
year 12 12 12 12 12 12 12 12 12 12 12 12
interest per
month (£) 167 167 167 167 167 167 167 167 167 167 167 167
purchase of plinths at cost
per cost of
plinth(£) 3 3 3 3 3 3 3 3 3 3 3 3
total plinths
per month 50 50 50 50 50 50 50 50 50 50 50 50
total cost of
plinths per
month 150 150 150 150 150 150 150 150 150 150 150 150
purchase cost of presentation cases
per cost of 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5

presentation
cases
total cases
for per
month 50 50 50 50 50 50 50 50 50 50 50 50
total cost per
month(£) 225 225 225 225 225 225 225 225 225 225 225 225
Annual Cash Flow Statement
Annual Cash flow statement
For the year ended March 31, 2017
Amount(£) Amount(£)
Cash available in the beginning on 1 April 2016 325000
Cash flows from Operating Activities:
Cash received from sale of carvings* 217238
less:
cash payments to suppliers:
for purchasing carvings* 103107
purchasing presentation cases 2700
purchasing plinths 1800
operating cost 23000
Interests paid on Loans 2000
other expenses:
Rent paid 4200
salary to assistants 8400

freight expenses 37125
packaging expenses 11083
credit card expenses 1662
Net cash flows operating Activities 22159
Cash flows from Investing Activities:
sale of Any Assets 0
less:
purchase of racking to store carvings 1250
purchase of Automated electric router 1900
websites development 3000
Research expenses 4500
Net cash flows from Investing Activities -10650
Cash flow from Financing Activities:
Cash receipts from borrowings 50000
less:
repayment of loans 0
Net Cash flows from Financing Activities 50000
Net Cash available on 31 March 2017 386509
Working Notes:
* Cash received from sales of carvings:
selling price carving in UK (£) 120
carvings sold in 1 year 1385
selling price of sold in a year(£) 166238

sale price of remaining carvings 85
number of remaining carvings 600
selling price of 50 carvings for year 51000
total selling price of 85 carvings 217238
* cash payments to suppliers
*for purchasing carvings:
Material purchases
carvings 1985
cost per carvings ($) 130
Total 258091
Less:53% discount 136788
total cost per month ($) 121303
1$ = 0.85£ 0.85
total cost per year (£) 103107
* purchasing presentation cases:
cost of 1 presentation cases (£) 4.5
presentation cases purchase per month 50
total presentation purchase per year 600
Total cost of presentation cases per year(£) 2700
* purchases of plinths
cost of 1 plinth(£) 3
total plinths purchase per month 50
total plinths purchase in a year 600
total cost of plinths for 1 year 1800

A clear explanation, of how much cash the venture will need to get started
It is impossible to determine how much cash is required to start the business but we can
make the plan with help of estimates. Those estimates can be determined with help of financial
forecasting and the information given by Nancy related to business with help these estimates we
prepared the Income Statements, Balance Sheets, and most importantly Cash Flow Statements.
Firstly we prepared the Income Statements which shows the incomes and expenses of
business and then we prepared the Balance Sheet which shows the financial position of business.
At the end we prepared Cash flow statement which help us in understanding the cash position of
organisation (Carslaw,) 1991. Net cash flow of operating activities is £22516 as per cash flow
statement shows that operating expenses are less than operating incomes. There is more cash to
set of operating expenses. Net cash flow in investing activities is £-10650 that more assets
purchases which give benefits in the future. But there is no cash inflow in because there are no
investments. Nancy can also invest some amount to get return on that investment and can also
sell it when cash is required. Net cash flow of financing activities is £50000 which shows the
inflow of cash in business. They can take loans only when they have sufficient cash in business.
So, nancy must have to make available cash for business so they can start there venture (Fraser,
et.al., 2010).
Nancy can start there business in UK by investing the capital of £325000. This amount of
cash can be utilise in purchasing carvings from suppliers Clear Cut who has its established
business of carved wooden ornaments in Oregon. The cost of carvings in U.S.A is $130 each
which is sold by Clear cut in 53% discount. After a proper market research for which Nancy pay
£4500 it is analysed that there is a demand of 375 carvings per month when business is
established but in initial year the sales is 35 carvings per month. Nancy already get the order of
50 carvings in £85 from Jeremy who is Nancy's friend which is in addition to the order of 35
carvings. Carvings sold to Jeremy includes of presentation cases and plinths. The cost of each
presentation case is £4.50 and the cost of each plinth is £3 to nancy. The total cost of carvings,
presentation cases and plinths is £2700 per year to Nancy (Nurnberg, 2006). They also have to pay

charges for air freight is £37127 for each year. The selling price in UK is £120 each carvings and
selling price to Jeremy is £85 for each carvings so the total sales during year is £101400. On the
sales receipts the credit card company take 1% charges as credit card expenses and after 1 week
of next month remit the amount of sales to Nancy. They take loan of £50000 @ 4% is interest
rates which is £2000 per year. These carvings are stored in a building rented £4200 per year and
to keep the carvings the rack is also purchases of £1250 (Carslaw, 1991). Automated electric
router is purchased in £1900 which is the assets of business. Business also spent £3000 on
website development which help in marketing of business and also for customers so they place
order for carvings online. The packaging and shipping cost of £8160 per year is paid to deliver
the carvings to the customers safely without any damage. The operating cost to perform
operations of business is £23000 per year. Nancy has to give salary of £8400 per year to her
assistant for there services. Cash available at the beginning of year is £325000 and cash available
at the end of a year is £386509 this shows increase in cash but cash availability of a business is
initially decreases as per monthly cash flow project which shows with help of following data and
graph.
Month Net cash available
April 354516
May 352572
June 350799
July 349228
August 347901
September 346867
October 346185
November 345923
December 346168
January 347019

February 348599
March 386509
The expenses of business like packaging and shipping, air freight, rent, interests rates,
every month is compulsory for which cash is required. Nancy also have to keep the sufficient
amount of cash for future debts and for making payments to suppliers so they deliver carvings on
time and there are no barriers in sales of carvings. Loan can also be taken from banks and other
financial institutions but they also give loans on basis of liquidity position of the business.
Liquidity position of business can be improve with proper availability of cash. More cash to be
invested in business so it improves the liquidity of company can be increases. New business
requires more publicity so they can aware people about them so for this Nancy has already
prepared the websites but it this not sufficient(Oldcorn, 1996). There are many peoples who do
not access internet or don't know how to access internet so nancy also have to make marketing
strategies for such peoples. For that promotional tools like posters, newspaper articles, pamphlet,
April
May
June
July
August
September
October
November
December
January
Feburary
March
320000
330000
340000
350000
360000
370000
380000
390000
Net cash available

hoardings, can be used for that cash is required because for such tools immediate or advance
payments is made. Nancy can also require cash to expand there business.
They need more cash to expand there business in future but has sufficient cash for
starting the business and they can use this cash to increase there cash availability by investing it
the investments which gives good return in the future.
Sensitivity Analysis
Sensitivity analysis shows the apportionment of uncertain output of a mathematical
model to different uncertain sources of its input. It is a technique that is used to determine the
impact of an independent variable to a particular dependent variable under a given set of
assumptions. It is used within the specific boundaries that depends on one or more variables.
Example effect of change of interest rates on bonds. It is also referred as the prediction to the
outcome of a decision, given a certain range of variables (Feldman, R., 2013). In general terms it
helps in analysing the sensitivity of output on a change in single variable of input, keeping all
other variables constant. Sensitivity analysis can be useful for:
 In the presence of uncertainty, testing the robustness of the results of a system or model.
 To understand the relationship between input and output variables
 Reduction of uncertainty through identification of inputs of model
 Searching for errors in the model.
 Fixing of those inputs that have no impact on outputs (Greenwood, Hinings and Whetten,
2014).
 It helps in decision making
 Helps in taking appropriate and informed decisions
 Aids error searching in the model
The only principle on which sensitivity analysis is based on is “change the model and
observe the behaviour”. For conducting sensitivity analysis following parameters must be noted:

 Experimental Design: varied combination of parameters are included in this. This
examines, how many and which parameters at a given point of time, need to be varied,
assignment of values before the experiment (minimum and maximum levels) and the
study of correlations : negative or positive according to the assigned combination of
values (Jha, S. and et.al., 2017).
 What to vary: Various parameters that may vary in the model are:
◦ Number of activities
◦ Objectives related to profit and risk
◦ Technical parameters
◦ Various number of constraints and their limits.
 What to observe:
◦ According to the strategy, value of objectives
◦ value of decision variables
◦ Value of objectives between two strategies
Measurement of Sensitivity Analysis:
Following steps can be used to conduct sensitivity Analysis:
1. The 1st step is to define the base output to which sensitivity is to be measured. Say
revenues on a single input (V1), keeping all other inputs of the model constant.
2. Then the value of the output is determined on another input (V2), keeping all other inputs
constant.
3. Percentage change in the output and the percentage change in the input is then calculated.
4. Last step is to determine sensitivity by dividing percentage change in output by the
percentage change in input (Sensitivity Analysis, 2017).

The process of sensitivity is repeated till the sensitivity for all the inputs are obtained.
This will conclude that higher the sensitivity, more the output is sensitive to any change in input
and vice versa.
Methods of sensitivity analysis:
Sensitivity Analysis can be carried out through different methods:
 Modelling and simulation techniques
 Scenario Management tool through excel
sensitivity Analysis has the following two approaches:
 Local sensitivity Analysis
 Global Sensitivity analysis
Various techniques of sensitivity analysis are:
1. Differential Sensitivity analysis
2. One at a time sensitivity Analysis
3. Factorial analysis
Sensitivity analysis For Nancy's venture:
Sensitivity Analysis for sales revenue, taking input as increase in customer traffic at
online retail websites. Sales revenue from Nancy's venture of carved wooden ornaments is
101400.
Suppose there is a 10% increase in customer traffic in a month at online retail websites,
sales volume of ornaments increases to 38 per month.
Sensitivity analysis = Percentage change in output / Percentage change in input
Sensitivity Analysis = 8.57% / 10%
Sensitivity Analysis = 85.7%

Working note:
Percentage change in output = 38 – 35 / 35 *100
Percentage change in output = 8.57%
With the help of this Nancy can find out change in its sales revenue on increase in
customer traffic by 20%, 30% and 50%
Customer traffic growth Unit Price Sales Volume Revenue Revenue Increase
0.00% 120 35 4200 0.00%
10.00% 120 38.00 4559.94 8.57%
20.00% 120 41.26 4950.73 17.87%
30.00% 120 44.79 5375.00 27.98%
40.00% 120 48.63 5835.64 38.94%
50.00% 120 52.80 6335.76 50.85%
60.00% 120 57.32 6878.73 63.78%
70.00% 120 62.24 7468.24 77.82%
80.00% 120 67.57 8108.27 93.05%
90.00% 120 73.36 8803.14 109.60%
100.00% 120 79.65 9557.57 127.56%
Based on the analysis the result will be, an increase in revenue by 16.32%, 24.63% and
43.06%. Likewise, sensitivity analysis can be conducted for various other outputs considering
only single variable to change remaining all other constant.
Suggestions to pay upfront fees to Clearcut supplier
The upfront fees is the amount which buyer has to pay to owner for using there
assets or for there services it is also called advanced payments. This upfront fees given as per the
amount mention in the contract between manufacturer and retailer. This is generally observed in
the contract between manufacturer and retailers. In our case nancy can pay upfront fees for

exclusive rights for five year period. This rights does not include any carvings and this rights not
affect nancy if she had not started the venture (Brickley, J.A., 2002). The contract is includes all
terms and conditions which is to fulfilled while payment of fees if nancy signs any such contract
be careful about all terms and conditions at the time when upfront fees is actually paid. Nancy is
buyer of carvings she has power to negotiate the upfront fees. Clear cut is a well known suppliers
of carved wooden ornaments in Oregon has a goodwill in the market and Nancy's business
venture is new and they need a good supplier who provide them quality carvings to proceeds
there sales. This can be provided by only clear cut. They can also negotiate upfront fees by
signing the exclusive rights with clear cut. This exclusive rights can bind the seller that they can
not sell carvings to anyone and anything which can affect the sells of Nancy. Nancy can sign
such contract with clear cut because they are new in market and its not easy to get such good
suppliers.
There sales as per demands is going to be increase in coming years so they can give 25%
of there five year sales if there is 20% increase in there sales every year to clearcut to maintain
good relations with them and also help business in getting the best carvings to sale in UK. This
also not affects the operations of nancy business. This also create good image of there business
in market and proper availability of goods also satisfies customers. There one year sale is
£101400 if there is 20% increase in there sales in each year there total sales after five years is
£210263.04 and with help of this amount there upfront fees is £52565.76 which they can pay in
both ways in instalments or may be full which is suited.
Recommendations
From the above study it is determined that the profit margin when calculated on monthly
basis is high and when calculated on annual basis, profit after tax is only £30625. This figure is
showing that the financial position of Nancy's venture is not sound. For this here are the
following recommendations to Nancy that can give her assistance to improve its profit:

 She is having a good amount of cash which she has not invested anywhere, if she makes
some investments, it will give her extra revenue.
 Fixed costs of the venture are comparatively high this is causing a negative cash flow
from operating activities.
 Instead of renting a room for her business operations, she can invest in a building. This
will give two positive impacts to her business that are, investments will rise that will
improve the balance sheet and another is her fixed cost will decline.
 Likewise, sensitivity analysis of sales revenue has been determined, she should determine
the sensitivity analysis of various other inputs.
 She can find another assistant with low salary payment as salary expense is the highest
fixed cost for her.
 She can also make an agreement with Clear Cut to ship the ornaments directly to her
customers. This will reduce the freight expenses, as those will be borne by customers.
 She could avoid borrowing the loan amount, as she has surplus of cash.
 She is investing full amount which she has got from her past service in this venture.
Instead, she can invest some amount for the betterment of her future.
 As she has taken a room on rent for her business operations, she can also start selling the
carved wooden ornaments in her locality. Instead of selling only online.
 She requires more cash as her business operations as operational expenses are high and
cash flow from operating activities is negative.
 For all the above requirements she can also enter into partnership, this will fulfil her
finance requirement.
Reflection of the Analysis
In the conclusion of this study, I would like to throw some reflection to the whole
financial analysis of Nancy's venture of carved wooden ornaments. This analysis is done with the

help of accounting tools like, financial statements that includes balance sheet, profit and loss
statement, cash flow statement of operating, investment and financial activities.
In this study I have conducted break even analysis and sensitivity analysis of her sales
revenue taking a single variable and keeping all other variables constant. Break even analysis is
done to find out at what point of sales does her all variable expenses get covered up. Thor ugh
this Nancy can set a clear minimum target of sales. She will be assured of no loss once she will
reach the point of break even sales. Sensitivity analysis shows change in her sales revenue due to
change in customer traffic at online websites. This gives her a clear estimate of increase in
percentage of her sales revenue with increase in customer traffic at online websites.
Cash flow statement has been prepared for her to let her know the flow of cash from her
venture for different business activities like operating activity, investing activity and financial
activity. From this I came to know that her venture has a negative cash flow operating activities
that means her operational expenses are more than her availability of cash. Cash flow from
investment activities are showing very low investments, this reduces her opportunity to get easy
loans. Her only revenue is the sales revenue because she has not made any other investments.
From the analysis of her balance sheet, I came to know that her profit is very low because
she has borrowed a loan amount of 50,000 on which she has to pay interest @ 4% and her fixed
costs are also high like rent and salary expenses.
If I had an opportunity to conduct this analysis further and through my way, I would also
like to take some more steps that are:
 I would definitely like to calculate some financial ratios for her venture in order to
determine the liquidity position of her venture. This will provide her the information of
how many changes she need to make in her current assets and current liabilities. Debt-
equity ratio, this will tell her the idle amount that she need to maintain as equity capital
and the amount that she can borrow. And various other ratio which will allow her to
know her net profit, net sales, etc.
 Along with the financial ratios, few more analysis like SWOT analysis, PESTLE
Analysis, etc. can also be conducted. This will give her the idea of strengths, weaknesses,