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Functions of Financial Management

   

Added on  2020-06-05

28 Pages6272 Words102 Views
FINANCIALMANAGEMENT

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

INTRODUCTIONFinancial management refers to the planning organising, directing and controlling of themonitory resources of the organisation in such a manner that it helps in achieving the goals andobjectives of the organisation. This function is directly associated to the top level management.Financial activities of the organisation includes utilization and procurement of the organisationalfunds. Elements of financial management includes various types of decisions that are -investment decisions that includes fixed assets known as capital budgeting, investment in currentassets known as working capital; financial decision that includes finance related decisions thatare raised from various resources; dividend decision that includes decision related to thedistribution of net profits. The objectives of financial management are to ensure adequate andregular 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 toplan a sound capital structure.Functions of financial management are estimation of capital requirement, to determinecapital structure, choice of sources and investments of funds, distribution of surplus profits, cashmanagement and financial controls. Management of the organisation need to ensure theavailability of funds at the time of meeting business requirements. Short term requirements ofbusiness includes stock, equipments, cost of sales and employees. Long term need includesincrease in assets.In the below study accounting for financial management is done for Nancy who is willingto start her own venture of carved wooden ornaments in UK. She is been retired from serviceswith an amount of £325000 and is willing to start a new business with this amount. The belowreport 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 flowstatement for monthly as well as yearly and also the sensitivity analysis of its financialinformation.Summary of all the assumptionsAssumptions:

In the absence of information, following assumptions have been made:All the amount which she received from her past services has been invested in thisventure 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 areexpenses of variable in nature for Nancy because these were purchased only for thepurpose 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 averageselling price of £120 per unit and sales to Jeremy throughout the year was 50 units at anaverage 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 woodenornaments has been increased by 20%.Nancy approached her financial advisor for her business and asked her financial advisorto make an estimated project for her business, which stated that she need more amount toinvest other than she received from her past service, therefore, she found it necessary toborrow £50,000 .For the purpose of annual calculations, sales are taken as constant. Sales is 35 + 50 i.e. 85per month throughout the year.Purchases from clear cut are based on the orders that Nancy get. She purchases only thatmuch 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 beenconsidered.

For the purpose of sensitivity analysis, increase in input variable that is customer trafficat online websites is taken as 10% on monthly basis.It is been assumed that Nancy further has not invested the available cash as she neededthat for her working capital.It is the policy of bank to remit the Sales revenue of the month of march at the last day ofthe 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 cutIncrease in freight chargesIncrease in sales revenueIncrease in Credit card chargesThrough sensitivity Analysis we have found the following estimates:Customer traffic growthUnit PriceSales VolumeRevenue Revenue Increase0.00%1203542000.00%10.00%12038.004559.948.57%20.00%12041.264950.7317.87%30.00%12044.795375.0027.98%40.00%12048.635835.6438.94%50.00%12052.806335.7650.85%60.00%12057.326878.7363.78%70.00%12062.247468.2477.82%80.00%12067.578108.2793.05%90.00%12073.368803.14109.60%

Break- even analysisA point where total sales of a company covers its expenses is Break- even Point for anycompany. Break even analysis includes examination and calculations of margin of safety for anorganisation, based on associated costs and revenues collected. Break even analysis is used todetermine economic level of sales to cover total fixed assets as it analyses different price levelsat different levels of demand. To determine break- even point or break- even sales followingthree variable must be known:Fixed Costs: Those expenses or costs which are independent of the sales volume are fixedcosts. 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 andmangers. This analysis is for the internal users i.e. for managers only because the calculations areoften not to be disclosed to the external users. It uses the fixed cost that is relative to profitearned. A company having low fixed cost will also have low break even point and vice versa. Itdeals 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 thegoods.For calculations of break even sales all the fixed expenses are divided by the contributionmargin percentage (Break Even Analysis, 2017). The formula is:Fixed expenses / contribution margin percentageone 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).

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