Introduction to Finance ( Distinction Criteria ) Importance of Finance

This report discusses the importance of finance in an organization and its components. It covers topics such as financial ratios, cash budget, break-even point, and investment appraisal methods. The report also provides expert solutions for finance assignments. The subject is Finance and the course code is not mentioned. The college/university is not mentioned.

Importance of Finance
1

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
Question 1........................................................................................................................................3
a) Calculate the financial ratio for the year ended as 31 march 2018-19....................................3
b)USERS OF FINANCIAL STATEMENTS-.............................................................................5
QUESTION 2..................................................................................................................................6
a) financial status's opening statement at the beginning of July 2015........................................6
b) Computation of forecast cash budget for next 6 months.........................................................6
c) Clarification of additional disbursements................................................................................7
QUESTION 3..................................................................................................................................7
a ) Calculation of Break even point (BEP)..................................................................................7
b) Margin of safety ( MOS ) for the year ended 2019 and 2020.................................................9
c) Evaluate the new strategies that can be made by Jessica.........................................................9
QUESTION 4..................................................................................................................................9
a) calculation of pay back period, Net present value and average rate of return.........................9
b) Determine the most effective method of project appraisal....................................................13
c)Capital budgeting methods and techniques that can used for investments decisions.............13
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18
2

INTRODUCTION
Finance plays an important role in an organisation stability, growth and expansion, it
basically the backbone of a business entity. There are various components indulge in managing
the finance, planning, organising, directing and controlling (Baker, Kumar and Pandey, 2020)
(Black and Stafford, 2018). In this report, ratio analysis has been used for finding out the
position of the company. In the second part cash budget have been prepared to forecast the
estimated expenses and income of specific period. In third question breakeven point, margin
safety concepts are used for determining the sales related decisions in order to develop a new
strategy to compete in the market. The other question asks for finding out the pay back, NPV and
ARR for finding out the most viable investment project.
Question 1
a) Calculate the financial ratio for the year ended as 31 march 2018-19.
1) Gross profit margin
= (sales revenue – Cost of goods sold) * 100/ Revenue
= (3495.00-2182) *100 / 3495
= (1313/3495.00) *100
3

= 35.6700%
Interpretation: It is a ratio which tells about the organisation ability to earn from the product
and services sold. Ideally a gross profit margin of an organisation must be 20% after deducting
the COGS. In the current case it is 35.67% which is effective ratio. This depict that company's
sales performance is recognisable.
2) Assets usage ratio
= total sales/ average total assets
=3495.0/ [(3812+2503)/2]
= (3495/3157.5)
= 1.100
Interpretation: This measure of financial analysis is used for determining the capability of the
organisation to make income from its assets. Higher ratio implies a better position of the business
entity. Ideal assets ratio must be 2.5 in the current case it is just 1.10. this implies that company
is not able generate enough income from its assets. The efficiency must be increased by
increasing the overall sales and productivity (Chin and Gallagher,2019).
3)Current ratio:
= current assets / current liabilities
= 1687 / 744
= 2.27
Interpretation: The metrics of financials states that how much a company is capable to pay its
short term liabilities. In general analysis the ratio should be 2:1 but the business organisation has
2:27 which means that the business entity is in good position. It is capable to meet its
obligations.
4) Acid test ratio
= (current assets – inventory)/ current liabilities
= (1687- 150)- 744
= 1537 / 744
= 2.06
Interpretation: The ratio accounts the most liquid assets of the organisation such as debtors,
cash and cash equivalent. This considers that can convert into cash easily, are available to readily
liquidate (Choudhury, 2018).
4

5)Inventories holding period in days:
= (Average inventory/ cost of goods sold) * 365
= [(150+102)/2] / 2182] *365
= (126/2182) *365
= 21.07 days
Interpretation: It states about the time the company have to hold stock before sales. It is basically
the time period in which the goods are kept before selling them.
1) Debt to Equity ratio:
= Debt / Equity
= 170/2898
= 0.058
Interpretation
It is an analysis of the leverage that the company has, it about the source of finance the company
use. Higher ratio depicts higher debt which is bad for the company. In the case of liver ton cop,
the debt to equity ratio is very low hence the company uses of own source of capital (Clarke and
Tooker, 2018).
b)USERS OF FINANCIAL STATEMENTS-
Financial statement- It is the record of company that shows financial position of business,
organisation or company. It includes balance sheets, income statement, cash flow statement. It is
easy to understand and contains relevant information.
Users-
1) Company's Management - The one who makes the financial statement that's the board
directors or managers are first and foremost users of the financial statement as they wants
to know about the growth and progress of organisation as they have to make policies as
per the position or requirement of business.
Investor's - Basically the owner of the company must be aware and updated about the financial
position of the company, as according to that they will decide whether to keep invested or not
(Dorfleitner, and Braun, 2019).
2) Competitor's - They want to check whether they are generating more profit or their
competitor. They also keep check and make record of the competitor to make policies as
per the position of the company.
5

3) Government - The government uses financial statement to check whether the company is
paying proper tax or not. They also make future prediction of tax by viewing the current
financial position.
4) Employee's – As the promotion, bonus or increment depends on the financial position of
company so employees are also interested in knowing about the financial position of the
organisation (Epstein, 2019).
QUESTION 2
a) financial status's opening statement at the beginning of July 2015
Assets
Non current assets £150,000
current assets
cash at bank £50,000
Total assets £200,000
Liabilities
Capital £200,000
Total £200,000
b) Computation of forecast cash budget for next 6 months
PARTICULAR July August
Septemb
er October
Novembe
r
Decembe
r
opening balance 50000 -65000 -110000 -95000 -30000
Receipts
Initial Investment 2000000
Receipts from revenue 150000 120000 150000 210000 260000 285000
Total 350000 170000 85000 100000 165000 255000
Payments
purchase of non-current
assets 150000
Material 120000 100000 60000 60000 60000 60000
6

Other expenses 55000 55000 55000 55000 55000 55000
Labour expenses 80000 80000 80000 80000 80000 80000
Tax paid 20000
Total 405000 235000 195000 195000 195000 215000
closing (bank overdraft) 50000 -65000 -110000 -95000 -30000 40000
In the above question it is to be concluded that the sassy cloth has over expenses
than the income which gives negative cash balance. In the upcoming 6 months, the organisation
is expecting £1,175,000. They need to minimize their expenses and try to increase its
productivity. They need to find out the sources which provide them cheap resources and
minimize their production cost. This will help in earning more, also the company should improve
their method of production by installing new technology and inventories which helps in doing
the work faster (Karim, Rabbani, and Bawazir, 2022).
c) Clarification of additional disbursements
The company have the to control the payment in the month of July and December
expenses such as software bills, rent, running fees and charge to the suppliers. The company
need to use various facilities of overdraft so that supplier paid on time the is no accumulated debt
that company need to pay back. This helps in maintain a good track with suppliers and other
creditors. The help of financial institution company can get growth and expansion.
QUESTION 3
a ) Calculation of Break even point (BEP)
BEP ( in units ) = fixed cost / contribution per unit
Total fixed cost = 1,650,000 + 2,850,000 + 930,000
= £ 5,430,000
contribution per unit = £ 300 – 125 - 15 - 20 - 15 – 10
= £ 115
BEP (in units) of year 2019 = £ 5,430,000 / £ 115
= 47217.39 equal to 47218 units
7

BEP (sales revenue ) For the year 2019 = fixed cost / profit volume ratio (P/V)
= 5,430,000 / 38.33 %
= £ 14,166,449.26
for the year 2020, there will be few changes in accordance with chief executive in Income
statement are
Particulars Price per unit Amount ( £ )
Sales 309 13905000
Less : variable cost
Direct material 125 5625000
Direct labour 13 585000
Manufacturing overhead 19.5 877500
Selling expenses 15 675000
Administration expenses 8 360000
CONTRIBUTION 128.5 5782500
Less : fixed cost
Manufacturing overhead 1650000
Selling and distribution overhead 2850000
Administration overhead 930000
New manufacturing facility 1450000
PROFIT -1097500
Break even point (BEP) for the year 2020 in units = fixed cost / contribution per unit
= 6880000 / 128.5
= 53540.86 equivalent to 53541 units
Break even point (BEP) for the year 2020 in sales revenue = fixed cost / Profit volume ratio (p/v)
= 6880000 / 41.59 %
= £ 16542438.09
8

b) Margin of safety ( MOS ) for the year ended 2019 and 2020
MOS in terms of units for the year 2019 = profit / contribution per unit
= -255000 / 115
= - 2217 units
MOS in terms of units for the year 2020 = -1097500 / 128.5
= -8541 units
MOS in terms of sales revenue for the year 2019 = profit / p/v ratio
= -255000 / 38.33 %
= £ - 665275
MOS in terms of sales revenue for the year 2020 = profit / p/v ratio (Morris, 2018)
= -1097500 / 41.59 %
= £-2638855.49
c) Evaluate the new strategies that can be made by Jessica
in the above calculation two strategies have been used for analysis namely BEP AND MOS for
the two consecutive year 2019 and 2020. The results are as follows the breakeven point where
there is no profit nor loss for the year 2019 and 2020 is produced 47218 units and 53541 units
roughly. Margin of safety is negative in both years which mean that company is not earning
enough to cover the cost. Years 2019 and 2020 are -2217 units and -8541 units respectively.
Sales revenue is very less and company need to make efforts towards increasing its productivity
and sales revenue. They have already spent 1450000 in the fixed cost which is not used
effectively company need to work towards it (Poongodi, and et al., 2020).
QUESTION 4
a) calculation of pay back period, Net present value and average rate of return
Year Appraisal A Appraisal B Appraisal C
cash inflow
cumulative
CF cash inflow cumulative CF
cash
inflow cumulative CF
9

1 75000 75000 95000 95000 50000 50000
2 65000 140000 65000 160000 60000 110000
3 60000 200000 45000 205000 65000 175000
4 55000 255000 45000 250000 66000 241000
5 50000 305000 45000 295000 57000 298000
Pay back period of appraisal A
PBP = 2+ (175000-140000) / 60000
=2+(35000/ 60000)
=2.58 years
Appraisal B
PBP = 2 + (195000 – 160000) / 45000
=2+(35000 / 450000
2.77 years
Appraisal C
PBP = 3 + ( 190000-1750000 / 66000
=3+(15000 / 66000)
=3.22 years
Net present value
Appraisal A Appraisal B Appraisal C
Year
COC
@18% CI PV of CI CI PV of CI CI PV of CI
1 0.847 75000 63525 95000 80465 50000 42350
2 0.718 65000 46670 65000 46670 60000 43080
3 0.609 60000 36540 45000 27405 65000 39585
4 0.516 55000 28380 45000 23220 66000 34056
5 0.437 50000 21850 45000 19665 57000 24909
5 0.437 5000 2185 8000 3496 4000 1748
Total
PV of
199150 200921 185728
10

cash
inflow
Net present value = PV of cash inflow – initial investment
Appraisal A
NPV= 199150 – 175000
=24150
Appraisal B
NPV = 200921 – 195000
=5921
Appraisal C
NPV = 185728 – 190000
=4272
Accounting rate of return
ARR = average annual profit / average initial investment
Appraisal A
Year cash inflow Deprecation Profit
1 75000 35000 40000
2 65000 35000 30000
3 60000 35000 25000
4 55000 35000 20000
5 50000 35000 15000
Average annual profit = (40000+30000+25000+20000+15000) / 5
= 130000/ 5
=26000
Average investment = ( initial investment+ scrap value) / 2
= (175000+5000) / 2
= 90000
ARR = (26000 *100) / 90000
=28.89%
Appraisal B
11

Year
cash
inflow
Deprecatio
n Profit
1 95000 39000 56000
2 65000 39000 26000
3 45000 39000 6000
4 45000 39000 6000
5 45000 39000 6000
Average
annual
profit 20000
Average investment = (initial investment+ scrap value) / 2
= (195000+8000) / 2
= 101500
ARR = (20000*100) / 101500
=19.70%
Appraisal C
Year
cash
inflow Deprecation Profit
1 50000 38000 12000
2 60000 38000 22000
3 65000 38000 27000
4 66000 38000 28000
5 57000 38000 19000
Average
annual
profit 21600
Average investment = (initial investment+ scrap value) / 2
= (190000+4000) / 2
12

= 97000
ARR = (21600*100) / 97000
=22.27%
b) Determine the most effective method of project appraisal
From the above calculation it can be said that, company should select the project A as compare
to another project (Verdier, 2020). Investment A gives higher return as compare to another
project. Project A will recovers its initial amount of investment in 2.58 years while other project
B and project C will recover its investment cost in 2.77 and 3.22 years respectively. The Net
present value of Appraisal 1 is 24150 however the NPV of other plans are 5921 and 4272. The
average rate of return of the return of project A 28.89%. The other investment option has average
rate of return is 19.70% and 22.27%. so from this evaluation it can be said that project A has a
more potential to profitability.
c)Capital budgeting methods and techniques that can used for investments decisions
PAYBACK PERIOD
It defines the time will take for a business to regain the original investment. The shorter
period shows more attractive investment and in longer case this period is less useful. It is
used to calculate returns by the investors.
To calculate this period, it is beneficial in financial and capital budgeting. This budgeting is a
primary activity of corporate finance (Wang, Wu and Hao, 2020).
Formula: Payback Period= Initial Investment% Annual Cash Flow
Advantages of Payback Period
Usage for Less Duration – This period is used in a business to make small investments and it
does not meet those factors which make the calculations so complicate into the account like
discount rates etc.
Clarity- It is very simple to calculate this period because when the business doing analysis of any
project this is calculated without the help of the calculator or an electronic item.
Risk Measurable- This is used to measure the risk and focused on how rapidly money can be
returned from an investment.
Disadvantages of Payback Period
13

Lucrative Cash flows covered- This period is focused only the cash flows and it also fails to
consider this that in the upcoming years. Due to which this flow will overlook a project and
generates useful flow in the upcoming years.
Unrealistic- This period is simple but it does not mean that it considers the normal business
environment. Basically the capital investments are not one-time investment. These projects used
in future for the other investment (Wuttke, Rosenzweig, and Heese, 2019).
Avoid Profit- This period is for short term due to which there is no surety of profit making in the
business.
NET PRESENT VALUE
This defines the difference between the value of present cash flow and the value of future cash
flow over a period of time.
Benefits-
Absolute value of money- This is the primary benefit of using the NPV. It means that a dollar
today is more valuable than a tomorrow. This is very useful in capital budgeting to evaluate
the present figures.
Take Action Quickly- This process helps to resolve the problems quickly and encourage to take
the strong decision for companies. It is to determine for examine the projects of the same
size and it also helps whether the investment is profit maker or not.
Drawbacks-
Rules are not formed to calculate rate of return- There is no set of rules to determine the rate.
Due to wrong calculation the NPV was inaccurate.
Do not Compare variable project of different sizes- This is not useful for measuring the projects
of different sizes (Zhang, 2020).
ACCOUNTING RATE OF RETURN
This method is used for calculating the rate of return of project or an investment that organisation
find viable, it helps in comparison between two or more projects. This is very important while a
capital budgeting decisions provides net income that can be earned. This compares the outcome
from the initial investment. this helps in finding out profitability of a project in a long term
14

investment. this rate of return calculation is basic return calculation as it does not consider the
discounting rate, that recognise the time value of money concepts (Smirnova, 2018).
.
15

CONCLUSION
From the above report it can be said that the ratio analysis helps in finding out the
monetary position of the company, in the Liverton co. financial statements helps in stability and
areas of improvement where the company need to work. Ratio analysis tell the mangers how they
can efficiently utilise its resources and earn a higher profit. Further in the case of assay clothes
cash budget held the organisation in finding out the estimation for 6 months about the income
and expense components. Predetermination of the income and expenses in talking more efficient
decisions. Free air Ltd, made use of breakeven analysis to find the point where there is no loss
and no profit, by the help breakeven point. This evaluation helps in determining the sales price of
the good and services. New strategies can be build using the breakeven analysis and further
planning can be maid which can lead towards organisational objective. The computation of NPV,
payback period, accounting rate of return helps in finding out the reliability, profitability of the
projects. Also helps in determine which project has more potential and making choices between
different options available.
16

17

REFERENCES
Books and Journals:
Baker, H.K., Kumar, S. and Pandey, N., 2020. A bibliometric analysis of managerial finance: a
retrospective. Managerial Finance.
Black, J. and Stafford, D.C., 2018. Housing policy and finance. Routledge.
Chin, G.T. and Gallagher, K.P., 2019. Coordinated credit spaces: The globalization of Chinese
development finance. Development and change, 50(1), pp.245-274.
Choudhury, M.A., 2018. The ontological law of Tawhid contra ‘Shari’ah-compliance’in Islamic
portfolio finance. International Journal of Law and Management.
Clarke, C. and Tooker, L., 2018. Social finance meets financial innovation: Contemporary
experiments in payments, money and debt. Theory, Culture & Society, 35(3), pp.3-11.
Dorfleitner, G. and Braun, D., 2019. Fintech, digitalization and blockchain: possible applications
for green finance. In The rise of green finance in Europe (pp. 207-237). Palgrave
Macmillan, Cham.
Epstein, G., 2019. The Political Economy of Central Banking: Contested Control and the Power
of Finance, Selected Essays of Gerald Epstein. Edward Elgar Publishing.
Karim, S., Rabbani, M.R. and Bawazir, H., 2022. Applications of blockchain technology in the
finance and banking industry beyond digital currencies. In Blockchain Technology and
Computational Excellence for Society 5.0 (pp. 216-238). IGI Global.
Morris, J.H., 2018. Securing finance, mobilizing risk: money cultures at the Bank of England.
Routledge.
Poongodi, M and et al., 2020. Prediction of the price of Ethereum blockchain cryptocurrency in
an industrial finance system. Computers & Electrical Engineering, 81, p.106527.
Smirnova, V., 2018. Why make political finance transparent? Explaining the Group of States
against Corruption (GRECO)’s success in reforming national political finance
regulation. European Political Science Review, 10(4), pp.565-588.
Verdier, P.H., 2020. Global banks on trial: US prosecutions and the remaking of international
finance. Oxford University Press.
Wang, L.O., Wu, H. and Hao, Y., 2020. How does China's land finance affect its carbon
emissions?. Structural Change and Economic Dynamics, 54, pp.267-281.
Wuttke, D.A., Rosenzweig, E.D. and Heese, H.S., 2019. An empirical analysis of supply chain
finance adoption. Journal of Operations Management, 65(3), pp.242-261.
Zhang, F., 2020. Leaders and followers in finance mobilization for renewable energy in Germany
and China. Environmental Innovation and Societal Transitions, 37, pp.203-224.
18