Importance of Managerial Finance

The provided assignment highlights the significance of managerial finance in financing activities effectively, expanding operations by garnering diverse sources of funds, and using investment appraisal techniques to evaluate new projects' profitability. It concludes that managerial finance is crucial for managers to make informed decisions, and investment appraisal techniques are essential for determining whether new projects will provide adequate returns or not.

Managerial Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Explaining source of finance available to business to carry out operations...........................1
Various investment proposal techniques and limitations and provide recommendations......3
Management tools Break-even analysis and Budgets............................................................8
Calculation of Break-even analysis and preparing cash budget.............................................9
Assessing estimated organisation's performance.................................................................11
Literature Review of management tools and importance to company.................................11
Issues for management to consider surviving and earn profit..............................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................12

INTRODUCTION
In the recent times, it is the accountability of manager to develop sound strategic and
policy framework which in turn ensures optimal use of financial resources. Now, for getting the
desired level of outcome and achieving success business unit places high level of emphasis on
investing money in the profitable opportunities. In this regard, manager is required to make
selection of suitable project which in turn aid in organizational growth. The present report is
based on the case situation of Coco plc which offers intellectual financial services to the
customers in UK market. In this, report will provide deeper insight about the ways in which
investment appraisal techniques assist in the making selection of suitable project out of several
alternatives available. Further, report will shed light on the significance of BEP analysis in
managerial decision making. It also depicts issues which management need to keep in mind for
making profit.
Explaining source of finance available to business to carry out operations
There are various sources of finance which can be availed by the company and are listed
below-
Internal Sources
Retained Earnings
This is quite useful option for Coco Ltd to expand operations in effective manner. Profits
attained from last year may be used by the company in order to attain finance. Retained earnings
is the part of profits which is declared as dividends to shareholders and as such, it can be utilised
by organisation to ease off funding (Jeong and Park, 2018).
Advantages
 Main advantage of availing this option is that company need to pay its shareholders and
as such, it is cheaper source of finance.
 It is useful for company as retained earnings are flexible source of finance.
Disadvantages
 It is disadvantageous as more amount means that there is over-capitalisation in the
company.
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 Retained amount lowers dividends of shareholders and they are disheartened. Thus, lower
dividends are paid which affects market price of shares as well.
Sale of Fixed Assets
Fixed assets are integral part of organisation as this help to achieve production in the best
possible manner. Coco Ltd can sell-off its assets and thus, large amount will be generated
helping to overcome shortage of finance in effective manner. Thus, obsolete assets that are of no
longer use may be sold by the firm to garner finance with much ease (Diltz and Rakowski,
2018).
Advantages
 The main merit of sale of fixed assets is that quick money can be produced and as such,
funds can be utilised by Coco Ltd.
 Another advantage is that assets can be disposed with much ease. Thus, firm may be able
to effectively channelise funds towards its operations.
Disadvantages
 The main demerit of this type of source of finance is do not provide adequate results as
company is unable to garner desired value from sale.
 It may result in loss to company as proper value is not attained by it which results in
dissatisfaction.
External Sources
Bank Loans
Bank is useful source of funding by which Coco Ltd can generate finance for expanding
activities. Generally, fixed rate of interest is to be paid along with principal amount (Choi and
Szewczyk, 2018).
Advantages
 It is carries fixed interest rate and as such, business may forecast payments.
 Another merit is that no share is needed to be provided to bank only interest and principal
amount is provided.
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Disadvantages
 It is disadvantageous as security is provided for availing loan.
 Bank loan is inflexible as once loan is approved, it can't be reverted.
Venture Capital
The venture capitalists provide funds to company and technical advice is provided by
them as well.
Advantages
 Innovation is provided by them as technical support is imparted.
 They provide business with new insights to accomplish success (Venture Capital:
Meaning, Features, Advantages and Disadvantages. 2018).
Disadvantages
 It is not good as share is taken by the venture capitalists in the company.
 It is unsuitable as short-term requirements are not fulfilled.
Various investment proposal techniques and limitations and provide recommendations
Net present value method presents return in monetary terms which will be generated by
the firm after specified time frame. Along with NPV, there are several other techniques which
can be used by Coco plc for evaluating the viability of investment options available to them such
as:
Payback period: This tool of investment appraisal renders information about the time
period within which initial investment will be recouped. In other words, such tool of capital
budgeting helps in assessing time frame after which firm would become able to generate profit
margin. As per selection criteria, project with less payback period is highly preferred over others.
Limitations
 It does not consider time value of money concept which in turn recognized as the main
limitation
 Payback method only entails recovery time but does not provide information about
return which will be generated after recovery period.
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Accounting rate of return: By using such tool, manager of Coco Plc can assess average
return or profitability associated with the concerned investment proposals. On the basis of this,
firm should give priority to the project which has high ARR.
Limitations
 Absence of time value of money concept
 Consider profit margin for the purpose of evaluation
Internal rate of return: Such tool of investment appraisal also helps in making
estimation about the profitability of potential investment options available. IRR is the most
effectual methods which presents profitability aspect in the form of %. Hence, project which has
IRR should be considered or selected for investment purpose in comparison to others (Abdoh
and Varela, 2018).
Limitations
 In the case of two mutually exclusive projects such technique proves to be unsuitable
 Further, in IRR, there is a need to use two discounting rates which in turn recognized as a
complex task
BEP may be served as a most effectual tool, as per managerial accounting, which provides
information about the position of no profit no loss. Using such technique, business entity can
assess the units which need to be produced or sold for recovering all the expenses incurred. In
the context of Coco plc, break even analysis is highly significant from planning purpose.
Coco Super
Year 0 1 2 3 4 5
Revenue 100 1400 5000 4800 3800 3200
Less: 42 150 144 114 96
1442 5150 4944 3914 3296
Expenses of
Component A 580 500 820 860 1000
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14.5 12.5 20.5 21.5 25
594.5 512.5 840.5 881.5 1025
Expenses of
Component B 1200 1050 1400 1800 1700
30 26.25 35 45 42.5
1230 1076.25 1435 1845 1742.5
Overhead 220 220 230 200 200
STO Officer 1 328 328 328 328 328
11 9.9 8.91 8.019 7.2171
90.20 81.18 73.06 65.76 59.18
STO Officer 2 182 182 182 182 182
14 12.88 11.8496 10.90 10.03
63.7 58.60 53.92 49.60 45.63
2198.4 1948.534 2632.48 3041.86 3072.31
GP -756.4 3201.466 2311.52232
872.141774
4
223.685548
448
Capital allowance
@ 25% -189.1 800.3665 577.88058
218.035443
6
55.9213871
12
Profit before tax
(PBT) -567.3 2401.0995 1733.64174
654.106330
8
167.764161
336
Applying
Corporate tax @
-107.787 456.208905 329.391930 124.280202 31.8751906
5

19% 6 852 538
Net income -459.51 1944.89 1404.25 529.83 135.89
Year Cash flows
Discount factor @
9%
Present Value of
cash flows
0
1 -459.51 0.917 -421.57
2 1944.89 0.842 1636.98
3 1404.25 0.772 1084.34
4 529.83 0.708 375.34
5 135.89 0.650 88.32
2763.41
Initial outlay 13800
-11036.59
Coco Platform
Year 0 1 2 3 4 5
Revenue 1680 5400 3960 3960 2880
Less: 50.4 162 118.8 118.8 86.4
1730.4 5562 4078.8 4078.8 2966.4
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Expenses of
Component
A 580 500 820 860 1000
14.5 12.5 20.5 21.5 25
594.5 512.5 840.5 881.5 1025
Expenses of
Component
B 1200 1050 1400 1800 1700
30 26.25 35 45 42.5
1230 1076.25 1435 1845 1742.5
Overheads 220 220 230 200 200
STO Officer
1 328 328 328 328 328
11 9.9 8.91 8.019 7.2171
90.20 81.18 73.06 65.76 59.18
STO Officer
2 182 182 182 182 182
14 12.88 11.8496 10.90 10.03
63.7 58.60 53.92 49.60 45.63
2198.4 1948.534 2632.47768
3041.85822
56
3072.31445
1552
GP -468 3613.466 1446.32232 1036.94177 -
7

44
105.914451
552
Capital
allowance
@ 25% -117 903.3665 361.58058
259.235443
6
-
26.4786128
88
Profit before
tax (PBT) -351 2710.0995 1084.74174
777.706330
8
-
79.4358386
64
Applying
Corporate
tax @ 19% -66.69 514.918905
206.100930
6
147.764202
852
-
15.0928093
462
Net income -284.31 2195.18 878.64 629.94 -64.34
Year Cash flows
Discount factor @
11%
Present Value of cash
flows
0
1 -284.31 0.901 -256.1351351351
2 2195.18 0.812 1781.6573330087
3 878.64 0.731 642.4539952663
4 629.94 0.659 414.9609898529
5 -64.34 0.593 -38.1826584473
2544.7545245454
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Initial outlay 7600
-5055.25
It can be interpreted that Coco Platform may be utilised by the business as the same has
less negative NPV as compared to other.
Management tools Break-even analysis and Budgets
Break-even analysis is the most essential tool, if any business plan is created. This is
used to find out the volume of sales and in business it is required to cover both variable cost and
fixed cost. At break-even point, the business has made no money but they have not made any
loss as well. For finding the break-even point do a preliminary research, in that line up all raw
material suppliers and get the price list from all of those suppliers. Before setting break-even
point the basic cost and figures are required i.e. Variable expenses and fixed expenses (Lee and
Park, 2018).
No business aims is to lose, break-even analysis is the first destination of doing business.
It offers business. It gives lot of benefits which are worth to consider. It gives profit with the
insight of sales level business. It also forecast its cost, profit behaviour and volume. Break-even
analysis is the most important thing in decision making process. For forecasting sales level,
break-even can ascertain the number of units of a product to sell to generate the profit how much
is targeted.
This is helpful to managers for finding margin of safety, and degree of leverage for
decision making. If a company's product is not working well and is tending to fall, then because
of break-even it would be able to determine the employees number to maintain the production
cost and even surplus as well. Every organisation incurs additional storage cost to store the goods
which are unsold. Even the relationship between variable cost, selling price, fixed cost and sales
volume gets impacted by contribution margin. So in the same series business can tell that what
product can give profit or not.
Last but not the least break-even analysis gives the understanding of cost, and in effective
decisions regarding investment, pricing and expenditure among other things (Mansour and
Bhatti, 2018).
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Budget gives a path for business to survive or sustain in the market to meet their
objectives and goals as they pass through each month, quarter and year. They need to be
effective and to establish definite sales and target that can give success to the strategy which is
adopted by business.
This also brings unity in the organisation if team work is performed, or it illustrates
relationships between numbers. If limit is given to the employees and any department exceeded
the limit then next department will balance it. Communication is very important in every aspect,
if the goals of organisation are communicated properly and specific about the segregation. It
motivates the employees and staff members to think out of the box for the solution to shortfall of
sales or huge expenses. Budget gives quantifiable goal on which the employees have to focus. If
the result is properly engaged, committed team then it will directly reflect in the financial
position of the company (Alexander and Springer, 2018).
Budget keeps all the shareholders, investors and all other parties who wants to achieve
success of your company, then they also require protecting their interests. In the expansion of
business, budget is the primary need along with business goals. If all the parties don't agree with
the objective and budget then it will be difficult for a organisation to achieve success so it should
be in favour of business and stakeholders.
Calculation of Break-even analysis and preparing cash budget
Cash budget June July August
Sales revenue
Product Strategy Planning
(SP) 9310 9310 9310
Product Business Plan (BP) 12600 12600 12600
Total sales 21910 21910 21910
40 % Cash in month 8764 8764 8764
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60 % credit in following
month 0 13146 13146
Total receipts available 8764 21910 21910
Expenditures
Rent expense 5333.33 5333.33 5333.33
Telephone charges 266.67 266.67 266.67
Loan Interest 840 840 840
Insurance expense 1666.67 1666.67 1666.67
Electricity and Gas charges 400 400 400
Business Rate 1000 1000 1000
Marketing expense 3266.66 3266.66 3266.66
Administration expense 4533.33 4533.33 4533.33
Staff Salary expenditure 13300.00 13300.00 13300.00
Total payments 30606.66 30606.65 30606.65
Surplus/Deficit in month
-
21842.6566666667 -8696.6533333333 -8696.6533333333
Opening balance of month 3000 3000 5696.6533
Closing balance of month 3000 -5696.7 -3000
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Sales revenue 581 581 581
Variable cost per unit 428 428 428
Contribution per unit (CPU) 153 153 153
Total expenditures 30606.66 30607.66 30608.66
Total units in month 200 200 200
Sales in (BEP) 15000 15000 15000
Assessing estimated organisation's performance
Coco Ltd will be profitable by setting new office and as a result, goals may be achieved
by it in effectual way. Sales will be injected as well.
Literature Review of management tools and importance to company
Break-even analysis
It is useful for business to carry out relationship between profits, sales volume and
expenditures at various level of output. As per the views of (Park, Park and Ratti, 2018), firm is
able to analyse whether profits will be ascertained at specific point or not. When break-even is
achieved by the business, it has no profit no loss situation. However, (DeBoeuf, Lee, Johnson
and Masharuev, 2018) says that production and volume are constant which is rare phenomenon.
Budgets
Budget is a financial goal prepared for anticipating future income and expenses for a
specific period. (Woo, Kang and Lee, 2018) says that strengths and weaknesses can be found out
by the business in effective manner. Better coordination may be achieved with help of
preparation of budgets. However, (Heaton, 2018) employees would not be encouraged when
difficult targets are made by company. It requires planning which is time-consuming process.
These management tools are important for Coco Ltd in order to accomplish set targets
and achieve stated goals in the best possible way.
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Issues for management to consider surviving and earn profit
The other issues that should be considered for earning profits are as follows-
1. Checking out strategies
The management of Coco Ltd should take review of implemented strategies so that any
deviations can be eradicated and corrective actions may be taken for improvement.
2. Taking feedback from customers
This another issue which should be properly tackled by management so that customer
suggestions may be implemented to provide them satisfaction.
3. Encouraging workers
Employees should be motivated in effective way in order to achieve efficiency and to
earn profits as well from the market (Champagne, Karoui and Patel, 2018).
4. Reviewing marketing plans
Marketing plans are required to be reviewed by the business. This will provide clarity
where company should promote its products and what more channels can be used to attain profits
by marketing goods.
CONCLUSION
Hereby it can be concluded that managerial finance is quite important for managers in
order to finance activities in the best possible manner. It is also useful for company in expanding
operations by garnering various sources of funds in effective way. Furthermore, investment
appraisal techniques are crucial in carrying out whether new project will provide adequate
returns or not.
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REFERENCES
Books and Journals
Abdoh, H.A.A. and Varela, O., 2018. Product market competition, cash flow and corporate
investments. Managerial Finance. (just-accepted). pp.00-00.
Alexander, J. C. and Springer, T. M., 2018. Valuation effects of REIT mergers and the role of
diversification. Managerial Finance. (just-accepted). pp.00-00.
Champagne, C., Karoui, A. and Patel, S., 2018. Portfolio turnover activity and mutual fund
performance. Managerial Finance. 44(3). pp.326-356.
Choi, S. H. and Szewczyk, S., 2018. Corporate governance structure and strategic change:
evidence from major acquisitions. Managerial Finance. (just-accepted). pp.00-00.
DeBoeuf, D., Lee, H., Johnson, D. and Masharuev, M., 2018. Purchasing power return, a new
paradigm of capital investment appraisal. Managerial Finance. (just-accepted). pp.00-00.
Diltz, J. D. and Rakowski, D., 2018. Mutual fund research: a perspective on how we have
arrived at the current state of academic research on mutual funds. Managerial
Finance.44(3). pp.294-302.
Heaton, J. B., 2018. Hedge Fund Activists: Pessimists in a World of Managerial Optimism.
Jeong, D. and Park, S., 2018. The more connected, the better? Impact of connectedness on
volatility and price discovery in the Korean financial sector. Managerial Finance.44(1).
pp.46-73.
Lee, H. and Park, K., 2018. Introduction to the special issue on the Korean financial
markets. Managerial Financ. 44(1). pp.2-4.
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