Managing Finance and Operation

This study material provides insights into managing finance and operation. It covers topics like operational and regulatory factors to be considered by the board, financing needs, and sources of finance. It also includes a critical evaluation of financial appraisal techniques such as contribution analysis and break even point.

Managing finance
And operation

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK ..............................................................................................................................................1
CONCLUSION................................................................................................................................6
REFERENCES ...............................................................................................................................8

INTRODUCTION
Operation management is the managing of the companies operation and activities in order
to acquire the desired results. There are many activities in the company which relates to the
planning and forming of policies and procedures.
In the report, the company New Life Holiday and Leisure group Plc uses methods to
operate its business functions. The board have to take appropriate decisions in order to achieve
desired goals in the company. Also report includes operational and regulatory factors to be
considered by the board of directors in the company.
Furthermore, report includes the various financing needs of company New Life Holiday
and Leisure group Plc and also the alternative sources of finance by which funds can be raised by
the company in order to meet its capital requirement.
The report also includes the calculation of financial worth of the current proposal and an
alternative evaluation including all costs and revenues. The report also includes contribution
analysis, break even, payback, ARR and NPV of company New Life Holiday and Leisure group
Plc.
TASK
A) Operational and regulatory factors to be considered by the board
with the growing organization structure in the industry there is prime need to grow and
achieve success to survive in the global market. For the company achieving success it is essential
to have effective leaders and efficient top management . The board of directors in New Life
Holiday and Leisure group Plc. Have to formulate the plans and policies in order to manage its
operational in the business. With the effective board structure the company can achieve its
success and with the bad policy management there can be failure in the company New Life
Holiday and Leisure group Plc . There are many factors which can be effected by the board
decisions on the organization like customers , employees, production and manufacturing and also
various plans and policies followed by the organization New Life Holiday and Leisure group Plc
(Carrillo de Albornoz And et. al., 2018). There are four main factors which can be increase and
decrease the board effectiveness. The factors are as follows-
The Four P's of Board effectiveness
People- People in the organization are the factors which can effect the functions of
organization New Life Holiday and Leisure group Plc on large scale. Therefore while deciding
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the policies for the organization by the board its employees have to be given priority in its
operation. The policies regarding the working hours and shifts of employees, also the needs of
board to recruit the employees. Also the company New Life Holiday and Leisure group Plc need
to formulate the remuneration strategies and also determine focus of the policies on whether to
achieve benefits or to increase salary (Dalgliesh, 2016). The company's New Life Holiday and
Leisure group Plc board of directors will also decide whether they will build talent or will
purchase the talent through outer recruitment.
Product- the product in the organization is the another essential factor. Effective board
evaluate and provide an overview of the organization performance by questioning loops and gaps
in the business operation that are critical for its performance. The organization New Life Holiday
and Leisure group Plc business is widely dependent on the product or services provided by
organization. Effective boards review the core product of organization which are the cost of
production, pricing, competitor analysis and advice accordingly to the operation mangers.
Therefore the formation of the accurate policies by the company New Life Holiday and Leisure
group Plc can help company in achieving its product goals as well as organizational goals in the
process of development (Iossa and Saussier, 2018).
Process- after considering the people and product of organization by its board there is
need to plan for the process to be used by the company New Life Holiday and Leisure group
Plc. The process of company refers to formulation of policies for production of goods and
services in the organization to achieve the desirable outcomes. This might include performance
indicators such as profits, quality or sales. Effective board map includes the efficient operational
management and evaluating operational risk.(4 Key Factors to Consider for Board Effectiveness,
2017) .
Profit- profit of an organization is another important factor for which a business operates.
The company New Life Holiday and Leisure group Plc works for earning the return for the
activities of the business. In the board decisions, directors have to decide the source of profit and
also the margins made from the expected deliverables. If the company New Life Holiday and
Leisure group Plc is having problem is making even the operating level return, than the profits
are going downside. Also in the process of taking decisions for profit company needs to decide
the dividend policies of the organization, capital optimization and returns on assets and returns
on equity. Therefore the company needs to make policies in the management of deriving profits
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for the company so that the company New Life Holiday and Leisure group Plc can achieve its
organization goals in long run (McMurray and et. al., 2017).
Operation management
Operation management is concerned with controlling the production process and business
operations in the most effective and efficient manner. Operation management also involves the
process by which raw materials, labour and energy are converted into goods and services. There
are many theories and approaches designed to study the operations management in the
organization to achieve its desired operation goals.
Modern operations management revolves around four theories that are- business process
redesign (BPR), reconfigurable manufacturing systems, six sigma and lean manufacturing (Mello
and Livingston, 2016) . The organization New Life Holiday and Leisure group Plc uses the
operational management theories which are explained below-
Business process redesign - Business process redesign theory was formulated in 1993
which focuses on analysing and designing workflow and business processes within the company.
It is used in the company New Life Holiday and Leisure group Plc to restructure organization by
designing the business process from the initial levels.
Reconfigurable manufacturing systems - this is concerned with the companies
restructuring through the incorporation of accelerated change in structure, hardware and software
components. In New Life Holiday and Leisure group Plc this system assist the rapid changes in
the production capacity and also the ways in which they can effectively function in response to
market or intrinsic system changes (Mestry, 2016).
Six sigma theory- this approach focuses on the quality of the management. The six sigma
method within the company New Life Holiday and Leisure group Plc focuses on defined step
sequence and financial targets, such as increasing profits or reducing costs. The various tools
which can be used in company New Life Holiday and Leisure group Plc include trending charts,
potential defect calculations and other ratios.
Lean manufacturing theory- it is a systematic method of eliminating waste within the
manufacturing process. In the company New Life Holiday and Leisure group Plc this theory
accounts for waste that is crated and eliminate wasteful resource expenditures as much as
possible (Operations management theory, 2017) .
B) Financing needs and sources of finance
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Financing needs
There are certain needs of the company which are associated with the functioning of the
companies. The finance needs of companies are evolved through the operations of business.
Funds are needed for purchase of raw material, expenses incurred in the manufacturing process
of the product. Also the fund is needed in the purchase of asset and capital goods in the company
New Life Holiday and Leisure group Plc for improving the working capacity of the company.
There are mainly two types of financial needs in the company which are as follows-
Fixed capital- the funds which are required to purchase fixed or durable assets are
known as fixed capital or long term capital(Obaidullah, 2018). The company New Life Holiday
and Leisure group Plc needs the fixed capital to purchase land, building, machinery, equipment
and furniture etc. manufacturing activities in the company New Life Holiday and Leisure group
Plc requires large investments in plant, machinery, warehouses and others. Also the trading
concerns need relatively lesser investment in such assets. The decision regarding the requirement
of fixed capital are to be taken properly in the company. These assets continue to generate
income and profits over an extended period of time. Also the funds invested in fixed assets
cannot be withdrawn and put to some other use. The fixed capital of company requires long term
finance to achieve its organizational goals.
Working capital- working capital is the investment of money in the company New Life
Holiday and Leisure group Plc in short duration. The working capital in a company includes
purchase of raw materials, payment of wages and salaries, rent, fuel , electricity and water. Also
the working capital includes repairs and maintenance of machinery, also the expenses incurred
on advertisements of product and services (Owen and Mason, 2017). In the company
requirements of these funds are at short intervals and are usually lesser in amount. The working
capital requirements in the company New Life Holiday and Leisure group Plc is required in
completing the manufacturing process of the product and services.
Sources of finance
Financing is a crucial part of every business it determines the amount of capital required
by the company. In the company New Life Holiday and Leisure group Plc there is need of
financing to pay for their assets, equipments and other important items(Ponnusamy and Bao,
2018) . There can be two types of financing in the company which can be long- term finance and
short term finances. For meeting the long- term and short term funds requirement in the company
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there is availability of sources like capital generated by the firm and from the external factors
like new debt and equity.
LONG- TERM FINANCING
Long term finances is needed in the company New Life Holiday and Leisure group Plc
to meet its capital requirement. The capital requirement is usually needed to acquire new
equipment, research and development,to enhance cash flow. Also the long term financing is
required for companies expansion and technological advancements. Although there are many
sources of long term capital some of the major methods for long-term financing are explained
below-
Equity financing- equity financing in a company New Life Holiday and Leisure group
Plc includes the issue of shares to the public to collect funds from them. The equity financing
method is less risky in respect to cash flow commitments (Stewart, 2017). However the cost
associated with equity is very high and required expenses in order to issue shares and maintain
shareholders.
Corporate Bond- in order to collect funds by the company it issues special kind of
corporate bonds which helps in effectively collection of funds to achieve its goals and meet the
long term requirements. The corporate bonds issued by the company New Life Holiday and
Leisure group Plc comprise of the maturity date and the principle amount which is to be
redeemed to the bond holders. Also some bonds have an associated call option that permits the
issuer to redeem it reaches the maturity. There are bonds on whom the investors have options to
convert bonds into equity in the company New Life Holiday and Leisure group Plc.
Capital Notes- capital notes are a type of convertible security that are exercisable into
shares. The capital notes are alike warrant but they don't have expiry date on an exercise price
(Sudo, 2016).
SHORT-TERM FINANCING
Short-term financing are the funds used for the short run and there is less amount of
capital required as compared to the long term requirements. The short term finances is used
usually to pay inventory orders, payrolls and daily supplies of goods. These are certain short-
term financing instruments-
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Commercial Paper- commercial paper are promissory note which have pre-determined
period of time. The maturity time of the commercial paper is usually 1 to 364 days. The
commercial which have excellent credit ratings can sell their commercial paper at good price.
Promissory Note- it is a type of instrument in which the issues or maker of the
instrument promises to pay any pre determined amount on a specific date or on demand raised by
payee and under specific terms.
Asset- based Loan- this type of loan are secured by company's assets. The assets which
are used for backups can be real estate, accounts receivable, equipment and inventory (Kang and
Mason eds., 2016) . The asset for raising loans can be of single category of assets or by a
combination of assets in the company New Life Holiday and Leisure group Plc.
C) Critical Evaluation of Financial Appraisal
Contribution Analysis
Contribution is calculated by subtracting variable cost from profits. By calculating
contribution company can find out how much cash is available with company for the payment of
its fixed assets. Contribution of New Life Holiday and Leisure Group Plc in its new project is
453562.5 Euro and fixed cost of company is 150000 Euro thus, it is evaluated that company is
earning profit as it has more amounts left after paying fixed cost incurred in project. Contribution
also shows amount of sales which is not utilised in paying of variable cost. Contribution also
helps reducing and managing cost. As if variable cost is high and it is giving more low amount of
contribution than company than it is helpful for company in reduction of cost.
Break Even Point
Companies calculate break even point for determining a point where sales of firm is not
giving profit & loss. After this point company is able to earn profits.
Break Even Point= (Fixed Cost/Contribution Margin)
=(150000/52.43%)
= 286587.69
If sales of New Life Holiday and Leisure Group Plc in Philgamel Suites is 286587.69
Euro than company can make profits by increasing its sales beyond this point. As sales of
company in this project is more than break even point which shows its new project is profitable.
Further, company also can invest more money in for earning extra profits by promoting sale of
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its new product line, It also helps company in maintaining its sales volume so that it cannot
reduced below this level. It also beneficial for company in setting up of its fixed cost thus, it is
evaluated that allocation of fixed cost in this project is viable. This break even point shows that
investment planning & decisions are good and facilitating sustainable growth of business and
company also able to set its sales target with this.
Break Even point helps companies in managing its sales level and direct cost engaged in
production of products & services(Polman and Sinke, 2016).
Pay-back Period
Payback is a period which calculates a time period in which company is able to offset its
cash outflows with cash inflows. A project which require less time is most viable and profitable
of firms. There are two method for calculation of payback period Subtraction & Averaging
Method. New Life Holiday and Leisure Group Plc calculates its payback period with the help of
Averaging Method.
Payback Period= (Initial Cash Outflow/ Cash Inflow)
(1050000/303562.5)= 3.45 years
Cash Inflow
Sales 953562.5
Less- Variable Cost 500000
Less- Fixed Cost 150000
Net Inflow 303562.5
Cash Outflow
Building Cost 1000000
Equipment 50000
Net Initial Cash Payment 1050000
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New Life Holiday and Leisure Group Plc can mitigate cost of all its investment in 3.45
years after this company can make more profits by operating business in this project. Whereas
with this company can not evaluate value of its future cash flows. By comparing payback period
of two projects company can also evaluate that which project is taking less time in converting its
cost of project in profit.
Annual Rate of Return (ARR)
Annual Rate of Return is calculated for determining profits earned by business firms out
for investments made by them. By calculating ARR New Life Holiday and Leisure Group Plc
can identify how much their investment is beneficial and what type of changes are required in
investment decision of company so that it cab achieve its objectives. ARR is also calculated for
checking feasibility of financial appraisal of business and calculation of annual rate is explained
below-
Accounting Rate of Return- (Incremental Accounting Profit/Initial Investment)
=(303562.5/1050000)
=28.91%
By evaluating financial appraisal of New Life Holiday and Leisure Group Plc is
evaluated that company make an investment of 1000000 Euro in Purchasing of Building and
50000 in Equipment. Company earns same amount of profits in all years thus, profit of company
is 303562.5 Euro. ARR of company shows that it earns 28.91% in a year out of its investment.
Thus, ARR helps company in comparing its profitability of a project from other projects of firm.
This percentage of ARR also enable company in making various decisions such as investment
decision, acquisition decisions and other financial decision related to expansion of business.
With the helps of ARR company can increase its annual rate of return by doing further
investment in purchasing of assets and by eliminating unnecessary cost. However, ARR is not
beneficial for company in identifying profits of projects which are having different cash flows
and different investment value. This percentage of ARR does not calculated by considering time
value of money as it is not helpful in identifying future profits of project(MURPHY, KEANE
and Richardson, 2019).
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Net Present Value (NPV)
Net Present Value is calculated for evaluating effectiveness and practicability of
investments made by companies. It is also helpful for New Life Holiday and Leisure Group Plc
in making decisions regarding expansion of business as company is expansing its business by
introducing new suite in its product line named as Philgamel Suites. NPV of company is
calculate below-
Year 0 1 2 3 4
Net Cash Flow -1050000 303562.5 303562.5 303562.5 303562.5
Discount
Factor 1%
1 0.99
[303562.5/
(1.01)]
0.98
[303562.5/
(1.01)^2]
0.97
[303562.5/
(1.01)^3]
0.96
[03562.5/
(1.01)^4]
Present Value -1050000 300556.93 297581.12 294634.77 291717.6
Present Value= [(Cash flows)/( 1+r)i]
Net Present Value= (300566.93+297581.12+294634.77+291717.6-1050000)
=134490.42
Net Present Value of New Life Holiday and Leisure Group Plc is positive which sjhows
that companies new business or investment is profitable. It is also evaluated with the help of
Present Value of company of 4 years that companies profits is increasing day by day thus,
business of firm is growing. Further, its is also analysed that business has an opportunity to
include new product line and can make further investment. As NPV of firm for the new project
of introduction of new suite is positive it assumed that future cash flows is less valuable than
present cash outflows.
Net Present Value of project of New Life Holiday and Leisure Group Plc is calculated on
the basis of all cash inflows, cash outflows and amount of risk involved in a specific project.
Thus, it gives actual profit incurred from investment made by company.
NPV of this project also helps company in calculating aggregate value of profits earned
by company in 4 years. Like in this project firm gain a profit of 134490.42 by discounting cash
flow of different years. This NPV shows that investment decisions mad by company is reliable
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and all other decisions regarding revenue & allocation of cots is viable. It is also analysed that
companies companies auditors and other financial manager are skilled and knowledgable.
Positive NPV of project made by New Life Holiday and Leisure Group Plc also helps it
in making further decisions regarding expansion & diversification of business. Thus, this project
is wealthy and helps in maximising financial worth of business(O’Connor, 2018).
On the other hand, Company can not make same financial decision for all of its projects
as different projects require different amount of cost and revenues. Thus, New Life Holiday and
Leisure Group Plc cannot use NPV of this project for its other project. In this case it is
appropriate for Philgamel Suites only. Also NPV of a project is calculated by taking assumptions
so sometimes it does not give true value of profits made by company. Further, rate of return is
assumed for calculation of Net Present Value of in this project firm determine 1% rate of return
which is very low that the reason it is showing higher profit. Whereas if financial manager of
company set higher rate of return than it gives more losses.
Further, its is evaluated company allocate equal cost in all years which benefits it in
calculating profits. But company can achieve higher rate of profits if sales and cost of company
is being revised year by year. This further help hotel in enhancing its customer base & market
share as with new cost and investment offerings of company is maximised. Company can also
calculate NPV of its business assuming different rate of return for evaluation of viability of
projects and it is also beneficial for company to check its projects profitability.(Pillai, Bhatnagar
and Thukral, 2016, December.).
CONCLUSION
With this the report concludes that operation management is the prime responsibility of
the management in the organization. The report states that there is proper formation of the
policies in the organization New Life Holiday and Leisure group Plc in order to achieve its
organizational goals.
The report concludes that there are four major factors which effect the decisions of board
in company. The factors which widely effect the business are- people, process, profit and
product. Also there is use of various management theories in the report. The company New Life
Holiday and Leisure group Plc can improve the decisions of board by concentrating on the four
major factors explained in the report.
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Also the report concludes that there are two types of financing needs which are working
capital finance and fixed capital finance.
Furthermore report states the financial worth of current proposal and calculation of all
cost and revenue of the current proposal in the company New Life Holiday and Leisure group
Plc(Sudo, 2016).
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Sudo, T., 2016. Climate finance and the role of international cooperation. Managing the
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ONLINE
4 Key Factors to Consider for Board Effectiveness. 2017. [online]. Available through
<http://sbs.strathmore.edu/news/4-key-factors-consider-board-effectiveness/>
Operations management theory. 2017. [online]. Available through
<https://www.investopedia.com/ask/answers/050715/what-operations-management-theory-
and-how-can-it-help-businesspeople>
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