Sources of Finance for Businesses in the UK | London School of Science & Technology

In this assignment we  will discuss about managing financial resources and decisions below are  the summaries points of this assignment:- Finance refers to obtaining money to start, run and expand a business. Internal and external sources of finance are available. Popular sources of finance for businesses in the UK include banks, grants, business angels, own finance, loans, and CDFA. It is not advisable to fund start-up with personal savings, loans or credit. Bank overdrafts and term loans are a good way to cover fluctuation of funds. Grants are a reliable source of funds from government sources. Angel investors are growing trend in the business world and provide their suggestions, skills, talent, and experience to businesses. CDFA is a good example of loans for businesses. Selected sources of finance will impact the financial statements of the business. Bank loans affect the financial position of the business and charge all expenses and interest in the profit and loss account. Grants charge as an expense in the profit and loss account and increase assets and liabilities on the balance sheet. Angel investors affect the debit side of the profit and loss account and the liability side of the balance sheet.

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ASSESSMENT COVER SHEET
Unit Number and
Title
Assessment Title
Course Title
Assessment Code
Unit 2: Managing Financial Resources and Decisions – Level 4
Managing Financial Resources and Decisions
HND Business
HND Bus-Unit 2/Managing Finance July 2013
Hand Out Date 29th July 2013 Hand In Date 21st September 2013
Lecturer(s)
John Owen
Michael Evans
Dhaneswar
Chooramun
Jane Evans
Vijay Shah
Anuja Prashar
Shohail Choudhary
Internal
Verifier Jonathan Cartmell
Sources of
information
1. Course Notes / Slides / Activities / Handouts.
2. Recommended Learning Textbooks:
BPP Business Essentials Managing Finance
3. Recommended Learning Web link:
 Tutor2u
To be filled by the student FINAL VERSION YES/NO (Delete as
appropriate)
Student
Name Maria Mihaela Buzas Lecturer Michael Evans
Student ID H1307048 Group(e.g.) MFRO 49(9)
Assessment Requirements
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and time.
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within the text and an entry in a references list. Otherwise it will be considered as
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staff at LSST.
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Pass
In order to achieve Pass, students must achieve all the pass criteria below.
Source: Google Images
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Q 1.1
Identify and describe at least six sources of finance that are available to businesses in
the UK.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 4th August 2013
In order to complete the above task, your answer should include the following:
 Identify six sources of finance and provide a brief description of each source identified
In answering this question, you will have covered the following assessment criterion:
 1.1 Identify the sources of finance available to a business.
Finance refers to source of money for a business to start up, run and then expand. There are mainly two
sources of finance – internal & external. Some of the popular sources of finance for business in UK are:
 Banks – These are the most widely used start-ups for the business in UK. Bank offer overdrafts as a
form of short term finance and Terms loans are considered to help businesses in buying supplies and
equipments such as fixed assets, machinery or office equipments etc (Broadbent and Cullen, 2012).
 Grants – Under grants funding appear from EC and UK government sources, it is better option for
businesses seeking finance for specific projects.
 Business Angels – Often high net worth individuals, Business Angels invest in high growth businesses
on their own or as part of a syndicate. Besides providing finance angel investors also provide their own
ideas, skills and contacts to businesses (Carey, 2001).
 Own finance – One can start its own business by using its own financial resources. This money can be
available in form of personal savings or fixed deposits or investments.
 Loans – It’s not just the banks that provide the loans but there are also other business support
organization and agencies which provide finance to businesses in UK.
 CDFA – Based in UK, Community Development Finance Association provides loans and support to
businesses, charities, social enterprises etc (Collis and Jarvis 2002).
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Q.1.2
Assess the implications and costs (if any) of the identified sources of finance available
to UK businesses.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 6th August 2013
In order to complete the above task, your answer should:
 Assess the effects of these sources of finance on control of the business.
In answering this question, you will have covered the following assessment criterion:
 1.2 Assess the implications of different sources of finance.
Businesses in UK have many sources of finance available for the business activities. Typically it is not advised
to fund the start-up for the business from own funds, loans or credit not necessarily customized to the business
requirements and needs. Bank overdrafts and term loans are fine way of covering any instability or fluctuation
of funds coming in and out of business (Deakins, Morrison and Galloway, 2002). Grants can be defined as the
trustable source of funds as the finance comes from the government sources, businesses can search for grants
available in different regions and can find further information on their websites. Angel investors is the
growing trend in the business world, apart from arranging finance they also provide their suggestions, skills,
talent and experience to the businesses in UK (Dittenhofer, 2001). The National Network Enterprise is a good
example of loan for the businesses. Mostly based within the UK’s most disadvantaged communities the
Community Development Finance Associations represent a system of regional community fiancé institutions
in every local region of UK. (Fairchild, 2002).
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Q.1.3
Highlight the advantages and disadvantages of the different sources of finance that
you have chosen (Q1.1) as suitable for any business in the UK.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 9th August 2013
 List the advantages and disadvantages of the six different sources of finance that you
consider suitable for your chosen business in Q1.1.
In answering this question, you will have covered the following assessment criterion:
 1.3 Evaluate appropriate sources of finance for a business project.
Own finance makes a great source of capital for the business because possession costs are minimum and
business will not be paying any interest or other charges on loans. Drawback is that if the personal savings is
plowed into the business, it will lose it all in case if business doesn’t runs (Gloy and LaDue, 2003).
Arranging a group of investors can help in raising startup and expansion of capital without inserting the
entire risk on the company alone. The disadvantage of bringing in investors is that the company losses a
certain element of control over the business (Carey, 2001). Bank loans enables to keep cash on hand which
can be use as the operating capital or for personal survival during the decline of the business on the other side
the drawback is the interest charged on the loan, bank will ask for interest whether the business is running
good or bad.
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Q 2.1
You intend to set up your own business. In order to do this, you will need to consider
the amount of finance required to achieve this objective. Consider how much finance
you would need for premises, staff, marketing etc. Note: Make sure you show how
much investment you need and why. Also make sure you provide a brief synopsis of
the business.
Select the sources of finance (identified in Q1.1) that are the most suitable for your
project and explain why they are the most suitable. Analyse the cost of these sources
of finance
Guidelines: (Approx. 180 words) Recommended Interim Deadline:12th August 2013
• From the sources of finance selected choose at least 3 different sources that are
suitable to your business, and justify your selection.
• Analyse the costs of the different types of finance available to the business.
In answering this question, you will have covered the following assessment criterion:
 2.1 Analyse the costs of different sources of finance
Setting up own business requires suitable source of finance available for its start-up. Presently I want to start
a business dealing in producing equipments, tools and machinery for schools, colleges and educational
institutes in UK. It will need £500,000 for the business to start and £100,000 out of it will be needed for the
premises, staff and marketing (Lam, 2010). Out of the above identified sources of finance three of them are
most suitable for the described business.
Bank loans are like the supermarket for debt financing providing short term and long term financing
and they arrange funds for all asset needs, including equipment, working capital etc. Unlike other financing
terms banks offer some flexibility, the business can pay off the loan early and finish the agreement, (Leung,
2011) VCs and other institutional investors may not be so amenable. Angel investors are also the better
medium of raising the funds for the business, if one must sell an ownership to get the company off the
ground, start by finding a respected industry executive who is agreeable to spend a reasonable amount and
give venture credibility with other investors. The advice and networking without all the heavy handed
demands of a VC come in handy too (Li, 2003). Many small business administration offer grants to help
new companies to start the business, grants are fundamentally free money and government guaranteed loans
come with interest rates that are usually far below what one can get on its own (Dittenhofer, 2001).
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Q 2.2
Explain why financial planning is important for the success of any business.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 17th August 2013
In order to complete the above task, your answer should:
 Explain what is meant by ‘financial planning’.
 Explain why the process of financial planning is important to the success of a business.
In answering this question, you will have covered the following assessment criterion:
 2.2 Explain the importance of financial planning.
Financial planning can be termed as the process of estimating the funds and capital required for the business to
develop and expand. It is the process of framing the financial policies and procedures which are essential for
administration and investment of funds in effective manner. It is possible to manage income more efficiently
with the help of financial planning; it increases the cash flow by cautiously monitoring the spending expenses
and prototypes (Keller, 2011). An increase in cash flow results in increase of capital for the business, financial
planning acts as a guide in choosing right type of investments policies required for the business. Fine
understanding can be achieved when measurable financial objectives are set and hence it can improve the
control over budget and financial policies (Broadbent and Cullen, 2012). Process of financial planning reduces
the uncertainties which can be hindrance in growth of the business and ensures long term survival of the
business by implementing expansion programmes.
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Q 2.3
Identify the main users of financial information and assess their information needs.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 19th August 2013
In order to complete the above task, your answer should:
 Identify the different users of an organisation’s financial information.
 Assess the different information needs of these decision makers.
In answering this question, you will have covered the following assessment criterion:
 2.3 Assess the information needs of different decision makers.
Financial statements provide the information about the financial requirements, operations and wealth of an
organization that is intended for use widely by the financial decision makers (Shim, and Siegel, 2008). There
are many types of users of financial information such as:
 Investors – These people need the financial information for making the decisions relating to holding,
buying and selling of shares and securities of other companies.
 Government – Government agencies need the financial information in command to standardize and
authorized the business practises and introduce provisions for the regulation of the firms (Correia and
et.all. 2012).
 Competitors – These people need the financial information in order to understand the strategies,
strength, weakness and functioning of the other companies.
 Lenders – Many lending institutions like banks and loan giving agencies examine the financial
information while making the decision to lend the money including the amount of interests and
security (Keller, 2011).
 Customers – They need the financial information for evaluating the performance of the company and
its persistence in the market.
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Q 2.4
Explain the impact that the sources of finance selected in Q 2.1 has on the Profit & Loss
Account and on the Balance Sheet.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 22nd August 2013
In order to complete the above task, your answer should
 Consider how the chosen sources of finance will affect the costs in the P&L Account
 Consider the effect they may have on the assets and/or liabilities in the Balance Sheet.
In answering this question, you will have covered the following assessment criterion:
 2.4 Explain the impact of finance on the financial statements.
Selected sources of finance will have their impact on the financial statements of the business. Arranging
finance through bank loans is a form of debt financing, funds coming through bank loan will affect the
financial position of the business and will charge all the expenses and interest relating to bank loan in the
profit & loss account. Amount of loan will increase the liabilities wall of the balances sheet (Carey, 2001).
Generating finance through grants will charge as an expense in the profit & loss account and assets and
liabilities side of the balance sheet will increase affecting the liquidity of the business. Funds coming from
angel investors will affect the debit side of profit & loss account; hence the profitability will be affected
because the profits coming from investments will be shared with the investors. Liabilities side of the balance
sheet will be affected because the funds or capital has been generated for the business (Deakins, Morrison and
Galloway, 2002).
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Q 3.1
You are a self-employed management consultant and you have been asked by Bloggs
Books to prepare a cash budget for the four months ending April 2014. The manager of
Bloggs Books has provided the following details:
1. The Bank Balance on 1st January 2014 will be £5,000.
2. Total monthly sales for the four month period ending April 2014 are forecasted as
£
Jan 150,000
Feb 100,000
March 75,000
April 100,000
3. Cash purchases during the relevant period are
£
Jan 52,000
Feb 32,000
March 74,000
April 82,000
4. A new supplier has offered Bloggs Books two months credit starting Jan 2014; this
means that materials bought on credit in January will be paid for in March and so
on. Bloggs Books plan to make the following credit purchases from this supplier
£
Jan 46,000
Feb 20,000
March 30,000
April 20,000
5. Bloggs Books pay rent of £20,000 per month quarterly in advance. Payments are
due on 1st January, 1st April etc.
6. Other expenses are forecasted as follows
£
Jan 10,000
Feb 15,000
March 20,000
April 20,000
7. Bloggs Books will be repaying a Bank Loan at the rate of £10,000 per month. The
last installment is due in March 2014.
Prepare the Cash Budget for the four months ending April 2014, and identify whether
the business has a surplus or a deficit, and if they have a deficit suggest how they could
deal with this.
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Guidelines: (Approx. 100 words) Recommended Interim Deadline: 26th August 2013
You need to prepare a Cash Budget working out whether the organisation has a cash surplus or
a cash deficit at the end of the 4 month period, and then explain how the business would react
to this.
In answering this question, you will have covered the following assessment criterion:
 3.1 Analyse budgets and make appropriate decisions.
Table 1 : CASH BUDGET
Jan (£) Feb(£) March(£) Apr(£)
Opening cash balance 5000 23000 66000 (-)9000
Sales 150000 100000 75000 100000
Total Inflow 155000 123000 141000 (-)9100
0
Cash Purchases 52000 32000 74000 82000
Rent 60000 0 0 60000
Credit 0 0 46000 20000
Loan 10000 10000 10000 0
other expenses 10000 15000 20000 20000
total outflow 132000 57000 150000 182000
Closing cash balance 23000 66000 (-)9000 (-)9100
0
Cash budget indicates whether a business has sufficient amount of cash resources to operate its routine
activities, it reflects the total cash outflow and cash inflow from the business activities (Carey, 2001). The
above cash budget of Blog’s Books is showing deficit amount at the end of the April 2014. The deficit reflects
the excess of spending over income that means amount of expenses are more than the amount of income and it
also shows that it becomes difficult for the company to survive in the long run. Company can reduce or
eliminate the deficit by increasing sales and reducing expenditures
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Q 3.2
A business making 1000 units of Product A has the following costs :
Variable Cost = £10/unit
Fixed Costs = £5/unit
Total Cost = £15/unit
All of the Fixed Costs for the Product A are recovered when 1000 units have been made
and sold with a Mark-Up of 40%.
a) Calculate the selling price per unit for any one of the first 1000 units made and
how much profit will be yielded from the selling of the first 1000 units.
b) The business has an opportunity to sell a further 600 units to a major retailer who
demands discounts. The additional production can be achieved within the
existing capacity at marginal costs. If the company wants to maintain 40% mark-
up margin on the additional sale of the 600, what is the unit price for any of
additional 600, and how much profit will be achieved from the sale of these
additional 600.
You may round up your figures to nearest £1 when calculating your answer.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 28th August 2013
In order to complete the above task, your answer should show that:
In a) Pricing should be based on fixed and variable cost recovery
In b) Pricing should only be based on variable cost recovery.
In answering this question, you will have covered the following assessment criterion:
 3.2 Explain the calculation of unit costs and make pricing decisions using relevant information.
Number of units = 1000
Variable cost = £10/unit
Fixed cost = £5/unit
Total Cost = £15/unit
A) Cost price = 1000 * 15 = 15000 = 15000 + 40% mark up
= 6000 + 15000
= 21000 £ (profit)
Selling price per unit = 21000 / 1000 = 21 £
B) Additional units to be sold = 600 units
Additional units * cost price * mark up %
600 * 10 * 140/100 = 8400
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8400 / 600 = 14 £
Profit = selling price – cost price
8400 – 6000 = 2400 £
The above calculation shows that 21000 £ can be realized from the sale of first 1000 units and selling
price per unit will be 21 £. If the company wants to maintain 40% mark-up margin on the additional sale of
600 units the unit price will be 14 £ and company will be getting a profit of 2400 on sale of these additional
600 units (Broadbent and Cullen, 2012).
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Q 3.3
You are an advisor to the CEO of XYZ Ltd who has been presented with three New
Product opportunities. He has asked you to identify which product the company should
produce and sell.
You need to use the Payback Period and Net Present Values (NPV) for each of the
products and identify which one new product (A, B or C) you would select for
manufacturing and selling by the organisation.
Yr. Product A Product B Product C
0 Investment £100,000 Investment
£100,000
Investment £70,000
1 £40,000 £47,500 £25,000
2 £35,000 £47,500 £30,000
3 £55,000 £47,500 £40,000
4 £60,000 £47,500 £50,000
Total £190,000 £190,000 £145,000
The estimated cost of capital is 10% per annum.
Note –The discount factors are as follows:
Year 1 = 0.909
Year 2 = 0.826
Year 3 = 0.751
Year 4 = 0.683
(Also see merit question one).
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 30th August 2013
In order to complete this task, your answer should:
 Calculate the NPV and Payback method using the above figures and assess the viability
of the project.
In answering this question, you will have covered the following assessment criterion:
 3.3 Assess the viability of a project using investment appraisal techniques.
Table 2 : Payback Period
Yr. Product A Product B Product C
0 Cash flow
cumulative value
Cash flow
cumulative value
Cash flow
cumulative value
Initial
cost
100000 100000 70000
1 £40000 40000 £47,500
47500
£25000
25000
2 £35000 75000 £47,500 £40,000
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95000 65000
3 £55000
130000
£47,500
142500
£50,000
115000
4 £60000 £47,500 £145,000
Payback period
Payback period is the time required to recover the cost of investment. The payback period of a given
investment is a vital determinant of whether to undertake the position or project or not. (Deakins, Morrison and
Galloway, 2002).
Company should manufacture Product C because it will be beneficial for the company as its cost will
be recovered in between year 2 and 3. The initial cost of the manufacturing the product is also very low so it
will gives more profitability to the company. The initial cost of the product A and B is too high in compare to
product C, so company should manufacture and sell product C. Firstly Company should produce Product C
then product A and at last Product B. these criteria will be favorable for the company.
Table 3 : NPV of product A
Yr. CASH
FLOW
P.V. FACTOR @
10%
PRESENT VALUE
1 40000 0.909 36360
2 35000 0.826 28910
3 55000 0.751 41305
4 60000 0.683 40980
TOTAL PRESENT VALUE 147555
INITIAL
INVESTMENT
(-)100000
NET PRESENT
VALUE
47555
Table 4 : NPV of Product B
Yr. CASH
FLOW
P.V. FACTOR @
10%
PRESENT VALUE
1 47500 0.909 43177.5
2 47500 0.826 39235
3 47500 0.751 35672.5
4 47500 0.683 32442.5
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TOTAL PRESENT VALUE 150527.5
INITIAL
INVESTMENT
(-)100000
NET PRESENT
VALUE
50527.5
Table 5 : NPV of Product C
Yr. CASH
FLOW
P.V. FACTOR @
10%
PRESENT VALUE
1 25000 0.909 22725
2 30000 0.826 24780
3 40000 0.751 30040
4 50000 0.683 34150
TOTAL PRESENT VALUE 111695
INITIAL
INVESTMENT
(-)70000
NET PRESENT
VALUE
41695
Net present value
In finance net present value is termed as the computation of the present values of the cash flows and it
is the amount of difference between the present value of cash inflows and cash outflows; it is used in capital
budgeting to analyze the profitability and liquidity of an investment of a product or project. NPV is a central
technique in discounted cash flow analysis and is a standard way of using the time value of money to appraise
long term projects (Broadbent and Cullen, 2012).
According to net present value method the company should manufacture product B because its NPV is
highest in compare to NPV of the product A and C. this will generate more profit and inflows to the company,
so firstly company should manufacture Product B and then Product A and at last Product C.
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Q 4.1 and 4.2
Discuss the difference between Gross Profit and Net Profit in the Profit and Loss Account
and explain why it is important to differentiate between fixed and current assets in the
Balance Sheet.
Explain how the Accounting Equation (Assets = Capital + Liabilities) in its different
forms affect the way the Balance Sheet is presented.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 2nd September
2013
In order to complete this task, you need to consider:
• The difference between net and gross profit and discuss why it is important to show
current assets under a different heading to fixed assets in the Balance Sheet.
• The different layouts available for the Balance Sheet.
In answering this question, you will have covered the following assessment criteria:
 4.1 Discuss the main financial statements.
 4.2 Compare appropriate formats of financial statements for different types of business.
In the profit & loss account the gross profit margin is a measurement of firm’s manufacturing and distribution
efficiency during the production process and it is calculated by subtracting the cost of goods sold from revenue
(Shim, K. J. and Siegel, G. J., 2008). A firm boosting higher gross profit margin it shows that its competitors
and industry is more efficient. On the other had net profit refers to the amount left over after all deductions are
done, once the net value is attained nothing more is subtracted. Net profit is calculated by subtracting expenses
such as selling, general and administrative expenses and taxes from gross income (Deakins, Morrison and
Galloway, 2002).
Under balance sheets fixed assets such as inventories, cash in hand, debtors are non-moving assets,
fixed in nature and are not easy to in cash and current assets such as plant, machinery, land & building etc are
flexible in nature, easily convertible in cash and it’s a type of floating money to the company (Keller, 2011).
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Q 4.3
Your company has the following annual statements at the end of Period 31st August
2013:
Income Statement (Profit & Loss Account) for Period Ending 31st August 2013
£(000) £(000)
Sales 1200
Cost of Sales (400)
Gross Profit 800
Admin. Expenses 300
Marketing Expenses 150
Total Expenses (450)
Net Profit 350
The dividends paid to ordinary shareholders after taxation is 25p per share and the
current quoted share price is £3.00
Statement of Financial Position (Balance Sheet) at 31st August 2013
£(000) £(000)
Fixed Assets
Buildings 2000
Machinery & Equipment 500
Vehicles 150
Total Fixed Assets 2,650
Current Assets
Inventory (Stock) 800
Accounts Receivable (Debtors) 150
Cash in Bank 300
Total Current Assets 1250
Total Asset (Fixed + Current) 3,900
Non-Current Liabilities
Long-term loan (200)
Current Liabilities
Accounts Payable (Creditors) 200
Overdrafts 150
Other accrued expenses 150
Total Current Liabilities (500)
Total Liabilities (700)
Total Assets Less Total Liabilities 3,200
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Financed by Equity :
Ordinary Share Capital 3000
Retained Profits 200
Total Equity 3,200
Required:
(a) Calculate the following accounting ratios:
 Current ratio
 Acid test ratio
 Return on capital employed (ROCE)
 Gross profit margin
 Net profit margin
 Debtor’s Payment Period (use Sales for the Period)
For each ratio, include the formula in words and your workings and explain what each
ratio measures.
Guidelines: (Approx. 150 words) Recommended Interim Deadline: 4th September
2013
In order to complete the task you should:
 Calculate and interpret the relevant financial ratios based on the information given in the
financial statements.
In answering this question, you will have covered the following assessment criterion:
 4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and
external.
Current ratio = = 125000/500000=2.5%
Current ratio measures the capacity of the firm to pay its short term liabilities also known as liquidity ratio and
cash ratio (Leung, 2011) .
Acid test ratio = = 125000 – 800000 / 500000 = .9%
Acid test ratio is the stringent indicator that determines whether a firm has enough short term assets to wrap up
its immediate liabilities without selling its inventory (Gloy and LaDue, 2003).
Return on capital employed ratio = *100 = 350000 / 3400000 * 100 = 10.2 %
Return on capital employed ratio indicates the profitability and efficiency of firm’s capital investments. It
should always be higher than the rate at which the company borrows; otherwise any increase in borrowings
will reduce shareholder’s earnings.
Gross profit margin = *100, = 800000 / 1200000 * 100 = 66.6 %
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It is a profitability ratio that shows the relationship between gross profit and total sales of the company and it
helps in evaluating the operational performance of the business (Fairchild, 2002).
Net profit margin = *100, = 350000 / 1200000 * 100 = 29.1 %
Net profit is a profitability ratio that shows relationship between net profit after tax and net sales.
Debtors payment period = *365 = 150000 / 1200000 * 365 = 45.62 %
Debtor’s payments period indicates the debtor collection period and the time taken to collect trade debts; it is
the year’s sales which are outstanding at the balance sheet date, express in days.
All of the above ratios help in analysing and evaluating the profitability & liquidity of the business.
These ratios are considered important in terms of financial planning and strategies of the business (Fairchild,
2002).
.
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PART B – MERIT CRITERIA ONLY
Merit
In order to achieve Merit, students must achieve all the Learning Outcomes plus M1,
M2 and M3
MERIT ONE
This question relates to Q3.3
Discuss why some businesses prefer to use the Payback method of investment
appraisal whilst others feel that NPV is a better method.
Guidelines: Word count approx. 250 Recommended interim deadline: 7th September 2013
Discuss the advantages and disadvantages of the two methods of investment appraisal used in
Q3.3.
In answering this question, you will have covered the following merit descriptor:
 M1 An effective approach to study and research has been applied
Payback period is the time required to recover the cost of investment. The payback period of a given
investment is a vital determinant of whether to undertake the position or project or not. (Deakins, Morrison
and Galloway, 2002). Payback period is used by the businesses because it is easy to apply and easy to
implement regardless of academi9c training or field of endeavor, it is an effective tool of measuring
investment risks and used widely when liquidity is an important criteria to choose a project. Projects with
smaller investments use the payback period, it is not worth expensing much time and effort in complicated
economic analysis in such projects.
NPV clearly indicates whether the project adds value to the company or not and is used very easily in making
investment decisions. NPV allows easy comparison between different investment option and under NPV
discount rate can be modified to show a number of factors such as risks in the market. The method makes the
decision procedure relatively forward (Deakins, Morrison and Galloway, 2002). In finance net present value is
termed as the computation of the present values of the cash flows and it is the amount of difference between
the present value of cash inflows and cash outflows; it is used in capital budgeting to analyze the profitability
and liquidity of an investment of a product or project. NPV is a central technique in discounted cash flow
analysis and is a standard way of using the time value of money to appraise long term projects Broadbent and
Cullen, 2012).
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MERIT TWO
This question relates to Q 4.3.
Research and discuss the benefits and limitations in the use of ratio analysis for
decision making.
Guidelines: (Approx. 250 words) Recommended Interim Deadline: 9th September
2013
In order to answer this question you need to look at the benefits of using ratio analysis, as well
as the limitations of using ratios, keeping in mind political, social and environmental issues.
In answering this question, you will have covered the following merit descriptor:
 M2 Complex information/data has been synthesised and processed.
Current ratio measures the capacity of the firm to pay its short term liabilities also known as liquidity ratio and
cash ratio (Leung, 2011). Acid test ratio is the stringent indicator that determines whether a firm has enough
short term assets to wrap up its immediate liabilities without selling its inventory (Gloy and LaDue, 2003).
Return on capital employed ratio indicates the profitability and efficiency of firm’s capital investments. It
should always be higher than the rate at which the company borrows; otherwise any increase in borrowings
will reduce shareholder’s earnings. Net profit is a profitability ratio that shows relationship between net profit
after tax and net sales.
Gross profit is profitability ratio that shows the relationship between gross profit and total sales of the
company and it helps in evaluating the operational performance of the business (Fairchild, 2002).
Debtor’s payments period indicates the debtor collection period and the time taken to collect trade debts; it is
the year’s sales which are outstanding at the balance sheet date, express in days.
All of the above ratios help in analysing and evaluating the profitability & liquidity of the business. These
ratios are considered important in terms of financial planning and strategies of the business (Fairchild, 2002).
.
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MERIT THREE
This question relates to Q3.1
Merit Three (M3) will be awarded if the appropriate structure and approach has been
used in Q3.1 above.
Guidelines (Approx. 250 words) Recommended Interim Deadline: 11th September
2013
To achieve this merit, you must use the correct format with each input and output clearly
named.
In answering this question, you will have covered the following merit descriptor:
 M3 The appropriate structure and approach has been used.
Table 6 : CASH BUDGET
Jan (£) Feb(£) March(£) Apr(£)
Opening cash balance 5000 23000 66000 (-)9000
Sales 150000 100000 75000 100000
Total Inflow 155000 123000 141000 (-)9100
0
Cash Purchases 52000 32000 74000 82000
Rent 60000 0 0 60000
Credit 0 0 46000 20000
Loan 10000 10000 10000 0
other expenses 10000 15000 20000 20000
total outflow 132000 57000 150000 182000
Closing cash balance 23000 66000 (-)9000 (-)9100
0
Cash budget indicates whether a business has sufficient amount of cash resources to operate its routine
activities, it reflects the total cash outflow and cash inflow from the business activities (Carey, 2001). The
above cash budget of Blog’s Books is showing deficit amount at the end of the April 2014. The deficit reflects
the excess of spending over income that means amount of expenses are more than the amount of income and it
also shows that it becomes difficult for the company to survive in the long run. Company can reduce or
eliminate the deficit by increasing sales and reducing expenditures
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PART C – DISTINCTION CRITERIA ONLY
Distinction
In order to achieve Distinction, students must achieve all the Learning Outcome, all
merits plus D1,D2 and D3
DISTINCTION ONE
This question relates to Q3.3.
Justify the use of investment appraisal techniques including ARR in the process of
strategic decision making for a business
Guidelines: (Approx. 200 words) Recommended Interim Deadline: 14th September
2013
Explain why businesses need to use investment appraisal methods and financial planning in
their decision making process and the limitations of the most common methods used.
In answering this question, you will have covered the following distinction descriptor:
 D1 Conclusions have been arrived at through synthesis of ideas and have been justified
NPV evaluates all the cash inflow and outflow over time, takes foreign exchange rates and inflation into the
account and conveys the benefits to the company terms of decision making. Accounting rate of return is a
method of contrasting the average profits a company expects to the amount need to invest, it is easy to
understand and calculate (Broadbent and Cullen, 2012). . It is a simple capital budgeting tool and is used
extensively to provide a direction in deriving the attraction of an investment project. In this way it helps in
implementing and executing decision related to functioning of business. Payback period technique suffers with
drawbacks because it doesn’t take into account the time value of money.
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DISTINCTION TWO
This relates to Q3.1
Discuss ways in which the use of cost controls can affect the outcome of the cash
budget, also discuss other possible consequences to a business of reducing costs.
Guidelines: (Approx. 200 words) Recommended Interim Deadline: 16th September
2013
You need to discuss ways businesses may reduce certain costs to improve cash balance and
what other possible effects this action may have on the business.
In answering this question, you will have covered the following distinction descriptor:
 D2 The importance of interdependence has been recognised and achieved.
Write your answer here
A cash budget is often used as a planning and control tool but it does not do the control job. It will, however,
highlight financial tight spots and indicate weaknesses requiring attention (Deakins, Morrison and Galloway,
2002).
The cash control involves effecting the cash position by :
 A smaller proportion of cash sales and a larger proportion of credit sales than expected.
 Declining sales, with resultant fall-off in revenue.
 an opportunity arising for favorable speculative buying not covered in the purchasing budget
 debtors paying their accounts more slowly than expected and increases in operating costs and
Price increases for materials, supplies, labor etc (Keller, 2011).
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DISTINCTION THREE
Critically evaluate the limitations of financial planning.
Guidelines: (Approx. 200) Recommended interim Deadline: 18th September 2013
For the distinction you need to look at the limitations inherent in the process of
financial planning. For example, plans can be made useless by PESTEL factors.
In answering this question, you will have covered the following distinction descriptor:
 D3 Effective thinking has taken place in unfamiliar contexts.
Write your answer here
Financial planning can be termed as the process of estimating the funds and capital required for the business to
develop and expand. It is the process of framing the financial policies and procedures which are essential for
administration and investment of funds in effective manner (Broadbent and Cullen, 2012). Plans and decisions
require facts about the future. Financial planning is done by considering expected situations in future which
are always uncertain, these situations cannot be anticipated exactly, and therefore its compliance is limited.
Another drawback is the reluctance or inability of the company to change a financial plan once it has been
executed. Process of financial planning reduces the uncertainties which can be hindrance in growth of the
business and ensures long term survival of the business by implementing expansion programmes.
The growing mechanism of the business industry changes every time, methods of production, changing
customer tastes generates new demand every time (Carey, 2001). These changes require alteration in financial
planning also, once the investment are made in assets cannot be reversed. Lack of coordination creates
problems in executing financial decisions and indecision among workforce disturbs the procedure of financial
planning.
– THE END –
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