Managerial Finance: Best Limited Investment Appraisal and Cash Budget

This report provides a comprehensive analysis of managerial finance, focusing on key areas such as funding sources, investment appraisal techniques, cash budgeting, and breakeven analysis. The report begins with an introduction highlighting the importance of finance for business operations and growth, followed by a literature review supporting the use of various accounting models. It then delves into different sources of funding, differentiating between internal and external sources, and discussing short-term and long-term financing options. The core of the report centers on investment appraisal, particularly the Net Present Value (NPV) method, applied to a case study involving Best Limited's potential machinery purchase. The NPV analysis reveals the investment's unprofitability, leading to the discussion of alternative methods like Payback Period and Accounting Rate of Return (ARR). Furthermore, the report examines cash budgeting as a crucial tool for financial planning, and concludes with a breakeven analysis and an overall evaluation of the financial strategies. The report emphasizes the importance of financial management in making informed decisions and achieving business objectives.

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MANAGERIAL FINANCE

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EXECUTIVE SUMMARY
A company needs to manage everything in an organised manner. Therefore, there exists various
accounting system such as cost accounting, management accounting and financial accounting. In
this case study, many topics has been covered relating to cost accounting uch as breakeven
analysis, sources of funds, investment appraisal etc.

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CONTENT PAGE
Serial number Particulars Page number
1. Introduction 4
2. Literature review 5
3. Sources of funding 6-7
4. Investment appraisal 8-9
5. Cash budgeting 10
6. Breakeven analysis 11
7. Evaluation 12
8. Conclusion 13

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INTRODUCTION
An organization sustains because of the management that manages it and the management can do
so if it has enough skills and proper funding to support its ideas, actions and skills. 'Finance' is
the money that is available to a business for carrying out its operations. An idea can became
reality only if there are proper funds for execution. Business growth demands for more cash and
in fact, for day-to-day transactions, a minimum level of finance is to be maintained. The
importance of finance can be enumerated as follow:
 To increase the capacity of the business: As the business grows, it needs cash to improve
its technology and better capacity so as to decrease its cost of production and remain in
the competition.
 For further expansion, i. e., to enter into the new market : When a business reaches its
optimum level, it thinks of selling its products in the new market that involves a
considerable risk but also gets accompanied with enough support from its current
operations. Further expansion may also include entering the same market but with
different products. In both the cases, finance is required for its expansion schemes.
 Take-over’s, acquisitions & moving to new premises: When a business purchases another
business, a considerable amount of finance is required for such acquisition so as to be
able to pay the owners of the selling company. When a business decides to change its
premises, cost such as renting of vans or reallocation of transportation services or change
& shift of workers, installation of new machinery & equipments requires huge finances.
 For day-to-day operations : A business's day to day operations ranging from paying to
creditors for raw materials to purchase of new machinery to payment of wages & salaries
requires a minimum maintenance of cash in hand.

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LITERATURE REVIEW SUPPORTING ACCOUNTING MODELS
We have used a number of tools to evaluate the proposals of thr company to analyze whether the
targeted returns would be achieved or not. The reason fot using such tools serves a number of
advantages :.
1. We used Investment Appraisal technique initially. This is because when investments are huge,
the management should take reasonable care before making such decisions. The use of NPV
technique is superior to other techniques and provides reliable results that can be applied onto
before making an investment into the company. Also with the use of such techniques, a company
is able to estimate its approximate cash outflows in comparison to inflows and xan then take the
decision.
2. The use of Cash budgeting serves the following advantages :
 Financing Needs : A cash budget helps a company to anticipate in advance if any
cash deficit is likely to arise and the extent of that shortfall. It indicates the difference
between the budgeted and actual to analyze ehen a need of borrowing arises.
 Planning of Actions : A cash budget helps a company to determine whether it had
enough cash in hand to meet its future obligations and to take an action if the actual
values doesn't match with the budgeted values or varies significantly. It helps a
company to pre-decide its action if there is a decline in market demand or there is a
shortfall in required materials due to internal failure.
a. Financial Performance : It shows a company's financial position to all the
stakeholders such as general public, investors, suppliers, company leaders, etc. For
example, increasing cash flow indicates strong demand for company's products and
therefore, boosting the confidence of investors in the company.
3. As we have used breakeven analysis in analyzing this proposal of the company, lets consider
the importance of such tools for the company :\
 Break Even Analysis helps in discovering the point of profitability because a
company that is not aware of its profitability point can turn worse at any time.
 It helps in pricing of a product or service as this analysis reveals the amount of
revenue required to be earned to recover all the fixed expenses as profits happens
only after reaching the break even point (Palepu, Healy and Peek, 2016).
 This analysis helps in creating a strategy for the business future and when there
are more than one product, such analysis helps in providing a time line of each
product for the company. It helps in developing a better overall financial strategy
that fits the projected costs & profits (Phillips, 2014)..

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SOURCES OF FINANCE
Some sources of finance are short term, meaning that it has to be paid back within a year and
some sources of finance are long term and can be paid back in years. The different sources of
finance can be stated as (Bruner, Eades and Schill, 2017):
 Internal Sources : The internal sources are defined as the generation of finance from
within the business. Such sources includes :
a. 'Organic Growth', that is finance generated out of expansions and increase of sales
resulting in increase in revenue.
b. Some businesses retains their profits year after year and re-invest them in their operations
& plans.
c. Sale of assets also generates revenue for the business.
 External Sources : External sources can be defined as the finances taken from external
sources which can be both short term as well as long term. The short term financial
sources include (TULSIAN, 2016):
b. Overdraft facilities : Such facilities are provided to the individuals by their financial
institution to withdraw or use money more than they have in their account subject to a
specified negative balance amount as per the credit agreement. Establishing such
agreement with the bank can help a firm or an individual to meet their short term cash
problems instantly. However, such negative balance is to paid back to the bank within a
month.
c. Trade Credit: This refers to the credit extended by the suppliers of goods & services that
allows to buy the raw materials now but pay at a later date. Such credit facilities doesn't
require any formal agreement and helps a business to concentrate on the core activities.
However, such facilities are allowed to a business only if it has a good track record of
repayment. Thus, not available for startups and if not paid on time, such facilities are
expensive due to involvement of interest on the respective amounts.
d. Factoring : This refers to the facility where the business sells its accounts receivables to a
third party called factor who then assumes the responsibility of such debtors. It helps in
improving the current ratio and speeding up of conversion of stock into cash improves
stock turnover ratio and reduces the burden of risk as it ensures prompt payment.
However, it may result in over dependence, mismanagement and can be uneconomical
for companies with small turnover (Clarke and Clarke, 1990).
The Long term sources can be enumerated in the given points:
a. Savings & Shareholders Investments: A sole proprietor or a partner may invest his own
savings in the business or borrows it from friends or relatives. However, for big
companies, the money is being invested by people called as shareholders. Such
investment exists in the form of shares with the investors (Fairhurst, 2015). Such finance
can be retained in the business for a long period of time without the pressure of returning

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it. However, for the smooth functioning of funding, the confidence of the investors &
own satisfaction is to be achieved which basically demands for profits.
b. Debentures : Debentures are long term obligations where it carries a fixed rate of interest
which is to be paid on a regular basis. The main advantage of debentures is its low cost in
comparison to equity & preference funds. However, the regular payment of interest can
create a burden on the company.
c. Mortgage & Bank loans : A business finds bank loans more suitable as a source of
finance as banks are confined to their interest income and doesn't need a share in the
business profits. Also, banks offers loans for a good period of time and only after
scrutinizing the financial credibility of the business. However, the maid disadvantage of it
is security that usually has to be given to banks over the assets of the company known as
mortgage. Thus, if a business fails, the bank gets the first call over the assets held as
security with them. Also, it lacks flexibility (Taylor, 2008).

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INVESTMENT APPRAISAL.
Investment appraisal, also known as capital budgeting, is used to determine whether the long
term investments of the business are worth the funding of cash or not. Such investments include
purchase of new machinery, new plants, research development projects, etc. NPV is one such
method that calculates the net cash inflows as on the present day and compares it with the net
cash outflow on the same day. Positive NPV indicates that the investment is worth funding and
vice-versa (Galbraith, Downey and Kates, 2002).
In the given case of BEST LIMITED, they are planning to purchase a new machinery. The
following table has been prepared using NPV analysis :
(The figures are in €'000)
Particulars 0 1st year 2nd year 3rd year 4th year 5th year
Sales 1300 4635 5517 5245 3151
Less :
Variable
costs
Component
MX
546 743 994 1035 1287
Component
SL
1040 1485 1748 2364 2203
Overheads 237 255 361 338 348
Senior
technology
officer 1
193.20 195 197 199 201
Senioe
Technology
officer 2
150 150 150 150 150
Net
Revenue
(866.2) 1815 2067 1159 (1038)
OUTFLOW
:
Cost of (18800)

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machine
Working
capital
requirement
(900) 300 (200) 500 (400)
Total net
money cash
flow
(19700) (566.2) 1615 2567 759 (1038)
Discounting
factor @8%
1 0.926 0.857 0.794 0.735 0.681
Present
Value
(19700) (524) 1384 2038 558 (707)
NPV (16951)
As per the given table, the NPV is not only negative but also with a huge amount which doesn't
even form 15% of the actual cash outflow at the beginning of the year. Thus, it is not beneficial
for the company to make such an investment as cash outflow is way more tha cash inflows as on
the present date.
The other techniques that can be used are as follows :
1. Payback Period method : This method examines the time requirement for recovering the initial
cash outflow from the cash inflows from such investment. This method too enables the company
to decide whether such proposals should be taken or not. However, this method doesn't consider
time value of money and doesn't consider the cash inflows incurring after the payback period,
thus, failing in comparison of one project with the other (Shim and Siegel, 2008).
2. ARR (Accounting Rate Of Return) : ARR refers to the amount of profit expected on an
investment made. It is calculated by dividing the average profit by the initial investment to get an
expected return. However, like payback period method, ARR too disconsiders the time value of
money & doesn't consider the cash flows which is the actual important part of a company.

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CASH BUDGET
A cash budget is more like a plan prepared by the company regarding its expected cash receipts
and expenses during a particular period. It includes revenue collected, payments made, loans
repayment, interest received or paid, etc. In other words, it is an estimation of company's cash
inflows and outflows in a particular period and the projection of future position of company
(Hassani, 2016).
As per the given case of Best Limited, the company offers 80% credit to be paid in the following
month, which is actually not a good signal. As the company is already suffering from cash
reductions in its existing business and also, is opening its new office through external sources of
finance, it is not supposed to provide so much credit facilities to its customers as the current
status of the company demands for cash inflows into the entity. Therefore, the policy of the
company may not turn out to be in its favour in future (Holland and Torregrosa, 2008).

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BREAK EVEN ANALYSIS
Best Limited is thinking of opening a new shop at London with certain conditions, that is, it has
to offer a total of 60 services (Khan and Jain, 2014).
Since BEST LIMITED is opening its first outlet at London, we cannot expect to recover the
fixed cost at one instance. Also, there is a total of 60 services that can be provided and minimum
of 40 services per service. Therefore, following the marginal costing method and analyzing the
above two options, the maximum contribution is in option-II, i.e. 40 units of BP and 20 units of
SF.
Break Even Analysis is analyzing of amount of revenue required to cover all the fixed costs and
therefore, calculating the point after which the company would be having profits only, that is,
margin of safety. This tool is highly used by businesses as it helps in formulation & planning
processes (Saunders and Cornett, 2017)..
It is important to know the bruit effects on the company:
 Bruit will allow getting into the markets outside the UK, which is to provide access to
skilled workers.
 Brexit greatly affects the investments. Startups seeking funds will find cautious investors
but they can still manage to find the required funds.
 Brexit effects majorly include the changes in the volatility of the pound that would affect
the buying power and consumer spending.
As we have used breakeven analysis in analyzing this proposal of the company, lets consider the
importance of such tools for the company :
 Break Even Analysis helps in discovering the point of profitability because a company
that is not aware of its profitability point can turn worse at any time.
 It helps in pricing of a product or service as this analysis reveals the amount of revenue
required to be earned to recover all the fixed expenses as profits happens only after
reaching the break even point (Palepu, Healy and Peek, 2016).
 This analysis helps in creating a strategy for the business future and when there are more
than one product, such analysis helps in providing a time line of each product for the
company. It helps in developing a better overall financial strategy that fits the projected
costs & profits (Phillips, 2014)..

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EVALUATION
Best Limited has been a profit making company that includes retaining its existing customers &
maintaining a good market share. However, due to brexit effects, it is losing its market share and
suffering from cash reductions in the last two previous years indicating outflows more than
inflows. Thus, the conditions show that the company isn't enjoying a prosperous status at present
and the management is targeting towards changing of methods & opening of new operations so
as to be back to its old profitability track.
Well, in such a case, the decisions of the management aren’t appropriate for the company's
future. For example, the idea of purchasing a new software reflects irregular revenues in 5 years
and the cost incurred in comparison to such returns forms a large % of revenue. And in fact,
intwo years, the company could have negative cash balance.
In the same way, in its target of opening a new office at London, the estimation of fixed costs are
so high that the company would have to increase its current capacity to such a level that it can
produce approximately 20 times of what it is producing now so as to cover its fixed costs.
The company isn't in a position to overlook its revenue income and get the best sources for its
operations irrespective of its costs. It has to first set up a target sales & profit so as to formulate
its cost structure in accordance with that.
If the company would follow its decisions and it turns out to be unfavorable in actuality as per
the financial tools, the company would be bounded by heavy pressure of loan & it will shake the
confidence of the investors and thus, degrading the reputation of the company heavily.