Managing Financial Resources and Decisions: Fort Sport Ltd Finance

This report, prepared for Fort Sport Ltd, a small private company specializing in online fitness product sales, addresses key financial management aspects to support its planned expansion. The report begins by identifying and assessing various sources of finance, considering implications such as legal, financial, and control dilution, alongside evaluating their suitability for the company. It then delves into financial costs, emphasizing the importance of financial planning for success and assessing the information needs of different decision-makers within the company. A cash budget is prepared, along with recommendations for surplus or deficit management, and pricing decisions are made using cost-plus and return on capital employed methods. Furthermore, the report uses payback period and net present value (NPV) to assess the viability of potential new product opportunities. Finally, the report explains the purpose of financial statements, compares different formats, and applies financial ratios to evaluate the performance of XYZ Ltd, providing a comprehensive analysis of financial resources and decision-making.

Unit 2: Managing Financial Resources and
Decisions - RESIT
Level : 4
Title Managing Financial Resources and Decisions
Learning
Outcom
e
Learning
Outcome
Assessme
nt
Criteria
In this assessment you will
have the opportunity to
present evidence that shows
Task
no. Evidenc
e
LO1
LO2
Understan
d the
sources of
finance
available
to a
business
Understan
d the
importanc
e of
financial
planning
and
informatio
n needs.
1.1
Identify the sources of finance
available to a business
1.2
Assess the implications of the
different sources
1.3
Evaluate appropriate sources of
finance for a business project
2.1
Analyse the costs of different
sources of finance
2.2
Explain the importance of
financial planning
2.3 Assess the information needs of
different decision makers
2.4 Explain the impact of finance on
the financial statements
Unit 2: Managing Financial Resources and Decisions May 2014 1

LO3
Be able to
make
financial
decisions
based on
financial
informatio
n
3.1 Analyse budgets and make
appropriate decisions.
3.2 Explain the calculation of unit
costs and make pricing decisions
using relevant information.
3.3 Assess the viability of a project
using
investment appraisal techniques.
LO4
Be able to
evaluate
the
financial
performan
ce of a
business.
4.1 Discuss the main financial
statements.
4.2 Compare appropriate formats of
financial statements for different
types of business.
4.3 Interpret financial statements
using appropriate ratios and
comparisons, both internal and
external.
title Managing Financial Resources
and Decisions
Purpose of this assignment –
This unit is designed to give learners a broad understanding of the sources and
availability of finance for a business organisation. Learners will learn how to evaluate
these different sources and compare how they are used. They will learn how financial
information is recorded and how to use this information to make decisions for example
in planning and budgeting. Decisions relating to pricing and investment appraisal are
also considered within the unit. Finally, learners will learn and apply techniques used
to evaluate financial performance.
Unit 2: Managing Financial Resources and Decisions May 2014 2

Scenario
You work as a finance manager within the Head Offices of Fort Sport Ltd.
You have been asked to assist the management team in preparing and forecasting the
company’s expansion. Fort Sport Ltd is a small private company who began trading in
April 2013. The company supplies fitness products online to the public; specialising in
mid range sporting goods and equipment. In 2014, it wishes to increase its activity in
the market and as such need to identify a variety of options for finance.
Your research has shown that the Bannatyne Group would be interested in investing in
Fort Sport Ltd. This could be an option for the company and will be something for you
to consider, however, in the event that this investment is not viable, other options of
finance must be explored.
The Bannatyne Group has been keen to enter into a deal of this nature as market
research indicates that internet related businesses are expected to grow in the UK and
globally.
Your line manager has asked you to explore the cost and profit implications of various
sources of finance that would be available to Fort Sport Ltd. In particular, the
executives within the group want to know what the costs would be if the group were
to accept the investment offer from the Bannatyne Group.
Please use the following case study as a
reference:-http://businesscasestudies.co.uk/beeson-gregory/raising-finance-for-smes/
intr.html#axzz2yDASkv00
Unit 2: Managing Financial Resources and Decisions May 2014 3

Task 1 (This tasks offers you an opportunity to achieve L.O. 1: 1.1, 1.2 and
1.3)
You have been asked to identify a range of sources of finance available to Fort Sport
Ltd. These can include raising funds through a combination of finance areas. Please
identify at least three sources (1.1).
You should also assess the implications of your choices: What are the legal,
financial and dilution of control implications (percentage ownerships); risks of
bankruptcy.(1.2)
After assessing the possible sources of finance, you must choose a source(s)that
would be appropriate for Fort Sport Ltd. You are required to:
 evaluate benefits of different sources for Fort Sport Ltd;
 match term of finance to term of project (1.3)
Unit 2: Managing Financial Resources and Decisions May 2014 4

Task 2 (This tasks offers you an opportunity to achieve LO2: 2.1, 2.2, 2.3, and
2.4)
Analyse the financial costs of your chosen sources of finance for Fort Sport Ltd.
(2.1)
With reference to the financial planning of this task, you will need to explain in a report
format why financial planning is important for the success of Fort Sport Ltd.(2.2)
Assess different information needs for each decision maker within Fort Sport
Ltd: Identify and assess the information that is needed for a range of decision makers.
(2.3)
Explain how the loan and investments (purchase of ordinary shares) impacts the
balance sheet and income statement (2.4)
Unit 2: Managing Financial Resources and Decisions May 2014 5

Task 3 (This tasks offers you an opportunity to achieve LO3: 3.1, 3.2, and
3.3)
Task 3a. Analyse budgets and make appropriate decisions:
The CEO of Fort Sport Ltd has asked you to prepare a Cash Budget for the four months
ending October 2014, and identify whether the business has a surplus or a deficit. If
Fort Sport Ltd has a surplus, suggest two ways in which it could utilise this and if it has
a deficit, suggest two ways it could deal with this.(3.1)
The CEO of Fort Sport Ltd has asked you to prepare the Cash Budget based on the
following information:
1. The Bank Balance on 1st July 2014 will be £50,000.
2. Total monthly sales for the four month period ending October 2014 are
forecasted as:
£
July 150,000
August 100,000
Sept 125,000
October 120,000
3. Cash purchases during the relevant period are:
£
July 52,000
August 32,000
Sept 74,000
October 82,000
4. A new supplier has offered Fort Sport Ltd two months credit starting July 2014;
this means that materials bought on credit in July will be paid for in September and so
Unit 2: Managing Financial Resources and Decisions May 2014 6

on. Fort Sport Ltd plan to make the following credit purchases from this supplier:
£
July 46,000
August 20,000
Sept 30,000
October 20,000
5. Fort Sports Ltd pay rent of £15,000 per month quarterly in advance. Payments
are due on 1st July, 1st October etc.
6. Other expenses are forecasted as follows:
£
July 10,000
August 15,000
September 20,000
October 20,000
7. Fort Sports Ltd is repaying a bank loan at the rate of £10,000 per month. The last
installment is due in September 2014.
Task 3b.
Fort Sport Ltd is considering selling high quality ‘luxury’ exercise equipment.
Its costs for 500 units are as follows:
Total Direct Cost £20,000
Fixed Cost £10,000
Total Cost £30,000
Fort Sport is currently reviewing its selling prices and is considering cost-plus pricing
based on:
Either a 33.33 % mark-up on cost price (i.e. profit is 33.33 per cent of cost price)
Or a 20 % return on capital employed.
Unit 2: Managing Financial Resources and Decisions May 2014 7

Fort Sport will choose the method that provides the highest return.
Fort Sport Ltd has capital employed of £10,000.
Calculate the unit price based on both costing methods, and select the price you think
is most appropriate. Explain why you think it is the appropriate price.
You may round up your figures to nearest £1 when calculating your answers. (3.2)
…………………………………………………………………………………………………………………..
Task 3c.
Fort Sport Ltd has been presented with 3 new product opportunities. You have been
asked 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. Based on the table below, identify which 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 £50,000 Investment £50,000 Investment £35,000
1 Cash
Inflow
£20,000 £23,750 £20,000
2 Cash
Inflow
£17,500 £23,750 £15,000
3 Cash
Inflow
£25,000 £23,750 £12,500
4 Cash
Inflow
£32,500 £23,750 £25,000
Total £95,000 £95,000 £72,500
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
To assist Fort Sport Ltd to make a decision, you are required to calculate the following
Unit 2: Managing Financial Resources and Decisions May 2014 8

for each of the three projects. (3.3)
• Payback period
• The accounting rate of return(ARR)
• The net present value (NPV)
Unit 2: Managing Financial Resources and Decisions May 2014 9

Task 4 (This tasks offers you an opportunity to achieve LO4: 4.1, 4.2, and
4.3)
You have been asked to prepare a report for the Managing Directors of Fort Sport Ltd.
They will attend the Bannatyne Group Head Office to meet with key decision makers in
the venture capitalist department. They have asked you to provide them with an
explanation of the purpose of the Trading Profit and Loss Account or Income
Statements and the Balance Sheet. How would Fort Sport’s capital appear in the
balance sheet and the income statement? (4.1)
Compare appropriate formats for financial statements for different business
organisations. That is, compare the balance sheet formats and also compare the
income statements/profits and loss accounts formats. (4.2)
XYZ Ltd runs a chain of small shops and you have just received the following
extracts from the audited accounts for the period ending 30th September 2013.
PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED 30th SEPT 2013
£ 000 £000
Sales 800
Cost of goods sold (150)
Gross Profit 650
Wages 400
Other Expenses 20
(420)
Net Profit 230
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPT 2013 (Balance Sheet)
£000 £000
Fixed Assets 650
Current Assets
Stock 300
Debtors 100
Bank 280
Unit 2: Managing Financial Resources and Decisions May 2014 10

680
Total Assets 1330
Financed by:
Equity and Liabilities
Share Capital 500
+Net Profit 230
Total equity capital 730
Non-Current Liabilities 150
Current Liabilities
Creditors 450
Total Equity and Liabilities 1330
Required:
(a) Calculate the following accounting ratios for XYZ Ltd:
• Current ratio
• Acid test ratio
• Return on capital employed (ROCE)
• Gross profit margin
• Net profit margin
For each ratio, include the formula in words and your workings and explain what each
ratio measures. (4.3)
Unit 2: Managing Financial Resources and Decisions May 2014 11

Answer Sheet
Unit 2: Managing Financial Resources and Decisions May 2014 12