Financial Management Report: Wordsworth Plc Analysis

This report delves into the realm of financial management, analyzing various financial sources available to a business, including equity, debt, and retained earnings, while also identifying the implications of each source. It explores the calculation of the cost of capital, including ordinary and preferen...Read More

MFRD

Table of Contents
INTRODUCTION ..........................................................................................................................4
TASK 1 ...........................................................................................................................................4
1.1 Assessing the sources of finance which are available to the business organization .......4
1.2 Identifying the implications of each financial source to the business .............................5
1.3 Evaluating the suitability of selected sources of finance .................................................6
TASK 2 ...........................................................................................................................................7
a. Calculating the cost of ordinary share capital ....................................................................7
b. Calculating the cost of preference share capital ................................................................7
c. Finding the cost of debentures ...........................................................................................8
d. Computing weighted average cost of capital .....................................................................8
2.2 Presenting the importance of financial planning ............................................................9
2.3 Assessing the information needs of Directors, Senior and Junior managers ................10
2.4 Analyzing the impact of financial sources of annual statements...................................10
TASK 3..........................................................................................................................................11
3.1.........................................................................................................................................11
i) Preparing Production Budget in units and in monetary terms..........................................11
ii) Producing the Budgeted Profit and Loss Account for the following year. ....................12
iii) Calculating the level of sales required to produce the required level of profits.............13
3.2.........................................................................................................................................13
i. Calculating the fixed overhead absorption rate per direct labor hour...............................13

ii) Computing the fixed overhead cost per unit for each product .......................................14
iii) Calculate the budgeted production cost per unit for each product.................................14
iv) Calculating unit cost by using mark-up method ..........................................................14
3.3.........................................................................................................................................15
TASK 4..........................................................................................................................................17
4.1 Stating the information which is provided by the financial statements of business
organization .........................................................................................................................17
4.2 Comparing the financial statement format of different types of business organization 18
4.3 Analyzing the financial performance of Wordsworth Plc through the means of ratio
analysis ................................................................................................................................18
CONCLUSION .............................................................................................................................19
REFERENCES .............................................................................................................................21

INTRODUCTION
In the business organization, manager plays a vital role in making effectual
administration of financial resources. Moreover, finance is one of the essential elements which
are needed by the firm to implement plan. Thus, for the attainment of organizational goals
effective allocation and usage of funds are highly required. This aspect shows that in the absence
of having enough resources highly competent or sound plan of the business organization has no
worth. By considering this, it can be stated that effective financial management is key of success
which in turn helps company in meeting the objectives. The present report is based on different
case situations which will provide deeper insight about varied financial sources and their
implications. Further, report will highlight the importance of financial planning and other
monetary tools and techniques. It will also depict the extent to which financial position and
performance of Wordsworth Plc was good during the period of 2015 and 2016.
TASK 1
1.1 Assessing the sources of finance which are available to the business organization
Finance is the effective process and finance management plays a vital role to achieve the
grand success in the business as well. There are several sources of finance such as equity, debt,
debentures, retained earnings and team loans, working capital loans, letter of credit, euro issue,
venture funding or more. These sources are mainly depend on the time period and the owners
and stakeholders and shareholders and control and the other sources of generation and these
factors has the great impact on the growth of the organization as well(Tang, Tao and Bekedam,
2012).
Sources of finance are the most major explored area for all the entrepreneurs to start and
set up new business and manage the finance as well. It is very toughest part of all efforts and
business and it is very major part to manage the finance for finance manager. Choosing the right
source and making the right strategy is more challenging for finance manger and has the
effective impact on the growth of the organization as well. On the basis of time period sources
are mainly classified in terms of long term, short term and for ownership it is more divided in the
form of owned capital and borrowed capital as well. Mainly the internal and external sources are

the two sources of capital and all these sources of capital more applicable for different types of
requirements . Long term finance sources can be any in the form like
 share capital or equity share
 preference capital or preference share
 bonds and debentures
 term loans
 venture funding
 international financing like Europe issue, Foreign currency loans, ADR, GDR etc.
Short term finance sources includes finances like trade credit, creditors, payable, factoring
services, bill discounting etc.
In the ownership financing resources it is majorly based on the sharing the cost and control over
the capital as well. Own capital is sources from mainly like equity capital, preference capital,
retrained earnings and convertible debentures or more. Borrowed capital includes the following
sources like financial institutions, commercial banks or more(Coleman, 2007).
1.2 Identifying the implications of each financial source to the business
There are various types of implication which affect the financial sources in the form of
balance sheet management, cash flow management, or more and affect the growth of the
business as well. A entrepreneur start a small business and start up so there is very effective role
of finance management in the form of cash management, account management and company's
profit and gain and quality or production management as well(Benedict and Elliott, 2008). A
small business require a effective finance management for their business and has the impact on
the growth of the organization. Sources of the internal finance for the Wordsworth Plc which are
given below: Personal savings : Mainly Wordsworth Plc only depend on the saving sources as a
finance sources. Personal savings of the organization and saving of each individual who
belongs to the management of that organization, is directly affect the growth of the
organization and development as well.
 Retained profit: This is very important for any organization and retained the profit in any
of the way like reinvest the cash in the particular business as well. It could includes the
new technology, marketing and advertising process, and software system as well.
External finance sources

 Loans: Loan is very important factor that affect the organization growth and the
development process as well. It includes the fixed and variable interest secured against
the asset being invested in and because of that legal shared interest in the investment. If
the business is fail so the loan process is very effective to reset the business at very
starting point and set the business in current market trend .
 Factoring: This process is include total outsourcing of the company and arrangement
with an external organization as well. There are also some of fees involves to manage the
workforce and accounts and it includes credit management, administration charges,
interest and current protection charges(Cox and Fardon, 2003).
1.3 Evaluating the suitability of selected sources of finance
In the evaluation of the selected sources of the finance this is mainly includes the
financial performance and financial position as well. This process is majorly includes the
effectiveness of finance management and processing. Suitability of financing method includes
the following: Financial performance and position: Performance and position are very important for
any of the organization and also company needs to be taken out into the accounts as well.
Recent performance and position of the organization may has the great impact in the
competitive world. It is well suited for the finance management to achieve the success
and target goals of the particular organization.
 Financial performance: By evaluating the selected source of finance it mainly includes
the key areas like growth in form of turn over, net profit of the company, growth of
operating profit and growth and profit after and before the tax services applied.
Suitability of financing alternatives
1. Availability: The availability in the finance management is very important tool to achieve
the success in the organization. A small and medium size company always focusing on
the funding and raising the equity end. If the organization require more equity in their
firm so that they must be able to suggest the potential sources like venture capitalist and
also able to aware the drawbacks of that type of sources.
2. Maturity: Matching is very important and effective tool for any small and big
organization. Hence, short term business includes the short term finance management and
long term business need long term finance management accordingly.

3. Security: Security is the main process in case of debt is raised , it should be effective for
the data security and account management process.
TASK 2
a. Calculating the cost of ordinary share capital
Cost of ordinary share capital: Dividend per share / Market or net price per share
Ke = D / Net proceed * 100
 Ke = cost of equity share capital
 Net proceed (NP) = par value of preference share + premium
 D = Equity share dividend
Given that:
 D = 10 p per share
 NP = £2 per share
Ke = .10 / 2 * 100
Ke = 5%
b. Calculating the cost of preference share capital
 KP = D / Net proceed * 100
 Kp = cost of preference share capital
 Net proceed (NP) = par value of preference share + premium
D = Annual preference share dividend
NP = 1.02
Dividend = 12%

Kp = .12 / 1.02 * 100
= 11.76%
c. Finding the cost of debentures
Kd: when tax rate is given
Cost of debt = Amount of interest (1- tax rate) / amount of loan * 100
= 100 (1 - .20) / 1000 * 100
= 8%
d. Computing weighted average cost of capital
Computation of WACC
WACC = E/ V * Re + [(D/ V * Rd) * (1 – t )]
E = Market value of the company’s equity
D = Market value of the company’s debt
V = Total market value of the company (E + D)
Re = cost of equity
Rd = cots of debt
T = Tax rate
WACC = 4500 / 5500 * .05 + [(1000 / 5500 * .08) * (1- .20)]
= 0.04 + 0.01 * .80*
= 0.04 + 0.01
= 0.05 or 5%

2.2 Presenting the importance of financial planning
The financial planning is the effective approach to reach the set target goals of the
organization with an ease and effective manner as well. Moreover, financial planning includes
the process like managing the team members and allocate them a specific task so that they can
gives the effective outcome accordingly(Enz, 2008). Financial plan make it very easier to
achieve the goals and forces to stay on the right track and work towards to achieve the company's
long term goals.
Financial planning includes various types of planning like cash flow management, risk
management, tax planning, education planning, investment planning, estates planning etc.
Importance of financial planning: Collection of optimum funds: Optimum fund is very crucial for finance management
process and it includes the fine requirements of the fund. Collection of optimum funds is
mainly include the avoiding of the wastage and capitalized situation. Fix the capital structure: Financial planning is very appropriate and crucial for each and
every organization and also for short and long term goals. It would help to fix the capital
structure and manage the funding. Long term funds are generally contribute in the
shareholders and debenture holders. Investing in Right project: Financial planning direct the management to invest in right
projects which are effective for the company and gives the boost to the growth of the
organization as well. Financial control: Financial planning is the base of checking the revenue of the present
scenario and compare it with other organization as well. It also includes the comparison
of estimated revenue with actual cost. Coordination: It also includes the coordination process in the production of the firm and
management the sales process of the firm.
 Linking in between investment and decision: Financial planning helps the management to
manage the debt and equity ratio, in which it direct the manager for where to invest the
fund and how it would be beneficial for the firm.
2.3 Assessing the information needs of Directors, Senior and Junior managers
The executive of the company are responsible for taking the decision relate3d to the
strategy and tactical decision in the business

The Director is responsible with the strategic management he need the large amount of the
information for the broad resources and may be related to the market customer preferences
supply chain and competitive environment in the business for making the profit. They have need
to information related to the efficient manner in the business(.Giniat, 2011).
Senior manager – they take the decision relate to the tactical it may be relate to the monitoring
operation and finance resources of the business. The manager can attend the relation and
awareness of the public policy which are regulated by the government and issues of th3e day to
day activity in the business. It also relates with the client prospectives that make the arrangement
related to the pilot researches and other project related to the meet the expectation of the
business. It includes the internal business and communication with staff and researches conduct
in the company. It refers to the innovation and learning prospectives which are relate to the
company policy, efficiency and culture barriers of the company by the building 5the culture of
the business.
Junior manager - are the part of the project and it also supports the senior manager and also
responsible for the operation and also help in collecting the data and analysis and interpreted the
data with the help of research policy for generating the profit in the organisation. It is the
analysed and result can collect the information of the project manager and not a individual it is
related to the group activity and team are assigned the task. They take the lead when they have a
good experience and skill to analysis and take the action accordingly(Higham and Lin, 2011).
2.4 Analyzing the impact of financial sources of annual statements
Financial sources has the great impact on the company's annual report and annual
statements as well. It is the process which includes the all effects of the company faced in a year
and has the effective impact also. Annual report is mainly intended to give the whole report about
the shareholders and stakeholders of the information and about the activities as well.
Financial statements mainly includes the formal record of the company's actual funds and
activities and position of a business and person or other entity as well.
The most common financial report includes the balance sheet information, retained earnings and
financial position and financial performance as well.

TASK 3
3.1
i) Preparing Production Budget in units and in monetary terms
Production budget
Gold tap
Particular / year 1 2 3 4 5
2000 2200 2420 2662 2928.2
Budgeted sales unit
Planned production (in
units) 2000 2200 2420 2662 2928.2
Price per unit 93.33 93.33 93.33 93.33 93.33
Planned production (in £) 186660 205326
22585
9 248444.46 273289
Silver tap
Particular / year 1 2 3 4 5
4000 4400 4840 5324 5856.4
Budgeted sales unit
Planned production (in
units) 4000 4400 4840 5324 5856.4
Price per unit 63.33 63.33 63.33 63.33 63.33
Planned production (in £) 253320 278652 306517 337168.92 370886
ii) Producing the Budgeted Profit and Loss Account for the following year.
Gold tap
Particulars
Amount
(in £)

Sales
revenue 233325
Material 40000
Labor 100000
Variable
overhead 20000
Fixed
overhead 26660
Total
expenses 186660
Net profit
Sales
revenue
–
expense
s 46665
Sliver tap

Particular
s
Amou
nt (in
£)
Sales
revenue 316650
Material 60000
Labor 100000
Variable
overhead 40000
Fixed
overhead 53333.3
Total
expenses
25333
3
Net profit
63316.
7
iii) Calculating the level of sales required to produce the required level of profits
Target contribution = Fixed cost + desired profit
= 80000 + 125000
= £205000
Contribution = Sales – variable cost
= 116.66 – 80
= £36.66 contribution per unit
205000 / 36.66
= 5592 units
Hence, by considering this, it can be stated that X Plc should produce 5592 units for
attaining the profit margin of £125000.
3.2
i. Calculating the fixed overhead absorption rate per direct labor hour
Fixed absorption rate = Fixed absorption per unit / direct labor hour

Fixed absorption per unit = 80000 / 6000
= £13.33 per unit
= 13.33 / 50 * 100
= 27%
ii) Computing the fixed overhead cost per unit for each product
Fixed overhead cost per unit = Fixed overhead / number of units produced
= 80000 / 6000
= £13.33 per unit
iii) Calculate the budgeted production cost per unit for each product
Budgeted production cost per unit = Budgeted overhead / budgeted activity
Budgeted variable overhead = 6000 * 10
= £60000
Total budgeted overhead = 60000 + 80000
= £140000
Budgeted production cost per unit = 140000 / 6000
= £23.33 per unit
iv) Calculating unit cost by using mark-up method
Particulars Gold tap Silver tap
Total cost (Material + labor +
overhead + fixed cost)
20 + 50 + 10 + 13.33 = 93.33 15 + 25 + 10 + 13.33 = 63.33
Mark up 25% 25%
Price per unit = unit cost +
( cost * mark up percentage)
93.33 + (93.33 * 25%) =
116.33
63.33 + (93.33 * 25%) = 79.16

3.3
Calculation of NPV, ARR and payback period
i. Payback period
2 + 240000 / 440000
= 2.5 years
ii. Average rate of return (ARR)
Year Operating Cash inflow
1 240000
2 200000
3 280000
4 320000
5 360000
Total profit 1400000
Average (Total amount / 5) 280000
Average investment (initial
investment + scrap value / 2) 600000
ARR (average profit / average
investment) *100 280000 / 600000 * 100 = 47%
Year Operating
Cash inflow
Depreciatio
n
Net cash
flows
(Operating
cash flow +
Cumulati
ve cash
inflow
PV
factor
@
Discounted
cash inflow

depreciation
) 10%
1 240000 160000 400000 400000 0.909 363600
2 200000 160000 360000 760000 0.826 297360
3 280000 160000 440000 1200000 0.751 330440
4 320000 160000 480000 1680000 0.683 327840
5 360000 160000 520000 2200000 0.621 322920
Total
discounted
cash
inflow 1642160
Initial
investment 1000000
NPV
(Total
discounte
d cash
inflow –
initial
investmen
t) 642160
The above depicted table presents that X Plc will recover the amount of initial amount
within the period of 2 years and 5 months. Acceptable criteria which have setting down by X Plc
account for 4 years. Hence, by keeping such aspect in mind it can be stated that X plc should
select proposal which in turn offers opportunity to the firm to recoup initial investment within

2.5 years and thereby starts to make profit. Further, NPV of proposed investment is £642160
which shows that firm will generate positive return after the period of 5 years. On the basis of
such method business unit should select project because it offers solution by taking into account
the time value of money concept. Further, ARR of the project is 47% which entails that X plc
will earn moderate level returns from investment proposal. Hence, by keeping all; such aspects it
mind it can be stated that such proposal will aid in the profitability aspect of firm.
TASK 4
4.1 Stating the information which is provided by the financial statements of business
organization Income statement: expenditure and income are the main two major elements of such
statement which furnishes information regarding company’s profitability. Hence, the
main aim of Wordsworth Plc behind the preparation of financial statement is to assess the
profit amount generated by the firm during year over the expenses. Income statement
helps company in evaluating profitability over the years (Atrill and McLaney, 2009).
Further, it also helps in making assessment of area of expense which requires high
control.
 Cash flow statement: This statement of final accounts provides information about the
cash position and performance in three divisions such as operating, investing as well as
financing. Hence, by preparing such statement Wordsworth Plc can get idea about the
area from where cash received and spent during the specified time frame (Benedict and
Elliott, 2008). Hence, by evaluating the position of inflow and outflow business unit can
make suitable decisions regarding expansion as well as other business activities.
 Balance sheet: Statement of financial position is prepared by the firm with the motive to
get information regarding assets and liabilities. Hence, such statement helps in getting
deeper insight about the level which business unit had enough current assets for meeting
the obligations (Coleman, 2007). Further, by making assessment of such statement
business unit can identify the level to financial needs are fulfilled from debt and equity
sources. Balance sheet includes following:

Assets
 Fixed assets: Plant & machinery, furniture’s & fixtures etc.
 Current assets: Cash, debtors, inventory etc.
Liabilities
 Shareholders’ equity
 Long term debt or liability
 Current liabilities: Creditors, bank overdraft, outstanding expenses etc.
4.2 Comparing the financial statement format of different types of business organization
Income and other statements of business units are highly varied due to the nature and
size. However, income statement clearly states the amount of profit to each kind of business
organization. Nevertheless, layout and rules followed by the different types of business units are
highly varied.
Sole traders mainly prepare income statement with the aim to get information about the
profit generated over the level of expenditure. Hence, business entities who operate and regulate
activities by their own without the interference of others does not lay more emphasis on framing
other accounts (Curry, 2013). Along with this, sole traders are not obliged to follow specific
guidelines such as accounting rule, auditing and publishing aspect.
Wordsworth Plc comes under the category of publicly listed organization which has
accountability to prepare and publishes audited financial statements (Dada, Azim and Ullah,
2014). Hence, with the motive to meet the requirements of both higher management and other
stakeholders Wordsworth Plc prepares income and cash flow statement, balance sheet, statement
of changes in equity, supporting notes etc. In this regard, Wordsworth Plc follows the guidelines
of UK GAAP and IFRS for preparing and presenting final accounts.
Partnership firm prepares all the accounts in line with the public and private business
unit. The only difference is that partnership firm additionally prepares partners capital account
which in turn provides deeper insight about the capital and goodwill aspect of each member

(Enz, 2008). However, such kind of firm is not obliged to follow specific rules and regulation in
relation to UK GAAP, IFRS, auditing etc.
4.3 Analyzing the financial performance of Wordsworth Plc through the means of ratio analysis
Ratio analysis of Wordsworth Plc for the year ended at 2015 and 2016
Profitability ratio analysis
Particulars Formulas 2016 2015
Sales revenue 15712 6375
Gross profit 4312 2163
Operating profit 72 388
Net profit
GP ratio GP / net sales * 100 27% 34%
Operating profit
ratio
Operating profit / net sales *
100 0% 6%
Net profit ratio NP / Net sales * 100
Profitability ratio analysis
 GP ratio: This gross profit ratio states that company will faced the loss, in compare with
the year of 2015 to 2016. It directly affects the sales and production of the firm and
expenditures as well.

 Operating profit ratio: Operating profit ratio of the company also goes down in the year
of 2016 with the compare of year 2015 as well. Because of operating expenditure goes
very high so that company's operating profit ratio goes down.
CONCLUSION
From the above report, it has been articulated that financial sources affect business unit
on the basis of various aspects such as legal, financial and bankruptcy. Hence, higher
management of the firm should consider such implication while making selection of financial
source for business. Besides this, it can be inferred that Brian Harris Chartered Accountant firm
has assessed the cost of capital structure items by considering the accounting rules and
regulations. Further, it has been articulated that better usage of funds can be facilitated by the
firm through financial planning. It can be revealed from the report that X plc should employ
money in machine which in turn helps in enhancing financial performance significantly. It can be
summarized from the report that financial statements which are prepared at the end of accounting
year helps company in making suitable decisions for expansion and other activities. It can be
seen in the report that Wordsworth Plc is required to make changes in the existing strategies and
policy framework. By this, company would become able to enhance profitability aspect to the
significant level.

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