Contents

1.1 Identify at least three sources of finance that is suitable to your chosen type of business.
............................................................................................................................................... 2
1.2 What are the legal, financial & dilution of control implications in this project?...................3
1.3 evaluate sources that would be appropriate for your business project..............................4
Advantages and disadvantages of different sources:..........................................................4
2.1 ANALYSE the finance costs of your chosen sources of finance for your business...........6
2.2) why financial planning is important for the success of business?....................................7
2.3 Identify and assess the information that is needed for a range of decision makers?........8
Task 4................................................................................................................................. 9
4.1 Explain the Major components of the Trading Profit and Loss Account, the Balance Sheet
and Cash flow......................................................................................................................... 9
4.2 Compare appropriate formats for financial statements for different business
organisations........................................................................................................................ 11

Task 1

1.1 Identify at least three sources of finance that is suitable to your

chosen type of business.

There are number of sources by which we can gather funds and finances for our
business project. But the financial sources which I have chosen for my business
project are as follows:
1) Bank loans
2) Share capitals
3) Entrepreneurs capital
Bank loans:
As it is known that bank loans provides a longer term kind of finance so we
will take help of these loans for a start up with the fixed period of 5 years. The
rate of interest and the timings and amount of repayments would be
negotiated. The bank usually requires something in the form of security for the
loan. We will present these securities in the form of personal guarantees and
some fixed assets. We will get almost 50% of our finances from the bank .and
the rest from the other financial sources.
Share capitals:
The other financial source by which I will get finances for my business project
is through share capital. This will include share capital from friends and family.
Opinions will be encouraged of these parties which are investing in my
business project. they will be asked to invest substantial amount for a long
period of time also it would be made clear that they will not get too much
involved in business day to day operations Return of the amount will be
promised according to their respective shares once my project will achieve its
breakeven point. 30% of the finances will be managed through share capitals.
Entrepreneurs capital:
The last 20% of the finances which are required for my business project startup will be managed by the entrepreneur itself. So I will invest my personal
savings credit cards some fixed assets and also funds raised from my family
members as well.

1.2 What are the legal, financial & dilution of control implications in
this project?

This project will definitely involve some implications and risk factors as we will be
taking funds and finances from the other parties like bank. So there would be loan
implications involved in this project which would be :
Legal implications:
If the project will get defaulted it will result in asset seizure by the bank
Financial implications:
Payment of amortization month/quarter / annual would be funded
Dilution of control implications:
There would be no dilution of control implications in this case
Risk of bankruptcy:
There is the risk of bankruptcy involved in this business project. If the business fails
to repay its loan amount or enters in the state of bankruptcy in future, the assets will
be utilized by the bank to get the loan amount recovered .in this case share capital
and personal finances would be in great threat if the debt amount is not repaid.
In case of shared capital and personal finances following implications would be
involved:
Legal implications: in case of share capital, a legal agreement will be required and
signed by both the parties

Financial implications: percentage of profit would be dedicated to the investors in

share capital according to their investment in shares which will be written in the
contract and they will start receiving it as the business achieves its break even.
Dilution of control implications: there would be no dilution of control implications
in the case of personal or share capital.
Mutual trust would be required by the investors in this case. If the business fails to
generate profit then the amount of share capitals would be recovered from personal
or fixed assets.

1.3 evaluate sources that would be appropriate for your business

project
Advantages and disadvantages of different sources:

Advantages and disadvantages of bank loan are as follows:

Advantages:

Bank loan would be secured in a specific time frame

The bank loan can be used in different ways like it would be utilized in
purchasing machinery say fixed assets or purchasing raw material.

Disadvantages of bank loan:

Some loans can include a prepayment penalty or high penalty rates or some

sort of other financial charges which are difficult to pay

Also there are number of limitations involved in banking transactions
Borrowing too much money can also cause decreased cash flows and

payments can overtake income in some cases

The chances of bankruptcy are also involved in this type of financial source.

Advantages and disadvantages of share capital and personal financing are as

follows:
Advantages:

In case of share capital a good amount of finances can be collected from

friends and family.

The personal investment will require no time bound repayments
Lesser chances of bankruptcy
There would be less limitations by the investors due to the presence of mutual

trust
In case of loss appeal for extended time duration for repayment can also be
requested
Disadvantages:

In case of failure in the project mutual trust will be lost

Personal assets can be utilized in case of failure in repayments
Personal disputes can also happen
Decision making process can get hindered due to suggestions and ideas of
investors involve in the share capital.

Opinion of others vs personal opinion:

My opinion is to stick to the described financial sources for raising capital.Every
business involves risk factors but higher risk higher return. I consider my business
project to be successful enough to generate maximum profits so I will utilize these
financial sources for my project.
My friends and family members have suggested me to add merchant banking,
common shares and fund raising by preferred shares in my financing parties list. As
the risk would be equally distributed and so the return . but I dont want many
investors involved in this project secondly my business project is new in market so
stakeholders will have lesser trust or no trust in buying shares which is unhealthy for
any business.

Task 2:

2.1 ANALYSE the finance costs of your chosen sources of finance

for your business

My chosen financial sources are bank loans , share capital and personal financing ,
so the fianc cost of bank loans will include :

Arrangement fees
Interest
Insurance
Compliance cost
Professional advice
Legal fees

And the finance cost for shared capital will include:

Cost of shares
Dividend
Agreement cost

While personal financing would include cost of the assets that are being invested in
the business project.

2.2) why financial planning is important for the success of

business?
The reasons why financial planning is important for the success of my business
project are as follows:

It can help in marketing decisions. Financial Plan will provide our business
with what we need to know if we put in place a strategy.In fact, it is to provide

more revenue information to our business.

It can quickly identify an economic downturn. If your income is less than your
forecast, you can focus on sales and marketing, trying to increase. Or, if the
overhead to a higher than expected, you can take steps to reduce these
problems. By examining your financial plan regularly can solve all the
problems, immediate, rather than being caught by the bigger problems down
the line.

It can measure our business progress. It can tell us how the actual income is

better than expected? and how the business achieve profitable growth .
Financial planning process can help us in determine who we can wait until our
cash flow better to the most important expenditures. This is a common
mistake for small businesses underestimate the cash they need to keep their
business running - a mistake, unfortunately, led to many companies hobbled,

truly have the opportunity to start and run.

We can sell on the spot trends and can take advantage of them.
Given the practical effect of the better than expected for the small business
owners need to be encouraged. The graphs can show the monthly income a
month or a cash balance increased steady growth is a big motivating factor.
Financial planning can help us to see; with clarity of hard data on the road of
the business is a success.

2.3 Identify and assess the information that is needed for a range of
decision makers?

For this business project following types of information would be needed by the
decision makers:

Balance sheet information providing details about assets and liabilities

Sales and purchase information including trading accounts with customers

and suppliers
Information about the purchase of assets and liabilities
Information about the incurred cost
Information about wages and salaries paid
Information about liquidity
Information regarding break even analysis and other financial statements
Also information about business transactions.
And loan repayment durations.

2.4 Using the table below, complete a balance sheet for

accounting purposes.
Assets

Fixed Assets

10000

Accumulated Depreciation

1000

Total Fixed Assets

9000

Current Assets
Stock

2500

Debtors

1500

Bank

12500

Total Current Assets

16500

Liabilities
Creditors

3000

Loan

2000

Credit card

750

Total Liabilities

5750

Equity
Capital

2000

Retained Profit

17750

Solution of the problem

The balance sheet of the company is:
Assets

Fixed Assets

10000

Accumulated Depreciation

1000

Total Fixed Assets (A)

9000

Current Assets
Stock

2500

Debtors

1500

Bank

12500

Total Current Assets (B)

16500

Total Assets (A+B)

25500

Liabilities
Creditors

3000

Loan

2000

Credit card

750

Total Liabilities (C)

5750

Equity
Capital

2000

Retained Profit

17750

Total Equity (D)

19750

Liabilities + Equity (C+D)

25500

Task 3
3.1 Analyse budgets and make appropriate decisions
3.1A Produce a personal budget of your own finances AND make decisions from this
budget.
3.1B The Simmons Company is planning to request a line of credit from its bank. The
following sales forecasts have been made for parts 2014 and 2015.
3.1 A Personal Cash Budget is:
Monthly budget
Monthly income
Monthly expenses
Rent
Car lease payment
Utilities
Food
Others
Bank savings
Total expenses
Left over money

6000
1000
500
500
1000
1000
500
4500
1,500

3.1 B Simmons Companys cash budget for the last six months of 2014:

Beginning

July
110,000

August
160,250

September
308,000

October
(76,750)

November
78,500

December
151,250

cash balance
Collection (w-

157,500

285,000

435,000

562,500

300,000

288,750

1)
Total cash

267,500

445,250

743,000

485,750

378,500

440,000

75,000

105,000

735,000

255,000

195,000

135,000

22,500

22,500

22,500

22,500

22,500

22,500

salaries
Lease

7,500

7,500

7,500

7,500

7,500

7,500

payments
Miscellaneous

2,250

2,250

2,250

2,250

2,250

2,250

available:
Less:
Payments
Payments to
labor and raw
materials(w-2)
General and
administrative

expenses
Income tax

52,500

52,500

payment
Research

150,000

laboratory
payment
Closing

160,250

308,000

(76,750)

78,500

151,250

220,250

balances

Working:

Cash

Actual

July

Augus

Septemb

October

Novembe

December

collection

sales

er

For sale of

forecas

t
May

150,00

22,500

0
June

150,00

120,00

22,500

July

0
300,00

0
15,000

240,00

45,000

August

450,00

22,500

360,000

67,500

September

0
600,00

30,000

480,000

45,000

October

0
300,00

15,000

240,000

45,000

November

0
300,00

15,000

240,000

December

0
75,000

3,750

157500

285,00

435,000

562,500

300,000

288,750

Cash
available

Payment Collection Policy:

Sale month
Following month from the sale
3rd month of sale

5%
80%
15%

Payment in the following month during which the costs are incurred
Depreciation isnt considered during cash forecasting.

3.2 Explain the calculation of unit costs and make pricing decisions
using relevant information.
Explain why you think it is the appropriate price. You may round up your
figures to nearest 1 when calculating your answers. (3.2)
Solution
Calculating unit cost through the two costing methods for Luxury Ltd.
Capital pricing method:
Total profit = 20% (50,000)

= 10,000
Total selling price = 35,000 + 10,000 (Profit)
= 45,000
Per unit selling price = 45,000/500
= 90
Mark-up method:
As mark-up is 33.33% of cost price:
Total cost = fixed cost + direct cost
= 10,000 + 25,000
= 35,000
Per unit cost = 35,000/500
= 70
Total selling Price= 35,000 + 33.33% (35,000)
= 46,667
Per unit selling price = 46,667/500
= 93
Total Profit = 46,667- 35,000 = 11,667
By using capital pricing method:
Total profit = 20% (50,000)
= 10,000
Total selling price = 35,000 + 10,000 (Profit)
= 45,000
Per unit selling price = 45,000/500
= 90

After making all the calculations, it is concluded that the total profit is greater when
calculated by the mark-up method so it is suggested that the unit selling price should be 93
instead of 90 for the Luxury Company Ltd as this will enable the company to earn more
profits.

3.3 Assess the viability of a project using investment appraisal

techniques.
In a new strategy aiming to diversify its products range Imads luxury 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

Investment 80,000

Investment 150,000

Investment
80,000

1 Cash Inflow

35,000

30,000

40,000

2 Cash Inflow

35,000

45,000

40,000

3 Cash Inflow

40,000

75,000

20,000

4 Cash Inflow

50,000

75,000

25,000

Total

160,000

225,000

125,000

The estimated cost of capital is 10% per annum. None of the projects will have any residual
value at the end of the 4 years and there is no depreciation.

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 for
each of the three projects. (3.3)

Payback period

The accounting rate of return (ARR)

The net present value (NPV)

Product A:
Payback Period:
Year

Cash flow (A)

0
1
2
3
4

-80,000
35,000
35,000
40,000
50,000

Discount factor

Discounted cash

Cumulative

(B)

flow (A*B)

discounted cash

1
.909
.826
.751
.683

-80,000
31,815
28,910
30,040
34,150

flow
-80,000
-48,185
-19275
10,765
44,915

Payback period: 3 + (10,765 / 34,150) = 3.31 years.

Accounting rate of return:
Formula for accounting rate of return is:
= Avg. accounting profit / avg. investment
Avg. accounting profit = 160,000 / 4 = 40,000
Accounting rate of return = 40,000 / 80,000 = 50%
Net Present Value:
NPV= (cash inflow of y1/ discount factor + cash inflow of y2 / discount factor + cash inflow of
y3 / discount factor + cash inflow of y4 / discount factor) Less (Initial investment)
= (35,000 / .909 + 35,000 / .826 + 40,000 / .751 + 50,000 / .683) 80,000
= (38503 + 42,373 + 53,262 + 73,206) 80,000
= 127,344

Product B:
Payback Period:
Year

Cash flow (1)

0
1
2
3
4

-150,000
30,000
45,000
75,000
75,000

Discount factor

Discounted cash

Cumulative

(2)

flow (1*2)

discounted cash

1
.909
.826
.751
.683

-150,000
27,270
37,170
56,325
51,225

flow
-150,000
-122,730
-85,560
-29,235
21,990

Payback period: 3+ (-29,235/ 51,250) = 3.57 years

Accounting rate of return:
Formula for accounting rate of return is:
= Avg. accounting profit / avg. investment
Avg. accounting profit = 225,000 / 4 = 56,250
Accounting rate of return = 56,252 / 150,000 = 37.5%
Net Present Value:
NPV= (cash inflow of y1/ discount factor + cash inflow of y2 / discount factor + cash inflow of
y3 / discount factor + cash inflow of y4 / discount factor) Less (Initial investment)
= (30,000 / .909 + 45,000 / .826 + 75,000 / .751 + 75,000 / .683) 150,000
= (33,003 + 54,479 + 99,867 + 109,810) 150,000
= 147,159
Product C:
Payback Period:
Year

0
1
2

Cash flow (A)

-80,000
40,000
40,000

Discount factor

Discounted cash

Cumulative

(B)

flow (A*B)

discounted cash

-80,000
36,360
33,040

flow
-80,000
-43,640
-10,600

1
.909
.826

3
4

20,000
25,000

.751
.683

15,020
17,075

4,420
21,495

Payback period = 3 + (4,420 / 17,075) = 3.25 years

Accounting rate of return:
Formula for accounting rate of return is:
= Avg. accounting profit / avg. investment
Avg. accounting profit = 125,000 / 4 = 31,250
Accounting rate of return = 31,250 / 80,000 = 39.5%
Net Present Value:
NPV= (cash inflow of y1/ discount factor + cash inflow of y2 / discount factor + cash inflow of
y3 / discount factor + cash inflow of y4 / discount factor) Less (Initial investment)
= (40,000 / .909 + 40,000 / .826 + 20,000 / .751 + 25,000 / .683) 80,000
= 44,004 + 48,426 + 26,631 + 36,603 80,000
= 75,664
The calculations show that among all the three products, the preferred manufacturing should
be of product B for the company.

4.3 Luxury Ltd runs a chain of small shops and you have just received
extracts for the period ending 31th December 2014.
Summarised Balance Sheet at 31st December 2014

000

000

Fixed Assets

2,600

Current Assets
Stock

600

Debtors
Bank

900
100
1,600

Trade creditors

800

800
3,400
Debenture stock

1,400
2,000

Capital reserves
Ordinary share capital

1,000

(1 shares)
Preference share capital

200

Profit and loss account

800
2,000

Summarised Profit and loss account for the year ending 31st December 2014

000
Sales
Cost of sales (including purchases)
Gross Profit

6,000
4,500
1,500

Admin and distribution costs

Trading profit

1,160
340

Debenture interest

74

Profit before tax

266

Taxation

106

Profit after tax

160

Preference dividend

10

Profit available for ordinary shares

150

Ordinary dividend

10

Retained profit

140

You are required to calculate the following accounting ratios for Ltd:

Current ratio

Acid test ratio

Return on capital employed (ROCE)

Gross profit margin

Net profit margin

For each ratio, include the formula and INTERPRET the financial statements using the ratios
above also COMPARING these with Industry standards for internal and external ratios.
Solution:
Current Ratio:
= Current assets / Current Liabilities
= 1600 / 800
=2

The answer shows that the company is in the best condition to meet its liabilities because
the available assets are double in comparison to the liabilities.
Acid Test Ratio:
= (Cash + Accounts receivable + Short term investments) / Current Liabilities
= 1000 / 800
= 1.25
This ratio is satisfactory for the company as when it goes down from 1, this shows the
reluctant attitude of the companies towards the liabilities.
Return on capital employed:
ROCE = earnings before interest and tax / capital employed
= (160-74) / 1200 (1000+200)
= 7.16%
This financial ratio measures the profitability and efficiency of a company. Greater the ratio,
higher the performance of the company.
Gross profit Margin:
= (Revenue costs of goods sold) / Revenue
= 1500 / 6000
= 25%
Higher gross profit margin shows the financial stability of the company.
Net profit Margin:
= Net Profit / Revenue
= 160/ 6000
= 2.67%
This indicates also the financial stability of the company

Task 4

4.1 Explain the Major components of the Trading Profit and Loss
Account, the Balance Sheet and Cash flow.

Major components involved in profit and loss account are:

Income
Revenue (sales) is different from all the normal business operations
acquired. Income includes sales of goods and services, interest charges
and dividends, rebates and rents received.
Cost of goods sold (COGS)
Cost of goods sold (cost of sales) is the cost of goods sold during the
period. Cost of sales includes all direct relationship to make your
inventory for sale, such as the cost of:

Import tariffs,
Non-recoverable taxes,
Freight inward,
Shipping insurance,
Direct labor and
Other charges.

Main business costs vary directly with sales and production Under
normal circumstances, the cost of sales applies only where there is sale
of shares or stock, is to get your product into the total direct costs of the
directory, and ready for sale.
Gross Profit

Gross profit is sales, production or purchase of goods or minus operating

expenses, the difference between the costof providing services before
such as wages, rent, finance charges, or electric power is known as the
gross profit.
Other operating expenses:
Distribution costs and administrative expenses, which are not directly
related to the production process, but would help the company's
activities, but also has been called further cost "other operating
expenses." These include distribution costs and marketing costs,
administrative costs, as well as research and development costs. Sales
and marketing expenses include the cost of delivery of goods and
services. These costs may include: fees outbound transportation costs,
warehouse delivery fleet costs and cost of goods,advertising.
Major components of balance sheet are:
1) assets
2) liabilities
3) owners equity
Assets are owned by the company, and it will generate economic
benefits of the project in the future. There are two types of assets,
current assets and fixed assets .Current assets are those that you
want or convert assets or a use of cash within the business cycle
or year. Current assets include cash, accounts receivable and
inventory. Long-term assets are what you use in the company's
business, and will continue to provide benefits over a year or
operating cycle.
Liabilities are the amount of debt the company owes and will have
to solve in the future. There are two types of liabilities. Current
liabilities are those expected to be settled within one year or one

operating cycle. While long-term liabilities includeslong term

commitments such as loans, mortgages and bonds.
While owners equity represents owners capital invested.

4.2 Compare appropriate formats for financial statements for

different business organisations.

There are Formats available of four financial statements: financial

position (balance sheet), comprehensive income (income) statement,
statement of changes in equity (equity reports), and cash flow
statements. What is the difference between them is that their reports.
Assetsand liabilities are reported in the balance sheet while income,
expenses are reported in profit income statement; cash flow statement
reports cash flow operations, investment and finance. Of these, only the
balance sheet applies to a single point in time. Other details stated
period time.Balance table is usually divided into two parts - one for the
assets, liabilities and net assets for the rest - to work with the two parts
to show the company's financial income and output is how to balance
each other. Balance Sheet observes constantly changing complexity,
depending on their detail.Income table for displaying net income for the
conversion, and the purpose of showing company managers and
investors is very simple if the acquisition or during a particular enterprise,
lost scale enterprise accounting of money period. There are generally
two types of income sheets - single and multi-step - with the latter ratio,
because it provides a longer breakdown finances.Equity statement
showing changes in the company's retained earnings, which is part of

the former net income of the company has no more detail Publish and
constantly held itself. It includes dividends, operating profit and loss, as
well as all other charges or credits such earnings.Finally information,
including the action of the company's overall cash flow of information in,
be determined by the operating, investment and financial point of view
the cash flow statement shows. This information is most useful to
bankers, accountants, investors, and potential employees. in sole
proprietorship all above discussed items are listed generally in balance
sheet and income statement while in case of limited company so other
items can also include in income statement which includes extra ordinary
items like material or cost of material, some exceptional items of
abnormal size and incidence which are derived from the ordinary
activities of business and earnings per share which are disclosed after
retained profit for the year.

Bibliography
http://beta.tutor2u.net/business/reference/why-businesses-need-finance

http://www.investopedia.com/terms/b/balancesheet.asp
http://www.investopedia.com/terms/i/issuedshares.asp
http://www.investopedia.com/terms/p/plstatement.asp
http://www.investopedia.com/terms/v/venturecapital.asp
http://www.managementstudyguide.com/financial-planning.htm