Unit 2 Ruby

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Contents1.1 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 ould be appropriate for your business project..............................!

"dvantages and disadvantages of different sources#..........................................................!

2.1 "$"%'( the finance costs of your chosen sources of finance for your business..... ... ...)

2.2* hy financial planning is important for the success of business?....................................+

2.3 Identify and assess the information that is needed for a range of decision maers?.... ... .-

as !................................................................................................................................./

!.1 (0plain the ajor components of the rading rofit and %oss "ccount, the alance 'heetand 4ash flo........................................................................................................................./

!.2 4ompare appropriate formats for financial statements for different business

organisations........................................................................................................................11

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as 1

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

chosen type of business.

here are number of sources by hich e can gather funds and finances for our

business project. ut the financial sources hich I have chosen for my business

project are as follos#

1* an loans2* 'hare capitals3* (ntrepreneur5s capital

Bank loans: "s it is non that ban loans provides a longer term ind of finance so e

ill tae help of these loans for a start up ith the fi0ed period of 6 years. he

rate of interest and the timings and amount of repayments ould be

negotiated. he ban usually re7uires something in the form of security for the

loan. We ill present these securities in the form of personal guarantees and

some fi0ed assets. We ill get almost 689 of our finances from the ban .and

the rest from the other financial sources.

Share capitals:he other financial source by hich I ill get finances for my business project

is through share capital. his ill include share capital from friends and family.

:pinions ill be encouraged of these parties hich are investing in my

business project. they ill be ased to invest substantial amount for a long

period of time also it ould be made clear that they ill not get too much

involved in business day to day operations ;eturn of the amount ill be

promised according to their respective shares once my project ill achieve its

breaeven point. 389 of the finances ill be managed through share capitals.

Entrepreneur’s capital:he last 289 of the finances hich are re7uired for my business project start<

up ill be managed by the entrepreneur itself. 'o I ill invest my personal

savings credit cards some fi0ed assets and also funds raised from my familymembers as ell.

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1.2 What are the legal financial ! dilution of control i"plications in

this pro#ect$

his project ill definitely involve some implications and ris factors as e ill be

taing funds and finances from the other parties lie ban. 'o there ould be loan

implications involved in this project hich ould be #

%egal i"plications#

If the project ill get defaulted it ill result in asset sei=ure by the ban

&inancial i"plications:

ayment of amorti=ation month>7uarter > annual ould be funded

'ilution of control i"plications:

here ould be no dilution of control implications in this case

(isk of bankruptcy:

here is the ris of banruptcy involved in this business project. If the business fails

to repay its loan amount or enters in the state of banruptcy in future, the assets ill

be utili=ed by the ban to get the loan amount recovered .in this case share capital

and personal finances ould be in great threat if the debt amount is not repaid.

In case of shared capital and personal finances folloing implications ould be

involved#

%egal i"plications# in case of share capital, a legal agreement ill be re7uired and

signed by both the parties

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&inancial i"plications# percentage of profit ould be dedicated to the investors in

share capital according to their investment in shares hich ill be ritten in the

contract and they ill start receiving it as the business achieves its brea even.

'ilution of control i"plications# there ould be no dilution of control implications

in the case of personal or share capital.

utual trust ould be re7uired by the investors in this case. If the business fails to

generate profit then the amount of share capitals ould be recovered from personal

or fi0ed assets.

1.) e*aluate sources that +ould be appropriate for your businesspro#ect

,d*antages and disad*antages of different sources:

"dvantages and disadvantages of ban loan are as follos#

,d*antages:

• an loan ould be secured in a specific time frame

• he ban loan can be used in different ays lie it ould be utili=ed in

purchasing machinery say fi0ed assets or purchasing ra material.

'isad*antages of bank loan:

• 'ome loans can include a prepayment penalty or high penalty rates or some

sort of other financial charges hich are difficult to pay• "lso there are number of limitations involved in baning transactions

• orroing too much money can also cause decreased cash flos and

payments can overtae income in some cases

• he chances of banruptcy are also involved in this type of financial source.

"dvantages and disadvantages of share capital and personal financing are as

follos#

,d*antages:

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

friends and family.

• he personal investment ill re7uire no time bound repayments

• %esser chances of banruptcy

• here ould be less limitations by the investors due to the presence of mutual

trust

• In case of loss appeal for e0tended time duration for repayment can also be

re7uested

'isad*antages:

• In case of failure in the project mutual trust ill be lost

• ersonal assets can be utili=ed in case of failure in repayments

•

ersonal disputes can also happen• ecision maing process can get hindered due to suggestions and ideas of

investors involve in the share capital.

:pinion of others vs personal opinion#

y opinion is to stic to the described financial sources for raising capital.(very

business involves ris factors but higher ris higher return. I consider my business

project to be successful enough to generate ma0imum profits so I ill utili=e these

financial sources for my project.

y friends and family members have suggested me to add merchant baning,

common shares and fund raising by preferred shares in my financing parties list. "s

the ris ould be e7ually distributed and so the return . but I don5t ant many

investors involved in this project secondly my business project is ne in maret so

staeholders ill have lesser trust or no trust in buying shares hich is unhealthy for

any business.

as 2#

2.1 ,-,%SE the finance costs of your chosen sources of finance

for your business

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y chosen financial sources are ban loans , share capital and personal financing ,

so the fianc@ cost of bank loans ill include #

• "rrangement fees

• Interest• Insurance

• 4ompliance cost

• rofessional advice

• %egal fees

"nd the finance cost for shared capital ill include#

• 4ost of shares

• ividend

• "greement cost

While personal financing ould include cost of the assets that are being invested in

the business project.

2.2/ +hy financial planning is i"portant for the success of

business$

he reasons hy financial planning is important for the success of my business

project are as follos#

•

It can help in mareting decisions. Ainancial lan ill provide our business

ith hat e need to no if e put in place a strategy.In fact, it is to provide

more revenue information to our business.

• It can 7uicly identify an economic donturn. If your income is less than your

forecast, you can focus on sales and mareting, trying to increase. :r, if the

overhead to a higher than e0pected, you can tae steps to reduce these

problems. y e0amining your financial plan regularly can solve all the

problems, immediate, rather than being caught by the bigger problems don

the line.

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

better than e0pected? and ho the business achieve profitable groth .

• Ainancial planning process can help us in determine ho e can ait until our

cash flo better to the most important e0penditures. his is a common

mistae for small businesses underestimate the cash they need to eep their

business running < a mistae, unfortunately, led to many companies hobbled,

truly have the opportunity to start and run.

• We can sell on the spot trends and can tae advantage of them.

• Biven the practical effect of the better than e0pected for the small business

oners need to be encouraged. he graphs can sho the monthly income a

month or a cash balance increased steady groth is a big motivating factor.

Ainancial planning can help us to seeC ith clarity of hard data on the road of the business is a success.

2.) Identify and assess the infor"ation that is needed for a range of

decision "akers$

Aor this business project folloing types of information ould be needed by the

decision maers#

• alance sheet information providing details about assets and liabilities

• 'ales and purchase information including trading accounts ith customers

and suppliers

• Information about the purchase of assets and liabilities

• Information about the incurred cost• Information about ages and salaries paid

• Information about li7uidity

• Information regarding brea even analysis and other financial statements

• "lso information about business transactions.

• "nd loan repayment durations.

2.4 Using the table below, complete a balance sheet for

accounting purposes.,ssets D

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Ai0ed "ssets 18888

"ccumulated epreciation 1888

0otal &ied ,ssets 333

Current ,ssets

'toc 2688

ebtors 1688

an 12688

0otal Current ,ssets 14533

%iabilities

4reditors 3888

%oan 2888

4redit card +68

0otal %iabilities 5653

E7uity

4apital 2888

;etained rofit 1++68

Solution of the proble"

he balance sheet of the company is#

,ssets D

Ai0ed "ssets 18888

"ccumulated epreciation 1888

0otal &ied ,ssets 8,/ 333

Current ,ssets

'toc 2688

ebtors 1688

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an 12688

0otal Current ,ssets 8B/ 14533

0otal ,ssets 8,9B/ 25533

%iabilities

4reditors 3888

%oan 2888

4redit card +68

0otal %iabilities 8C/ 5653

E7uity

4apital 2888

;etained rofit 1++68

0otal E7uity 8'/ 1653

%iabilities 9 E7uity 8C9'/ 25533

0ask )

).1 ,nalyse budgets and "ake appropriate decisions

).1, roduce a personal budget of your o+n finances ,-' "ake decisions fro" this

budget.

).1B 0he Si""ons Co"pany is planning to re7uest a line of credit fro" its bank. 0he

follo+ing sales forecasts ha*e been "ade for parts 231; and 2315.

).1 , ersonal Cash Budget is:

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).1 B Si""ons Co"pany’s cash budget for the last si "onths of 231;:

=uly ,ugust Septe"ber >ctober -o*e"ber 'ece"ber

eginning

cash balance

118,888 1)8,268 38-,888 F+),+68* +-,688 161,268

4ollection F<

1*

16+,688 2-6,888 !36,888 6)2,688 388,888 2--,+68

otal cash

available#

2)+,688 !!6,268 +!3,888 !-6,+68 3+-,688 !!8,888

%ess#

ayments

ayments to

labor and ra

materialsF

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8

Gune 168,88

8

128,88

8

22,688 < < < <

Guly 388,88

8

16,888 2!8,88

8

!6,888 < < <

"ugust !68,88

8

< 22,688 3)8,888 )+,688 < <

'eptember )88,88

8

< < 38,888 !-8,888 !6,888 <

:ctober 388,88

8

< < < 16,888 2!8,888 !6,888

$ovember 388,88

8

< < < < 16,888 2!8,888

ecember +6,888 < < < < < 3,+684ash

available

16+688 2-6,88

8

!36,888 6)2,688 388,888 2--,+68

ayment 4ollection olicy#

'ale month 69

Aolloing month from the sale -89

3rd month of sale 169

ayment in the folloing month during hich the costs are incurred

epreciation isn5t considered during cash forecasting.

).2 Eplain the calculation of unit costs and "ake pricing decisions

using rele*ant infor"ation.

Eplain +hy you think it is the appropriate price. ou "ay round up your

figures to nearest ?1 +hen calculating your ans+ers. 8).2/

'olution

4alculating unit cost through the to costing methods for %u0ury %td.

4apital pricing method#

otal profit H 289 F68,888*

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@ 13333

otal selling price H 36,888 18,888 Frofit*

H !6,888

er unit selling price H !6,888>688

H /8

688

H /3

0otal rofit @ ;4446A )5333 @ 11446

By using capital pricing "ethod:

otal profit H 289 F68,888*

@ 13333

otal selling price H 36,888 18,888 Frofit*

H !6,888

er unit selling price H !6,888>688

H /8

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"fter maing all the calculations, it is concluded that the total profit is greater hen

calculated by the mar

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ear ! H 8.)-3

o assist Aort 'port %td to mae a decision you are re7uired to calculate the folloing for

each of the three projects. F3.3*

L aybac period

L he accounting rate of return F";;*

L he net present value F$J*

roduct ,:

aybac eriod#

ear 4ash flo F"* iscount factorF*

iscounted cashflo F"M*

4umulativediscounted cash

flo

8 3 !8,888 .+61 38,8!8 18,+)6

! 68,888 .)-3 3!,168 !!,/16

aybac period# 3 F18,+)6 > 3!,168* H 3.31 years.

"ccounting rate of return#

Aormula for accounting rate of return is#

H "vg. accounting profit > avg. investment

"vg. accounting profit H 1)8,888 > ! H !8,888

"ccounting rate of return H !8,888 > -8,888 H 689

$et resent Jalue#

$JH Fcash inflo of y1> discount factor cash inflo of y2 > discount factor cash inflo of

y3 > discount factor cash inflo of y! > discount factor* %ess FInitial investment*

H F36,888 > ./8/ 36,888 > .-2) !8,888 > .+61 68,888 > .)-3* K -8,888

H F3-683 !2,3+3 63,2)2 +3,28)* K -8,888

H 12+,3!!

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roduct B:

aybac eriod#

ear 4ash flo F1* iscount factor

F2*

iscounted cash

flo F1M2*

4umulative

discounted cashflo

8 168,888 H 3+.69

$et resent Jalue#



H F38,888 > ./8/ !6,888 > .-2) +6,888 > .+61 +6,888 > .)-3* K 168,888

H F33,883 6!,!+/ //,-)+ 18/,-18* K 168,888

H 1!+,16/

roduct 4#

aybac eriod#

ear 4ash flo F"* iscount factor

F*

iscounted cash

flo F"M*

4umulative

discounted cash

flo

8

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3 28,888 .+61 16,828 !,!28

! 26,888 .)-3 1+,8+6 21,!/6

aybac period H 3 F!,!28 > 1+,8+6* H 3.26 years

"ccounting rate of return#

Aormula for accounting rate of return is#

H "vg. accounting profit > avg. investment

"vg. accounting profit H 126,888 > ! H 31,268

"ccounting rate of return H 31,268 > -8,888 H 3/.69

$et resent Jalue#



H F!8,888 > ./8/ !8,888 > .-2) 28,888 > .+61 26,888 > .)-3* K -8,888

H !!,88! !-,!2) 2),)31 3),)83 K -8,888

H +6,))!

he calculations sho that among all the three products, the preferred manufacturing should

be of product for the company.

;.) %uury %td runs a chain of s"all shops and you ha*e #ust recei*ed

etracts for the period ending )1th 'ece"ber 231;.

Su""arised Balance Sheet at )1st 'ece"ber 231;

?333 ?333

Ai0ed "ssets 2,)88

4urrent "ssets

'toc )88

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ebtors /88

an 188

1,)88

rade creditors -88

-88

3,!88

ebenture stoc 1,!88

2,888

4apital reserves

:rdinary share capital 1,888

FD1 shares*

reference share capital 288

rofit and loss account -88

2,888

'ummarised rofit and loss account for the year ending 31st ecember 281!

?333

'ales ),888

4ost of sales Fincluding purchases* !,688

Bross rofit 1,688

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"dmin and distribution costs 1,1)8

rading profit 3!8

ebenture interest +!

rofit before ta0 2))

a0ation 18)

rofit after ta0 1)8

reference dividend 18

rofit available for ordinary shares 168

:rdinary dividend 18

;etained profit 1!8

ou are re7uired to calculate the folloing accounting ratios for %td#

L 4urrent ratio

L "cid test ratio

L ;eturn on capital employed F;:4(*

L Bross profit margin

L $et profit margin

Aor each ratio, include the formula and I$(;;( the financial statements using the ratios

above also 4:";I$B these ith Industry standards for internal and e0ternal ratios.

Solution:

4urrent ;atio#

H 4urrent assets > 4urrent %iabilities

H 1)88 > -88

H 2

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he anser shos that the company is in the best condition to meet its liabilities because

the available assets are double in comparison to the liabilities.

"cid est ;atio#

H F4ash "ccounts receivable 'hort term investments* > 4urrent %iabilities

H 1888 > -88

H 1.26

his ratio is satisfactory for the company as hen it goes don from 1, this shos the

reluctant attitude of the companies toards the liabilities.

;eturn on capital employed#

;:4( H earnings before interest and ta0 > capital employed

H F1)8 1288 F1888288*

H +.1)9

his financial ratio measures the profitability and efficiency of a company. Breater the ratio,

higher the performance of the company.

Bross profit argin#

H F;evenue K costs of goods sold* > ;evenue

H 1688 > )888

H 269

Nigher gross profit margin shos the financial stability of the company.

$et profit argin#

H $et rofit > ;evenue

H 1)8> )888

H 2.)+9

his indicates also the financial stability of the company

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0ask ;

;.1 Eplain the S/

4ost of goods sold Fcost of sales* is the cost of goods sold during the

period. 4ost of sales includes all direct relationship to mae your

inventory for sale, such as the cost of#

• Import tariffs,

• $on

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

e0penses, the difference beteen the costof providing services before

such as ages, rent, finance charges, or electric poer is non as the

gross profit.

>ther operating epenses:

istribution costs and administrative e0penses, hich are not directly

related to the production process, but ould help the companyOs

activities, but also has been called further cost Pother operating

e0penses.P hese include distribution costs and mareting costs,administrative costs, as ell as research and development costs. 'ales

and mareting e0penses include the cost of delivery of goods and

services. hese costs may include# fees outbound transportation costs,

arehouse delivery fleet costs and cost of goods,advertising.

ajor components of balance sheet are#

1* assets2* liabilities3* oner5s e7uity

• "ssets are oned by the company, and it ill generate economic

benefits of the project in the future. here are to types of assets,

current assets and fi0ed assets .4urrent assets are those that you

ant or convert assets or a use of cash ithin the business cycle

or year. 4urrent assets include cash, accounts receivable and

inventory. %ong

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operating cycle. While long

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the former net income of the company has no more detail ublish and

constantly held itself. It includes dividends, operating profit and loss, as

ell as all other charges or credits such earnings.Ainally information,

including the action of the companyOs overall cash flo of information in,

be determined by the operating, investment and financial point of vie

the cash flo statement shos. his information is most useful to

baners, accountants, investors, and potential employees. in sole

proprietorship all above discussed items are listed generally in balance

sheet and income statement hile in case of limited company so other

items can also include in income statement hich includes e0tra ordinary

items lie material or cost of material, some e0ceptional items of

abnormal si=e and incidence hich are derived from the ordinary

activities of business and earnings per share hich are disclosed after

retained profit for the year.

Bibliography

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

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
http://beta.tutor2u.net/business/reference/why-businesses-need-financehttp://www.investopedia.com/terms/b/balancesheet.asphttp://www.investopedia.com/terms/i/issuedshares.asphttp://www.investopedia.com/terms/p/plstatement.asphttp://www.investopedia.com/terms/v/venturecapital.asphttp://www.managementstudyguide.com/financial-planning.htmhttp://beta.tutor2u.net/business/reference/why-businesses-need-financehttp://www.investopedia.com/terms/b/balancesheet.asphttp://www.investopedia.com/terms/i/issuedshares.asphttp://www.investopedia.com/terms/p/plstatement.asphttp://www.investopedia.com/terms/v/venturecapital.asphttp://www.managementstudyguide.com/financial-planning.htm

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Unit 2 Ruby