btec unit 2
TRANSCRIPT
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1.1Identify the sources of finance available to a business.
Funding is the driving force behind every profitable projects. Businesses need capital to fund
these endeavors, which generate income. However, not all companies have instant access to
the money. The abundance of funding options makes it easier for employers to determine thetype of financing that best suits their needs.
Bank Loan
Banks and credit unions provide loans to companies large and small. When companies get a
loan from a Bank, they have access to a specific amount of money, but are bound by the terms
of payment of bank interest rates. Interest is the fee for borrowing money for the Bank, which
builds up based on the amount of the loan is used and how long the business repay the money.
HOME EQUITY LINE OF CREDIT
If the employer also owns a home, that home equity line of credit. Home equity lines of credit
are financial institutions loans give homeowners based on the amount of equity they have in
their home, and the value of their home and the mortgage current. Once applicants are
approved for home equity lines of credit, they have immediate access to funds. Beware of the
volatility of interest rates, as published August 2009 by the Federal Reserve that interest rates
on home equity lines of credit are usually variable. Sets a variable interest rate based on the
index value. As such, this type of loan requires employers to monitor closely the rate of interest.
FIND AN INVESTOR
Groups of investors or private investors look for companies that need financial assistance. The
main types of venture capitalists and angel investors. Capitalists invest money widely, with an
average investment of $ 500,000 to $ 10 million, according to an article in the magazine, "top
100 venture capital firms". Angel investors provide smaller amounts which remain significant.
Corporate investors supply capital for fractional ownership in the company. Instead of charging
interest on the amount of money loaned to businesses, investors want a share of the profits.
YOUR OWN MONEY
If employers have a savings or retirement accounts, they can benefit from another source of
funding, known as the "bootstrapping", when the employer uses personal resources to finance
business endeavours. Personal resources are the main source of financing for new
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entrepreneurs most, she says, "small business administration". This also includes the use of
personal credit cards. However, credit cards have high interest rates, so it is better to use credit
cards for short-term investments that will pay off quickly.
1.2 Assess the implication of the different sources.
Sources of finance can be top secret into:
Internal sources (raised from within the establishment)
External (raised from an external source)
There are five internal sources of finance:
Owners outlay (start up or supplementary capital)
Retained income
Sale of supply
Sale of fixed material goods
Debt collected works
Owners investment
This is money which comes from the owner/s own investments
It may be in the form of start up wealth - used when the business is location up
It may be in the form of extra capitalperhaps used for development
This is a long-term foundation of finance
Advantages
Doesnt haveto be repaid
No concentration is payable
Disadvantages
There is a limit to the quantity an owner can advance
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Retained Profits
This source of economics is only available for a business which has been trade for more
than one year
It is when the returns made are plough back into the business
This is a medium or long-term cause of finance
Advantages
Doesnt have to be repay
No interest is owed
Disadvantages
Not existing to a new business
Business may not make an adequate amount of profit to plough back
Sale of Stock
This money comes in from export off unsold stock
This is what happen in the January sales
It is when the income made are plough back into the business
This is a short-term cause of finance
Advantages
Quick way of raising speculation
By selling off stock it reduce the costs associated with investment them
Disadvantages
Business will have to take a summary price for the supply
Sale of Fixed Assets
This money comes in from export off fixed assets, such as:
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a piece of apparatus that is no longer needed
Businesses do not always have remaining fixed assets which they can sell off
There is also a maximum value to the numeral of fixed assets a firm can sell off
This is a medium-term spring of finance
Advantages
Good way to raise sponsorship from an asset that is no longer needed
Disadvantages
Some businesses are not likely to have surplus assets to sell
Can be a slow method of raise finance
Debt Collection
A defaulter is someone who owes a business money
A business can raise finance by collect the money owed to them (debts) from their
debtors
Not all businesses have debtors ie those who agreement only in cash
This is a short-term font of finance
Advantages
No additional cost in success this finance, it is part of the businesses regular operations
Disadvantages
There is a risk that debts remaining can go bad and not be repaid
External Sources
There are five internal sources of finance:
Bank Loan or Overdraft
Additional Partners
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Share Issue
Leasing
Hire Purchase
Mortgage
Trade Credit
Government Grants
Bank Loan
This is money on loan at an agreed rate of interest over a set period of time
This is a middling or long-term source of finance
Advantages
Set repayments are spread over a time of time which is good for budgeting
Disadvantages
Can be dear due to interest payments
Bank may have need of security on the loan
Bank Overdraft
This is where the business is authoritative to be overdrawn on its account
This resources they can still write cheques, even if they do not have an adequate
amount of money in the account
This is a short-term foundation of finance
Advantages
This is a good way to swathe the period between money going out of and coming into a
commerce
If used in the short-term it is regularly cheaper than a bank loan
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Disadvantages
Interest is repayable on the quantity overdrawn
Can be high-priced if used over a longer period of time
Additional Partners
This is sources of finance apposite for a partnership business
The new partner/s can make a payment extra capital
Advantages
Doesnt have to be repaid
No concentration is payable
Disadvantages
Diluting have power over of the partnership
Profits will be come apart more ways
Share Issue
This is sources of sponsorship suitable for a limited company
Involves issuing more share
This is a continuing source of finance
Advantages
Doesnt have to be repay
No interest is to be paid
Disadvantages
Profits will be paid out as dividend to more shareholders
Ownership of the company could revolutionize hands
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Leasing
This technique allows a business to obtain assets without the need to pay a large lump
sum up frontage
It is arranged through a economics company
Leasing is like rent an positive feature
It involve making set repayments
This is a medium-term starting place of finance
Advantages
Businesses can have the use of up to date tools without delay
Payments are multiply over a period of time which is good for budget
Disadvantages
Can be high-priced
The asset belong to the finance company
Hire Purchase
This process allows a business to obtain assets without the need to pay a large lump
sum up obverse
Involves paying an initial set down and regular overheads for a set period of time
The main difference between hire obtain and leasing is that with hire purchase after all
repayments have been made the business owns the positive feature
This is a medium-term source of business
Advantages
Businesses can have the use of up to date tools without delay
Payments are spread over a time which is good for budget
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Once all repayments are made the business will own the advantage
Disadvantages
This is an high-priced method compared to buying with cash
Mortgage
This is a loan protected on property
Repaid in instalment over a period of time characteristically 25 years
The business will own the material goods once the final payment has been made
This is a long-term starting place of finance
Advantages
Business has the use of the belongings
Payments are multiply over a period of time which is good for budget
Once all repayments are made the business will own the positive feature
Disadvantages
This is an high-priced method compared to buying with cash
If business does not keep up with repayments the belongings could be repossessed
Trade Credit
Trade recognition is summed up by the phrase:
buy now pay later
Typical trade acknowledgment period is 30 days
This is a short-term foundation of finance
Advantages
Business can sell the goods first and pay for them later on
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Good for ready money flow
No concentration charged if money is paid within agreed time
Disadvantages
Discount given for ready money payment would be lost
Businesses need to with awareness manage their cash flow to guarantee they will have
money available when the debt is due to be compensated
Government Grants
Government organisations such as endow NI offer grants to businesses, both
conventional and new
Usually certain surroundings apply, such as where the business has to locate
Advantages
Dont have to be repay
Disadvantages
Certain situation may apply eg location
Not all business may be eligible for a grant
Factors Affecting Choice of Source of Finance
The source of finance chosen will depend on a number of factors:
Purposewhat the investment is to be used for
Time Periodhow long the sponsorship will be needed for
Amounthow much money the business requests
Ownership and Size of the big business
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1.3 Evaluate appropriate sources of finance for a business project.
A business faces three most important issues when selecting an apposite source of finance for
a new project:
1. Can the investment be raised from internal resources or will new finance have to be raise
outside the business?
2. If finance needs to be raised on the outside, should it be debt or fairness?
3. If external debt or evenhandedness is to be used, where should it be raised from and in which
form?
Can the obligatory finance be provided from interior sources?
In answering this question the company needs to judge several issues:
Is the amount of cash held? The company needs to consider how much in current cash and
short-term investments, and how much of that will be needed to support existing operations. In
the case of coins, this is the most obvious source of funding for the new project. If you cannot
provide the required cash in this way then the company should consider in future cash flows.
You can set up a cash balance, but probably very detailed at this stage. If the expected cash
flows of the company insufficient to finance the new project then it can consider tightening
controls on working capital improved cash position. Debtors strike to settle early, running down
inventory levels and extending the repayment period for debtors can raise cash resources. Note
however, there are dangers in such tactics. For example, customer/vendor lost goodwill and
production stoppages because of stock-outs etc. If you cannot provide the required funding the
immigration.
The current capital is gearing up for business. Although religion is attractive because of its
cheap, a blemish that attention must be paid. If too much is borrowed, then the company may
not be able to meet interest payments and principal, may follow. The level of borrowing of the
company usually measured by gearing (ratio of debt to equity) and companies must ensure this
does not become too high. Comparisons with other companies in the industry or with the
company's recent history is useful here.
Security available. Many lenders will require that assets be pledged as collateral against loans.
Provide security for borrowing from good quality assets such as land and buildings usually no
intangible assets such as capitalization of research and development expenses. In the absence
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of good assets, security has increased borrowing is not an option. Business risks. Business risk
indicates volatility in operating profit. You should avoid companies with operating profits are
highly volatile high levels of borrowing, they may find themselves in the position of operating
profit falls and that it could not meet the interest Bill. High-risk projects funded usually stock, as
there is no legal obligation to return equal pay.
Operating leverage. The Guide refers to the company's operating costs that are fixed rather
than variable. High proportion of fixed costs of operating gears. Companies with high operating
gears tend to have operating profits are volatile. This is because fixed costs remain the same,
regardless of sales volume. Thus, if the increase in sales, operating profit increases by the
largest. But if sales volume, operating profit fell by a greater proportion. Generally, it's a very
dangerous policy combination of highly leveraged finance with high operational gearing. High
operating leverage is common in many service industries, where many are fixed operating
costs.
Monitoring the vote. Issue of shares to new investors could change the voting control of the
business. If the founding owners holding more than 50% of the capital may be interested in
selling new shares to investors outside the control of the vote in the General Assembly might be
lost. The current state of the equity markets. The Hang Seng manikombanis prices will be
reluctant to sell new shares. They feel risividoil prices are very low. This would reduce the
wealth of the owners. Note thisdos does not apply to rights issues that sold shares to existing
owners. New issues of shares on stock markets in the United Kingdom has binrari over the last
few years due to the bear market. At the time of weritingthiri is some evidence that the bear
market is about to end. After considering the points mentioned above, the company will be able
to decide between using the DIN or stock. Another important resolution should use any type of
financing, and so should be considered.
Equity Finance
A detailed consideration of the different sources of evenhandedness venture is beyond the
scope of this piece and students are not obligatory to consult their textbooks or Manuals for
more comprehensive coverage. However, here are a few general points on the subject:
For companies who have already contributed in the question of rights, mandatory under
company law matters. This means that any new shares to existing shareholders commensurate
with existing stockpiles. This is to protect the existing shareholders of the company selling
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shares to new investors at a low price, diluting the wealth of existing shareholders. This
condition can be overcome if existing shareholders prepared to vote on the ' waiver of pre-
emption rights.
The current situation of the company. Companies listed on the London Stock Exchange
securities "or" alternative investment market (aim), a new stock can be raised by selling new
shares in these markets through issues, offers for sale or development. Other companies who
lack the stock more difficult raising stock, you may need to resort to venture capitalists if they
require equity financing for long-term investments. Fixed borrowing rate float v many lenders
offer borrower choosing between a fixed interest rate and one floating (no changes) with the
General level of interest rates. Fixed rate borrowing may attract certainty (you know what is the
interest rate that you are going to pay) but on average it is more expensive. This is because
lenders see themselves as taking more risk on fixed rate lending as they may lose in the case of
an increase in interest rates. Generally, floating (variable) rate of borrowing cheaper.
Conclusion
It is not possible to recommend ideal source of funding for any project. What is important is that
students appreciate the advantages and disadvantages of the various methods of funding, and
can provide advice for companies.
2.1 Analyse the costs of different sources of finance
Costs of different sources of finance
Organisations need possessions for effective operation
Such possessions include machines, personnel, and money
Money as a possessions need to be managed with awareness
The need to manage economics arises because it has expenditure
Analysing cost is important for good organization and success
Share capital/owners fundCash dividend:- speculation cost , paid out to shareholders
share paid out depends on management, and within officially permitted constraints
For investors payment is an important source of returns
Shareholders be expecting the dividends to increase in the fullness of time and to be
consistent from year to year
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Owners fund
Dividends: example b Mr owns 100 shares in ICI, the company will pay a lot pence per share
twice a year. If pushed ICI up 20 p per share in March and September, the cost of a business
return Mr 100 x 0.20 2 = 40 return sector (b):-instead of paying cash dividends, the
company can pay them in the form of new shares. This is called the dividend yield stripe: (for
example, instead of paying the 20 profit ICI had made Mr alternative of 2 new shares in ICI
plus 4 pounds in cash (the advantage that company reserves much more cash for use in
business
Share capital/owners fund
Costs contd:
cost of provided that financial reports
hosting annual wide-ranging meetings
assessment fees
administrative price tag of complying with legal stock switch over
requirements
for disclosure of in turn to shareholders
Costs for contribute to floatation
expenditure to issue houses, e.g. investment bank
Bank loan
Interests that is floating (fixed or variable) usually the bank rate often dictated by Government
policy and premium Bank makes a profit, if you take a loan of 100,000, and 10% interest, cost
10,000 a year and other major cost: first-order fee to cover the cost of the lenders (to prepare
the data on the computer, checking references) a charge, interest for the debt is outstanding
financial and non-financial costs:-Providing regular information to the lender for the sole tradersand business partners are required to put up personal property as security-and so the pressure
myself and damaging effects on personal life and relationships
Opportunity cost
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Costs: for an alternate forgone
This circumstance where instead of a company paying interest of 10,000 per year, and the
company could do something else with the 10,000 income generation more for example, if
the company can spend 10,000 a year in additional advertising, this could generate 15,000
extra for profit Taking out the loan and interest payment mean that wasted an opportunity to
earn an extra 15,000 the opportunity cost the 15,000
Government grant
The costs include administrative costs of application fill out forms on a regular basis underline
the power of that business is still eligible to receive funds (revenues:-companies pay taxes on
income (profits is the cost of retained earnings, and the cost of capital (such as retained
earnings capital not needed immediately and reinvested in short will be some costs
overdraft
Costs: Often Interests, fees and higher fees May loan when the maximum is exceeded
insurance business assets May Require good credit score
Factoring
Costs: Possible harm to customers Company image distortion May impose restrictions on
the way in which you do business Reduction in mobile phones
Leasing
Costs:
Fixed interest payable Cost of leasing than purchase costs of Maintenance requirement
depending on the type of agreement Credit history check
Trade credit
Costs:
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Sued terms Credit worth Cost and penalty if the default Can in case of non -payment
Reference-
Dyson, J R (2007). Accounting for non
Accounting Students, Financial Times/ Prentice
Hall
Websites
www.aat.co.uk
www.bized.co.uk
www.ft.com
http://www.citehr.com/116640 -financial-planning.html
2.2 explain the important of financial planning.
Financial planning
Definition:
Financial planning involves the analysis of financial flows of the company. that includes
predicting the consequences of investment decisions and the financing and the distribution of
profits and weighting effects of different alternatives: Van Horn You've got to be careful if you
don't know where you're going, because you might not get there. Quote from Yogi Berra
Contents of financial planning
Pro forma balance sheet Pro forma "income statement" Pro forma statement of sources and
uses of cash Description of capital expenditure planned
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Description of why these amounts are needed and strategies to be used
Why do we need financial
planning
Effect "financial managers" Help avoid surprises Help "financial managers" to deal with the
surprises that can not be avoided Integration Evaluation of alternatives in target investment &
finance Feasibility studies TIME horizon long-term FP 3 to 5 years, but usually 5 years "short-
lived" FP 12 months
Elements of financial planning
1.Sales Forecast
2.Economic Assumptions
3.Pro forma Statements
4.Asset Requirements
5.Financial Requirements
6.Plug
Steps in financial planning
process
1 Project the fiscal statement
2 resolve the Funds desirable
3 calculate the Fund ease of use
4 create System of Controls
5 Feed Back Loop- A modus operandi to adjust the fundamental plan
6 Performance Based Mgt. reimbursement System
Uses of proforma statements
- Assess : probable Performance Vs General targets
- Estimate the effect of planned operating changes, what if analyses
-Forecast firms future finance needs
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-educated guess future FCF which determine the
companys taken as a whole value
Uses of Proforma
- used by existing and forthcoming lenders
-enables grounding of Pro forma Cash flow
Statement
-adjustment in deliberate operation, credit policy etc.,
- Weaknesses
-Past vs. Future
- Variables are mandatory to take Desired
Values
Class Task
You are granted a 50,000 (fifty thousand pounds) to start a small business as you wish. What
will you do with this money, and what should be doneTo small groups (15-20 minutes)
Long term planning & budgets
After preparing detailed budget for year 1, we need to bring them, and the cost of new entries
for the years 2 and 3 Adjust the projections of inflation basket prepare review detailed
financial plan and revise periodically
Financial monitoring
Importance of financial planning
Helps people plan Financial: live within their income brought allocate priorities financial
meeting expenses meet financial emergencies and reduce credit use reduce uncertainty and
conflict over finances gain asense of independence and control save and invest to reach
financial goals
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Sign of poor planning-overtrading
Overtrading:
(Occurs when a business tries to do too much with too little long-term capital (may encounter
problems in debt maturity (also visible in the business, and when there is a rapid increase in the
rate of rotation (rapid increase in current assets, fixed assets may be
Overtrading-signs
(The rate at which turned into cash stock and debtors are slow (increase in stocks and debt is
greater than the rate of increase in sales (may is likely to lengthen the repayment period for
creditors (exceeding overdraft limit agreed by the Bank.
Reference
a. Dyson, J R (2007). Accounting for non
Accounting Students, Financial Times/ Prentice
Hall
b. Websites
c. www.aat.co.uk
d. www.bized.co.uk
e. www.ft.com
f. http://www.citehr.com/116640-financial-planning.html
2.3 assess the information needs of different decision makers.
Introduction
Different party in organization
require different in turn
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According to their echelon of interest
According to their dissimilar needs
Types of decisions
Strategic conclusion: long-term, on the surface focussed, not
detailed & undertake by top level administration
Tactical pronouncement: short-term, more detailed. Internal
focussed & undertake by middle supervision
Operational decision: day to day decision, on the inside
focussed, for shop floor operation, impacts unswervingly on
customers
Types of stakeholders
Owners
Shareholders
Managers
Staff or employees
Customers
Suppliers
Community
Government
I= Internal
E= External
Stakeholders
(Shareholders/owners;-(classified as internal party (interested in profitability (profit attributable to
shareholders (asset base (NET/Organization (the availability of cash for future expansions
Managers
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Act on behalf Responsible shareholders (agents) to strategic decision -making Responsible
for planning Controlling Organizing responsible owner (s) Interested in performance and
growth business Interested Interested external information in business profits
Employees
(Interested primarily in salaries (other benefits of employment (employment security (corporate
profitability (future expansion plans (those wishing to profit & loss account information
Bankers/Lenders
(Interested in the following information (the liquidity of the company (profit (coverage of benefits
(the ability to pay interest and loan (fixed asset base (leveraged company (wanting budget
information and cash flow
Suppliers
Firms get the resources they need to produce goods and services from suppliers Businesses
should have effective relationships with its suppliers in order to get quality affordable resources
this two-way process, suppliers depend on companies that supply Interested in cash flow for
business Interested in ability to meet payment obligations in due time
Customers
Customers purchase goods or services produced by the companies They may be individuals
or other companies, Firms must understandand meet the needs of their customers, they will
fail to make a profit, in fact, survive interested in the quality of the product/service information
Community
Firms and societies that existed in the local bilateral relationship has been the community
often provide many company employees and clients often supply business the goods and vital
services to local area But sometimes can feel aggrieved by some community aspects of
company interested in Support organizational moral commitment to the environment and
corporate social responsibility
Government
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The period given depends on rationale of account
First part details the returns from sales and the expenditure associated with it-to arrive at gross
proceeds
The second part contain deductions and supplementary income not linked to sales to arrive at
net proceeds
Cash flow statement
Explains change in cash balances over a period of time by identifying all sources and uses of
ready money
Sources- any actions that brings hard cash into the firm e. g. sale of utensils
Uses any commotion that causes cash to leave the firm, e. g compensation of taxes
Impact of finance on financial
statements
Organisations require funding for different purposes for investment in new equipment or
machinery finance To grow or expand To meet short term/long term To pay debt obligations
or tax or other commitment Can come from internal or external sources Other identified
sources mentioned previously in the case of previous topics Each will have an effect on one or
more of the financial statements
Impact of finance on Fin Statements
SOURCES OF
FINANCE
BALANACE
SHEET
PROFIT & LOSS
ACCOUNT
CASH FLOW
STSTEMENT
Money
borrowed from
families &
friends
Increase the
current asset in
bal sheet (cash)
Shown as short
term liability
May increase
cash
available
Bank loan Affect current
asset-cash &
Affect P&L
expenses
Affect
available
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long-term
liability in
b/sheet
(interest) cash
(increase)
Sales of fixed
assets
Affect fixed
asset value in
b/sheet
(reduce)-
increase cash
(current asset)
Affect revenue in
P& L (Sales
income)-profit
may be affected
Increase
available
cash
Sale of stocks Affect current
asset in
balance
sheet-
reduces stock
value and
increase cash
Affect sales
revenue &
profit or loss
Affect
available cash
in cash flow
Additional
capital from
new partners
Affect equity
value & current
asset (cash)
N/A Affect available
cash
Debt collection Affect liability
on b/sheet
(reduce)-
increase current
asset value
(cash)
May affect sales
revenue acct-if
source from
sales
May affect cash
flow statement
Sale of new
shares
Affect equity
account &
May affect P& L
if share are sold
May affect
available cash
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Sources of
finance
Balance sheet Profit & Loss
A/c
Cash flow
Statement
Trade credit Affect creditors
a/c in balance
sheet (increase)
and increase
current asset
(stock)
N/A N/A
Retained
earning
Affect equity
account
(increase
reserve) and
affect current
asset (cash)
N/A Increase
available cash
in cash flow
Government
grant
Increase current
asset (cash)
N/A Affect available
cash in cash
flow
Reference
non-Accounting students, Prentice HallAtrill & McLaney (2004) Accounting
and Finance for non-Specialists, Prentice
Hall
BPP, Managing Financial Resources, Core Unit 2
www.bized.co.uk
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Reference
a. Sources-of-Finance
3.1 analyse budgets and make appropriate decisions.
Budgets and budgetary control
budgets are a economic and/or quantitative
statement, recitation to a defined time period,
stating the plan with systems of joystick over
it so as to accomplish the set objectives or plan
variances are basically deviation from set plan
[or budget] which may be either sympathetic
denoted by [F] or undesirable denoted by an [A]
Merits and Demerits
merits: integrates complete business & motivate
facilitates announcement & co-ordination
allows for development & control, could lead to
better presentation [MBO] & a performance
measure & reward apparatus of some sort
demerits: inflexible, awkward, outdated,
a rule than a tool, non value-adding etc.
Types Of Budgets
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fixed budgets are in the main inflexible & rigid,
they are as a rule set within a relevant range
theyre non-adaptive, developing or responsive
use for monitoring & control within huge firms
flexible budgets on the differing, quick to respond,
i.e. responds to asking price behaviours, adaptive,
use in strategic diplomacy & tactical exercises
Fixed budget
Constructing a fixed financial statement
Adopt the subsequent steps for fixed budget
time-honoured desired level of activity (1 level only)
Establish costs of machinery [matl, labour]
establish cost behaviours [by components]
Determine the system to adopt [vertical etc]
Ensure the arrangement identify the followings;
The direct price tag, gross profit, net income etc
Example fixed budget
establish the cost per learner per month using the data below:
No of learners at the college 1000 learners
No of learners per classroom 40 learners
Cost of book bag each learner is issued with 200 each
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Tutors per pay hour 20 per hour
No of teaching hour per week [4 wks per mth] 32 hours
Monthly overhead [principals salary] 20,000
Other monthly overhead cost per month 16,000
solution: fixed budget
Suggested solution [fixed budget]
Direct material [1000 x 200/learner 200,000
Direct labour cost [working note 2 below] 64,000
Overheads [20,000 +16,000] 36,000
Total cost of providing lectures 300,000
Average cost per learner [300,000/1000
[wk 1 no of tutor [ 1000 learners/(40 learners per class =
[wk 2 tutor pay [25 tutors x 32 hrs/wk x 20 per hr x 4 wks] =
300
25 tutors
64,000
Constructing a flexible budget adopt the following steps for elastic budgets
conclude the level of movement to budget for
create the cost per constituent to be used
E.g. material, labour and optical projection
conclude the cost behaviours [ by component]
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Determine the layout to adopt [vertical etc]
Format to state, unswerving cost, gross and net profit
Example flexible budget
Prepare flexible budget for activity levels [1000, 2000, & 2500]
No of learners at the college 1000 learners
No of learners per classroom 40 learners
Cost of book bag each learner is issued with 200 each
Tutors pay per hour 20 per hour
No of teaching hours per wk [4 wks per month 32 hours
Monthly overhead: principal salaries 20,000
Other monthly overheads per month 16,000
Solution: flexible budget
Suggested solution [flexible] 1000 2000
Direct materials [200 each] 200,000 400,000
Direct labour 64,000 128,000
overheads 36,000 36,000
Total cost of lecturing 300,000 564,000
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Average cost per learner
[w.1 no of tutor [1000/40 learners per class =
25 tutors
[w.2 tutor pay (25 tutors x32 hrs/wk x 20/hr x
4 wks) = 64,000
300 282,000
What to note: flexible budget
stuff costs increases by 200 per student
labour expenditure increases by the no. of learners
caused by? no. of classes & tutors obligatory
integrate & motivates, overhead is invariable
total costs increases with bustle [AC drops]
why? total FC is unchanged in relevant range
there are no incomplete tutors [so, round up!]
Summary
budgets may be describe as revolutionary plans
fixed budgets are rigid [i.e. non-responsive]
flexible budgets act in response to the activity levels
cost per unit declines as the commotion level rises
fixed budgets are used in unwavering environments
it is also number one & used by the government
use flexible budgets in shifting conditions
Practice Question
Each product consumes materials worth 50.00
Each labour hour is paid at this rate 10 per hour
Each worker works standard hour per wk of 32 hours
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How many weeks are there in a month 4 weeks
Total overheads per month
Q.1 prepare a flexible budget at 800, 2500 & 5000 activity
levels
Q.2 which activity produces the lowest cost per unit?
Q. 3 why is this the case [provide a reason for your choice]
26,850
Types of budget
Cash vs Zero-based
cash budgets reproduce cash movements only
forecasts future cash location or requirements
they do not match the earnings forecasts & may
start with cash famine [overdraft] or surplus
zero-based budget start from a zero base
each period & requires mgs. to justify wishes
for reserve each year [promotes efficiency]
Features of effective budgeting
1. truthful forecasting
2. Based on organisational aim
3. in sequence is timely and accurate
4. fashioned with multilevel input
5. standard reviews are built-in
Problems with budgeting
The progression is too long
There is a grouping of game playing
Business decisions revolutionize but the budget does not
People in charge of budget are held responsible in areas where they have no
responsibility
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Applying an subjective proportion to prior period actual
Uses of budget
To stay surrounded by a limit
For have power over purposes
For forecasting
To entrust
To prioritise Wants,& classify Needs,
Within the territory of what we Can
Reference
Dyson (2007) Accounting for non-Accounting students, Prentice Hall
Atrill & McLaney (2004) Accounting and Finance for non-Specialists, Prentice Hall
BPP, Managing Financial Resources, Core Unit 2
www.bized.co.uk
http://en.wikipedia.org/wiki/budgeting
en.wikipedia.org/wiki/zero_based_budgetting
http://en.wikipedia.org/wiki/personal_budget
3.2 explain the calculation of unit costs and make pricing decisions using relevant
information.
Costs & cost calculations
cost classifications: direct outlay & prime expenses
cost classifications: indirect overheads & total overheads
cost behaviours: fixed expenses [meaning & uses] variable overheads [its meaning & applications]
semi-variable outlay [meaning & applications]
presenting expenditure behaviours using diagram
Direct costs & prime costs
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means? cost appreciable to product or examination
meaning? its fluctuate with volume of output
express costs consists of direct material costs
nonstop labour & direct expenses [e.g. delivery]
most important costs consists of the total direct costs
i.e. [material + labour + any through expenses]
so, prime cost is the same as shortest cost? yes!
Indirect Costs & Total Costs
i.e. costs not particular to product or service
circumlocutory costs consists of indirect material costs
[e.g. cleaning materials], indirect employment cost
[e.g. salary, bonus pay] & circumlocutory expenses
[e.g. rent, indemnity, repairs, publicity etc.]
the total outlay = [total direct & indirect costs]
i.e. [direct expenses + indirect costs] = total costs
Fixed Costs & Variable Costs
fixed price tag do not change with movement levels
i.e. cost remains predetermined within a relevant range
but in the long-run, all costs become up-and-down uneven costs adapt to the levels of activity
states that costs increases per unit as commotion
levels jump down [i.e. fixed costs over more volume]
as volume rises, the total common cost drops
Diagram-fixed cost
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Semi Variable Costs
this is a assortment of both fixed & variable costs
example: cellular phone cost [i.e. fixed land line]
- a portion of the asking price is fixed [i.e. line rental]
- the other portion is changeable [the no. of calls]
what to do with mixed costs when scheduling:
- separate the total cost into unchanging & variable
- use high & low process or regression chemical analysis
Cost-plus pricing-company adds a certain entitlement on the cost of producing its
product to set the business price
Skimming method- makes a high profit at the onset to cover investigate cost offering
reduced numbers. Used by electronic commodities and other tech product e.g. Apple i-
pads and i-phones
Penetration pricing: offering low prices in order to gain so many clients at the
commencement. The aim is on wider acceptance and increase souk share and
competiveness. This is a very good entry approach where competition is high and
intense
Target pricing:used for intended or unambiguous purpose e.g. to enable a single-
minded rate of homecoming on investment for a scrupulous period of time- used by
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companies whose capital speculation is high e.g. energy companies or sports car
companies
Reference
Atrill, P (2009) Management Accounting for Decision Makers 6thEdn. Prentice Hall
BPP Managing financial resources core book unit 2
www.globusz.com/ebooks/costing/00000010.htm
http://en.wikipedia.org/wiki/cost-centre
http://en.wikipedia.org/wiki/operating-cost
www.bized.co.uk
3.3 assess the viability of a project using investment appraisal technology.
Investment Appraisal
A means of assessing whether a worthwhile investment project or project Investment can not
be buying a new PC for a small company, a new piece of equipment in the manufacturing plant,
and a completely new factory, Used etc in both the publ ic and private sector
Types of investment
appraisal
Accounting period Payback rate of return (ARR) rate of return (IRR) Internal NET
Profitability indicator "present value (discounted cash flow)
Investment appraisal
I do a investment companies? The Importance of remembering as a purchasing capacity do
not buy stocks, bonds or investment bank! Buy equipment/machinery or building a new plant
for: Increase capacity (quantity that can be produced) which means: Demand can be
achieved and this generates sales revenue Increased efficiency and productivity Investment
therefore assumes that investment will produce future revenue streams to assess Investment
is all about evaluating these streams of revenue against costs Not investing science! The
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payment method generates the length of time it takes to pay off the initial capital cost
information Requires to return investments 600,000 It cost machine produces elements that
yield a profit of 5 each to produce 60,000 units per year will be Payback period 2 years
Payback could occur during Can generally take into account the reduced cash flows from
investment to days
Why do companies invest?
Importance of remembering
investment as the purchase of
productive capacity NOT buying
stocks and shares or investing in a
bank!
Buy equipment/machinery or build
new plant to:
Increase capacity (amount that can
be produced) which means:
Demand can be met and this generates sales revenue
Increased efficiency and productivity
Investment therefore assumes that the investment will
yield future income streams
Investment appraisal is all about assessing these
income streams against the cost of the investment
Not a precise science!
Pay back method
The length of time taken to repay the initial
capital cost
Requires information on the returns the investment
generates
e.g. A machine costs 600,000
It produces items that generate a profit of 5 each on a
production run of 60,000 units per year
Payback period will be 2 years
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Payback could occur during a year
Can take account of this by reducing
the cash inflows from the investment
to days, weeks or years
Days/Weeks/Months x Initial Investment
Payback = ----------------------------------------
Total Cash Received
e.g.
Cost of machine = 600,000
Annual income streams from investment
= 255,000 per year
Payback = 36 x 600,000/765,000
= 28.23 months
(2 yrs, 6 months)
INCOME STREAMS
YEAR 1 255, 000
YEAR 2 255, 000
YEAR 3 255, 000
Accounting rate of return [ARR]
A comparison of the profit generated
by the investment with the cost of the investment Average annual return or annual profit
ARR =
--------------------------------------------
Initial cost of investment
An investment e.g. is expected to result in cash outflows of 10,000 a year for the next five
years the initial cost of investment profit Total 20,000 and 30,000 annual profit: = 30000
pounds/5 = 6000 ARR = 6000/20000 100 = 30% A return worthwhile? Net present value
NPV Takes into account the fact that money values change with time How much will you
need to invest today earn x amount of time? Value of money affected by interest rates NPV
helps to take these factors into account returns shows you what is your investment would earn
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in alternative investment e.g-project 150,000 costs After 5 years cash = 100,000 (10%)
If you had invested 1 million to the Bank offers interest of 12% will be the largest returns might
be better off to reconsider your investment! The principle: How much you will have to invest
now earn 100 in one year if the interest rate is 5%?
Net present value
Future Value
PV = -----------------(1 + i)n
Where i = interest rate
n = number of years
ThePV of 1 @ 10% in 1 years time is
0.9090
If you invested 0.9090p today and the
interest rate was 10% you would have 1
in a years time
Process referred to as:Discounting Cash Flow
Cash flow x discount factor = present
value
e.g. PV of 500 in 10 years time at a rate
of interest of 4.25% = 500 x .6595373 =
329.77
329.77 is what you would have to invest
today at a rate of interest of 4.25% to earn
500 in 10 years time
PVs can be found through valuation tables (e.g. Parrys Valuation Tables)
Internal rate of return IRR
Allows the risks associated with the investment project to be assessed is the IRR the interest
rate (discount rate) that makes the net present value = zero value helps us measure Allows
the investment firm to assess whether the investment in the device, and so will yield the best
return based on internal criteria for comparison Allows return of projects with different initial
expensesSet allows cash flows to different discount rates Software or simple charts to find
the internal rate of return
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Profitability index
Allows comparison of the costs and benefits of different evaluation projects and thus allow the
decision-making be undertaken "net present value" index =-profitability-considerations Key
"investment cost of initial capital" for companies looking to use:Ease of use/simplicity required
DegreeExtent of precision required which could be future cash flows accurately measure
Extent of future interest rate movements that could be taken into account, he predicted
factoring in inflation raised the Necessity of making Investment long-term decisions requires
special attention because of the following reasons:-Effect They finance the steady growth in
the long term They affect risk It firm involves the commitment of considerable amount of
investment decisions They are irreversible, and in large loss They are among the toughest
decision to make benefits Future need detailed evaluation because they are difficult to predict.
Advans & disadvans of payback period
Simple to use and gives an overview on how long it will take to recover the investment May
be useful where a relatively short time scale Help determine how fast the cash flow has
become positively Useful project where companiescash flow problems: defects Can give a
simplistic mode Does not take into account the fact that future returns may be less than the
value of the ignore the qualitative aspect of resolution Does defects recovery period does not
look at how many are created after the rear Does not look The profitability of the project and
compare the return with the initial investment
Take no account of interest rate
ACCOUNTING RATE OF RETURN:
ADVANTAGES
Shows the profitability of investment clearly use Take into account the interest rate factor
Can compare alternative draft show differences in return-ARR defects Does not take into
account that future returns may be less than the value of Ignore does not consider the
qualitative aspect of resolution Does how long it takes to recover the initial investment shows a
net present value/DCF-advantages of profitable investment clear Take into account the
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interest rate Allows a return in the future could be less than the value of defects: Ignore quality
do not consider side Does how long it takes to recover the initial cost of investment
Reference
BPP, Managing financial resources, core unit 2
http://www.financial.kaplan.co.uk/Document/ICEAWMI_c
h3_p.pdf
www.businessstudiesonline.co.uk
www.revisionworld.co.uk/files/investment
4.1 discuss the main financial statement.
The financial statements include the four key small business income statement, balance sheet,
cash flow statement, statement of owner's equity. Private businesses and small businesses do
not need to prepare financial statements. However, if they want to go or need financing, a set of
financial statements will come in handy. Data that help small business owners collect their
financial records, and compare current performance against prior periods and the industry
average. The income statement is the basic components of the income statement revenue,
expenses, and profits. Usually appears in the top line revenues and bottom line shows the net
profit or loss. Companies incur losses if expenditures exceed revenues. The size and
complexity of the company determines the number of items in the income statement, but the
main categories that include sales and operating costs and non-operating expenses. Gross
profit equals Sales minus cost of goods.
Balance Sheet
The components of the balance sheet of assets and liabilities and owner's equity. Asset is
displayed on the left side while the other two appear on the right side. The basic accounting
equation States that assets must equal total liabilities and owner's equity. Assets include current
assets such as cash, inventory, fixed assets, such as plants and other properties. Include
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liabilities short-term liabilities, including liabilities accounts payable, long-term, such as bonds. A
small business may not have any long-term debt. Equity section of the balance sheet holders
may contain only the ending balance for the period because it shows the ending balance in the
account statement of owner's equity.
Reference
Dun & Bradstreet Credibility Corp.; Financial Statements for Small Businesses; Tim Devaney,
et al.
San Joaquin Delta College Small Business Development Center: Get a Handle on Your
Business Finances
University of Arkansas at Little Rock, Arkansas Small Business and Technology Development
Center: Understanding Financial Statements: What Do They Say About Your Business?
AccountingAide: Statement of Owner's Equity
4.2
There are three types of financial statements: income statement, balance sheet and cash flow
statement. Each of these financial statements show a different aspect of the business. However,
correctly understand the financial health of the business, all the three financial statements
should be studied together. Each financial statement can show potential problems or
weaknesses that are evident in other data. There are standard forms that are used for each of
the three financial statements.
BASIC INCOME STATEMENT
The basic form of the statement of income on income first, followed by the expenses. Expenses
are subtracted from revenue to calculate the net income of the business. This is a statement of
income used by most service providers and others that did not cost of goods sold for the
services they use to create simplified profit more. If there is a cost of goods sold, income
statement, statement of participation.
http://www.dandb.com/credit-resources/small-business-help/financial-statements-for-small-business/http://www.dandb.com/credit-resources/small-business-help/financial-statements-for-small-business/http://www.dandb.com/credit-resources/small-business-help/financial-statements-for-small-business/http://sbdc.deltacollege.edu/inbusiness/finance.htmlhttp://sbdc.deltacollege.edu/inbusiness/finance.htmlhttp://sbdc.deltacollege.edu/inbusiness/finance.htmlhttp://asbdc.ualr.edu/business-information/1531-financial-statements.asphttp://asbdc.ualr.edu/business-information/1531-financial-statements.asphttp://asbdc.ualr.edu/business-information/1531-financial-statements.asphttp://accountingaide.com/examples/stmtownereq.htmhttp://accountingaide.com/examples/stmtownereq.htmhttp://asbdc.ualr.edu/business-information/1531-financial-statements.asphttp://asbdc.ualr.edu/business-information/1531-financial-statements.asphttp://sbdc.deltacollege.edu/inbusiness/finance.htmlhttp://sbdc.deltacollege.edu/inbusiness/finance.htmlhttp://www.dandb.com/credit-resources/small-business-help/financial-statements-for-small-business/http://www.dandb.com/credit-resources/small-business-help/financial-statements-for-small-business/ -
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INCOME STATEMENT FOR RETAIL OR MANUFACTURING
Income statement-shop retail or manufacturing process is very different from the statement of
service. In the income statement, the first line of gross income or revenue, followed by
subtracting the cost of goods sold or manufactured. This provides the amount of gross income.
The second section of the income statement lists all expenditures associated with SG & amp; A,
parts sales and General and administrative business. This is subtracted from the gross income
reveal operating income. The last section presents expenditure and interest expense and taxes
to net income from other businesses.
BALANCE SHEET
The balance sheet shows the assets, liabilities and shareholders ' equity & # 039;. Total assets
must equal total total liabilities and shareholders equity & # 039;. Section I of the balance sheet
lists all the assets. This includes cash, investments, real estate and other commercial
equipment and stores. The following section lists the liabilities, or what the company owes to
others. This includes any loans or accounts payable. The last part of the shareholders & # 039;
equity is the difference between total assets and total liabilities.
Reference
Investopedia: Understanding the Income Statement
Investopedia: Balance Sheet
Investopedia: Cash Flow Statement
4.3 interpret financial statements using appropriate ratios and comparisons, both internal and
external.
"In spite of constraints analysis is widely used as a tool to assess past performance and predict
future successes or failures of entrepreneurs." Ratio analysis is not just picking different
numbers of balance sheet and income statement and statement of cash flows and compare.
Ratios compare the facts against previous years, industry, other companies, or even the
economy generally. Consideration of the relationship between the values of rates and contact
them to find out how the company's past and future. Themes and trends the chronology of these
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