fa assignment
TRANSCRIPT
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Faculty of Business
Submission of Group Assignments: Cover Sheet
Date of Assignment: 08.2016 Due Date: 08.2016
Date of Submission: 08.2016
1. Course: Bachelor of Business Administration
2. Year: 1 3.Semester: 1 4.Module Code: BM111
5. Module Name: Fundamentals of Accounting
6. Lecturer-in-charge: Ms. Shashitha Jayakody
7. Title of assignment: Sources of Finance
8. Supervisor:
Declaration:
We certify that:
• This assignment is my/our own work, based on my/our personal study and/or research.
• I/We have duly acknowledged all material and sources used in the preparation of this assignment.
• Neither the assignment, nor a substantial part of it, has been previously submitted for assessment in SLIIT
or any other institution.
• I/We have not copied in part, or in whole, or otherwise plagiarized the work of other students. I/We are
fully aware of the rules and regulations of SLIIT regarding plagiarism and exam malpractices. I/We
understand that I am/all of us are liable to bear the consequences of (anyone involved in) plagiarism.
• The use of any material in this assignment does not infringe the intellectual property/copyright of a third
party.
• All resources documents/reference materials are attached to this document.
Student ID Student Name Signature Contribution %
BM16432376 Nadishan G.S.W.Y. 20%
BM16428034 Samaratunga Y.A.M.S. 20%
BM16429024 Nawarathna N.M.D. 20%
BM16430532 Wijesooriya W.A.D.I. 20%
BM14406386 Galigomuwe N.G.J. 20%
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TABLE OF CONTENTS
1. Abstracts……………………………………………………………….....3
2. Acknowledgement………………………………………………………..4
3. Introduction……………………………………………………………….5
4. What is source of finance………………………………………………....6
5. Internal financial sources of Lucky Lanka PLC…………………………..7
a. Own capital………………………………………………..8
b. Working capital…………………………………………..10
c. Sales of assets…………………………………………….11
d. Provision of depreciation…………………………………12
e. Retained profit……………………………………………13
6. External financial sources of Lucky Lanka PLC…………………………14
a. Share issuance……………………………………………15
b. Bank loans………………………………………………..18
c. Bank overdrafts…………………………………………..20
d. Leasing…………………………………………………...21
e. Hire purchasing…………………………………………...23
7. Conclusion………………………………………………………………...24
8. Recommendation………………………………………………………… 25
9. References………………………………………………………………...26
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1. Abstracts
This report was furnished to describe the various financial sources of Lucky Lanka Milk
Processing PLC to their day to day activities in order to grow and change over time.
Lucky Lanka Milk Processing PLC is one of the leading Sri Lankan brand names which
earned fame of bringing Sri Lanka’s name to global level. Lucky Lanka Milk Processing PLC
is very popular among Sri Lankans. Because of it is ingeniousness and it helps to consolidate
Sri Lankan farmers. Lucky Lanka Milk Processing PLC is recently listed in Colombo Stock
Exchange also.
Lucky Lanka Milk Processing has to raise funds through various sources in order to execute
their day to day operations as well as company’s growth. This report discuss about Lucky
Lanka Milk Processing PLC financial sources.
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2. Acknowledgement
We as a group of student of SLIIT would like to express our profound gratitude to Ms.
Shashitha Jayakodi for her constant encouragement throughout this assignment in order to
make this task fulfill.
Secondly we would like to thank Mr. G.S.W. Hareendra who is the regional marketing
manager of Lucky Lanka Milk Processing PLC supported us by providing these valuable
information in prompt manner to achieve this task.
Last but not least we would like to express our thanks to the staff of Lucky Lanka Milk
Processing PLC for their co-operation during this assignment.
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3. Introduction
This report is furnished to explain how Lucky Lanka Milk Processing PLC fulfills their
financial requirements through various resources to execute their day to day activities as well
as business growth. Lucky Lanka Milk Processing PLC was established in 1991 and that time
it was quite a small scale business and now it has expanded to vast level through past 2 & ½
decades and they have registered under Companies Act No. 7 of 2007 and recently listed in
Colombo Stock Exchange also. This company privileges Sri Lankan indigenous milk farmers
to uplift their businesses as well as to consolidate Sri Lanka’s rural economy. In this report
we discuss about how this company satisfy their financial requirements.
Basically we have recognized some financial resources of the company we have categorized
two main headings; ‘Internal Financial Resources’ and ‘External Financial Resources’. Under
internal financial resources we can recognize own capital, working capital, sales of assets,
provision of depreciation and retained profit. External resources are share issuances (voting
and non-voting), bank loans, over drafts, leasing, hire purchasing.
In this assignment we are going to explain each resource which we have mentioned in the
above paragraph thoroughly. Furthermore we hope to discuss about the situations where the
company uses those financial resources as well as advantages and disadvantages of them.
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4. What is source of finance?
Finance is a compulsory segment for every business from the beginning to throughout its
entire life time. Basically we can see day to day finance requirement for any business in the
need world as well as there are some finance requirement can be generated in the long run
when the business organization wants to improve or expand their business. Finance is not
only a require to carry out their day to day activities but also this is very critical when some
important factors come to play such as expansion of business, increase the product range,
acquiring another business and etc.
Finance resources can be easily introduced as how particular business organization raise their
funds for different activities. Finance resources are very critical when considering the
liquidity of a business organization. At a given time business organizations have various
ways to raise their funds and each organization chooses and appropriate option by
considering their stability, easiness (readiness), accessibility and etc. Business organization
can basically raise their funds in two main ways; internal resources and external resourses.
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5. Internal financial sources of Lucky Lanka PLC
In this chapter we are going to discuss about internal financial sources and how they effect on
company’s financial requirements as well as advantages and disadvantages of each source.
We are going to explain about some internal financial source which we have recognized in
Lucky Lanka Milk Processing PLC as follow.
1. Own Capital
2. Working Capital
3. Sales of Assets
4. Provision of Depreciation
5. Retained Profit
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5.a.Own Capital
Mr. Lal K.A. Gunawardena, Ms. B.A. Gunawardena, Ms. D.A. Gunawardena, Ms.
N.A.Gunawardena started this business in 1991 and they are the pioneers of Lucky Lanka
Milk Processing (Pvt) Ltd. those who have the highest contribution to the capital. Their
contribution as follow
Owner
Contribution
Mr. Lal K.A. Guanwardena
931,198,500
Ms. B.A. Gunawardena
133,029,100
Ms. D.A.Gunawardena
133,028,250
Ms. N.A.Gunawardena
133,028,250
Total
1,330,284,100
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Advantages of Own Capital
1. Generated among owners, therefore no need to pay fixed pay back outside party.
2. Provided by the owners and it motivates them to improve and growth the business.
3. In case of profit loss or bankrupt this has lenient payback procedures.
Disadvantages of Own Capital
1. Government taxes are applied.
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Working Capital = Current Assets – Current Liabilities
5.b.Working Capital
Working capital which is something known as funds that business organization has to execute
their day to day activities. At a given time working capital can be calculated by using below
formula.
Advantages of Working Capital
1. This is generated inside the business therefore no external parties involved and no
payback.
2. Neither interest rate nor government taxes applied to this.
Disadvantages of Working Capital
1. Danger of experiencing lack of sufficient funds for day to day activities incase of over
using this method.
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5.c.Sales of Assets
This is another internal source of raising funds by selling business’s own assets. By this
method company can generate money for its capital needs. This source falls under short or
long term finance depending on what kind of assets are sold. By selling something like a
motor vehicle they can cater their short term small financial requirements. If they sell land or
building they can cater to long term and bigger finance needs.
Advantages of Sales of Assets
1. Sold to raise cash.
2. Makes sense to dispose of underused assets.
3. Finance development without extra borrowing.
4. They can sale and lease it back.
5. Loses assets but has the use of the cash.
Disadvantages of Sales of Assets
1. Time taken to sell the assets.
2. Advertising and other expenses (Stamp fee)
3. Lose of an asset.
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5.d.Provision of Depreciation
Some assets as machineries, vehicles etc. have used full life time and expenses are allocated
certain amount of money based of particular method (Straight-line method and Reducing
Balance method) to reestablish the certain asset after its useful life time. This is another
internal finance resource of Lucky Lanka Milk Processing PLC because they have lot of
machineries involved in their business.
Advantages of Provision Depreciation
1. No government taxes apply.
2. Nil cost involved (except calculation cost)
3. Long term basis and comparatively very low amount is allocated certain time period
hence company generated necessary funds gradually.
Disadvantages of Provision Depreciation
1. Difficult to make predictions of life time and end value therefore accuracy is reduced.
2. More assets show significant expenses.
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Retained profit = Net profit - Dividends
5.e.Retained Profit
Retained profit is something known as the sum of the profit which remains after paying
dividends to shareholders. This source falls under long term financial source for the company
and this does not have many fixed day of maturity like debentures. After certain period of
time companies issues ordinary shares in order to raise their stated capital as well as to attract
new investors to the business. This source of finance is only available for a business which
has been trading for more than one year.
Advantages of Retained Profit
1. Doesn’t have to be repaid.
2. No interest is payable.
3. No government taxes apply.
4. Can attract new investors.
Disadvantages of Retained Profit
1. Not available to a new business.
2. Demoralizing investors due reduce dividends (earnings)
3. Does not generate any income to the company for the period that their holding it.
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6. External financial sources of Lucky Lanka PLC
External financial resources are the methods of raising funds with outside parties involvement
Lucky Lanka Milk Processing PLC as a company with huge operations as well as a listed
company they have vast range of external financial resources, some of them as follow.
1. Share issuances
2. Bank loans
3. Bank overdrafts
4. Leasing
5. Hire Purchasing
In this chapter we are going to discuss about external financial sources and how they effect
on company’s financial requirements as well as advantages and disadvantages of each source.
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6.a. Share Issuances
Lucky Lanka Milk Processing PLC is a listed company in Sri Lanka. Arguably share issuance
is the best privilege that PLC has comparing to other business organizations. They were listed
on the Diri Savi Board in Colombo Stock Exchange in 2014 and their first share issuance
happened on August of 2014. Lucky Lanka Milk Processing PLC issues both voting and non-
voting shares and contribution of each is shown below.
The Company intends to allot the said 38,000,000 Ordinary Voting Shares @ rate of 6 LKR
and 24,000,000 Ordinary Non-Voting Shares @ rate of 3 LKR, on the basis set out below.
Investor category Ordinary Voting
Shares Ordinary Non-
Voting
Shares
Percentage
Unit Trusts
3,800,000
2,400,000
10.00%
Retail Individual Investors
17,100,000
10,800,000
45.00%
Non Retail Investors
17,100,000
10,800,000
45.00%
38,000,000
24,000,000
100.00%
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Objectives of the Issue.
To provide an opportunity to the public to participate in the equity of the company this in turn
will broad base the ownership and allow the company greater access to the capital market of
Sri Lanka.
The funds raised from the IPO will be utilized in the following manner;
Description Amount
(LKR Million) Fund
Utilization
period in the
year 2014
Settlement of long term liabilities
(As per the details given below)
200
July/August
Improvement of the existing production plant
New cold room complex with an ammonia refrigeration
system – LKR 35 Million
Extension to the existing UHT milk processing building –
LKR 30 Million
New machinery including conveyer systems & pigging
systems – LKR 10 Million
75
August
Implementation of the new projects - Gedarata Kiri , Milk
Bar Outlet and School Canteen
25
July to
November
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Advantages of Share Issuances
1. Dividend is variable with profit as well as not to be paid in case of lose.
2. Assets are not subjected to reduce when issuing.
3. In case of bankrupt or any other unexpected condition shares have least propriety to
pay back.
4. This is a privilege of PLC which helps to raise huge amount of funds as well as
contribute many investors.
5. Permanent source. (when required can issue)
Disadvantages of Share Issuances
1. Can result loss of control from its initiator.
2. Have to share company’s profit.
3. Issuance cost.
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6.b. Bank Loans
Lucky Lanka Milk Processing PLC has taken loans of 164,698,318 LKR to consolidate
company’s infrastructure .These loans were taken from various financial institutions such as
licensed commercial banks and registered finance companies. Below table shows the
contribution of loans to Lucky Lanka Milk Processing PLC financial flow.
Name of Registered Finance
Companies
Type of the Loan Amount outstanding as at
31-03-2014 (LKR)
Mercantile Investment
Term Loan
7,114,960
Asia Assets Finance PLC
Term Loan
2,356,266
Name of Licensed Commercial
Banks
Type of the Loan Amount outstanding as at
31-03-2014 (LKR)
Union Bank PLC
Term Loan
110,751,718
Commercial Bank PLC
Term Loan
9,301,821
NDB Bank PLC
Term Loan
35,173,553
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Advantages of Bank Loans
1. Set repayments are spread over a period of time which is good for budgeting.
2. Can raise significant amount of funds.
Disadvantages of Bank Loans
1. Can be expensive due to interest payments.
2. Bank may require security on the loan.
3. Time taken is quite high.
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6.C. Bank Overdrafts
This is a facility of current account holders to manage their instance financial requirements.
This facility is known as the privilege to draw (issue) cheques than the remaining balance of
the account. This is very easy method but interest rate is very high. Commercial banks issue
two types of overdrafts which are known as ‘permanent overdraft’ and ‘temporary overdraft’.
Lucky Lanka Milk Processing PLC uses both types of overdrafts to fulfill their temporary
financial requirements.
Advantages of Bank Overdrafts
1. Easy to use this facility.
2. Almost no paper works involved.
3. Can access easily as when company need.
Disadvantages of Bank Overdrafts
1. Very high interest rate to be paid.
2. Amount that can be raised through this method is comparatively low.
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6.d. Leasing
Leasing is another source of finance which Lucky Lanka Milk Processing PLC uses. This
method enables company to use the assets over a time period which they agree with the lessor
and they have installment plans to pay the amount and agreed interest in order to acquire the
asset after time period in the agreement. Lucky Lanka Milk Processing PLC’s leasing details
are shown in below table.
Lucky Lanka Milk Processing PLC acquired following assets on finance leasing
Name of the Financial
Institute Type of the Loan Amount outstanding as at
31-03-2014 (LKR)
Nation Trust Bank
Finance Leases
5,662,805
Asia Assets Finance PLC
Finance Leases
13,238,410
Mercantile Investment PLC
Finance Leases
16,582,127
Description Amount as at 31-03-2014 (LKR)
Plant machinery and equipment 32,462,361
Refrigerators 13,577,723
Motor vehicles 42,075,000
Total 88,115,084
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Advantages of Leasing
1. No need to pay entire price of an asset to use it.
2. Payments are made as installments hence gradually funds are going away from the
company and simultaneously they can use the asset as well.
3. Time taken for the process is comparatively low. (Paper work)
Disadvantages of Leasing
1. Fixed interest to be paid.(high cost)
2. In case of failure to pay installments according to agreement may lose the asset as
well the payments made.
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6.e. Hire Purchasing
This is an agreement of owner of asset let the company use the asset on hire where hirer
(Lucky Lanka Milk Processing PLC) has to pay regular installment, by the time hirer made
all payments hire is allegeable to purchase the asset. These periodic payments are also
included an interest other than the price of the asset.
Advantages of Hire Purchasing
1. Immediate without making the full payment company is eligible to use the
asset.(obtain benefits by using the asset)
2. Expensive assets can be utilized as the payment is spread over a period of time.
3. Easy to access as well as no guarantee to be shown in order to obtain privileges of
hire purchasing.
4. Fixed rental payments make budgeting easier as all the expenditures are known in
advance.
5. Possibility of granting the ownership of the asset after the agreed time.
Disadvantages of Hire Purchasing
1. Company has to pay an interest other than the price of the asset.
2. To obtain the legal authority over the asset have to make the entire payment which
interest included.
3. Company’s funds are going away for a longer period.
4. In case of changing company strategy or any other condition which resulting the
asset unessential company is subject to penalty.
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7. Conclusion
Lucky Lanka Milk Processing PLC is Sri Lankan leading dairies production supplier and
throughout this assignment we have recognized various sources of finance which are used by
the company. We as a group of students following business management degree understood
pros and cons of each source further more we have learnt that financial sources can be
categorized in various methods such as internal and external, short time period and long time
period and etc. In this study we have realized that Lucky Lanka Milk Processing PLC uses
more external sources to raise their funds and they are obtaining the privileges of PLC as
well. Choosing the most appropriate alternate among the available methods to raise funds is
very crucial to any business organization.
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8. Recommendation
We would like to recommend Lucky Lanka Milk Processing PLC to issue ‘debentures’ as
well because of various reasons such as
1. More preferred by investors.
Investors would like to invest on debentures because safety of the investment hence
company can raise more funds.
2. Management is not subject to change.
No voting rights granted by the investors those who invest on debentures.
3. Company can invest on long time framed projects.
This is a reliable source and company has clear idea about the funds raised by
debentures.
4. Can obtain tax relief because debentures are recognizing as loans.
Income tax relief for the interest paid to debentures hence debentures are recognize as
loan.
5. When inflation existing in the economy it is an advantage to the
company.
When inflation occurs in the economy the exact interest paid is less.
6. Less Costly.
No need to pay dividends only fixed amount of interest paid.
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9.References
1. http://www.cse.lk/company_info.do
2. http://colombostockwatch.com/company/lucky- lanka-milk-processing-company- llmp-
n0000/
3. http://www.luckylanka.lk/
4. https://www.cse.lk/cmt/upload_report_file/1365_1441970985492.pdf
5. http://www.luckylanka.com/images/Lucky-Lanka-Initial-Public-Offering-
Prospectus.pdf
6. http://www.businessdictionary.com/
7. http://www.investopedia.com/