Managing financial resources and decisions Essay Sample

past five years specializes in manufacturing furniture for both the retail sector and private residences. Currently, the company is categorized as a medium-sized business and employs 200 individuals.

The company has experienced a 1% decrease in market share and now needs to expand its product range. To do this, Living Wood is planning to purchase new machinery worth ?5 million. In order to raise this capital, they are considering taking out a long-term bank loan since the amount needed is quite substantial.

Populating wood has the option to purchase equipment, which can help minimize the risk of a bad investment. If the machinery does not work out as planned, Populating Wood can return it. Being a private limited company, they can also sell shares to their family and friends.1b) There are various sources of finance for businesses, and their suitability depends on the type of business.

Living wood could travel in for a loan to raise the needed capital. It would be best to obtain a long term loan in this instance, considering that ?5 million is a significant amount.

If Populating wood were to opt for a short term loan, they would not be able to repay it within a year. Their financial records indicate a net profit of only ?370,000 in 2010, making it highly unlikely for them to repay ?5 million in this timeframe. A bank overdraft is not a suitable option either, as they are designed for short-term use and come with high interest rates, which are more suitable for smaller amounts. In order to obtain the required ?5 million, Populating wood would have to pay an exorbitant amount of interest that could potentially surpass

the principal itself.

Populating Wood may consider purchasing the equipment in order to spread the cost over a longer period of time and reduce the financial burden. This approach would also mitigate the risk of a failed investment, as Populating Wood can return the machinery if it does not meet their expectations. However, this may not be applicable in all cases.

The expense of renting equipment ultimately exceeds the initial amount. Populating wood could potentially increase funds by selling their fixed assets, although this may not be the optimal choice. These fixed assets may consist of land and machinery, and selling them could generate a substantial amount of capital.

In the future, these items may have a better purpose. For instance, individuals might have initially bought land with plans to expand later on.

Living Wood currently has machinery that is around five years old and may not meet their financing needs. Moreover, they will need to acquire a new machinery, which will require additional capital. To tackle this problem, Living Wood can choose to sell their debts to a debt factorization company. This would provide them with more immediate cash. However, it is important to consider an alternative viewpoint.

Populating wood's current debtors are not significant, and they would incur a fee if they engage the services of a debt factorization company. Regrettably, Populating wood lacks the financial means to pay this fee due to their need for capital. Nonetheless, as a private limited company, they have the alternative of selling shares to their close family and friends.

The company may view giving shareholders a share of the profits as a liability, but it is necessary. However, since the new machinery

is expected to enhance productivity, they might be able to afford it and selling shares could become a feasible option. 1c) Financial Planning involves establishing objectives and policies.

Financial planning involves managing and budgeting for the financial activities of a business. This ensures effective and fair financial and investment policies. According to Michael Armstrong in his book "The Handbook of Management Techniques," a Financial Plan predicts the business's performance in financial terms, providing an overall measure of its performance and serving as a foundation for making financial decisions and obtaining financing. Performing financial planning is crucial for the success of any organization.

It helps ensure the Business Plan is realistic by verifying that the goals set are achievable from a financial perspective. It helps establish financial targets for the organization. Figure 1: Components of a financial statement The three main components of a financial statement are the Cash Flow Statement.

The Income Statement, also known as the Net Income and Loss history, and the Balance Sheet are interconnected. This implies that modifications in one will unquestionably affect the others. However.

The three statements analyze different aspects of the company. The income statement represents Living wood’s ability to generate cash and displays its revenues, expenses, capital, and cost of goods purchased.

This will allow Livingwood to determine their net income or loss for the year. The cash flow statement is a crucial document for any company, as it shows how cash will flow in and out of the business. It provides Livingwood with information on the amount and timing of cash needs, as well as the sources of cash generation. The cash flow statement is a valuable predictor of future profits

or losses and is essential for assessing the risk of running losses.

This statement will determine if they require additional hard currency. It ensures a balance between the outflow and inflow of finances to maintain business stability. Unlike the other two statements, the balance sheet remains distinct.

The balance sheet is prepared annually and provides a summary of financial information for three categories: Assets, Liabilities, and Equity. It allows stakeholders to determine the company's net worth and financial position. Populating wood anticipates an increase in demand and new contracts.

They require ?5 million for the purchase of new machinery, which will help expand their range of products. To accomplish this, a solid financial plan is necessary. Living Wood will need to increase furniture production, despite the potential delay in selling due to the current economic downturn. In the meantime, they will have to make financial arrangements to sustain the business until the market recovers.

Using wood material will require more capital for stocking costs. The financial plan will show the expected cash inflow and outflow. This information will help determine future actions for using wood material. However, Populating wood does not anticipate a high demand according to the case.

The lack of a steady supply of natural materials forces individuals to buy them from whatever provider is accessible, resulting in decreased quality and increased costs. The financial program aims to address this issue by ensuring a consistent availability of natural materials, thereby reducing uncertainties and preparing for future increases in demand.

Retaining a reliable supplier enables companies to reduce costs.1d ) Decision making refers to the mental processes that lead to selecting a course of action from several alternate scenarios.

According to Baker et al.'s 2001 study, "efficient decision-making involves a series of steps that require the input of information at different stages of the process as well as a feedback process." A systematic and logical decision-making process helps address critical elements that lead to a good decision. Knowledge-based decisions can drive a company towards success, while decisions made with incomplete information can harm their business.

Any determinations made are founded on both qualitative and quantitative information. Fiscal planning is crucial for decision making as a business cannot operate without a stable financial plan. In the absence of efficient decisions, a business will struggle to progress effectively.

The Financial Plan serves the purpose of understanding the precise position of the business, including its standing compared to competitors. Additionally, it highlights the business's liabilities and investments. For instance, if a business intends to make a significant investment, various financial factors need to be taken into account, which can be facilitated by the financial plan, starting with the exact amount required.

To improve the company's future returns, Populating Wood needs to update its MIS system. Anticipating demand is difficult without proper systems in place. Market research is needed to predict future trends in furniture demand. Efficient sales tracking will allow Populating Wood to effectively forecast cash flows and benefit financial planning.

Populating wood demands to retrieve its market place, so they are planning to increase their merchandise scope by purchasing new machinery worth ?5 million.

Living wood requires a financial plan to assist them in producing a wider range of products and improving productivity. Similar to any other business, Living wood needs to determine how many years it will take to see

returns on their investment in the machinery.

The fiscal program will display the projected future cash inflows and outflows, allowing Living Wood to determine if they can afford the machinery and if it is a good investment. Part 22a) Use appropriate ratios to calculate and analyze the company's performance over the last 2 years. 2b) How does this financial statement differ from other familiar statements? 2a) According to writer Shyam Bhatawdekar, financial ratio analysis is the systematic use of ratios to interpret financial statements, revealing a firm's strengths, weaknesses, historical performance, and current financial status.

The author emphasizes the importance of ratios in making related information comparable. They argue that a single figure in isolation is not meaningful, but when presented in relation to another figure, it can lead to significant conclusions. Consequently, individual numbers in a financial statement often have limited significance.

The analysis of correlation between two figures can provide the available information by using ratios. There are four main categories of ratios, each containing eight basic ratios.

Liquidity measures- Current Ratio.

• Capitalization measures- Financial Leverage. Long-run Debt to Capital
• Activity measures- Assets Turnover per Period. Inventory Turns per Period.

Dayss Gross saless in Inventory

• Profitability measures- Return on Gross saless. Return on Capital Employed Ratios. nevertheless do hold their restrictions. Their dependability depends upon the consistence of the original records. Changes in monetary values besides interfere with the comparings made.

Small mistakes or tampering with original records can lead to incorrect decisions. The ratios for the years 2010 and 2009

are shown below:

Net Income Margin (NP/Sales*100)
2010: 7.41%
2009: 8.47%

Return on Capital Employed (NP/Capital Emp.)
2010: [value not provided]
2009: [value not provided]The Net Income Margin is a measure of profitability, expressed as a percentage and calculated by dividing net income by turnover. It serves as an indicator of cost control effectiveness for companies. When comparing the Net Income Margins, it is evident that Populating Forests had a stronger performance in 2009 compared to 2010, achieving a net income of 37.

In 2009, Populating wood had a higher gross revenue compared to 2010, with an increase of 8%. However, in 2010, there was a decrease in gross revenues by 20.6%. These results indicate that Populating wood was more effective in cost control during the year of 2009.

In 2009, higher overhead costs may have resulted from various factors. This suggests that Populating Forests was more efficient in managing costs during this year compared to 2010. The increase in sales revenue can be attributed to a higher demand in 2009, while the economic conditions in 2010 may have caused a decrease in demand. To accurately assess profits, it is important to consider the capital invested in generating these profits. The Return on Capital Employed (ROCE) indicates the comparison of net profit with total capital employed, expressed as a percentage. Based on this information, it is clear that the company performed significantly better in 2009.

Despite using more capital in 2009, Populating Forests experienced only a 6.84% difference

overall compared to the other year. However, there was a significant 37.8% difference in maintained incomes.

The company's efficiency with capital in 2009 is demonstrated by not declaring dividends and reinvesting the full net income into the business. The Current Ratio indicates a company's liquidity, i.e., its ability to meet short-term liabilities with short-term assets.

Additionally, it can serve as an indication of the company's ability to meet creditor's deadlines. Generally, a current ratio greater than or equal to 1.5 is considered favorable.

If the current ratio is very low, the company will struggle to meet its short term liabilities. However, if the current assets greatly exceed the short term liabilities, the company may not be effectively utilizing its current assets. The calculations demonstrate that in both years, Living Wood had a current ratio higher than one.

In 2010, the company had a ratio of 1.95:1, indicating that for every pound the company owed in the short term, it had ?1.

In 2010, the company had 95 available assets that could be converted to cash. Despite improvement in that year, the company had good short-term fiscal strength in 2009, providing a safety net for any unexpected situations. However, it is not feasible for companies to quickly convert all their current assets into cash.

In businesses with slow stock turnover, a significant amount of natural materials stocks are kept, and finished goods stocks may be stored for a long period of time. These stocks are considered non-liquid assets, meaning that they cannot be easily converted into cash. To determine if a company has enough short-term liquid assets to cover its immediate liabilities, we calculate the Acid Test ratio. If a

company's ratio is less than 1, it is commonly believed that they cannot pay their current liabilities and should be closely examined. However, a ratio of 0 is particularly concerning.

Overall, 8 is widely accepted. However, in 2009, Populating Forests faced financial difficulties in repaying their liabilities, with a ratio of only 0.84. Nevertheless, this may have served as a wake-up call for the company to improve its financial management rather than indicating significant losses.

In 2010, Living Wood's liquidity improved compared to 2009.2b. A fiscal statement includes a Balance Sheet, Trading and Profit and Loss Account, and Cash Flow Statement. The Trading and Profit and Loss history documents the income and expenses during a specific time period.

The Net income and Loss Statement is a financial statement that shows how gross income is transformed into income. It consists of three sections: the Trading history, the Net income and Loss history, and the Appropriation history. Figure 3 (Beginning: RJA. (2007)) provides an illustration of a net income and loss history divided into these three components.

profitandlossqq0 [ ONLINE ]. Available at: hypertext transfer protocol: //img210. imageshack. us/img210/1589/profitandlossqq0. jpg [ Accessed 10 March 11 ] ) The purpose of the profit and loss history is to show directors of Livingwood whether the company has made or lost money during the period.

This statement aims to help determine the historical performance, forecast future performance, and evaluate future cash flows of the enterprise. For a limited company like Living wood, the format varies. In a limited company, revenue is referred to as turnover, and costs are categorized into headers such as Distribution costs and Administrative costs.

The statement of Interest Payable and Taxation represents

the net income for the year. This includes dividends that need to be paid by limited companies. The Net Income and Loss statement includes the dividends paid for both preference and ordinary shares.

In a sole trading or partnership concern, dividends do not exist. Instead, sole traders receive all the profits earned, while the owners of a partnership receive a portion of the profit which is reflected in their individual capital accounts. In an unincorporated business, expenses are expressed in greater detail.

Unincorporated concerns do not qualify for corporation tax and will therefore not be included in any company's accounts. They are subject to personal income tax on their share of profits; however, this is not reflected in the business's financial statements. The Balance Sheet displays Living wood's assets and liabilities.

and their equity. The three main components of a balance sheet: Assets, Liabilities, and Capital. The upper section represents the net assets of the business and is applicable to all types of businesses. The lower section represents the owners' stake in the business. In a company, the owners are shareholders whose initial investment is indicated as share capital.

When partners form a partnership, their individual investments are recorded in separate capital accounts and current accounts. However, for sole traders, profits are often transferred to the capital account, resulting in the Balance Sheet representing only opening and closing capital. The Balance Sheet of a limited company displays tangible and intangible assets. Additionally, limited company Balance Sheets include a separate header for investments made during the year.

The Current Liabilities and Long Term Liabilities are referred to as: creditors - amounts due within one year, and creditors - amounts due after

more than one year. In the Capital and Reserves section of a limited company, the capital portion, premium portion, general reserve, and retained earnings are typically displayed. As a sole trading and partnership entity, which doesn't have shares, only the capital employed for the year will be displayed under the Capital.

The cash flow statement details the inflow and outflow of physical currency over a specific time period. This statement is crucial for analyzing a business's financial health and determining potential liquidity issues. It is important to note that profitability does not guarantee liquidity; a company can still fail due to insufficient cash flow despite being profitable. The timing of cash flows, both incoming and outgoing, serves as valuable input for financial models like the internal rate of return.

By utilizing a Cash Flow Statement, Populating wood can determine the amount and timing of cash inflows and outflows for the business, contributing to the understanding of net present value. This valuable information can assist in making future decisions.

To implement new machinery, there is a need for a hard currency flow statement, which shows that changes in the cash balance stem from changes in assets, liabilities, and owners' equity. Changes in assets and liabilities are reflected in the balance sheet, while alterations in owners' equity result from changes in net income presented in the Income and Loss history. In Part 33a, the nature and purpose of material and labor discrepancies are explained. Part 3b involves calculating these discrepancies based on the given information. Comments on the calculated discrepancies are provided in Part 3c. Discrepancies refer to the difference between actual results and expected results.

When the existent consequences are

better than expected consequences given discrepancy, it is called favorable discrepancy. On the other hand, when the existent consequences are worse than expected consequences given discrepancy, it is called inauspicious or unfavorable discrepancy. Material discrepancy refers to the difference between the existent sum cost of the existent figure of units produced and its budgeted cost in terms of materials. This discrepancy provides insights into the efficiency of material usage in producing the output. A material discrepancy can occur if the price paid for the material is higher or lower than the standard price.

The discrepancy in costs can be attributed to various factors such as unpredictable fluctuations in monetary values, higher conveyance costs, or additional responsibilities. It can also be caused by using more or less materials than the standard for each unit produced. Other reasons could include taking a cash discount or differences in the quality of materials purchased.

A labour discrepancy is the variation between the standard cost of actual production and the actual cost of production. This discrepancy provides information about the efficiency of labour in producing the final output. A total labour discrepancy can occur when the hourly wage paid to workers is either higher or lower than the standard. This can be due to an increase in wages or excessive overtime with overtime premium included in direct labour costs.

A labor discrepancy can also be caused by the time taken for production being more or less than standard. This could be due to machine displacement or materials not being available. The purpose of the material and labor discrepancies is to control the cost of direct materials, to evaluate the performance of

the purchasing department, and to calculate the effect of price increases or decreases on the profit of the company.

and to measure efficiency of workers.3c ) The stuff costs for sofa no 123x were really ?110 per couch which is ?2 more than the budgeted cost. This. in entire. is an inauspicious monetary value discrepancy of -11 % . This could be because of an addition in the monetary value of stuff per kg. Besides the quality of the stuff may hold improved doing the monetary value to travel up.

It is possible that the 8% difference in material use can be explained by the fact that Populating forests used 1kg less material per couch than expected. Another reason for this difference could be that Populating wood reduced their material wastage or improved their efficiency in using materials due to strict quality control. However, the labor rate difference is a negative 10%.

This is an increase of ?9.30 per couch, resulting in a total increase of ?2232 for 240 couches. This difference may be attributed to an increase in employee rewards. The employees may have worked additional hours, resulting in higher labor costs, including overtime premiums charged to direct labor costs.

However, the labor efficiency discrepancy is also undesirable. This discrepancy of -5% may have been caused by inefficient work being done, as well as resulting in an unfavorable labor rate discrepancy. As a result, the number of couches produced could have been lower than the budgeted amount.

It may have taken a longer time to produce the necessary units. Part 44a) A individual chair made by Populating wood has a selling price of ?15 and a variable cost of

?12. Fixed costs amount to ?5400 per year. The breakeven points in units and in ?'sales value can be calculated as follows: Sales = Variable expenses + Fixed expenses + Net income. 15Q = ?12Q + ?5400 + ?0. This can be simplified to 3Q = ?5400. Therefore, Q = ?5400 / ?3, which equals 1800 units. The breakeven point in units is 1800 units. To calculate the breakeven point in ?'sales value, multiply 1800 by 15, resulting in ?27000. The breakeven point in ?'sales value is ?27000. Figure 4 shows the Breakeven chart for Populating wood. 4b) The contribution to sales ratio needs to be calculated for Machine A.

Populating wood would start receiving returns after only 2.5 years, whereas with Machine B they would have to wait for 4 years to receive any returns. Based on this information, it would be more beneficial for Populating wood not to borrow money for Machine B, as they would have to repay the bank for a longer period of time and pay a higher amount in interest. ARR, which stands for the Accounting Rate of Return, calculates the profits that will be earned by a project.

The ranking of an undertaking is determined by its rate of return. Machine A has a higher ARR, making it worthwhile to invest in, as opposed to Machine B which only offers a 1% return. If the NPV is positive, the present value of benefits exceeds the present value of costs, indicating that the undertaking will yield returns greater than the capital cost. Consequently, the undertaking will be accepted. On the other hand, if the NPV is negative...

Based on the analysis,

the investment will not be profitable and not worth investing in because it will have a return lower than the cost of capital. The analysis of Machine A indicates a positive Net Present Value (NPV) of ?324.73, whereas Machine B does not show a positive NPV.

Is it negative ?353. 01? It would not be a good business decision for Living wood to invest in Machine B as they are losing ?353. 01 over the cost of capital. IRR involves comparing the anticipated rate of return from the investment, calculated on a discounted cash flow basis, with the rate used as the cost of capital. Projects with an IRR higher than the cost of capital are worth undertaking. Machine A has a much higher IRR than Machine B.

Machine A yields a favorable return of 18% for Populating wood, while Machine B only gives a return of 2%. Based on this information, it can be concluded that investing in Machine A would be the better option for Populating wood.

It is suggested that they should take a loan for Machine A.6 as Populating Wood is not financially performing well according to the hard currency budget. However, the Net profit and Loss Account indicates that they did indeed earn a reasonable amount of net income, which was ?510,000 in 2009 and ?370,000 in 2010.

The company may have made a lower amount of profit in comparison to the previous year, but they did not incur a loss. The cost of living wood is being charged at ?25 per couch, while the costs per couch for the company amount to ?28, i.e., ?3 more per couch. Consequently, for each couch they

produce, living wood will consistently experience a loss of ?3.

Populating wood is facing a loss that is preventing it from covering its fixed costs and achieving break-even. If this situation persists, the business might be compelled to close down in the long run. To rectify the financial situation, improvement measures are necessary.

The company had two options: either raise their selling price or lower their average costs. However, increasing the selling price might decrease customer willingness to purchase their products, resulting in decreased sales.

This will not be beneficial for Living Wood as they are not proficient in starting with. By reducing the average expenses, Living Wood will be able to retain their customers and even generate profit. To minimize their expenses, Living Wood could negotiate with their employees to enhance efficiency and reduce or eliminate waste.

By purchasing cheaper natural materials, they can reduce the expenses associated with these materials. However, this might result in lower quality couches. To illustrate this point, they recently invested ?2000 in new machinery.

Typically, the purchase of new machinery leads to improved efficiency and reduced labor costs. However, in this case, labor costs have increased by ?600 every month after the new machinery was acquired.

It is evident that there is a 50% increase in production, indicating either the machinery is ineffective or excessive labor is employed. This results in the production of more wood than they can afford, as seen in the cash budget analysis.

It is evident that Populating wood is not effectively managing its cash flows as they are allocating a 2 month credit period to their customers. Based on the available information, it is clear that they cannot afford to

do so. Therefore, by reducing the credit period, Populating wood will be able to enhance their cash flow.

They may also request a longer repayment period from their suppliers, therefore improving their cash flow even more. DecisionPopulating Wood Ltd is a privately held company established by three carpenters: Billi Child, Bengazy, and Lee Jones.

Populating Wood is a company that specializes in manufacturing furniture for both retail and private use within the domestic market. Although the company has good potential and available resources, it is not currently maximizing their utilization.

Therefore, Populating Wood is experiencing losses due to the fact that their production costs exceed their selling price by ?3 per unit. Additionally, the machinery they purchased has only increased their average costs without improving their production efficiency. This indicates that the machine is ineffective in assisting Populating Wood. Mentioned by Armstrong.

M. (2010). A Handbook of Management Techniques. 3rd edition. India: Kogan Page Ward.

J. 2000. Project Management Footings. 1st ed.