Managing Financial Resources and Decision Making

Managing Financial Resources and Decision Making

 

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Managing Financial Resources and Decision Making

Task 1

A variety of financing options are available to the Barclays Bank UK. They include the issue of share capital, the sale of existing assets, the use of general reserves of profits (retained earnings), bank loans and other credit facilities, debentures, and venture capital.

1. Issue of share capital: Provides a viable solution for an organization especially for highly capital-intensive projects. In addition, this approach is effective in providing the entity with a solid solution of capital needs. The downside is the reduced levels of control for the existing owners given that the control and ownership of the entity is divided with inclusion of the new investors (Connolly, & Institute of Chartered Accountants in Ireland, 2006, p.33).
2. Retained earnings (general reserves): This is a highly effective option for low capital-intensive projects to be undertaken by the entity. It does not result in the distribution of ownership of the entity and jeopardizing the existing levels of control for current owners. It is an effective solution given that it does not result in incurrence of costs by the entity that would lead to decline in profits (Collins, & McKeith, 2010, p. 35).

• Sale of Assets: The entity could make sale of assets that it deems as having outlived their useful purposes to the organization. Assets could also be in the form of ownership stakes in other entity, land, property or machinery. They provide an immediate source of capital for the entity to undertake its project needs.

1. Debentures:
2. Venture Capital: The entity could also seek funds from capital venture enthusiasts seeking to invest in the entity. However, they are a driven by the need to acquire significant ownership or shareholding in the entity.
3. Bank Loans: This provides a viable alternative source of capital funding despite the immense costs associated with this option. It is preferable for small and low capital-intensive projects as large funding translates to immense costs of repaying the interests and principal amounts (Walton, & Aerts, 2006, p. 27).

Task 2

Sales budget for July 2012-June 2013
Month	Monthly Budget	Actual Monthly	Actual cumulative	Variance
July	240,000	200,000	200,000	-40,000
August	230,000	300,000	500,000	70,000
September	270,000	360,000	860,000	90,000
October	265,000	385,000	1,245,000	120,000
November	265,000	340,000	1,585,000	75,000
December	300,000	280,000	1,865,000	-20,000
January	250,000	325,000	1,695,000	75,000
February	265,000	295,000	2,125,000	30,000
March	300,000	275,000	2,354,000	-25,000
April	325,000	295,000	2,654,550	-40,000
May	325,000	285,000	2,945,600	-40,000
June	350,000	305,000	3,152,000	-45,000

Part 2 (Excel Worksheet)

 

 

Task 3

1. Absorption pricing: it usually calculated based on all variable costs of production and the allocation of fixed costs. The profit mark-up is usually absent or present in some cases depending on the need (Elliott, & Elliott, 2008, p. 32).
2. Marginal pricing: this provides for price setting with respect to marginal costs of production of a single unit of a product. Focuses on direct costs of production to provide a marginal price for the product. The inclusion of overheads results in provision of pricing at a premium that will ensure profitability for the entity.

Break-Even Point

Fixed costs/Price-Variable costs= Breakeven point in units

290,000/300-220

290,000/ 80

= 3,625 units

Increase in sales price 5%

100-300

105= 105*300/100

=315

Decrease in sales price 5%

300-15= 285

b).

Project	A	B
Year/Returns
Year 0	(200,000)	(200,000)
Year 1	80,000	30,000
Year 2	80,000	50,000
Year 3	40,000	90,000
Year 4	20,000	120,000
Resale Value	40,000	40,000
Discount factor = 16%

Payback Period

Initial investment cost= 200,000

Project	A		B
Year/Returns		cash flow		cash flow
Year 0	(200,000)	(200,000)	(200,000)	(200,000)
Year 1	80,000	(120,000)	30,000	(170,000)
Year 2	80,000	(40,000)	50,000	(120,000)
Year 3	40,000	0	90,000	(30,000)
Year 4	20,000	20,000	120,000	90,000
Resale Value	40,000	20,000+40000= 60,000	40,000	90,000+40,000= 130,000
Discount factor = 16%

Accounting Rate of Return

Accounting rate of return= average accounting profit/ average investment

Project A

(80,000+80,000+40,000+20,000) /4

= 220,000/4

= 55,000/200,000

= 0.275*100

= 27.5%

Project B

(30,000+50,000+90,000+120,000) /4

= 290,000/4 = 72,500

= 72,500/200,000

= 0.3625*100

= 36.25%

Net Present Value

NPV= Initial investment + (total cash flows/ 1+discount rate)^time

Project A

NPV= -200,000+ (220,000/ (1+0.16) ^4

NPV= -200,000+ (220,000/ 1.16^4

NPV= -200,000+ (220,000/1.81

NPV= -200,000+121,547

NPV= 78,453

Project B

NPV= -200,000+ (290,000/ (1+0.16) ^4

NPV= -200,000+ (290,000/1.16^4

NPV= -200,000+ (290,000/1.81

NPV= -200,000+160,221

NPV=39,779

Task 4

Financial Period ended March 2013

The revenues for this period were provided at 38.041 billion with the gross profit provided as 11.474 billion. It is evident from the statements that the entity incurred significant losses primarily attributed t the sale of a core function or component in the business that was responsible for generation of revenues. In addition, the entity incurred losses worth 3.959 from continued operations mainly attributed to higher costs of operation and low revenues. Profit was accrued from discontinued operations, was worth 4.616 billion, and contributed significantly to the profitability of the entity during this financial period. Continuing operations at the entity resulted in significant losses whereas the discontinued operations accrued significant revenues for the entity. This was an essential source as it provided the shareholders with the much-needed returns for their shares at the entity (Smith, 2010, p.21).

The entity accumulated a significant amount of fixed assets which could have been impeded the levels profitability in the entity due to interests to repay loans associated with purchase of such assets. In addition, the entity also indicated that there was a significant amount of current assets held mainly attributed to cash and cash equivalents from business activities in the entity. Furthermore, the entity had accumulated significant comprehensive incomes in the 2013 financial period, which enhanced the issue of returns to the shareholders.

Financial Period ended March 2014

There were increases in the revenues collected within this financial period. This can be attributed to increased sales activities. The increase in sales activities was reflective of an increase in the costs of goods sold due to increase in purchase costs for the materials. In addition, the operating losses increased compared to the previous financial period of 2013 at 2.02billion to 3.913 billion. This can be attributed to the cost overruns associated with higher expenses than the revenues collected. A majority of the profits accrued from the entity are as a result of disposal of business components that were responsible for revenue accrual to the entity (Lucarelli, & Brighetti, 2011, p. 41).

The entity made sale of some of its fixed assets as a means of sourcing for funding for various investment activities in the entity with an aim of enhancing operations and revenue generation. In addition, the entity also achieved significant levels of liquidity as a result of the sale of assets as compared to the 2013 financial period. In addition, current assets were reduced in the 2014 period largely associated with investments into business operations to enhance its operations given the significant operation losses evident in the 2013 period.

 

 

 

 

 

 

 

 

Bibliography

Black, G, 2004, Applied financial accounting and reporting, Oxford: Oxford University Press.

Collins, W, & McKeith, J, 2010, Financial accounting and reporting. Maidenhead: McGraw-Hill Higher Education.

Connolly, C, & Institute of Chartered Accountants in Ireland, 2006, International financial accounting and reporting, Dublin: Institute of Chartered Accountants in Ireland.

Elliott, B, & Elliott, J, 2008, Financial accounting and reporting, Harlow: Financial Times Prentice Hall.

Levy, H, 2006, Stochastic dominance: Investment decision making under uncertainty, New York, NY: Springer.

Lucarelli, C, & Brighetti, G, 2011, Risk tolerance in financial decision-making, Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.

Smith, B P, 2010, Introductory financial accounting and reporting, Berkshire, England: McGraw-Hill.

Sutton, T, 2004, Corporate financial accounting and reporting, Harlow: Financial Times Prentice Hall.

Vance, D E, 2003, Financial analysis & decision making: Tools and techniques to solve financial problems and make effective business decisions, New York: McGraw-Hill.

Walton, P J, & Aerts, W, 2006, Global financial accounting and reporting: Principles and analysis, London: Thomson.