MILESTONE SCHOOL OF

BUSINESS

MANAGEMENT OF FINANCIAL RESOURCES AND

DECISIONS

ASSIGNMENT OF DECEMBER 2014

EJEMEWUO OVOKE

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TASK 1
Capital remains a key factor in the success of business in todays world, to the
extent that provision of capital for businesses has itself become a form of
business. Finance for investment can be raised in several ways, grouped under
two main heads by economists;
-

Internal sources, that is means by which businesses raise capital from

within the business;
External sources, that is, sources of finance outside the business which
can be exploited.

Before delving into the crux of the issue, note should be taken that all sources of
finance are useable by all forms of businesses. The nature of the business
(partnership, sole proprietor, Public Limited company etc) determines the
sources of finance available to it.

INTERNAL SOURCES OF FINANCE

Retained Profits
Profits can be a source of finance where management refrains from paying
shareholders dividends on their shares in favour of reinvestment. The readily
available nature of this source of finance makes it a reliable source, as there is
no uncertainty surrounding its availability or accessibility. However, management
must be keen to understand how shareholders view this, to make sure they are
not upset. The unpredictable nature of the future also makes it uncertain that the
company will stand the test of time, therefore making this source of finance in
itself doubtful as one cannot predict the certainty of the future investment
leading to profits.
Working Capital
Working capital refers to the amount of money available to a business for its
daily order of business. By controlling the level of its working capital, a business
ensures that it has enough finance to run its business, thus an internal source of
finance. Control of working capital can be realised by ensuring a strict follow-up
of company debtors to ensure all money owed the company is collected, or by
ensuring a low or zero inventory, that will help raise capital for reinvestment,
though this must be done with caution, ensuring that there is enough stock to
meet the demand for the product. Delaying payment of creditors can also help
the level of working capital, as the business saves money meant to pay its
creditors for its own purposes. The business must however beware of the effect
of this, as she could earn the reputation of a late payer in the eyes of its
creditors.

Sale of Assets
The sale of assets owned by the business can be a viable source of finance as it
raises ready cash for investment. Closely linked to this is the sale and lease-back
technique where the business sells one of its assets and then takes that same
asset on lease from the new owner. This allows the business to raise capital from
the sale, while spending a minimal sum on leasing the property, thus reducing
cash out flow and increasing in-flows. However, the prospect of losing the
benefits of owning an asset leaves much to be desired of it. Sale and leaseback
could also put the business in a precarious situation as she is left to the whims
and caprices of a landlord

EXTERNAL SOURCES OF FINANCE

A) SHORT TERM SOURCES

i)

Overdraft:
Bank overdrafts are flexible loans that allow a business withdraw sums
over and above its banks balance at the time of withdrawal. Overdrafts are
made on request of the applicant, and the bank applies a floating charge on
them
Being quick and easy to arrange make it accessible to use in times of dire
need. However, the fact that banks will need to be paid once the sum is due
could be uncomfortable for the bank, especially if it coincides with times of
bad business.
ii)

Debt Factoring:
Factoring of a debt constitutes an agreement whereby a business sells its
credits to a factor, allowing the latter to collect debts owed the business on
her behalf, in exchange for a 2 3% administration charge.
The possibility of saving time is an important factor for the businesses.
The business can focus itself on important issues, while the factor chases its
debt from head-strong customer. However, the prospect of losing an
administration charge to the factor means the business would not be
receiving the whole sum of the initial debt owed.
iii)
Bank Loans:
Available to all businesses, bank loans constitute an agreement between a
lender (bank) and the business for the payment of a said sum of money to the
business known as a loan and on presentation of a collateral. In exchange,
the lender charges a certain interest on the loan which has to be paid by the
business. Failure to pay the loan plus the interest would give the lender power
to use the collateral to cover the cost of the loan and the interest due.
3

B LONG TERM SOURCES

.
I)

Share or Equity Capital:

Equity capital refers to the amount of money raised by a business through
the sale of shares in the stock exchange as a result of the floatation of the
business. This can only be done by large companies. The two main types of
shares are ordinary and preference shares.
This method of finance provides large inflows of cash into the business for
investment. It also puts the onus on the managers to succeed as they now
have to meet the expectations of people who have invested into the business.
This would however have a knock-on effect on the decision making process,
as managers would have to consider the point of view of the shareholders in
making key decisions.
II)

Loan Capital

a) Mortgages
Being a loan on freehold property, mortgages permit businesses to hold
possession of a premises / property while paying a monthly charge
towards owning the property permanently. This is advantageous as it
prevents the business from splashing out a large sum to out rightly
purchase the property, thus, leading to a minimisation of the outflow of
cash.
b) Venture Capital
This is a long term investment made by individuals usually to small startup businesses in exchange for a stake/share in the proceeds of the
business. Though not very common nowadays, venture capitalist funds
provide the business with the required cash to fund its projects though it
could be dreadful to go into business with someone that will lead to
dilution in control within the company.

TASK 2.
DEFINITION OF TERMS

Tangible costs
Tangible costs are those measurable and foreseeable costs incurred by a
business on a daily basis. Its opposite is intangible costs, which are unforeseen
costs that affect the running of a business. Evidenced by receipt, tangible cost
4

constitutes things like raw material and labour cost. Their effects are usually felt
instantly by the business, though there exist others whose effects are felt in the
future, for example, cost for staff recruitment and training. In terms of sources of
finance, dividends paid to shareholders fall under this head, as dividends are
paid in relation to the amount of shares owned.
Opportunity cost
Opportunity cost can be defined as the cost of forgone alternative. It is the cost
incurred by a business as a result of selecting one thing over another, which is
calculated in monetary terms. In terms of sources of finance, favouring
reinvestment of profits over payment of dividends to shareholders makes the
latter the opportunity cost of the business.
Overtrading
Overtrading occurs where the money held by the business cannot sustain the
operational level of the company. Overtading could occur as a result of undertrained staff who find it difficult to rid the business of stock in its warehouses, or
to meet the changes in market force, or failure by management to properly
manage change within the business, or failure to pump in more money into the
business.
The direct effect of overtrading is that it causes liquidity problems like excessive
borrowing.
Also, suppliers hold onto their products, leaving the customer in a need. To curb
this overtrading problem, management must ensure enough finances that reflect
the level of operations carried out
The sources of finance and their costs are registered by the business in a
document known as a balance sheet. As its name signifies, the balance sheet
provides the business an insight into the balance between what it owes and what
it is owed. The balance sheet will carry the following headings to detail the
different sources of finance
a) Assets
Assets comprise of those things that have a value. In terms of sources of
finance, this will include balances in the bank and all other forms of liquid
cash held by the business. This will cover all cash received from the
different sources of internal finance.
b) Liabilities
Liabilities refer to all the sums of money owed by the business to others
such as bank loans, trade credits, mortgages and salaries among others
c) Shareholders Equity
This records the amount of money paid to shareholders as a result of their
investment in the business, known as dividends

FIXED COST

2)
keve

VARIABLE COST
HIRE OF ROOM
WAITRESSES (1 PER 25
DELEGATES) MAIN SPEAKER

NORTH

SOUT
H

NORTH
1536
25
500
500

SOUTH

FOOD AND WINE

20

16

RECEPTIONIST

50

50

PRINTING

300

300

POSTING (PER DELEGATE)

0.25

0.25

point =

1000

20

Brea
n

FIXED COST
CONTRIBUTION

But CONTRIBUTION = SELLING PRICE/UNIT VARIABLE COST/UNIT

SALES = Number of delegates x selling price / delegate
= 125 x 40
= 5000
Variable cost for north will be the various variable costs multiplied by the number
of delegates as shown below
VARIABLE COSTS FOR
NORTH
WAITRESSES (1 PER 25
DELEGATES)
FOOD
AND
DELEGATE
RECEPTIONIST

WINE/

WORKINGS
25 X 5
(5
waiters
delegates)
20 x 125
50

TOTAL VARIABLE COST

125
for

125
2500
50
6

PRINTING

300

300

POSTING

0.25

31.25

TOTAL VARIABLE COST

****

3006.25

CONTRIBUTION = selling price/unit variable cost/unit

= 40 24.05
= 15.95

Thus Breakeven point for North = fixed cost

Contribution/unit
= 1500
15.95
= 94.04 units
3)
VARIABLE
COST
FOR
SOUTH
WAITRESSES (1 PER 25
DELEGATES)
FOOD AND WINE PER
DELEGATE
RECEPTIONIST
PRINTING
POSTING PER DELEGATE
TOTAL VARIABLE COST
FOR SOUTH

WORKINGS
20 x 5

TOTAL
COST/ITEM
100

16 x 125

2000

50
300
0.25 x 125
*****

50
300
31.25
2481.25

VARIABLE

CONTRIBUTION = selling price/unit variable cost/unit

= 40 19.85
= 20.15units

Thus Breakeven point for South = fixed cost

Contribution/units
= 2036
20.15
= 101.04units

4) Workings based on the assumption that 175 delegates will be present

Variable
costs
Waiters
Food
and
wine/delegate
Receptionist
Printing
invites
Posting invites
TOTAL
VARIABLE
COST

NORTH

SOUTH

7x25
20x175

175
3500

7x20
16x175

140
2800

*****
*****

50
300

*****
*****

50
300

0.25X175
*****

43.75
4068.75

0.25X175
*****

43.75
3333.75

CONTRIBUTION =SALES/unit VARIABLE COST/unit

NORTH =40 23.25
= 16.75

SOUTH = 40 19.05
= 20.95

Thus Breakeven point for North = Fixed cost

Contribution/unit
NORTH = 1500
16.75

SOUTH = 2036
20.95

= 89.55Units

= 97.18Units

5) MARGIN OF SEFETY = BUDGETED SALES BREAKEVEN SALES

For 125 Delegates:
Budgeted sales = 40 x 125 Delegates
(North) = 3,761.6

Breakeven sales = 40 x 94.04

= 5000

= 40 x 20.15 (South)

= 806
Margin of Safety for North
= 5000 - 3,761.6
= 1,238.4 Units

Margin of Safety for South

= 5000 - 806
= 4,194 Units

TASK 3
1) A budget is a financial plan for a specific period of time. Being a plan, a
budget spells out managements positive intent to meet the goals of the
budget, distinguishing it from a forecast which is a prediction of the way
things wil be in the future. Setting up a budget is the result of a nine stage
process that sees the input of different professionals involved in different
processes within the business. The cash budget is one of the many
budgets that exists, and it is a budget that details the way the business
will spend its money in the short or long run. The cash budget can be used
as a tool to access the business performance. This will be illustrated by
the paragraphs that follow:
The cash budget assists managers to adopt a wholesome approach in
managing the affairs of the business. Since it sets targets for the
businesses in the short and long term, the health of the business will be
determined by its ability to meet the set targets. Here, the cash budget
serves as a performance benchmark.
The columnar approach of a cash budget assists management to
understand reasons why targets set are not met within the business. Other
aspects like bonuses and allowances can be monitored using the cash
budget
Junior managers can also be accessed via the cash budget. They will be
accessed via their ability to meet the targets they set at the budget
adoption process. This is known as the feedback role of the cash budget.
The budget can, most importantly be used as a feed forward mechanism,
as it can be used as a tool to inform management of what strategies to put
in place in order to right the wrongs of the past budget
2) Other kinds of budgets include
-

The production budget that outlines cost of production

Purchases budget analysing the cost of purchasing raw materials

Overheads budgets assessing the total cost of the business

Sales budget

3) ACCOUNTING RATE OF RETURN = AVERAGE ANNUAL PROFIT

100%
AVERAGE ANNUAL INVESTMENT

AVERAGE ANNUAL PROFIT = TOTAL ANNUAL PROFIT

NUMBER OF YEARS
AVERAGE INVESTMENT = COST OF MACHINE +SCRAP VALUE
2

YEARS
1
2
3
4
0

PROFIT/LOSS PROJECT A
15.000
10.000
5000
0
10000

LOSS/ PROFIT PROJECT B

0
0
4000
16000
10000

a) AVERAGE INVESTMENT = COST OF MACHINE +SCRAP VALUE

2
PROJECT A = 50000 + 10000
PROJECT B = 50000 + 10000
2
2
30.000

30.000

AVERAGE ANNUAL PROFIT = TOTAL ANNUAL PROFIT

NUMBER OF YEARS

PROJECT A = 15.000 +10000+5000+10000

4000+16000+10000
4
4

PROJECT B =

= 10.000
= 7500

ACCOUNTING RATE OF RETURN = AVERAGE ANNUAL PROFIT

100%
AVERAGE ANNUAL INVESTMENT

PROJECT A = 30000 X
100%

100%

PROJECT A = 30000 X

10

10000

7500

=300
=400

b) PAYBACK PERIOD
PROJECT A = 2.33

PROJECT B= 3.62

NET PRESENT VALUE

YEARS

PV

0
1
2
3
4

*****
0.909
0.826
0.751
0.683

CASH FLOW
PROJECT A
50000
25000
20000
15000
10000

PV PROJECT
A
-50000
17066.5
16520
11265
6830

CASH FLOW
PROJECTB
-50000
10000
10000
14000
26000

PV PROJECT
B
-50000
9090
8260
10514
24588

TASK 4

Businesses use financial statements as a tool to understand the way their

business performs. There are three main types of financial statements that are
used bby all businesses. We shall be examining how these financial statements
report the types of finance and their costs.
Balance Sheet (statement of financial position)
The balance sheet of a business details the assets and liabilities of a
business for a stated time. These are then sub-categorised to current and
fixed assets, long and short term liabilities , floating assets etc. The
heading current assets usually carries most of the sources of finance. It
covers things like bank balances (cash) and inventories. The cost of types
of finance are registered as liabilities, that is, what the business owes

11

other persons. The term current liabilities is used to cover loan interests,
salaries paid, accounts payables etc.

Income statement
The income statement shows details of the income available to the
business and the way the money was spent (expenditure). Also known as
a profit and loss statement, it shows the difference between income and
expenditure for a specific period. In terms of the sources of finance, the
name sales is used to describe the money earned from the sale of the
companys products. Like the balance sheet, the term current assets is
used to depict bank balances and income from loans, while liabilities
include all the company owes.

BIBLIOGRAPHY

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- David Harvey, E. M. P. A., 2001. Accounting for

Business. 3rd ed. Worburn, Massachussets: Butterworth
- Heinemann.
- Eddie McLaney, P. A., 2002. Accounting An
Introduction. 2nd ed. Edinburgh: Pearson Education
Limited .
- Michael Parkin, M. P. a. K. M., 2000. Eonomics. 4th ed.
Essex: Pearson Education Limited.
- Michael Parkin, M. P. K. M., 2000. Economics. 4th ed.
Essex: Pearson Education Limited.
- US Securities and Exchange Commission, n.d. US
Securities and Exchange Commission. [Online]
Available at:
http://www.sec.gov/investor/pubs/begfinstmtguide.htm
[Accessed 02 February 2015].
- Voigt, S., 2010. The Economic Effects of Competition
Policy , Torino: University of Kessel.

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