The importance of finance and financial planning in business

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Task 01

1.1

Finance plays an important part of modern business world. Financial resources are every business success point. Without a financial backup whole company will be unproductive. There are two main finance types in business that are long term and short term finance. The definition of Short term financial sources is that a company that will able to gain finance in a shorter time. They are, bank loans, over drafts, trade credit, leasing, credit cards. Loan term financial sources are Bank loans, Share capital, Debentures, Asset sales, Venture capital, owner’s capital. When it comes to Berkshire Partners same financial sources are help to Berkshire authors will mention some of important finance for Berkshire, -

Getting lease - it’s good idea for the Berkshire because this case study they describe about getting two machines but financial manager told that they don’t have money to buy it so getting lease is better to boost the production.

Credit facility from the supplier - ask the supplier from credit, -

Issues shares - Berkshire is the large private limited company the shareholders can bring in capital by issuing the shares.

Bank loan - Berkshire get over from their current situation and because of their previous profits the management will be able to get a good reply from their bank.

Bank Overdraft - Berkshire careful about inters and before going to like this financial source should think they have ability to pay over draft.

1.2

When financial comes to business there are two types of major sources that are internal and external,

Internal sources: External sources:

ï‚· Sales of capital * Ownership capital

ï‚· Working capital * Non-ownership capital

ï‚· Personal servings

ï‚· Retained profits

1.3

Because of this different sources of finance style some situation better than other situation. It’s same as Berkshire Partners for an example, taking loans or debentures will be a good idea than getting shares for this organization because if taking loan monthly payment or interest fixed it good for Berkshire.

Task 02

2.1

Financial planning takes on a critical role for business owners. In the current situation for Berkshire need good financial plan because in the organization everyone has a deferent ideas so no one don’t have common ideas to expand the company because of this main reason need financial plane for Berkshire.

For this company financial plan most important because anybody can see it from profit and loss account that the company is able to make a profit of only ......and if the buy new machine buy borrowing the funds for which the cost of capital to the company may range in between ......% to .....% may bring down Berkshire profit as compared to the last year.

2.3

Financial planning help in decision making and management can know various sources of funds on company’s profitability and give a more clear vision. In Berkshire two owners is, to make their mark at the global market. But the problem that they are having is the lack of technology and the experience. So I believe that by keeping a good financing planning, and when their profits are high they can react as fast as they can and enhance more business.

2.4

International Accounting Standard (IAS) is a board which sets standards for transactions and the events that should be recorded in the financial statements.

In the first scenario Prudence concept should be applied because values in the financial statements should be always understated rather than overstating because true and fair value should be entered. According to this case he should then charge $2000.

I. Money measurement concept state's that materials with significant value should entered in the appropriate financial accounts. Petty cash book is good example because this books contains least expensive items like stationary, postage, etc.

II. A merchandising company is going to liquidate the business in order to pay off the liable amount to its creditor. Going concern is the suitable concept to apply in this situation because going concern concept states that financial statement will be prepared unless the business liquidate or cease trading.

III. Historical cost concept should be used in this case because this concept states that a value of a resource should be recorded according past event valuation and it is due to maintaining consistency and comparability. So ERP should be recorded at a cost of $40 million.

Task 03

Case 01

Sales Budget for month of February

Details

February

Sales Unit

1200

*

Selling Price

306

Revenue

367200

Cost of production budget

Details

February

Direct materials (18857*12)

226284

Direct labour (5829*15)

87435

Variable production overhead

28286

Fixed production overhead

15429

Cost of production

357434

Gross Profit = Revenue - Cost of goods sold

= 367200 - 357434

=$9766

Budgeted gross profit =60*1200

=$72000

Details

Budget

Actual

Variance

Direct Material

162000

226284

(64284)

Direct Labour

72000

87435

(15435)

Variable production OH

36000

28286

7714

Fixed production O/H

18000

15429

2571

3.2

Unit Cost

Details

Direct Labour

189

Direct Material

73

Variable O/H

24

Fixed O/H

13

Cost per unit

299

Margin 45%

134.55

Selling Price

433.55

Case 2

Cash inflow

Details

Year 1

Year 2

Year 3

Year 4

Year 5

Sales (online)

1040000000

1248000000

1560000000

1664000000

1768000000

Leasing revenue

20000000

20000000

20000000

20000000

20000000

Sales (in store)

312000000

374400000

468000000

499200000

530400000

1372000000

1642400000

2048000000

218300000

2318400000

Initial investment = Vehicle + Warehouse +Expand facility

=150000000 + 3400000000 + 900000000

=4450000000

Cash Outflow

Year 1

Year 2

Year 3

Year 4

Year 5

Depreciation

3000000

3000000

3000000

3000000

3000000

License

30000000

30000000

30000000

30000000

30000000

1% Gross profit

27040000

32448000

40560000

43264000

45968000

Operating cost

60000000

65000000

70000000

75000000

80000000

120040000

130448000

143560000

151264000

15896800

Details

Year 1

Year 2

Year 3

Year 4

Year 5

Cash inflow

1372000000

1642400000

204800000

2183200000

2318400000

Cash outflow

(120040000)

(130448000)

(143560000)

(151264000)

(15896800)

Profit

1251960000

1511952000

61240000

2031936000

230503200

Average profit =

= 1431918240

Average investment =

= 890000000

ARR =

=

= 160.9%

Year

Cash inflow

Cash outflow

Balance

Accumulated Balance

0

(4450000000)

(4450000000)

1

1372000000

(117040000)

1254960000

(3195040000)

2

1642400000

(127448000)

1514952000

(1680088000)

3

2048000000

(140560000)

1907440000

(227352000)

4

2183200000

(12126000)

2171074000

1943722000

5

2318700000

(15896800)

2302503200

4246225200

X = 3.1

PBP = 3 years 1 month

Year

Balance

DCF 12%

Adjusted Cash flow

0

(4450000000)

1

(4450000000)

1

1254960000

0.893

96506424

2

1514952000

0.797

896851584

3

1907440000

0.712

867885200

4

2171074000

0.636

759875900

5

2302503200

0.621

619373361

NPV=340949715

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