Introduces to Finance

Particulars	Units	£ per unit	£
Total Cost	40000	7.25	290000
Add: (Skilled) Labour Cost	40000	26.1	2088000
Add: (Unskilled) Labour Cost	40000	13.05	783000
		46.4	3161000
Add: Expenses	40000	25.12	1004850
Add: Fixed Costs	40000	0.3625	14500
Total Cost of Sales	40000	104.51	3723600

Utilizing the two tables prepared earlier in this section, the aforementioned table has been formulated. This table includes the ascertainment of Target Selling Price that must be taken into account by marking up the unit costs by 45%. Hence, the expenses worth £3723600 is ascertained as 35% of the total labour cost, that is, £2871000 (=£2088000+£783000). On the other hand, the Fixed Costs worth £0.3625 per unit is ascertained by marking up the unit fixed costs by 45%. Through this process, the targeted selling price per unit for the 40,000 units of output produced is £104.51.

c. Preparing a statement of Cash Budget of Z Ltd. of four months:

Given Information:

Second Month	60% of the unit price
Third Month	30% of the unit price
Fourth Month	10% in the fourth month
Finished Units Purchased	40000

Particulars	January	February	March	April
	£	£	£	£
Purchase of Finished Units from Supplier	2883000	2883000	2883000	2883000
Payment to Supplier for: January	–	1729800	864900	288300
February	–	–	1729800	864900
March	–	–	–	1729800
April	–	–	–	–
Total Budgeted Cash	2883000	4612800	5477700	5766000

As per the information given in previous table, the above Cash Budget has been prepared. In order to ensure simplicity of calculations, it is assumed that the month initiates on the first of January. Another assumption that has been taken while preparing this budget is that the Finished Units purchased by Z Ltd. from its suppliers are 40,000 at £72.075 per unit on a monthly basis. Keeping this in mind, the payments made for the purchases have been shown for each purchase between the periods January and April. For instance, the 60% of the unit price paid to the supplier for January Purchase is allocated to February. On the other hand, the purchase of finished units made in February and other consecutive months have their 60% share payment allocated to March and other consecutive months.

d. Disadvantages of using Zero-based Budgeting System:

In the context of given case scenario, Z Ltd. has been utilizing various budgetary information in order to control costs of production while maximising profit. Keeping this mind, various drawbacks of using Zero-based Budgeting System have been advised to its management which have been discussed as under:

• Time Consuming as it includes initiating of planning of all functional costs from scratch at the beginning of each financial period (Ross, Westerfield and Jaffe, 2013).

• Since it includes complete refurbishing of functional costs, higher number of manpower is required to formulate the ideal Zero-based Budget for the company.

Thus, adoption of this system would result in incurring of excessive costs for Z Ltd. as well as expertise to explain the inclusion or exclusion of cost related to each task.

QUESTION 3

Given information:

Particulars	Costs	Cost of 1 month
Annual rent	15000 Yearly	1250
Marketing cost	3000 Quarterly	1000
IT	2 Per consultation	250
Energy drink	1.25 per consultation	156.25
Labour	10 per consultation	1250
Consultation charges	18 per consultation	2250

a. Calculation of total fixed costs per month

Particulars	Amount
Rent (15000 / 12)	1250
Marketing expenses (3000 / 3)	1000
Total fixed expenses	2250

b. Calculation of variable cost per month

Particulars	Amount
IT cost (125 * 2)	250
Energy drink (125 * 1.25)	156.25
Labour cost (125 * 10)	1250
Total variable expenses	1656.25

c. Calculation of contribution per month

Particulars	Amount
Charges per consultation (125 * 18)	2250
Less: Variable expenses
IT cost (125 * 2)	250
Energy drink (125 * 1.25)	156.25
Labour cost (125 * 10)	1250
Contribution per month	593.75

d. Break even number of consultations required per month

Break even point in number = Fixed cost/ contribution per unit or consultation = 2250 / (593.75/125) = 2250 / 4.75 = 473.68 or 474

e. Strengths and weaknesses of cost volume profit analysis

Cost volume profit analysis: It can be defined as a technique which is used by business entities to determine their contribution which is remaining after deducting all variable expenses from sales or revenues. The contribution is firstly used to recover all the fixed costs and then the remaining amount is considered as profits for the organisation (Schwienbacher and Larralde, 2012). Main objective of using it is to determine relationship between profit, volume and cost of specific business units. With the help of it ability of an organisation to generate profits could be measured. In other words it could be defined as a planning process which is used by managers for the purpose of forecasting future volume of production, sales, costs and profits which could be acquired in future. There are various strengths and weaknesses of this technique which are as follows: Strengths:

• Cost volume profit analysis help top level executives to formulate strategic decisions for future by helping them to determine value of actual expenses and incomes which has taken places for a specific time period. With the help of it they will be able to make strategies in which they can plan to enhance overall profitability of organisation.

• With the help of cost volume profit analysis detailed information of organisation’s activities could be gathered. It can guide managers to forecast future sales, profits and losses which may take place in upcoming period of time.

• It helps to find break even point for the organisation so that it can be determined that when amount of units are required to be manufactured in order to cover all the expenses and investments that are made in business.

• It is considered as the base of plans that are made for various purposes such as marketing, budgeting etc.

• As it guides managers to forecast future sales and revenues so it can also help them to make budget according to requirements of organisation.

• Weaknesses:

  • Cost volume analysis can result in different human errors because for managers it is not possible to record information in a precise way and if detailed data is recorded in books then it can result in human errors (Shoup, 2017).

  • As it is based upon projection and future is uncertain so it is not possible to trust the projections to make appropriate business decisions.

  • It taken number of units in to consideration to project costs and revenues for future period but it could not be the only driver to forecast the same.

  QUESTION 4

  a. Various Funding Options in terms of Debt and Equity available to the entrepreneur

  Funding Options related to debt and equity help in reducing costs and providing flexibility to the available working capital with the entrepreneur. In the context of given case scenario, the solicitor invests £1,000 from her savings. She aims to accumulate the rest of the capital from external funding options which have been discussed as under:

  Type of Funding Option	Advantages	Disadvantages
  Angel Investing	Prove to be less risky than debt financing as this investment is not required to be paid back in event of bankruptcy (Van Der Wijst, 2013).	Loss of complete control of the start-up itself.
  Bank Loans	Available as a fixed source of funding for a fixed term including interest payments.	This option requires collateral security which can result in forfeiting of the asset in the event of bankruptcy.
  Personal Sources of Income	Cheap source of Finance as the entrepreneur is already having a fixed source of income through her other business venture. Thus, resulting in time-saving too.	May result in decline of retained funds for that business which has been undertaken by the solicitor.

  b. Key Differences between discounted and non-discounted methods of investment appraisal

  For any organisation, investment appraisal methods play an important role as they help in measuring the feasibility and viability of a project that is considered as a potential opportunity for the enterprise. Due to this reason, a company may apply various discounted and non-discounted methods of investment appraisal. Discounted techniques of investment appraisal are those which ascertain Future Cash flows by discounting them using a certain figure, usually Weighted Average Cost of Capital (WACC) to determine their present day values. These include calculation of NPV, IRR of the projects (Yescombe, 2013). On the other hand, the Non-Discounted methods of investment appraisal are ones which derive cash flows on their current values. Mostly these include determination of Payback period as well as Accounting Rate of Return. Thus, the key difference between the two is the utilization of discounting factor to derive present value of the given future cash flow figures.

  Conclusion

  From the above project report it has been concluded that finance is an element which is required by all the business entities to conduct operational as well as executional activities. With the help of it long as well as short term goals could be achieved by utilising monetary resources appropriately. If an organisation is not able to manage funds properly then it can leave negative impacts on operational efficiency. There are various techniques which could be used to determine actual status of the company these are cost volume analysis, investment appraisal techniques etc. Companies can also formulate budgets such as production so that actual cost of business activities could be analysed.

References

• Brealey, R. A. and et.al., 2012.Principles of corporate finance. Tata McGraw-Hill Education.

• Frino, A., Hill, A. and Chen, Z., 2015.Introduction to corporate finance. Pearson Higher Education AU.

• Gitman, L. J., Juchau, R. and Flanagan, J., 2015.Principles of managerial finance. Pearson Higher Education AU.

• Melicher, R. W. and Norton, E. A., 2013.Introduction to finance: Markets, investments, and financial management. John Wiley & Sons.

• Ross, S. A., Westerfield, R. and Jaffe, J. F., 2013.Corporate finance(pp. 353-54). McGraw-Hill/Irwin.

• Schwienbacher, A. and Larralde, B., 2012. Alternative types of entrepreneurial finance. InThe Oxford Handbook of Entrepreneurial Finance.

• Shoup, C., 2017.Public finance. Routledge.

• Van Der Wijst, N., 2013.Finance: a quantitative introduction. Cambridge University Press.

• Yescombe, E. R., 2013.Principles of project finance. Academic Press.