Managing Financial Resources and Decision Individual Assignment

Managing financial resources and decision
Individual assignment
BTEC EDEXCEL HND DIPLOMA IN BUSINESS (MANAGEMENT &HUMAN

RESOURCES)
OFFERED BY INTERNATIONAL COLLEGE OF BUSINESS AND TECHNOLOGY
UNIT 05: Managing financial resources and decisions

HND/BM/52/46
ICBT CITY CAMPUS
Nakeeb Nawaz
SUBMITTED TO: MRS. Madhushani Hassanthika
16th July 2014
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CT/HND/BM/52/46
Acknowledgment
Special token of gratitude goes for Mrs.Madushani Hassanthika for making this path to bring
the maximum outcome of this project
I would like to appreciate the priceless contribution of several people who helped me to make
this report and also the manager of Cargills for giving all the necessary details in order to
complete this report successfully
And also like to mention my parents and my friends who supported me to make this
assignment a success
So my heartiest appreciation goes for all who support get done this task
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Executive summery
Finance generally refers to 2 activities. To the study of how money is managed efficiency and
effectively and the process of collecting required money.
This report mainly contains about how effective decisions should me made using required
financial tools such as investment appraisal techniques.
The first task contrasts on how financial reports are taken into consideration in order to
evaluate business performances and positions. As per SLAS (Sri Lanka Accounting
Standards) purpose of publishing financial reports are also analyzed in the report
The second part of the report discusses on how a company analyses required external and
internal factors such as SWOT analysis and PEST analysis in order to establish small and
medium scale businesses.
It further discusses on different appraisal techniques so that it would be much easier to figure
out the pattern of profitability of a company for investment purposes. We should be able to
identify the future cash inflows and outflows so that it would be much effective in testing the
companys performance continuously.
In the latter part of the report has discussed about the sources of finance available for the
business and also has discussed about the advantages and disadvantages of the sources of
finance available and also the best option has been suggested. Documents required to apply
for a business loan has been stated and also the reason for submitting the documents
requested by bank is also stated in the report and finally has spoken about the impact of bank
loans to the business.
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Introduction
Financial Reports of companies bring out information about the company and how the
procedures of the company are taken into action. Furthermore financial reports show the
companys current position and the performance in financial terms.
In Sri Lanka Quoted Companies which are listed in the Colombo Stock Exchange has to
prepare their financial report in accordance with SLAS (Sri Lanka Accounting Standards). It
is essential to assess the financial reports on a continuous basis in order to endure keep the
standard effectively.
We live in an era where businesses are thriving to satisfy customers beyond their expectations
due to the presence of high competition. As a result young entrepreneurs commit themselves
in putting up new business ideas in order to succeed in their profession. In order to invest in
such businesses we should be able to analyze the necessary requirements such as SWOT and
PEST analysis. Furthermore we should be able to predict future results due to present
transactions and events.
Also small and medium scale businesses contribute collectively to an economy
comprehensively. So it has to consider as an important industry to carry out businesses.
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Contents
....................................................................................................................................................1
Acknowledgment.......................................................................................................................2
Executive summery....................................................................................................................3
Introduction................................................................................................................................4
List of illustrations.....................................................................................................................7
Cargills (Ceylon) PLC............................................................................................................8
PART A.......................................................................................................................................8
01.
Purpose of publishing financial information...................................................................8
Use of financial information for the stakeholders..................................................................9

To shareholders / owners........................................................................................................9
02.
Standards requested by SLAS in order to publish financial reports.............................10
03.
Analyzing financial statement of Cargills....................................................................11
Part B........................................................................................................................................15
2.0 SWOT Analysis (analysis is with regard to the fast food industry in Sri Lanka.).............15
Strengths...............................................................................................................................15
PEST Analysis..........................................................................................................................16
02. Cash flow statement of a similar industry..........................................................................17
03. Timeline..............................................................................................................................18
04. Investment Appraisal Techniques........................................................................18
ARR (average rate of return)................................................................................................19
Discounted payback period..................................................................................................20
05.Calculation of IRR (investment rate of return)...................................................................21
06. Possible source of finance..................................................................................................21
07. Documents required to obtain bank loan...........................................................................22
08. Impacts of bank loans to the business................................................................................23
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Conclusion and recommendation.............................................................................................24

Appendices...............................................................................................................................25
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List of illustrations
Table 1.0 Current asset ratio
11
Table 1.1 Acid test ratio
12
Table 1.2 Return on capital employed
12
Table 1.3 Gross profit ratio
12
Table 1.4 Net profit margin
13
Table 1.5 Fixed asset turnover ratio
13
Table 1.6 Price per earnings ratio
14
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Cargills (Ceylon) PLC

Cargills (Ceylon) PLC is the largest retail store chain in Sri Lanka possessing of more than
half of the market share in the retail industry. Also Cargills Food City is rated the fourth most
valuable retail brand in Sri Lanka. (Brand Research Lanka)
It was established in 1844 and since it has built a solid durable foundation for the retail
industry. Cargills is recognized for its innovative supermarket techniques. It has also known
as the Highest Brand Equity in the Asia Pacific region. (Survey on Shopper Trends by
ACNielsen)
It deals with food and other franchise businesses. Cargills distributes its food and non-food
brands through their marketing and distribution chain to retail industry.
Due to being the only retail king it is capable of giving the highest possible price to its
suppliers even the suppliers provide highest nutritious food possible to the consumer at
lowest possible price.
The retail chain is accelerated with over 197 outlets across the island. With immense
innovation and safety their food products has led to sectorial growth
PART A
1. Purpose of publishing financial information
The purpose of publishing financial information is to provide information about companys
financial position, performance and changes in the position of the organization over a period
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of which is useful for a wide variety of users in making decisions. These users can be known
as Stakeholders of the enterprise.
These stakeholders comprise of suppliers, customers, shareholders, managers, competitors,
government, pressure groups and etc.
Use of financial information for the stakeholders
To shareholders / owners
To evaluate the growth of the business

To evaluate the profitability of the business.
To estimate the share of profit that is allocated to shareholders.
To managers
To manage operational activities.

To make economic decisions.
To compare previous years performances.
To compare with the competitor performance and position.
To set future aims and targeted budgets.
To suppliers
To evaluate the credit period.

To appraise the liquidity of the organization.
To judge the growth and performance of the business.
To Government authorities
To calculate the annual tax to be paid.

To evaluate the job opportunities available.
To provide tax reliefs or tax rebates.
To provide subsidies if the company is failing over a period of time.
To Employees
To evaluate on salaries and wages.
Job security.
Bonuses and allowances.
To community and pressure groups
To judge on growth and profitability of the business.

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To experiment project researches.

To evaluate on purchasing shares.
To financial institutions
To make decision on providing loans.

To allow overdraft facilities.
To evaluate on purchasing shares.
2. Standards requested by SLAS in order to publish financial reports

As per SLAS 03 presentation of financial statement should comprise of 5 components.
1.
2.
3.
4.
5.
Income Statement
Balance Sheet
Statement of Changes in Equity
Cash flow Statement
Notes to the Accounts
In a companys financial information stated assets, liabilities and equity are associated with
the position of the organization while stated income and expenditure are associated with
performance of the organization.
SLAS shall be applied to all general purpose financial statement prepared and presented in
accordance with SLAS.
The company follows required standards in accordance with SLAS in representation of
financial statement. Due to the publishing of financial statement, a company can access to the
information in order to evaluate the actual performance and position in comparison to the
expected performance and position, and also competitor analysis would be much effective.
The main objective of SLAS 03 is to make decisions by different stakeholders regarding the
company.
Standards followed by Cargills in preparing financial statements

The Balance Sheet, Income Statement, Cash Flow Statement, Statement of Changes in Equity
and Accounting Policies and Notes (Financial Statements) of the Group as at 31 March
2012 are prepared in accordance with the Accounting Standards laid down by the Institute of
Chartered Accountants of Sri Lanka and are in compliance with the requirements of the
Companies Act No. 07 of 2007. The accounting policies adopted are consistent with those of
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the previous financial year. There were no changes to the accounting policies of the Group
during the year.
3. Analyzing financial statement of Cargills

A companys financial statement can be analyzed in various ways in order to derive ratios and
come into conclusions.
3.1 Liquidity Ratios
Current Asset Ratio
Year
Current assets/ Current
Liabilities*100
Current Asset Ratio
2010
4,697,601 / 7,085,476*100
2011
5,736,722 / 11,348,392*100
66.2990178
Table 1.0
50.5509679
Current Asset Ratio = Current Assets / Current Liabilities*100

This shows the amount of current assets held in comparison to Current liabilities. The
standard current asset ratio should be more than or equal to 2. According to the evaluation the
current assets ratio of year 2011 is 50.5%, while in year 2010 is 66%. The current asset ratio
has decreased from 15.5%. It is known that the companys current liabilities have increased
proportionately when compared to the previous year. We can come to conclusion that the
value of the current assets is approximately half of the current liabilities in both the years.
The company should reduce the amount of liabilities and/ or increase the amount of current
assets in order to gain the required standard of current assets.
Acid Test Ratio

Acid Test Ratio = (Current Assets - Stock) / Current Liabilities*100
Year
(Current assets - stock) /
2010
(4,697,601-3,059,389) /
2011
(5,736,722-3,576,322) /
Current Liabilities*100
Acid Test Ratio
7,085,476*100
23.1207049
Table1.1
11,348,392*100
19.0370582
The standard acid test ratio is more than or equal to 1. According to the calculation in the
year 2010 is 23%, while in 2011 the ratio is 19%. We can say that the company is not up to
the required standard of acid test ratio. The decrease is 4%. But the company can achieve its
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target by increasing its level of assets and/ or decrease the amount of liabilities as the earlier
solution.
3.2 Profitability Ratios

ROCE (Return on Capital Employed)
ROCE = Net profit After Tax/ Capital Employed*100
Year
NP after tax/ Capital*100
ROCE
2010
712,392/ 6,141,155*100
11.6002934
Table 1.2
2011
1,094,173/ 7,049,433*100
15.5214327
This ratio derives on the amount you get to every rupee invested. It is being mentioned that
when 100 rupee is employed the return for the year 2010 was 11.6 rupees while in year 2011
it is 15.5 rupees. This explains that the company has increased its ROCE by 4%.
Gross Profit Ratio
Gross Profit Ratio = Gross Profit / total sales revenue *100
Year
GP/Sales*100
GP Ratio
2010
2,640,373/ 30,874,797*100
8.5518716
Table 1.3
2011
3,482,427/ 37,128,661*100
9.3793498
Gross profit ratio is derived in order to evaluate the amount of gross profit gained with
comparison to the sales. The percentage in 2010 is 8.5% while in year 2011 is 9.3%. There is
an increase of 0.8%. It shows that the company is achieving well in Sales compared to the
previous year.
Net Profit Margin

Net Profit before tax / Total sales Revenue *100
Year
NP/Sales*100
NP Ratio
2010
1,000,726/30,874,797*100
3.2412391
Table 1.4
2011
1,406,703/37,128,661*100
3.788753
Net profit ratio is derived in order to evaluate the amount of net profit gained with
comparison to the sales. The percentage in 2010 is 3.2% while in year 2011 is 3.7%. There is
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an increase of 0.5%. It shows that the company is achieving well in Sales compared to the
previous year which has a big impact on the ratio to change by 0.5%.
3.3 Efficiency Ratios
Fixed Asset Turnover Ratio
Fixed Asset Turnover Ratio= Total sales revenue/ Fixed asset at NBV
Year
sales / Fixed asset at
NBV*100
Fixed Asset Turnover Ratio
2010
30,874,797/ 9,251,241
2011
37,128,661/ 13,568,878
3.337368143
Table 1.5
2.736310327
Fixed asset turnover asset derives the amount of sales against the fixed asset of the company.
The ratio has been decreased in 2011 when compared to the year 2010 by 0.6.
3.4 Investment Ratio

Price Per Earning Ratio
Price per Earning Ratio = Loans / Shareholders Fund *100
Year
Loans / Shareholders fund*100
Price per Earning Ratio
2010
198,499 / 6,141,155*100
3.2322747
Table 1.6
2011
384,167 / 6,959,710*100
5.5198707
Price per earnings ratio refers to the valuation of organizations current share price and
comparing it with the earning per share. According to the valuation in the year 2011 there
is an increment of 2.3%.
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Part B
2.0 SWOT Analysis (analysis is with regard to the fast food industry in Sri
Lanka.)
Strengths
Product differentiation due to introduction of new varieties of products.
Location of the outlet which is accessible easily for the consumers.
Setting of the outlet which provides the feeling of staying at with utmost relaxed
mentality.
Expertise and experienced staff in the industry is an added strength.
Quality products and innovative concept.
Management technique which reflects customer focused service.

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Weaknesses
Bakery items are quite perishable, so it has to be sold fast as possible because
consumers prefer fresh products.
Limited variety of menu.
Lack of experience as we are new to the industry.
Though financial reports possess reports of stability, unseen weaknesses are there yet
to be identified.
Lack of capital to be employed.
Opportunities
Expanding the range of products.
Expanding the business by establishing more outlets in different places.
Producing more healthy and nutritious products will increase the sales.
The industry is growing at a higher pace where the demand wont find an end.
Undertaking cake orders would be a fresh opening to a new market.
Threats
Competition from other bakeries and bakery product suppliers such as Royal
Bakery, The fab, P&S and etc.
Economic downturn would affect the disposable income which would lead to
reduction in sales.
Demand for Short eats would decrease due to health concern.
PEST Analysis
Political and Legal Factors
Documents which are essential to register the outlet.
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Employment Laws and rules.
Environmental Regulations.
Health and Safety factors.
Tax Payment strategy.
Trade Restrictions or Subsidies.
Economic Factors
Market growth Rate.
Interest Rates when applying the loan.
Inflation Rate.
Exchange Rate when importing raw materials.
Stability of currency value.
Social Factors
Population and growth of population.
Age distribution of consumers.
Attitude of the career.
Safety precautions of the consumer.
Religious intervention on certain products.
Technological Factors
Variety development.
Baking Process.
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New machinery embracement.
02. Cash flow statement of a similar industry

Date
Description
Amount Rs
Initial Investment
(90,000)
31/01
Cash sales
50,000
31/02
Cash purchases
(30,000)
31/03
Dividend received
10,000
31/04
Tax paid
(30,000)
31/05
Depreciation of assets
(7,500)
31/06
Sales on credit
20,500
31/07
Rent paid
(10,000)
31/08
Cash sales
15,000
31/09
Cash purchase
(25,000)
31/10
Salary paid
(20,000)
31/11
Insurance
(10,000)
31/12
Equipments purchased
(3,000)
(30,000)
03. Timeline
5%
(90,000)50,000(30,000)10,000(30,000) (7,500)20,500(10,000)15,000(25,000) (20,000)
(10,000)(3,000)
1/01
2/01
3/01 4/01 5/01
6/01 7/01
8/01 9/01
10/01 11/01
12/01
04. Investment Appraisal Techniques

NPV
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i
12
(1+
Total PV =
Fv
12t
50,000
0.05 1
( 1+
)
12
( 7,500 )
0.05 5
(1+
)
12
( 25,000 )
0.05 9
(1+
)
12
(30,000)
0.05 2
(1+
)
12
20,500
0.05 6
(1+
)
12
( 20,000 )
0.05 10
(1+
)
12
10,000
0.05 3
(1+
)
12
(10,000)
0.05 7
(1+
)
12
(10,000 )
0.05 11
(1+
)
12
(30,000)
0.05 4
(1+
)
12
15,000
0.05 8
(1+
)
12
f+
( 3,000 )
0.05 12
(1+
)
12
49,790.88 + (29,750.1) + 9,875.57 + (29,501.42) + (7,345.02) +

19,992.2 + (9,710.62) + 14,506.77 + (24,084.78) + (19,179.13) +
(9,549.27) + (2,852.79)
= (37,807.71)
ARR (average rate of return)
Average profits = all inflows (profits)
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12
= 50,000 + 10,000 + 20,500 + 15,000
12
= 7,958.33
ARR = Average profit
100
Investment
= 7,958.33
100
90,000
= 8.84%
Discounted payback period
Initial investment
90,000
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1st month
(49,790.88
)
40,209.12
2nd month
000000
40,209.12
3rd month
(9,875.57)
30,333.55
4th month
000000
30,333.55
5th month
000000
30,333.5
5
th
6 month
19,992.2
10341.35
7th month
00000
10341.35
14,506.77
Payback period is equal to 7 months and 21 days
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05. Calculation of IRR (investment rate of return)

Inflows
50,000
10,000
20,500
15,000
Outflows
90,000
30,000
30,000
7,500
10,000
25,000
20,000
10,000
3,000
Cannot find IRR since the final balance is a negative value due to the high amount of out
flows.
06. Possible source of finance

Finance plays a big role in every business organization. It is the main driving force of
resources which moves the organization towards a certain direction.
Source of finance can be broadly identified as the ways and methods a business is able to
raise funds for its various business activities. Source of finance varies according to
organizations.
A business might have various alternatives for financing itself, but it must select the most
beneficial source, sources of finance can be mainly classified into 2
1. Internal source of finance this is the source of finance from within the
organization itself. Some internal source of finance can be as follows
i.
Retained profits these are the undistributed profit of the organization which
were kept behind as resources, using retained profits to finance is easy
ii.
because there is no cost of finance

Accumulated depreciation this is the total/ addition of deprecation for a
particular asset which were charged during the past financial year.
Accumulated depreciation is treated as a reserve and will be used to purchase
new assets and also used for business purpose
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iii.
Sale of fixed asset a business can finance itself either by selling its assets
(fixed assets/ intangible assets/ investment in other business etc.) such
decisions should be made only if the business has no other options left.
2. External source of finance these are the sources from outside of the organization.
i.
bank loan or overdraft a business can borrow a loan or get an O/D facility by
ii.
keeping as security
Leasing this is where the organization would use the assets without owing/
buying it. payments will be made in installments, where the ownership will be
iii.
transferred after the last payment

Preference share these are the shares issued to the public with a fixed rate of
iv.
annual dividends. Preference shareholders are not owners of the company

Ordinary shareholders these are the shares issued to the public with ordinary
rights on the companys profit and variable dividend. Ordinary shareholders
are the owners of the company.
Agreeing to all the finance sources above the best option I would select is bank loan, the
reasons for selecting it as the best option since the organization is been established and its
not possible to finance internally.
07. Documents required to obtain bank loan

A financial market can be identified as a situation where finance borrowers and finance
lenders would meet in order to fulfill each others requirements.
A business needs to obtain a bank loan in order to increase their financial stability. The
documents needed to obtain a bank loan for a business are;
Completely filled application form

NIC of the individual/individuals- this is required by the banks to identify if the
individual is of legal identity.

Individuals and the business credit profile- this includes the credit history of the
owners and the business. This will be helpful to the banks to identify the credit history
of the owners and the business.

Collateral- anything of value which is pledged when obtaining loans. This is used by
banks to ensure that the loans will be paid on the maturity date by the borrowers.
Financial statements- to identify the stability and the position of the business.
Bank statement- to see if the owner has a bank account and see if the bank account is
well maintained.
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The above mentioned documents used by Cargills to obtain loans are attached as appendices
to the report.
08. Impacts of bank loans to the business

The advantages that the business can gain through bank loans are:
1. Increment of the working capital of the organization cash increases in the business
since obtaining a bank loan. This funds needed by a business organization to run its
day to day business activities such as cash purchases, stocks for sales and production
ETC.
2. Investment decisions these are decisions made on the acquiring of fixed and current
assets of a business organization. EX: purchase of land, purchase of machinery
3. Ensuring the availability of funds of and when required
4. Ability to maintain a required liquidity level
Disadvantages of gaining a bank loan:
1. High interest value to be paid in paying back the loan
2. Risk value is high since loans are been taken by keeping a collateral, so the risk
attached with a bank loan is relatively high

3. Monthly installments paid to the bank will reduce the cash flow of the business
which will reduce the working capital of the company
Conclusion and recommendation

This report contains of two sections.
The first Section talks about how financial reports of listed quoted companies of Colombo
Stock Exchange continue their standards of SLAS (Sri Lanka Accounting Standards) in order
to evaluate required performance, positions and liquidity of the company.
Furthermore it discusses on how different appraisal techniques are being used to evaluate
different decision making process.
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The second part of the report analyses on different environmental factors to be considered
when starting off a small and medium scale businesses, and how financial statements are
being evaluated in different ways. The balance sheet which describes the position of the
business, trading profit and loss a/c which shows the financial performance and the cash flow
statements of the business to measure the liquidity of the business. Furthermore this report
specifies about evaluation of investment appraisal techniques in order measure the businesss
existence. Additionally this report sum ups including the ways and means of risk
measurement techniques which is used to calculate the risk to be borne and sources of finance
which could be considered in investing. Finally it discusses about the impact of the financial
statement to gain different sources of finance.
As a whole this report deliberates on how effective decisions are to be taken with regards to
finance and resources.
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References
George N. Root. 2009. The Advantages & Disadvantages of External Financing.

[ONLINE] Available at: http://smallbusiness.chron.com/advantages-disadvantages-
external-financing-10033.html. [Accessed 07 May 2014].

John DeMerceau. 2009. Advantages & Disadvantages of Bank Loans. [ONLINE]
Available at: http://smallbusiness.chron.com/advantages-amp-disadvantages-bank-
loans-47377.html. [Accessed 08 June 2014].

http://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-
entrepreneurs-finance-dileep-rao.html
anthonys,d (2012). business finance . Colombo: misadventures . 34-50
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Appendices
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Managing financial resources and decision

BTEC EDEXCEL HND DIPLOMA IN BUSINESS (MANAGEMENT &HUMAN

UNIT 05: Managing financial resources and decisions