business plan

    business plan

    This unit is designed to give learners a broad understanding of the sources and availability of finance for a business organisation. Learners will learn how to evaluate these different sources and compare how they are used.
    They will learn how financial information is recorded and how to use this information to make decisions for example in planning and budgeting. Decisions relating to pricing and investment appraisal are also considered within the unit. Finally, learners will learn and apply techniques used to evaluate financial performance

    Learning Outcomes and Criteria covered by this Assignment:
    Learning Outcomes:
    LO1 Understand the sources of finance available to a Business
    LO2 Understand the implications of finance as a resource within a business
    LO3 Be able to make financial decisions based on financial information
    LO4 Be able to evaluate the financial performance of a business

    Learning outcomes and assessment criteria

    Learning outcomes Assessment criteria
    LO1
    Understand the sources of finance available to a Business
    1.1 Identify the sources of finance available to a business

    1.2 Assess the implications of the different sources

    1.3 Evaluate appropriate sources of finance for a business project

    L02
    implications of finance as a resource within a business

    Understand the implications of finance as a resource within a business 2.1
    Analyse the costs of different sources of finance

    2.2 Explain the importance of financial planning

    2.3

    2.4

    Assess the information needs of different decision makers

    Explain the impact of finance on the financial statements
    LO3
    Be able to make financial decisions based on financial information 3.1
    Analyse budgets and make appropriate decisions

    3.2

    3.3 Explain the calculation of unit costs and make pricing decisions using relevant information

    Assess the viability of a project using investment appraisal techniques.

    LO4

    Be able to evaluate the financial performance of a business
    4.1 Discuss the main financial statements
    4.2 Compare appropriate formats of financial statements for different types of business
    4.3
    Interpret financial statements using appropriate ratios and comparison, both internal and external.

    Key dates
    REPORT STRUCTURE AND POINTS TO BE COVERED IN THE REPORT
    REPORT STRUCTURE AND POINTS TO BE COVERED IN THE REPORT
    Assignment1
    Assume that you are working as an advisor to a given number of different businesses in different sectors and are given task to arrange required finances. Keeping the fact in mind that different businesses have different finance requirements, you are asked to discuss the finance options available to them.

    Business scenario 1
    John has recently started with a small subway sandwich type business in a mobile van in Essex area. The business is doing very well and John anticipates that he will soon need to expand to cater the new customers and their growing demand. He is considering a permanent location for his business providing takeaway and eat-in facilities to a small number of customers. He is also considering introducing ice cream with a limited number of flavours. John anticipates that he will require funds of approximately £15,000 for renting the required place, buying a freezer for the ice-cream, some furniture. The business is expected to pay the borrowed funds in about 2 years.

    Business scenario 2
    Andrew and Tom had started a joint business as a partnership a few years ago, importing sport goods. The business imports various sport goods like baseball bat, cricket bat, snooker table, football etc from a few neighbouring countries and from China. The business is growing and now they need an office, warehouse to store goods, display showroom, a few computers and VDU’s where customers can see the different products. The partnership will soon require a heavy investment for which both partners are prepared but are considering different options available to them. The partnership anticipates that £35,000 will be required for rebranding the image, required space and computers. The business is expected to pay the borrowed funds between 2 to 4 years.

    Business scenario 3
    Beta Ltd is incorporated in the UK as a private company selling expensive holiday packages to General public. The business originally started in Devon ten years ago and is doing very well. The owners have decided to expand the business by introducing a mini cruise and a private yacht into their fleet. Although the business is doing very well and has cash in reserve but is not enough. Moreover, the owners are not sure which finance option would be more suitable? They have asked for an advice from you. The company anticipates a cash requirement of £145,000 to make the purchase outright. The improved fleet will pay for the required funds within 5 years.

    Business scenario 4
    Banana Plc is incorporated in the UK as a public limited company since 1985. The company is following the Dell’s business model of assembling the computer components according to customer needs and then selling. Currently, the company is only serving the UK but is planning to expand and exploit neighbouring EU countries. The company is expecting a large increase in their customer base and large number of overseas orders. The company is anticipating a cash need of around £0.25m for the expansion. Due to fast turnaround of computing equipment, Banana plcstrongly believe that it can repay the loan within 12 months of borrowing.

    Task Activity 1 (Assessment criteria targeted 1.1)

    1.1Identify the sources of finance available to the businesses mentioned above?
    Learners are required to discuss range of sources: sources for different businesses; long term such as share capital; retained earnings; loans; third-party investment; short/medium term such as hire purchase and leasing; working capital stock control; cash management; debtor factoring etc in the class and submit a written report incorporating the class discussion on all four given scenarios towards end of the term.

    Task Activity 2 (Assessment criteria targeted 1.2)

    Assessment Method: Written report

    1.2 Assess the implications of the different sources discussed in the business cases provided under scenario assignment 1. There is no need to repeat a source once discussed.
    Implications of choices: legal, financial and dilution of control implications; bankruptcy can be discussed.

    Task Activity 3 (Assessment criteria targeted 1.3)
    Assessment Method: Written report

    1.3 Evaluate appropriate sources of finance for a business project. Learners are required to discuss advantages and disadvantages of different sources; their suitability for purpose e.g. matching of term of finance to term of project for the business cases provided under Assignment1.

    Task Activity 4 (Assessment criteria targeted 2.1)
    Assessment Method: Group discussion and written report

    2.1 Analyse the costs of different sources of finance
    Learners are required to discuss different finance costs e.g. interest, dividends; opportunity costs e.g. loss of alternative projects when using retained earnings; tax effects for different businesses

    Assignment 2

    Task Activity 5 (Assessment criteria targeted 2.2)

    Case study Capco Ltd manufactures toys for children between the age group of 3 and 6 years. They have been very successful in selling the toys in the UK and now wish to expand their business by selling the toys across Europe. The business is considering 2 different toys to export. One of them is a baby doll and the other one is a video game. Capco Ltd has been selling baby dolls in the UK from quite a while and has been very successful. The company has not manufactured video games before and has no prior experience of it but thinks that it is a good opportunity for them to target a new market with a new product.
    The company has limited cash reserves and has decided to manufacture a small number of baby dolls to start with and to concentrate on selling video games on a large scale being their main product in the overseas market. Keeping the low cash reserves in mind, the company decides to do limited advertising for its products and will mainly use super stores shelves for display.
    The company has started producing both products and has spent a big portion of its cash reserve on advertising the video game, hoping to get good response.
    The advertising campaign is over now but to their surprise, they have received very few orders for the main product i.e. video game and a large number for baby dolls for which they were not prepared. The company wishes to increase its advertising for video game so as to attract more customers but they do not have enough cash to do so. They have accepted so many orders for the baby doll that they are running short of completed orders; do not have enough inventory / raw material to honour their commitment.
    The company now has to turn to a bank for a loan but it will take some time to process the loan application and there is no guarantee that the loan will be approved. Capco has decided to put a hold on accepting new orders for baby doll until loan is approved. Video games are still not generating enough cash and the company is considering withdrawing it from the overseas market.

    Q.2.2 Learners are required to explain the importance of financial planning by highlighting the need to identify shortages and surpluses e.g. cash budgeting; implications of failure to finance adequately; overtrading etc for the business case study provided.

    Task Activity 6 (Assessment criteria targeted 2.3)
    2.3 Assess the information needs of different decision makers

    Q.2.3Learners are required to explain the information needs of different decision makers. The different stakeholders are: shareholders, management, employees, banks, suppliers, government departments like HMRC, investors etc
    Assessment Method: Group discussion and written report

    Task Activity 7 (Assessment criteria targeted 2.4)
    2.4 Explain the impact of finance on the financial statements.

    Q2.4 Learners are required to explain how different types of finance and their costs appear in the financial statements of a business; the interaction of assets and liabilities on the balance sheet and on international equivalents under the International Accounting Standards (IAS). Learners should use the business cases provided under scenario assignment 1 as a guide.
    Assessment Method: Group discussion and written report

    Task Activity 8 (Assessment criteria targeted 3.1)
    3.1Analyze budgets and make appropriate decisions
    Preparation of cash budget
    Months Sales (credit) Purchases (Credit) Wages Manufacturing expenses Admin expenses Selling expenses
    Nov 11 30,000 15,000 3,000 1,150 1,060 500
    Dec 11 35,000 20,000 3,200 1,225 1,040 550
    Jan 12 25,000 15,000 2,500 990 1,100 600
    Feb 12 30,000 20,000 3,000 1,050 1,150 620
    Mar 12 35,000 22,500 2,400 1,100 1,220 570
    Apr 12 40,000 25,000 2,600 1,200 1,180 710

    Additional information:
    1. Customers are allowed credit period of two months
    2. Dividend of £10,000 in payable in the month of April 2012
    3. Machinery will be purchased in the month of January 2012 for £5,000 and a building on mortgage with its 1st monthly mortgage payment to come out in March 2012, will cost £2000each month
    4. Creditors are allowing us a credit of 2 months
    5. Wages are paid on the 1st of the next month in arrears
    6. Delay in payment of other expenses is one month
    7. Balance of cash in hand on 1st Jan 2012 is £15,000
    From the given forecasts of income and expenditure, prepare a cash budget for the months January 2012 to April 2012.

    Preparation of sales budget
    2011 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
    Units 700 850 1000 1150
    Sales Price £9.00 £9.00 £9.00 £9.00
    Learners are required to prepare sales budget for the year 2011

    Preparation of production budget (in units)
    2011 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
    Units (opening inventory) 100 50 – 200
    Production required (in units) ? ? ? ?

    Learners are required to prepare production budget (in units) for the year 2011
    Assessment Method: Discussion paper and budget sheets

    Assignment 3

    Task Activity 9 (Assessment criteria targeted 3.2)
    Explain the calculation of unit costs and make pricing decisions using relevant information
    Alpha Meridian Business produces two different products namely Product X and Product Y through a joint production process. The relevant monthly cost and expense information is as under:
    Cost centre Cost/expense Product X Product Y
    £
    Warehouse 1000 50% 50%
    Material 2000 40% 60%
    Labour 1500 25% 75%
    Machine repairs 500 20% 80%
    Cutting & finishing 375 45% 55%
    Marketing costs 750 50% 50%

    The business produces 25 units of Product X and 35 units of Product Y every month. Learners are required to calculate the unit costs and its use within pricing decisions

    Assessment Method: Group discussion and written report

    Task Activity 10
    Assess the viability of a project using investment appraisal techniques
    Learners are required to calculate payback period; accounting rate of return; discounted cash flow techniques i.e. net present value; internal rate of return for the provided case study on Hull and Dear Ltd.
    Assessment Method: Case study

    Case Study – Hull and Dear Ltd
    Hull and Dear Ltd is a successful high street fashion house that wishes to expand its business over the next 5 years. The company is considering 2 options. Option A involves the purchase for £400,000 of the adjoining empty shop to make a larger retail outlet for its own branded clothing. The cash flows associated with this option are given below.

    Option B involves the purchase of a similar fashion retailer in a nearby town for £850,000. This would entail spending £100,000 initially to convert it to the Hull and Dear Ltd’s style. Cash flows are estimated to be £250,000 in the first year, rising by £50,000 p.a. in each of the next 4 years.

    Cost of capital to be used is 10% for both options.

    Option A
    Year Cash Flow
    1 £100,000
    2 £140,000
    3 £180,000
    4 £210,000
    5 £230,000

    Option B
    Year Cash Flow
    1 ?
    2 ?
    2 ?
    4 ?
    5 ?

    Years Discount factor at 10%
    1 0.91
    2 0.83
    3 0.75
    4 0.68
    5 0.62

    Required
    Management of Hull and Dear Ltd wishes to compute the cash flows of option B. Also evaluate and Recommend which of the two options should be selected using the following techniques:

    a) i. Payback period (PBP)

    ii. Net present value (NPV)

    b) iii. Provide a theoretical overview of internal rate of return (IRR) and clearly explain its importance. Assuming that cost of capital is not provided in Option an above; calculate the IRR for the project.

    iv. A project requires an investment of £2000 and will return a profit of £2500. Calculate its accounting rate of return (ARR)

    (Clearly state advantages and disadvantage of each method)
    Assessment Method: Written report

    Task Activity 11 (Assessment criteria targeted 4.1 & 4.2)
    Discuss the main financial statements and compare appropriate formats of financial statements for different types of business

    Learners are required to discuss the basic form, structure and purpose of main financial statements i.e. balance sheet, profit and loss account, cash flow statement, preparation not required; Learners will be expected to distinguish between different types of business i.e. company, partnership and sole trader

    Assessment Method: Group discussion and written report

    Task Activity 12 (Assessment criteria targeted 4.3)
    Interpret financial statements using appropriate ratios and comparisons, both internal and external.
    Learners are required to use key accounting ratios for profitability, liquidity, efficiency and investment; perform comparison for both external i.e. industry standards and internal i.e. previous period for the provided case study on ZIGZAG plc.

    Assessment Method: Case study on ZIGZAG Plc, written report ZIGZAG Plc
    The financial statements of ZIGZAG Plc, a company limited by shares, for the years ended 31 Mar 2011 and 31 Mar 2012 are summarized below.

    Income statements for the years ended 31 Mar 2011 31 Mar 2012

    £000 £000
    Revenue 20,000 26,000
    Cost of sales (15,400) (21,050)
    ––––––– –––––––
    Gross profit 4,600 4,950
    Expenses:
    Administrative (800) (900)
    Selling and distribution (1,550) (1,565)
    Depreciation (110) (200)
    Loan note interest – (105)
    (2,460) (2,770)
    –––––– –––––––
    Net profit 2,140 2,180
    ––––––– –––––––

    Balance sheets as at 31 Mar 2011 31 Mar 2012
    £000 £000
    Non-current assets
    At cost 4,600 5,600
    Accumulated depreciation (800) (1,000)
    3,800 4,600
    Current assets
    Inventory 6,000 6,700
    Receivables 4,400 6,740
    Bank 120 960
    ––––––– –––––––
    14,320 19,000
    ––––––– –––––––
    Capital and reserves
    Issued share capital 8,000 8,000
    Accumulated profit 3,120 5,300
    ––––––– –––––––
    11,120 13,300
    Non-current liabilities
    7% Loan notes – 1,500
    Current liabilities 3,200 4,200
    –––––– –––––––
    14,320 19,000
    –––––– ––––––
    Additional Information
    During 2011, ZIGZAG issued loan notes of £1,500,000 at 7% per annum to fund the expansion of the business. The additional cash was received on 1 June 2011.
    Industry average ratios for the year ended 31 March 2012 are as follows:
    1. Current ratio 4.55 times
    2. Gross profit margin 21%
    3. Net profit margin 9%
    4. Return on equity 29p
    5. Earnings per share 25.2p
    6. Debt equity ratio 0.7%
    7. Inventory conversion period 114 days
    8. Receivables collection period 85 days
    Required:
    Calculate the following ratios for ZIGZAG Plc for both of the years, compare the latest year with the industry average and analyze.
    1. Current ratio
    2. Gross profit percentage
    3. Net profit percentage
    4. Return on equity
    5. Earnings per share
    6. Debt equity ratio
    7. Inventory conversion period
    8. Receivables collection period

    Merit Pointers

    M1: Identify and apply strategies to find appropriate solutions.
    Learners are required to demonstrate that effective judgments have been made by recommending the most suitable source of finance available to the business scenarios, provided in Assignment 1.

    M2: Select/design and apply appropriate methods/techniques.
    Learners are required to justify the selection of methods and techniques used for investment appraisal in AC 3.3 by discussing the advantages and disadvantages of the techniques used.

    M3: Present and communicate appropriate findings.
    Learners are required to summarize the ratios calculated in AC 4.3, draw valid conclusions and prepare an individual presentation of the findings to an audience.
    Assessment Method: Group discussion, discussion paper and individual presentation
    Distinction Pointers

    D1: Use critical reflection to evaluate own work and justify valid conclusions.
    Learners are required to propose realistic improvements against defined characteristics for success for the ratios calculated in AC 4.3 and forward recommendations to the financial controller of the company in the form of a memo.

    D2: Take responsibility for managing and organising activities.
    Learners are required to recognize the importance of interdependence of different budgets with each other.

    D3: Demonstrate convergent/lateral/creative thinking.
    Learners are required to write a personal statement by performing a self evaluation and by demonstrating that they have learnt / acquired new accounting and finance concepts through this module.
    Assessment Method: Written report

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