BTEC HND in Business Module Booklet Unit 2 Managing Financial Resources & Decisions Unit level 4 Unit code H/601/0548 Unit type Core Block Start Date 21/11/2016 Hand out date 21/11/2016 Submission Deadline 12/02/2017 Lectures & Formative Assessments 10 Weeks Summative Assessment & Feedback 2 Weeks Guided learning hours 60 Module Leader Dalton Vincent Lecturer 1.1 Introduction 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. Students of this unit will gain an understanding of where and how to access sources of finance for a business, and the skills to use financial information for decision making. Upon completing the unit, learners will understand the sources of finance available to a business; understand the implications of finance as a resource within a business; be able to make financial decisions based on financial information, and; be able to evaluate the financial performance of a business. 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. 1.2 Learning Outcome By the end of this unit a student will be able to: ⦁ Understand the sources of finance available to a business ⦁ Understand the implications of finance as a resource within a business ⦁ Be able to make financial decisions based on financial information ⦁ Be able to evaluate the financial performance of a business 1.3 Essential Content LO1 Understand the sources of finance available to a business: 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 Implications of choices: legal, financial and dilution of control implications; bankruptcy. Choosing a source: advantages and disadvantages of different sources; suitability for purpose e.g. matching of term of finance to term of project LO2 Understand the implications of finance as a resource within a business Finance costs: tangible costs e.g. interest, dividends; opportunity costs e.g. loss of alternative projects when using retained earnings; tax effects Financial planning: the need to identify shortages and surpluses e.g. cash budgeting; implications of failure to finance adequately; overtrading Decision making: information needs of different decision makers Accounting for finance: 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). LO3 Be able to make financial decisions based on financial information: Budgeting decisions: analysis and monitoring of cash and other budgets; Costing and pricing decisions: calculation of unit costs, use within pricing decisions; sensitivity analysis; Investment appraisal: payback period; accounting rate of return; discounted cash flow techniques i.e. net present value; internal rate of return; Nature of long-term decisions: nature of investment importance of true value of money; cash flow; assumptions in capital investment decisions; advantages and disadvantages of each method. LO4 Be able to evaluate the financial performance of a business Terminology: introduction to debit, credit, books of prime entry, accounts and ledgers, trial balance, final accounts and international equivalents under the International Accounting Standards (IAS); Financial statements: basic form, structure and purpose of main financial statements i.e. balance sheet, profit and loss account, cash flow statement, notes, preparation not required; changes to reporting requirements under the International Accounting Standards (IAS) e.g. statement of comprehensive income, statement of financial position; distinctions between different types of business i.e. limited company, partnership, sole trader; Interpretation: use of key accounting ratios for profitability, liquidity, efficiency and investment; comparison both external i.e. other companies, industry standards and internal i.e. previous periods, budget Recommended Resources Recommended text and links: Dyson J R, (2007), Accounting for Non-Accounting Students. Financial Times/Prentice Hall. ISBN: 9780273709220 Atrill, P. (2012), Financial Management for Decision Makers. 6th Edition, Harlow: Pearson Financial Times/Prentice Hall. ISBN: 9780273756934 Atrill, P. and McLaney, E. (2013), Accounting and finance for non-specialists.8th ed. Harlow: Financial Times/Prentice Hall. ISBN: 9780273778035 Watson, D. and Head, A. (2012), Corporate Finance Principles and Practice. 6th edition, Harlow: Pearson ISBN: 9780273762874 1.4 Scheme of Work Week Session Lecture Schedule Contents Activity/seminar and formative assessment Resources 1 AM Introduction to Managing Financial Resources & Decisions Introduction to the module, mode of assessment, awareness of the awarding body, assessment criteria and the mode of assessment Lectures PM Sources of finance Internal / external; 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 (LO 1.1) Lectures and discussions 2 AM Sources of finance implications Evaluating appropriate sources Implications: legal, financial and dilution of control implications; bankruptcy. Choosing a source: advantages and disadvantages of different sources; suitability for purpose (LO1.2 & 1.3) Case study Assessing the implications of the various sources of finance PM Workshop Workshop Workshop to address Task 1 3 AM Financing and cost Tangible costs e.g. interest, dividends; opportunity costs e.g. loss of alternative projects when using retained earnings; tax effects (LO 2.1) Lectures supported with Exercises PM Financial planning Financial planning: the need to identify shortages and surpluses e.g. cash budgeting; implications of failure to finance adequately; overtrading (LO 2.2) Lectures and discussions, scenarios 4 AM Budgeting Budgeting decisions: analysis and monitoring of cash and other budgets (LO 3.1) Lectures supported with Exercises PM Workshops Workshops Workshops 5 AM Decision making for financing Decision making: information needs of different decision makers (LO 2.3) Lectures and discussions, scenarios PM Accounting for finance 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 (LO 2.4) Lectures supported with Exercises 6 AM Costing and pricing decisions Calculation of unit costs, use within pricing decisions; sensitivity analysis (LO 3.2) Lectures supported with Exercises PM Workshops Workshops Workshops 7 AM Investment appraisal Payback period; accounting rate of return; discounted cash flow techniques i.e. net present value; internal rate of return (LO 3.3) Lectures supported with Exercises PM Workshops Workshops Workshops 8 AM Financial statements and interpretations basic form, structure and purpose of main financial statements i.e. balance sheet, profit and loss account, cash flow statement, notes, preparation not required; changes to reporting requirements under the International Accounting Standards (IAS). (LO 4.1& 4.2) Lectures and discussions, scenarios PM Use of key accounting ratios for profitability, liquidity, efficiency and investment Use of key accounting ratios for profitability, liquidity, efficiency and investment (LO 4.3) Workshops 9 Assignment support week 10 Assignment support week Assignment submission 1.5 Teaching Ethos The college’s approach towards teaching and learning is simple and effective. The main aim of UKCBC is to assist learners in maximising their potential by ensuring that they are taught clearly and effectively. This will enable students to engage in the learning environment and promote success in both their academic studies and subsequent career. The module tutor(s) will aim to combine lectures, workshops and tutorial activities. This environment will provide opportunities for the student to understand the course material through case study and text and to apply it in a practical way. The intent is to facilitate interactive class activities, and discussion about the significant role of research in a global and local business environment. 1.6 Methods of Delivery LECTURES: These will be developed around the key concepts as mentioned in the indicative course content and will use a range of live examples and cases from business practice to demonstrate the application of theoretical concepts. This method is primarily used to identify and explain key aspects of the subject so that learners can utilise their private study time more effectively. SEMINARS: These are in addition to the lectures. The seminars are designed to give learners the opportunity to test their understanding of the material covered in the lectures and private study with the help of reference books. This methodology usually carries a set of questions identified in advance. Seminars are interactive sessions led by the learners. This method of study gives the learner an excellent opportunity to clarify any points of difficulty with the tutor and simultaneously develop their oral communication skills. CASE STUDIES An important learning methodology is the extensive use of case studies. They enable learners to apply the concepts that they learn in their subjects. The learners have to study the case, analyse the facts presented and arrive at conclusions and recommendations. This assists in the assessment of the learner’s ability to apply to the real world the tools and techniques of analysis which they have learnt. The case study serves as a supplement to the theoretical knowledge imparted through the course work. 1.7 Plagiarism Any act of plagiarism will be seriously dealt with according to the colleges and awarding bodies’ regulations. In this context the definition and scope of plagiarism are presented below: Plagiarism is presenting someone’s work as your won. It includes copying information directly from the web or books without referencing the material; submitting joint coursework as an individual effort; copying another student’s coursework; stealing coursework form another student and submitting it as your own work. Suspected plagiarism will be investigated and if found to have occurred will be dealt with according to the college procedure. (For further details please refer to the plagiarism policy and the student code of conduct.) 1.8 Assignment brief Unit 2 Managing Financial Resources & Decisions Unit code H/601/0548 Unit type Core Block Start date 21/11/2016 Assignment/hand-out date 21/11/2016 Deadline/hand-in date 12/02/2017 Word count 3000 – 4000 words approximately Purpose of this assignment The assignment will test learner’s broad understanding of the sources and availability of finance and their ability to evaluate different sources and suggest appropriate sources for a business organisation. Case problem Clariton Antiques Ltd was founded five years ago by four partners. It started as an unincorporated business and has grown slowly and steadily, and has developed a good reputation for selling antique items. It has 2 branches in London and is looking to acquire a building in Birmingham to open another branch. They would need to raise £0.5 million. They have few loans at present, and could raise considerably more. It has been suggested, though, that this is the time for the firm to 'go public' and raise the money that way. Task 1 You are required to: 1.1- Identify the sources of finance available to; ⦁ Unincorporated business. ⦁ Incorporated business 1.2- Assess the implications for using; ⦁ Internal sources of finance ⦁ External sources of finance 1.3- Evaluate the most appropriate sources of finance for Clariton Antiques Ltd. Task 2 Clariton Antiques Ltd have just been approached by 'We Finance Limited', a venture capital organisation, with an offer to finance their expansion by offering the full £0.5m for a 20% stake in the business. Alternatively they can use the services of a finance broker to obtain a bank loan. The broker will charge a 1% fee on the amount secured and interest on the loan would be 2% APR payable over 10 years. The directors have produced the financial statement for the last financial year ending 31st March 2016. Income Statement 2016 2015 £000 £000 Revenue, net of sales tax 1255 1220 Cost of sales (1077) (1045) Gross profit 178 175 Operating expenses (121) (129) Profit from operations 57 46 Finance cost (10) (10) Profit before tax 47 36 Income tax expense (14) (13) Profit for the period 33 23 Statement of changes 2015 2014 £000 £000 Opening balance 276 261 Profit for the period 33 23 Dividend (8) (8) Closing balance 301 276 Balance Sheet 2015 2014 £000 £000 £000 £000 Non-current assets Property and Equipment 580 575 Goodwill 100 100 680 675 Current assets Inventories 47 46 Trade receivables 12 13 Cash 46 12 105 71 785 785 Equity Share capital 150 150 Accumulated profit 151 126 301 276 Non-current liability Interest on borrowing 142 140 Deferred tax 25 21 167 161 Current liabilities Trade payables 297 273 Short term borrowing 20 36 317 309 785 746 You are required to: 2.1 Analyse the costs of the two sources of finance under consideration with reference to; ⦁ Dividends ⦁ Interest ⦁ Tax 2.2 Explain the importance of financial planning for Clariton Antiques Ltd with reference to; ⦁ budgeting ⦁ implications of failure to finance adequately ⦁ overtrading 2.3 Give an assessment of the information that will be needed to make decision on financing the takeover by; ⦁ The partners ⦁ Venture capitalist (We Finance Limited) ⦁ Finance broker 2.4 Explain the impact on the financial statements if Clariton Antiques Ltd choose to go with; ⦁ Venture capitalist (We Finance Limited) ⦁ Finance broker Task 3.1 Clariton Antiques Ltd needs to produce a cash budget for the Banks in order to ensure that there is enough cash within the business to achieve the operational levels set by the functional budgets. The following sales forecast have been produced for the next six months. 2016/2017 £ November 150,000 December 150,000 January 2017 300,000 February 450,000 March 600,000 April 300,000 May 300,000 June 75,000 July 150,000 Collection estimates obtained from the credit and collection department are as follows: collected within the month of sale, 5 percent; collected the month following the sale, 80 percent; collected the second month following the sale, 15 percent. Total payments for six months to June 2017 is provided as follows; £ January 807,250 February 137,250 March 119,750 April 437,250 May 227,250 June 219750 The cash on hand on 1st January 2017 will amount to £110,000 Required: Prepare an analyses of the cash budget for Clariton Antiques and advice on decisions that can be taken to improve their financial position. Task 3.2 For a company engage in production, the cost per unit is usually derived from the variable costs and fixed costs incurred by a production process, divided by the number of units produced. Since Clariton is not engaged in production explain how unit costs will be calculated to make pricing decisions giving suitable example. Task 3.3 Clariton has conducted a financial analysis of two investment projects overseas. At this stage it would only be possible to fund one of the two proposed projects. The costs of capital is very high because of inflation at 14% and Clariton has presented the following figures to you for your consideration. Details of cash inflows have only been presented for 6 years as it is considered that financial information after this date is likely to be highly inaccurate. Clariton has decided that the investments will only be considered if they meet the following criteria: Payback 3.5 Years Average Rate of Return 35% Net Present Value £2m Investment 1 Investment 2 £m £m Initial cost 8.6 4.4 Cash inflows Year 1 1.6 0.8 Year 2 2.8 1.4 Year 3 3.4 2.0 Year 4 3.6 2.4 Year 5 4.0 2.3 Year 6 4.2 2.6 Required: Assess the viability of the projects using investment appraisal techniques and state whether the options satisfy Peter’s criteria for investment Task 4 4.1 Discuss the key components of financial statements ⦁ Income statement ⦁ Statement of cashflows ⦁ Statement of changes in equity and gains ⦁ Statement of financial position ⦁ Notes to the financial statement 4.2 Compare the format used by Clariton Antiques Ltd to presenting their financial statement with that of a sole trader or a partnership or both. 4.3 Interpret the recent financial statement (see task 2) of Clariton Antiques Ltd using appropriate ratios and making comparison with the previous year? 1.9 Evidence to achieve Pass, Merit and Distinction Pass LO1 To achieve a Pass you must address 1.1, 1.2 and 1.3 as instructed and exhibit an understanding of different the sources of finance available to businesses. LO2 To achieve a Pass you must be able to address 2.1, 2.2, 2.3 and 2.4 as instructed demonstrating understanding of the implications of finance as a resource within a business LO3 To achieve a Pass you must be able address 3.1, 3.2 and 3.3 as instructed with evidence towards being able to make financial decisions based on the financial information given in the assignment. LO4 To achieve a Pass you must able to address 4.1, 4.2, and 4.3 as instructed with evidence towards being able to evaluate the financial performance of a business with specific reference to the given organisation. Merit M. Identify and apply strategies to find appropriate solutions. Effective judgments have been made. An effective approach to study and research has been used. To achieve M1 you will make effective judgements and show that an effective approach to the study and research has been used across your assignment. M2. Select/ design and apply appropriate methods/ techniques. A range of methods and techniques have been applied. To achieve M2 you will use a range of methods and techniques and see that the complex data has been synthesized and processed. Complex information/data have been synthesized and processed. M3. Present and communicate appropriate findings. Appropriate structure has been used. Technical language accurately used. A range of methods of presentation has been used. To achieve M3 you will present and communicate appropriate findings with appropriate structure. Distinction D1. Use critical reflection to evaluate own work and justify valid conclusion. Synthesis has been used to generate and justify valid conclusions Evaluation has taken place using defined criteria Realistic improvements have been proposed against defined characteristics Evidence of synthesis with valid conclusions. Evaluation has taken place using the defined criteria. Realistic improvements have been proposed against defined characteristic D2. Take responsibility for managing and organizing activities. The importance of interdependence has been recognized. To achieve D2 you will have demonstrated autonomy across your assignment, with effective independent research and met the deadlines to submit all the tasks and achieve the unit assessment criteria and an interdependence with each learning outcome has been demonstrated D3. Demonstrate convergent, lateral and creative thinking Ideas generate and decisions taken. Lateral thinking have been applied. Capacity for innovation and creative thought has been used. Receptiveness to new ideas has demonstrated. Your work demonstrates new ideas or suggestions towards the assigned tasks and your research shows some creative thinking and receptiveness to new ideas across the assignment making it look different and creative. 2.0 Glossary of academic words used in this and other assignments Account for Give reasons for: explain why something happens. Analyse Examine something in very close detail and from a number of angles. Identify the important points and chief features, and understand their relationships. Argue Present a case for and against a proposal or statement and present your own opinion at the end. Compare Show how two or more things are similar. Contrast Look at two or more things and draw out differences. State whether the differences are significant. Critically evaluate Weigh arguments for and against something, assess the strength of evidence on both Faisales. Define Give the exact meaning of. Describe Give a detailed account of the main features or characteristics ... Discuss Write about the most important characteristics of something. Give arguments for and against, look at it from a variety of perspectives. Distinguish Identify the differences between two items. Evaluate Assess the worth or usefulness of something. Use evidence to support your opinion. Examine Look at something in detail. You may be expected to 'critically evaluate' it as well. Explain Make it clear why something happens or why it is the way it is. Identify Recognise name and briefly describe something. Illustrate Use examples to further explain or justify something. Could be visual or verbal. Interpret Explain the meaning or significance of information or data that you are presenting. Justify Provide evidence that supports an argument or idea. Outline Give only the main points, show only the main structure. Prove Present evidence in a logical structure to support an argument for a point of view. Relate (Two meanings) 1. Show how ideas / theories/ events etc are linked or connected. 2. Tell a story. Explain something in a narrative fashion. Review Survey and comment on the key aspects of something or a range of things. State Give the main features clearly and simply. Summarise Draw out the main points, omitting detail and examples. To what extent… How far is something true, or contributes to a final outcome. Also how far is it not true? In academic writing the answer is usually somewhere in the middle. Trace Describe the development of something; follow the order of different stages in an event or process. Adapted from Cottrell.S.(2003) The Study Skills Handbook. Basingstoke. Palgrave.