Working capital requirements for 2014 for Archie’s company

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Working capital requirements for 2014 for Archie’s company

  1. 1. NATIONAL ECONOMICS UNIVERSITY BTEC HND IN BUSINESS Assignment Cover Sheet NAME OF STUDENT REGISTRATION NO UNIT TITLE ASSIGNMENT TITLE ASSIGNMENT # NAME OF ASSESSOR Due date Nguyễn Hùng Chiến 10120115 Unit 2: Managing Financial Resources and Decisions Individual Assignment 1: Archie’s Company 1 of 3 Marcus Lang and Nguyen Huu Chi 10 am Oct 25, 2013 I, __________________________ hereby confirm that this assignment is my own work and not copied or plagiarized from any source. I have referenced the sources from which information is obtained from me for this assignment. ________________________________ Signature ______________________ Date -----------------------------------------------------------------------------------------------------------FOR OFFICIAL USE 1
  2. 2. ASSIGNMENT GRADE Unit Outcomes Outcome Evidence for the criteri a Feedback Assessor’s decision Identify the sources of finance available to a business Explore the sources of finance available to a business (Unit 2, 1) Analyse the implications of finance as a resource within a business (Unit 2, 2) a Assess the implications of the different sources b Select appropriate sources of finance for a business project c Assess and compare the costs of different sources of finance a Explain the importance of financial planning b Assess the information needs of different decision makers c 2 Internal Verification
  3. 3. Outcome Evidence for the criteri a Feedback Assessor’s decision Explain the impact of finance on the financial statements d Merit grades awarded M1 M2 M3 Distinction grades awarded D1 D2 D3 Professor’s additional feedback and comments Assignment ( ) Well-structured Reference is done properly / should be done (if any) Overall, you’ve Areas for improvement: ASSESSOR SIGNATURE DATE / / NAME:......................................................................................... (Oral feedback was also provided) STUDENT SIGNATURE DATE / / NAME :........................................................................................ 3 Internal Verification
  4. 4. FOR INTERNAL USE ONLY VERIFIED YES NO DATE : .............................................................................. VERIFIED BY : ........................................................................ NAME : .............................................................................. 4
  5. 5. Table of Contents NATIONAL ECONOMICS UNIVERSITY....................................................................................................1 BTEC HND IN BUSINESS ............................................................................................................................1 Evidence for the criteria...............................................................................................................................2 Table of Contents..............................................................................................................................................5 Assignment.......................................................................................................................................................6 I.Introduction....................................................................................................................................................6 II.Assumption project business:.......................................................................................................................7 III.Major Finding..............................................................................................................................................8 1.Task1: ........................................................................................................................................................8 2.Task 2:......................................................................................................................................................11 3.Task 3:......................................................................................................................................................12 4.Task 4:......................................................................................................................................................15 CONCLUTION..............................................................................................................................................17 REFERENCES...............................................................................................................................................18 5
  6. 6. Assignment I. Introduction Archie Andrew is a man who has been working in the electronic industry for 15 years. Now, he want to have owner company and find four investor will go into business with him. The main product of his company are electronic product. About the capital, Archie has $50000, each of the investors has $125000 and they will put into company’s assets, in company, through agreement of four investor, Archie will run the company Because The Archie’s company will require a total of $1500000 of financing to invest and star up company, Archie plans to borrowing more money from other sources or sell their shares, bonds. Firstly, he identifies the following assets he will need to conduct his operations: Vehicle: $50000 Equipment: $675000 Furthermore, he want to rent office space, factory space, computer machines, labour, raw material, etc. So Archie need the possible strategy and analysis clear working capital, balance sheet, etc. to choose suitable plan for company. 6
  7. 7. II. Assumption project business: Assumption Archie is a new company, and was set up in UK UK’s general situation and the industry -Country and capital: England: London Xcốt-len :Edinburgh Side Uên :Cardiff South Ai-len:Belfast -Languages: English and UEN -Region: Christian -Government and Monarchy: Constitutional monarchy The UK is a leader in power and trade finance. -Currency: Pound City of London is one of the leading financial market in the world. (UK is at the forefront in conducting privatization of State enterprises, focused on investing abroad. This country has built a capitalist economy with strong industry, excellent services.) 7
  8. 8. III. Major Finding 1. Task1: A. Calculate the working capital requirements for 2014 for Archie’s company and explain the importance of financial planning to Archie and his investors. The costs incurred in a year $ 625,000 500,000 $ Materials 25% of $2,500,000 Labour 20% of $2,500,000 Variable 10% of $2,500,000 250,000 overheads Fixed oberheads 20% of $2,500,000 500,000 Selling and 5% of $2,500,000 125,000 distribution 2. Raw materials are in stock for 3 months Raw materials 3/12 of $625,000 156,250 3.Work in progess inventory is 2 months worth of 1/2 produced goods Materials (50% 1/12 of $625,000 52,083 complete) Labour (50% 1/12 of $500,000 41,667 complete) Variable 1/12 of $250,000 20,833 overheads (50% complete) 114,583 4.Finished goods represent one month of production Materials 1/12 of $625,000 52,083 Labour 1/12 of $500,000 41,667 Variable 1/12 of $250,000 20,833 overheads 114,583 1. Dentoers take 2 months before payment Debtors 2/12 of $2,500,000 416,667 802,083 5.Credis is taken as Materials 1.5/12 of $625,000 78,125 Labour - 50 weeks Variable overheads Fixed overheads Selling and distribution 1/50 of $500,000 10,000 1/12 of $250,000 20,833 1/12 of $500,000 41,667 0.5/12 of $125,000 5,208 155,833 Working capital requirement 8 $(802,083 - 155,883) 646,250
  9. 9. - The importance of financial planning to Archie and his investors: B. Archie has heard of JIT and EOQ, but does not understand the difference between the two. Explain the difference to him and articulate the underlying assumptions of each approach. “Finance is money, or, in broader terms, it is a monetary arrangement made in exchange for the ability to do something. The basic sources of money are saved, borrowings, grants and earning.” (Course book, 2013, p25). So, Financial Planning is a continuous process to help you in making sensible decisions about your money that can help you achieve your goals in life. But the question is “Why financial planning is important”. There are three reasons. Good inventory management is key to a company’s achieving its goal of meeting customer demands and having high profitability. There are two ways of managing inventory, EOQ and JIT. - Strategy Just-In-Time (JIT) is a concept in modern manufacturing. The brief summary is: "Right product - with the right amount - in the right place - at the right time necessary." In other words, the JIT is a production system in which the flow of raw materials, goods and products circulating in the production and distribution planning in detail step by step, so that the next following can be done as soon as the process is terminated. Thereby, there are no items in the manufacturing process in order not to fall into the state, pending, no labour or equipment that has to wait for input operation. - Manage your income and capital or cash management. Many businesses or organizations have monthly changing in revenues, they have period cash is plentiful, have period cash is shortages. Building the financial planning help the top to control more easily, income expenditure budgeting will show the best way possible in managing income. Thus, management of income or financial planning is necessary in increasing cash flow. - Costs priority: The financial planning process helps a company can be identify the most important expenditures, that bring about immediate improvements in productivity, efficiency. Since, financial planning can help in appreciating the best investment opportunities for companies The JIT system allows the system to operate most effectively, avoiding unnecessary waste. - Assess the level of risk in the investment: Every business wants to reach the long-run investment. Thus, financial planning helps them to assess and avoid the risk in the investment 9
  10. 10. - EOQ, Economic Order Quantity: is one of the techniques for inventory control which minimizes total holding and ordering costs for this year. Economic order quantity is the technique that solves the problem of materials management. EOQ is essentially an accounting formula determined at which the combination of order costs and inventory costs to the least. The result is the most cost effective way to order quality Based on these principles, calculation methods will calculate the additional time to inventory and the numbers of adding product after each order. The model applied in the context of supply and stable supplies of relatively have good planning JIT EOQ Just-in-Time (JIT) is a management philosophy in Japan with the aim of providing for the right time, right product and amount of shares at the right time. Economic Order Quantity (EOQ) is a method That at producing period large quantities of materials, businesses maintained at the desired level with minimal cost JIT focus on meeting the needs of customers on time with the right quality and quantity with minimal resources, time, and waste material. EOQ maintains a fixed amount of material in their inventory and have a degree of reorganization, in which it must be added in order to avoid shortages and additional costs JIT is dependent on the work ethic and EOQ is dependent on financial and marketing commitment of the entire workforce of the strategy company. Assumption for the JIT model:  - It depends on the kind of product that a company produce. JIT works best in food (perishable) business, fashion but can also be applied in cars manufacturing like in Toyota. - Have good buyer-supplier relationships - Buyer should near the supplier in location - Get effective communication between buyer and supplier in both ways - Good demand predicting or stable demand. - Suppliers should be flexible (if having a changing in demand, suppliers should be able adaptation) 10
  11. 11.  Assumption for the EOQ model - The cost of the ordering remains constant. - Demand is constant. (Course book, 2013) - The produce time is not changing or zero (Course book, 2013) - Purchase cost per unit are constant (i.e. no bulk discounts) (Course book, 2013). - The optimize plan is figured out for only one product. -There is no delay in the replenishment of the stock, and the order is delivered in the quantity that was demanded. (i.e. in whole batch) 2. Task 2: they can increase both the volume of suppliers and Archie’s sales. However, in case if Archie pays late fee and interest, suppliers will have more benefit in contact like Archie must pay more interest than normally.  On the market today, in the short term, there are many factors affecting customer when deciding to extend trade credit. Specially, with Archie- a new company, customer wants to see more and more information like application forms, Cost of Trade Credit ,etc. Of Archie.  To be extended a short-term (1 year) or a long-term (more than 1 years) loan from the bank, the banks will be checked some information from your company. Applying Archie, assuming Archie wants a banker extend a short-term or long-term loan. In deciding whether or not to extend for Archie, how long to extend, how the interest rate, banks will consider your financial ability (you have grounds to show repay the bank in a timely manner, ...), Through the credit agreement signed, Archie’s financial report, business plan, affordability. Bankers can predict the Archie’s ability for repaying the fees and interests or not. If they see a suitable situation, Archie can be extended loan banking. It the way the bank see con your company when you want to extend more money from the short-term or longterm loan bank. To be more opening, before being extended, there are some principles of lending if a company want to borrow money from bank. The bank must look business - Trade credit is one part of the process to build business credit. It is an open account with a supplier who lets a customer buy now and pay later. A formal credit card must be complete with application: The legal name of businesses, legal owner, year in business, industry SIC code, ID of company, number employees, total revenues per year, bank references, and Signatures of the owners/officers of the company. Then, a credit institution licensed will check the quality of your company's reputation through purchase history, banking information, overall financial health, and other data. This check will be kept continuing monthly. Besides, If Archie wants to be accepted by the supplier, they must ensure the contract with pay on time the fees and interest. Different suppliers will have different terms and conditions for company Archie when they pay trade credits. If Archie uses suitable trade credits, 11
  12. 12. asking for loan from you company. Can they be trusted, is your company able to repay (i.e. “is it a profitable one and are there enough spare profits to be able to afford the interest and the periodic repayment of portions of the loan” – Course book, 2013). Furthermore, the bank want to know the purpose of the loan, repayment term of the loan are very significant. Special, the bank will need some form of security that it can turn to if your company can not repaid (just like a mortgage). investor buys Archie’s shares, they become shareholders. Shareholders own a share of the company in which they have invested or bought shares. This means the shareholder can have a say in the running of Archie’s activities. They may take part in a key making decision of the company. In other side, Archie is an electronic company, so in the stock market, Archie’s share can get high stably, so the shareholders can return on their investment quickly and get a high dividend per year. Adding reasonable financial resources, ability controls the capital, assets and income, Archie are perfect berth stop for investor when they are deciding to purchase a part of a stock issue from Archie.  Financial resources, ability to return on investment, dividends per year are elements to help Archie to attract an equity investor when they sell shares. When an 3. Task 3: A. Unit 2, 1.b, 1.c: Archie and his group of investors are interested in raising the additional needed capital by issuing more shares of common stock even if they don’t retain control of the company (The issuance of shares of the company and investors Archie has many advantages. it helps companies have a large capital to help companies attract and maintain good staff, have the opportunity to cooperate with high potential companies and more professional. however The Archie companies willing to sell 100% of shares can lead to unpredictable consequences. For example, dispersion of ownership, profit or loss can be entirely firm. All information of the company have been widely publicized and rigorous.) Benefit Private placement Cost Quick and expense effective. Difficult to find suitable investors. Shareholders are choice of investors. Be danger of insufficient in funds. Flexibility in kind and type of funding. Some case limited investors. Burdens Practically Power was divided to many part or power of shareholders are not big Lost money and time to find suitable investors Investors easily affected by small Practicality is not high, a company will Easier to negotiate on return. Money for scrutiny not too much. OTC Shares are sold widely and publicly Lack of comment and feedback from 12
  13. 13. Quick attract investors and capital to expand rapidly economic investment professionals The capital increase is not limited from the investor. Easy to lose company if appear the investor buy all Archie’s shares changes, and sold his shares need to take time to be permitted from the competent authority. But if you want quickly investment, this is a good way for get fast capital Day by day, Archie always proves their ability that they can be good in business and show their financial capital per month or year. If Archie want to follow a long term business, this a good way to get a safety funds. Not count overall In short time, Archie financial and in some can be expansion to case, there are high bigger with fast capital ricks. Public stock market Archie’s shares are post on NYSE, it increase the belief of customer through financial statements and information publicly available on the market, Archie increased safety for buyers High fees take part in and high taxation. Archie must follow many rules. The transaction will take more time Archie always be carefull with any decision investment and must get great satisfaction from the investors Increase speed investment and reduce the risk of high concept of investment However Archie must be a company that had a history business in the past, and assets more and more than 500000$ they have. So it is impossible for Archie to appear in Public stock market. B. Unit 2, 1.a, 1.c: With one company begin a business like Archie, they should improve their financial through issuing bond. The company will be proactive and easy to control debt and plan to create a payment plan. However bond still have constraints, raising by using bond are good and safety than borrowing from a lender. Benefit Bonds Bond is relatively safe because it kind of securities fixed income. Issuance costs and pay lower interest rates than conventional bonds as compared to the interest rates and this means Cost Due to shareholder participation in the management of the company should switch can cause a change in control of the company. When bonds are converted, the equity is 13 Constraints Typically, bonds can be sold at any time - this is one of the advantages compared to other types of bonds are fixed income securities otherwise. However, it is also an inherent risk of price fluctuation. That is when
  14. 14. reducing the risk to the issuer. "diluted" by the increased number of Increase in share capital in shares outstanding, each share when it represents a the future to move from lower percentage of bond debt into equity. ownership in the Stock price declines are not company. due to avoid an increase in the number of shares on the The results of conversion will reduce interest costs, market quickly. I,e, increase the taxable Before switching bonds income of the company. will not reduce the income Therefore, companies of the shareholders from have to pay more taxes issuing shares. when converting. Easier to raise capital due to the attraction of being able to switch from bonds to stocks. the sale of bonds by the end of its term, if the price falls at the loss, the investor will receive less than the initial investment (capital loss). Professional stressed that only invest in bonds when you have detailed advice, including investment objectives and risk tolerance of the client has been thoroughly reviewed. It is important, investors must own an idle funds (not to be used during the term of the bonds) sufficient to provide for the case of capital loss due to loss of bond prices. Overall the biggest constraints is “Risk of price fluctuations” C. Unit 2, 1.a, 1.b: From introduction, beginning capital of Archie is $5500000. Archie want to raise their financial to $1500000 by adding $950000. However Archie want to keep the control of the company. There are two way for Archie now, raising capital by shares and borrowing from other sources. If Archie choose the way using shares, and still keep the control, Archie must have at less 50% share of company or at less $750000. Then Archie should borrow ($950000-$750000= $200000). Tax By Shares Rick Financial costs implications Profits tax from the financial shares approved and all investors are supported by government by coincidence tax If a shareholders or investors buy more than 50% shares of company, Archie will be lost control. (OTC of public stock market). If Archie use private placement, they can control the amount of shares Dividend and money services for keeping the investor stay for investment 14
  15. 15. By Borrowing When Archie borrow money from bank or other sources, the company must pay the tax, and interest rate depend on bank loans. If the company is not good business, can’t repay debt, interest rate that the company will lose control or bankruptcy If Archie get profit, they must pay interest, so profit line will decline. 4. Task 4: A. Following profit and lost statement for Archie’s Company for 2014, we can see there are two evidence to show Archie did raise their financing. That are “Interest Payable: 40000$ and Dividends: 22,500$” Assumption Archie loan short term and long term. - That dividends of 3% have been declared at year’s end, so Archie’s share equity is 22,500/3%= 750000$ - Initial, Archie has been able to utilize 150000$ of trade credit, Archie’s financial requirement is 1500000$, then borrowing requirement is 1500000-750000-1500000 = 600000$ - 600000$ here are include short term and long term loan. So if short term is X, long term loan will be (600000-X) - Archie’s interest payable is 40000 with lines of credit and short term loan at 4%, long term borrowings are available from bank at 8%, we have 4% * X + 8% * (600000-X)=40000 X=200000$ Finally, Archie’s short term loan is 200000$ and long term loan is 400000$ B. Impact the financial statement: - Loans often require repayment monthly , which will impact your financial statements regularly. Loan payments structured in many different ways can impact your financial statements better in some months than in others. Some loans (gyre loans) offer regular cash to your cash flow while other loans disappear, it will make a changing with financial statements. - Shares offer an cash flow, in many case not require repayment. Common shares will impact your financial statements less than preferred shares. besides, when a company put shares into market, contemporary it make raise dividends, and make a changing in a financial statement Impact the value of the company: 15
  16. 16. - If a company are borrowing more and more, tax will be low, it make increasing mobility of capital and labor , attract skilled workers and many different sources. Then profit before tax decrease, neither tax repayment. It make increase the value of a company - Shares: When a company sell put more share into market, ability financial of a company will increase because shares make increase capital. However this also make increase tax of capital, profit after tax will decrease, so value of the company will decrease. C. With a corporation , Shareholder has the most important role for the company , the role of Shareholder more important . The Shareholder who directly contribute money to the company to help companies invest in the project . Apply to Archie companies , some shareholders are unhappy with the interest rate of dividends . If they feel that the company pay the interest rate for the bank at 4 % and 8 % for short term and long term loan . In fact they have only received 3 % dividend rate . They feel the money they can get to more than 3 % , they are a loss . However, if you look at the table of Archie fiscal 2014 , Revenue was $ 2.5 million , which suggests the company is profitable , with revenues of non-negative , and particularly Retained Profit for the year of the company is $ 387,880 , which this confirms the company is to invest in a particular project in the next year . They showed us a lot of money to keep the scale of large projects . So until next year , make sure the company will continue to profit , and 3 % dividend that much more valuable when compared with 4 % and 8 % bank interest rates . So , a word of advice to shareholders and investors , continue to invest in companies Archie 16
  17. 17. CONCLUTION With a joint stock company and the new company as Archie, the efficiency is essential. As a company in the field of electricity, Archie needs to attract more and more investors efficiently, so companies need to have specific business strategies, creation of trust with customers and neck their shareholders to continue to stay invested. Through the sale of stocks, bonds, bank lending, Archie also need to calculate to please shareholders, increasing the interest dividends and retained profits for the company to continue investing in next year. To do that, Archie should assess the situation through financial reports, updated full information to shareholders, and the promises made in conjunction with the development rising dividend rate for shareholders 17
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