Assignment

ON

MANAGING FINANCIAL PRINCIPLES &

TECHNIQUES

Submitted to:

Submitted By:

(.....................................)

MANAGING FINANCIAL PRINCIPLES &

TECHNIQUES

Table of Contents
ABSTRACT........................................................................................................................................... 4
PURPOSE OF THE ASSIGNMENT...................................................................................................... 4
BACKGROUND..................................................................................................................................... 4
INTRODUCTION................................................................................................................................... 5
TASK-(1) THE COST CONCEPTS IN DECISION MAKING PROCESS...............................................5
1.1 THE SIGNIFICANCE OF COSTS IN PRICING STRATEGY...........................................................5
1.2 THE COSTING SYSTEM THAT PROVIDES A PROFIT MARGIN OF 10% AT A SELLING PRICE
............................................................................................................................................................... 6
1.3 THE ABSORPTION COSTING SYSTEM FOR SETTING SELLING PRICE...................................7
THE ABSORPTION COSTING (1.2) SYSTEM STEPS INVOLVED WITH VARIOUS STEPS SUCH
AS ...................................................................................................................................................... 7
1.3 (A) HOW THE ABSORPTION COSTING AFFECT MANAGEMENT DECISION MAKING ON
REDUCTION PRICE.............................................................................................................................. 7
1.3 (B) PROPOSAL FOR IMPROVEMENTS IN ABSORPTION COSTING..........................................9
TASK-(2) THE FORECASTING TECHNIQUES TO OBTAIN INFORMATION FOR DECISION
MAKING................................................................................................................................................ 9
CONTRIBUTION FOCUSED TO THE PROFIT GENERATED ON INDIVIDUAL PRODUCTS.
THEREFORE IT IS USED TO DETERMINE HOW MUCH QUANTITY NEEDS TO BE SOLD TO
COVER BOTH VARIABLE AND FIXED COSTS................................................................................10
CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT VARIABLE PRICE PER UNIT...........10
CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT VARIABLE PRICE PER UNIT...........11
THEREFORE CONTRIBUTION

= 21280 12089 = 9,191.............................................................12

TASK-(3) BUDGETARY TARGETS.................................................................................................... 12

3.1 BUDGETARY TARGEY FOR SALES REVANUE OF POUND 1500 AND 3200..........................12
3.2 MASTER BUDGET FOR APRIL TO JULY @ OF 2% INCREASE E IN SALES OF EACH
MONTH................................................................................................................................................ 13
............................................................................................................................................................. 13
3.3 COMPARISON BETWEEN PREDICTED BUDGET AND APRIL11 ACTUALS...........................14
3.4 EVALUATION OF BUDGETARY MONITORING PROCESS FOR PEODUCTION AND SALES
BUDGETS .......................................................................................................................................... 15
TASK-(4) RECOMMENDATIONS IN COST REDUCTION AND MANAGEMENT PROCESS...........16
4.1THE PRESENT ECONOMIC DECLINE AND CUSTOMER SPENDING POWER.........................16
4.2 COST REDUCTION PROCESS AND APPROPRIATE COSTING METHODS.............................17
4.3 EVALUATION OF THE POTENTIAL USE OF ACTIVITY BASED COSTING..............................17

TASK-(5) FINANCIAL APPRAISAL TECHNIQUES FOR STRATEGIC INVESTMENT DECISIONS 18

5.1 INVESTMENT DECISIONS IN VARIOUS PROJECTS.................................................................19
THE DISCOUNTED CASH FLOW AT THE COST OF CAPITAL AND THE EFFECT ON PRESENT
VALUE SHOWS THE RELATION LIKE ........................................................................................... 21
5.2 & 2.2 VARIOUS SOURCES OF CAPITAL....................................................................................22
5.3 RECOMMENDATIONS OF THE VARIOUS PROJECT INVESTMENTS......................................23
5.4POST AUDIT APPRAISAL TECHNIQUES....................................................................................23
TASK-(6) INTERPRETATION OF FINANCIAL STATEMENTS FOR PLANNING DECISION MAKING
............................................................................................................................................................. 23
6.1 FINANCIAL VIABILITY OF MARKS&SPENCER ........................................................................24
6.2 RATIO ANALYSIS OF MARKS & SPENCE FINANCIAL REPORTS ..........................................24
6.2.1 RATIO ANALYSIS OF MARKS & SPENCE ............................................................................25
6.3 RECONMENDATIONS ON THE STRATEGIC PORTFOLIO OF MARKS & SPENCER..............26
CONCLUSION..................................................................................................................................... 26
BIBLIOGRAPHY................................................................................................................................. 27

ABSTRACT
This assignment demonstrates the cost concept in pricing strategy,
forecasting techniques to obtain the information for decision making and
budgetary process of an organization. In addition it deals with recommending
the cost reduction techniques and management process in organizations.
Furthermore it deals the financial appraisal techniques to make strategic
investment decisions and interpret financial statements for planning and
decisions making process, besides that analyzing the sources of capital for
the organizations.

PURPOSE OF THE ASSIGNMENT

The objective of this assignment is to analyze the cost concepts and decision
making in pricing strategy, design suitable pricing system and suggest the
costing system for pricing and proposal for improvements, application of
forecasting techniques in production, preparation of production and sales
budgets, assessing the ratios and make recommendations on the strategic
portfolio.

BACKGROUND
MARKS & SPENCER Ltd, the giant supermarket chain decided to manufacture
and sell low cost lunch boxes focused to sell international students in London.
On these circumstances they have consulted with PJ Consulting and by the

request of the line manager conducted this activities and prepared this report
and submitted.

INTRODUCTION
The role of both managing finance and applying cost concepts in
manufacturing process are significant to the organizations for the successful
launching and branding of the product among competitors and financial
control and success of the organization. In addition the application and use of
financial appraisals let organization to take wise decisions on long term
investments. The cost reduction and cost control leads the organization
survives financially sound.

TASK-(1) THE COST CONCEPTS IN DECISION MAKING PROCESS

Refers to (Business Dictionary, 2013), In business, cost is usually a monetary valuation
of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred,
and (6) opportunity forgone in production and delivery of a good or service. All expenses
are costs, but not all costs (such as those incurred in acquisition of an income-generating
asset) are expenses.
Therefore the cost has a monetary value and effect that involved with the
production or providing services and each element involved has a cost effect
such as, effort, material, resources, time and utilities consumed, risks
incurred and opportunities in production and delivery of goods or services. In
addition, the cost can classify various ways based on the nature and
requirement of the decision making likewise, by element, by function, by
behaviour, by controllability and by normality. There are expense centre, profit
centre and investment centre in an organization.

1.1 THE SIGNIFICANCE OF COSTS IN PRICING STRATEGY

The general principles for profit maximising cost are, opportunity cost,
comparison of costs and benefits also instrumentalism. The cost classification
can be done in different ways, therefore a classical classification shown
below.
The costs can be classified in to two categories such as
1. Manufacturing cost - direct material, direct labour, management and
overhead expenses and prime versus conversion costs
2. Non manufacturing costs selling and distribution and administrative
expenses
There are various other costs like, variable costs, fixed costs, standard costs

The decision making cost classifications are

Differential costing it differs between alternatives and it also called
incremental costs
Opportunity costs - it is the potential benefit given up by the choosing
one alternative over another
Sunk costs it is the cost already happened and not can change any
decision now or in future.

1.2 THE COSTING SYSTEM THAT PROVIDES A PROFIT MARGIN

OF 10% AT A SELLING PRICE
The costing system is an accounting system that established to monitoring an
organizations costs and to provide managerial information in operations and
performance. The pricing decision must cover the costs and ensure all the
costs recovered and included the required profit, moreover it must be
competitive. The following costing systems can perform according to the
nature and necessity of the organization.
Standard costing it is based on setting particular standards for each
production activity and process and these standards agreed among
those interested within the organization and it represent normal and
reasonably efficient manufacturing performance.
Absorption costing it is a full costing or complete absorption method
that ensures all manufacturing costs are recovered in production
process, such as it covers the direct and indirect labor cost also the
variable and fixed overheads.
Managerial costing In this method the costs have different behaviors
when the production or sales volume changes. Therefore in marginal
costing, the behavior of the connected cost is measured rather than the
origin and measures the relative effects not than total costing. It
compares and decides the change in cost that happened when the
output volume change by per unit and it quantified by total variable cost
for a single unit, for example. FIG-1

 Machine Hourly Rate This method adopted in production made in

machines

1.3 THE ABSORPTION COSTING SYSTEM FOR SETTING SELLING

Price
The absorption costing (1.2) system steps involved with various steps such
as
Identifying and list accurate assessment of all costs in the business
Classify it into categories of cost
All direct cost allocate into manufacturing output
Allocate indirect cost into individual service departments
Re-allocation of costs from production services to production
departments
Establish a correct overhead rate
Absorb direct and indirect costs into product

1.3 (A) How the absorption costing affect management decision making on
reduction price
The declines in the financial environment and price reductions in the outlets
demands various pricing strategies in Marks & Spencer, therefore the various
absorption costing methods can practice by managers in the organization,
such as

Absorption rate The absorption rate or recovery rate is the method to

apportion overheads to a product or services and it based on the direct
material and labor or machine production hours or units of outputs or

also percentage of the product sales price. When producing large range
of different products with overall production cost, there is close relation
with products and the overhead cost, therefore the absorption cost will
be: direct material /total overhead
Percentage of the selling price This method used when products are
sold out through different outlets, such as a sales force, retailer chain
stores online sales or through agents. Therefore in this case there is
different discount from the list price and this method useful to establish
the maximum production cost of a product by using list price of a
competitors product and work reverse. For example FIG-2.

Rate per Unit It allocates the separate proportion of the total

overhead costs to every finished product therefore all overhead costs
will absorbed by the total of whole produced products. Fig-3

Percentage of the manufacturing cost- It used when, where the

products have a similar nature or similar price. It is straight forward to
add a certain percentage for administrative and selling overheads.
FIG- 4

1.3 (B) Proposal for improvements in absorption costing

The absorption costing system argues that it covers all the costs or complete
absorption, such as prime cost and overhead expenses. When establish an
allocation of overhead costs rate, consider how the product reached the
customer, there may be distributors and mediators and their cost may differ
and the discount rates and if it through the online sales the advertisement cost
may vary rather than the traditional method of advertising. If it is sell through
own hyper markets, the overhead costs may vary. On those circumstances the
overhead expenses calculation can make like how much effort and space used
for the product to reach the customers. If in case like Marks & Spencer, the
lunch boxes displayed in a area and the labor and space factor to be
considered when fixing the selling price. Therefore it will let to compete the
market and when financial declines and periodic discount offers. If clearly
focus to the improvement of absorption costing, if consider the overhead
allocation in such a manner or concept gives strength to this system of
costing method in a deep more wide coverage. This provides the organization
to compete with competitors and play in the market without any financial risk,
but it provides the strength to compete and long term financial success.

TASK-(2) the forecasting techniques to obtain information for decision

making
Decision making is the significant part of management and managing finance
financial forecasting and timely well considered decision lead organizations to
financial success. The financial decision making models like cost benefit
analysis decides quantitatively whether to go and break even analysis
determines whether a product becomes profitable or not, besides that the NPV
and IRR decides whether to invest and cash flow techniques tests the viability
of the project .

Lunch Box Production Cost and Anticipated Revenue Decisions

Date
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11

Apri.11

Amount() (+/ -)variation(%) %variation

Particulars
Material
0.90
3.00
0.0270
Labour
0.65
0.50
0.0033
Overheads
0.15
2.00
0.0030
Admin. Over Heads
0.22
1.5
0.0033
Total per unit cost
1.92
Selling price per unit
2.99
Margin per unit
1.07
(% of per unit margin)
55.73
Sales units in April
7000
Total sales in pounds
20930

11-May
(+)
(-)
(+)
(+)

Variated price
0.9270
0.64675
0.153
0.2233
1.9501
3.04
1.0868
55.73
7000
21258

The percentage of margin in both cases 55.33

April selling price/unit
April per unit cost
Therefore per unit margin
Therefore percentage of margin

= 2.99
= 1.92
= 1.07
= 55.73%

If consider the +/- variation in May11

Total cost per unit
Add 55.73% of per unit margin
Therefore the May 11 per unit Selling price

=1.9501
= 1.09
= 3.04

Contribution focused to the profit generated on individual products. Therefore it is

used to determine how much quantity needs to be sold to cover both variable and
fixed costs.

Contribution per unit = selling price per unit variable price per unit
Therefore the selling price per unit = 2.99
Total direct variable expenses per unit = material + labor + overhead
= 0.90+0.65+0.15 = 1.70
That is, total variable cost per unit
= 1.70
Total fixed expenses cost per unit
= 0.22
So, contribution per unit
= 2.99 1.70 = 1.29
OR
Contribution per unit x number of units sold
= 1.29 x 7000 = 9030

OR
Contribution = Total sales total variable cost
Total sales = total units x selling price
Variable cost
= variable cost x total number of item sold
= 1.70 x 7000 = 11,900
Selling price per unit
= 2.99
Total units sold
= 7000
Therefore total sales
= 2.99 x 7000 = 20,930
Contribution
= 20930 11,900 = 9030

Contribution as per May-11 Variations

Date
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11

Apri.11

Particulars
Material
Labor
Overheads
Admin. Over
Heads
Total per unit cost
Selling price per
unit
Margin per unit
(% of per unit
margin)
Sales units in
April
Total sales in
pounds

Amount(
)
0.90
0.65
0.15
0.22
1.92

(+/-)
variation
(%)
3.00
0.50
2.00
1.5

%variatio
n
0.0270
0.0033
0.0030
0.0033

11-May
(+)
(-)
(+)
(+)

Vitiated
price
0.9270
0.64675
0.153
0.2233
1.9501

2.99
1.07

3.04
1.0868

55.73

55.73

7000

7000

20930

21258

Therefore the selling price per unit = 3.04

Total direct variable expenses per unit = material + labor + overhead
= 0.9270+0.64675+0.153 = 1.727
That is, total variable cost per unit
= 1.727
Total fixed expenses cost per unit
= 0.2233

Contribution per unit = selling price per unit variable price per unit
So, contribution per unit

= 3.04 1.727 = 1.313

OR
Contribution per unit x number of units sold
= 1.313 x 7000 = 9,121
OR
Contribution = Total sales total variable cost

Total sales = total units x selling price

Selling price per unit
= 3.04
Total units sold
= 7000
Total sales
= 3.04 x 7000 = 21280
Variable cost
= variable cost x total number of item sold
= 1.727 x 7000 = 12,089

Therefore contribution

= 21280 12089 = 9,191

Comparative study Table

Contribution as per April-11 and after variation in
May-11

Particulars
Total units sold
Selling Price per unit
Direct Variable Expenses
Fixed Expenses Cost Per Unit
Contribution Per Unit
Total Value of the Contribution
Total Value of the Variable Cost
Total Sales Value
Percentage of Margin

April-11
7000
2.99
1.7
0.22
1.29
9030
11900
20930
55.73

May-11
7000
3.04
1.727
0.2233
1.313
9121
12089
21280
55.73

TASK-(3) BUDGETARY TARGETS

Refers to (ecommerce-now.com, 2001)(cited from CIM), The establishment of

budgets relating the responsibilities of executives to the requirements of a
policy, and the continuous expansion of actual with budgeted results, either to
secure by individual the objectives of that policy or to provide a basis for its
revision'.
Budgetary targets are established by the organizations as a boundary for to
spend how much to a specified area in a department or competency
environment and it should be a guide line for the operations to be function to
stay within the maximum target of effort spent, moreover it organizes the issue
in a system integrated within the management control methods. The budget
aims to plan, monitor, and control, besides that it ensures the departmental
efficiency and monitor managerial efficiency.
3.1 BUDGETARY TARGEY FOR SALES REVANUE OF POUND 1500 AND 3200
To meet the budgetary target of gross sales revenue of pound 1500

The per unit selling price of in May 11

Therefore to meet pound 1500
That is

= 3.04
= 1500/3.04 = 493.43
= 493 units

If required to generate a gross revenue of pound 3200

Per unit selling price May 11 = 3.04
Total target sales revenue
= 3200
Therefore 3200/3.04
= 1053 units

3.2 MASTER BUDGET FOR APRIL TO JULY @ OF 2% INCREASE E IN SALES

OF EACH MONTH

Selling price/unit in
May11
Monthly Increase
April- 11 Actual sales
Total Monthly Revenue

3.0
4
2%

2 % Increased sales up to
July(each month
April
MAY
JUNE
7000
7140
7283
21706
22140

Date
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11

Particulars
Amount() (+/ -)variation(%) %variation11-May
Material
0.90
3.00
0.0270
(+)
Labour
0.65
0.50
0.0033
(-)
Overheads
0.15
2.00
0.0030
(+)
Admin. Over Heads 0.22
1.5
0.0033
(+)
Total per unit cost
1.92
Selling price per unit 2.99
Margin per unit
1.07
(% of per unit margin)55.73
Apri.11 Sales units in April 7000

JULY
7428
22583

Variated price
0.9270
0.64675
0.153
0.2233
1.9501
3.04
1.0868
55.73
7000

Production Schedule@2% increase and sales

forecast
Production
Schedule@2%
increase

April

MAY

JUNE

JULY

August

Sept.

Budgeted sales
quantity
Add desired ending
inventory
Total required
quantity
less beginning
inventory
Required
production
Budgeted sales
quantity
Selling Price Per
Unit
Total Sales in
Pounds

7000

7140

7280

7428

7577

7140

7280

7428

7577

7729

14140

14420

14708

15005

15306

7000

7140

7280

7428

7577

7140

7280

7428

7577

7729

7000

7140

7280

7428

7577

2.99

3.04
21705.
6

3.04
22131.
2

3.04

3.04
23034.0
8

20930

22581.12

7729

3.3 COMPARISON BETWEEN PREDICTED BUDGET AND APRIL11 ACTUALS

The April-11 sales indicates that, sold out 7000 units at a selling price of pound
2.99 per unit with a profit margin of 55.73%. The variable cost was 1.7 and fixed
cost was 0.22 with a contribution per unit of 1.29. May-11 also an anticipated
sales units of 7000 with a change in fixed and variable costs. So out of that the
element labor has reduced and other elements has an increase, therefore the
selling price increased and fixed at 3.04 with the profit margin of 55.73,
therefore in that case the contribution per unit increased up to 1.1313. The
detailed comparison shown on below table
Comparative study Table
Contribution as per April-11 and after variation in
May-11

Particulars
Total units sold
Selling Price per unit
Direct Variable Expenses
Fixed Expenses Cost Per Unit
Contribution Per Unit
Total Value of the Contribution
Total Value of the Variable Cost
Total Sales Value
Percentage of Margin

April-11
7000
2.99
1.7
0.22
1.29
9030
11900
20930
55.73

May-11
7000
3.04
1.727
0.2233
1.313
9121
12089
21280
55.73

3.4 EVALUATION OF BUDGETARY MONITORING PROCESS FOR

PEODUCTION AND SALES BUDGETS
Refers to (civicus, 2013), A budget is a document that translates plans into
money - money that will need to be spent to get your planned activities done
(expenditure) and money that will need to be generated to cover the costs of
getting the work done (income). It is an estimate, or informed guess, about
what you will need in monetary terms to do your work.
The budget is vital tool for any organization, besides that it is essential to
monitor the finance of the organization. Therefore monitor the income and
expenditure to control or to be in target and essential to report it to authorities
and also prepare projections and financial decisions.

Production budget
Production budget follows after the sales budget and it predict the required
quantity to be produced during the budgetary period to cover the sales
quantity to be produced during the budgetary period to cover the sales
quantity and predicted closing stock quantity. The production quantity
calculated as
Budgeted sales in units............................
Add desired ending Inventory................

2000
600
-------Total required quantity........................... 2600
Less Beginning balance inventory...........
400
-------Required production quantity................
2200

An example shown in Fig-4

Sales Budget
Refers to (Accounting for Management, 2013), A sales budget is a detailed
schedule showing the expected sales for the budget period; typically, it is
expressed in both dollars and units of production. An accurate sales budget is

the key to the entire budgeting in some way. If the sales budget is sloppily
done then the rest of the budgeting process is largely a waste of time.
The sales budget is the beginning point of to prepare a master budget and the
other elements in master budget such as, production, purchase, inventories
and expenses that depend of affect it in different ways. A typical example
shows in Fig-5

TASK-(4) RECOMMENDATIONS IN COST REDUCTION AND MANAGEMENT

PROCESS
Sold out each units in a desired margin of profit - The confirmation of
desired margin of profit ensures the financial earning, but control the fixed
expenses to not run over the targeted production cost. To stay in the
competitive market, the selling price should be competitive, therefore to
sustain, new fair methods to be practiced in production and fixed expenses
such as
Material can purchase and manage in alternative sources or material
management can reduce the cost some extent.
Labor cost to be rethinking with fair norms and can utilize alternative
source like emerging countries manpower if it not affect the cost of
production negatively.
Delegation of responsibility easy with matured HR, so the variable
administrative overhead and fixed overhead allocation can reduce,
therefore it reduces the waste of resources and can save cost of
production.
4.1THE PRESENT ECONOMIC DECLINE AND CUSTOMER SPENDING POWER

When economic declines are happening in the economy, obviously it affects

the purchasing power or spending power of the public and customers.
Therefore, on such a situation the products can provide with a discounted
price. The discount may affect the desired margin of profit, therefore to sell
each profit in a desired profit of margin, new methods or solutions and also
tactics to be practiced.

4.2 COST REDUCTION PROCESS AND APPROPRIATE COSTING

METHODS
The purchasing power may change, when the price of material increase or
decrease as in inflation increase or decrease, as in inflation increase or
decrease. In real better high income, that is higher purchasing power and the
real income refers to the income adjusted for inflation. The indexing of real
values of salaries, wages, and pensions will help to calculate and understand
the real value and practice the discounted prices. The purchasing power and
consumer price index reflects in consumer confidence and these data and
information helps to decide the price cuts to deals the situation.
(Boundless, 2013)
4.3 EVALUATION OF THE POTENTIAL USE OF ACTIVITY BASED COSTING
Refers to (Investopedia, 2013) An accounting method that identifies the
activities that a firm performs, and then assigns indirect costs to products. An
activity based costing (ABC) system recognizes the relationship between
costs, activities and products, and through this relationship assigns indirect
costs to products less arbitrarily than traditional methods.
All costs are not possible to assign in this method, such as management and
salaries and other office overheads to a specified product manufactured,
therefore it has no popularity. It is useful when a business has lots of
overheads and it is not make any sense for custom production environments
and cost drives drive costs. The following example shows the Activity based
costing and without it.

TASK-(5) FINANCIAL APPRAISAL TECHNIQUES FOR STRATEGIC

INVESTMENT DECISIONS
Refers to Business Dictionary, An evaluation of the attractiveness of an
investment proposal, using methods such as average rate of return, internal
rate of return (IRR), net present value (NPV), or payback period. Investment
appraisal is an integral part of capital budgeting, and is applicable to areas
even where the returns may not be easily quantifiable such as personnel,
marketing, and training. (Business Dictionary, 2013)
Capital Budgeting is the process by which the firm decides which long-term
investments to make. Capital Budgeting projects, i.e., potential long-term
investments, are expected to generate cash flows over several years. The
decision to accept or reject a Capital budgeting project depends on an
analysis of the cash flows generated by the project and its cost.(Mark A.
Lane, 2002 - 2013 )
The capital budgeting followed some basic rules for financial appraisals, those
are-

PAYBACK PERIOD
It is the period of time to recover from the investment project to recouped the
initial investment and used to capital investment decision making rule and it
mentions that all the capital investment has a specified period of payback and
it should be a specified period of years or accepted years of period.

NET PRESENT VALUE (N.P.V)

It shows the expected impact of the invested project on the value of the firm
on the capital budgeting project. A positive value should be accepted in N.P.V
and it shows the increase of value of firm and mutually exclusive projects, the
highest positive N.P.V will be accepted. It means that it calculated present
value of the inflows and deducted the present value of the investment projects
cash outflows.

INTERNAL RATE OF RETURN - IRR

Refers business finance, The Internal Rate of Return (IRR) of a Capital
budgeting project is the discount Rate at which the Net Present Value (NPV) of
a project equals zero. The IRR Decision rule specifies that all independent
projects with an IRR greater than the Cost of capital should be accepted.
When choosing among mutually exclusive Projects, the project with the
highest IRR should be selected (as long as the IRR is greater than the cost of
capital). (Business Finance Online, 2002-2013)
When considering the investment project , the decision will consider the various factors
such as , availability of capital, sources of the capital and cost of it, life time of the
project, cash flows and payback period, capital allowances, grants and taxations, the

residual value of the asset and sensitivity analysis like sales volume, sales price,
operating costs and capital expenditures.

The equations used for Capital Budgeting

(Net Present Value)

(Internal Rate of Return)

(Pay Back Period)

5.1 INVESTMENT DECISIONS IN VARIOUS PROJECTS

The investment decision on a new project will be considered that, whether it
generates cash flows for compensate the cost of capital or not, if it not covers,
the value of company not changing positively. If it generate more than the cost
of capital, on that case increase the value of company and if not generate more
than that of cost of capital, it means that it reduces the value of company.

Cash
Flow
Stateme
nt
Year
0
1
2
3
4
5
TOTAL C.F

PROJECT 1

Cumulative
C.F

PROJECT -2

Cumulative
C.F

(90,000)

(90,000)

(90,000)

(90,000)

20000

(70,000)

10000

(80,000)

30000

(40,000)

20000

(60,000)

40000

40000

(20,000)

20000

20,000

60000

40,000

20000
110,000.00

40,000

50000
120,000.00

90,000

NPV and IRR for project 1

NPV and IRR for project - 2

Payback Period, NPV, IRR Summary Table

Projects
PROJEC
T1
PROJEC

Investment
90,000.00

Payback
Period

NPV

IRR

3
3.33

4303.57
29846.59

13.932
21.697

T2

90,000.00

NPV
(+)
(-)
Projects
PROJEC
T1
PROJEC
T2

DECISION
Accept
Reject

Investment

NPV

90,000.00

4303.57

4.78

90,000.00

29846.59

33.16

Therefore the project 2 is recommended.

Cash flow symbo Cost of
l
capital
Cash flow
=
Cost of
capital
Cash flow
>
Cost of
capital
Cash flow
<
Cost of
capital

Company value
No change
increase
decrease

The discounted cash flow at the cost of capital and the effect on present value shows the
relation like
1. Positive value = project returns more than the cost of capital
2. Negative value = project returns less than cost of capital
3. Zero value
= project returns cost of capital
Earning Based Measures

Risk Based Measures

ARR

Pay Back Period

NPV

Gearing

IRR

BEP

Sensitivity of
estimated(a)Taxation(b)Inflation(c)Capital
Rationing

NPV
(+)
(-)

DECISION
Accept
Reject

5.2 & 2.2 VARIOUS SOURCES OF CAPITAL

There are various sources of capital and it classified into internal and external
sources as mentioned in the Table.1
TABLE 1

Internal
sources
1 Own money

External sources
Ownership capital

Non ownership capital

2 Sale of
personal
property

1 Ordinary shares
2 Preference shares

1
2
3

Debentures
Bonds
Bank Loans

Overdraft

Hire purchase

4 Sale of
assets and
lease back
5 Cheque
discounting

Leasing

7
8

Trade Credit
Venture Capital

6 Working
capital
Arrangemen
t

Factoring

1
0

Franchising

3 Retained
profit

There is internal capital and external capital sources and the external sources
consist of ownership capital and non ownership capital. The entrepreneur can
contribute own money such as from his personal fund as capital, it may arise
from sale of personal property or other belonging like land, house, precious
metals or vehicles. The retained profit can also used if an emergency arises,
cheque discounting is also practice to manage the urgency, besides that the
wise management of working capital provides a source to generate fund.
The ownership capital like ordinary shares and preference shares can issue
and the can use it without any interest or financial charges. The non
ownership capital like debentures can issue for long term and also mortgage

debentures can also be considered. The bonds can issue to public with a
steady rate of interest for a long term. The bank loans with a flat rate also
suits, besides that overdraft from external sources through bank with daily
basis interest rate can consider too. The hire purchase like giving an initial
deposit to the seller and buy a high cost asset, raw-material or plant and avoid
other costly than this fund can be also practiced.
Financial leasing and operating leasing or grants from local governments,
trade promotion agencies or government agencies or trade credit or more
credit period to settle the invoices also considered. The venture capital like
money invested by private parties with designed rate of interest and run up to
agreement period or factoring of invoices or signed work agreement contracts
with effect of the interest rate of concerned bank. Franchising is another
source of raising capital and it bring to practice like allow an external party to
run the same type of business under the same flagship and can collect the
franchise money. In addition in new generation environment, there are various
other situations exist to raise the fund like credit.
5.3 RECOMMENDATIONS OF THE VARIOUS PROJECT INVESTMENTS
The various organizations have different aspects that affected in legal terms,
authority and bankruptcy. The rules and regulations connected with the
concerned government and all organizations have its own responsibility and
obligations to legislature, stake holders and government, besides that it has
its own advantages and disadvantages also limitations when implementing the
external and internal capital or fund.
5.4POST AUDIT APPRAISAL TECHNIQUES
Post audit is the comparison between actual incomes yielded in a capital
project with predicted income in appraisal techniques. Therefore the
investment decision making is significant in organizations. The expenditures
in the investment project and the operating capability of organization also the
ability to face the changing environment decide the long term operations of
organization. The level of productivity at a maximum required to run the long
term investment projects. The post audit and appraisal required to understand
the performance and level of quality and performance in the production of the
organizations.
TASK-(6) INTERPRETATION OF FINANCIAL STATEMENTS FOR PLANNING
DECISION MAKING
The financial statements of an organization provide the historic financial data
and information. The financial statements consists of detailed and accurate
record of assets and liabilities, income statement and cash flow statements.
These are quantitatively written records and explain the financial status of an
organization. Therefore, the historical performance of the organization's
information available to the stakeholders It is constructed in a standardized
format and financial based historic records. The use of financial statements
used to recognize why there is no excess fund available, is the financial entity

sound or not, is there any possibility to generate funds and is there any funds
available to meet the predicted demand.

Methods of Financial Analysis

The financial analysis based on the performance is the comparison of financial
ratios of solvency, profitability and growth.
Past performance compared with past records of same firm
Future performance compared with mathematical and statistical
techniques
Comparative performance compared with organizations in the same
industry

6.1 FINANCIAL VIABILITY OF MARKS&SPENCER

The financial viability of an organization consists of an assessment of the
viability, stability and profitability of an organization or a subsidiary or an
individual project. The information that used to make assessment is available
from the financial statements. The viability study decides whether to continue
the operations in whole or part, make or purchase decision of material, acquire
rent or lease of machineries, increase the working capital or not and invest or
lend capital.
The following elements are also examined by the financial analysis process
such as Profitability based on income statement
Solvency based on balance sheet
Liquidity based on balance sheet
Stability based on income statement and balance sheet
6.2 RATIO ANALYSIS OF MARKS & SPENCE FINANCIAL REPORTS
Interpreting the financial statements consists of conducting the rearrangement
of data to a format to get the information to appraise the performance,
activities, financial soundness and stability and growth of the organization.
The analysis measures the overall performance and gives attention if required
in any a particular area, besides that, it evaluate the flow of funds to
understand the ability to generate fund and requirement of fund. The ratio
analysis in terms profitability, risk, growth and return derived and advantages
gained on application of funds such as return on investment.
There are various financial ratios and examples of such ratios are as follows

Operating cycle
Liquidity
Profitability
Activity
Financial leverage
Shareholders ratio

Return ratio

6.2.1 RATIO ANALYSIS OF MARKS & SPENCE

Liquidity Ratio
Current ratio = current assets / current liabilities
= 1520.20/1890.50 = 0.804126
Quick ratios = current assets - inventory/current liabilities
= 1520.20 - 613.20/1890.50 =0.479767
Net working capital to sales ratio = current assets current
liabilities/sales
=1520.20 1890.50/9536.60 =
-0.03883
Profitability ratio
Gross profit margin = gross income/ sales
= 523.0/9536.60 = 0.054841
Operating profit margin = operating income/ sales
= 852.07/9536.60 = 0.089347
Net profit margin = net income/ sales
= 288.70/9536.60 = 0.030273

Efficiency Ratios
Efficiency ratios are used to analyze the organizations assets and liabilities
usage in internally and it analyses how efficiently it manage the receivables,
repayment of liabilities, the quantity and usage of the equity, besides that the
usage of s\inventory and machinery. The common ratios of efficiency ratios
are Accounts receivable turn over
Fixed assets turnover
Sales to inventory
Sales to net working capital

 Accounts payable to sales

inventory turn over

1. Accounts Receivable Turnover Ratio = Net Sales / Average Gross Receivable

= 9536.60/281.40 = 33.88984
(It indicate the liquidity of receivables)
2. Fixed assets turnover ratio = net sales / net fixed assets
= 9536.60 / 5633.0 = 1.692988

(It measures the capacity utilization and the quality of fixed assets)
3. Accounts payable turnover ratio = purchase / average accounts receivable
= 77.20 / 281.40 = 0.274343
(Purchases = closing stock opening stock = 613.20 536 = 77.20)
(Indicate the liquidity of the firms payable)

6.3 RECONMENDATIONS ON THE STRATEGIC PORTFOLIO OF

MARKS & SPENCER
The portfolio strategy acquire the lasting change in performance by focusing
to drive share holders return in present and in future and make positioning the
organization to create value. The corporate portfolio works on balancing the
risk diversification, short term gains, long term share holders value by
optimizing allocation of resources, products lines and other initiatives.
The strategic portfolio recommendation based on the low-volatility strategies
such as
1. Long only minimum- variance portfolio and
2. Minimum variance- - portfolio
These strategies uses advanced optimization and statistics techniques for
hedging against that of estimation risk of associated models, therefore get
consistency good risk adjusted return than market indexes.

CONCLUSION
Managing Finance with decision making process of cost concepts allows to control the
market by fair price, when competition and financial fluctuations take place, besides
that it let control the cost of production and overall performance of an organization.
The forecasting techniques allow managers not only to take acceptable decisions but
also lead the organization profitably. The both budgetary process and cost reduction
techniques allow to control over the expenses and smooth flow of management process

of organization. The interpretation of financial statements allows recognizing the

financial soundness and the changes required areas of the organizations functional
process.

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