Financial Decision-making for Managers

You have been employed as a business advisor with a local enterprise company that works with local government to provide advice to small and medium sized businesses and new entrepreneurs on various aspects of business. The partners know you have some financial knowledge and have asked you to complete a variety of tasks related to finance.

Task 1
Jess is a local entrepreneur who has spare funds in her company and wants to invest in listed company shares. She has asked you to look at two potential companies that are listed on the stock exchange and advise on their stability and the likely rate of return. You should select two company annual reports on which to carry out ratio analysis and produce a report for Jess with commentary on the business performance of each of the selected companies.

The report must:
• Explain how financial statements support decision-making
• Analyse the annual reports you have downloaded using ratio analysis and other information about performance in the annual reports to enable Jess to make her decision
• Assess the effectiveness of ratio analysis as a decision-making tool

Extension activity
To achieve a Distinction, you must also evaluate the usefulness of published financial statements to investors.
Learning outcomes and assessment criteria
LO1 AC 1.1, 1.2, 1.3, 1D1


Task 2
Many clients ask for advice on the sources of finance that might be suitable and available for them and also about how they can use management accounting techniques to assess their need for finance and the costs and benefits of different sources. The partners think it would be useful to have a written guide for clients about sources of finance. You should write a guide suitable for clients with little financial knowledge using examples to illustrate the guide.

Your guide must:
• Differentiate between long-term and short-term business finance needs
• Assess the sources of finance available to business organisations
• Evaluate the implications arising from of the use of different sources of finance
• Explain how budgeting, cash flow forecasting and cost-benefit analysis can support decisions about finance required by the business and which sources to use

Extension activity
To achieve a Merit, you must also assess the potential legal and ethical implications of using different sources of finance.
To achieve a Distinction, you must also recommend actions a business might take to improve its cash flow position.
Learning outcomes and assessment criteria
LO2 AC 2.1, 2.2, 2.3, 2M1
LO3 AC 3.1, 3D1

Task 3
Quality Furniture Limited, a local furniture business, is looking at ways to expand the business. You have been asked to support the business owner, Asha Begum, in assessing three options. You will use a range of capital investment techniques to assess the options. The business has £30,000 to invest. Forecasted cash flows for each of the options are as follows:

YearOption A – Develop an online presence to increase sales
£
Option B – Acquire additional warehouse space to improve stock availability
£
Option C – Set up an import operation to extend product range
£
0
Initial Outlay
(30,000)(30,000)(30,000)
112,0009,0006,000
213,5006,00010,500
37,50010,50013,500
47,50010,5007,500
54,5009,75010,500

Quality Furniture Ltd’s cost of capital for appraisal purposes is 15%
The extract from the Present Value tables of £1 at 15%

Year 01
Year 10.870
Year 20.756
Year 30.658
Year 40.572
Year 50.497

You must:
• Assess the option using each of the following techniques:
o Accounting rate of return
o Payback period
o Discounted cash flow – NPV, Net Present Value Method
o IRR – Internal Rate of Return
• Produce a report of your findings making a recommendation of which option Asha should choose based on which you think is the best method for assessing the options. You should justify your answer.

Extension activity
To achieve a Merit, you must also include in your report an evaluation of the use of the different capital appraisal techniques to inform financial decision-making.
Learning outcomes and assessment criteria
LO3 AC 3.2, 3M1

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