MFR 20-21 Resit-77250035 Exam Answers PDF

Preview

Summary

Module: Managing Financial Resources
RESIT EXAMINATION WEIGHTAGE 60% TOTAL MARKS...

Description

ANSWER BOOK

MANAGING FINANCIAL RESOURCES 2020/21 BLOCK A RESIT EXAM STUDENT ID NUMBER: 77250035

1.b. - Gross profit margin has increased 38% to 40%, Possibly additional volume has been obtained by discounting. - If margin had been maintained at 40% then the incremental sales revenue would have produced £1,194k in additional gross profit -The additional £70k claim of former employee had negatively impacted the profit but having increased margin of profit it is recoverable. - Without the £195400 plant purchase which was paid via loan if avoided, the cashflow in financial activity would have been resulted positive.

1.c. - The level of inventory has increased by 13% from 2018 to 2019. This has created the need to finance this increase in working capital. To control the total cost of inventory it is must to balance out the relevant and working capital costs. i.e., variable costs of inventory or holding costs etc. For an example, if it cost certain amount to hold fixed unit of inventory for yearly basis than the average cost of inventory also increases. Thus, the solution could be to hold short term inventory whenever needed and save the company’s finances. -The Working capital ratio for year 2019 is 2:1 which indicates high level of working capital while the inventory has increased by 13%. The one factor that affects the level of working capital is the new plant purchase via loan credit and another could be the firm is having high operating efficiency thus it requires more working capital and amount of inventory as well. Overall, it suggests that the firm has enough inventory for the year 2019. (Samiksha, 2021) 2.b. Assuming the sales mix of 4 divisions remains the same, Breakeven will be, Total fixed cost / Contribution per unit = 140,000/ 350 = 400 units Thus, Sweet dreams ltd. need to sell total 400 units.

2.d. The Fabric cost per meter for cushion is 1.31 which is lower than other divisions. Plus, the variable cost is also not high. As the cushion division does not increase unavoidable costs. So, it should not be close. The reasons like performance issues can be solved but financially it should not be closed only considering that factor. 2.e. The alternative of increase profitability can be by limiting the fixed cost of rent, utilities and salaries by minimum 5%. 2.f. Generally, the financial factors are related to the profits and costs. But at certain times the non-financial factors can affect more than the financial decisions made in the company and it should be always given importance when making discontinuation decisions. For example, if the cushion department closes then the closing or discontinuation can result into unemployment of lots of people working in that division- [like those who could be part of being in outsourcing business] this could also lead to lack of motivation in other division’s staff. Secondly, other parties like suppliers and customers will also be affected by the decision and there could be ethical issues as well before closing down the particular department, so if the firm outsources from different country, then there will be issues like fair wages to past employee etc.

4. b. For effective working capital management, the Schoolyform group should more focus on short -term finance. The Schoolyform should maintain the short-term cash flow as classes paid advance, but the huge amount of finance goes out as license fees and wages of tutors. The receivables and inventory can be converted as short-term assets as to control the outgoing expenses to suppliers. Additionally, to implicate all these features the Schoolyform Group can invest in short term finance and high liquid securities as they have huge amount to pay for license fee and salaries. As working capital is the most important aspect for any company and it helps knowing firm’s overall efficiency and the total assets owned by the firm. (CNB, 2021) The schoolyform should maintain day-to-day operating expenses in order to improve short term cash flow which will contribute to healthy working capital which can be used to maintain the balance between liquid assets and profits of the firm. 4.c. Generally, any firm’s accounts are listed into by the number of days since the invoice gets issued. For an example, 0 to 30 days,31-60 days, 61-90 days, or more than 90 days. (Mitra & Paul, 2018)

In Schoolyform case, suppliers are paid 14 days after goods are received and customers pay to the company 30 days after receiving services.

1] The schoolyform can consider giving an early payment rewards or discount to encourage early payments which can help managing receivables days performance. i.e. 2% discount if customers pay within 1 week of invoice.

2] They can consider implying an effective payment plan for the customers. For an example, there may be a chance that many customers who inform at last date that they need extension date to pay the invoice. In that time, payment plan can assist the firm to manage the outstanding balances and receivables performance. 4.d. -

Undoubtedly, the working capital helps maintain the liquidity of the firm, but it also holds up the amounts that can be invested in better investment portfolios.

-

For the service provider like Tutor2U, the most funding comes from long term loyal customers who adapt their services every now and then. Thus, the capital raised can be invested in many ways possible rather than adding in working capital.

-

Even with the low working capital, these firms can still maintain the sales if they imply the quick receivables collection process.

-

Sometimes some services offered by these firms could be on demand so working capital as low can also meet the short-term needs of the firm. Also, after some years the company has fixed assets and technologies which can be used for longer time and help reduce short term expenditures. (Wei, 2019)

References: CNB,2021. Improve your accounts receivables collection [online] Available at:

[Accessed on 11th June 2021] Mitra. & Paul, P., 2018 Analysis of the effect of working capital management [online] Available at: https://journals.sagepub.com/doi/abs/10.1177/2319510X18812142? journalCode=abrb#:~:text=The%20working%20capital%20management%20is,Bagchi %20%26%20Khamrui%2C%202012). [Accessed on 11th June 2021] Samiksha, S., 2021 Factors affecting company’s working capital [online] Available at: https://www.yourarticlelibrary.com/management/top-13-factors-affecting-the-working-capitalof-a-company/8742 [Accessed on 11th June 2021] Wei, J., 2019 Advantages of maintaining low working capital [online] Available at: https://www.investopedia.com/articles/investing/103015/advantages-maintaining-lowworking-capital.asp [Accessed on 11th June 2021]...