QHO320 Understanding Finance Assignment Sample

PART A: QHO320 Understanding Finance Assignment

1. Cash Budget

Cash budget of Linda Ltd for the period of 6 months is as follows:

2. Issue in cash budget

It has been identified that firm is paying its entire creditor after the one month of purchases. Firm should increase the trade payable time duration which will help in managing high cash balance and thereby facilitates optimum utilization of the business finances.

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3. Suitable source of finance

After evaluating the cash budget, it has found that firm is having effective cash balance so that organization could opt for raising finance from debt sources such as debenture or bank loan for the expansion purpose. According to the Cao (2022), it has been identified that debt will help in gaining the tax benefit for the firm which result into high firm’ profitability. However, Debt finance creates the interest obligation which further increases the financial burden. Based on the view point of Lv et al, (2021) issue of share will help in gaining access to the large amount of funds and reduces the financial obligation of the business entity. However, equity source of finance result into the dilution of ownership and leads delay in the decision making process. After evaluating both limitation and advantages, director of Linda ltd is advised to choose debt financing for the expansion plan.

PART B: RATIO ANALYSIS

1. Calculation of Ratios

Ratio analysis of Linda Ltd for the period of 2020 and 2021 is as follows

1. Gross profit margin

1. Contribution margin

1. Operating profit margin

1. Return on Equity/investment

1. Asset turnover

1. Liquidity ratio

1. Current ratio

1. Inventory days

1. Trade receivable days

1. Trade payable days

1. Gearing ratio

2. Evaluation of Firm’s performance:

Below is the evaluation of firm’s performance based on the above ratio analysis:

Profitability: It has been determined that firm’s profits have increased in year 2021 as compared to the previous year. Linda Ltd is able to attain the ideal ratio that indicates the firm’s efficiency in maintaining long term stability within the industry. Further, it has been identified that operating ratio of firm is 1% and in the year of 2020 firm was unable to earn any operating profit which indicates the firm’s inefficiency in managing the operational cost. It has further depicted that firm is having effective profits to cover its fixed cost. Additionally, the return for shareholder has increased which indicate the adequate profitability position of Linda ltd.

Liquidity: The current ratio of the organization is effective which indicate that Linda ltd will be able to pay off all its liabilities by selling its assets (Bertoldi et al, 2021). However, the firm is not having adequate amount of liquid assets that will create issue in paying off short term liabilities.

Efficiency: It has further determined that firm’s asset turnover ratio has increased which indicate that Linda ltd is making optimum utilization of firm’s resources (Sasongko, Ilmiyono and Tiaranti, 2021). The debtor’s receivable time is reducing and creditors payable time duration get increased which denotes effective cash flow of the Linda Ltd. From the above analysis, it has concluded that firm should initiate the expansion as firm is having effective liquidity, profitability and efficiency position.

PART 3

NOTES: Issues impacting manufacturing of Linda David

As the Linda Ltd is planning to source raw material from other part of the Europe, company will face issue in effectively managing the supply chain. Firm will not be able to manage all the activity of supply chain which increases risk of mishappening. Further prices of goods and services in Europe are increasing which create issue in managing overall cost of production.

Issue impacting consumer demand

From the pestle analysis, it has identified that there is increase in the inflation rate within the country. This results in increasing the cost of production and makes the product expensive for the customer. Further, inflation causes reduction in purchasing power of customer leading to fall in demand (Lubis et al, 2022). There is increase in the number of organizations providing Heavy electric equipment that result in reducing demand.

Impact of flexible budget

Flexible budget refers to the budget in which amount are changed based on revenue, cost and due to any expected event (Johansson-Berg and Wennblom, 2023). As it has identified that there is inflation in the country, flexible budget will aids in adjusting the cost according to the current economic situation. This budget will also help in effectively allocating necessary resources results in adequately managing supply chain (Impact of Flexible budget, 2024). This budget assists in effectively managing cash flow as firm is provided with opportunity to allocate resources based on the company’s funds

REFERENCES

Books and Journals

• Cao, L., 2022. Ai in finance: challenges, techniques, and opportunities. ACM Computing Surveys (CSUR), 55(3), pp.1-38.
• Lv, C., Bian, B., Lee, C.C. and He, Z., 2021. Regional gap and the trend of green finance development in China. Energy Economics, 102, p.105476.
• Bertoldi, P., Economidou, M., Palermo, V., Boza‐Kiss, B. and Todeschi, V., 2021. How to finance energy renovation of residential buildings: Review of current and emerging financing instruments in the EU. Wiley Interdisciplinary Reviews: Energy and Environment, 10(1), p.e384.
• Sasongko, H., Ilmiyono, A.F. and Tiaranti, A., 2021. Financial ratios and financial distress in retail trade sector companies. JIAFE (Jurnal Ilmiah Akuntansi Fakultas Ekonomi), 7(1), pp.63-72.
• Lubis, S.S., Maherza, W., Ziwiana, N.D. and Muda, I., 2022. Flexible Budget and Overhead Analysis in Pharmacy Issuers. Journal of Pharmaceutical Negative Results, pp.2931-2936.
• Johansson-Berg, T. and Wennblom, G., 2023. If managers feel safe, budget control becomes enabling. Evidence from a large local government organization in Sweden. Journal of Public Budgeting, Accounting & Financial Management, 35(6), pp.154-179.

Online

• Impact of Flexible budget. 2024. Online available through;< https://www.prophix.com/blog/flexible-budget-everything-you-need-to-know/#:~:text=Because%20flexible%20budgets%20allow%20companies,more%20flexible%20with%20their%20spending.>

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