Investment Proposal - Business Plan Example

Investment Proposal Analysis and Monitoring of Cash and Other Budgets Monitoring the cash flow in a business is one of the most important things especially for a business that has just started. This is because it enables the company to manage it assets and liabilities. Pak Fruits Ltd needs must have their cash flow monitored in order to ensure that the company makes enough profits to service the bank loan and other costs. The analysis and monitoring will involve the calculation of unit cost of the bananas. This cost will include transportation and other related costs (Nazar & Bailis 2012). The unit cost for Pak Fruits Ltd will be the total cost involved in transporting the bananas from Pakistan to the final destination divided by the total units. The units in this case are kilograms since the bananas will be sold in kilograms and not per piece. Transportation costs and other costs involved in supplying the bananas have been used to come up with the unit cost. The selling price of £1 per kilogram is inclusive of the 25% gross profit margin that the company wishes to make. The gross profit margin will be derived from dividing the gross profit with the total revenue and expressing it as a percentage. Costing and Pricing Decisions There are three major pricing strategies including cost-based pricing, customer-based pricing and competitor-based pricing. I have chosen the cost-based pricing because I will be able to cater for the cost and make a reasonable profit. If Pak Fruits Ltd spends a total of £ 500 on all costs including labor then the total cost of production will be the £ 500. If the company wants to start by supplying a total of 1000 kilograms of bananas then that will be the total number of units to be supplied. The unit cost per kilogram will therefore be £ 500 divided by the 1000-kilogram units to get £ 0.5. ROI Return On Investment (ROI) measures the profitability of a company indicating whether or not it is using its resources in an efficient manner. A positive ROI is important in ensuring that the business keeps running and attracts more investors. Investors and financial institutions would be interested in ROI. Investors would want to know if they will get a good return on their investment while financial institutions would want to know if the company will be able to pay its debts in good time (Nazar & Bailis 2012). Investment Appraisal An investment appraisal involves evaluating an investment proposal’s attractiveness using various methods like Internal Rate of Return (IRR), Average Rate of Return (ARR), Payback Period and Net Present Value (NPV). Pak will start with an employee base of three, which is quite manageable for a small starting business. It is important to determine how many kilograms will be bought in order not to have excess stock, which may go bad due to the perishable nature of bananas. The company will come up with the accounting rate of return by dividing the average profit by average investment as a percentage. Choosing investment opportunities will be crucial and the company will need discounted cash flow techniques. Discounted cash flow is a valuation method used in estimating an investment opportunity’s attractiveness. The net present value (NPV) will be determined by finding the difference between the present value cash inflows and outflows. The internal rate of return (IRR) determines whether a project is worth taking and the higher it is the better the project. Nature of Long Term Decisions As the business owner, my capital investment decisions will ensure that I allocate the limited resource to projects that will best achieve the company’s goals. There are assumptions in capital investment that help an investor in making decisions. They include fixed income and global equity. They may be useful in helping with the company’s investment decisions but their disadvantage is that they change depending on the economic trends globally. They therefore might be misleading in a few cases. Main Financial Statements It will be important to keep good financial records in order to monitor the cash flows and growth of the business. There are three main financial statements and they include the balance sheet, the income statement and the statement of cash flows. The balance sheet contains the company’s assets, liabilities and share holder’s equity as at a given time. The income statement gives a report of the company’s revenues and expenses over a period of time such as a month or a year. The statement of cash flows gives a report on the company’s change of cash and cash equivalents over a period of time same as the income statement. The items on the balance sheet are those used in the daily running of the business like cash at hand, cash in the bank, debtors and creditors. It also includes long term capital and equity. The income statement gives the company details of the income and expenditure and the gross and net profits. It includes income from the sale of bananas and any other income and all related expenses. The cash flow enables me as the manager to know liquidity of the company. Formats of Financial Statements There are various financial statement formats depending on the nature of business and the statement being produced. The balance sheet’s format starts with the non-current assets then current assets. The assets are listed on the left while their values are listed on the right side. Non-current assets include buildings, machinery and equipment while current assets include cash, inventories and receivables. Next is equity and liabilities. Equity includes share capital and retained earnings while liabilities are divided into two. Non-current liabilities are long term borrowings while current ones include short term payables. The income statement format also has the items on the left and their values on the right. It starts with the sales which will be £ 26,000. Then there is the cost of goods sold and their difference gives the gross profit on sales. From that the operating expenses are deducted to give the income and other revenues and gains are added to that. Other expenses are then deducted to get the profit before tax. Once the income tax is deducted we are left with the net income which is the net profit. The cash flow statement simply includes the cash received from customers and the cash spent on running expenses. The running expenses include the daily activities involved in running the business like delivery and cleaning expenses. Financial statements help in financial planning and it is important in helping to determine what should be done to generate cash flow, investing in rising opportunities, building a long term capital base and monitor spending habits. Budgeting is an itemized summary of income and expenditure. It is important in helping to identify wasteful expenditures, achieving financial goals and adapting quickly to changing financial situations. Formats of Financial Statements for Different Businesses Financial statements generally have the same information with a slight difference depending on the nature of the business. Manufacturing and retail businesses offer tangible products while service businesses offer an idea. This will then mean that in the financial statements of a service company there will be no cost of goods sold. The financial statement will only have other costs including the cost of their services. On the other hand, manufacturing and retail businesses will have the cost of goods sold. Terminology In preparing statements, different terminologies are used. A debit entry symbolizes an increase in assets and a decrease in liabilities. A credit entry means that there is an increase in liability either on the part of the company or the customer. Books of prime entry are the ledger accounts which are used to prepare financial statements. They are individual accounts of customers, creditors and the various assets in a company. The trial balance is a combined list of ledger account balances on either the debit or credit side. The final accounts include a summary of all accounts at the end of an accounting period (Nazar & Bailis 2012). International Accounting Standards In accounting, there are standards set to guide businesses in preparing and reporting their financial reports and status. International Financial Reporting Standards are designed in such a way that financial statements have a similar format and can be understood globally regardless of the nature of business or the location of the business. There rules were issued between 1973 and 2001. This was done by the International Accounting Standards Committee. On 1st of April 2001 this committee was replaced by the International Accounting Standards Board. They are responsible for issuing new standards as they come out and these standards are the ones referred to as International Reporting Financial Standards. Distinction between Different types of Business There are various types of business including sole proprietorship, partnership and limited companies. Pak Fruits Ltd is a limited company meaning that it is a legal entity on its own and its liabilities cannot be shouldered by the owner. A limited company has to report its financial status at the end of an accounting period. A sole proprietorship on the other hand is owned by a single person and he or she bears the liabilities and loses of the company. A partnership involves people coming together and starting a business which can have a legal identity of its own. Interpretation of Ratios and Comparison There are various ratios used in business to determine different values. They include liquidity ratios, asset turnover ratios, financial leverage ratios, profitability ratios and dividend policy ratios. Liquidity ratios show a company’s ability to meet its shorts term financial obligations. Asset turnover ratios provide information on the company’s utility of assets. Financial leverage ratios provide information on the use of long term debts. Profitability ratios provide various measures used in generating profits. Dividend policy ratios give an insight of the dividend policy and the company’s future growth prospects. Profit and Loss Statement Pak Fruits Limited Annual Statement of Income Year Ending 2013 Revenue Gross Sales 26,000 Net Sales 26,000 Costs Incurred Beginning Inventory 0 Purchases 24,000 Cost of Goods Available 24,000 Ending Inventory 4,000 Cost of Goods Sold 20,000 Gross Profit 6,000 Operating Expenses Advertising 300 Wages 900 Employee Insurance 300 Rent 500 Total Operating Expenses 2,000 Net Profit Excluding Taxes 4,000 Taxes Income Taxes 500 Payroll Taxes 500 Total Taxes 1,000 Net Profit 3,000 Balance Sheet Pak Fruits Limited Balance Sheet For the Month Ended 2013   Asset Liability Cash 20000 Accounts Payable  500 Accounts Receivable 12000 Equity 3000 Supplies 1000 Capital 38500 Land 4,000 Other Building 5,000 Total Liabilities   Total Assets 42,000 Owners Equity 42,000 Cash Budget Pak Fruits Limited Cash Budget For the Year Ended 2013 Beginning Cash Balance 1,000 Cash Income 6,000 Cash Outflows 3,000 Ending Cash Balance 4,000 References Nazar, J. & Bailis, R. (2012). How to Start a Business. New York: Amazon Digital Services, Inc. Read More