unit 5 p3 p4 p5 m1 m2 d1 d2 DONE

UNIT 5 P3- PASSED

Prepare a 12- month cash flow forecast to enable an organisation to manage its cash

A cash flow forecast is an estimated sum of money you expect your business to bring in and pay out over a period of time. If the business is doing well, then the closing balance of money is greater than the opening balance, because this will mean the business is making a profit. Cash flow has the chance to be increased by many different things such as; assets being sold, an increase in price of a product, more goods being sold, a decrease in the cost of goods etc. Cash flow forecasts are helpful for multiple reasons within a business. They can help avoid potential issues that could occur in the business and it can also be useful to understand where the business will be gaining money from at the end of the month. It can also help a business to plan how much they expect to spend in costs, plan how much they expect to make in sales for the year, understand when cash will come into their bank account and leave it.

A financial forecast should be comprehensive as you make it and it should include all the businesses sales, costs and cash transactions. Although, it doesn't have to be penny accurate, because this makes it extremely different to comply with and it is something thats supposed to be mainly accurate, but an estimated sum. You create a cash flow forecast by first creating the sales forecast, which is a plan of how much you expect to sell in the future, broken down by months. Then the profit and loss forecast is created which combines the businesses income and its day to day running costs, which gives th business a view of the projected profit in the future. When this is all produced, then the cash flow forecast can be created.

PUT CASH FLOW FORECAST IN HERE

UNIT 5 P4

Prepare a profit and loss account and balance sheet for a given organisation

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UNIT 5 P5

Perform a ratio analysis to measure the profitability, liquidity and efficient of a given organisation

Within this assignment, I will be analysing the profitability, liquidity and efficient of a chosen business.

Ratio analysis covers three areas, profitability, liquidity and efficient. Profitability measures how much how much profit the business makes Furthermore, the liquidity measures the businesses ability to turn assets into cash in order to pay debts. Efficient ratios look at the how long it takes for stock to to be turned into cash. Ratio analysis also allows for both inter-firm and intrafirm comparisons. Ratios will be used by internal stakeholders which include employees and managers. As well as this, external stakeholders include creditors and investors.

Profitability

Profitability is a measure of the profit of a firm in relation to another. This allows for a more comprehensive assessment of the performance of a firm by comparing one figure to another.

Gross profit percentage of sales is worked out by; 

gross profit x 100
sales turnover

The gross profit percentage of sales tells you how much profit is left in the business once all the costs of goods has been taken away. If the gross profit decreases, this means the business should start looking at the prices of their stock, and probably start reducing them. This can be done by finding a different, cheaper supplier or try to gain more sales.

Net profit percentage of sales is worked out by;

net profit percentage x 100
sales turnover

Net profit percentage of sales shows the business how much profit is made after all the expenses have been taken off the amount. If the net profit decreases, this means that that business will need to look at their expenses and start reducing them. One way they could do this is by making staff redundant, another way is by changing the location of the business to a poorer area, so the rent is cheaper.

Return on capital employed is worked out by;

return profit before interest and tax x 100
capital employed

The return on capital employed is helpful for the business, because it shows them how much money they are using in order to generate profit. They will use this information to show investors to help them decide if its effective to make an investment and generate the right amount of return. They do this by looking at the interest rates.

Liquidity

Liquidity is how quick a business can turn over their short term debts. It is measures in two different ways, which are through current ratios and acid test ratios.

Current ratio is worked out by;

current assets
current liabilities

The current ratio shows how many assets the business have, compared to the number of liabilities they have. If the number of assets are less than the number of liabilities, this means that the business will have to pay off some of their debts in order to cover some costs they have. It is bad for the business to be in that position therefore it should be avoided.

Acid test ratio is worked out by; 

current assets- stocks
current liabilities

The acid test ratio shows how quickly the business can turn their stock into cash. This isn't the same as current ratio because it doesn't include stock. This is because stock is considered to be the hardest asset to turn into cash quickly.

Efficiency

Efficiency looks at how well the business manage their stock and finances. There are three ways in which a business calculate their efficiency, which are; debtors payment period, creditors payment period and the rate of stock turnover.

Debtors payment period is worked out by; 

debtors x 365
credit sales

The debtors payment period looks at how quickly it takes for the business o pay back its debts and it is expressed using a number of days. The business will try to reduce the number of days, if they have cash flow problems. The number of days will be different for every business, because it depends on the nature of the debt and it also depends on how the business will deal with it. The business can also get other businesses to buy their debts off them, which is a way of making money.

Creditors payment period is worked out by;

creditors x 365
credit purchases

The creditors payment period shows how long it takes the business to pay back their suppliers for goods they have brought using credit. This is an expression in terms of number of days. The business will try to lengthen the number of days if they have cash flow problems.

Rate of stock turnover is worked out by; 

average stock held x 365
cost of goods sold

The rate of stock turnover shows how quickly it takes the business to sell its stock. It also measures how long it is held by the business. This is an expression in terms of number of days. Although, the businesses will try to not keep the stock for a long period of time, because this could mean the stock may go out of date.

Average stock is worked out by:

opening stock and closing stock
2

UNIT 5 M1- PASSED

Analyse the cash flow problems a business might experience

Within this assignment I will be analysing the cash flow problems that a business might experience. When you are creating and constructing a cash flow forecast, many problem could occur which could affect the cash flow forecast.

One problem that could occur is that the business is not able to pay creditors the money they owe them on time. In the future the business could have problems such as; creditors not wanting to provide services to the business again. This means that the business will need to find new suppliers, who have low interest rates to make sure that they are able to repay the money back 100% because they cannot do the same thing again. Sometimes, in such a case, the business may have a bank overdraft and will have to help them pay for their debts.

Additionally, the outflow could potentially be greater than the inflow with means that the business will have a negative cash balance. This will result in the business not being able to afford or pay for any of their expenses. Also, the business could have a greater inflow in different seasons of the year. This would mean that they wouldn't be able to pay there expenses either. Lastly, if the products the business sell are not up to the right standards for their target market, then they won't sell and they will go find the similar products for cheaper at one of the businesses competitors.

Another fact which could lead to cash flow problems is when a business offers too much credit to trade debtors, this a good way to build up revenue. Although, it has to take into consideration that if there is late payments by the customers, that this can put a strain on the business and cause severe cash flow problems for the business. The business will have to com up with strategies to make the payments happen frequently again by slow-paying customers. This can happen by negotiating terms; specific dates can be issued to let debtors know how long they have to pay back their remaining balance. This is a good solution, because they will feel forced to pay back the remaining amount of money they owe. This will help the business because it will allow everything to run in an orderly manner. Also, an alternate method is to check the credit score of debtors before buying supply's on credit. By doing this, it will enable us to know whether they are able to pay it back or not.

Furthermore, another important factor happens when a business purchases too many assets. Capital expenditure should only happen if there is a definite need and the business is able to afford the purchase. If the business is doubting it, then they should make an arrangement with the suppliers to ensure that paying for the assets will not mean that too much of the businesses profit will be lost. One of the agreements that could be made is by reviewing and rescheduling payments to avoid the business having bad debts, which could have a unpleasant effect on the business, and cause problems with the cash flow.

From looking at the cash flow forecast, It is clear to say that the business rely's on one loan which is the capital that they began with. Bank loans are really helpful for businesses that are starting up, although it doesn't mean that the business can not let the suppliers down if the bank loan gets delayed or is no longer available. Then that is a huge problem for the business and can cause major cash flow problems, because the business cannot do anything until they get the bank loan. This is a huge problem for the business because they would not be able to pay for any of their stock, their rent, staff etc and this delays the opening of the business. This could massively affect the businesses cash flow because they may have already laid out for some supplies for the business such as the stock. If this happens. then there is a slight chance of the business surviving.

If the cash flow forecast isn't properly controlled then the business cannot predict what is going to happen for the business in the future. It can help a business to plan for the future, by working out the costs they are going to have raised over the year. Additionally, it can tell you wha the business revenue is going to be and how the business performance for the following year is going to be like. This is important because if the cash flow forecast is controlled, then the business may overspend or not realise that they aren't making enough profit to survive. By not controlling the cash flow, they are stopping themselves from noticing any problems that could occur and the business cant solve these issues before its too late.

UNIT 5 M2- PASSED

Analyse the performance of a business using suitable ratios

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Ratio Anlaysis for Grecko Business
By Olivia Spalter

Liquidity Ratios

Current Ratio
-The current ratio has increased from 2010 when it was 6:7, to 2:3 in 2011. This is good because is shows the business has got more assets, which means that the liquidity has increased.
-The ratio isn't that high, which means that the business may have too many current assets.
-Also, the ratios show that the current assets can easily cover the current liabilities, which is really good for Grecko.

Liquidity
-In 2011, there was an improved liquidity, the acid test ratio decreased though, which means that the stock has been converted into cash much quicker. This increases the businesses liquidity.
-The current ratio has increased which means that Grecko owns more liabilities or less assets.
-This is bad for Grecko, because they own more debts and less assets which means they will have to owe more money eventually.
-Grecko should invest into more expensive assets so that this decreases the ratio of the current ratio.

Profitability Percentages
-In 2011, the gross profit has increased due to the costs being reduced. Also, it could have been because of the net profit being increased. This means that the revenue has increased because of the increased costs.
-The return of capital employed within the business has increased which means that there is more cash in the business.
-In 2011, the business is doing financially better than in 2010 which is positive for the business.

Gross Profit Percentage
-In 2010, the gross profit percentage increased from 81.6% to 85.9% in 2011. This shows the Grecko has more operating profit which is being generated by the businesses sales.
-The increase could mean that the business have creased their overheard. Also, it could mean that Grecko have increased their gross profit.

Return on Capital Employed
-In 2010, the return on capital employed percentage has increased from 8.9%, to 15.1% in 2011. This means that more return is being generated by the capital employed within Grecko.
-Because it has increased it is good for the business, because it displayed that theres an improvement in the return on capital.
-This means that more profit per pound of capital employed has been generated.

Profitability
-In 2011, the gross profit has increased. This is due to the costs being reduced in Grecko. Or it could have been because the net profit has increased.
-This means that the revenue has increased because of the decreased costs.
-The ROCE has increased which is good for the business, because it means there is more cash in Grecko.
-Overall, this show the business are doing financially better in 2011, than they were doing in 2010.

Profitability Percentages

Percentage of Sales
-In 2010, the percentage of sales increased from 68.9% to 70.5% in 2011. This shows the expenses as a percentage of revenue.
-This is bad for the business because it shows there isn't a good control of overheads. Overheads have increased to more than the sales revenue!!
-I think the department that deal with the finance within the business, should closely focus on the payments of the overheads and try to find a way to decrease them.

Debtors Payments Period
-In 2010, the debtors payment period has decreased from 29.1 days to 17.4 days in 2011. By having a decrease its good because it shows that it is taking less day for the business to collect their debts.
-This is because there was an improvement in control of trade receivables, which is because of a more efficient management.

Rate of Stock Turnover
-In 2010, the rate of stock turnover has decreased from 15.7 times a year to 15.5 times a year in 2011. This is only a small decrease, however it shows that the inventory within the business was turned over more than in 2010.
-This is because of an improvement in stock control and a better management team.

Efficiency
-In 2011, the rate of stock turnover was better throughout the whole business, this means that it will take them less time to sell all their stock and convert it into cash quicker to help them pay off their debts.
-In 2010, it took them longer to pay back their debts than in 2011, which shows that they are earning more capital which is a positive thing for the business.

Conclusion
-Overall, Grecko's financial performance was a lot more positive in 2011 than it was in 2010. This is because the current ratio has increased. Also, the acid test ratio has improved. This means that there is a better liquidity within the business.
-ROCE, net profit percentage, efficiency of the business and the gross profit percentage have all increased drastically in 2011.
-The successfulness of the business has increased, which is due to the decrease in the overheads and the increase of sales. The sales in the business increased due to the management team being better at controlling the stock. Greece raised their prices of the products they sell, which has made their profit increase because more customers are buying from Grecko now.

UNIT 5 D1- PASSED

Make recommendations to the customer to solve the problems you have identified in his cash flow forecast. Justify your recommendations
Identify, for him, the dangers and costs of a poor financial planning

Profitability ratios compare the profits that have been earned by the business in relation to the level of sales that have been achieved. Gross profit percentage shows the proportion of sales that are involved of those costs related to the goods that have been sold in order to generate sales. If the gross profit percentage is high, this is good because it means that more gross profit is generated by the sales. This could be due to the increased sales price, or it could be because of a decrease in the cost of sales. The net profit percentage is the percentage once all the costs have been taken away in relation to the level of sales achieved. If the percentage is high, this is good because it means the business is operating more profit which is produced by the sales. Although, this may lead to a decrease in overheads. Furthermore, percentage of sales is a percentage that expresses the profit from operations in relation to the revenue created by the sales. This could be because of an increase in gross profit. Lastly, return on capital employed is a percentage, which shows the return of a business.It is generated by the capital employed in the business in relation to the investment rates. If the percentage is high, then this is good or the business, because it means that it shows an improvement in the return on capital.

The liquidity ratios measure the businesses ability to meet the spending they do on a day to day basis. Current ration shows the proportion of current assets to current liabilities. It measures the businesses liquidity. If the ratio is big, then this shows that the business has more assets than it has liabilities, which means that they can meet their day to day expenditures. Acid test is a ratio which measures the businesses ability to turn their current assets into cash. to help them over their liabilities. If the ratio is big, then this is good because it means the business is quick to convert their assets to cash.

Additionally, financial efficiency ratios measure the effectiveness of the business, although management control the operations within the business and how well they are controlling the business resources internally. Debtors payments period measures the average amount of days the business takes to collect debts. If it takes the business a long period of days, this means that the business are taking a long time to pay off their debts which is bad. This shows that the management team within the business aren't properly controlling the business as well as they should be. Creditors payment period measures the average amount of says it takes the business to pay their suppliers. If it takes the business a long time to pay their suppliers, this is good because it shows the business is taking advantage of their supplier credit. On the other hand, it could also indicate the possibility that the business are not being able to pay sooner. Rate of stock turnover is a measure of years, which shows how many times a year the stock is turned over. If it takes the business a large amount of days, this is bad because it means the business take longer to sell the stock. This proves that the business have bad management with their stock.

Gross profit percentage= gross profit- sales revenue
Expense(%)= expense- revenue
Net protift margin= net profit (before tax)- sales
ROCE (%)- net operating profit- (total asset-current liabities) x 100

UNIT 5 D2

Evaluate the financial performance and position of a business using ratio analysis

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