Assignment 1 – Managing Finance, Resources

New Business Scenario Business idea I have looked at several business options, such as subcontracting, selling the patents for the products and creating a business to manufacture the products myself. Although the risk would greater, establishing my own business to manufacture the products would mean higher financial rewards and greater control of my current range of products, plus any future designs. Cost Model In order to agree a price with my customer, I needed to construct a cost model to ensure that all my costs were covered and that I could achieve my target profit.

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This can be seen in _APPENDIX _1. In order to manufacture the products, the business will need a combination of costs that can be categorised as ‘Direct costs’ (costs that increase or decrease in relation to the number of units produced) i. e. materials & labour. Other costs are referred to as ‘Indirect costs’ (costs that the business has to pay regardless of how many units are produced). In the case of direct costs, allocating them to a single unit is much simpler as the required resource (materials or labour) is clearly definable.

The direct cost of producing a single unit remains the same regardless of how many units are produced. However, although labour costs are commonly recognised as direct costs, certain commentators argue that this is not the case as it is difficult to increase or decrease an employees working hours in line with the number of units produced. Indirect costs have a totally different impact on a single unit. These are costs that are born by the company in its daily running and will usually relate to support areas of the business and will not fluctuate with unit quantity i. e. dministration, expenses and rental of premises to name but a few. There are a number of ways that businesses allocate these costs to a unit but at present the most commonly used method is Absorption Based Costing whereby the costs are divided across the units produced using a common cost driver (these can be man hours or machine hours depending on the nature of business activity). This involves dividing the total number of hours in the business for the chosen cost driver and then applying the calculated rate to the number of hours required to produce one unit. {draw:frame} Material cost per unit (direct cost)

Indirect costs per unit (indirect cost) 3. Selling price The detailed breakdown of the unit costs can be seen in the appendices. The selling price has been determined by the cost per unit of each product plus a 10% mark up. I have researched lingerie specialists to review market prices for standard products to ensure the cost of the product is competitive. At this level of mark up, the product is competitive in line with other similar manufacturers although it could be deemed as a specialist item. The profit made from the 10% mark up will be used to facilitate the future strategy of the company.

So we can invest in a larger factory, purchase operating assets, keep credit terms to a minimum, maintain a reserve for any unconsidered future eventualities and strengthen the business value. The selling price that I have currently applied to my products has been designed to ensure that I am competitive as a new market entry. Although my products appeal to a niche in the market if it is too expensive the consumer will continue to do what they have done in the past and my business venture will fail. As the product grows momentum and my business becomes established my selling price will be based on other considerations.

My experience and future outlook will allow me to plan a strategy that considers product demand and allows possible expansion, process development, property investment and research & development into new products. As time goes by, my selling price will be designed to reflect the strategy I adopt for my company. Budget In order to get a clear view of cash movement within the business and to plan my future requirements, I have constructed a cash flow statement and a budget. One will show if I have enough cash reserve to run the business or whether I need to find additional sources of finance.

The other highlights if I will make a profit at my expected sales volume. Sources of finance Whilst considering my business venture, I did investigate the possibility of alternative sources of finance, described below, so that I could reduce my personal initial investment. This would have allowed me to save the funds for my personal use or as a form of emergency financing within the business. However, my personal lack of business experience and the fact that the business has no trading history was considered too high a risk in all sources of finance.

As a result these options were considered too high cost at the initial start up stage and I have chosen to review my finance options once the business has begun trading. Short Term sources of finance Bank Overdraft – although i have planned a cash flow statement and budget, my view of the future may not be exactly correct. Income & expenditure timings may not occur as expected and there is a risk that there will be insufficient cash to make payments at the time requested by my supplier.

Arranging an overdraft facility will facilitate in ensuring that all payments are made on time so I can maintain a good relationship with my creditors. An overdraft facility would incur a monthly interest charge to the business as a percentage of the amount borrowed. Trade Credit – As a newly established business it is very difficult for me to gain trade credit from suppliers. This can be done over a period of time by ensuring that all accounts are settled in a timely manner. As my supplier gains confidence in my business my trade credit limit will begin to grow.

This will facilitate in strengthening my cash flow position as I am already required to give credit terms to my main customers. As a rule Trade credit does not incur interest charges, in fact if annual purchase values are high enough the business could receive a discount for bulk purchases reducing material costs. Leasing – In order to assist my business to grow I have opted to take a personal lease on a car, funded by the business. This will allow me to personally market my products with potential customers with the aim of expanding my customer base.

The lease covers the maintenance of the vehicle as well as use so reduces my risk and inconvenience of an unreliable vehicle. The premises is also on a short term lease over two years. Although I would ideally like to buy a property, this provided a much quicker alternative and ensures that I do not have the liability of paying for and maintaining a building over a long term should the business venture fail. Bank loans – I would use this as a source for funding capital investment in assets and other tangible requirements for my business. This would incur interest charges to the business.

The level of interest would depend on the security that the business could offer to the bank. Credit cards – I plan to use a credit card to fund my logistics costs on a monthly basis. The best price I have found for this service requires me to pay for it as requested. The credit card terms gives me 30 days before payment is due which allows my business to retain cash for a limited length of time. This can be applied to any expense and as long as I make payments within the statement date the business will not incur any credit card interest charges.

Long term sources of finance Owners/Share capital – The business set up is currently being funded from a personal inheritance of ? 100,000 from the death of a family member and savings of ? 5,000. At the moment my 100% ownership allows me to have full independent control over running the business and full rights to the profit from the business. However, should I require funding in the future, I would have the option to invite an investor to inject money into the business for a share of its value.

Although this could improve cash flow in the business when required at less cost to the business than some other forms of finance, it may require me to relinquish some of the control and profits in the future. Retained profit – In order to meet my personal commitments I aim to take a small salary out of the business. I intend to retain any other profit within the business as risk mitigation and to assist in growth by reducing the need to access funding from external sources this will hopefully make it cheaper for the business and will reduce cash flow risks.

Controlling the finances of the business As can be seen from the scenario above, the correct planning and management of finance is imperative to a business’ future. Numerous stakeholders have a vested interest in the business’ sustainability and the reputation of the business affects the way they behave towards it. Suppliers – When considering whether to give credit terms a supplier is concerned with the business’ ability to make payments within a timely manner.

As credit activity occurs any default on payments can result in the supplier reducing or removing the credit facility which can adversely affect the business’ cash flow and its ability to trade. Customers – Reputation is a major factor with consumers when deciding to purchase products. The state of the business can influence their decision as the viability of the product may be thrown into question. The customer may ask questions such as ‘will my warranty/guarantee be honoured? ’, ‘Can I get replacement parts? ’ and ‘Will the product depreciate at an exceptional rate? . Banks/Loans – The scenario is similar to the suppliers, Banks give loans based on risk and if a business is considered high risk it may be refused the loan or charged excessively high interest against the borrowing. This only exasperates the cash situation. Investors – Long term viability can influence an investor’s choice to put money into a business, they aim to recover their investment over a period of time and if cash is not managed correctly the long term sustainability is questioned making the investor reluctant to invest.

Employees – Job security is the primary concern for employees. They need to feel comfortable that they can plan for their future and meet their own personal commitments. A business with questionable strength creates a feeling of insecurity that can result in a disgruntled workforce and risk that the business will lose its essential skill base. In conclusion, the key to managing a successful business is forward planning and careful management of resources and costs. Maintaining a pro active approach to managing the business will ensure that surprises are minimal and solutions available.

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