Asres Kebede PPMR GSRH003/12

1. What does it mean finance?

Ans: -

Finance is abroad term that describes activities associated with banking, leverage, credit, capital
markets, money and investments. Or basically it represents money management and the process of
acquiring needed funds.

2. What are the major source of finance?

Ans: -

there are two sources of finance:

 Internal source of finance and

 External source of finance

Internal source of finance is a source of finance which is driven within the organization.

More specifically the source of the finance is the organization by itself. To mention some of them is

Owner investment, retained profit, sale of stock, sale of fixed assets, debt collection. Whereas
external source of finance is a source of finance driven from outside of the organization. The source of
finance are external institutions other than the organization. To mention some of them:

Bank loan, additional partners, share issue, leasing, hire purchase, mortgage and trade credit.

3. Why projects not yet completed within the allocated budget and time?

Ans: -

there are a lot of reason for projects not completed within the allocated budget and time

the reason is:

 Lack of project management experience:

A mismanaged project can lead to poor budget management and missed deadlines that in
return result in cost overrun and missed deadline.

 Scope creep:

The additional hours and resources needed because of the project scope creep will result in
additional budget and time consumption.

 Poor planning
 Lack of coordination

To generalize, with respect to the course project finance management, we might suffer with budget and
time overrun because of mainly two things. These are:
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 Lack of proper cost management: if we don’t have proper cost monitoring and control in the
project with the means of cost reporting, we will end with budget overrun. So as a project
manager we should maintain a proper cost monitoring and control plan and implement it in
such a best way.
 The progress report is the main tool to keep the project in the right track to complete the
project within the allocated time. If we don’t have progress report format and update the status
of the project periodically, it will never be easy to complete the project within the project time.

4. Explain the difference between cost and expenses. Support by example

Ans: -

The term cost is to mean the amount spent to purchase an item, a service and etc. which result in
asset. but We call expense that the amount spent to get the service, good and item with some cost
that will not bring an asset.

Example

If we purchase a house with some amount in Hawassa city with amount ETB 1.5 million and pay ETB
30,000 for commissioning, the ETB 1.5 million is cost of buying the house and ETB 30,000 is
considered as the expense to buy the house.

5.what is difference and similarities between development project and commercial /business
project?

Ans: -

Similarity

 Both are temporary and unique

 Both have scope
 Connected activities
 Both have time restrictions
 High level of uncertainty and risk

Difference

 The development project focus on solving development problems without much concerning on
the return. In short development project is not profitable whereas business project is profitable.
 development project is owned by government or society whereas the business project is owned
by private.
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6. Discuss the cost classification with respect to:

a. time
b. management function
c. traceability to particular cost object
d. behavior pattern
e. decision making process

Ans: -

a. Time period costs not included in product costs and not directly tied to the production
process. Overhead or sales, general and admistrative costs are considered as time
period cost.
b. Management function deals with the cost of production, selling and distribution.
Thus, costing means such an analysis of information as to enable management to
know the cost of producing and selling, that is the total cost of various products and
services and also to know how the total cost is constituted.
c. Based on their traceability to a particular cost object this aspect is one of the most
important classifications of costs, in to direct costs and indirect costs. This
classification is based on the degree of traceability to the final product of the firm.
And the direct and indirect costs will be influenced by traceability.
Direct costs: so these are the costs which are easily identified with a specific cost unit
or cost centers.
Indirect costs: these costs are incurred for many purposes, i.e. between many cost
centers or units. So we cannot easily identify them to one particular cost center.
d. Based on their behavior pattern cost behavior patterns refer to how business and
operating expenses change or remain stable through different events. Patterns can
change especially during varying production levels or sales volume within the
company. Cost behavior patterns occur in fixed, variable and mixed expenses.
e. Based on decision making process used during the planning cycle and drives the
process of choosing product and process designs. Will result in a product that can be
produced at a cost that will allow an acceptable level of profit, given the products
estimated market price, selling volume, and target functionality.
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7. Which project selection techniques/ method is best? Why?

Ans: -
Internal rate of return(IRR) is the best compared to the other methods used for the selection of
projects because, it provides the exact rate of return for each project as compared to the cost of
the investment. It also allows investor to get a sneak peek into potential returns of the project
before it begins. And it considers the time value of money that makes the process of evaluating
returns more accurate and credible.

8.explain the key points included in progress report.

Ans: -

the key point in progress report are:

 Report date: the date the report is prepared
 Overall status: the overall status of the project, the milestone accomplished, works to be
completed, risks identified will be included under this section.
 Project summary: display summary information about a project, including current stage,
over all status, key accomplishments, upcoming activities, the cost and amount of
resources that are consumed, mapped risks indicating categories with high number of
risks.
 Key issues: what problems or unexpected things, if any, have arisen
 Identified risks: the risks identified up to the report date.
 Tasks and next step: the tasks which are completed and balance task need to be
completed and the next step means the next mile stone to be completed.
 Decisions needed: in this section the issue which need special attention will be presented
to get attention of the top management for decision.
 Key future dates: dates that shows future mile stones to be completed
 Budgeted cost: the budget allocated for the project
 Spend to date: the amount of money or resources spent up to report date.
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9. Discuss at least five internal and external sources of finance with their advantage and
disadvantage.
Ans: -

the five internal source of finance is:

 Owners investment: this is money comes from owner saving.

Advantage
 Doesn’t have to repaid
 No interest is payable
Disadvantage
 There is a limit to the amount

 Retained profit: this is the profit made is again ploughed back to investment.
Advantage
 Doesn’t have to be repaid
 No interest is payable
Disadvantage
 Not available to a new business
 Business may not make enough profit to plough back
 Sales of stock: this money comes from selling of unsold stock.
Advantage
 Quick way of raising finance
Disadvantage
 Business have to take reduced price for the stock.
 Sales of fixed asset: this money comes from selling off fixed asset.
Advantage
 Good way to raise the finance that is no longer needed.
Disadvantage
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 Some business doesn’t have surplus assets to sell.

 Debt collection: a business can raise finance by collecting the money own to them
from their debtors.
Advantage
 No additional cost in getting this finance.
Disadvantage
 There is a risk that debts owned can go bad and not be repaid.
The five external source of finance is:

 Bank loan: this money borrowed from bank with some agreed interest rate within
specified period of time.
Advantage
 Set repayment are spread over a period of time which is good for budgeting.
Disadvantage
 Can be expensive because of the interest
 Bank overdraft: this is where the business is allowed to overdrawn on its account.
Advantage

 This is a good way to cover the period between money going out of and coming into
a business

Disadvantage
 Interest is repayable on the amount overdrawn

 Additional partners: This is sources of finance suitable for a partnership business

Advantage
 Doesn’t have to be repaid
 No interest is payable
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Disadvantage

 Diluting control of the partnership

 Profits will be split more ways
 Share issue: This is sources of finance suitable for a limited company

Advantage
 Doesn’t have to be repaid
 No interest is payable

Disadvantage

 Profits will be paid out as dividends to more shareholders

 Ownership of the company could change hands
 Leasing: This method allows a business to obtain assets without the need to pay
a large lump sum up front

Advantage

 Businesses can have the use of up to date equipment immediately

 Payments are spread over a period of time which is good for budgeting

Disadvantage

 Can be expensive
 The asset belongs to the finance company
10. Elaborate the factors affecting choice of source of finance
Ans: -
The factors affecting the choice of the source of the finance are
 Cost
There are two types of cost, the cost of procurement of funds and cost of utilizing the funds.
 Financial strength and stability of operations
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In the choice of the source of finance business should be in a sound financial position so to be
able to repay the principal amount and interest on borrowed amount.
 Form of organization and legal status
The form of business organization and status influences the choice of a source for raising money.
 Purpose and time period
Business should plan according to the time period for which the funds are required.
 Risk profile
Business should evaluate each of the sources of finance in terms of the risk involved.
 Control
A particular source of funds may affect the control and power of the owners on the management
of a firm.

11. Describe at least 4 project classifications

Ans: -
Firms can categorize projects in the following forms:
 Replacement or maintenance of businesses: expenditure to replace worn-out
equipment’s used in production of profitable production.
 Replacement or cost reduction: expenditure to replace serviceable obsolete equipment.
 Expansion of existing products or markets: expenditure to increase existing products.
 Safety or environmental projects: expenditure necessary to conform with government
orders, labor agreement or insurance policy terms fall under this category.
12. What is the need for progress report?
Ans: -
 to inform a supervisor, associate, or customer about progress we have made on a project
over a certain period of time.
 Reassure recipients that we are making progress, that the project is going smoothly, and
that it will be complete by the expected date.
 Provide our recipients with a brief look at some of the findings or some of the work of
the project.
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 Give our recipients a chance to evaluate our work on the project and to request
changes.
 Give us a chance to discuss problems in the project and thus to forewarn recipients.
 Force us to establish a work schedule so that we'll complete the project on time.

13. Discuss cost management vs cost reduction

Ans: -
both concepts aim to control the cost but the consequence of the two method is different
and as we mentioned below cost management is a systematic way of controlling and
managing the cost and it have positive impact opposite to cost reduction which has
negative impact.
Cost management:

• An ongoing, healthy process of monitoring, analyzing, and accurately allocating costs and
of promoting a culture of cost awareness.
• Nothing wrong with this at all
• It same as cost controlling and
• Has positive impact
Cost reduction
 We all need to do a little belt tightening now. But, this is different.
 Frequent cost cutting can adversely affect a company –
 quality may suffer,
 the reputation of the company can be hurt,
 customers, suppliers, and staff become unhappy
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14. What is CVP analysis and why?

Ans: -
CVP analysis is the analysis of three variable namely cost, volume and profit. Such analysis
explores the relationship existing amongst costs, revenue, activity level and resulting profit. It
aims at measuring variation of cost with profit.
Why we use CVP is because we need to:
• Analyzing the effects of changes in selling prices on profits
• Analyzing the effects of changes in costs on profits
• Analyzing the effects of changes in volume on profits
• Setting selling price
• Selecting the mix of products to sell
• Choosing among marketing strategies

15. What is monitoring and impact valuation mean?

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Impact is the difference between outcomes with the program and without it and the goal of
impact evaluation is to measure this difference in a way that can attribute the difference to the
program, and only the program.
Monitoring is closely following up the process to achieve the goal.
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Part II: work out

#1

Ans: -
Given:
Sales output=600,000 per year
Selling price =3 per unit
Fixed cost=480,000 birr
Variable cost= 2 birr per unit.
Required:
a. compute the company’s CM ratio and variable expense ratio.
b. compute the company’s breakeven point in both units and sells birrs.

a.CM Ratio = unit contribution margin /unit selling price

= (ETB3-ETB2)/ETB3= 0.334

Variable expense ratio= variable expense/per unit selling price

= ETB 2/ 3

=0.667

b. Breakeven point = Fixed expenses / CM per unit

= ETB 480,000/ (ETB 3- ETB 1)

=480,000 units

In sells birr = 480,000 unit’s x ETB 3

= ETB 1,440,000
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