Awarding Body: Arden University

Programme Name: Business Management with Foundation 2024

Module Name (and Part if applicable): Introduction to Business Finance

Assessment Title: Time Constrained Assessment

Student Number: 152860

Tutor Name: Ross Thompson

Word Count: 3000

Question 1

a) Here are the financial ratios for TT for the years X1 and X2:

Profitability Ratios:
Gross Profit Margin = (Gross Profit / Sales Revenue) * 100
X1: (43 / 200) * 100 = 21.5%
X2: (30 / 190) * 100 = 15.8%

Operating Profit Margin = (Operating Profit / Sales Revenue) * 100

X1: (22 / 200) * 100 = 11%
X2: (10 / 190) * 100 = 5.3%

Net Profit Margin = (Net Profit / Sales Revenue) * 100

X1: (14 / 200) * 100 = 7%
X2: (4 / 190) * 100 = 2.1%

Liquidity Ratios:
Current Ratio = Current Assets / Current Liabilities
X1: 66 / 60 = 1.1
X2: 66 / 60 = 1.1

Quick Ratio = (Current Assets - Stock) / Current Liabilities

X1: (66 - 25) / 60 = 0.68
X2: (66 - 24) / 60 = 0.7

Gearing Ratio:
Debt to Equity Ratio = Long-term Debt / Shareholders' Equity
X1: 60 / 71 = 0.84
X2: 60 / 78 = 0.77

Efficiency Ratio:
Inventory Turnover = Cost of Sales / Average Inventory
X1: 157 / ((24 + 25) / 2) = 6.29 times
X2: 160 / ((25 + 29) / 2) = 5.52 times

b) Comment:
● Profitability: There's a decrease in all profitability ratios from X1 to X2, indicating
declining profitability, possibly due to increased costs or lower sales revenue.
● Liquidity: Both current and quick ratios remain relatively stable, indicating TT's
ability to meet short-term obligations.
 ● Gearing: The debt to equity ratio decreases from X1 to X2, indicating a lower
reliance on debt financing in X2 compared to X1.
● Operating Gearing Ratio: TT has the highest operating gearing ratio in the sector,
which suggests that a small change in sales can lead to a larger change in
operating profit due to high fixed costs.

c) Advantages of investing in an effective, automated bookkeeping system:

● Improved accuracy: Automated systems reduce the likelihood of errors and
misstatements in financial statements.
● Time-saving: Manual bookkeeping processes can be time-consuming;
automation streamlines these processes, freeing up time for other tasks.
● Real-time insights: Automated systems provide up-to-date financial data,
enabling better decision-making and financial management.
● Compliance: Automated systems can help ensure compliance with accounting
standards and regulations, reducing the risk of penalties or fines.

Question 2

a) Accounting Rate of Return (ARR) using the average method:

For Software A:
Average Annual Profit = (Total Cashflows / Number of Years) = (16,000 + 16,000 +
16,000 + 12,000) / 4 = £15,000
Average Investment = Initial Outlay / 2 = £40,000 / 2 = £20,000
ARR = (Average Annual Profit / Average Investment) * 100 = (15,000 / 20,000) * 100 =
75%

For Software B:
Average Annual Profit = (Total Cashflows / Number of Years) = (17,000 + 17,000 +
17,000 + 17,000) / 4 = £17,000
Average Investment = Initial Outlay / 2 = £50,000 / 2 = £25,000
ARR = (Average Annual Profit / Average Investment) * 100 = (17,000 / 25,000) * 100 =
68%

b) Payback Period:

For Software A:
Payback Period = Initial Outlay / Annual Cash Inflow = £40,000 / £16,000 = 2.5 years

For Software B:
Payback Period = Initial Outlay / Annual Cash Inflow = £50,000 / £17,000 = 2.94 years
c) Net Present Value (NPV):

For Software A:
NPV = C0 + (C1 / (1 + r)^1) + (C2 / (1 + r)^2) + (C3 / (1 + r)^3) + (C4 / (1 + r)^4)
NPV = -£40,000 + (£16,000 / (1 + 0.10)^1) + (£16,000 / (1 + 0.10)^2) + (£16,000 / (1 +
0.10)^3) + (£12,000 / (1 + 0.10)^4)
NPV ≈ -£40,000 + £14,545 + £13,223 + £12,020 + £8,611 ≈ £8,399

For Software B:
NPV = -£50,000 + (£17,000 / (1 + 0.10)^1) + (£17,000 / (1 + 0.10)^2) + (£17,000 / (1 +
0.10)^3) + (£17,000 / (1 + 0.10)^4)
NPV ≈ -£50,000 + £15,454 + £14,049 + £12,772 + £11,611 ≈ £3,886

d) Based on the ARR, payback period, and NPV, Software A seems to be the better
choice. It has a higher ARR (75% compared to 68% for Software B), a shorter payback
period (2.5 years compared to 2.94 years for Software B), and a higher NPV (£8,399
compared to £3,886 for Software B).

e) The use of FinTech in the online retail sales project could be beneficial in several
ways:
● Payment processing: FinTech solutions can offer secure and efficient payment
processing systems for online transactions, enhancing customer experience.
● Data analytics: FinTech tools can analyze customer data to provide insights into
consumer behavior, preferences, and trends, helping TT make informed
business decisions.
● Personalized marketing: FinTech enables targeted and personalized marketing
campaigns based on customer data, increasing the effectiveness of marketing
efforts.
● Supply chain management: FinTech solutions can optimize supply chain
processes, including inventory management and logistics, to ensure timely and
cost-effective delivery of products to customers.

Question 3

Briefing Note to Chairperson Caroline

Subject: Budgeting Approaches, Organizational Slack, and Debt Finance for TT

Dear Chairperson Caroline,

I hope this note finds you well. As we delve into the strategic decisions regarding TT's
budgeting approaches, organizational efficiency, and financial structure for the
upcoming online retail sales project, it's crucial to consider various factors and their
implications. Below is an overview of key considerations:

a) Budgeting Approaches:

Advantages and disadvantages of different budgeting approaches:

1. Incremental Budgeting:
● Advantages: Simple, easy to implement, and provides a clear basis for
comparison with previous periods.
● Disadvantages: May perpetuate inefficiencies and fail to account for changing
business needs, leading to budgetary slack and suboptimal resource allocation.

2. Zero-Based Budgeting:
● Advantages: Forces departments to justify all expenses from scratch, promoting
cost-consciousness and potentially uncovering inefficiencies.
● Disadvantages: Time-consuming, requires significant effort to implement, and
can be demotivating for staff accustomed to incremental budgeting.

3. Activity-Based Budgeting:
● Advantages: Aligns budgeting with specific activities, providing a more accurate
reflection of resource needs and fostering accountability.
● Disadvantages: Complex to implement and maintain, requires detailed activity
analysis, and may not be suitable for all departments or projects.

b) Organizational Slack (Budgetary Slack):

Organizational slack refers to the intentional padding of budget estimates, resulting in

excess resources or funds beyond what is necessary for operations. Problems caused
by organizational slack include:

● Misallocation of resources: Excess budgetary allowances may lead to inefficient

resource allocation, hindering productivity and profitability.
● Reduced accountability: Slack can obscure true performance measures, making
it difficult to assess departmental or project efficiency accurately.
● Opportunity costs: Funds tied up in slack could be better utilized elsewhere, such
as investments in growth opportunities or debt repayment.
c) Sources of Debt Finance for the Online Retail Sales Project:

TT has several options for debt finance to fund the new online retail sales project,
including:

● Bank loans: Traditional loans from banks offer competitive interest rates and
flexible repayment terms.
● Bonds: Issuing bonds allows TT to raise funds from investors in exchange for
fixed-interest payments over time.
● Vendor financing: Suppliers may offer financing options to TT, such as extended
payment terms or installment plans for IT hardware and software purchases.
● Private equity or venture capital: In addition to debt, TT could explore equity
financing options through private equity firms or venture capitalists, exchanging
ownership stakes for capital investment.

Each debt finance option carries its own considerations regarding interest rates,
repayment terms, collateral requirements, and impact on TT's financial structure and
ownership. Careful evaluation of these factors is essential to make an informed
financing decision aligned with TT's strategic objectives.

If you require further elaboration or assistance on any of these topics, please don't
hesitate to reach out.

Best regards,

[Your Name]

———

This briefing note provides an overview of the considerations surrounding budgeting

approaches, organizational slack, and debt finance options for TT's online retail sales
project, tailored for Chairperson Caroline's understanding and decision-making process.

References:

https://emeritus.org/in/learn/business-finance-definition-and-meaning/

https://www.investopedia.com/articles/pf/13/business-financing-primer.asp
https://www.billdu.com/blog/business-finance-meaning/

https://squareup.com/au/en/the-bottom-line/managing-your-finances/business-finance-
definition-importance

https://www.studysmarter.co.uk/explanations/business-studies/financial-performance/
financial-terms-and-calculations/