E-Assessment Brief (Moodle) and feedback form to use with Edexcel Qualifications (QCF)
Learner’s Name Fred Gillard
Course OCR Level 3 Cambridge Technical Extended diploma in Business
Unit Number(s) ; Title(s) Unit 2: Business Resources
Assignment Title ; Number (e.g. 1 of 3) Choosing the most appropriate source of finance
3 of 4
Assessor’s Name Tyrone De Silva
Assessment Brief IQA
by: (name and signature) B Dass Assessment Brief sampled
by Lead IQA: (name and signature)
Date 27.8.18 Date
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**Any resubmission evidence must be submitted within 10 working days of receipt of results of assessment.
Specific outcomes and criteria being assessed
Unit Grading Criteria offered Description
3 P4 Describe sources of internal and external sources of finance for a selected business
3 M2 Analyse the advantages and disadvantages of a range of different sources of finance for a selected business
3 D1 Evaluate the best source of finance to meet the needs of a selected business
English, maths and other Skills for Success covered in this assignment English
Developing Mastery skills. Analytical and evaluative skills Maths
Compare the costs of each financial products on business costs
Skills for Success
Developing commercial awareness.
Developing research techniques
Scenario Select an organisation and describe the different sources of internal ; external sources available.
Task 1 Grading criteria covered: P4
Produce a report which describes the different sources of finances available to your selected business. Ensure you differentiate between internal ; external sources of finance. 4 internal 4 external
The company I have been given is Cornelius, this a Health and Nutritional chemical company, they specialise in Health and Nutrition, which in turn helps to keep people fit and healthy. Cornelius was established in the City of London by Dr. Ernst Gustav Cornelius as E.G Cornelius – a commodity trading business in 1935.
An Internal source of finance is something that happens inside the company for example sales of assets.
An External source of finance is funds raised outside the company.
Internal source of finance
Retained Profit is when a business has a very successful year of trading and selling assets when they have paid all of the cost they have money/ profit in the bank. Looking at Cornelius they have a good year as they made £10-£20 millions in retained profit this year and that was with all the expensive repaid. So, they are doing well as a company in their sector.
Reduce stock this means the company cuts the stock down, assets to make money. In Cornelius case they would reduce the amount of raw materials, finished items, so their costs will be lower. So, they are making more profit by doing this. However, this would affect them by not having enough stock if they sold-out.
Sales of assets this means the company have got they hands on some money by selling stock and assets. In this case the only way Cornelius would get they hands on money is selling the products, cutting down on machinery and vehicles.
Owners Funds is used mainly by the owner as it is what you have in your account. Also it the money the owners invested his own money into the company. Cornelius would have used this type of finance when they started up as the owner would but money towards it.
External source of finance
Trade Credit: Businesses will usually place an order for supplies / inputs and will pay after receiving the items. Looking. At Cornelius they would do this when they have got they supplies in to make they treatments and products and they would wait until they got what they needs.
Bank loans, financial leverage is how much money they borrowed to start the business or make a product. Cornelius would have used this type of finance in the early stages of what they are doing as no one knew how they were so they wouldn’t by making much money and would need to borrow it from the bank to do so.
Venture capital: the term ‘venture capital’ is more specifically associated with putting money, usually in return for an equity stake, into a new business, a management buy-out or a major expansion scheme. Cornelius would uses venture capital if one someone would by the company and give shared owners to them.
Leasing and hiring equipment and vehicle. The company would lease equipment they would pay a monthly fee to a company to uses the equipment and the other company will make sure the equipment is functioning and if not they would send someone out o sort it out. Hiring they would hire vehicles and do the same thing as leasing when they pay monthly fees. The vehicle will be insurance and taxed b the hiring company. In this case Cornelius would lease equipment and Hire vehicles.
Task 2 Grading criteria covered: M2
Produce a report of no more than 500 words which analyses the advantages and disadvantages of internal & external sources of finance for your selected business. A minimum of 3 Internal & 3 external sources.
Internal Sources of Finance Advantages and disadvantages
Advantages of Retained Profit
When earnings are retained, they add to the corporate balance sheet, which increases stockholder equity, increasing stock value. Increases of this kind provide stock price momentum, attracts investors and can drive the stock price even higher. Had the profit been distributed to the stockholders, they would benefit from the dividend, but the value of the corporation itself wouldn’t increase.
In business, increased liquidity assures stability because it provides funds for any emergency that arises and – more importantly – makes it possible for the corporation to survive a downturn in the economy without borrowing funds, and to recover from an initiative that wasn’t profitable.
Retained profits are a source of interest-free funds for research, innovation and expansion.
Disadvantages of Retained Profit
Disadvantage – this one of retaining profit rather than distributing it as dividends to stockholders – is one of the most important considerations for many investors when buying stock is the stock’s dividend stream. When profits are retained rather than distributed, even a highly profitable corporation may be less attractive to stock buyers than would an otherwise similarly profitable corporation that distributes dividends generously to stockholders.
Linking back to the company Cornelius I can see they would uses retained profit to their advantage because all the money they make keeps the company going. Also, they will keep their employers happy as they are getting paid, Keep shareholders happy as the company is make money and they are making money. However, the disadvantage of this is invested may see the retained profits aren’t doing well so they will not take a risk and put money in the company. So, the company may struggle
Advantages of Reduced Stock
By reducing your stock, this limits the amount of floor space/storage area you must dedicate to holding the stock. You can reduce the number of warehouse employees you need, reduce administrative costs of logging, moving the stock out to suppliers. Less rental of floor space, if you don’t own the warehouse. Plus, the more area of your business dedicated to holding excessive stock, the less fluidity you have with money – i.e. It is all tied up in stock. You should be aiming to do JIT – just in time delivery
Reducing your stock also reduces your waste/disposal of waste. Some products perish, expire or simply go out of season or style. Reducing your stock levels, you mitigate the value of products that are thrown out or sold at marked down prices or even loss. This reduces your overall inventory costs and improves your bottom line. Plus, marking down items to get them sold can instil a price orientation in your customers that is hard to overcome. You don’t want your brand to be seem as cheap and cheerful!
Customers often stop to look at items in the window of their favourite shop – hence the term window shopping or view online their favourite businesses on a regular basis. By reducing held stock and getting a good turn over quickly, you can move merchandise around and keep fresh products rotating on a regular basis. The newer displays and products customers see when they stop in to browse, the more likely they are to continue to come back and spend money more often. This is seen as a key factor of a business, as to how up to date they are with trends.
Disadvantage of Reduced Stock
If you have a customer base that places steady orders or you’ve been in business long enough that you know what sales to expect for a given period, keeping reduced stock on hand may be a safe way to save some money. But a declining inventory puts renewed emphasis on those projections, because it reduces the amount of flexibility you must increase your bandwidth. When demand increases, your business could suffer long-term consequences if you lack the capacity to serve your customers and your competitors are able to fill the breach.
This is sometimes known as the “Delia” effect. Delia Smith is a well-known cook/TV presenter and when she said about cooking and using an ingredient – it sold out immediately and the suppliers could not keep up with demand.
Benefit of ordering stock in bulk is that you can use your purchasing power to negotiate discounts, which allows you to minimise those costs. Keeping a minimum inventory means your cost structure can change quickly if supplier prices fluctuate. E.g. if you need a commodity that suddenly spikes in value or your main source for your goods has its manufacturing facility damaged in a fire for example, you may have to pay a lot more on short notice to replenish your stores, with another company/supplier, whose quality you may be unaware of as you haven’t used them before
Linking back to the company Cornelius they would only reduce they stock if they had to make money. As reducing stock is good because it allows you to save money on materials and floor space. This means the company would need to reduce sales as a result of reducing stock they would run out of products to sells. This can be good for Cornelius however, it can be bad as well as they would lose money if they reduce stock.
Advantages of Sales of Assets (fixed)
The biggest advantage of an asset sale is the money you’ll have on hand once everything is finalised/sold. You can use the money towards, a down payment on a house/another facility or put it toward paying off your debts or purchasing new assets.
Disadvantages of Sales of Assets – disappointing Results
Unfortunately, asset sales don’t always give the best price, as the bidders know that you need as much cash as possible, especially if you’re selling multiple items at once. For business asset sales, experts recommend pricing each item individually, and you can apply this same concept to personal asset sales. If you’re responsible for setting the price for each item, use sites like Craigslist and eBay to monitor the going rate for used items. If you have valuable assets like antiques, it might be worth getting an estimate from an auction/antique auction house before the sale date. Sometimes, this must be done Bankruptcy – so buyers know you need as much cash as possible, to pay off creditors – so you don’t always get the best price.
Disadvantage of Sales of Assets is you won’t be allowed to sell your assets at the same price due to the price change.
Linking back to the company Cornelius I can see they would try and uses sales of assets to their advantage. As they would sell more stock at once so more money is going back into the company banks. However, the only down fall for Cornelius is they wouldn’t be able to change they price already sold it at one price so other people would want to pay it for the same
External Sources of finance Advantages and disadvantages
Trade credit or on Account. This is offer by companies to maintain Customer loyalty this means the supplier trusts you and your company that you will pay them on receipt of an invoice and have confidence that you will pay. This means this has a positive on your cashflows as you are receiving the items to make your products however, it will have a negative on your supplies cashflows as you don’t pay straight away.
Disadvantages of trade credit is the supplier may not supply you with your supplies to make your products as they want the money straight away for supplying you.
bills to pay.
Linking back to Cornelius I can see using trade credit is good as it gives you good customers satisfaction as you suppliers delivers the good to you as you pay them back when asked. You invested your time in the supply as you stuck by them for years, so they know you want to do anything to make them hate you. However, this can have a negative on Cornelius cash flow as money is going out straight to the suppliers before they sold anything. The supplies maybe damaged and they have washed money on them.
Advantages of Bank loans
Bank loans, loans your money when you need this to pay for assets and you don’t have enough money in the company to do this. This means you get the money quickly and efficiently as you are dealing with the banks money and not your own, so you can pay debts off and keep the company going.
Disadvantage of bank loans means you must pay interest rates or have a time limited loan with criteria of when you must pay this back and the assets that you have purchased are not legally yours until you have paid off the loan. This could mean that the bank could always foreclose the loan and take control of the assets that you have purchased but not necessarily paid for all of them.
The company Cornelius would use bank loans if they are running low on money as the sales haven’t happen. Cornelius would have to pay interest and they may go up though the loan, so they would be owing more money to the banks and this would affect the company in the long run.
Disadvantages of venture Capital
Means more stakeholders and shareholder take control of your company this means you loss some control. This is often high risk as investments are being done on high risk businesses
Advantage of venture capital is you get more connections in with the business, so it will have tremendous benefits.
This is someone who makes money by investing in high risk projects to make money quickly and is a way of providing capital for new enterprises. This way of finance is used often in start-up businesses. Think Dragons Den. Where they invest in your business but for a stake of it, and often influence major decisions within the company. This is often used by wealthy investors who like to invest their capital for long term growth. The capital is known as venture capital and the investors are called venture capitalists.
Cornelius owners may not want to see the company and lose owners ship of it so they may not choose to uses venture capital. However, they would do if the price was right and let the other person take charge of it and have a down-step of owners if the company needed it.
Task 3 Grading criterion covered D1:
To achieve task 3 you will select an appropriate source of finance for a business of your choice and make a case for your choice. In your evaluation you will construct a report supporting your choice of finance stipulating why it represents the most appropriate source of finance.
The company I have chosen is Cornelius this company that specialises in health, nutritional and beauty care. Founded in 1935 by Dr. Ernst Gustav Cornelius as E G Cornelius in the City of London as a commodity trading business. The most important source of finance for the business is venture capital. The most important source of finance for the business is venture capital. I have chosen venture capital because if the business didn’t have investors, stakeholders and shareholders to invest money into the company the company wouldn’t run as they wouldn’t have any money to produce products and pay for supplies/suppliers from other companies and they wouldn’t be able to have many great partnerships and offices across the world. Venture capital is extremely important to this company even more than sales of assets what brings a great turnover and net profit in per year to keep the business performing at such high standards. However, with the investor that put thousands of pounds into the business to when it was starting out this business would not be able to last. This is why capital is most important to this company Cornelius. The company has stuck to its original ideas – as a commodity trading business.
Venture capital is companies with a potential to grow need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists. Cornelius would use
venture capital as it will help the business grown quicker as they have money to use to sell and produce products. Venture capital is also important as it can take the stress off the owner as they would they would reduce the ownership of the company and allow the capitalists to take some control of the company. Venture capital is more appropriate to the company Cornelius as it puts large sums of money into the company to make the company more efficient and grow the company outsets. However it can be the downfall of the company as the investors are looking for high rewards when they do this and the company isn’t performing they may pull out of the investing and let the company fall. Or they will put more money in so the company can get back on its feet. Venture capitalists is more important to Cornelius than bank loans as bank loans you can only get a maximum sum of money of £50,000 for example, and you will have to pay interest on that, you will have to pay it back in a certain time as well. And the company may need more money than that to keep it going so venture capital is better for the company. Comparing this to sales of assets its better as they already have money in the bank to make and produce products with sales of assets they would have to wait until they sold things before money is going into the company and they will have to pay the expensive so they may have debts and can’t pay it of because the company sales are bad or slower. With venture capital the money invested will help pay the expensive and leave the company debt free.