SOLUTION: Business Finance | My Assignment Tutor

Student ID number: 2018076 Title of module: Business Finance Task: 2500 words Date of submission: 14:00 Friday, 26th March 2021 Word Count: Executive Summary 100 WORDS FOR EACH PART, Summary of the tasks and main findings For both tasks 1 and 2 first task of this report identifies the meaning of profit and cashflow and what disparate them. It is followed by an overview b. what is meant by Working Capital and, the meanings of Receivables, Inventory and Payables. c. how changes in Working Capital affect Cashflow. (30 marks) ii. Apply the concepts in (i) above to this company to show how the way the company is being managed might affect its financial results. (15 marks) iii. Analyse and recommend what steps should now be taken to improve this company’s cash flow through better Working Capital management. (15 marks) Your report should begin with a concise and relevant Executive Summary. An additional Introduction is not needed. The Executive Summary and References do not count towards the word limit. The contents of tables are also excluded but the use of text in tables should be kept to a reasonable level and be properly explained in the body of the text. Second task of this report incorporates a cash budget statement analysis prepared for Thorne Estate Ltd for a four months period. Observations were made related to the 25 units break-even point, where the company’s growth requires additional staff. In addition, recommendations were based on the high tax liability, by forecasting their tax position to pay some of the loan, reinvest their money or negotiate better fee structure. This report investigated the various aspects of hosting the Olympics games, which was found to be mainly positive, creating new buildings that can be used further for the community, bringing financial gain from tourism. The analysis focused on the economic impact mainly, which has resulted positive despite the huge spending involved to host such an event, the publicity the country receives, the job creation on long and short term and future trade opportunities, are huge advantages from which the hosting country can benefit. The other two aspects discussed were the environmental which brings positive changes in public transport through the cycle schemes and implements changes in the infrastructure that reduces pollution. The social impact concluded that it lifts up population’s morale, brings people together providing entertainment and sporting facilities. Table of Contents Executive Summary. 2 Main body. 4 I.Cash Management and components of Working capital 4 a)Profit and Cashflow.. 4 b)Working Capital, Receivables, Inventory and Payables. 5 c)Working capital affects cashflow.. 6 II.Company‘s management affects Trend Ltd financials’ results. 8 IV.Analysis and recommendations improving company’s cash flow through better Working Capital management 9 I.Cash budget statements for Thorne Estate Ltd from 1st Jan to 30th April 2021. 11 II.Observations and recommendations to the management of Thorne Estate. 11 Appendix. 12 Reference list 14 Main body Task 1 I. Cash Management and components of Working capital a) Profit and Cashflow Profit is defined by Wood and Sangster(2007) the amount by which the price of goods sold to clients are higher than the value of the assets used to enable supplying the goods for a period. The profit is recorded in the Income Statement which informs users about a company’s financial performance. The most important types to show a business profit are gross profit, being identified as total sales minus total cost of sales, and net profit, which is calculated as the gross profit minus the other expenses incurred by the company to trade. To figure out the cash circulating into and out of an organisation within a period, Carey and Knowles(2020) are introducing the Cashflow Statement. Being the most important statement within business users, it shows if the company has problems with cashflow or the opposite, and how the business has funded its operations. Also analyses the long-term assets bought or sold, and any extra long-term funding raised or repaid within a financial period. A difference between profit and cashflow is seen on the Income statement which is prepared on an accrual basis. As accruals are deducted as an expense incurred but not yet paid for, it will not affect the cash. However, when we get the total from the trial balance and we add the accruals, they will increase or decrease the expense, which means the profit will decrease. (Carey and Knowles,2020) Depreciation being a non-cash item is another cause of difference between cash and profit. This is added back as a non-cash expense and does not affect the cash, but it affects the depreciation expense, so as result will reduce the profit. If an owner buys non-current(long term) assets, that will reduce their cash and not impact the profit. However, depreciation occurs, and the purchase of the asset will devalue at the end of each financial account, where the owner decided its value at that day. Now if the owner decided to sell a non-current asset, the value at that time will be added to the working capital but will not have an effect on the profit. (Carey and Knowles,2020) Any movement within Working Capital, increase or decrease, will have a straightforward consequence to cash balance, but not on the profit price. The profit of a business never makes a reliable indicator of its cash balances, and even might present a shortage of cash. In order to succeed, a business must keep an eye on its profitability but also its liquidity, as well as closely monitoring and controlling all areas of the working capital. Being short of cash can have serious consequences, having your assets repossessed or even imprisonment. 430 words b) Working Capital, Receivables, Inventory and Payables One of the biggest items under the operating activities is working capital. According to Carey and Knowles(2020) working capital represents the business owner’s investments in current assets. To find out a business worth we deduct from the company’s short-term assets(inventories, short-term receivables, cash balance) less the short-term liabilities(short-term payables, loans, due within a year). The main components that makes up the working capital formula is: Accounts Receivable plus Inventory minus Accounts Payable. This formula is crucial to execute financial analysis, financial modelling and conducting cash flow. As stated by Afaneh. A,(2020) trade receivables are customers who owe business money, where the business has sold the goods/services on credit but has not yet received the money. However, the business will suffer, being deprived of cash if an abundance of receivables occurs. So, thereafter is important in the statements of cash flow to subtract any increase in receivables as an outflow of capital. The definition given by Cambridge Business English Dictionary to Inventory as being “the amount of goods and materials owned by a company at a particular time”, whether they are raw materials, work in progress or ready for resell. If more money will be utilised to buy these products, also the inventories will grow for the business portfolio. Therefore, in the cash flow statement should be deducted any increase in the inventory as an outflow of capital. Investopedia’s explanation of Accounts payables are the amounts owed short-term to supplier of the business and the obligation of honouring their obligation. This is used to fund the business and can be found on the balance sheets. As long as the company continues to deal on credit, they will be cash deprived, and any boost in payables should be included in the cash flow statement as a cash inflow. In order to enhance cash flow, administration may embrace to settle these payments as soon as possible. 301 words c) Working capital affects cash flow Increases and decreases in a business working capital will not impact on the profit figure, but they will have a direct effect on the cash balance. Working capital is found on the balance sheet on a company’s financial statement whereas cash flow is located with the cash flow statement. (Afaneh.A,2020) Looking at the components of the working capital- inventory, receivables and payables we can work out how the working capital might affect the cash flow. If you purchase more inventory, that will make the cash flow go down, but the profit will not be affected. Your cash will be frozen in the stock purchased. If you purchase less inventory ,that will affect the cash flow going up and the profit will be affected, because you don’t have enough merchandise to sell and make a profit. In conclusion, if you held more inventories that will reduce your cash, but it does not affect your profit. (Carey and Knowles,2020) If trade receivables are increased, that will reduce the cash flow, but does not impact the profit. When we have credit sales, the cash will go down, however profit will not be affected. Same happens if trade receivables go down, cashflow will go up and profit will not be affected. (Carey and Knowles,2020) When trade payables increase, the cash will go down and the profit will not be affected. If trade payables decrease, the cash will go up and profit will not be affected. Good practice is to match your receivables with your payables, credit both. (Afaneh.A,2020) Figure 1: How working capital affects cash flow (Source: Created by Learner) 246 words ii. Apply the concepts in (i) above to this company to show how the way the company is being managed might affect its financial results. Focuse on their decision and next criticise -Think of what the company might do, manufacturers of gym clothing and footwear. -It supplies several large design companies who then market the clothes and shoes under their own brands. Their clients are now businesses,b2b model, business to business, maybe that will have some implications, maybe trades receivables maybe high, think how it’s operating, who are the customers, who are the suppliers, cause that will give more meaning to the numbers. -300million, large company, since the turnover, so expecting many employees, maybe operate in multiple countries – Two key corporate customers are Tkechers Ltd and Sadidas Ltd.,largest two custmers maybe special relationships – The company is managed by Arpha, who owns 30% of the shares in the company, while the remaining 70% is split between four other family members.despite the large size, it’s a company private ltd, founder alpha, the maj holders 30 % – The other shareholders are concerned about the business. Although there seems to be plenty of business coming in and the last year has been reasonably profitable (Operating profit was £60 million last year before interest and tax), the company’s debt has increased to £95 million from £60 million the year before.the manager is alpha,but the other four family members are happy with the profit 60 mil op profit,but worried about the debt, increased to 95 mil. Concern the company is borrowing in excess of what it needs, to have in mind – Arpha has started talking about the need for the other shareholders to invest more money to reduce the debt. Arpha is recommending that clearly the business canno t repay the debt or reduce the debts from its own revenue ,so he wants the owners to injectsome cash -Towards the end of last year, TL acquired a 30% stake in a company which produces a range of walking clothes and sandals. The impact of buying this company will show this year,not last year.So they both 30%stake in the company, now the items they are selling they are somehow related to what the company already sells,still under the clothing and footwear but maybe the customer time is different-clothes and sandals, above gem clothing and footwear -TL invested £20 million in the company to acquire the shares and has agreed to pay a £5 million advance fee for exclusive supply of the products. Cash involved in this deal 20mil went out to buy 30%shares and also paid 5mil fee, exclusivity product supply -The company is owed £10 million for a series of large orders placed by Tkechers last year. T kechers trade receivables is 10mil owed -There is also an outstanding dispute about a £12.5 million delivery to Sadidas completed in 2019. This an account receivables owed by sadidas dispute,maybe don’t agree with this figure,or disagree with the quality of the product, they are not happy with the figure -This has led to payment being withheld while negotiations continue between lawyers and industry consultants. Not collectable -There is a further problem that Arpha believes the Sadidas issue arose due to the supply of sub-standard materials by a supplier in 2018. Some of the material were poor quality using in the making of the product than what was agreed,, -He has refused to pay the supplier which is now threatening legal action. Sadodas,our business and the supplier. Supplier gave us some material that was less quality, made the product for sadidas, now complain,going back to the supplier . So in the same way sadidas refuse to pay arpha, also arpha refuse to pay suppliers -In the meantime, a large stock of materials and supplies has built up at the company’s London warehouse. Stock building up means inv increasing -Arpha insists that the company needs to have this level of stock for when the dispute is sorted out. This level of inv is needed, he doesn’t think is high level of stock,because when dispute is over this inv will be needed.he could be right or wrong,keep open mind -He is also reluctant to press his key customers too hard for payment. Another approach is that he is too soft with the collecting the credits from the customers -The other shareholders have approached TL’s accountants to review the situation.the other 4 shareholders clearly not happy with the debt,not happy being asked to make investments to settle this debt II. Company‘s management affects Trend Ltd financials’ results List all the factors that will result in profit and cash not being the same. Inventory HELD AT THE END OF TH MONTH Fridges purchased Danni had capital put into the business TRADE RECEIVABLES WHO OWE THE BUSINESS AT THE END If you held more inventories that will reduce your cash, it doesn’t affect your profit If you buy non current assets, that will reduce your cash and not impact the profit Capital increases your cash not impact profit Trade receivables if they go up that will reduce the cash, but don’t impact profit. Have this in mind question answered by teacher IV. Analysis and recommendations improving company’s cash flow through better Working Capital management The general causes of cash flow problems should be analysed using the case study presented to you, particularly regarding the management of working capital. Methods for dealing with cash flow problems and managing cash for the business described should be proposed and evaluated. iii. Analyse and recommend what steps should now be taken to improve this company’s cash flow through better Working Capital management. How to improve cash flows under better management Good way to approach this is a paragraph introduction under management working capital is key …, under management working capital this and this accounts will be addressed, then write one large or two small paragraphs about each one, one large paragraph about accounts receivables(since we have a dispute and have other large customer with some outstanding amounts maybe recommend more than 1 for this), and be specific what it is your recommendation, what is to be done, one about inventory and one about trade payables, at least one recommendation for each account, make sure it’s a clear recommendation, precise, very specific, and a summary to be in executive summary, each recommendation Operating activities is working capital +trading related Investing activities is selling/buying non-current assets Financial activities is loans and shares Working capital is the amount invested in the short-term assets of a business. It is represented by inventories, short-term receivables, and cash balances less short-term liabilities. Track the cash and see where the cash has been spent and what are the sources of cash that you have received Movements in working capital Increases in inventory use up cash and hence represent an outflow of funds.Increases in trade receivables deprive the business of cash and are an outflow of funds.Increases in trade payables help fund the business and give rise to an inflow of funds. Depreciation is added back to profit as a non-cash expense. Purchases of non-current assets are an outflow in the year they are purchased. Increases in inventory use up cash and hence 2020 2021 changes represent an outflow of funds. inv 7000 20000 13000up Increases in trade receivables deprive the 11000 18000 7000up business of cash and are an outflow of funds. Increases in trade payables help fund the 15000 30000 15000up business and give rise to an inflow of funds. Cash outflow 13000 receivables 7000 The only way to increase current assets is by investing cash Or trade payables is a liability, usually liabilities behave in an opposite way to assets,so increase in assets that will lead to outflow, increase to liability that increase to a cash inflow Is the inventory too high and needs to be lowered to improve the cash Or is the payables too low and we need to seek more credit from our customers To improve cash position only within the management of working capital Decrease accounts receivables, decrease inventory increase accounts payables What to look for in a statement of cash flows The statement of cash flows shows how cash has been generated during a financial and how it has been spent . The statement can therefore be used to confirm whether business has managed it Cash Flows appropriately and whether it has adequate cash balances for the future . Order to interpret a statement of cash flows ,there are certain questions that it is often helpful to consider : 1.Have the company cash balances increased or decreased over the course of the accounting period? 2.Did the cash generated from operations easily cover any interest ,,tax and dividends that have been paid ? These are essential payments ,and if a business did not easily meet these commitments ,that would be a cause of concern . 3.What happened to the long-term funding of the company over the course of the accounting period? 4.Did the company make any significant investments in non-current assets during the accounting period and how were they funded ?One significant principle of cash management is that any investment in long-term assets should be funded by long-term sources of funds. For example ,the purchase of non-current assets should be funded by cash generated from operations, a loan issue ,or a share issue . 5.How well has the company managed it’s working capital over the accounting period? 6.Is the final cash balance likely to be adequate to allow the business to operate on a day-to-day basis in the subsequent period? 540 words 1440 TASK 2 I.cash budget statements for Thorne Estate Ltd from 1st Jan to 30th April 2021 II.Observations and recommendations to the management of Thorne Estate With debt of £40,000 in January they achieve a positive balance in March, selling 25 properties as their monthly target. At this target they may reach breaking point with staff capacity so recommend factoring in additional staff going forward. Likewise, if they fall below 20 units, staff are at risk, last in, first out to maintain profits. With April tax liability@ £95,800, tax planning should be considered to reduce 2022 liability knowing profits will be healthy. each way Appendix Task 2 Income The cash sales will be 1% in the month of sale: 10 units*180,000(price per unit)*1%(in the month of sale)=£18,000 in January 2021 15 units*180,000*1%=£27,000 in February 2021 25 units*180,000*1%= £45,000 in March 2021 30 units*180,000*1%= £54,000 in April 2021 Now we are calculating the next 2% from credit sales which we receive in the month after sale: 10 units*180,000*2%=£36,000 in January (as it starts from December 2020) 10 units*180,000*2%=£36,000 in February(From January will receive 2% in February and so on) 15 units*180,000*2%= £54,000 in March 25 units*180,000*2%=£90,000 in April Total income sales we add each column : 18,000+36,000=£54,000 in January 2021 27,000+36,000=£63,000 in February 2021 45,000+54,000=£99,000 in March 2021 54,000+90,000+20,000(surplus vehicle net book value)=£164,000 Expenditure Salary per year, first will calculate how much they get monthly, and then will add the bonus of £140 when they sell over 20 properties In January 35,000 salary per year*9 employees/12 months=£26,250 salary per employee In February 35,000*9/12=£26,250 In March 35,000*9/12=26,250+140(bonus)*9(employees)*5(properties over 20 units)=£32,550 In April 35,000*9/12=26,250+140(bonus)*9(employees)*10(properties over 20 units)=£38,850 Variable expenses at 0,5% of each property sold in the month of sales In January we have 180,000(price per unit)*10units sold*0.5%=£9,000 In February we have 180,000*15*0.5%=£13,500 In March 180,000*25*0.5%=£22,500 In April 180,000*30*0.5%=£27,000 Fixed overheads of £4300 paid monthly in the month they arise Thorne Estate pays interest of 6% every 3 months on a loan of £200,000, with last payment in December each year, so the next payment will be in March 2021 of £3,000 Tax liability of £95,800 due to be paid in April 2021 Total expenditures, we add each column again: 26,250+9,000+4300=£39,550 in January 26,250+13,500+4300=£44,050 in February 32,550+22,500+4300+3000=£62,350 in March 38,850+27,000+4300+95,800=£165,950 Net cash flow is total income sales minus total expenditures 54,000(total sales January)-39,550(total expenditure January)=£14,450 63,000-44,050=£18,950 in February 99,000-62,350=£36,650 in March 164,000-165,950=(£1950) in April Opening cash balance we know is a deficit of (£40,000) in January, so the Closing balance for January will be 14,450(Net cash flow)-40,000=(£25,550) in deficit For February we have the closing balance from January carried over as the op cash balance 18,950-25,550=(£6600) in deficit In March (£6600) will be our new opening balance 36,650-6600=30,050 finally on the plus side In April £30,050 is the opening cash balance (1950)-30,050=£28,100 Reference list https://corporatefinanceinstitute.com/resources/knowledge/modeling/working-capital-formula/Page 8, Frank Wood and Alan Sangster, Business accounting 1Accounting book, page 116 Krugmanhttps://dictionary.cambridge.org/dictionary/english/inventoryhttps://www.investopedia.com/terms/a/accountspayable.aspLecturer slidesHorngren et al(2005)Carey and Knowles(2020)(Chapter Seven, The statement of Cash Flows, PAGE 110,111,114)Afaneh. A(2020) Bakare.R,2020.An introduction to Corporate Governance,MOD003353 Business Environment[online via internal VLE]Available at: [Accessed 10 December 2020].