NN34 Accounting and Finance : The Cash Flow Statement
Questions:
Task 1: Business start-up projection
You are being assessed on your ability to demonstrate competence in the use of EXCEL to solve business and financial problems, and also to extract relevant data for the assessment of financial performance.
Two retiring lecturers are planning to set up a coffee bar in Openshaw. The financial year will run January-December 2018. A small, ground level unit with outside seating has been located and the entrepreneurs are in negotiations with developers. A competitive rent for the first year has been offered, as well as a license to sell alcohol. The pair are also undertaking market research, estimating costs and considering how to differentiate.
They have prepared the following forecast:
|
MONTH |
Sit-in (no. cups sold) @ £2.40 average price |
Take out (no. cups sold) @ £2.30 average price |
Food (no.items) @ £5.50 average price |
|
JAN |
2 200 |
1 250 |
1 250 |
|
FEB |
2 400 |
1 300 |
1 300 |
|
MAR |
2 600 |
1 350 |
1 350 |
|
APRIL |
2 800 |
1 400 |
1 400 |
|
MAY |
3 000 |
1 450 |
1 450 |
|
JUNE |
3 200 |
1 450 |
1 450 |
|
JULY |
3 200 |
1 540 |
1 540 |
|
AUG |
3 200 |
1 540 |
1 540 |
|
SEPT |
3000 |
1 400 |
1 400 |
|
OCT |
2 800 |
1 400 |
1 400 |
|
NOV |
2 600 |
1 400 |
1 400 |
|
DEC |
3 200 |
1 680 |
1 680 |
The average cost of food items bought in is estimated at £2.20 each, initially paid in cash for the first 3 months and on one month’s credit after that, as credit worthiness is built. Coffee can be bought in at approximately £0.60/cup, paid for in the month sold.
Anticipated monthly costs include: wages £1 600, general costs (service charge, rates…) £3 000, website maintenance £150, marketing £200. The
development costs of the website are £3 000 payable in February, in addition to legal costs of £1250. Accountancy fees for the year are not to be paid until 2019 but are likely to be £2 000. Rent is £3 500/quarter payable January, April, July and October. Starting in January, the pair wish to each draw £1 600 /month. Equipment: Coffee making and grinding machines £12 000, shop fittings £4 000 and IT costs £2 000, all to paid for in January. Depreciation of equipment: Coffee making machines 4 years, shop fittings 5 years and IT equipment 3 years.
The retirees have a total of £20 000 redundancy funds to invest in the business and are hopeful of securing a bank loan of £20 000, payable over a 5-year term at a fixed interest rate of 6%.
Using EXCEL prepare a 12 monthly Cash Flow Forecast, year-end 2018 budgeted Profit and Loss Account and Balance Sheet.
In a short report to the entrepreneurs, offer advice as to the feasibility of the project and make suggestions as to how they might ensure that the business start–up is liquid and profitable.
Task 2: Analysis of Financial Performance
You have applied for a position as a junior financial executive for a multinational retailer. As part of the selection process, you are to be assessed on your ability to find, collect, analyse and present information as well as the ability to analyse financial statements and extract relevant data for the assessment of financial performance.
You must interpret and analyse the final accounts of Marks and Spencer plc 2017 as disclosed in the full report on Moodle, using the Consolidated Income Statement (p92), Consolidated Statement of Financial Position (p93) and Consolidated Statement of Cash Flows (p95).
This will involve undertaking a comparison of financial data over the two years, calculation and interpretation of accounting ratios. Study of the Chairman’s Statement and Annual Report will enable you to analyse performance in the light of the company’s objectives and decisions taken.
You must include calculations in an appendix for the purposes of assessment. You should not rely on calculations presented in the Marks and Spencer Annual Report & Financial Statements, but must undertake your own calculations using appropriate financial accounting techniques.
Answers:
Task 1 – Business start – up projection
cash flow forecast, budgeted profit and loss account and balance sheet
The main objective of the report is to assess the feasibility of a start-up business. It will be taken into consideration the profitability and liquidity factors to assess the feasibility of the business. Further, the report will comment on the cash flow statement, budgeted profit and loss statement and balance sheet of the business for the period of 12 months to analyse the profitability and liquidity of the business. From the given case study, it is recognised that 2 retiring lecturers are planning for setting up the coffee bar in the Openshaw. The financial year for assessment will be considered as from January to December 2018. The partners are already in negotiation process with the developer for the ground level, small outside seating unit and the competitive rent for 1st year has already been offered. The entrepreneurs already acquired the license to sell alcohol.
Discussion
Any feasible business is the one that generates sufficient cash flow, profits and offers adequate liquidity to meet the lon
g-term viability and goals of the business. The business can ensure the profitability through following ways –
- Launching the business with sufficient fund – once the plan is made to start the business, the entrepreneurs shall have enough funds to cover up the initial costs. It will reduce the risks and start the business with strong base of customers (Bodie, Kane and Marcus 2014).
- Talk to the potential customers – if the potential customers are identified, they can be contacted for knowing their exact demand. If the needs of the customers are not fulfil, it is obvious that the business will fail. Therefore, knowing their demand will help the business to earn profit
- Pre-sell the product – before launching the business finally, the entrepreneurs can pre-sell their product on experimental basis to assess the acceptability of the product and can ask the customers that if the similar product is launched how much they are ready to pay which in turn will help to fix the price range (Masini and Menichetti 2013).
- Scale the business – it can be done through investing in the marketing segment and taking into consideration the joint ventures and relationships. Investment can be made confidently in these areas as the entrepreneurs will have the product that will be launched for the potential customers. This means the product is not guessed and launched only after knowing the demand of the customers (Pasqual, Padilla and Jadotte 2013).
- Net profit margin – it can be seen from the calculation that the net profit margin of the company that is calculated as = net profit / sales *100 = 62043 / 215928 *100 = 28.73%. Therefore, the expected profitability of the business is quite sound and seems feasible for long-term sustainability (Laitinen 2017).
On the other hand, the business is suggested the following to maintain the liquidity –
- Overhead – assess the overhead cost and analyse if there are any opportunities exist to reduce the overhead cost. Reducing the overhead costs, including the rent, wages and general expenses apart from the direct costs will help to maintain liquidity.
- Accounts payable – can negotiate for longer terms of payment with the vendors wherever possible for keeping the money in longer terms.
- Drawings of the owner – the amount of the money taken out from the business for non-business purposes shall be monitored as large amount of money can lead to unnecessary drain of cash from the business (Sander and Kantšukov 2013).
- Current ratio – it is calculated through dividing the current assets of the company by the current liabilities. From the calculation, it is recognised that the current ratio of the company is = current assets / current liabilities = 55806/5696 = 9.80. As it can be seen that the current ratio of the company is very high, it is stating that the company is not utilising their working capital efficiently and is suggested to manage the working capital more efficiently.
Conclusion and recommendation
From the above analysis, it is found that the business is feasible in terms of both liquidity as well as profitability. The net profit margin of 28.73% is stating that if the business is launched it will earn sufficient profit to sustain over the long-term period. Further, the liquid ratio 9.80 is stating that the business will be able to pay off its short term obligations efficiently. Therefore, the lecturers are suggested to go ahead with the plan and launch the business with the projected sales levels.
Task 2 – Analysis of financial performance
Introduction
Marks and Spencer plc is the major retailer from United Kingdom that has more than 30 companies under it in the home market. It deals it footwear, clothing, gift items, home furnishing items. The company is committed to make each moment special for their customers through high quality own-brand clothing, food and home related products that are offered to the customers through the worldwide stores and through online (Marksandspencer.com 2017).
Discussion
As per the statement of the chairman, the company has made some tough decisions that directed to considerable adjustments to the profits of the company and repositioning the home and clothing business that will lead to short term reduction in the profits. However, the changes were implemented to improve the long-term health of the company. Further, the company repositioned the home and clothing business for the sustainable growth through ending the damaging cycle with regard to discounts and promotions. The company also focussed on the ranges of wearable, stylish and great quality essentials. Through implementation of the competitive, sensible pricing structures to the customers the company experienced improvements in the full price sales. Further, the company announced clear strategy for focussing on the strong franchise marketing and to establish joint ventures. Establishing the right stores at right places is also the reason behind reshaping the portfolio of UK stores. Further, the stores are expected to be more relevant with the changing requirements and habits of the customers in the digital world.
As the applicant for the position of junior financial executive for Marks & Spencer, the financial statement including the income statement, cash flow statement and consolidated statement of the company will be analysed for evaluating the financial performance of the company. Further, various ratios have been computed to analyse the company’s performances over the years of 2016 and 2017.
Operational efficiency – these ratios measure the efficiency of the company with regard to the utilization of the assets and efficiency with regard to management of the liabilities. It is defined as the ratio among the generation of output from business as compared to the output required for running the business (Tahmoorespour, Mina and Randjbaran 2015). If the receivable turnover ratio of the company is considered, it can be identified that the efficiency of the company has been increased from 18.99 in 2016 to 19.21 in 2017. Further, the asset turnover ratio of the company is increased from 1.25 to 1.28 over 2016 to 2017. Therefore, with regard to efficiency, the company is improving.
Liquidity – it signifies the ability of the entity to meet the short term obligations with the short term assets. Generally, the liquid ratio of more than 1 is considered as the company is efficient in meeting its current obligation (Friederich and Payne 2015). Looking at the liquid ratio calculation of the company it is recognized that though the current ratio and the quick ratio of the company is in increasing trend, both the ratios of the company for both the years are considerably lower than 1 that indicates that the company is efficient in meeting its short-term obligation (Khan and Guruli 2015).
Profitability ratio – looking at the profitability ratios of the company it is recognized that the net profit margin of the company significantly reduced from 3.83% to 1.09% over the years from 2016 to 2017. Further, the return of equity has been reduced from 0.12 to 0.04. Therefore, the company shall reduce the operational expenses to increase the net profits.
Capital structure – it represents the ratio of the debt to the equity of the firm and reveals the leverage level of the firm. Looking at the capital structure of the firm it is recognized that debt to equity ratio as well as the debt to total asset ratio both are in increasing trend that represent that the company’s leverage is increasing which in turn will involve more operational risks to the business of the company (Detzel and Strauss 2017).
Conclusion
From the above analysis, it can be concluded that the company has taken various steps like repositioning the home and clothing business that may lead to short term reduction in the profits. However, the decisions were taken to meet the long term financial objectives of the company. The company also focussed on the ranges of wearable, stylish and great quality essentials to implement the competitive, sensible pricing structures to the customers and to experience improvements in the full price sales. If the financial performance of the company is considered, it can be identified that the company make some improvements with regard to the operational efficiency. However, company’s position has been deteriorated with regard to liquidity, profitability and capital structure. Therefore, the company is recommended to take appropriate measures to improve its financial performance.
References
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Detzel, A. and Strauss, J., 2017. Combination Return Forecasts and Portfolio Allocation with the Cross-Section of Book-to-Market Ratios. Review of Finance.
Friederich, S. and Payne, R., 2015. Order-to-trade ratios and market liquidity. Journal of Banking & Finance, 50, pp.214-223.
Khan, A.H. and Guruli, M.R., 2015. Predicting Bankruptcy by Liquidity Ratios Analysis. Journal UMP Social Sciences and Technology Management, 3, pp.372-380.
Laitinen, E.K., 2017. Profitability Ratios in the Early Stages of a Startup. The Journal of Entrepreneurial Finance, 19(2), pp.1-28.
Marksandspencer.com., 2017. Welcome to Marks & Spencer. [online] Available at: https://www.marksandspencer.com/ [Accessed 25 Dec. 2017].
Masini, A. and Menichetti, E., 2013. Investment decisions in the renewable energy sector: An analysis of non-financial drivers. Technological Forecasting and Social Change, 80(3), pp.510-524.
Pasqual, J., Padilla, E. and Jadotte, E., 2013. Equivalence of different profitability criteria with the net present value. International Journal of Production Economics, 142(1), pp.205-210.
Sander, P. and Kantšukov, M., 2013. Effect of Corporate Taxation System on Profitability and Market Ratios–the Case of ROE and P/B Ratios. Research in Economics and Business: Central and Eastern Europe, 1(2).
Tahmoorespour, R., Mina, A.A. and Randjbaran, E., 2015. The Impact of Capital Structure on Stock Returns: International Evidence. Hyperion Economic Journal, 1(3), pp.56-78.
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