Reasons to Invest in a Wristwatch - Essay Example

Finance and accounting [Insert al affiliation] Introduction The financial report at hand is going to eluci and comprehensively make a summary of the wristwatch performance for the accounting period ending 31st December 2015. This will coincide with the income year end. The report has the following pertinent statements: the statement of financial position, the marginal cost statement, the income statement and finally the cash budget (stipulated in the appendices). Since the product will be operating according to the principle of going on concern it is supplemented with a prediction of the following accounting year. At the end of the year, the profit generation will be £4515679 (88.75% net profit margin appendix 4). The cash balance for the product will be £3797362 and consequently the total sales are anticipated to be £52141029. The main section I have decided to use cost accounting especially the marginal costing to clearly illustrate the contribution each unit of the product can yield as opposed by the full costing method. The idea of the wristwatch can be funded by $75,000 as starting capital (appendix2). For every business, capital is not critical and, therefore, calls upon an individual to put the idea into practical through funds (Marchal & Sauvé, 2010). It is clear that the capital outlay is somehow enormous, but this is because raw materials that are used to manufacture the watch. The watch requires material such as stainless steel, gallium phosphide, alkaline liquid, gold plated and quartz crystals. The Net Profit of £4515679 represents a margin of 88.75% (appendix 3) demonstrating the low burden of our fixed costs on our turnover. Comparing with an industrial average of 70.65% it is clear that we are performing well in our hub trading and common activities, creation vigorous margins for a start-up business, and we are taking a commendable strategy on the risk. To arrive at the net profit, a number of deductions should be made for the grant. These include expenses for labor, insurance of the building, advertisement cost and power for the production (Peterson & Fabozzi, 2006). On aggregate, the total costs sum up to $252601. Since they are costs to be incurred, they are deducted to get the net profit for the firm. The net profit for the product is $1262884. To combat bankruptcy, there is a cash of £3797362 (appendix 4) has been put in petty cash. The cash budget has authorized us ample time to recognize this setback and arrange appropriate financing option (Carey et al., 2011, p14). We are also bearing in mind trying to offer credit to a number of loyal customers (currently 30% of sales on credit n/10) to get better with our cash arrangement and trim down the need for external borrowing, but are cognisant as a new business that credit may will encourage sales. This is good news and a point of concern to the potential investors. It is noted that most of the investors fear risks and would, therefore. Do anything to avoid the risk and harvest the maximum return out of the investment (Singh, 2007). This will, therefore, attract more investors as the idea has unforeseen future of profit generation to meet the expenses, cater for remuneration of workers and consequently maximizing the shareholders wealth. From the cash budget, it is clear that the product will start with low sales since the product will not have penetrated into the market well (Viorica & Angela, 2010). Due to anticipation of the acceptance of the product, the total number of sales will start to increase at an increasing rate of approximately 7.69% i.e. for instance the sales will increase from 6500 units in August to 7000 units in September. The total revenue is projected to grow from $9000 in January then increase to $10000 in February (appendix 2), from that point forward; it will remain constant for three months then increase to at considerable amount (Periasamy, 2010). The total revenue generation at the year-end will be $1842337. The cash budget too highlights the payments that will be made in the course of the business operations. Analyzing the net receipts and payment, the firm will make more payments at the beginning of the year, and then after sometimes, the revenues will increase substantially. This normal as business takes the time to grow and become stable (Mulhern, 2012). Therefore, more of the cash will be used to finance the distribution of the products to the market and other operations in the initial stages. The product is expected to generate more receipts from June onwards. This is the time when the business will have stabilized. The year-end will have more payments than receipts because of the contingency and off-balance sheet activities that typically take place. The net income statement (appendix 3) demonstrates the net profit that is generated by the business. It is clear that the business will generate a total turnover of $5087915 with a gross profit of $5050655. Since expenses are also incurred, the total expenses costs will be $187008 hence a profit of (4702687-187008) = $4515679. The gross profit margin for the product is (4702687/5087915*100) = 92% meaning that the product is generating supernormal profits and cannot afford to disadvantage the investors. For this reason, they should be attracted to invest in the Wristwatch (Lehmann, 2007). Additionally, the firm has a total cash of $3797362 which signals the investors that the firm has a protection of unforeseen expenses hence they will be able to re-invest into the product. Focusing on the statement of financial position (appendix 4), it is well seen that the firm has a total fixed asset of $1646667. Due to massive cash outlet, the firm will have total assets of $5214029. The capital and liabilities compose of $75000 as the capital for the start of the business (Fraser & Ormiston, 2011). The capital yields a profit $4863647 leading to a total capital and liabilities of $4938647. The debt to asset ratio is (4938647/5214029*100) = 1:09 displaying that the company is solvency and, therefore, honor obligations of paying the debts. Conclusion In a nutshell wristwatch is one of the products potential investors should invest as there is low risk, high returns and its price is predictable. It offers high profit margins and, therefore, the investors should expect high returns. The key strategy that is to be put into practical is the mitigation process of the potential risks that may lead to the failure of the business. References Financial Accounting Standards Board. (2008). Statements of financial accounting concepts: Accounting standards. New York: Wiley. Fraser, L. M., & Ormiston, A. (2011). Understanding financial statements. Upper Saddle River, NJ: Prentice Hall. [online] available at: http://edwardlowe.org/digital-library/how-to-prepare-a-cash-budget/ Jawahar Lal. (2009). Accounting For Management. Himalaya Pub. House. Lehmann, R. (2007). Income investing today: Safety and high income through diversification. Hoboken, NJ: John Wiley & Sons. Marchal, S., & Sauvé, A. (2010). Goodwill, balance sheet structures and accounting standards Recent developments and issues for French groups. Mulhern, F. J. (2012). Customer profitability analysis: Measurement, concentration, and research directions. Journal of Interactive Marketing, 7. doi:10.1002/(SICI)1520-6653(199924)13:13.0.CO;2-L Periasamy, P. (2010). A Textbook of Financial Cost and Management Accounting. New Delhi: Himalaya Pub. House. Available at: http://www.wikihow.com/Calculate-Marginal-Cost Peterson, D. P., & Fabozzi, F. J. (2006). Analysis of financial statements. Hoboken, NJ: Wiley. Singh, Y. P. (2007). Accounting and financial management for I.T. professionals. New Delhi: New Age International. Viorica, L. D., & Angela, C. R. (2010). Rules of Valuation and Presentation of Assets in Balance Sheets. Available at: http://quickbooks.intuit.com/r/cash-flow/5-simple-ways-create-balance-sheet Read More