Financial Reporting Prepared for Summer Bodysuit Ltds - Example

SUMMER BODYSUIT LTD (SBL): CASE ANALYSIS By Student Name Course code + name Professor name University name City, State Date of submission Executive summary This report has been prepared by Drake management consultants and presented to Summer Bodysuit Ltd’s board of directors. The report has analyzed and summarized the problems faced the company and has given a detailed plan of action that should be adopted by the company as part of the solution. The report has noted that the company is facing financial challenges resulting to poor cash flows, funding inadequacies, economic cycle challenges, future uncertainty, regulations from lending institutions like the reduction in the amount of arranged overdrafts, growing pains especially when the company has been issued with a large order but unable to execute it at the moment and lastly technology and innovation whereby, the pace at which technology advances is fast such that the company’s assets becomes obsolete much earlier before returning back the invested amount. The company has been advised to plan well in advance in order to overcome these challenges. In addition, regarding the current financial needs that are urgent, options like selling some of the company assets, use of credit cards and invoice financing have been suggested to be explored as they offer an alternative source of financing. Summer Bodysuit Ltd (SBL): Case Analysis Introduction Summer Bodysuit Ltd has a life of its own, making it a productive and more profitable company requires that its owners think through the problems and have it in their minds that the financial challenges don’t necessarily make a business to fail. Therefore, taking into consideration the main pitfalls will help the board and management of the company to avoid or overcome them. The problems faced by Summer Bodysuit Ltd and their solutions include; Cash flow constraints Most business concerns face cash flow problems. Summer Bodysuit Ltd is not an exception. The company is in the business whereby it is bills for the work done and the cloths sold. This explains why the company’s revenue looks good on paper while the bank account looks terrible. Not many organizations would like to do it but it would be helpful if they kept track of the receivables and payables and ensuring that the clients pay. Therefore, the company should create the accounts receivables and collections office and task them with the responsibility of approaching their clients in the right way in order to have the company invoices paid (Atkinson, 2005). In order for the company to have a sound cash flow in the future, it should consider undertaking the following steps; Firstly, it should reduce its amount of fixed costs. These are the amounts spent by the company in order to maintain its current level of operations. The organization need to find the means of lowering its buildings and rent expenses, the sales expenses and other fixed costs. Reducing these expenses that rarely change from time to time will greatly free up a lot of cash that can be put into other uses in the business (Atkinson, 2005). Secondly, the company should take stock of inventory. There is no need for the company to stock too much of the raw materials or produce so much that it cannot sell at the same time. The company should only stock an economic quantity of inventory whose costs are not too high to acquire at once and which is enough to produce enough cloths for the customers according to the number of orders made. It is therefore critical that the organization strikes a good balance between enough and too much inventory (Atkinson, 2005). Thirdly, there is a need that the prices of the products are reviewed. This will ensure that the prices are kept up just like the industry average. The organization should compare the prices of the competitors and align the products price within the expectations of the customers (Dryburgh, 2010). Fourthly, Summer Bodysuit Ltd should not be ordering the entire of its raw materials from a single place. The company should get its different supplies from different customers who sell at a relatively low price. It is worth noting that the company should only buy from a single client when buying in bulk in order to benefit from the discount advantage. Fifthly, the company should lower the variable costs. These are costs that change with production. They are also known as direct costs. Lowering these costs will translate into more freed cash into the use for the business (Dryburgh, 2010). Lastly, Summer Bodysuit Ltd should manage its cash position well in order to remain liquid. The current ratio of the organization should reflect that the short term obligations of the organization can be covered. At the same time, the organization should not keep so much cash at the expense of investing it to generate more returns (Dryburgh, 2010). Funding Needs Another problem facing the company is lack of enough funding. It is quite normal that when an organization is at pivotal points of growth will easily find itself in need of more finances than it actually has. That is the situation that Summer Bodysuit Ltd has found itself in. the company has now tough decisions to make concerning the funding needs. The company has been given options by drake consultants of either using debt financing for example loans and other lines of credit. The company also has an option of selling equity to interested investors. It is worth noting that getting loans has proved challenging for the company. However, this is common in the business sector owing to economic circumstances (Holmes, Sugden & Gee, 2005). Solutions to the Funding Needs The company should consider selling part of their assets at the moment in order to raise the required cash. The board members can take a step further to loan the company by disposing of part of their assets like personal cars in order to fund the business. Another option available is for the company to make use of credit cards. This means that the company can get raw materials on credit, make the products and sell to pay the debt (Stango & Zinman, 2011). Economic Cycles The company has a great management and working on the right product that has got high market demand from its targeted customers, but still it struggles as a result of outside forces. It has been noted that the company started its operations when the economy and the industry was going through a crisis. Due to the preferences and choices of consumers, the product demand can suddenly go down without prior warning. What Summer Bodysuit Ltd has faced a challenge is planning for the periodic downturns that are inevitable in order to sustain themselves during periods of economic bad weather (Stango & Zinman, 2011). The solution that can work best for the company especially now that it is facing a financial crisis is to embed deferral and cancellation options in its contracts for new large contracts. By doing this the management will be able to have saved a lot of cash that would have been spent for future use during economic downturn (Stango & Zinman, 2011). Uncertainty The company has found itself in a great discomfort of uncertainty, the Keble bothers for instance suggest that the options that other board members have are not the best but lack to point out any better option that can be pursued by the company to generate the much needed fund to carry out the major order that was just received. Business certainty is a critical issue for the long term survival and growth in the business. Uncertainty in the credit markets , global economy and the uncertainty in the way the regulations from institutions for example banks and other financial lenders will affect business operations and products demand all combine to create a very uncertain future. The company is faced with a future that is uncertain. Other directors have warned the Keeble brothers that they risk being directors of two failed companies if they are not careful (Mclaney & Atrill, 2012). Due to uncertainty, Summer Bodysuit Ltd has essentially failed to plan for the long term and instead the company is focused on getting funds to execute the current order that has just been received. In as much as the short term plans and goals of the organization are quite necessary, if there is a failure in planning for the next five or ten years might be destructive to the value in the future. In order to solve this problem, there is a need that the company finds a good balance between short term planning and long term planning (Mclaney & Atrill, 2012). Regulation The ever changing regulatory environment is another challenge facing the organization. The financial policy changes by the British banks have caused a lot of concern for Summer Bodysuit Ltd. The sudden cut on the overdrafts that the company would previously access came when not anticipated for and has now thrown the company into a state of confusion. None of the management knows what to do to salvage the face of the company by being in a position to execute the large order made by getting the required finances (Mclaney & Atrill, 2012). Technology and Innovation The technological advances are taking place at a pace that is affecting businesses today. This is due to the fact that a competitor might relax and buy a better technology in the future rendering the company’s obsolete. For instance, the sale from the old plant in Summer Bodysuit Ltd did not yield so much. This change in technology at a fast rate makes the company to spend a fortune in re-investing with latest and efficient plant at the expense of other areas and saving for the future that is uncertain. The company currently faces a problem as the technologist’s ability to keep them abreast with emerging technology has a conflict with the current need to master the technological requirements of the company at the present. There is also a challenge of mastering which technology will give the highest returns in terms of investment and time. The only solution is for the organization to come up with a long term strategy on technological advancement while at the same time keeping an eye on developments technologically and being flexible enough to take advantage of them (Mayer, Schoors & Yafeh, 2003). Growing Pains The company has expanded and has taking large orders from its clients; it is evident that it has tremendously grown since its inception. The challenge it is facing is a cross road that it has hit, there is need for more capital than it actually has. The company had not budgeted for this eventuality. Now the company is challenged on how they can secure a loan or even sell its equity to secure capital (Media, 2011). Given that the company wants more cash urgently and given that the recent economic meltdown and the crunch on credit has caused the British banks to be quite conservative in the approaches that they utilize in granting overdrafts to companies and businesses, drake consultancy has come up with alternative sources that the company has been presented to Summer Bodysuit Ltd in these report. The company can make use of invoice finance facilities. These include invoice discounting and factoring that are likely to release a lot of cash for the use in the company than the traditional overdraft. An invoice finance organization gets more interested in the quality and the nature of the sales of the company rather than the financial history and assets of the company that needs funding. This is quite different from the bank granting an overdraft. This makes the invoice finance organizations to be better and more flexible in offering financing and offering discounting facilities to companies like Summer Bodysuit Ltd that cannot qualify for more overdraft facilities. The company should take advantage of this facility to get more funds to execute the large order that it has at the moment (Mayer, Schoors & Yafeh, 2003). It is worth to note that invoice finance facility can work in tandem with the existing overdraft from the bank. This will aid the company given that the bank is not willing to increase the overdraft, then Summer Bodysuit Ltd can top up its funding requirements through the operation of the invoice finance facility while at the same time operating an overdraft facility. The invoice finance facility must not necessarily be offered by the same bank that has offered the overdraft facility. In fact, it is advisable that the company takes an invoice facility from a different bank in order to spread the risk incase anything happens to the company’s bank or should it develop a more negative view of the risk that the company presents to them and as a result remove or cut the amount of bank overdraft. It is important to note that there are quite a lot of invoice finance companies that are independent and willing to provide funds as an alternative source other than the traditional banks (Holmes, Sugden & Gee, 2005). In terms of invoice finance costs, in certain cases, it can be quite competitive with an overdraft, however, in most cases, invoice finance is a cheaper mode of financing business than a bank overdraft (Holmes, Sugden & Gee, 2005). Therefore, Summer Bodysuit Ltd should not panic that the overdraft has been reduced, this is because there is an alternative funding sources that will be enough to make up for the short fall in the company’s financial requirements. Invoice finance easily is available instead of the bank overdraft or even in tandem (Holmes, Sugden & Gee, 2005). Question 2 Yes, the bank is right in reducing the amount of overdrafts granted to Summer Bodysuit Ltd. An overdraft should be understood to refer to an extension of credit that I granted from a lending institution when the organization’s bank account reaches zero. It is an arrangement whereby an organization is allowed by its bank to continue withdrawing money from its account even when the company’s account has got no cash. Therefore, it would be better for the organizations only to be allowed a given amount of overdrafts that they can be able to repay without encountering many difficulties. The reduction in the amount of overdrafts to Summer Bodysuit Ltd is as a result of the economic turmoil that the British banks went through in the recent period and trying to recover (Holmes, Sugden & Gee, 2005). It is also worth to note that the organization has an arranged overdraft with its bank. Therefore, the bank has a right of reducing the amount of overdraft that can be accessed according to the terms of the arrangement. Therefore, it is the right of the bank to control the limit of an overdraft depending on the economic affairs and the state of its operations. It is therefore squarely within the right of the bank to decide how much each of its customers can access in terms of overdrafts. An arranged overdraft is an agreement between the bank and an organization that enables the organization the flexibility and convenience to add to its current account by withdrawing to an agreed limit when the organization is in need of extra funds than it actually has. The organization simply uses its bank account in the usual manner (Schertler, 2004). When an organization arranges an overdraft well in advance, it costs less in terms of charges unlike when an organization opts to use unarranged overdrafts. It is important to note that in all these cases, the bank reserves the right to withdraw or reduce the amount of overdrafts according to its convenience. The bank is right in reducing the amount of overdraft given that this will reduce the increased liability of the company due to higher interest charges that normally accrue on this facility plus charges on the overdraft facility fees (Schertler, 2004). Overdrafts are normally meant to help organizations to cover financings that are short term in nature; the company has been using the facility for long. It should be understood that the facility cannot be used as long term source of funding (Schertler, 2004). There are also other requirements that might disadvantage the company should it be allowed to take huge amounts of overdrafts like depositing with the bank securities or having to source for personal guarantees. With the reduction of the overdraft amount, such tangible assets can be used to secure more loans at relatively lower rates with other lending institutions (Strain, 2012). The amount of an overdraft granted to an organization will largely depend on the cash flows amount of the business, its receipt timings, the payments it makes and the seasonal trends in sales. Therefore, there is need for the company to prove that in overall year, it generates a positive cash flow and that it is the temporal timings between sales, receipts and payments that make it need a temporal cash amount for its smooth operations. From the analysis of the affairs of Summer Bodysuit Ltd, it has been noted that the cash flow of the organization is minimal and continues to go down. In the previous year, the company had $ 56,000 in cash as compared to the current cash of $ 8,000. The difference is not caused by differences in sales and receipts as there is no information given on credit sales and the expected date of receiving the amount it is owed. Therefore, the organization does not need a temporary overdraft. It needs a long term financing. Therefore, the bank is right in reducing the overdraft and converts the rest into a medium term loan (Strain, 2012). Therefore, Summer Bodysuit Ltd should instead use a loan facility given that first, the organization and the bank will all be aware the amount of loan repayment that will be made and the amount of interest that will be repaid. This will enable the organization to plan for its cash flows. Second, the loan calls for a commitment from both the organization and the bank. The company will not have to worry whether the bank will withdraw as long as it abides by the terms of the loan (Strain, 2012). 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