Long-Term and Short-Term Finances for General Sportswear - Case Study Example

Financial Resources Management Name: Registration No: Institution: Date of Submission: 1. Case Study of General Sports Wear Task 1. There are different sources of long-term and short-term finances for general Sportswear. Some of the Long-term sources of finance available for the business include the following. 1.1. Long terms sources of finance These refer to sources of finance that will be needed over a long period of time such as over a year. These sources of finance can be suitable for funding projects by the company such as during the process of setting up new outlets An example of a long terms source of finance available for Sportswear are shares. These are parts of ownerships of a company. The company can sell some of its shares to external shareholders so that it can get additional funds to expand its activities. This implies that any person who wishes to be a shareholder in the company can take part in the purchase of shares in the business. In order to facilitate the sales of shares to the public, the company can seek the services of banking institutions (Carroll 2008). This can be followed by a process where shareholders have the freedom to sell their shares through stock exchange. Another source of long-terms funds for the business will be venture capital. This is where the company can invest in a developing company when the other companies have great potential of growth (Griffin 2011). In this regard, general Sportswear can invest in its competitor company; Premier Sportswear. In return, the company can benefit from the profits of the company in which they have invested. In addition, government grant can be a source of finance for General Sportswear. These funds can be obtained from the local authorities and the national governments (Mayers & Mayers 2004). This is mainly possible when the government wants to create incentives for developers to set up more firms. The company can also obtain bank loans that are offered by some banks to a period of up to 25 years (McKinney 2004). The loans are provided at a particular interest rate that is required to be paid when the company refunds the loans. 1.2. Short-term sources of finance Some of the short-term sources of finance for general Sportswear include bank overdraft. This is where the bank allows the company to get additional funds despite not having enough funds to finance its activities. In addition, trade credit can be used to finance business activities of the company. This can be achieved by obtaining a loan that is paid within a particular short period such as 28 days so that the company can pay for the goods it has obtained (McLean 2003). Furthermore, credit card is another form of short-term loan. This is where the business can be allowed to make payments for products and services by means of the credit card (Seidner, Zietlow and Hankin 2013). In addition, General Sportswear can get funding for its activities by leasing. This is where the company can pay for a product but does not have the ownership for the product. This can be achieved by paying for resources such as land where business branches are located and at the end of the lease period, the land is returned to the owner. Task 2.Implications of sources of finance identified above There are a number of implications of sources of funding explained above. The sales of shares will result into creation of additional funds which will ensure additional capital is generated for performing activities of the company (Sims 2002). The implication of venture capital is that when the company in which general sportswear invests in makes a profit, General Sportswear can also benefit from profits based on the amount of funds they have invested in the other company. Another implication is that the company will lose independence as a result of this form of funding. The implication of Grants from government is that it will ensure the company increases its capital base without the need to refund the funds obtained from the government. The implication of short-term sources of funds such as trade credit is that the company will get additional funds in a short period to facilitate its activities such as purchase of raw materials which can be refunded when the company is profitable. Task 3.Evaluation of appropriate finance sources and the advice to the Finance Director The finance director can be advised to ask the company directors to sell some of its shares to external shareholders because it will result into generation of additional funds that will ensure business activities are managed effectively. In addition, the use of venture capital is viable for the company because it will assure the company a certain amount of benefits if the company in which it has invested makes profit (Tschirhart and Bielefeld 2012). This will ensure the business is profitable despite not being in operation. The impression of the existing directors that obtaining loans would result into losses should be corrected by informing the Director of Finance that when loans are obtained, it is possible to conduct activities of the business in an effective manner so that profitability is achieved. It will result into additional gains for the company which will ensure the business is able to pay its loans within a short period while remaining profitable. 2. Implications of finance sources within the business Task 1 There are various costs that will be incurred as a result of obtaining different sources of financing for the General Sportswear Company. For example, when bank overdraft is obtained, the company will incur interest costs in addition to the money borrowed. When the company sells part of its shares to shareholders, it will result into a loss of profit as a result of dividends that will be paid to shareholders of the company. The cost of venture capital is that General Sportswear will not be provided with enough profits based on their investments in another company. This is because the policies of the company in which they have invested will dictate the amount of profit received by General Sportswear Company. When the company receives government grants, there may be taxes that will be charged when the money is provided to the company and this will have an impact on the net amount of funds received from the government. Task 2 Financial planning ensures a business affords and finances its business and strategic goals and objectives. There are a number of implications when a business does not finance its activities adequately. An example of such an implication is that the business may not allocate enough resources in the purchase of raw materials. This will have a great impact on the amount of products produced by the business because few products will be produced which does not meet customer demands. This will result into bad reputation for the business. Another implication that can result when a business does not finance its activities is that it may incur costs which are not accounted for. As a result, the business will not be able to balance the manner in which expenses are managed and this can have an effect o its profitability by registering losses rather than profits. The overall importance of financial planning is that it ensures the business is able to know the sources of finance, how the funds will be used and the most important areas that funds need to be allocated so that activities of the business are carried out effectively. For instance, in the case of General Sportswear, it will ensure the company is able to buy raw materials and also pay its employees in production, sales and management positions. Task 3 There are three main decision makers at General Sportswear that will need financial information so that operations of the business are carried out effectively. The Director f Finance will need to know the sources of finance available for the business and the areas where expenses are likely to be incurred so that he can allocate enough finances to each activity based on the demands of those activities. The Human resource manager will need to know the general payment structure for the company such as the amount of wages that employees in the company need to be allocated each month. His will ensure enough finances are set aside for this purpose. The production Department manager will be required to know the amount of raw materials to be bought, the transport and storage costs required for the materials and the costs of transportation of finished products from the stores to distribution outlets. This will ensure enough finances are set aside to cater for these activities. Task 4 a) Impacts of different types of finances and their costs on financial statements Finances such as bank overdrafts will result into an increase in amount of cash in bank in the financial statements while shares will result into an increase in capital of the business. Interest on bank loans will result into a decrease in value of finances in the financial statements. In a similar manner, debentures on share sold to investors in the company will result into a decrease in the value of cash in the financial statements. b) Interaction between assets and liabilities on the balance sheet and on international equivalents under the international Accounting Standards (IAS) The assets refer to tangible products owned by a business to which financial value can be attached and they usually appear on the right side of the balance sheet. Assets include cash in hand and debtors as well as expenses incurred in the process of running the business. Assets also include stock of raw material, and depreciation. Liabilities are sources of capital that are used to finance assets so that they can generate monetary values. Liabilities include share capital, creditors, long-term loans and bank overdrafts. 3. Making financial decisions based on financial information Task 1: Cash Budget for General Sportswear between July 2015 and December 2015. The following cash budget for General Sportswear is given:   Jul '15 Aug '15 Sep '15 Oct '15 Nov '15 Dec '15 Receipts             From Debtors 55000 55000 65000 65000 65000 75000 Cash Sales 1000 1000 1000 1000 1000 1000 Loan from Bank             Total Receipts 56000 56000 66000 66000 66000 76000 Payments             Cash Purchases 500 500 500 500 500 500 Payment to creditors 23000 23000 28000 28000 28000 33000 Power Light and Heat 1200 1200 1200 1200 1200 1200 Telephone & Postage 225 350 475 600 725 850 Rent & Rates 7260 7260 7260 7260 7260 7260 Insurance 3630 3630 3630 3630 3630 3630 Salaries 15400 15400 15400 15400 15400 15400 General Expenses 600 600 600 600 600 600 Drawing 1200 1200 1200 1200 1200 1200   53015 53140 58265 58390 58515 63640 Net cash flow for the month 2985 2860 7735 7610 7485 12360 Bank & Cash balance B/F 80000 80000 80000 80000 80000 80000 Bank & Cash balance C/F 82985 82860 87735 87610 87485 92360 Task 2: Analysis of product cost Total cost of 25000 units = Material Cost + Labor cost + Fixed Costs + Selling and Administrative Costs + Variable costs = (50000 + 60000 + 50000 + 25000 + 25000(0.5) + 25000(0.6) =(50000 + 60000 + 50000 + 25000 + 12500 + 15000) =£ 212500 a. Unit cost of a product =212500/25000 = £ 8.50 b. Selling price for a 60% gross profit =1.6*8.5 = £ 13.60 Total sales for 25000 units =25000*13.60 = 340000 Total GP = 340000 – 212500 = £ 127500 c. Factors to be considered by the company before fixing the sales price include: Cost of raw materials, labor cost, cost of equipment, transportation costs. d. The new selling price if the demand for the product is 20000 units and the company needs to make the same GP. 340000/20000 =£ 17 per unit Task 3   Proposal A Cumulative Proposal B   German Based Technology USA Based Technology Initial capital investment 200,000 250,000 estimated cash Outflows     Year 1 60,000 60000 100,000 100000 Year 2 60,000 120000 90,000 190000 Year 3 60,000 180000 80,000 270000 Year 4 60,000 240000 40,000 310000 Year 5 60,000 300000 20,000 330000 Calculation of payback period Payback period is the time taken for the cumulative income of a business to equal the initial investments The payback period for the proposal A will be = 3 + 20000/60000 =3.33 years The payback period for proposal B will be = 2 + ((250000 -190000)/80000)) =2.75 years Calculation of accounting rate of return Accounting rate of return refers to the ratio of estimates of accounting profit in comparison with average investment in a project. For project A Annual cost of capital = (200000 – 22000)/5 = 35600 Accounting income in year 1 = 60000 – 35600 = 24400, in year 2 = 24400, in year 3 = 24400, year 4 = 24400 and year 5 = 24400 Average Accounting income = 24400 Accounting Rate of Return = 24400/200000 = 12.2% For proposal B Annual Cost of Capital = (250000 – 27500)/5 = 44500 Accounting income in year 1 = 100000 – 44500 = 55500, in year 2 = 90000 – 44500 = 45500, in year 3 = 80000 – 44500= 35500, in year 4 = 40000 – 44500 = -4500, in year 5 = 20000 – 44500 = -24500 Average Accounting income = (55500 + 45500 + 35500 - 4500 – 24500)/5 = 21500 Accounting rate of return = 21500/250000 = 8.6% Calculation of Discounted Cash Flow Discounted Cash flow (DCF) refers to the process where the present value of an investment is calculated in terms of its future cash flows so that the current fair value of the investment can be obtained. The formula for obtaining DCF =CF1/ (1+r)1 + CF2/ (1+r)2 + CF3/(1+r)3….CFn/(1+r)n In the above formula: CF1= cash flow in period 1, CF2= cash flow in period 2, CF3= cash flow in period 3, CFn= cash flow in period n and r= rate of return For proposal A DCF =60000/ (1+0.122)1 + (60000/ (1.122)2 + 60000/1.1223 + 60000/1.1224 + 60000/1.1225 =53475.93+47656.9+42492.9+37878.78+33745.78 =215250.29 For proposal B DCF = 100000/ (1.086)1 + 90000(1.086)2 + 80000(1.086)3 + 40000/ (1.086)4 + 20000/ (1.086)5 = 92081 + 76271 + 62500 + 28776 + 13245 = 272873. Based on the calculations above, it is found that proposal B is the most suitable for the company. This is because it has a high value of discounted cash Flow despite having a low value of accounting rate of return compared to proposal A. In addition; it has a lower payback period compared with proposal A. 4. Evaluation of Financial performance of a business Task 1 The main financial statements of General Sportswear are the balance sheet, the profit and loss account and the cash flow statement. The balance sheet shows that the fixed assets of the company are land, machinery and vehicles where the current value is £705000. The current assets include cash at hand and cash in the bank, stock, debtors and investments which total to £ 111000. Liabilities of the company include capital of value £ 60000, long term liabilities and current liabilities that results into a total value of £ 816000. Profit and loss account of General Sportswear shows that there has been an increase in sales in 2014 compared to 2013 and the gross profit has also resulted into an improvement from £ 311 000 in 2013 to £ 350000 in 2014. Pretax profit has also improved from £130, 600 in 2013 to £ 140500 in 2014. This has resulted into a net profit of £ 84890 and £ 91325 in 2013 and 2014 respectively. The cash flow statement shows that there has been an increase in cash available to the company with an increase in both cash at hand and cash in the bank in the year 2014. Task 2 When the three financial statements are compared with those of a Limited Company, and partnerships, it is found that there are some distinctions. The balance sheet of the General Sportswear contains only one capital while that of partnerships contains capital contributed by each partner. Another difference between this balance sheet and a Limited Company is that this balance sheet does not contain shares and debentures while that of a Limited Company contains them. When the profit and loss account of General Sportswear is compared with that of a partnership, it is found that there are no differences since all the items included in the statement are found in standard partnership profit and loss account. In addition, there is a similarity between the profit and Loss account of General spots wear and that of a Limited Company. When the cash flow statement of General Sportswear is compared with that of a partnership and Limited Company, it is found that there are no differences since they share all the characteristics. Task 3 3a) Calculation of ratios Profitability ratio used. Gross margin= Gross Profit/Net Sales = For 2013: =311000/520000 = 59.8% For 2014: =140500/600000 = 23.42% Liquidity ration = Current Assets/Current Liabilities = For 2013: = 73500/38500 = 1.91 For 2014:=111000/116000 = 0.948 Asset Utilization ratio = Revenue/Total Average Assets For 2013: = 520000/788500 =0.6594 For 2014: = 600000/816000 = 0.7352 3b.) Internal and External judgment and comparison of the ratios with those of Premium Sportswear When internal judgment is made, it is found that there was a reduction in profitability ratio from 59.8% in 2013 to 23.4% in 2014, it is also found that there was a reduction in liquidity ration from 1.91 in 2013 to 0.948 in 2014 and finally, there was an increase in asset utilization ratio from 0.6594 in 2013 to 0.7352 in 2014. When external comparison is made with Premium Sportswear, it was found that profitability ratio of Premium Sportswear is higher than that of General Sportswear in both 2013 and 1024. It is also found that liquidity ration of Premium Sportswear is higher than that of General Sportswear in both years. This leads to the conclusion that currently, Premium Sportswear is performing better than General Sportswear and it is recommend that it should invest in Premium sportswear in order to improve its capability and efficiency. 5. References Carroll, N. V. 2008. Financial management for pharmacists: A decision-making approach. Baltimore: Lippincott Williams & Wilkins. Finkler, S. A., Jones, C. B., & Kovner, C. T. 2013. Financial management for nurse managers and executives. St. Louis, MO: Elsevier/Saunders. Griffin, R. W. 2011. Management. Mason, OH: South-Western Cengage Learning. Griffin, R. W., & Moorhead, G. 2010. Organizational behavior: Managing people and organizations. Australia: South-Western/Cengage Learning. Mayers, R. S., & Mayers, R. S. 2004. Financial management for nonprofit human service organizations. Springfield, Ill: Charles C Thomas. McKinney, J. B. 2004. Effective financial management in public and nonprofit agencies. Westport, CT: Praeger. McLean, R. A. 2003. Financial management in health care organizations. Clifton Park, NY: Delmar Learning. Reid, J. 2003. Seven fundamentals for effective financial management. Lansdowne: Juta Academic. Seidner, A. G., Zietlow, J., & Hankin, J. A. 2013. Financial management for nonprofit organizations: Policies and practices. Hoboken, N.J: Wiley. Sims, R. R. 2002. Organizational success through effective human resources management. Westport, Conn: Quorum Books. Tschirhart, M., & Bielefeld, W. 2012. Managing nonprofit organizations. San Francisco: Jossey-Bass. Read More