Business of Cape E-Distributors Ltd - Coursework Example

?FINANCE: Cape E-Distributors LTD Affiliation) a) Introduction to the business. Cape E-Distributors LTD Cape E-distributors LTD is a private limited online distribution company involved in the alcohol distribution business. This involves retail and wholesale selling of alcoholic beverages to consumers. This means, buying the inventory directly from the manufacturer and then distributing it to various outlets in the city at a margin. The business therefore plays an intermediary role by providing a channel for distributing the manufacturer’s products to the consumers. The only difference however is that we do our business online. This is an advantage to the business as an online presence gives it an increased global presence at the same time helping it minimize operation costs to zero since there are no fixed costs to be paid out such as rent and other utilities. The main reason why I chose this line of business was due to the fact that after intense market research, I found out that there is always a demand for alcoholic beverage all year round. Alcoholics will always drink alcohol whether they have enough income or not. Although lack of income may mean reduced alcohol intake, it does not mean they will completely not drink. It with this conclusion that I decided to start this business as there was going to be steady cash inflows for the business throughout the year. Also, alcoholic drinks being fast moving consumer goods, there will always be a high demand for the products and extensive distribution networks and it is due to this reason that I chose to be a cybermediary as there will always be a demand for the goods and to gain access to a large company. b) Analysis of break even. Break-even point is the level of sales at which profit is zero According to Atrill and McLaney (2011) at break-even point; sales are equal to fixed cost plus variable cost. In analyzing the break even, one normally needs the three pieces of information: Fixed costs, variable costs and average price per unit. Fixed costs are those minimum operating costs in a business that do not change no matter how many units one sells. They include rent, utilities, bank charges among others. Since Cape e- distributors is an online platform, it does not have any fixed costs as per now. Variable costs per unit-These are those costs that vary and depend on sales volumes. Average price per unit; Since you're able to choose exactly where to set your prices. Start by looking at your competition, and how they price their products. Break Even Analysis Formula therefore is: BEQ = Fixed costs / (Average price per unit – average cost per unit) Fixed cost =0 Average price per unit in year 1 is 55 Average cost per unit in year 1 is 11 Substituting into the formula = 0/(55-11) Therefore the break even quantity is zero. All the other break-even quantities for the subsequent years will be zero because there are no fixed costs for our firm. This is due to the fact that it is an online firm hence no operating costs are incurred. c) Analysis of business performance using financial ratios Profitability Ratios They use margin analysis to give an indication of whether a firm is generating enough returns on capital employed. For Cape distributors the gross profit margin is 91%, the net profit margin is 91% while the return on capital employed is 103%.With such high profitability ratios, it means that the firm has really minimized on its costs and the sales are increasing steadily.A high profitability ratio means that the firm is really good at cost controlling Pandey (2008). Liquidity Ratios These are the ratios that show whether a firm is able to meet its short term obligations as and when they occur. I n other words they measure solvency of the firm. For our business, the liquidity ratios calculated are current ratio which is regarded as a test of liquidity for a company. It expresses the 'working capital' relationship of current assets available to meet the company's current obligations. The other liquidity ratio is the creditor day’s ratio which for Cape e-distributors limited was on average 30 days which is essentially a month. This means that the firms take 30 days to pay creditors and 22 days to be paid by our debtors. This is healthy for the firm as our debtors should pay us first to ensure that we have sufficient cash flows to pay our creditors. This policy the firm has adopted is good. Gearing Ratio Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. Cape distributors LTD has a gearing ratio of 67%.The higher the gearing ratio the riskier the firm because it will be said to have a very high leverage. d) The differences between profit and cash Profit is the difference between income and expenses. Income is all the money that comes into the business as a result of sales that are made otherwise known as revenue. Income is usually recorded at that time it has been made and not when it was received. Expenses on the other hand are all overheads that pertain to the business. Cash is the difference between inflows (actual incoming cash) and outflows (actual outgoing cash) According to Tirole ( 2006) Cash flow also includes infusions of working capital from investors or debt financing. Theories of Profit   There are various theories of profit which have been advanced from time to time regarding the nature .Almost all of them differ basically from one another and are inadequate to explain the actual role of profit in the operation of free economy (Jensen, 1997) They include but not limited to the following:  (i) Marginal productivity Theory-Was developed by Professor Chapman, profits are equal to marginal worth of the entrepreneur and are determined by the marginal productivity of the entrepreneur.  (ii) Uncertainty Theory of Profit- Was developed by knights it is also known as the modern theory of profits. It proposes that profits are linked with uncertainty and risk bearing .The higher the risks the higher the profits.  (iii) Risk Theory of Profit- Profit arises because the entrepreneur undertakes risk of the business.  (iv) Keynessian theory of profit- Relates money supply variability and uncertainty to inflation and deflation. Variability of prices is a major cause of business cycles, wages and other costs of production adjust slowly hence affecting profits and investments.   e) Conclusion on the financial viability of the business Financial viability is the ability of a firm to meets its financial obligations as and when they occur whether in the short run or in the long term. This usually involves checking whether the firm can pay its bills on time, then can create a balance between the income and the expenses and finally can secure reliable sources of income generating projects. I could rate this firm, Cape e-distibutors LTD to be financially viable since from the break even analysis, it is depicted that the firm has a zero break-even point and 100% margin of safety. This means that it only needs to sell what it has to make enough profit. Another reason why I could say this firm is financially viable is because of the high profitability ratios. This means that the firm generates very high profits from the resources it employs hence has a higher chance of being a going concern and being able to sustain its operations from its income. The firm has been reporting increased profits since its incorporation and this is definitely a good trend as the business of a business is making highest profits and minimizing costs. References Atrill, P., & MacLaney, E. (2011). Accounting and finance for non-specialists (7th ed.). Harlow FT Prentice Hall. Eric Press, "Analyzing Financial Statements" (Lebahar-Friedman, 1999) http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470583622.html [accessed on 23 April 2012 3.30 P.M] Jensen, D. L., & Coffman, E. N. (2008). Advanced accounting (2nd ed.). New York: Random House Business Division.  J.Cammack, ( 2007)Building Capacity through Financial Management, , at: http://www.oxfam.org.uk/resources/downloads/buildfincap_book.pdf [accessed on 23rd April 2012 at 4.00 P.M] Leopold B., John W., Guthmann, H. G. (2000). Analysis of financial statements (4th ed.). New York: Prentice-Hall. Mellman, M., Kerstein, J., & Lilien, S. B. (1995). Accounting for effective decision making: a manager's guide to corporate, financial, and cost reporting. Burr Ridge, Ill.: Irwin Professional Pub.. Pandey, D. P. (2009). Micro-finance management. New Delhi: Adhyayan Publishers & Distributors. Top of Form Bottom of Form Read More