1.0. Background of London woods Limited
This is a private limited liability company that specializes in the production of furniture for sale to wholesale, retail and private use. It has been in business for the past five years and currently it employs 50 personnel that work within the company. It operates in the domestic market. The company was founded by three young men that were carpenters, Billi Kid, Bengazy and Lee Jones. These young men were energetic and they had appointed Operations Director aged 25 years. The operation's director's name was Mathew Do It. He is an innovator who is experienced within the industry. The company`s reputation for quality has been down over the past twelve months. The company has a strong customer base because of its product branding. The company's market share has reduced by 1 % over the past two years. Therefore the company has to to rethink on quality issues and product range if it has to expand the market and recover to its original position.
The company faces challenges because of the new competitors in the market that are offering new products that have a wider range. The new competitors are techno savvy and are employing technology to do their sales and faster delivery of the products. Billy and Bengazy want to expand their markets to cover the globe so that they can increase their business but they have little knowledge of technology. They also lack the facilities to do the business that can satisfy the globe. The operations manager wants to implement the idea that can improve and expand the business of London Woods limited. He wants to do this by focusing on quality and values in the workplace. He can do this only by involving the outside change agents and being responsible in making things in the organization to happen. He has proposed the purchase of two machines to be used in the production department. The machine will cost the company 4 million pounds. The machines will last for a period of five years and will enable the company to produce a wide range of products and it at the same time enable the company to have enough income. The company has no enough money to buy the machines according to Cecil Jones the Finance manager of the company. The cost of capital is 12% is if they are to borrow the money to buy these two machines. The company is planing to open a branch in Latin America where trees are cheap. The company will be able to make a wide range of products using less amount of money on the inputs.
1.1. Sources of finance for London Woods Company.
- Retained earnings- These are profits generated by the company over a given period as dividends to shareholders of the company. Retained earnings are kept in reserve for a specific objective or just for emergencies that may arise in the future (Heycunningham, 2006). Retained earnings are an internal source of finance. The retained earnings do not cost anything to the company. The advantage of this source of finance for the company is that the company's decisions will not involve other parties because the money will be from the company. Also the company's debt will not rise and there will be no costs associated with borrowing.
- Funding through share capital-These are issued to the company owners. They have a face value or a nominal value. They are called ordinary shares and their market value quoted have no relationship with the nominal value .The owners of the company give the amount to the company and the money will be used to run the activities of the company. The amount of shares an individual has determines the amount of dividends he will have at the end of a certain trading period. This type of funding has no costs because it has no interest ad the decision making is easy . Decisions are made the shareholders of the company. No costs are incurred in this type of source of funding for the company. In the London Woods the share capital; was at 1.00 pounds each.
- Loan capital-this is another source of funding for the company though it is an expensive source. The loan capita; would cost the London Woods 12% if they borrow money to buy the two machines. Banks give loans to be repaid over a specific period of time and then charge an interest. The interest may be fixed or variable depending on the borrower's ability to repay. This type of financing is the easiest type of financing to get to buy assets like the machine the London Woods require. The loan capital has a disadvantage because whether the London Woods will make a profit or a loss they will have to pay on the agreed date. Also, the loan is usually secured against an item of the organization and the item may be taken from the London Woods if they default on paying the agreed amount in time.
- Sale of assets-the London woods can decide to sell some of its assets to get the finance they need to run the operations of the company and satisfy its customers by supplying them good quality chairs. Sale of assets also may include leaseback which allows the company flexibility to plan for example they may want to sell the premises in the next 5 years.
1.2The impact of the sources of the finances the London woods Limited is using.
The use of retained earnings of the company has necessitated that the shareholders cannot get the dividends since the whole amount is re-invested back to the business (PENDLEBURY & GROVES , 2004) . This source is also called the “ploughing back method.”
Loans also affect the decisions of the company since the company cannot make the decisions without involving the bank. This slows the operations of the London Woods and can even prevent other operations within the company.
The use of money from the sales of assets reduces the available shares of the London woods. The sale also cannot realize the principal amount because of depreciation because of wear and tear.
1.3. Appropriate sources of finance the London woods can use to buy the machines
- Retained earnings: The company has retained earnings and it will be appropriate if it uses it because it has no costs. The founders will have to be patient and stay without dividends for some time before they can make profits after they purchase the machines. The two machines will in time generate the amount that can be allocated to the shareholders of London Woods as dividends.
- Bank loan: when all the other sources fail, the bank can be the last option although it will be expensive for the London Woods.
2.1. The costs of the Finances being used by the London woods Limited.
The company incurs costs in repaying the long term loan. This is a liability to the company and it affects the operations of the company.
2.2. Importance of financial planning to the London woods Limited.
- The company will be in a position to determine goals that are measurable. When specific targets will be set it will enable the London Woods to have a clear cut plan on how to achieve the said target.
- Financial planning will help the London woods to identify areas that are not moving well in accordance with the company`s set objectives and targets. It is important because problems are spotted earlier through financial planning.
- Financial planning enables London Woods to stay focused on the business. When a plan is made it details all the activities that the company is to do and achieve over a specified period of time. This will therefore make the company not deviate from doing its objective of making furniture.
- Financial planning spells the amount of money needed by the company to carry out its operations smoothly. It also gives the alternatives of getting the money to fund the projects of the company. London woods will be able to plan on getting the money to open a branch in the Latin America.
2.3. Importance of information in good decision making in London Woods Limited.
Information is power; in an organization like the London woods information is needed for it to be managed well. Every project in the company requires information. For the company to open a branch in the Latin America it must have information on the market of that place. It must also have information on the preference of the people of Latin America so that they can tailor-make products that suit them. Information about competitors, customers and production capabilities of the area are also needed. The management will then use the information obtained to make strategic decisions to be made. The information can also be used to identify options to be considered and these alternatives will be evaluated based on cost, time taken to implement, feasibility and consistency with the company's goal and objectives. The assessing of the decisions arrived at als require information. London woods to purchase the new machines a research on the machines must be done so that the right information can be obtained and can facilitate in the making of the decision of the company. The information can be obtained from the environment for example information on technology could be obtained from the competitor who used technology to market her products and deliver the products to the customers.
2.4. The impact of the sources of finance for the financial statement of London Woods Limited
The finances obtained to fund the company for example the loan has been indicated on the balance sheet. This reduces the amount that could have been shared by the shareholders of London Woods.
The retained earnings are another source of finance that makes the company reduces its costs because it is a cheap source of finance. The shareholders will not get the dividends as shown in the statements because the money is plowed back to the company
3.1. Cash budget April-December 2013
3.2a. The cost of producing single chair if a customer orders 1,800 chairs and state how affect pricing decisions cost
Cost of chairs
Variable cost 22 x 1800 = 39600
Fixed cost 5400 per annum = 5400
Total cost 45,000
Units/chairs produced 1800
Cost per unit = 450001800 = 25 pounds
3b. The cost of single mini-chair if 1500 chairs are produced. Branch can produce 50,000 chairs per annum.
Direct Labor (variable) =4
Direct material (variable) =3
Production overheads=5
Total variable cost per unit 12
Units produced=1500x12=18000
Fixed costs
Administrative overheads 2500
Other fixed costs 2000
The total cost of producing
1500 units 22, 500
Cost per unit = 22, 5001500 = 15 pounds
3.3 Assessments on whether London woods should buy the two machines.
Since NPV (net present value) is positive, the project is viable i.e. buy the machines.
4.1. Main Financial statements of a company.
- Balance sheet-this is a statement showing the financial position of a company at that given time. It gives a summary of the company`s liabilities, assets and shareholders' equity (Taparia , 2003). The assets are listed first on the balance sheet following their order of liquidity. The liabilities then follow. The assets are the net worth of a company. They can either be current assets or assets that are fixed. Current assets can be converted into cash very quickly. Examples of current assets include inventory assets, accounts receivable and cash. Fixed assets include buildings and land. They cannot be converted into cash easily. Liabilities are owned by the creditors. They are also classified into current liabilities and noncurrent liabilities. Current liabilities include notes payable and wages payable. Non current liabilities include mortgages and bonds.
The general balance sheet equation is :
Assets = Equity + Liabilities
- Income statement-it shows the results of the company during a period of the year for example one year. The equation used to describe the income of the company is:
Revenue - Expenses= Net income
Revenue is the inflows from the manufacture of products or delivering a service to a customer.
- Statement of retained earnings- Retained earnings are shown on the balance sheet and they are mostly influenced by the dividends and income
- Cash flow statement- This statement is used in determining the company's ability to pay its bills over a given period of time. The cash flow statement provides the uses of cash, sources of cash and changes in the cash remaining. This information is used to make a cash flow statement from the beginning of the period to the end of the period.
4.2. Comparison of financial statements of a sole trader and a company
Sole trader is a trader that operates alone. If the trader who makes all the decisions regarding his business unlike the company where there are many shareholders that must be involved in the decision making. The financial statements of a sole trader are not many compared to the company. The financial statements are not complex to interpret like the ones of the company. They are easy to interpret because they are not involved in many transactions. The financial statements are the same but the difference only comes when sharing of profits. The sole trader takes it all whereas in the company`s financial statements the profit must be shared in accordance with ratios they contributed their capital.
4.3
a) Net profit margin
= Net profit sales X 100
= 37051049906020 X 100
= 0.7
b) Current ratio
= Current AssetsCurrent Liabilities
= 1487810790750
= 1.88
c) Quick Ratio= Current Assets-StockCurrent Liabilities
=806980790750
= 1.02
d) ROCE
= net operating profit after taxCapital employed i.e. (total assets- current liabilities)
= 370 5101300 1300
= 0.028
e) Asset turnover ratio
= Sales revenueTotal assets
= 4990 60201100 1250 + 680 830 + 6020 + 800 960
= 3.996
f) Equity ratio
= shareholders fundsTotal assets
= 930790 + 37051012,489,060
1.04
References
HEYCUNNINGHAM, D. (2006). Financial Statements Demystified. Sydney, Allen & Unwin. http://www.books24x7.com/marc.asp?bookid=22548.
TAPARIA, J. (2003). Understanding financial statements: a journalist's guide. Oak Park, IL, Marion Street Press.
PENDLEBURY, M. W., & GROVES, R. E. V. (2004). Company accounts: analysis , interpretation and understanding. London, Thomson Learning.
