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Britannia: A Proprietary Form Owned By Tom Add in library

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Question:

Describe about the Assumption, Budgets and Ratio Analysis of Britannia?

 

 

Answer:

Executive Summary

Britannia is a proprietary form owned by Tom. He deals in cricket bats. He purchases them directly from the manufacturer and then stores it in his warehouse and then sells to the customers directly. Cricket is a sports activity. Playing cricket everyday keeps you fit. Children are a huge fan of cricket in our country as our country has won the ICC World Cup for 3 continuous seasons. Our country is ranked 1 all over the world in ODI and Test matches. So this is a business where there is no recession. Tom purchases the bats from the manufacturer and packs them in his branded packets and then sale it to the ultimate customers. Tom has just begun the business. Below we have done some analysis for the coming 5 years of the company. I have included the ratio analysis part also in it. I have done analysis of the following ratio and their outcome have been commented upon

  1. Gross Profit Ratio
  2. Net Profit Ratio
  3. Current Ratio
  4. Assets to Turnover Ratio

Assumptions

Sales Budget

1. Tom trades only in one item and that is cricket bat
 
2. Selling price increases from 200 in the 1st year to 239 in the 5th year
 
3. All sales occur evenly throughout the year
 
4. There is no opening stock
 
5. There is no loss of stock
 
6. There is no abnormal loss in the warehouse

Details regarding cost of product

1. Bats will be purchased at 150. The purchase price will increase to 170 at the end of 5 year

2. Transportation from the warehouse to the retail store will incurred by Tom. This will keep increasing till the end of fifth year

3. Approximately we assume that 1 salesman will sell 250-300 bats in a year. So with this assumption we employ 25 salesman in the 1st year which keeps increasing in the coming year and becomes 45 in the end of the 5th year

4. The plastic bags in which the bats will be packed will be directly purchased by the supplier and the salesman will pack them and will sell to the retail customer

5. Machine will be purchased in the beginning of the year

6. This machine will be used for packing the bats

7. The life of the machine is 5 years

8. The machine does not have any salvage value

9. The machine is depreciated equally throughout the 5 years

Stock

1. There is no opening stock

2. Tom does not return the old stock to the supplier

3. The stock is valued at average cost of all 5 years

Sales to debtors

1. 80% sales is cash sales

2. The remaining 20% is credit sales

3. The sales occur evenly throughout the year

4. There is no fixed percentage regarding the amount receivable from debtors. It varies from year to year

Cash Budget

1. The firm takes a loan of 1100000 from bank. This loan is long term. The rate of interest is 3.6%.

2. The company does not repay any principal amount throughout the 5years

3. Sales occur evenly throughout the year

4. All borrowing occurs at the beginning of the year, and all repayments occur at the end of the year.

5. The company does not have to make any payments until the end of the year.

6. No cash dividends are paid during the next five years

 

Budgets

1. Sales Quantity Budget

Quantity Purchase

Year

Opening Stock

Purchase

Sale Units

Closing Stock

1

0

30000

25000

5000

2

5000

30000

28000

7000

3

7000

35000

37500

4500

4

4500

40000

41000

3500

5

3500

42000

43000

2500

 

Year

Selling Price

Purchase Price

1

200

150

2

210

155

3

220

159

4

235

162

5

239

170

 

Sale Value and Purchase Price

Year

Sales

Purchase

1

5000000

4500000

2

5880000

4650000

3

8250000

5565000

4

9635000

6480000

5

10277000

7140000


2. Transportation cost

Transportation Cost Budget

Year

Cost

1

300000

2

320000

3

350000

4

370000

5

450000


3. Labour Budget

Salary

Year

No. Of labours

Salary/lab/p.a.

 

1

25

3000

75000

2

30

3100

93000

3

35

3200

112000

4

40

3300

132000

5

45

3350

150750


4. Packing cost Budget

Packing Material

Year

Cost per packet

No. of Packets sold

Packing Cost

1

15

25000

375000

2

15.5

28000

434000

3

16

37500

600000

4

17

41000

697000

5

17.5

43000

752500


5. Depreciation Budget

Depreciation of machine

Year

Dep

1

100000

2

100000

3

100000

4

100000

5

100000

 

Profit and Loss Statement(Marginal Costing Method)

 

Particulars

Year 1

Year 2

Year 3

Year 4

Year 5

 

No. Of Units

25000.00

28000.00

37500.00

41000.00

43000.00

 

Selling Price

200.00

210.00

220.00

235.00

239.00

 

Sales Value

5000000.00

5880000.00

8250000.00

9635000.00

10277000.00

Less

Purchase

4500000.00

4650000.00

5565000.00

6480000.00

7140000.00

 

Transportation

300000.00

320000.00

350000.00

370000.00

450000.00

 

Packing

375000.00

434000.00

600000.00

697000.00

752500.00

 

 

 

 

 

 

 

 

Contribution

-175000.00

476000.00

1735000.00

2088000.00

1934500.00

 

 

 

 

 

 

 

Less

Fixed Cost

 

 

 

 

 

 

Depreciation

100000.00

100000.00

100000.00

100000.00

100000.00

 

Warehouse Rent

1200000.00

1200000.00

1300000.00

1300000.00

1400000.00

 

Salary

75000.00

93000.00

112000.00

132000.00

150750.00

 

Interest

40000.00

40000.00

40000.00

40000.00

40000.00

 

 

 

 

 

 

 

 

Profit

-1590000.00

-957000.00

183000.00

516000.00

243750.00



Cash Flow Statement

Year

1

2

3

4

5

Opening Balance of Cash

0

10000

39500

37500

406500

Receipt

 

 

 

 

 

Total Sales

5000000

5880000

8250000

9635000

10277000

Cash Sales

4000000

4704000

6600000

7708000

8221600

Cash collected from debtors

800000

1000000

1500000

1800000

2500000

 

4800000

5714000

8139500

9545500

11128100

Payment

 

 

 

 

 

Purchase

4500000

4650000

5565000

6480000

7140000

Paid To Creditors for Purchase

3900000

3487500

5600000

6500000

7000000

Transportation

300000

320000

350000

370000

450000

Packing cost

375000

434000

600000

697000

752500

Machine

 

100000

100000

100000

100000

Interest

40000

40000

40000

40000

40000

Rent of Warehouse

1200000

1200000

1300000

1300000

1400000

Salary

75000

93000

112000

132000

150750

 

5890000

5674500

8102000

9139000

9893250

Bank Loan

1100000

 

 

 

 

Closing Cash Balance

10000

39500

37500

406500

1234850

 

Debtors

Year

Opening Balance

Sales

Receipt

Closing Balance

1

0

1000000

800000

200000

2

200000

1176000

1000000

376000

3

376000

1650000

1500000

526000

4

526000

1927000

1800000

653000

5

653000

2055400

2500000

208400

 

Creditors

Year

Opening Balance

Purchase

Paid

Closing Balance

1

0

4500000

3900000

600000

2

600000

4650000

4987500

262500

3

262500

5565000

5600000

227500

4

227500

6480000

6500000

207500

5

207500

7140000

7000000

347500


Balance Sheet

 

Liabilities

Year 1

Year 2

Year 3

Year 4

Year 5

 

 

 

 

 

 

 

 

Capital

796000

-794000

67400

-147600

209200

Add/Less

Profit/(Loss)

-1590000

-957000

183000

516000

243750

Add:

Capital Intro/Withdrawal

 

1818400

-398000

-159200

-159200

 

Net Worth

-794000

67400

-147600

209200

293750

 

 

 

 

 

 

 

 

Creditors

 

 

 

 

 

 

Purchase

600000

262500

227500

207500

347500

 

Machine

500000

400000

300000

200000

100000

 

Bank Loan

1100000

1100000

1100000

1100000

1100000

 

 

 

 

 

 

 

 

 

1406000

1829900

1479900

1716700

1841250

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Packing Machine

500000

400000

300000

200000

100000

Less

Depreciation:

100000

100000

100000

100000

100000

 

 

400000

300000

200000

100000

0

 

Debtors

200000

376000

526000

653000

208400

 

 

 

 

 

 

 

 

Cash

10000

39500

37500

406500

1234850

 

Stock

796000

1114400

716400

557200

398000

 

 

 

 

 

 

 

 

 

1406000

1829900

1479900

1716700

1841250


 
 

Ratio Analysis

Profitability ratio

These ratios help us to measure the ability of a particular entity to generate income when these are compared to expenses & all other costs that are incurred by the entity for a specific period of time. For all these ratios the success depends on increasing them as compared to previous year’s results or comparing the same with competitor’s results. In case if the result is positive than it means that the company is doing well. There are different types of profitability ratios such as Net Profit Ratio, Gross Profit Ratio, Return on Equity ratio Return on assets ratio, etc. One should consider certain aspects when the entity in which he is investing is having a business which is seasonal in nature. In such case the major part of the income is derived in very few months say 2-3 months.

Let us calculate the Gross Profit ratio of Britannia

Gross profit is a yard stick that can be used to measure the financial viability of a firm. It reveals the amount of excess receipts that remain after deducting the cost of goods sold. From this remaining part i.e. Gross Profit, the expense that are charged to profit & loss account are paid.

This is not a true estimate of company’s financial viability. In the absence of gross profit an organization will not be able to pay operating, selling, administrative and other expenses. It can’t even plan savings for future years by transferring them into reserves.

This ratio should remain stable in all the years. An increase in this ratio is not easy to make. It requires drastic changes that can affect the cost of goods sold or pricing policies of the company.

 The formula for calculating the gross profit ratio is

Gross profit/Net Sales * 100

Gross Profit

Gross Profit %

500000

10

12,30,000

21

26,85,000

33

31,55,000

33

31,37,000

31


The gross profit has been continuously increasing. In the first and the second year the company has suffered loss. The firm is new to the business. It is obvious that it may earn loss. The heavy investment in the first year and low sales has bought very less revenue to the firm. But from the 3rd year Britannia has started earning profit and is growing as it has not remained new to the business.

Net Profit

Net Profit

Net Profit %

-1590000

-31.80

-957000

-16.28

183000

2.22

516000

5.36

243750

2.37


Net Profit Ratio               

It is basically a ratio that measures how much part or portion of every dollar a company actually retains in earnings. It is very useful while we compare two companies in similar industries. Higher percentage of this ratio indicates that company has a better control over its cost as when compared to its competitors.

Shareholders have a close watch over this ratio. Changes in this ratio are endlessly scrutinized. This ratio shows the relationship between Net profit after tax & Net Sales. Net profit is calculated by deducting all expenses except dividends to shareholders. (Bizfinance, 2014). Net Profit Ratio= Net Profit/Net Sales *100

Net Profit

Net Profit %

-1590000

-31.80

-957000

-16.28

183000

2.22

516000

5.36

243750

2.37


We can see from our analysis that in the 1st two years of operation Britannia is incurring losses. But then onwards it has started earning profits. Profits have fallen during the 5th year. This is due to the increase in the warehouse rent and salary.

 

Short Term Solvency Ratios          

This ratios help to evaluate the ability of a company to clear its debts & other obligations. It analyses whether a company is able to meet its short term obligations & current liabilities as & when demanded from the creditors. The lower the ratio the more the chances that the company will default. This ratio is used majorly in insurance companies.

This help to know that the company will remain solvent or there are certain indications that shows that the company may become insolvent in near future. It measures only cash flows & not income. The majorly used short term solvency ratio is Current ratio which is explained & calculated as follows.

Current Ratio

Basically it is a ratio that measures a company’s liquidity i.e. its ability to pay short term obligation when they arise. It is the most widely used test of liquidity of a business. It is the ratio of Current Assets of a business to its Current Liabilities. Current Assets are those which are converted into cash within 12months or within the normal operating cycle whereas Current liabilities are the obligations of a business that have to be paid within 12months. An idle Current Ratio is 2:1 which means Current Liabilities are half of Current Assets.

Creditors prefer granting credit to those companies which have a higher Current Ratio as they will feel safe. The formula for this ratio is Current Assets divided by Current Liabilities. It is also known as Liquidity Ratio, cash asset ratio or cash ratio. When the current liabilities are more than the current assets then the company may face problem in discharging its short term liabilities & obligations. (Accounting Explained, 2014).

When the ratio is less than 1 then the company is facing financial crisis, but that does not mean that company will become bankrupt.

Current Assets

1006000

1529900

1279900

1616700

1841250

Current Liabilities

600000

262500

227500

207500

347500

Current Ratio

1.68

5.83

5.63

7.79

5.30


As we have mentioned above the optimum current ratio should be minimum 2:1 which means the current assets should be twice as current liabilities. The CR of Britannia is increasing year by year. This is due to huge credit sales and huge credit purchase. Except in the year 4 the ratio is between 5-6. This indicates that the firm has excessive cash balance which should be invested in government securities and other profitable investments. It can invest the excess cash in its own business by providing huge credit to creditors.

 

Efficiency Ratio

The word efficiency means optimal utilization of resources. This ratio is used to analyze how a company uses its assets & liabilities internally. The most widely used ratios are Accounts receivable ratio, Fixed Assets turnover ratio, stock turnover ratio, sales to net working capital ratio& sales to inventory ratios.

The ratios are calculated for Britannia is as follows

Fixed assets turnover ratio: The Company uses fixed assets to produce goods & services. The company should have a regular check on the utilization of fixed assets. The basic purpose of fixed assets is to fixed assets like land, building, machinery, etc. is to produce goods & services that earn income to the company. This ratio measures the capability of the company to generate sales by utilizing the fixed assets. The fixed assets used should be net of depreciation. This ratio is more often used in manufacturing industries where any fixed asset is purchased to increase the production. This ratio shows how efficiently the investment in fixed assets is utilized. The ratio of Britannia is calculated as follows

Fixed Assets

400000

300000

200000

100000

Turnover

5000000

5880000

8250000

9635000

Ratio

12.5

19.6

41.25

96.35


The company does not have much of the fixed assets in its pocket. The warehouse and retail outlets are rented by the firm. It owns just the packing machine. The cost of machine depreciates every year so we can find this ratio becoming favourable year by year. In the 5th year the ratio is 96.35 which means the assets is utilized in such a way that it yields 96.35 times more than its actual worth.

Conclusion

The above ratios especially the gross profit ratio proves that the firm has a bright future. In the beginning it suffered huge loss but it recovered the same in the coming 3 years. Thus based on our analysis shown above we conclude that the firm will continue to earn profit in future. There are certain assumptions based on which I have done the analysis. In case if any assumption fails than it will distort the predictions done for financial statements.

 

 

References

Accounting explained, 2014 “Current ratio”, viewed on 29th January 2015 <https://accountingexplained.com/financial/ratios/current-ratio >

Bizfinance, 2014 “Profitability ratio Analysis”, viewed on 29th January 2015 <https://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm>

John G. Finley, Simpson Thacher & Bartlett LLP, 2010, “Delaware Provides Guidance Regarding Discounted Cash Flow Analysis”, Viewed on 29th January 2015

<https://blogs.law.harvard.edu/corpgov/2010/07/16/delaware-provides-guidance-regarding-discounted-cash-flow-analysis/

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