Best Sources of Business Finance for Victory PLC

The Assessment Task

Part A

Victory PLC specialises in the manufacturing of walking boots. They sell their products directly to large wholesalers who in turn distributes to smaller retailers or sell the products online to consumers.  During the year ended 31 December 2021 Victory PLC turnover had increase by 8% to £324 million, however the company had seen a significant fall of 25% in their profits before tax and dividends of £22 million. The Board of Directors (BOD) attributes the fall in profit to the COVID-19 pandemic. Given the relation on CVID-19 restrictions, the BOD are very upbeat about some of the changes they wish to make in the new financial year. The Financial Director has presented the following information to the board:

1. The company’s liquidity ratio is 1:4.2. The Financial Director pointed out that there are two items impacting negatively on this ratio.
   
   
   1. Victory PLC is in dispute with one of its suppliers arising from a contract valued at £8 million. The company claims that the supplier had provided substandard raw material. Consumers had complained about the durability of the walking shoes, therefore Victory PLC had to refund customers. This dispute has been ongoing for the last two years. The Financial Director had set aside the £8 million in case the courts ruled in favour of the supplier
      
      
   2. Victory PLC largest customer, Vas Distributors, has reported financial difficulty as a result of the COVID-19 pandemic fallout. They owe Victory PLC £12 million and are asking for additional time to settle their debt. The Financial Director, being prudent has treated the full amount as Provision for Bad Debts.
      
      
2. The Tax Liability carried forward from 31 December 2020 is £4.2 million. Victory PLC is has made arrangements with the HMRC to pay this by 31 May 2022. The current year tax is £1.9 million
   
   
3. The BOD has set aside £2 million for dividends payments to shareholders.

The BOD of Victory PLC has set out an ambitious plan to improve the company’s earning power and, by extension, the liquidity of the business. They are hoping to implement the following during the year ending 31 December 2022.

1. The BOD is of the opinion that they would be in a stronger position to improve the earnings of the company by opening retail shops across the United Kingdom. The first retail shop is slated for a large shopping mall in London. This will cost £12 million and is expected to generate £35 over the next 5 years. Additionally, the BOD is expecting to open 5 other retail shops in the following 3 years. One in each of the city of Manchester, Edinburgh, New Castle, Cardiff and Belfast.
   
   
2. Expand their market base to include overseas territories in the United States, Africa and China. Victory PLC is in advance talks to open three retail stores (one in each of these territories similar to the proposed shop in London). The expected total costs are in excess of £26 million. Each shop is expected to generate in excess of £8 million in annual revenue in the first year and increased by 10% – 15% annually thereafter    
   
   
3. The BOD are also planning to increase their product range. They wish to include Victory Brand Hiking Jackets, Trousers, and Tops for both male and female. The expected sunk cost for setting up manufacturing is £15 million. Annual returns on the clothing division is forecast at £5 million in the first year with an expected to grow by 10% - 15% over next 5 years.
   
   
4. The Annual Shareholders meeting is Scheduled for April 2022 and BOD of Victory PLC is considering one of three options to raise the funds they need to finance these projects:
   
   
   1. Seek a Non-Current 15-year loan of £100 million at 5% interest from a financial Institution.
   2. Make a rights issue of shares in the amount of £100 million
   3. Issue a 5-year 2.5% Debentures

Required:

Prepare a report of up to 1,500 words addressed the BOD on which, in your estimation, is the best sources of business finance for Victory PLC. In your report please address the following:

1. the difference between Profit and Cash-flow
2. what is meant by Working Capital (liquidity) and how changes in Working Capital affect Cash-flow
3. Analyse and recommend what steps should now be taken to improve Victory PLC cash-flow.