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QH0320 Understanding Finance

Question

Answered

Question:

Task

You are required to produce a budget report, complete with analysis and commentary, on a given scenario. The report consists of THREE compulsory Parts.

Assessment Scenario

Hamble Ltd is an established food packaging and distribution business operating across London and the south east of England. The Directors of Hamble Ltd are considering expanding the business over the next 12 months by purchasing an existing established business which operates in the east of England and the midlands.

Part A

The directors of Hamble Ltd have asked you, as a recently employed assistant management accountant, to prepare and review their cash budget. The bookkeeper started the cash budget but was unable to complete it due to ill health.

In addition, Hamble Ltd requires you to evaluate the different funding options for its expansion plans.

Estimated sales and purchases for each of the nine months to September are given below:

 

Jan

£,000

Feb

£,000

Mar

£,000

April

£,000

May

£,000

June

£,000

July

£,000

Aug

£,000

Sept

£,000

Credit sales

9,500

8,000

6,000

11,000

12,350

14,000

13,250

4,500

12,500

Cash sales

250

350

800

600

620

900

500

350

800

Credit purchases

6,000

5,200

5,800

8,000

8,700

6,300

5,200

5,000

5,100

Trade Receivables: Credit sales are to be collected two months after the date they have been sold.

Trade Payables: Credit purchases are to be paid one month after the date they have been purchased.

Borrowings: The terms of a 5-year loan are coming to an end and Hamble Ltd are due to repay the capital of £1,000,000 on 31st July.

Current Liabilities: Corporation tax of £100,000 is due to be paid to HMRC in the month of May.

Delivery vehicles: Hamble Ltd has a policy of replacing delivery vehicles every 2 years. A number of delivery vehicles are due to be replaced under this policy in June at a cost of £1,250,000, but existing delivery vehicles will be traded in for £310,000 as Part of the deal.

Other overheads: Other overheads will be £2,200,000 per month settled on a monthly basis in the month incurred.

Cash: Hamble Ltd expects to have £90,000 in cash at the beginning of April.

You are required to:

  1. Using Excel, prepare a cash budget for the business for the 6-month period from April to September.

To achieve full marks you MUST show your working out, i.e. by using Excel cell referencing and formula.

  1. Examine the cash budget you have prepared and advise the directors of Hamble Ltd of any possible solutions to cash flow problems that might be evident. Marks will be awarded depending on the depth of
  2. Identify five sources of finance available to Hamble Ltd and evaluate the advantages and disadvantages of each. You should then make a recommendation to the directors of Hamble Ltd of the most appropriate source of finance for the proposed expansion plans. Marks will be awarded depending on the depth of discussion.
  3. Within the next 3-5 years Hamble Ltd intend to expand their business throughout the UK following which their aim is to list the business on the London Stock Exchange. The Directors of Hamble Ltd have asked you to brieflyexplain the advantages and disadvantages of raising finance through the issue of shares.

Part B

The Directors of Hamble Ltd have identified two existing established businesses that may be suitable to purchase to fulfil their expansion plans and have asked you to calculate and compare ratios for both companies before making a recommendation on which company to purchase.

Income Statements for the Year Ended 31st Dec 2020

 

 

Norwich Ltd

Salford Ltd

 

 

£'000

£'000

Sales revenue

 

8,320

11,250

Cost of sales

 

(6,020)

(9,030)

Gross profit

 

2,300

2,220

Operating expenses

 

(1,048)

(1,535)

Operating profit

 

1,252

685

Finance charges

 

(20)

(70)

Profit before tax

 

1,232

615

Taxation

 

(62)

(30)

Profit for the year

 

1,170

585

 

SOFP (Balance Sheet) as at 31st Dec 2020

 

 

 

Norwich Ltd

Salford Ltd

 

£'000

£'000

£'000

£'000

Non-current assets

 

502

 

198

Current assets

 

 

 

 

 Inventory

1,290

 

2,437

 

 Trade receivables

    730

 

1,990

 

 

 

2,020

 

4,427

Total assets

 

2,522

 

4,625

Equity

 

 

 

 

Share capital

  1,350

 

     800

 

Reserves

580

 

  1,145

 

 

 

       1,930

 

    1,945

Current liabilities

 

 

 

 

 Trade payables

430

 

     850

 

 Taxation

       62

 

       30

 

 Bank overdraft

      35

 

     350

 

 

 

         527

 

      1,230

Non-current liabilities

 

 

 

 

Loans

 

           65

 

1,450

Total equity and liabilities

 

 2,522

 

      4,625

You are required to:

  1. Use your Excel skills to calculate the following ratios for both companies.

You should then present your calculated ratios within your report in a simple table format for ease of comparison.

NOTE:  To achieve full marks you MUST show your working out, i.e. by using Excel cell referencing and formula.

  1. Gross profit margin
  2. Operating profit margin
  3. Return on capital employed
  4. Asset turnover
  5. Current ratio
  6. Acid test
  7. Inventory days
  8. Trade receivable days
  9. Trade payable days
  10. Working capital cycle/operating cycle
  11. Gearing
  12. Interest cover
Compare the performance of the two companies in the 4 key areas of profitability, efficiency, liquidity and gearing using the ratios calculated in Part 1 and make a recommendation as to which of the two companies Hamble Ltd should consider purchasing. Marks will be awarded depending on the depth of discussion.

Part C

Hamble Ltd has a varied client base that includes schools, hospitals and the hospitality sector and has experienced fluctuating consumer demands since the beginning of the Covid-19 pandemic.

One of their products is a fresh produce box, consisting of local seasonal produce, and which is ordered in units. The following information is available for the year ending 30th September.

Due to these fluctuating demands, you have been asked to use Excel to prepare a flexible sales budget for quantities of 200,000 units and 300,000 units. Sales revenue is fully variable.

NOTE:  To achieve full marks you MUST show your working out, i.e. by using Excel cell referencing and formula.

 

 

Budget

Sales (units)

 

250,000

 

£/unit

£000s

Sales revenue

 

3,250

Variable produce costs

 

(875)

Variable production overheads

 

(150)

Fixed production costs

 

(700)

Fixed administration costs

 

(1,160)

Profit

 

365

 
Consider specific factors that may contribute to an increase or decrease in Hamble Ltd’s consumer demand. You should identify a minimum of 2 factors that may contribute to an increased demand and a minimum of 2 factors that may contribute to a decreased demand. Marks will be awarded depending on the depth of discussion.

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