Britannia A Proprietary Form Owned by Tom

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 Gross Profit Ratio Net Profit Ratio Current Ratio 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 years results or comparing the same with competitors 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 companys financial viability. In the absence of gross profit an organization will not be able to pay operating, selling, administrative and other expenses. It cant 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 companys 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/