If we see the business report for the company we can easily find that company have a negative cash flow that has many problems. Company need to adjust its costs to make cash flow smooth. There are many problems with company finance as we can look that those problems are following:-
Costs on purchase are high for each month from January to December compare to sales so company should look for unconventional supplies in market.
Wages also are more than 30% of administrative costs that should be managed either by right sizing or downsizing.
Rent rates for company are also high company should look new areas where they can reposition.
Director's salaries are 40% of total human resource costs that are bigger should be decreased.
Company should control deficit through proactive approach in human resource and financial planning
Identify the likely causes of the problems and how they might be remedied and avoided in the future
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The major problems for company look into its failure to find good competitive suppliers, to decrease the bargain on salaries and reduction in administrative costs. (Phillips, 2008) As it is standards in business that administrative costs in production industry should not be more than 30 to 35 % yet we can see in this case of company there is huge human resource and administrative costs. Company should rearrange its human resource structures and should look alternative for the supply thus company can overcome the annual deficit in finance and can put that finance into development of business activities and production. To increase efficiency new automatic machinery can be installed that will save from administrative costs for company and company can come out of this fiscal crises over the years.
Make recommendations for improving the cash flow situation with a view to minimizing the cash deficit or possibly generating a cash surplus
For generation of cash surplus company should do some administrative adjustments and it should also look for any change in its technological capabilities and production units. As it looks that company is not having good competition for its suppliers and is playing in hands of suppliers which are supplying raw material at higher rates. (Heinz, 2000) Secondly the expenses over handling and administrative costs also putting burden on finance. Company also need relocate its installation as it seems it is paying maximum part of finance to rents. In this situation the impact of negative cash flow is harming the business ability and profits of company and is keeping it at loss.
In how much time a company can recover the original cost because the time is important factor in all of these financial matters.
It is calculated as:
Payback period is very important for the security market also it gives the true face of the project, like security in that sense if any company wants to start a new project and for the new project and for a new scheme the investment is required. For the investment and for the capital mostly companies knock at the door of the banks and apply for the loan for the new project. Banks and the other financial institutions calculate the IRR of the project it is positive then they sanction a loan for that.
Like if a project costs £450,000 and is expected to return £112,500 annually, the payback era of this project will be £450,000 / £112,500 = 4years.
Means in the five year the original amount will back.
But there are some serious issues about the payback period:
It does not calculate the profit of the project after it is accomplished it just focus of the return value but not measure of the future importance of the project.
It takes no notice of the time value of money, means time factor is not perfectly described.
Because of these facts and figures, other methods of resources budgeting like net present value, internal rate of return or cash flows are generally preferred.
TAX RATE 30%
1.5 m * 30% = 0.45 m
1.5 m * 70%= 1.05m
CASH NEEDED TO PURCHASE NEW MACHINE
Always on Time
Marked to Standard
REQ = 2.2M
IN HAND = 1.05M
FIRST INVESTMENT = 1.15 M
1.15M/5 = 0.23M
PROFIT AFTER TAX 0.57
30% TAX A PBT 0.17
PROFIT AFTER TAX 0.40
ADD DEPRECIATION 0.23
EXPECTED CASH FLOW 0.63
NP = - I.I + P.V + P.V + P.V + P.V + P.V
NP = -1.15 + 0.63 + 0.63 + 0.63 + 0.63 + 0.63
+ + + +
= -1.15 + 0.57 + 0.51 + 0.46 + 0.41 + 0.39
= 1.17 M
IRR = P.V + LDR + I.I
P.V OF LDR - P.V HDR
LDR = lower discount rate 40%
HDR = higher discount rate 50%
PVLDR= present value of lower discount rate
1 YR 0.63 0.45
2 YR 0.63 0.32
3YR 0.63 0.23
4YR 0.63 0.16
IRR = 0.40 + (1.28-1.15) . (0.50 - 0.40)
(1-28 - 1.09)
= 0.40 + (0.013)
IRR = 46.84%
PAY BACK PERIOD TIME
= INSTENT INVESTMENT
NET CASH IN FLOWS
= 1.825 YEARS
= 2 YEARS
Conclusion and recommendations
The calculation shows that company should go for this investment and adjustments and should try to cut and invest accordingly and this project will bring benefit for the company and will help in overcoming deficit in next few years. This is good news for company to carry its business.
Task three (PPT) (attached)
The mechanics behind each appraisal method
The relative pros and cons of each methods
The impact of the value money on future cash flow
Any assumption that need to be made when making investment decisions
Task four (A)
The contribution per unit and the contribution / sales ratio
Contribution provides a measure of how much a product contributes towards paying for the fixed overheads of a business
The use of contribution
Working out contribution allows a business to have a clearer picture of relative costs by removing overheads (fixed costs) which are difficult to allocate in cases where more than one product is made. (Kabanov, 2010) Contribution per unit is one of the most useful concepts in business studies. It helps a business to calculate:
Company has costs of £120,000 per month and sales of 500, 1000 and 7500 units; variable costs are £5 and the selling price is £120 per unit.
Method: calculating old and new profits using contribution
Total contribution - fixed costs = profit
Old profit; CPU = 5
(£5 x 500) - £120,000 = £119750
New profit; CPU = £17
(£17 x 7500) - £120,000 = £7500
The break-even point in unit and sales value
For company cost and profits are one which defines the breakeven point where the costs are recovered and profits starts after that point for company. Here the
Average per Unit Sales Price = £120.00 per unit
Average Per Unit Variable Cost = £5.00 per unit
Average Annual Fixed Costs = £120000
The above assumption can be utilized to calculate the number of unit that must be sold in order to break-even as well as the total dollar of sales needed to break-even. Using the formulas explained earlier, the following calculations can be made:
Break-Even Units: £120000 ÷ (£120 - £5.00) = 1043.47 units
Break-Even Sales: £120,000 ÷ 1 - (£5.00 ÷ £120) = £125000
Therefore, there will be no profit on sales of 1043.47 units and on the above level profit will be generated.
The margin of safety per unit and in sales value (unit sales for 2008 are expected to be 7500 units)
Margin of safety for the 7500 units' production is on the sales of 1000 unites at the market competition rates and this can bring the company in competition by the use of its production performance and can create a profit opportunity in future.
Fixed and variable costs and break-even analysis
A breakeven analysis normally is used for determining volume of sales volume in a business that is safe to start a profit for company production. This breakeven analysis helps companies to set minimum sales targets to recover their costs. It also helps in identification of number of unit sales where company can decide for bonuses. It also helps in pricing strategy and production decisions. It is taken by this formula:-
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Fixed Costs divided by (Revenue per unit - Variable costs per unit)
Fixed cost is which is necessary for payments to have production setup and start it for a certain period of time.
Variable cost is which depends on different market factors and internal organisational changes. Also depends on production of units.
Marginal and absorption costing
Marginal cost is cost which company incurs in production of additional units for a specific good.
Activity based cost method is one in which cost and performance are objective to resources and activities. Cost is based on activities and activities are based on resources it changes with change in activity and market trends.
It is an important topic in cost accounting where the standard cost is normally associated with the manufacturing costs of material, labour and overhead that are directly involved for production. It is different from actual cost that is calculated after adding all types of costs and expenses during production inclusion infrastructure and human resources which are not directly involved in production.
Market led pricing
It is a price which is based on the level of competition in the market as the market forces during competition for sales adjust the prices. Normally companies try to maintain price equilibrium so they should not compromise on profit ratios.
It is selling price with some addition of overheads and profit margins which directs cost per unit for a specific product. Thus the profit margins are computed on a fixed percentage with the average total cost.
Marginal cost pricing
The cost setting process in which an item price or unit price is set at same level for all unites produced after the initial units costs which is higher than the scale production. Thus company tries to gain maximum market share by reducing its costs.
Opportunity cost approach to pricing
It is cost set to achieve some other benefits in the market, this can be said as alternative price like some prices in sales times though in accounts the price is not mentioned by new opportunity cost but it is indicated by same set cost. But the aim is to gain something at the risk of price margins.