Analysis of Financial Proposal
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(1) analyse financial data; evaluate the results and formulate conclusions
(2) prepare a budget and explain how it would be negotiated and monitored.
(3) produce a financial proposal and present a sound business case to secure the required financial resources. The figures can be fictitious.
Part 1) Technique used: Ratio Analysis
Refer to the Appendix
These ratios help us to judge how good the firm’s profit performance is. The two key ratios to show profitability are:
Return on Capital Employed
This measures the level of profit of the business compared to the amount of capital that has been invested in it. It is effectively the return the business has made, and investors will want this to be higher than the rate of interest they could have got elsewhere. The budget is showing a healthy 68% return on capital which includes proposed bank borrowings.
This measures the level of profit compared to the turnover, it therefore shows the percentage profit on the sales. It can be measured as either a gross or net profit margin. The Gross Profit margin is 66.5% but the Net Profit margin is only 11.3% due to high wages and purchases costs. These could be reduced by bulk buying and negotiating special terms.
These are ratios that measure the liquidity of the business. Business has to ensure that they are able to meet their commitments as when they fall due by converting sufficient assets into cash. A business should avoid a situation where a lot of cash or capital is tied up in high levels of stock. Current asset and Acid Test ratio shows that the business has more than enough assets to cover its liabilities and it is very liquid as the stock and debtors can be turned into cash quickly.
This ratio compares the current assets and current liabilities. Clearly a business needs to have more current assets than liabilities, and so at a minimum the figure should be more than 1. Here it is 1.54 which is slightly higher and thus ensures sufficient liquidity.
Acid Test Ratios
This ratio takes a closer look at the business’s liquidity. One of the current assets is stock, and this clearly not always easy to turn into cash. In fact the firm may have high stock levels because they can’t sell all of it. So the acid test ratio takes the current assets and subtracts the stock. This is a test of immediate solvency. If the value of this ratio is much less than 1 the business may have a liquidity problem, as it may have insufficient assets to meet all its liabilities.
Debtors and Creditors Payment period
The debtors payment period shows how many days it takes on average for the debtors to pay back the owed money. The creditor payment period shows how many days it takes on average for the business to pay its creditors. Ideally the debtor period should be shorter than the creditor period for better efficiency. Here this is not the case and steps should be taken to chase the debtors to pay quickly.
This concerns the business’ long-term financial stability. It measures how much of the business is financed by debt. The higher the gearing percentage, the less secure it will be.
Normal figure is 50%.
It is imperative that for any business to trade effectively and be able to grow, it needs to build up enough cash reserves. Therefore it is important to ensure cash movements, that is the timing of cash inflow and cash outflow, are managed in such a way that it results in an overall positive cashflow position.
The budget would be negotiated on the basis of forecasted sales revenue, expected expenditure and any planned capital expenditure. The Bank manager needs to be pursuaded that the cash forecast is realistic and not over optimistic.
The budget would be monitored and reviewed on a regular basis and any material changes would be acted on. The negotiations would be based upon the fact such as reliability of the customer and suppliers, location of the pub. Also the fact that being a public house, the business is all year round and not seasonal and there are going to be peak seasons such as Christmas and other public holdiays. In addition, the pub would increase its takings by having special events and offers.
The budget should build a contingency fund for worst case scenario such as cost over-runs or loss of loyalty of its customers. It needs to show clearly that the owner has invested his/her money as a capital in the business and prepared to risk it, and has a strong track record in this field and that the business plan is credible.
A bank always demands a copy of current management accounts with a cash flow forecast in order to assess a business’s liquidity and then decides whether to grant the overdraft facility or not. Therefore, they are of utmost importance when negotiating a loan from a bank.
Cash budget gives an advance warning of any liquidity problems. It is often a lack of cash that causes most businesses to fail. It will give you an opportunity to decide when and how to increase or decrease your overdraft with the bank.
The total amount required is £50,000 but the business does not need to draw down all of the money at once. It should be stressed to the bank manager that you have number of years’ experience in the same business and you know the trade well. Also you have good interpersonal skills and the ability to get on with all types of people This is important for running a successful pub. You also have to stress that you have done your home work, prepared a business plan and have ideas to boost the business by holding special events throughout the year. You need to do some research about the market for a pub in that area. If there are only one or two pubs in the local area and nothing within, say 15 mile radius, then an additional pub in that area is going to stand a very good chance of success.
The following table shows the ratios for the year 2005:
Gross Profit Margin66.5%
Net Profit 11.3%
Debtor payment days28 days
2. Cox, 0 and Farndon, M (1997) Management of Finance (2nd Edition) Worcester:
3. Dyson, J (1998) Accounting for Non-Accounting Students London: Pitman
4. Http://www/bized.ac.uk - Learning resources contain summary notes on main topics.
5. Management and Cost Accounting, 4th Edition, by Colin Drury, Thomson Business Press.
6. Active Accounting by Brammer, Cox, Fardon, Penning. Osborne books.
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