Best Limited – Consultancy Services And Financial Needs

About Best Limited

An organization sustains because of the management that manages it and the management can do so if it has enough skills and proper funding to support its ideas, actions and skills. ‘Finance’ is the money that is available to a business for carrying out its operations. An idea can became reality only if there are proper funds for execution. Business growth demands for more cash and in fact, for day-to-day transactions, a minimum level of finance is to be maintained. The importance of finance can be enumerated as follow:

• To increase the capacity of the business: As the business grows, it needs cash to improve its technology and better capacity so as to decrease its cost of production and remain in the competition.
• For further expansion, i. e., to enter into the new market : When a business reaches its optimum level, it thinks of selling its products in the new market that involves a considerable risk but also gets accompanied with enough support from its current operations. Further expansion may also include entering the same market but with different products. In both the cases, finance is required for its expansion schemes.
• Take-over’s, acquisitions & moving to new premises: When a business purchases another business, a considerable amount of finance is required for such acquisition so as to be able to pay the owners of the selling company. When a business decides to change its premises, cost such as renting of vans or reallocation of transportation services or change & shift of workers, installation of new machinery & equipments requires huge finances.
• For day-to-day operations : A business’s day to day operations ranging from paying to creditors for raw materials to purchase of new machinery to payment of wages & salaries requires a minimum maintenance of cash in hand.

We have used a number of tools to evaluate the proposals of thr company to analyze whether the targeted returns would be achieved or not. The reason fot using such tools serves a number of advantages :.

1. We used Investment Appraisal technique initially. This is because when investments are huge, the management should take reasonable care before making such decisions. The use of NPV technique is superior to other techniques and provides reliable results that can be applied onto before making an investment into the company. Also with the use of such techniques, a company is able to estimate its approximate cash outflows in comparison to inflows and xan then take the decision.
2. The use of Cash budgeting serves the following advantages :

• Financing Needs : A cash budget helps a company to anticipate in advance if any cash deficit is likely to arise and the extent of that shortfall. It indicates the difference between the budgeted and actual to analyze ehen a need of borrowing arises.
• Planning of Actions : A cash budget helps a company to determine whether it had enough cash in hand to meet its future obligations and to take an action if the actual values doesn’t match with the budgeted values or varies significantly. It helps a company to pre-decide its action if there is a decline in market demand or there is a shortfall in required materials due to internal failure.

1. Financial Performance : It shows a company’s financial position to all the stakeholders such as general public, investors, suppliers, company leaders, etc. For example, increasing cash flow indicates strong demand for company’s products and therefore, boosting the confidence of investors in the company.
2. As we have used breakeven analysis in analyzing this proposal of the company, lets consider the importance of such tools for the company  :

• Break Even Analysis helps in discovering the point of profitability because a company that is not aware of its profitability point can turn worse at any time.
• It helps in pricing of a product or service as this analysis reveals the amount of revenue required to be earned to recover all the fixed expenses as profits happens only after reaching the break even point (Palepu, Healy and Peek, 2016).
• This analysis helps in creating a strategy for the business future and when there are more than one product, such analysis helps in providing a time line of each product for the company. It helps in developing a better overall financial strategy that fits the projected costs & profits (Phillips, 2014)..

Some sources of finance are short term, meaning that it has to be paid back within a year and some sources of finance are long term and can be paid back in years. The different sources of finance can be stated as  (Bruner, Eades and Schill, 2017):

• Internal Sources : The internal sources are defined as the generation of finance from within the business. Such sources includes :

1. ‘Organic Growth’, that is finance generated out of expansions and increase of sales resulting in increase in revenue.
2. Some businesses retains their profits year after year and re-invest them in their operations & plans.
3. Sale of assets also generates revenue for the business.

• External Sources : External sources can be defined as the finances taken from external sources which can be both short term as well as long term. The short term financial sources include  (TULSIAN, 2016):

1. Overdraft facilities : Such facilities are provided to the individuals by their financial institution to withdraw or use money more than they have in their account subject to a specified negative balance amount as per the credit agreement. Establishing such agreement with the bank can help a firm or an individual to meet their short term cash problems instantly. However, such negative balance is to paid back to the bank within a month.
2. Trade Credit: This refers to the credit extended by the suppliers of goods & services that allows to buy the raw materials now but pay at a later date. Such credit facilities doesn’t require any formal agreement and helps a business to concentrate on the core activities. However, such facilities are allowed to a business only if it has a good track record of repayment. Thus, not available for startups and if not paid on time, such facilities are expensive due to involvement of interest on the respective amounts.
3. Factoring : This refers to the facility where the business sells its accounts receivables to a third party called factor who then assumes the responsibility of such debtors. It helps in improving the current ratio and speeding up of conversion of stock into cash improves stock turnover ratio and reduces the burden of risk as it ensures prompt payment. However, it may result in over dependence, mismanagement and can be uneconomical for companies with small turnover (Clarke and Clarke, 1990).

The Long term sources can be enumerated in the given points:

1. Savings & Shareholders Investments: A sole proprietor or a partner may invest his own savings in the business or borrows it from friends or relatives. However, for big companies, the money is being invested by people called as shareholders. Such investment exists in the form of shares with the investors (Fairhurst, 2015). Such finance can be retained in the business for a long period of time without the pressure of returning it. However, for the smooth functioning of funding, the confidence of the investors & own satisfaction is to be achieved which basically demands for profits.
2. Debentures : Debentures are long term obligations where it carries a fixed rate of interest which is to be paid on a regular basis. The main advantage of debentures is its low cost in comparison to equity & preference funds. However, the regular payment of interest can create a burden on the company.
3. Mortgage & Bank loans : A business finds bank loans more suitable as a source of finance as banks are confined to their interest income and doesn’t need a share in the business profits. Also, banks offers loans for a good period of time and only after scrutinizing the financial credibility of the business. However, the maid disadvantage of it is security that usually has to be given to banks over the assets of the company known as mortgage. Thus, if a business fails, the bank gets the first call over the assets held as security with them. Also, it lacks flexibility (Taylor, 2008).

Investment appraisal, also known as capital budgeting, is used to determine whether the long term investments of the business are worth the funding of cash or not. Such investments include purchase of new machinery, new plants, research development projects, etc. NPV is one such method that calculates the net cash inflows as on the present day and compares it with the net cash outflow on the same day. Positive NPV indicates that the investment is worth funding and vice-versa (Galbraith, Downey and Kates, 2002).

In the given case of BEST LIMITED, they are planning to purchase a new machinery. The following table has been prepared using NPV analysis :

(The figures are in €’000)

As per the given table, the NPV is not only negative but also with a huge amount which doesn’t even form 15% of the actual cash outflow at the beginning of the year. Thus, it is not beneficial for the company to make such an investment as cash outflow is way more tha cash inflows as on the present date.

The other techniques that can be used are as follows :

1. Payback Period method : This method examines the time requirement for recovering the initial cash outflow from the cash inflows from such investment. This method too enables the company to decide whether such proposals should be taken or not. However, this method doesn’t consider time value of money and doesn’t consider the cash inflows incurring after the payback period, thus, failing in comparison of one project with the other (Shim and Siegel, 2008).
2. ARR (Accounting Rate Of Return) : ARR refers to the amount of profit expected on an investment made. It is calculated by dividing the average profit by the initial investment to get an expected return. However, like payback period method, ARR too disconsiders the time value of money & doesn’t consider the cash flows which is the actual important part of a company.

A cash budget is more like a plan prepared by the company regarding its expected cash receipts and expenses during a particular period. It includes revenue collected, payments made, loans repayment, interest received or paid, etc. In other words, it is an estimation of company’s cash inflows and outflows in a particular period and the projection of future position of company (Hassani, 2016).

Consultancy Services offered by Best Limited

As per the given case of Best Limited, the company offers 80% credit to be paid in the following month, which is actually not a good signal. As the company is already suffering from cash reductions in its existing business and also, is opening its new office through external sources of finance, it is not supposed to provide so much credit facilities to its customers as the current status of the company demands for cash inflows into the entity. Therefore, the policy of the company may not turn out to be in its favour in future (Holland and Torregrosa, 2008).

Best Limited is thinking of opening a new shop at London with certain conditions, that is, it has to offer a total of 60 services (Khan and Jain, 2014).

Since BEST LIMITED is opening its first outlet at London, we cannot expect to recover the fixed cost at one instance. Also, there is a total of 60 services that can be provided and minimum of 40 services per service. Therefore, following the marginal costing method and analyzing the above two options, the maximum contribution is in option-II, i.e. 40 units of BP and 20 units of SF.

Break Even Analysis is analyzing of amount of revenue required to cover all the fixed costs and therefore, calculating the point after which the company would be having profits only, that is, margin of safety. This tool is highly used by businesses as it helps in formulation & planning processes (Saunders and Cornett, 2017)..

It is important to know the bruit effects on the company:

• Bruit will allow getting into the markets outside the UK, which is to provide access to skilled workers.
• Brexit greatly affects the investments. Startups seeking funds will find cautious investors but they can still manage to find the required funds.
• Brexit effects majorly include the changes in the volatility of the pound that would affect the buying power and consumer spending.

As we have used breakeven analysis in analyzing this proposal of the company, lets consider the importance of such tools for the company  :

• Break Even Analysis helps in discovering the point of profitability because a company that is not aware of its profitability point can turn worse at any time.
• It helps in pricing of a product or service as this analysis reveals the amount of revenue required to be earned to recover all the fixed expenses as profits happens only after reaching the break even point (Palepu, Healy and Peek, 2016).
• This analysis helps in creating a strategy for the business future and when there are more than one product, such analysis helps in providing a time line of each product for the company. It helps in developing a better overall financial strategy that fits the projected costs & profits (Phillips, 2014)..

Best Limited has been a profit making company that includes retaining its existing customers & maintaining a good market share. However, due to brexit effects, it is losing its market share and suffering from cash reductions in the last two previous years indicating outflows more than inflows. Thus, the conditions show that the company isn’t enjoying a prosperous status at present and the management is targeting towards changing of methods & opening of new operations so as to be back to its old profitability track.

Well, in such a case, the decisions of the management aren’t appropriate for the company’s future. For example, the idea of purchasing a new software reflects irregular revenues in 5 years and the cost incurred in comparison to such returns forms a large % of revenue. And in fact, intwo years, the company could have negative cash balance.

Financial Performance of Best Limited

In the same way, in its target of opening a new office at London, the estimation of fixed costs are so high that the company would have to increase its current capacity to such a level that it can produce approximately 20 times of what it is producing now so as to cover its fixed costs.

The company isn’t in a position to overlook its revenue income and get the best sources for its operations irrespective of its costs. It has to first set up a target sales & profit so as to formulate its cost structure in accordance with that.

If the company would follow its decisions and it turns out to be unfavorable in actuality as per the financial tools, the company would be bounded by heavy pressure of loan & it will shake the confidence of the investors and thus, degrading the reputation of the company heavily.

Conclusion:

The Best Limited is suffering from cash reductions due to brexit effects and that is why, is seeking to make vast significant changes in its operations so as to keep on its profitability track (Reilly and Brown, 2012). However, the idea of buying a new software is not working as such due to negative NPV. But, in its second proposal of opening an outlet in London could be in its favour as brexit effects are in favour of UK countries as stated above and therefore, the company may incur losses but eventually, after the market acceptance, it would be highly back to its old revenue status (Saltelli, Chan and Scott, 2008).

The use of different techniques such as capital budgeting, breakeven analysis, and other discussions have analyzed the fact that the company have do lost a part of their income but the situations aren’t so unfavourable that liquidation will take place. The company could get back to its own old status by investments & proper utilization of such investments.

Reference:

Berman, K., Knight, J. and Case, J. (n.d.). Financial intelligence for HR professionals.

Bruner, R., Eades, K. and Schill, M. (2017). Case studies in finance. Dubuque, IA: McGraw-Hill Education.

Clarke, R. and Clarke, R. (1990). Strategic financial management. Homewood, Ill.: R.D. Irwin.

Fairhurst, D. (2015). Using Excel for Business Analysis A Guide to Financial Modelling Fundamenta. John Wiley & Sons.

Galbraith, J., Downey, D. and Kates, A. (2002). Designing dynamic organizations. New York: AMACOM.

Hassani, B. (2016). Scenario analysis in risk management. Cham: Springer International Publishing.

Holland, J. and Torregrosa, D. (2008). Capital budgeting. [Washington, D.C.]: Congress of the U.S., Congressional Budget Office.

Khan, M. and Jain, P. (2014). Financial management. New Delhi: McGraw Hill Education.

Palepu, K., Healy, P. and Peek, E. (2016). Business analysis and valuation. Andover, Hampshire, United Kingdom: Cengage Learning EMEA.

Phillips, J. (2014). Capm / pmp. New York: McGraw Hill.

Reilly, F. and Brown, K. (2012). Investment analysis & portfolio management. Mason, OH: South-Western Cengage Learning.

Saltelli, A., Chan, K. and Scott, E. (2008). Sensitivity analysis. Chichester: John Wiley & Sons, Ltd.

Saunders, A. and Cornett, M. (2017). Financial institutions management. New York: McGraw-Hill Education.

Shim, J. and Siegel, J. (2008). Financial management. Hauppauge, N.Y.: Barron’s Educational Series.

Taylor, S. (2008). Modelling financial time series. New Jersey: World Scientific.

TULSIAN, B. (2016). TULSIAN’S FINANCIAL MANAGEMENT FOR CA-IPC (GROUP-I). [S.l.]: S CHAND & CO LTD.

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