Case analysis: Finance (Essay Sample)

FINANCE: CASE ANALYSIS By (Name) Course Professor’s Name Institution Location of Institution Date FINANCE: CASE ANALYSIS PART A 1 The cash budget Gaia Ltd Cash budget April to September months april may june july august september Revenues (£ 000's) cash sales 82,500 85,500 90,000 92,000 99,000 120,000 overdraft 10 credit sales 4,200 4,200 4,200 4,300 4,305 4,400 Totals 86,710 89,700 94,200 96,300 103,305 124,400 Expenses (£ 000's) credit purchases 72,000 80,500 84,000 87,000 91,000 93,000 5-year loan repay 10,000 corporation tax 500 overhead expenses 9,000 9,000 9,000 9,000 9,000 9,000 Totals 81,000 90,000 93,000 106,000 100,000 102,000 Cash flow Margin ( £ 000's) 5,710 -300 1,200 -9,700 3,305 22,400 2 The budget showed a varying cash flow margin from negative margin to positive margin. The negative margin were affected by the extra expenses in the months of May and July. The extra expenses of a corporation tax (£ 500,000) and repaying of the loan (£ 10,000,000) led to negative margins in the budget. Corporate tax is a tax charged by the state government on profits earned by any company. Corporate tax is an external factor that is impossible to influence by the business on itself. A negative margin could mean that the business is not sustainable. The deficit in July was due to paying the 5-year loan. The deficit in the month of May can be avoided by not accumulating the corporate tax before pay (Shim et al, 2011). 3 Selling shares forms one of the major sources of capital. Shares are units of capital sold to potential investors in exchange with money in company business unit. The shareholders have rights to voting in the business and periodical price appreciations and dividends. Shares have an added advantages of a permanent mark of capital and is not repayable until the business is terminating. Disadvantages include reducing control of cofounders of the business over the business and may place the business to a threat of takeover (Long-term finance - Sources of finance - Edexcel - GCSE Business Revision - Edexcel - BBC Bitesize, n.d.). Financial loan is also a form of capital where the business obtains the money from the lender at agreeable terms and repays it within the specified time. Bank loans enables the company to estimate the cost of the loan as the interest rate and time of payment is predetermined. Loans poses risks in terms of higher cost of obtaining the loan, it requires security and a guarantor (Long-term finance - Sources of finance - Edexcel - GCSE Business Revision - Edexcel - BBC Bitesize, n.d.). Credit purchasing. The company may acquire the machinery and raw products from their manufacturers such as the battery companies and start producing with them then payments made later. Credit purchases may be expensive as the value is repaid with interest on it. They are however advantageous as the business will obtain the capital and start producing and pay for them later (What Is a Credit Purchase? | Definition, Importance, and Pros & Cons, n.d.). PART B 1 Ratio 2020 2019 gross profit margin 8.559455212       8.177172061 Operating profit margin -0.062860136       1.300216819 Return on capital employed -4.87804878       47.43220339 Asset turnover 5.466655976       4.72002924 Current ratio 1.433347455       1.283084577 Acid test   0.461625362       1.283084577 Inventory days 46.04319432       39.58424692 Trade receivable days 30       30 trade payable days 30       30 working capital cycle 46.04319432       39.58424692 gearing   0.251020408       0.951612903 Interest cover 0.491803279       -10.21350365 2 Profitability of producing Gaia Niche is low and can be diversely be affected by the fluctuation in the demand of the vehicles. There was a loss in the 2020 trading year. Return on employed capital for the year 2019 was favourable but it fall to negative in the next year. Efficiency measures how able can the company manage its short term liabilities and expenses using its assets. Efficiency is measured in different categories such as productive, technical and profit efficiencies. The efficiency is measured using various financial ratios above such as inventory ratio, asset turnover ratio and receivables ratio (Santosuosso, 2014). The asset turnover rose 4.7 in 2019 to 5.5 in 2020. The inventory turnover which rose from 39 days in 2019 to46 days in 2020 shows a drop in the efficiency of the business. Trade receivables and payable days are equal throughout which is one month length. The working capital days increased from 39 in 2019 to 46 in 2020 which shows inefficiency because for efficient firms the working capital cycle should be lowest. Overall performance showed a decline in the efficient of the EV business by Gaia ltd from 2019 to 2020 Liquidity measures how able is a business able to settle its short term liabilities using the current assets available. It is measured using several techniques and ratios mainly current ratio and the acid test ratio (Kiyotaki & Moore, 2012). The current ratio rose from 1.28 in 2019 to 1.43 in 2020. The increase shows an advantage to the case as it means that the business can easily pay it currents debts using its current assets. Acid test ratio measures how the “quick assets”-cash at bank and cash in hand- can be used to pay the current liabilities of the business. The quick assets are current assets with inventory assets excluded. The quick ratio dropped from 1.28 in 2019 to 0.46 in 2020. Gearing ratio measures the ratio of the owners’ equity in the business to the total long term liabilities in the business. When the gearing ratio is too low (thin capital), there are risks associated such as limits by the creditors (Sudharto & Salim, 2021).the ratio dropped from 0.95 in 2019 to 0.25 in 2020 meaning the business depended on creditors to raise their finance. Overall performance of producing EV by Gaia ltd will not improve their operations mainly due to fluctuations in demand of the cars. The performance of the operation reduced from 2019 to 2020 with reduced profitability, decline in efficiency, lower liquidity and worsened gearing ratio. It is unhealthy for the business to continue producing EVs because of the reduced performance in this business. PARTC 1 Budget Sales (units) 25,000 £/unit £ Sales revenue 3964...