Financial Analysis of Pooma Sports Ltd. - University Report

This report presents a comprehensive financial analysis of Pooma Sports Ltd., a UK-based sports equipment manufacturer and distributor. It examines the company's budgeting and strategic planning requirements, emphasizing the importance of budgets in achieving organizational goals. The report delves into break-even analysis for a new product, assessing cost behavior, risk, and return, and comparing in-house versus outsourced manufacturing. It differentiates between net cash flows and operating profits, highlighting the impact of costs and sales on cash flow. Furthermore, the report discusses original and proposed costing methods, analyzes the sales director's perspective on the proposed method, and appraises the results of capital investment, including reasons for conflicting investment advice and the associated risks and returns of each option. The analysis provides valuable insights into Pooma Sports Ltd.'s financial performance and strategic decision-making.

Running head: FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
Name of the Student
Name of the University
Author Note

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
Table of Contents
1.Executive Summary....................................................................................................2
2.Requirement for budget and strategic planning..........................................................3
3.Discussion related to break-even analysis of new proposed product..........................4
3.a Cost behaviour of the product..............................................................................4
3.b Review of risk and return.....................................................................................4
4.Differences between net cash flows and operating profits..........................................5
5.Discussion of original and proposed methods of costing............................................6
5.a Reasons for choice of apportionment...................................................................6
5.b Sales Director’s view on the proposed method....................................................7
6.Appraisal of results of capital investment...................................................................8
6.a Reasons for conflicts between investment advice................................................8
6.b Risk and return presented by each option............................................................8
References....................................................................................................................10

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
1.Executive Summary
The analysis in this report is based on the requirement of budget and planning of the
strategies of the organizations. The need for a budget to support the objectives and goals of
the organizations are also analysed in detail. The organization that is taken into consideration
for this analysis is Pooma Sports Ltd. which is based in UK. The major activity of the
organization is the manufacture and distribution of the equipments related to sports including
clothes. The different processes of the organization based are analysed from the perspective
of the general manager of the organization. The introduction of a product is also examined
based on the breakeven analysis. The risks and returns related to different manufacturing
processes are also analysed. The differences between the operating profits and net cash flows
are also analysed in detail. The different costing methods related to the introduction of two
new equipments are amalyzed and one equipment is recommended for the improvement of
the company.

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
2.Requirement for budget and strategic planning
Budgeting and strategic planning are two major factors of a particular business
enterprise. The business organizations regardless of sector, complexity, size all are heavily
dependent on the budgetary systems and the budgets so that they can achieve the strategic
goals. The process related to budgeting mainly involves setting of objectives and strategic
goals and thereby developing costs, revenues, cash flows and production. The effective
investment and financing strategies can thereby help the organizations to decide amount of
investments that can be made in the future (Alviniussen and Jankensgard 2015). A budget can
be defined as the quantitative analysis which is performed before the policies of the
organizations are applied. The major purpose of the budget system is to aid the objectives of
the management and thereby direct the managerial efforts effectively.
The budget of an organization is the formulated plan of the objectives of the
management. The major functions that are served by the budgets are, systematic planning,
coordination and communication, cost awareness and quantification, evaluation and control,
motivation. Budgets are also related to the human behaviour and the success of the
organization mainly depends on the actions that are taken by the top management and the
ways by which they appreciate the importance of interpersonal relationships (Bianchi and
Tomaselli 2015). There are three major approaches that can be used to develop the data that
is required for the final budget. The three approaches are imposed or top-down budget,
participative or bottom-up approach and negotiated approach. The approach of the budget
depends mainly on the leadership style of the organization to a large extent. Therefore, it can
be said that the formation of budget is important for the successful operations of the
organization. The objectives and goals of the organization are supported by the budget that is
formulated by the management (Bleyen, Lombaert and Bouckaert 2015).

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
3.Discussion related to break-even analysis of new proposed product
3.a Cost behaviour of the product
The cost of the materials that are required for in-house production and the labour cost
for in-house production is more as is depicted in the statement. The costs related to
outsourcing the manufacturers is quite high. However, the manufacturing overheads are more
in case of the in-house manufacturing process. The administrative overheads are same for
both in-house or outsourced manufacturers. This has led to the increase in break-even point
for the manufacture of the goods of the organization in the in-house factories (De
Baerdemaeker and Bruggeman 2015). The increase in break-even point depicts the higher
costs related to the processes of the organization.
3.b Review of risk and return
The statement has shown that sales price is same for both the styles of manufacturing
of the organization. The cost of materials is also high for the in-house manufacturers and the
labour cost is also high for the in-house manufacturers. This shows that the manufacturing
process is costlier for the in-house manufacturing. The manufacturing overheads are high for
in-house manufacturers and the administrative overheads are same. The break-even point is
low for the outsourced manufacturing process (Gianakis 2017). The margin of safety is high
in case of the outsourced manufacturer and unit sales is also high for this type of
manufacturing.
Break-even analysis is performed to analyse the success of a new company or a new
product line. The Pooma Sports company is planning to launch a new product and break-even
analysis helps in examining the feasibility of the product line of Rugby boots. The increase in
break-even point of the organization in case of in-house manufacturing has proved that the
process of in-house manufacturing is not feasible for the company. The break-even point of

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
the outsourced manufacturing process is low and this shows that the management should
employ this process to manufacture the new product line of Rugby boots (Herath, Bremser
and Birnberg 2014). This will help the organization in increasing the profitability and
ensuring success of the new product line.
4.Differences between net cash flows and operating profits
The net cash flows can be defined as the difference between the organization’s cash
inflow and the cash outflow within a given period of time. The changes that occur in the cash
balance of the organization is provided in detail in the net cash flow statement. The amount
that is obtained after deducting the total liabilities of the organization from total balance of
cash is also defined as the net cash flow of the organization. The sum of money that is lost or
gained because of the completion of the transactions is considered to be net cash flow
(Johnsen 2015).
Operating profit can be defined as the total profitability of the organization that is
obtained before considering the taxes and the interests. The operating expenses of the
organization are deducted from the gross profit to determine the operating profit. Operating
profits act as a key amount for the managers to depict the expenses and revenues so that they
can control them. Operating profits of an organization can also be defined as the profit that is
earned from the organization’s normal business operations. The profit that is earned from the
investments of the organization is not depicted by the operating profit (Klimaitienė and Jočys
2014).
The budget statement that has been prepared for Pooma Sports Ltd. shows that the
payments that are to be made by the organization is higher as compared to the receipts and
cash sales. The cash purchases, credit purchases, fixed overheads, operating expenses, labour
required for production, labour required in the administration departments are higher as

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
compared to the cash and credit sales. The costs related to the regular operations of the
organization is higher to the amount of sales of the organization. This leads to the negative
amount of cash flow in the organization even if the organization is running in profit after 6
months. The expenses that are linked to the day to day operations of the organization are high
and this has led to negative cash flow. The sales that are performed in credit and the credit
purchases are also responsible for the negative cash flows (Luther Cottrell 2014).
Operating profit of the organization is obtained from the difference of the total sales
of the products and the operating expenses. The fixed overhead costs and labour costs are
also deducted from the total sales of the organization. The operating profit of Pooma Sports
Ltd. is also negative as the overhead costs of the organization is high.
5.Discussion of original and proposed methods of costing
5.a Reasons for choice of apportionment
The apportionment of the costs that are depicted in the costing methods are based on
the apportionment of the maintenance costs and the administration costs as well. The
maintenance costs and the costs related to administration are chosen so that the overhead
costs can be calculated and thereby it can be reduced so that the organization can earn profits.
The statement consists the costs related to the direct materials, the direct labour costs of the
company. The direct costs related to the company include, indirect labour, rent, insurance of
the machines, heating, depreciation of the machines and power of the machines as well.
These costs can together depict the overhead costs related to the production of shoes and
maintenance. The costs related to staff of the administration and maintenance are also
depicted in detail in the statement. The different products that are analysed in this statement
are the sports shoes, sports equipment and sports clothing (Pawliczek et al. 2015). The

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apportionment of the costs is done based on the hours of the machine and the employees of
the administration department of the organization.
The next statement that has been prepared by the costing team of Pooma Sports Ltd.
has been prepared in such a way so that the overhead costs of the operations can be reduced.
The costs related to materials, labour, rent, insurance of the machines, administration costs
and depreciation of the machines are decreased so that the profits can be increased. The hours
of usage of the machines are also analysed to decrease the overhead costs,
5.b Sales Director’s view on the proposed method
The proposed costing method that has been formulated so that the overheads costs can
be reduced has been expressed as being superior for the organization. The overhead costs
related to sports equipment and sports clothing has reduced, however that of the sports shoes
have increased to a certain level. The costs that are related to the labour, equipments and
machinery requirement are analysed and thereby the cost management team has attempted to
decrease the overhead costs. The departments of sports equipments and sports clothing have
been struggling to make profits from the last few years. The decrease in the overhead costs of
the equipment can help in increasing the sales and profitability (Raghunandan, Ramgulam
and Raghunandan-Mohammed 2012).
The sales of the products related to these categories can increase and this will further
increase the profitability of the organization. The view of the sales director regarding the
proposed cost methods is therefore right and the proposed cost method will help in further
reducing the overhead costs related to the operations of the company. However, the overhead
costs related to sports shoes have increased substantially and this is a drawback of the
proposed cost method.

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
6.Appraisal of results of capital investment
6.a Reasons for conflicts between investment advice
The organization has been planning the purchase of two new equipments so that the
costs can be saved and efficiency of the production can increase. The two new pieces of
equipments are Superstitcher and Gluemaster. The function of Superstitcher is to automate
the processes related to production of the equipment which require stitching like, baseball
mitts and footballs. The function of Gluemaster is mainly to improve the processes of
production and the quality of the product for the items that require adhesive, like squash balls
and tennis (Van der Stede 2014).
The purchase and implementation of the two new equipments are expected to increase
the profit and rates of return of the organizations. The period of payback for Superstitcher is 4
years and that of Gluemaster is around 3 years. The cash flow statement related to the two
new equipments has depicted the effect of the introduction of these equipments on the profits
of the organization. The Superstitcher can help in the automation of the processes for
stitching related equipments and Gluemaster can help in the development of the production
process. However, due to the lack of enough funds the organization needs to choose any one
of the equipments so that the operations can be improved (Réka, Ştefan and Daniel 2014).
6.b Risk and return presented by each option
The product line of the organization does not contain many products which require
high amounts of stitching. This factor has reduced the need for the purchase of Superstitcher
and it can only be introduced if the product line increases in the future. The Gluemaster can
however be effective to reduce the costs and thereby increasing the efficiency of the
organization based on the product lines that are offered by the organization. The Gluemaster
can effectively increase the efficiency of Pooma Sports Ltd. by increasing the speed of

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
production. The increase in production can thereby increase the profitability of the
organization (Soboleva and Parshutina 2016). The organization is therefore recommended to
purchase Gluemaster as it will be the most effective and efficient equipment for the
improvement of the sales. The capital that can be invested by the organization is quite less
and this can allow the purchase of only one of the equipment for the improvement of sales.

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FINANCIAL ANALYSIS OF POOMA SPORTS LTD.
References
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management into the financial planning process.
Bianchi, C. and Tomaselli, S., 2015. A dynamic performance management approach to
support local strategic planning. International Review of Public Administration, 20(4),
pp.370-385.
Bleyen, P., Lombaert, S. and Bouckaert, G., 2015. Measurement, incorporation and use of
performance information in the budget: A methodological survey approach to map
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Eastern Europe, 37(3), pp.331-355.
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planning on managers’ creation of budgetary slack: The mediating role of autonomous
motivation and affective organisational commitment. Management Accounting Research, 29,
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Gianakis, G.A., 2017. Strategic Planning and Capital Budgeting: A Primer. Handbook of
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Johnsen, Å., 2015. Strategic management thinking and practice in the public sector: A
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268.

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Klimaitienė, R. and Jočys, S., 2014. THE METHODOLOGY OF IMPLEMENTING THE
“BEYOND BUDGETING” SYSTEM IN A COMPANY. Science and Studies of Accounting
and Finance: Problems and Perspectives, 9(1), pp.65-76.
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Line, 27(2), pp.49-53.
Pawliczek, A., Kozel, R., Vilamová, Š. and Janovská, K., 2015. On the strategic planning,
innovation activities and economic performance of industrial companies.
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behavioural aspects of budgeting with particular emphasis on public sector/service
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