Financial Risk, Goals, and Performance Monitoring for Lupton: A Case Study

This article discusses the financial risks faced by Lupton, suggests new corporate financial goals, and explains how to measure and monitor performance. It also covers working capital management and short-term finance options for Madden Ltd, along with a report on financial health and viability for shareholders.

Mock Exam

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
1. Possible internal and external financial risk to Lupton...........................................................3
2. Suggesting two new corporate financial goals for Lupton......................................................3
3. Measuring corporate financial goals and performance monitoring........................................4
QUESTION 2...................................................................................................................................4
1. Working capital management and improving it in future.......................................................4
2. Short term finance to be considered along with advantages and disadvantages.....................5
3. Report for shareholders relating to financial health and viability...........................................6
REFERENCES................................................................................................................................8

QUESTION 1
1. Possible internal and external financial risk to Lupton
By evaluating the case study of Lupton it is clear that there are many different risk which
is being faced by the company. the external risk which the company is facing is the advent that is
development of technology (Ślusarczyk and Grondys, 2019). This is the major risk because of
the reason that in case company will not be using the latest technology then this will be affecting
the working efficiency of the business.
Another internal risk faced by Lupton was that within the time frame of 1999- 2005 the
employees within the managerial and technical department left the company. This was not at all
good for business because now they have to hire new employees and again provide them training
to work.
Along with this, another internal risk is that the management of company operations is in
hand of single person only. This can also cause some of the issues relating to the management
because a single person cannot manage the working in better and effective manner.
Further with the signing of the agreement another risk being faced is that they will have to pay
100000 Euro as annual licencing fee. This will result in heavy expense and can affect the
profitability of business.
Along with this another external risk is that the company might face after the agreement
is that company has invested more in large machinery and there might be possible that the trend
changes (Oláh and et.al., 2019). Thus, this will result in loss for the company as the coffee
making machine will not be beneficial.
2. Suggesting two new corporate financial goals for Lupton
The financial goal for Lupton CMC are as follows-
 To increase the sales of the new product by 50% so that good profits can be earned.
 To increase the profits of company by 32% so that the commission can be paid to Somex
and then also profit is earned.
For translating these objectives to effective financial strategy the company must focus on
having less expenses. This is particularly because of the reason that in case the expenses will be
high then this will result in decline in profits (Сосновська and Житар, 2018). Thus, when the
strategy of Lupton will be focusing on reducing expenses then automatically the profit will

increase. In addition to this, another strategy for converting the objective in to success is to
implement effective marketing strategies. This is necessary pertaining to the fact that when the
business will be marketing the products in better manner then this will increase sales of the
business. Hence, the objective of increasing sales will be attained. Moreover, in case these goals
will be converted within the strategy then this will definitely increase profitability of business.
the reason underlying this fact is that in case the working will be improved then as a result of
this, the company will face growth.
3. Measuring corporate financial goals and performance monitoring
For measuring the success of the goal the use of KPI that is Key Performance Indicator
will be used. The reason pertaining to the fact is that under this strategy some indicator will be
set and against that the performance of the company will be measured. For instance, the
company has set that sales need to be increased by 50 %. Hence, the performance will be
measured against this basis that whether the sales has increased by 50 % or not. Moreover,
monitoring the performance of the financial objective is very important for the reason that in
case management will not be good then this will be affecting successful attaining of objectives.
Thus, the use of effective monitoring practices will result in effective attaining of the business
objectives.
QUESTION 2
1. Working capital management and improving it in future
Working capital management is being defined as the effective monitoring of the use of
current asset and current liabilities for managing liquidity of the business. The reason underlying
this fact is that in case the company will not be liquid then this will be affecting the working
efficiency of business (Le and et.al., 2018). the working capital of the company is being
calculated by deducting current liabilities from current asset.
Working capital = current asset – current liabilities
The working capital for Madden Ltd is
= 965000- 120000
= £845000

This calculation implies that the company is currently having sufficient assets in order to
pay off the current obligations. Further for assessing the liquidity of the company it is necessary
that current ratio8 is also being calculated in order to analyse that how liquid is the company.
Current ratio= current asset/ current liabilities
= 965000/ 120000
= 8.04
This position of the company is not good because the liquidity position is very high in
comparison to the ideal current ratio. As per the ideal current ratio the company must have twice
asset for paying off every current liability that is 2:1. But in actual the company is having very
high current ratio of 8 times which implies that company has blocked large amount of money in
the current asset. Furthermore, this position is not reliable because of the reason that within the
debtor there are some people who are from several years that is have not cleared the payment till
now and may be converted within bad debt.
Further the suggestion for improving the working capital of the company are as follows-
The first and foremost suggestion to the company is that they must improve the inventory
management so that the cash can be managed in proper manner. This is particularly because of
the reason that in case the large sum of money will be blocked in inventory then the liquidity of
the company will be affected.
In addition to this, another suggestion for improving performance in future is to shorten
the operating cycle. The reason for suggesting this method is that in case the operating cycle will
be less then inventory will be converted into cash speedily. Hence, liquidity position will be
improved.
2. Short term finance to be considered along with advantages and disadvantages
The company is experiencing the problem of cash flow and increase in operating cash
cycle. Thus, for solving this issue, the company might require some finance for short duration of
time. Various sources of short term finance for Madden Ltd are as follows-
Trade credit- The first source of short term finance is trade credit wherein the company
gets the credit from the supplier or the manufacturer (NGUYEN, PHAM and NGUYEN, 2020).
This source of finance does not provide cash but it provides the facility of purchasing the good
by not making the payment on immediate basis.

 The benefit of using trade credit is that it assists company in increasing sales as the
company has taken the supplies and not made the payment. Another benefit is that the
company can also get competitive advantage because they have the material and can sell
it effectively.
 On the other hand, the drawback of the use of trade credit is that there will be negative
effect on the cash flow of the business (Wang, Akbar and Akbar, 2020). This is
particularly because of the reason that in case the cash will not be paid on time then this
will be affecting the cash flow. Moreover, another drawback is that in case the company
will take too much of trade credit then their creditworthiness may decline.
Short term loan- In addition to this, another short term source of finance is the short
term commercial bank loan. This is a type of source wherein company will borrow money from
financial institution and against that they will pay some interest.
 The benefit of using short term loan is that the company can handle the emergency or
contingent situation in proper manner. Along with this, another benefit is that it will
improve the credit score in case payment of interest is done on time.
 On the other hand, the limitation is that the interest to be paid may be charged as high
rate. Along with this another drawback is that there can be penalty being charged in case
of non -payment of interest.
Secured short term loan- Another source of finance involves taking secured short term
loan. This is a type of loan involves borrowing money from institute by giving some collateral
security against the money borrowed.
 The benefit of using secured loan is that the company can borrow large amount of money
as the person has to keep something as collateral. In addition to this, another benefit is
that it involves lower risk for taking the loan.
 In against of this, the drawback of using this source of finance is that there is higher risk
for the borrower because the property can be taken by bank for non- payment of interest
or instalment.
3. Report for shareholders relating to financial health and viability
The financial health of the company is good and also the working is viable. The reason
underlying this fact is that the company has earned the profit of 322000. This implies that the
profitability of the company is good. Also, with the evaluation of the statement of financial

position it is clear that the company is having good asset and this implies that the security of the
company is nice. The profitability of the company is good and this suggest that company is in
position to meet the objectives of business (Afrifa and Tingbani, 2018). Also, the company is
capable of managing the expenses and as a result of this the working of the company will be
improved.
Moreover, with respect to sustainability the company is having a good position. The
reason underlying this fact is that the company has invested a lot of amount within the asset and
this is good for the sustainability of company. This is beneficial because in case of any
contingency in future, the company can sell the asset and use the money in solving problem.
Further by evaluating the overall performance it is clear that the company is performing
good. The reason underlying this fact is that the company is earning good amount of profit. Also,
the capital invested within the company is good and this need to be improved (Gonçalves, Gaio
and Robles, 2018). Along with this there is also a good balance within the debt and equity that is
3.41. this debt equity ratio is good and implies that the working of the company and the capital
structure is good and will assist company in evaluating the working in better and effective
manner.

REFERENCES
Books and Journals
Afrifa, G. A. and Tingbani, I., 2018. Working capital management, cash flow and SMEs'
performance. International Journal of Banking, Accounting and Finance. 9(1). pp.19-43.
Gonçalves, T., Gaio, C. and Robles, F., 2018. The impact of Working Capital Management on
firm profitability in different economic cycles: Evidence from the United
Kingdom. Economics and Business Letters. 7(2). pp.70-75.
Le, H. L., and et.al., 2018. Impact of working capital management on financial performance: The
case of Vietnam. International Journal of Applied Economics, Finance and
Accounting. 3(1). pp.15-20.
NGUYEN, A. H., PHAM, H. T. and NGUYEN, H. T., 2020. Impact of working capital
management on firm's profitability: Empirical evidence from Vietnam. The Journal of
Asian Finance, Economics, and Business. 7(3). pp.115-125.
Oláh, J., and et.al., 2019. Analysis and comparison of economic and financial risk sources in
SMEs of the Visegrad group and Serbia. Sustainability. 11(7). p.1853.
Ślusarczyk, B. and Grondys, K., 2019. Parametric conditions of high financial risk in the SME
sector. Risks. 7(3). p.84.
Wang, Z., Akbar, M. and Akbar, A., 2020. The interplay between working capital management
and a firm’s financial performance across the corporate life cycle. Sustainability. 12(4).
p.1661.
Сосновська, О. О. and Житар, М. О., 2018. Financial architecture as the base of financial
safety of the enterprise. Baltic Journal of Economic Studies. 4(4). pp.334-340.