Strategic Financial Planning for Sustainable Future

The report highlights the significance of capital structure in an enterprise's success. The proportion of debt and equity used by a company plays a crucial role in determining its risk level. Higher levels of debt compared to equity can contribute to higher financial burdens on the business, making it essential for investors, lenders, and creditors to analyze a company's gearing ratio to assess its risk. Additionally, cash flow statements are distinct from profits and measure a company's ability to generate cash, identifying its sources and applications.

Poundland Group PLC-
Accounts

Table of Contents
Introduction................................................................................................................................1
TASK 1......................................................................................................................................1
Debt and equity......................................................................................................................1
Gearing ratio..........................................................................................................................4
Accounting standard..............................................................................................................5
Credit crunch crisis................................................................................................................6
TASK 2......................................................................................................................................6
Cash flow statement...............................................................................................................6
Objectives of cash flow statements.......................................................................................6
Difference between cash flow and profitability....................................................................7
CONCLUSION..........................................................................................................................9
REFERENCES.........................................................................................................................10

INTRODUCTION
Each and every business organization prepares financial statements in order to
identify their business results. Moreover, business can take necessary decisions through
evaluating these statements. Poundland is a British Variety store chain that is headquartered
in Wilenhall. Company was established in the year 1990 that sells most of the items to stores.
The firm is providing large number of branded and own label products to the stores. It
decided a clear business growth strategy through paying focus on delivering qualified
products to the customers and planned for business expansions. The long term target of
company is to operate over 1000 stores in United Kingdom. This report will help us in
identifying the role of debt and equity in the business capital structure. Further, report
analyzes the importance of cash flow statement to get higher amount of profitability.
TASK 1
Every business organization requires collecting necessary amount of funds through
different finance sources. Both debt and equity used by every enterprise to fulfil long term
finance requirements. It helps to compare the business opportunities and risk with the other
firm that operates in the same industry. The distinction between debt and equity are explained
as under:
Debt and equity
Both are external finance sources as available outside from the market. Poundland
Group can issue equity shares in the market for collecting the funds. The cost of the share
capital is that company has to pay return to the shareholders. Further, it is not obligatory to
the firm to provide regular return. In case of loss, it does not require to pay dividend to the
shareholders. Further, shareholders are the owners of company so they have voting rights to
manage and control the business operations. Therefore, dilution of control exists in this case.
Before implementing any new policy or rules, company requires to communicate with their
shareholders. On the contrary, debt capital can be obtained through bank loans and issuing
debentures. Poundland Group requires paying timely interest and instalment to the
shareholders. Further, company requires keeping business assets as security towards the loans
(Hovakimian, Opler and Titman, 2001). They have to fulfil many legal formalities before
collecting funds. Further, the debenture holders and banks do not have any voting rights to
the organization. Therefore, dilution of control does not exist. Moreover, bank loans are
available at different time periods and at reasonable interest rates. On the other hand, interest
payment is considered as an allowable expenditure for the tax purpose. Hence, it is
1 | P a g e

considered as an easier source of finance in comparison to equity (Hovakimian, Hovakimian
and Tehranian, 2004). Organizations do not only use the equity and debts because using only
debts will diversify the control to business. However, if business will only use the debts then
it will lead to financial burden on company. Therefore, all the business organizations use a
combination of both the sources.
In context to Poundland Group Company, business is using 50486£ debts and
200583£ equity in the year 2013. The amount of debt gets declined in the year 2014 to
30000£ and further, equity also declined to 186475£ (Poundland Group plc Annual report
and Financial statements, 2015). However, in the year 2015, the debt is significantly
decreased to 2000£. On the contrary, the amount of equity get inclined to 226673£ which
indicates that business is collecting resources from equity capital and paid debts (Poundland
Group plc Annual report and financial statement, 2015). The debt to equity ratio which is
also called as gearing ratio, in Poundland Group Plc, in all the three years; they are 0.26, 0.16
and 0.01 respectively. All the ratios indicate that company is using greater amount of equity
as compared to the total debts in its capital structure. The proportion of debt and equity in
Poundland Group Plc are presented as under:
Particular 2013 2014 2015
Debt 50486 30000 2000
Equity 200583 186475 226673
Total capital 251069 216475 228673
The prepared pie chart represents the debt and equity proportion in the capital structure for
the year 2013, 2014 and 2015 which are as follows:
2 | P a g e

3 | P a g e
50486
200583
30000
186475

Gearing ratio
The proportion of debt and equity in the business capital structure is known as gearing
ratio. It measures the proportion of borrowed funds to the equity in business (Adrian and
Shin, 2010). A high gearing ratio represents high proportion of debt to equity and vice versa.
The importance of gearing ratio for investors, creditors and lenders are described as under:
Investor's View: Investors have the motive of getting higher amount of return on
their investments. Therefore, before making investment in the company they analyse the risk
return relationship in the business. They determine the gearing ratio of the company for that
purpose. Higher the debt to equity ratio contributes to higher the financial obligation of the
business to pay interest (Margaritis and Psillaki, 2010). Therefore, business having high
financial risk in this situation. Further, they analyse the company's existed shareholders return
to assess their future return and make investment in the profitable company that have greater
opportunities of high return.
Lender's View: Lenders also analyse the debt to equity ratio before providing any
loans to the business. They analyse the business profitability in order to assess the ability of
company to paying debt on right time (Penman and Penman, 2007). Moreover, they analyse
the profits volatility and the financial health of the business to take corrective decisions. They
provide loans to the organization that is financial strong in order to secure their loans.
Creditor's View: They analyse the gearing ratio in order to determine the
creditworthiness of the business and provide services at an acceptable gearing ratio. In case
of high gearing ratio the creditors might afraid to give credit to the business as it lead to high
4 | P a g e
2000
226673

financial obligation to the business (Welch, 2011). However, low gearing ratio or maintained
gearing ratio would be preferable by them. Therefore, the businesses require maintaining an
appropriate ratio between the business debt and equity.
Accounting standard
Business requires manipulating the composition of debt and equity proportion in order
to maintain its gearing ratio. Every organization requires preparing its financial statements
according to the Accounting standards. There are number of accounting standards that have
to follow by each and every corporation.
Accounting standard 13 that relates to accounting for investment require showing the
amount of all the investment in the financial statements of the company. According to this
standard, the companies have to disclose all the investments in the final accounts. Investment
is the assets that are held by enterprise for earning income includes dividend, interest and
other rentals. In context to Poundland Group financial statements the company disclosed the
amount of the share capital and the borrowings. Further, the accounting standard 16 that
applied to the borrowing cost. According to the standard the business should disclose the cost
of all the borrowings in the financial statements. The cost of the borrowing includes interest
and other commitment charges on borrowings, amortisation of discount or premium,
amortisation of ancillary cost and exchange difference arising from foreign currency
borrowings. With reference to Poundland Group Plc it disclosed the amount of finance
expenses in the income statement.
On contrary, Accounting standard 22 applied for accounting for taxes on the incomes.
Moreover, debt interest is deducted while calculating the business taxes. In context to Pound
land Group Plc the company disclosed the amount of taxes in its income statement.
Furthermore, accounting standard 21 that relates to preparation of consolidated financial
statements. As per the Accounting standard parent or holding company that has any
subsidiary requires to prepare consolidated financial statements. The standard is also applied
for investments that have taken place in subsidiary company by the parent company.
According to this standard the consolidated financial statements are such statements that
prepares through combining all the operations of the subsidiary company. Further, the
amount of equity share capital that is invested by the parent or holding company in subsidiary
also must be shown in the prepared accounts (Gill, Biger and Mathur, 2011). Poundland
Group Plc discloses the amount of invested share capital in the subsidiary company and also
the respective changes that have taken place in the accounting period in the consolidated
5 | P a g e

statement of changes in equity. Therefore, on the basis of such accounting standard, it can be
said that it encouraged them to change its capital structure through changing the debt and
equity combination.
Credit crunch crisis
Due to the debt facilities that are available for the different time duration and also at
the reasonable rates business used it to a great extent. Excessive borrowings or lending by the
entities resulted in credit crunch crisis. Further, credit crunch crisis is the reason for global
financial meltdown in the year 2007. It has both negative and positive impact on both the
consumers and the businesses. It reduces the amount of loan availabilities from the banks due
to higher the interest rates (Kumar, 2009). Therefore, the business struggle to survive in the
market due to lack availability of funds through banks. Business may not have adequate
availability of required funds in this case as in this case banks refused to lend loans to the
business. Further, it create uncertainty for the future earnings that causes that large number
of investors can sell their stocks and make investment in other safer areas. However, it has
also some positive effects. For instance, using greater level of debts in the capital structure
resulted in enhancing the financial burden to them. This in turn the business financial position
can be weakened (Foster and Magdoff, 2009). Therefore, if the credit crunch arises than
business will not take any further loan and collect funds through equity. This in turn, the
financial position can be strengthened.
TASK 2
Cash flow statement
Cash flow statements measure the cash sources and its application in the business. It
is a financial statement that measures the cash generated or its implication or uses in the
company. It identifies the changes in the financial position of the business on cash flow basis.
Every business organization whether big or small needs to prepare cash flow statement in
order to determine the changes in the cash balance between two accounting period.
Objectives of cash flow statements
There are different objectives for preparing the cash flow statements. Some of the
most important objectives of these statements are described as under:
It identifies the cash earning capacity of the business. Moreover, it indicates the
amount of cash collected and also the purpose for which cash is being utilised in the business.
It helps in making effective cash planning and control in order to ensure adequate availability
6 | P a g e

of cash at any point of time (Hodder, Hopkins and Wood, 2008). Further, it measures the
business ability to pay the business obligations such as loan repayment, shareholder dividend
and taxes. Investors evaluate the cash flow statement to ensure the regular return on their
respective investment. It evaluates the cash inflows and outflows from operating, investing
and financing activities. Moreover, the statements helps to identify the reasons of the
difference between the businesses net income, its cash receipts and cash payments. It helps
the management in taking effective and strategic capital budgeting decisions. It ensures
optimum use of available funds for getting higher the benefits for the business.
In context to Poundland Group Plc the company prepare the cash flow statement for a
given period. It shows the cash flows from the business operating, investing and financing
activities. All the cash flows that relates to the business operation prevails under the operating
activities. It includes purchase and sales activities of the business. However, the purchase and
sales of capital assets reflect under the investing activities. It includes acquisition and
disposal of the fixed assets. Furthermore, cash flow from financing activities reflects the
changes in capital structure. It includes the company's purchase and sales of stock and
proceeds and payments on the debt financing. Poundland Group Plc cash flows from
operating, investing and financing activities are 33417£, (16438£) and (10034£) in the year
2013. However, in the year 2014, respective cash flows get inclined to 48202£, (17625£) and
(48170£). Operating activities cash flows get changed due to the adjustment for non cash
expenditures and increase the other operating expenses such as trade payable. On contrary,
the investing activity cash flows get changed due to acquisition of property, plant and
equipment and other non tangible assets. Further, the cash flows that results from financing
activities arises due to proceed from new loans, repayment to borrowers, redemption of
preference share in subsidiary company and new finance expenses. Therefore, the net cash
flows at the end of the year get decreased from 42861£ to 25268£ in the year 2014.
Difference between cash flow and profitability
Cash flow and profitability are distinct from each other. Income statements are
prepared in order to determine the business profitability. However, Cash flow statements are
prepared to determine the business cash inflows and cash outflows (Deegan, 2012).
Cash flow is the difference between the amount of business cash receipts and cash
payments. However, profitability is the difference between business revenues and
expenditures. A highly profitable entity may have adequate profit availability to 1000£
7 | P a g e

million and revenues to £1 Billion but the business trading is stopped in the market. There are
various reasons may be responsible for such occurrences described here as under:
Certain cash flows are not recorded as business revenues and expenses hence create a
reason for difference between profits and net cash flows. Moreover, certain cash flows that is
recorded as incomes or expenses but may not be a part of business operating activities. For
instance, if company make future payments in current period resulted in lowering the cash
flows without affecting the profitability. This in turn, results in different amount of cash
flows and the profitability. Moreover, the non cash transactions such as depreciation, loss on
sale of machinery are recorded in profit and loss statement. Hence, affect the business
profitability. However, cash flow statements do not includes any non cash transaction hence
it do not influenced the business cash flows resulted in difference between cash flows and
profitability (Orpurt and Zang, 2009). In the consolidated cash flow statement of Poundland
Group plc company adjust the amount of 15096£ of depreciation and amortisation in the
operating activities. On contrary, the non operating cash flows do not impact the business
profitability. For instance, expenditure and incomes that relates to the purchase and selling of
assets are not recorded in the profitability statement. Moreover, the payment to borrowers or
lend from borrowers and purchase and sales of company’s stock not present in the income
statement. This in turn the profitability will be unaffected (Carpenter and Guariglia, 2008).
Poundland Group income statement do not involve the expenditures that are incurred for
acquiring the property, plant and equipment amounted to 16563£ and other tangible assets
amounted to 1062£. Further the amount of loan taken of 29268£ increased the cash flows.
Moreover, repayment of borrowings to 54914£ and redemption of preference share capital to
20000£ lead to decrease the cash flows without impact the profits (Poundland Group plc
Annual report and Financial statements, 2014).
On the other hand, cash flow statement shows all kind of cash flows whether related
to operating activities or not. It shows all cash flows from operating, financing and investing
activities. In addition to it, non cash revenues may increase the business profits without
affecting the cash flows (Reinhart and Rogoff, 2010). The reason behind that is business
record its revenues on the basis of accrual concept. For instance, a credit sales made by the
enterprise may increase the overall profits at that time but at the same time it do not impact
the cash flows. However, when the business receive cash amount then it will be lead to
increase the cash flows without affecting the profits. Along with the non cash incomes, non
cash expenses also are a reason for having different cash flows and profitability (Crotty,
8 | P a g e

2009). Companies may have less profitability due to non cash expenditures but such kind of
expenses will not affect the cash holdings. Therefore, it can be concluded that such business
that have higher amount of profitability but due to lack of cash business market trading
activities may be stopped. This in turn, affects the business growth, development and
sustainability for the future period.
CONCLUSION
From the presented report it becomes clear that the proportion of debt and equity that
is used by the enterprise in its capital structure plays a very important role in the organization
success. Further, the report described that higher level of debts as compared to the equity
contributes to higher level of risk for the business as it create financial burden to the business.
Moreover, the report explained that investor, lenders and creditors use the gearing ratio in
analysing the business risk and take effective decisions. In addition to it, cash flow statement
is significantly distinct from the profits of the business. It measures the business cash earning
capacity and identifies the cash sources and its application in the business.
9 | P a g e

REFERENCES
Books and Journals
Adrian, T. and Shin, H.S., 2010. Liquidity and leverage. Journal of financial intermediation.
19(3). pp.418-437.
Carpenter, R.E. and Guariglia, A., 2008. Cash flow, investment, and investment
opportunities: New tests using UK panel data. Journal of Banking & Finance. 32(9).
pp. 1894-1906.
Crotty, J., 2009. Structural causes of the global financial crisis: a critical assessment of the
‘new financial architecture’. Cambridge Journal of Economics. 33(4). pp. 563-580.
Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia.
Foster, J.B. and Magdoff, F., 2009. The great financial crisis: Causes and consequences.
NYU Press.
Gill, A., Biger, N. and Mathur, N., 2011. The effect of capital structure on profitability:
Evidence from the United States. International Journal of Management. 28(4). p.3.
Hodder, L., Hopkins, P.E. and Wood, D.A., 2008. The effects of financial statement and
informational complexity on analysts' cash flow forecasts. The Accounting Review,
83(4), pp.915-956.
Hovakimian, A., Hovakimian, G. and Tehranian, H., 2004. Determinants of target capital
structure: The case of dual debt and equity issues. Journal of financial economics.
71(3). pp. 517-540.
Hovakimian, A., Opler, T. and Titman, S., 2001. The debt-equity choice. Journal of
Financial and Quantitative analysis. 36(01). pp.1-24.
Kumar, A., 2009. Global financial crisis and government intervention: surplus generation,
gearing ratio, asymmetry of financial multiplier and other considerations. Accountancy
Business and the Public Interest. 8(1). pp.1-24.
Margaritis, D. and Psillaki, M., 2010. Capital structure, equity ownership and firm
performance. Journal of Banking & Finance. 34(3). pp.621-632.
Orpurt, S.F. and Zang, Y., 2009. Do direct cash flow disclosures help predict future operating
cash flows and earnings?. The Accounting Review. 84(3). pp. 893-935.
Penman, S.H. and Penman, S.H., 2007. Financial statement analysis and security valuation
(p. 476). New York: McGraw-Hill.
Reinhart, C.M. and Rogoff, K.S., 2010. From financial crash to debt crisis (No. w15795).
National Bureau of Economic Research.
Welch, I., 2011. Two Common Problems in Capital Structure Research: The Financial‐Debt‐
To‐Asset Ratio and Issuing Activity Versus Leverage Changes. International Review of
Finance. 11(1). pp.1-17.
10 | P a g e

Online
Poundland Group plc Annual report and financial statement, 2014. [Pdf]. Available through:
<http://www.poundlandcorporate.com/~/media/Files/P/Poundland/reports-and-
presentations/Poundland-annual-report-2014.pdf>. [Accessed on 17th December, 2015].
Poundland Group plc Annual report and Financial statements, 2015. [Pdf]. Available
through: <http://www.poundlandcorporate.com/~/media/Files/P/Poundland/reports-
and-presentations/ar-2015.pdf>. [Accessed on 17th December, 2015].
11 | P a g e