Financial Strategies and Analysis for British Embroidered Ltd.

This report provides a comprehensive financial analysis of British Embroidered Ltd., a company specializing in embroidered and printed work clothing. The report explores various sources of finance, including internal sources like retained earnings and sale of assets, and external sources such as the issue of shares and bank loans. It evaluates the impact of these sources on the company's financial health and suggests the most appropriate financing options. The report also delves into the cost analysis of different finance sources and the importance of financial planning, assessing the information needs of various decision-makers, and examining the impact of finance on financial statements. Furthermore, it analyzes the company's cash budget, calculates unit costs using markup and cost-plus pricing methods, and assesses project viability using investment appraisal techniques like payback period. The report concludes with a discussion of key financial statements and their interpretation using ratios.

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Table of Contents
INTRODUCTION ...............................................................................................................................3
TASK 1.................................................................................................................................................3
1.1 Identifying the sources of finance available to business............................................................3
1.2 Stating the impact of different sources of finance.....................................................................3
1.3 Appropriate source of finance for British Embroidered Ltd......................................................4
TASK 2.................................................................................................................................................4
2.1 Analyzing the cost of different sources of finance ....................................................................4
2.2 Stating the importance of financial planning ............................................................................5
2.3 Assessing the information need of the different decision makers..............................................5
2.4 Stating the impact of finance on financial statements ..............................................................6
TASK 3.................................................................................................................................................6
3.1 Analyzing budget and make suitable decisions ........................................................................6
3.2 Calculation of unit cost and make pricing decisions.................................................................7
3.3 Assessing the viability of project using investment appraisal techniques.................................7
TASK 4.................................................................................................................................................9
4.1 Discussing the main financial statements which are prepared by the firm................................9
4.2 Comparing formats of different types of business ..................................................................10
4.3 Interpreting financial statements by using ratios.....................................................................10
CONCLUSION...................................................................................................................................11
References..........................................................................................................................................13
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INTRODUCTION
In the present era, each and every business organization needs to frame competent strategies
which facilitate effective use of fund. Now, company can build competitive edge over others when
they execute their plan in an effectual manner. In this, finance manager is required to take strategic
business decision which makes contribution in the attainment of organizational goals and objectives
(Ahn, Amiti and Weinstein, 2011). Thus, growth and success of the firm is highly dependent upon
the extent to which business unit makes use of its financial resources. This project report is based
on the case scenario of British Embroider Ltd. Who offers embroidered or printed work clothing. It
is listed on the recognized stock exchange. The present report will describe the sources of finance
which business unit can undertake to expand their business operations and functions. Further, it
will also shed light on the various financial aspects which aid in the success of firm.
TASK 1
1.1 Identifying the sources of finance available to business
British Embroidered can raise finance by taking into account following internal and external
sources of finance are enumerated below:
Internal sources: It refers to those which are available within the business unit. Retained earnings: Company can make use of retained profit for expanding their business
operations and activities. It is the part of profit which business unit keep with itself each
year to meet the contingent situation (Anandarajan, Anandarajan and Srinivasan, 2012).
 Sale of assets: Fund can be raised by British Embroidered by selling the assets which cannot
be used in the productive activities. Thus, it is the most effectual source which will help
business unit in meeting their financial requirements.
External sources: These sources of finance are those which present outside the business
organization. Issue of shares: By issuing shares to the general public British Embroidered can meet its
financial need. This is the cheaper source of finance which provides assistance to the firm
in getting the desired outcome (Berger and Black, 2011).
 Bank loan: British Embroidered cam take financial assistance from bank by approaching
them for loan. This source of finance offers high level of tax benefits to the business unit or
organization.
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1.2 Stating the impact of different sources of finance
Internal and external sources of finance place high level of impact on financial health,
position and other aspects of British Embroidered. If company uses retained profit for the purpose
of expansion then they are not in position to grab the opportunities which will arise in near future.
Besides this, when business unit takes decision to raise finance by selling the assets then they it
negatively affects the goodwill of firm (Brandimarte, 2013). In this, company is not able to
encourage more investment in the business organization. Further, in shares British Embroidered has
legal obligation to involve their shareholders in the decision making process of the firm. Further,
corporation is required to give dividend to their shareholders which in turn monetary cost for the
firm. Along with it, in bank loan financial institution has right to cease the asset if firm makes
default in the payment of loan amount to interest. Along, high interest rate closely influence to gross
profitability. Thus, manager needs to consider all these aspect while selecting the source of finance.
1.3 Appropriate source of finance for British Embroidered Ltd.
From the above identified internal and external sources of finance it is suggested to British
Embroidered that they need to sale the assets which have no use in the present time. Moreover,
company has assets which cannot be used by them in further manufacturing aspects. Thus, selling
the non-productive or non-profitable assets business unit can generate fund. Besides this, By issuing
shares to the existing and potential shareholders company can raise finance to the large extent.
Moreover, investors are always ready to invest money in shares which makes high value addition in
money (Gang, 2011). Liquidity and net profitability of British Embroidered is good. Further,
company continuously makes efforts to make optimum use of capital which is employed by them .
All these aspects helps business unit in attracting the large number of investors. Thus, by raking
into consideration both the above mentioned sources British Embroidered can explore its business
area in an effectual manner.
TASK 2
2.1 Analyzing the cost of different sources of finance
Cost is one of the main factors which have level of influence upon the decision making of
organization in relation to the sources of finance. Moreover, internal and external sources of finance
impose varied cost in front of the business unit. If British Embroidered makes use of retained profit
then it is unable to offer dividend or high return to the stakeholders. Besides this, if business
enterprise sales their asset then it negatively affects the brand or corporate image of firm. In this,
investors think that company does not have ability to perform so it sell assets. This is turn enforce
opportunity cost in front of the organization. On the contrary to it,in the issuance of shares company
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has to pay dividend to their shareholders which reduces the gross margin of firm. Further, in bank
loan business entity has to pay interest to the financial institution (Hakim, Hamid and Meera, 2015).
High interest rate also cut down the profit of firm to the signifiant level. Thus, internal as well as
external sources impose both financial and opportunity cost on British Embroidered.
2.2 Stating the importance of financial planning
Financial planning is an ongoing process which is used by the business organization to
determine or estimate the capital which they require to execute the strategies and policies (What is
financial planning, 2016). By making effectual financial plan British Embroidered is able to
forecast the cash inflow or outflow in the best possible manner. Besides this, financial plan offers
framework to the manager which they can use to compare the actual financial performance with the
standard one. Through this, business unit is able to assess the deviation which take place in the
financial aspect. It enables manager to take corrective measures within the suitable time frame.
Along wit it, by forecasting the inflow and outflow corporation is able to determine the profit which
it will generate during the predetermined time frame. Thus, it can be stated that financial planning
makes contribution in the attainment of organizational goals and objectives.
2.3 Assessing the information need of the different decision makers
Information need of the internal and external decision makers are as under:
Internal decision makers Managers: They undertake financial statements to evaluate the liquidity, solvency and
profitability. With the help of this, manager is able to frame competent strategic framework
for the future (Hoshi and Kashyap, 2011).
 Employees: Salary increment, fringe and other monetary benefits of the employees are
highly associated with the profitability of the firm. Thus, human resources of British
Embroidered makes assessment of the income statement to satisfy their information
requirement.
External decision makers Shareholders: Investors make evaluation of the risk and return before making investment in
the shares of firm. Thus, they do ratio analysis with the help of financial statement to
examine the financial health and position of the business unit. Financial institutions: Bank and other lending institutions undertake undertake financial
statements to examine that firm is able to make payment on time or not (Irwin and Scott,
2010). By keeping this fact in mind bank who offers financial assistance to British
Embroidered assesses the balance sheet to fulfil their financial needs.
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 Government: Tax is the major source of income of the government so they make use of
income statement to calculate the suitable amount of taxation.
2.4 Stating the impact of finance on financial statements
In order to expand the business functions British Embroidered sale their assets and make
issue of new shares. Both these sources have impact on financial statements in the following
manner:
Profit and Loss a/c
Debit Credit side
Particulars Amount Particulars Amount
To loss on sale xxx By profit on sale of
assets
Balance Sheet
Liabilities Amount Assets Amount
Shareholder's equity xxx Fixes assets xxx
less: sale of assets xxx
Net amount
Cash (Shareholders
equity + amount
received by selling of
assets)
xxx
TASK 3
3.1 Analyzing budget and make suitable decisions
Cash budget of British Embroidered for the four months
Particulars September October November December
Cash inflow
Cash sales 135000 90000 112500 108000
Total cash inflow 135000 90000 112500 108000
Cash outflow
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Cash purchase 46800 28800 66600 73800
Credit purchase 41400 18000
Rent - - - -
Other business expenditure 9000 13500 18000 18000
Loan instalments 9000 9000 9000
Total cash outflow 55800 51300 113500 118800
Net cash inflow 79200 38700 -22500 -10800
Opening cash balance 45000 34200 4500 -27000
Closing cash balance 34200 4500 -27000 16200
Cash budget of British Embroidered shows that sales of British Embroidered shows
fluctuating trend which may cause of decreased and negative inflow. On the contrary to this,
expenditure of the business enterprise increased which closely affects the cash position of firm.
Thus, company needs to make focus promotional strategies and campaign which helps them in
pushing up sales of firm. Besides this, business enterprise needs to exert control over the expenses
which helps in improving their cash position.
3.2 Calculation of unit cost and make pricing decisions
a. Mark up pricing method
Particulars Amount
Cost of equipment per
unit
£27,000 / 500 = 54
Profit% 33.33%
Profit amount 33.33% *54 = 18
Price 54+18 = 72
b. Cost plus pricing method
Particulars Amount
Return on capital employed 20% 20% * 9000 = 1800
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(X*500) – £27,000 = 1800
500x = 1800+27000
500x = 28800
X = 28800 / 500 = £57.6
From the above calculation it has been assessed that British Embroidered needs to undertake
Mark up pricing method. Moreover, this method helps business unit in generating the high amount
of profit as compared to cost plus pricing method. Thus, company requires to select Mark up for
calculating the price of equipment.
3.3 Assessing the viability of project using investment appraisal techniques
British Embroidered undertakes capital budgeting tools with the aim to assess the viability
and profitability of three project which are mentioned below:
Calculation of payback period
Year Cash inflow
of project A
Cumulative
cash inflow
Cash inflow
of project B
Cumulative
cash inflow
Cash inflow
of project C
Cumulative
cash inflow
1 20000 20000 23750 23750 20000 20000
2 17500 37500 23750 47500 15000 35000
3 25000 40000 23750 71250 12500 47500
4 32500 72500 24750 96000 25000 72500
Project A: 2 + 12500 / 25000
= 2.5 years
Project B: 2+ 2500 / 23750
= 2.10 years
Project C: 2 + 15000 / 12500
= 2 +1.2
= 3.2 years
Computation of Net present value and average rate of return
Project
A
PV
factor
@10%
Present
value
Project
B
PV
factor
@10%
Present
value
Project
C
PV
factor
@10%
Present
value
Initial 50000 50000 50000
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investment
1 20000 0.909 18180 23750 0.909 21589 20000 0.909 18180
2 17500 0.826 14455 23750 0.826 19618 15000 0.826 12390
3 25000 0.751 18775 23750 0.751 17836 12500 0.751 9387.5
4 32500 0.683 22198 24750 0.683 16904 25000 0.683 17075
Total
discounted
cash
inflow 73608 75947 57032.5
NPV
(Total
discounted
cash
inflow-
initial
investment
) 23608 25947 7032.5
Average 23750 16000 18125
ARR 47.50% 32.00% 36.25%
` From the above mentioned analysis it has been assessed that British Embroidered should
make investment in project B over the project A and C. Moreover, net present value of project B is
25947 whereas NPV of project A and C is 23608, 7032.5. NPV considers the time value of money
and thereby offers highly realistic results. Further, British Embroidered will be able to recover its
initial investment within the 2 year 10 months. Thus, it can be said that business unit will attain
success by investing money In project B.
TASK 4
4.1 Discussing the main financial statements which are prepared by the firm
1. Report
To
Managing Director
British Embroidered Ltd.
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From the study it has been assessed that there is large number of internal and external
sources of finance available to the business organization. Company can make use of retained profit
for expanding the business operations and functions. Further, business unit can also raise finance by
selling the non-profitable or productive assets. In addition to this, external sources of finance can
also be used by the business unit to fulfil their financial requirements. Thus, by issuing shares
company can generate the amount which they needed. Besides this, leasing and bank loan are also
the most suitable sources which help them in meeting their needs.
2. The main purpose behind the preparation of income statement to assess the profit earned by the
firm over the expenses. Through this, business unit is able to identify the area of expenditure in
which they need to make control. Further, by preparing income statement British Embroidered is
become able to assess the trend of profitability aspect by comparing it from previous years. Besides
this, business unit prepares balance sheet to evaluate their financial health and performance (Labatt
and White, 2011). By preparing its business organization is able to frame competent strategies and
policies in an effectual manner.
3. Impact of invested capital in balance sheet and income statements
Profit and Loss a/c
Particulars Amount Particulars Amount
To dividend to the
shareholders
xxx
Balance Sheet
Liabilities Amount Assets Amount
Shareholder's equity xxx Cash xxx
4.2 Comparing formats of different types of business
Financial statements which are prepared by the different types of business unit highly
differs in the following manner: Sole trader: It refers to those who operate and perform the business activities by their own
without any interference of others. Thus, sole traders only prepares income statement
because they are highly concerned with the profit which is generated by incurring the
expenses (Midrigan and Xu, 2010).
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 Public organizations: It may be defined those which owned and controlled by the
government. Public organization prepares income, cash flow statement and balance sheet to
evaluate their financial health and performance (Newell and Seabrook, 2006). Besides this,
they also require to publish the financial statements to the general public at large with the
aim to build faith in the mind of stakeholders.
Different between the income statement and balance sheet
Income statement Balance sheet
This statement provides information regarding
the indirect and other office expenses which are
incurred by the firm during the accounting year
(Minsky, 2015). Further, it also contains
information about the income which is earned
by the business unit.
Balance sheet is divided into two parts such as
assets and liabilities. Assets side furnishes
information about the fixed and current assets.
Whereas, liabilities side include shareholder's
equity, long term and current liabilities.
4.3 Interpreting financial statements by using ratios
a. Computation of ratios
Ratios Formula Benchmark 2015
Profitability ratio
Gross profit ratio Gross profit / net sales
*100
50.00% 585 / 720 *100 =
11.40%
Net profit ratio Net profit / net sales
*100
10.00% 207 / 720 *100 =
28.75%
Liquidity ratio
Current ratio Current assets / Current
liabilities
1.5:1 612 / 405 = 1.5:1
Quick or acid test ratio Current assets – (Stock
+ prepaid expenses) /
Current liabilities
01:01:00 AM (612-270) / 405 = .84:1
Return on capital
invested
(Net operating
profit/employed
2.42
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capital)
b. Interpretation of ratios
 Profitability ratios: This ratio provides deeper insight about the profitability aspect of the
firm. The above mentioned ratio analysis clearly shows that gross profitability aspect of
British Embroidered is lower as compared to the standard which is 50%. On the contrary to
it, net profitability of the business unit is 28.75% which is higher in against to BM. Thus,
organization needs to frame competent strategies and policies which helps in raising the
gross profit margin.
 Liquidity ratios: From this measure, one can easily analyze the financial capability of firm in
relation to meeting their current obligations (Mohamed and Lashine, 2003). Current ratio of
the firm meet the standard to the great extent which is 1.5:1. Besides this, Quick ratios of
British Embroidered was .84:1 in 2015 which is more near to benchmark. On the basis this
aspect it can be said that business unit has enough amount of current assets to meet their
liabilities.
 Return on capital employed: By doing ratio analysis it has been identified that British
Embroidered has made optimum use of its financial resources to generate the high sales
revenue.
CONCLUSION
From the above report it can be concluded that British Embroidered needs to sale
unproductive assets and issue shares to generate fund. Further, it can be inferred that financial
planning facilitates optimum use of monetary resources to the large extent. It can be stated that
British Embroidered needs to make investment in project B which proves to be more profitable for
it. It can be revealed from the report that net profitability and liquidity position of British
Embroidered is sound. Business unit needs to undertake effectual measures to improve their gross
profitability.
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REFERENCES
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Brandimarte, P., 2013. Numerical methods in finance and economics: a MATLAB-based
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Gang, Y.A.N.G., 2011. Study on Enterprise Financial Appraising Model for Social Responsibility.
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Labatt, S. and White, R.R., 2011. Carbon finance: the financial implications of climate change .
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Midrigan, V. and Xu, D.Y., 2010. Finance and misallocation: Evidence from plant-level data (No.
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Minsky, H.P., 2015. Can" it" happen again?: essays on instability and finance. Routledge.
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Online
What is financial planning, 2016. [Online]. Available through:
<http://www.financialplanning.org.uk/wayfinder/what-financial-planning>. [Accessed on
20th April 2016].
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