Financial Analysis and Budgeting for T-shirts Ltd Case Study

This case study analyzes the financial performance of T-shirts Ltd, examining its statement of profit and loss and statement of financial position. The analysis reveals a decline in revenue and profit, increased expenses, and a negative profit before interest and tax. The study delves into the concepts of accrual and cash accounting, differentiating between profit and cash flow. It highlights the importance of budgeting techniques and the benefits of forming a limited company. The case study covers the company's financial health, including its assets, liabilities, and equity. It also examines the company's cash flow and the impact of increased credit terms. The study provides a comprehensive overview of the financial challenges faced by the company and the importance of effective financial management.

Case Study T-shirts Ltd

TABLE OF CONTENTS
PART 1: BUSINESS PERFORMANCE ANALYSIS....................................................................1
Analysing Statement of Profit and Loss.....................................................................................1
Analysing Statement of Financial Position.................................................................................1
PART 2: UNDERSTANDING KEY FINANCIAL INFORMATION AND MANAGEMENT
OF CASH.........................................................................................................................................2
Examining the concept of accrual accounting and cash accounting...........................................2
Determining what is the meaning of Profit and Cash flow and how do they vary.....................3
PART 3: BUDGET TECHNIQUES & COMPANY FINANCE....................................................4
Defining budget and examining purpose of preparing budget....................................................4
Determining the main benefits to form a limited company and list it on stock exchange..........5
REFERENCES................................................................................................................................7

PART 1: BUSINESS PERFORMANCE ANALYSIS
Analysing Statement of Profit and Loss
Profit and Loss statement is considered to be prominent in effectively summarizing the key
revenues, expenses and costs which tends to occur over a specific period of time. It is significant
in determining the financial position of the company. T- Shirt limited company tends to
demonstrate that, the revenue of the company has decreased from £ 2,101,000 in 2018 to £
1,366,000 in 2019. Decline within the revenue in turn is mainly because of the loss of the
potential customers and markdown within the prices. The gross profit of the T- Shirt limited
company had a drastic fall from 1,261,000 in 2018 to £ 615,000 in 2019. Change within the sales
is the key factor which leads to decline in the gross profit of the company. However, the other
expenses of the company has significantly increased from 820,000 in 2018 to £ 1,009,000 in
2019. Increase in expenses mainly results in the less profit for the business. It is of crucial
importance to increase the sales and revenue of the company and reduce the expenses to improve
business performance and efficiency. The profit before interest and tax shows negative value in
the year 2019 which mainly accounts for £ (394, 000). Negative profit before interest and tax
indicates that, the sales of the company is not significant and states that the company is not
earning enough to cover the expenses of the company. There seems to be rise in the finance cost
of t- Shirt Company from £69, 000 in the year 2018 to £ 106, 000 in the year 2019. Rise within
the finance cost demonstrates that, the organization has taken up additional set of credit facility.
However, the company has incurred the loss for the year 2019, which mainly accounts for
£500,000. The loss within the company states that, there seems to be high expenses for the
company when compared to income and earnings for the set accounting period. This affects the
financial health and operations of the business.
Analysing Statement of Financial Position
Statement of Financial Position is also referred to as a balance sheet which mainly focuses
on effectively representing and asset, equity and liability of the company for the specific period
of time. T- Shirt limited company tends to demonstrate that, the total assets of the company has
reduced from 1,634,000 in 2018 to £ 1,700,000 in 2019. It states that the asset has been used
within the operations of the business. Decrease in the total asset is mainly because of the rise in
the inventory and trade and other receivables. The t- shirt public limited company has also
increased the credit terms which has been given to the customers from 30 days period to 60 days
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with the main attempt to attract more business. The cash and cash equivalents has declined
drastically from 45,000 in 2018 to £ 0 in 2019. Cash and cash equivalents are considered to be of
crucial importance which is useful for the company to comply with the needs of the working
capital. The total equity of the T- Shirt limited company has fallen from 810,000 in 2018 to £
310,000 in 2019. This tends to happen when the company tends to lose money within the normal
course of the business. There seems to be rise in the total long term borrowings of the company
which has increased from 688,000 in 2018 to £ 921,000 in 2019. However, the total liabilities of
the company has increased from 824,000 in 2018 to £ 1,390,000 in 2019. This is mainly because
of the rise in the trade payables and increase in the bank overdraft of the company. Change
within the current asset tends to have positive set of cash flow impact. It is of crucial important
for the company to effectively pay off the liabilities and improve the business performance with
high degree of relevance and accuracy.
PART 2: UNDERSTANDING KEY FINANCIAL INFORMATION AND
MANAGEMENT OF CASH
Examining the concept of accrual accounting and cash accounting.
Cash accounting is considered to be useful in recognising the revenue when the payment
has been received for the sale and also recognised expenses or prepaid expenses when the
company pays for the specific purchase (Nurullah, and Kengatharan, 2015). Cash accounting is
considered to be prominent in providing clear set of picture of how much money the company
has and also reflect the financial position of the company. Cash accounting only take into
consideration those income and expenses which has been settled by the exchange of money.
One of the key significant benefit of the cash accounting that it is simple and it helps in
showing how much money the company has in hand. It is used for the company to recognise the
revenue and the cash has been received and recognises expenses when the payment has been sent
to the respective parties. One of the key advantage associated with the cash accounting is that it
is easy to use and implement and also helps in maintaining the business records with greater
accuracy.
One of the major disadvantage associated with the cash accounting is that it does not
show full picture. It does not show the liabilities of the customers towards business and unpaid
Customer debts. However, no clear picture associated with the long-term finances of the
company can eventually impact the decision making and growth of the company (Cash Basis
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Accounting vs. Accrual Accounting, 2020). In case the business sells products or services on
credit and has gross receipts higher than the IRS requirement. Then the company cannot use cash
basis accounting. However, in this specific case study, the t- shirt public limited company mainly
focuses on increasing the credit terms which has been given to the customers from 30 days
period to 60 days with the main attempt to attract more business.
Accrual basis of accounting is considered to be prominent because it is considered to be a
method where the expenses and revenues have recorded only when the transaction tends to occur
rather than when the payment has been received or made (Kobayashi, Yamamoto and Ishikawa,
2016). This method of accounting tends to follow the matching principle. This principle tends to
normalise trade that the expenses and revenues of the company must be recognised within the
same period of time.
One of the key significant benefit of the accrual accounting is that, it is significant in
effectively providing clear set of picture associated with the finances and performance of the
company. Another key major advantage associated with the accrual accounting is that, it is useful
in making the be possible financial decision and is significant for making easier set of pitch
linked with the long – term finance. One of the key significant benefit of the accrual accounting
is that, it helps in the easy planning leads to useful business analysis.
One of the major disadvantage associated with the accrual accounting is that, it is
considered to be as one of the time consuming process. It also results in the watching up of the
invoices for the specific period. It also tends to involve the tracking of the account payables and
account receivables and the cash flows of the company. It is difficult to switch the cost and also
leads to deception.
Determining what is the meaning of Profit and Cash flow and how do they vary.
Profit is considered to be as a revenue minus expenses. This is referred to as a net income.
It is an amount of the money which tends to remain from the sales revenue after the cost has
been deducted. Rising profit is considered to be crucial for the health and benefit of the company
(Choi, 2018). It is useful in taking into consideration the total financial gain as well as the losses
for the particular period. It is significant in measuring the amount of money which has been left
after deducting all the expenses from the business revenue.
Cash flow is referred to as the inflow as well as outflow of the business for a specific
period. Cash flow is considered to be the money which tends to flow into and throughout the
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business during the specific period of time. Cash flow does n take into consideration the credit
from the suppliers and also the money which has been owed to the company from debtors. Cash
flow is one of the key prominent metric which tends to signify the health of the company. It is
useful in assessing how the company has been performing. The cash flow balance helps in
carrying out the day to day business operations by subtracting the cash outflows with the cash
inflows.
The key difference between the cash inflow and the profit is that, cash flow is referred to as
a money which tends to flow from the in and outside the business within specified period of
time. On the other hand, profit helps in showing the immediate degree of success to the business
and helps in effectively determining the long term financial outlook of the company. However,
cash flow and profit both of them are considered to be as the key significant measure which leads
to the success of the company (Eulner, and Waldbauer, 2018). Cash flow is considered to be as a
money which tends to flow within and outside of the firm from financing, operations and
investing activities. It is the fund which is available in order to meet the near term and current
obligations. It helps in paying off the expenses on a timely manner. On the contrary, profit is the
net income which tends to remain after all the expenses of the firm has been deducted. A
business does not tend to survive until and unless it is profitable.
PART 3: BUDGET TECHNIQUES & COMPANY FINANCE
Defining budget and examining purpose of preparing budget.
Budget is considered to be of crucial importance because it helps in improving the business
planning process (Goel, 2016). Budgeting is referred to as the high degree of accounting within
the future terms which useful in indicating definite set of course of action. A budget is
considered to be as a formal quantitative expression associated with the management plans. It is
useful for providing standard for the comparison to what has actually been achieved.
 Increases the net worth of company: The key purpose of the budget is to effectively
organise, plan, improve and track the financial performance and situation of the
company. It is considered to be significant to control the spending in order to consistently
invest and save a portion of the income (Gigli and Mariani, 2018). A budget is considered
to be significant in attaining long-term financial goals of the company in order to solve
any financial problem. Budget is considered to be useful in allocating the money to
invest and put money to the work in order to grow the net worth of the T- shirt company.
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 Useful in gaining financial control: One of the key prominent purpose of the budget is
that it helps in gaining financial control and is relevant in controlling the major problems.
It is also considered to resolve the financial problem at a faster pace. One of the key
prominent purpose of budget is that it helps in reducing financial stress by effectively
managing the money by effectively prioritising and tracking the expenses of the
company.
 Forecasting the income and expenditure: The key purpose of the budget is that it is
useful in forecasting the income and expenditure of the T- shirt company. The key
purpose of the budgeting is that it is useful in providing model of how the company might
perform in future, speak financially and develop certain strategies and plans to carry out
their business operations.
 Effective tool for decision making: One of the key purpose of the budget is that it is
useful in providing a financial framework which is prominent for decision making (Horn
and et.al., 2015). It is useful in managing business in a responsible manner and is useful
in proposing effective action plan.
 Monitoring of the business performance: One of the key prominent purpose which is
linked with the purpose of budgeting is that it is relevant in measuring the actual
performance of the company with that of forecasted business performance. It helps in
determining the cause of deviation and take necessary action.
Determining the main benefits to form a limited company and list it on stock exchange.
Limited company in turn is considered to be as one of the second most effective way to
effectively set a business within UK. Business structure of the limited company is considered to
be prominent for the individual to effectively create the business as the separate entity
(Kengatharan, 2016). Any business lability and debt is mainly paid by the business and not the
shareholder or the owner of the company.
 Tax efficient: It is considered to be as one of the prominent advantage associated with the
limited company in order to be tax efficient (Malenko, 2019). It is also significant in
effectively maximizing the tax free income.
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 Limited liability: It is considered to be significant in effectively offering limited set of
liability associated with the business owner. It is significant in protecting the personal
finances and assets.
 Separate legal entity: Within the eyes of law limited company is considered to be as a
separate legal entity. The director of the T- shirt limited liability company will not have
any attachments associated with the action of the company apart from the shares of
organization.
Listing of the company on the stock exchange demonstrates that the shares of the company
has been significantly listed upon the stock exchange (Nurullah, and Kengatharan, 2015). The
mart value of the company which tends to fall below a critical set of levels can be delisted by the
stock exchange. The key benefit associated with listing of the company on a stock exchange
significant in gaining access to the capital for future growth. It is also considered to be useful in
enhancing liquidity as well as the visibility. It is prominent in effectively complying with
specific regulatory norms and is relevant to ensure transparency in order to carry out operations
(De Souza and Lunkes, 2016). Liquidity is prominent in giving shareholders effective set of
opportunity to realize key value of investment. Listing of the company on the stock exchange is
useful in increasing the transparency and more of the employees. Increasing the visibility is
considered to be prominent in improving the perception of the public in relation to the company
and it is useful in increasing the morale and value of the employees within the T- shirt limited
company.
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REFERENCES
Books and Journals
Choi, J.H., 2018. Accrual accounting and resource allocation: A general equilibrium
analysis. Available at SSRN 2977082.
De Souza, P. and Lunkes, R.J., 2016. Capital budgeting practices by large Brazilian
companies. Contaduría y Administración, 61(3), pp.514-534.
Eulner, V. and Waldbauer, G., 2018. New development: Cash versus accrual accounting for the
public sector—EPSAS. Public Money & Management, pp.1-4.
Gigli, S. and Mariani, L., 2018. Lost in the transition from cash to accrual
accounting. International Journal of Public Sector Management.
Goel, D., 2016. The earnings management motivation: Accrual accounting vs. cash
accounting. Australasian Accounting, Business and Finance Journal, 10(3), pp.48-66.
Horn, A and et.al., 2015. The use of real option theory in Scandinavia's largest
companies. International Review of Financial Analysis, 41, pp.74-81.
Kengatharan, L., 2016. Capital budgeting theory and practice: a review and agenda for future
research. Applied Economics and Finance, 3(2), pp.15-38.
Kobayashi, M., Yamamoto, K. and Ishikawa, K., 2016. The usefulness of accrual information in
non‐mandatory environments: The case of Japanese local government. Australian Accounting
Review, 26(2), pp.153-161.
Malenko, A., 2019. Optimal dynamic capital budgeting. The Review of Economic Studies, 86(4),
pp.1747-1778.
Nurullah, M. and Kengatharan, L., 2015. Capital budgeting practices: evidence from Sri
Lanka. Journal of Advances in Management Research.
Online
Cash Basis Accounting vs. Accrual Accounting. 2020. [ONLINE]. Available through<
https://bench.co/blog/accounting/cash-vs-accrual-accounting/ >
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