Financial Management Report: Felix Pearls Profit and Loss Statement

This report presents a financial analysis of "Felix Pearls", a new privately-owned venture, examining its financial viability and providing data to support strategic business decisions. The analysis includes a Profit and Loss Statement for the company's first year, incorporating projected monthly purchases, sal...Read More

University of Cumbria
Masters of Business Administration
CRKC7003: Financial Management
Interim Assessment Paper:
FELIX PEARLS PROFIT AND LOSS STATEMENT
Student ID: 1553206
This work is entirely my own, except where the words or ideas of other writers are specifically
acknowledged according to accepted citation conventions; there is no plagiarism.
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Table of Contents
Executive Summary......................................................................................................................1
Target Market...............................................................................................................................2
2.0 Analysis of Felix Pearls Proposed Business Venture.........................................................2
3.0 The Profit and Loss Statement..........................................................................................4
Breakeven Analysis (as per excel calculations)............................................................................5
Balance Sheet...............................................................................................................................6
Cash Flow Statement...................................................................................................................7
Financial Health Indicators...........................................................................................................8
4.0 Conclusion.........................................................................................................................9
References..................................................................................................................................10
ANNEX I: FELIX PEARLS INVENTORY REGISTER FOR THE PERIOD JANUARY 1 TO DECEMBER 31,
2020...............................................................................................................................................11
ANNEX II: FELIX PEARLS PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED DECEMBR 31,
2020...............................................................................................................................................12
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Executive Summary
Financial Management helps business owners and managers in the decision-making process
(McLaney and Atrill, 2016). To do this, financial information must be collected, analyzed and
communicated to ensure that informed business decisions are made (McLaney and Atrill, 2016).
The purpose of this paper is to undertake a financial analysis of a new privately-owned venture
known as “Felix Pearls”. The information provided herein will provide data to assess the
financial viability of the company in order to set targets and allow Felix to make strategic
business decisions for the survival of the company. Moreover, the Profit and Loss Statement
(P&L Statement) is presented for the company’s first year in operation using monthly projected
purchases, sales, and expenses as provided contained herein. The aim is to determine the
financially feasible of the company to sustain operations beyond its first year of operations.
Felix Pearls appreciates a pool of experienced and talented staff and a wide market in
Switzerland and the equivalent is relied upon here because of the uniqueness of the pearls
it will offer. They have a comprehensive, concentrated basic leadership which includes all
the staff at key, strategic and operational level. The section technique was propelled by
business hole in the monopolistic idea of the main Pearl Industry in Switzerland since 2012
with little upgrade of the products and enterprises.
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Target Market
Felix’s business venture encompasses the purchasing of undrilled pearls from Tahiti to be sold in
Zurich, Switzerland. The findings in the P&L Statement show that in order for Felix to meet the
market demand at the end of year 1, there is need to maintain monthly sales of approximately 14
percent. The company however, would undergo a loss within the first six months of operations
and would break-even in month seven. Nevertheless, Felix Pearls would recognize a gradual
increase in net income of over two thousand dollars monthly beginning from its seventh month
of operation.
2.0 Analysis of Felix Pearls Proposed Business Venture
Felix has decided that he will import undrilled pearls from Tahiti to maintain his planned
business venture in Zurich. As mentioned in the case study, single, undrilled pearls sell for an
average of XPF $14,800 in Tahiti. However, Orohena Pearls in Tahiti has agreed to sell one
undrilled pearl to Felix at 35% discounted rate of XPF $14,800.00. In addition, shipping fee of
XPF $1,800.00 is to be paid for delivery of the pearls to Zurich, where they would be drilled and
sold as a finish product. XPF $1.00 is approximately CHF $0.01 (Coin Mill Currency Converter
Online, 2019). Therefore the cost price to purchase one undrilled pearl inclusive of insurance
and freight is CHF $1620. Felix has decided to sell each pearl at CHF $270.00, a profit margin of
57.7%.
Also the company has borrowed the amount of the loan in order to increase the capital and
expand the business. Felix took a loan of 75000 @ 6% of the interest rate thereby creating
the debt to the equity ratio of 0.083. Further, the debt factor would help the company in
taking the tax advantage on the interest amount. Hence, the long term debt shall be availed
by the Felix. The loan would also help the company in making the alignment between the
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proportions of the funds acquired. The amount of the loan is minimal, but as the business
tends to grow the amount is going to fluctuate.
In other to ensure the company maintains adequate stock levels to supply customers, the
idea of maintaining stock on hand of approximately four weeks of projected sales is
commendable. For this purpose Felix buys a rack and the special safe costing CHF 5700
along with the small room for CHF 850 cost to store the pearls in the safe manner. An
alarm system will also be introduced in order to monitor the storage and the safety of the
pearls. As the case explains, a shipment would take three weeks to reach Zurich from Tahiti.
Therefore, having adequate stock levels would supply customers in the following month should
there be any delay in receiving stock for the following months.
Felix has undertaken a market research and the findings show a monthly demand for 250
undrilled pearls in Switzerland. Schmidt, S. (2016) explains that market research is useful in
obtaining a holistic view of the target market which serves to inform decision-making.
Felix has also decided to create a website since his intention is to sell pearls online only.
Research shows that one advantage of online retailing is that it increases sales and profits for
businesses much quicker than physical entities (Hudson, M. 2018). Nevertheless, in addition to
Felix’s online small business, he would be supplying Paula with 30 pendants monthly at CHF
$170.00 from the start of business on January 1, 2020, which would mean an additional annual
income of CHF $61,200.00, approximately 39.4% of the company’s annual Net Profit.
Whilst only 30 pearls would be sold in the first month of operations, a gradual increase in
monthly online sales of approximately 14 percent is anticipated to reach the company’s target of
250 pearls by the end of the first year. Assuming most expenses remain fixed except for bank
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charges and interest fees, using the figures provided in the P&L for December 2020, Felix is
expected to receive net income of approximately 44.82 percent monthly starting from December
2020.
3.0 The Profit and Loss Statement
Generally delivered month to month, this is an outline of salary and costs for your business.
The Profit and Loss proclamation will advise you whether your business profited for the
month under audit.
The first step in preparing the Profit and Loss Statement for the Year January 1 to December 31,
2020, was to prepare an Inventory Register (presented in Annex 1) for the period in question. In
doing so, the amount of stock required to be purchased monthly would be determined to meet the
projected sales target of 250 pearls by the end of year 1. The writer assumes monthly projected
sales of approximately 14% if Felix is to meet this target. Therefore, the projected Gross Profit to
be realized at the end of year one operations is CHF $155,382.15 assuming no discounts, sales
returns, or allowances during the period.
In preparing the P&L, expenses associated with the functioning of the business are considered.
These includes monthly rates for telephone and internet, utilities (water, electricity and gas),
stationery and printing fees, repairs and maintenance to plant and equipment, motor vehicle
expenses, among others. Stationery and printing fees will remain low as most of the sale
transaction will be done online. Assuming the company expenses the amount spent on market
research as equal portions during the first year of operations, a projected mount of CHF $750.00
is paid monthly.
Based on the projected sales for the year and the expenses to operate the business as shown in the
P&L Statement in Annex II, it is clear that Felix would operate at a loss within the first six
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months of operations even whilst he explores a loan facility in the amount of CHF 75,000.00 at
the start off business in January 2020. This option however presents an increase in liability to
the business. However, the business still seems viable since Felix would still be able to break
even in the seventh month of operations. CHF $900,000 invested into the business as owner’s
equity at start up would allow Felix to have available cash in order to stay afloat during the first
six months of operations (Dewachter, Iania, Lyrio and de Sola Perea, 2015).
Breakeven Analysis (as per excel calculations)
BREAK EVEN ANALYSIS
Warehousing Costs(5700*12) 68,400
Rent Expenses (850*12) 10,200
Rent Deposit 2,550
Full Time assistant salary (3600*2*12) 86,400
Part time assistant (350*12) 4,200
Interest expenses (6% *75000) 4,500
Total Expenses
Credit Card Charges (1.2% *1,58,400) 1,901
Total 178,151
Breakeven Point
Fixed Assets 178,151 203529
Contribution ratio (1-variable costs/sales) 0.88
-19,751
The breakeven analysis is the technique which makes the businesses figure out the
approximate amount of the sales they are required to make in order to achieve the no
profit, no loss situation. Currently the break even sales in dollars are $203529, which again
indicates a situation where the company would earn the zero profits. It is necessary to
maintain the breakeven to avoid any drastic losses in the business (Harding, 2017).
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Balance Sheet
A balance sheet is a preview of what a business claims (assets) and owes (liabilities) at a
particular point in time. An accounting report is typically finished toward the end of a
month or financial year and is a pointer of the monetary soundness of your business.
A balance sheet is formed up of three areas:
Assets – cash, inventory, current assets
Liabilities – loan from the bank, suppliers
Proprietor’s value/ owner’s Equity– Retained earnings and capital
OROHENA PEARLS
TAHITI
Projected Balance Sheet for the First Year of Operations
As At December 31, 2019
PARTICULARS Year 1
Assets
Current Assets:
Cash 1013566.00
Inventory (100*12*0.009*9620) 790560.00
Total Assets 1804126.00
Liabilities and Capital
Outstanding expenses 113566.00
Long term loan 75000.00
Paid-in Capital 900000.00
Retained Earnings 715560.00
Total Liabilities and Capital 1,804,126.00
In order for Felix Pearls to meet its projected sales target of 250 pearls by December 2020, the
company would need to maintain stock in hand of 500 pearls during the month of December
2020. At the close of December 31, 2020, Felix Pearls closing stock will be 250 pearls which
will be carried over to January 1, 2021 as opening stock, enough to maintain the market demand
for the month, whilst the company places its next order.
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The Inventory Table shows that the total projected sales for the first year of operations ending
December 31, 2020 is CHF $401,736.95. One can also see that the projected annual Cost of
Goods Sold (Purchases) for that same year for undrilled pearls excluding shipping fees is CHF
$210,335.79. Felix has decided in the first instance to absorb the cost of CHF $15.00 to ship each
the pearl to his customers in Zurich. Nevertheless, this will be an expense to the company and
must be accounted for as part of the selling cost of the pearls. This means Felix will spend an
approximate of CHF $24,334.00 in shipping fees. Likewise, a projected annual cost of additional
material (silver chains and clasps) to produce the pendants will total CHF $11,700.00 (Williams
and Dobelman, 2017).
Cash Flow Statement
OROHENA PEARLS
TAHITI
Projected Cash Flow Statement for the First Year of Operations
As At December 31, 2019
Income Year 1
Sale of Carvings 158,400
Additional Cash Received(Loan) 75,000
Subtotal Cash Received 233,400
Expenditures
Fixed Expenses 178,151
Variable Expenses -19,751
Subtotal Cash Spent 158,400
Net Cash Flow 75,000
Retained Income 715,560
Cash Balance 790,560
The cash flow analysis will give the relative information of the inflow as well as the outflow
of the cash. The monthly presentation have been provided in the excel sheet. The cash flow
is basically prepared to understand the movement of the cash in the both potential as well
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as non-potential areas. In the present situation the cash is being realized from the sales. The
expenditure or say the inflow of the cash is quite huge especially in case of purchasing the
inventory. Moreover, as of now the business has the low fixed assets but as it grows the
business will require some of them. The cash have been taken as CHF 900000 to invest in
the business and the thereafter it reached to CHF 1013566. This though indicates that the
company is trying to improve and move in the same direction; however the company
requires few initiatives to roll back (Bastos, Kamil and Sutton, 2015).
Financial Health Indicators
Analysis KPI Formula
How much sales are to be attained to cover all the
expenses? Breakeven Analysis
Fixed Assets/
Contribution margin
ratio
Does the business is working towards the
profitability?
Gross profit margin
Net profit margin
Gross profit/revenue x
100
Net profit/revenue x 100
Is the business surrounded by too much of debt? Debt to Equity ratio Debt/ Equity
Will the business be able to face the economic
recession? Debt to equity ratio Debt/ Equity
Whether the business is capable enough to settle
down the expenses? Liquidity ratio Current
liabilities/current assets
How much working capital must be retained in the
business? Working capital ratio Current assets/current
liabilities
Whether the stock is moving at the fast pace or not? Inventory turnover Closing stock/COGS x
365
How many days are required by the customers to
pay their bills? Inventory turnover Closing stock/COGS x
365
The quick movement of the invoices Accounts payable
turnover
Accounts payable/COGS
x 365
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Control of the high expenditure Expenses ratio COGS/revenue
4.0 Conclusion
In conclusion, Felix Pearls would be a viable business opportunity since profits would out weight
expenses by month seven and would continue to rise in the following months, assuming sales
remain constant and realizing annual net income of 44.82% annually commencing from the end
of January 2021. Hence forth, it is recommended to not to accept the idea as would be costly and
the by the time it reaches the seven month the costs are piled up.
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References
McLaney, E. and Peter, A. (2016), Accounting and Finance: An Introduction. 8th ed. Pearson
Prentice Hall, USA
CoinMill (2019) The Currency Converter [online] Available at:
https://coinmill.com/CHF_XPF.html#XPF=1
[Accessed on 12 June 2019]
Schmidt, S. (2016) Five Benefits of Market Research Reports [online] Available at:
https://blog.marketresearch.com/5-benefits-of-market-research-reports
[Accessed on 12 June 2019]
Hudson, M. (2018) The Balance Small Business [online] Available at:
https://www.thebalancesmb.com/selling-online-retailing-storefront-alternatives-2890252
[Accessed on 13 June 2019]
Bastos, M.F.R., Kamil, H. and Sutton, M.B., 2015. Corporate Financing Trends and Balance
Sheet Risks in Latin America. International Monetary Fund.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book
Chapters, pp.109-169.
Dewachter, H., Iania, L., Lyrio, M. and de Sola Perea, M., 2015. A macro-financial analysis of
the euro area sovereign bond market. Journal of Banking & Finance, 50, pp.308-325.
Harding, S., 2017. MBA management models. Routledge. California
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ANNEX I: FELIX PEARLS INVENTORY REGISTER FOR THE PERIOD JANUARY 1 TO DECEMBER 31, 2020
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ANNEX II: FELIX PEARLS PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED DECEMBR 31, 2020
12