Financial Analysis and Planning Report: General Sportswear

This report provides a comprehensive financial analysis of General Sportswear, a private limited company in the sportswear industry. The report begins by exploring various sources of finance, including long-term options like bank loans and equity shares, and short-term sources such as the sale of old assets. It examines the implications of these sources, considering both positive aspects like capital raising and potential drawbacks like shareholder interference. The report then evaluates the suitability of different financing options for General Sportswear, recommending leasing companies, the sale of old assets, and special financial institutions. Task 2 analyzes the costs associated with different sources of finance, including interest, dividends, and flotation charges, and emphasizes the importance of financial planning. It identifies key decision-makers and their financial information needs, including shareholders, employees, customers, and the government. Task 3 involves preparing and analyzing a cash budget for General Sportswear, recommending improvements to address income fluctuations. It also calculates unit costs using different markup methods and assesses the cost-effectiveness of each project. Finally, Task 4 covers the main financial statements, preparing different formats for various business structures, and calculating relevant ratios for Comparator, providing a holistic view of the company's financial performance.

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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
1.1 Different sources of finance...................................................................................................4
1.2 Implication of sources of finance...........................................................................................4
1.3 Evaluating the appropriate sources of finance ......................................................................5
TASK 2............................................................................................................................................5
2.1 Analyzing the costs of different sources of finance...............................................................5
2.2 Importance of financial planning ..........................................................................................6
2.3 Identifying main decision makers and assessing their financial information needs..............6
2.4 Impact of finance on financial statements.............................................................................7
TASK 3............................................................................................................................................7
3.1 (a) Preparing and analyzing cash budget...............................................................................7
3.1 (b) Recommending General Sportswear to improve the cash budget....................................8
3.2 Calculating the unit cost in both options...............................................................................8
3.3 Assessing the cost of each project.........................................................................................9
TASK 4..........................................................................................................................................10
4.1 Main financial statements of company................................................................................10
4.2 Preparing different financial statement formats for different businesses............................11
4.3 Calculating ratios for Comparator.......................................................................................15
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................19
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Illustration Index
Illustration 1: Format for sole trader..............................................................................................11
Illustration 2: Format for partnership firm.....................................................................................14
Illustration 3: Format for public limited organization...................................................................15
Index of Tables
Table 1: Cash budget.......................................................................................................................7
Table 2: Costing of both options......................................................................................................8
Table 3: Net present value method..................................................................................................9
Table 4: Accounting rate of return.................................................................................................10
Table 5: Payback............................................................................................................................10
Table 6: Ratio analysis...................................................................................................................16
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INTRODUCTION
The management of financial resources is the crucial task which gives upward direction
to business and assists corporation to carry out all business activities effectively. Present report is
based on General Sportswear a private limited company which provides wide range of products
and services in sportswear. Further, report cover sources of finance by which company c an raise
its fiance in order expand in the marketplace. This will also be helpful in reducing the financial
burden of corporation and support in opening its new outlet. In addition to this ratio analysis of
corporation also done for assessing the performance of company for particular time span.
TASK 1
1.1 Different sources of finance
There are different sources of finance which can be used by General Sportswear. This
includes both long term and short term sources.
Long term sources
The long term sources available to business includes leasing companies, special financial
institutions and bank. Here, bank loan makes it possible to provide long term loan to meet the
specific requirement of business (Allen and Economy, 2011). However, high cost of financial
creates barriers for the firm. On the other hand, issue of equity share is also the effective aspect
of raising long term finance. Furthermore, special financial institutions provides monetary
sources by assessing the information related to project plan.
Short term sources
The short term sources of finance includes sale of old assets, retained profit and personal
saving of owner. This proves to be effective in operating business with high rate of return.
However, these sources meet only short term requirement of business through which company
can maintain its flow of production. Under this, personal saving is imperative aspect wherein
money can be arranged in less time span so as to meet the purpose of business (Bloodgood,
2006).
1.2 Implication of sources of finance
The implication of sources of finance are considered in both negative and positive aspect.
For example issue of share is the foremost way to raise capital in the market but it indirectly
invite the interference in the managerial decision caused by shareholders. Further, retained profit
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creates opportunity cost for company because profitability can be used in the present business
activities instead of making its investment in expansion activities (Gaskell and Ashton, 2008).
Further, bank loan generate time to issue the money because of legal formalities along with
several additional charges. Also, company need to pay the cost in form of interest on right time.
Apart from this, issue of share also generate need to pay dividend on right time so as to meet the
expectations of shareholders in an effectual manner. Apart from this, special financial institutions
interfere in the operation of firm when it grant money for the expansion of the same.
1.3 Evaluating the appropriate sources of finance
There are several sources of finance which are appropriate for the business and assist
company to expand business. Here, General Sportswear can selected the following sources- Leasing companies- Under this organization can use leasing company for accessing to
highly equipped technologies (Khan and Hildreth, 2004). It will reduce the financial
burden and company can easily meet its long term requirement by expanding business in
the marketplace. Sale of old assets-The short term source of finance as sale of old assets is the effective
form of raising finance. Under this, General Sportswear will sale its old assets which are
not more in use but has value in monetary term. It aids to provide some amount for the
expansion of business (Cesarotti, Silvio and Introna, 2009).
 Special Financial Institutions-this is the most appropriate source of financial for General
Sportswear where company will access get total amount of money to be required to
expand the business. This source provide immense support for the firm.
TASK 2
2.1 Analyzing the costs of different sources of finance
There are several cost of finance which need to be considered by corporation while
accessing the same. It consists of interest, dividend and floatation charges which are paid on
issue of shares. Also, non-monetary cost is occurred while taking bank loan or issuing shares.
This is because taking loan from bank is long process which take extensive time (Burke and
Wilks, 2006). On the other hand, interest is paid on debentures bank and for leasing company
also if the assets is purchased. It increases financial burden for a certain time span if General
Sportswear is not making profit. Furthermore, dividend is paid on shares. However, it depends
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on the profitability of corporation. For example if an organization is earning enough profitability
then it can pay dividend to equity shareholders. Apart from this, issue charges, flotation cost are
paid while issuing shares. In addition to this, legal charges are also paid for taking loan and
accessing finance through special financial institutions (Ledgerwood and White, 2006).
2.2 Importance of financial planning
Financial planning is not the way opt give upward direction to business but also serve as
the key role behind success of business. This is because corporation plan out each and every
activity by forcing on financial resources to be required in business for the present as well future.
Further, General Sportswear can schedule all business activities according to budget so as to
reduce the cost of production and enhance overall rate of return (Verbeeten, 2011). Similarly,
financial planning makes it possible to access cost effective sources of finance which leads to
enhance the sales turnover and create competitive edge of the corporation. Furthermore, resource
allocation process is completed with the help of financial planning thereby General Sportswear
can achieve specified objectives in an appropriate manner. Apart from this, financial planning
proves to be effective in determine certainty fro future business activities and accordingly
competitive edge of the same can be ensured.
2.3 Identifying main decision makers and assessing their financial information needs
There are several decision making who require detail information regarding company and
play active role in decision making process. The first one is shareholders who invest money and
take part in board meeting of General Sportswear (Milner and Rosenstreich, 2013). The second
one is employees who make efforts to carry out business. Here they need to assure about their
future growth and security at workplace. The third one is customers for whom General
Sportswear deals in Sport related products and services. They are internal stakeholders who play
active role in growth and success of the organization. Apart from this, competitors are involved
who require that other companies perform in an ethical manner. IN addition to this, government
is also important stakeholder who imposes several kind of rules and regulation related to ethical
conduct and taxation which need to be taken into account by company.
2.4 Impact of finance on financial statements
a)Cost of different financial statements are shown in different financial statement according to
specific format. Here, interest and commission are shown in profit and loss account. On the other
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hand, all direct expenses are included in the trading account. Apart from this, payment of loan is
shown in cash flow statement whereas increase in capital amount is transacted in balance sheet
(Nguyen, 2010).
b) According to the International Accounting Standard assets and liability of company must be
equal. For example if General Sportswear access to bank loan then it will increase the assets side
by enhancing the cash balance. On the same time, it will increase liability. Apart from this, cost
of loan will be shown in profit and loss account which again reduced profitability and have
impact on liability side of firm
TASK 3
3.1 (a) Preparing and analyzing cash budget
The budget of General Sportswaer has been prepared as follow which consists of detail
information regarding surplus and deficit of an organization. Here, cash budget for corporation
has been prepared as follows in accordance with income and expenses-
Table 1: Cash budget
Months Jan. Feb. Mar. Apr.
Receipt £50,000 £8,740 £7,900 -£1,860
Sales £11,340 £20,160 £21,840 £23,360
Total (A) £61,340 £28,900 £29,740 £21,500
Payment
Purchase £1,200 £12,100 £13,100 £14,100
Expenses £9,400 £6,900 £8,500 £9,900
Salary to store
manager £2,000 £2,000 £2,000 £2,000
Capital
expenditure £40,000 £8,000
Total (B) £52,600 £21,000 £31,600 £26,000
Deficit/
surplus(A-B) £8,740 £7,900 -£1,860 -£4,500
The above cash budget depicts that income flow of Sportswear is varying to a great
extent. In the month of January company is having £8740 income which then reduced to 7900 in
month of February. After that sales revenue of company has increased in month of March but the
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deficit of corporation is also there 1860. In addition to this, income of company went down by
4500.
3.1 (b) Recommending General Sportswear to improve the cash budget
According to the above cash budget it has been found that General Sportswear is having
high profitability at the initial stage but the same has been decreases in the following months. It
depicts that additional expenses of corporation is the main reason behind downturn of
profitability (Zoubi and Al-Khazali, 2007). Owing to this, organization need to provide training
to its workforce so as to carry out business in an effectual manner. In addition to this, quality
standard can be followed whereby prices can be increased to earn greater profitability by
covering cost.
3.2 Calculating the unit cost in both options
The unit cost of product are calculated as follows in accordance with 30% mark up on
cost price and 25% on return on capital-
Table 2: Costing of both options
Cost 30% mark-up on
cost price
25% on return on
capital
Direct Material £190,000 £190,000
Direct labour £150,000 £150,000
Prime cost £340,000 £340,000
Overheads(Fixed) £100,000 £100,000
Total cost £440,000 £440,000
Profit margin £132,000 £250,000
Sales £572,000 £690,000
Selling price/per
unit £286 £345
Above table is showing that corporation should set the price of product by putting 25%
margin on capital. It aids to increase rate of return by covering cost of production effectively. On
the other hand, £286 will be price per chair if 30% mark up is set on cost price. Therefore, option
second is more feasible for X ltd.
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3.3 Assessing the cost of each project
There are several types of investment appraisal techniques which assist Axist Ltd to
select the best project as per the cost and time taken to recover the cost. It consists of following
techniques-
 Net present value method-Under this cost of a project is calculated on the basis of future
value of project. It facilitates corporation to assess the net present value of project in
accordance with revenue (Allen and Economy, 2011). As per the following table, none of
the project is generating appropriate revenue.
Table 3: Net present value method
Years Project 1 Project 2
Present
value at
10%
PV of
project 1 PV of project 2
1 £29,000 £20,000 0.909 £26,361 £18,180
2 £32,000 £20,000 0.826 £26,432 £16,520
3 £25,000 £15,000 0.751 £18,775 £11,265
Residual
value £20,000 £15,000 0.751 £15,020 £11,265
Total cash
inflow £86,588 £57,230
Initial
investment £100,000 £60,000
Net present
value -£13,412 -£2,770
 Accounting rate of return-It is another investment appraisal technique in which
management of organization come to know about the rate of return on investment. As per
the following table it has been found that Project 2 is having comparatively high cash
flow as 5.55%. On the other hand, project 1 generates only 1.99% revenue. It shows that
project 2 is better among both. However, both are generating inappropriate return.
Table 4: Accounting rate of return
Years Project 1
Cash flow
after
depreciation
Project 2
Cash flow
after
depreciation
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1 £29,000 £2,333 £20,000 £5,000
2 £32,000 £5,333 £20,000 £5,000
3 £25,000 -£1,667 £15,000 £0
Residual value £20,000 £15,000
Depreciation £26,667 £15,000
Initial
investment £100,000 £60,000
Average cash
flow £2,000 £3,333
ARR 1.99% 5.55%
 Payback period method-Under this method a project is assessed in the light of time taken
to recover the cost (Bloodgood, 2006). Here, both of the project are having negative
return till third year. Hence, none of the project is beneficial for company as it will take
extensive time to recover the cost..
Table 5: Payback
Project 1 Cumulative cash
flow Project 2 Cumulative
cash flow
Years/Initial
investment £100,000 -£100,000 £60,000 -£60,000
1 £29,000 -£71,000 £20,000 -£40,000
2 £32,000 -£39,000 £20,000 -£20,000
3 £25,000 -£14,000 £15,000 -£5,000
TASK 4
4.1 Main financial statements of company
The main financial statements of company are balance sheet, income statement and cash
flow statement. All these statement play active role in managing business activities of
corporation. Here, income statement is the basis statement which includes all the transactions
related to sales, purchase and profitability as well as other additional expenses incurred by
corporation (Gaskell and Ashton, 2008). This proves to be effective to prepare other financial
statement of the firm. On the other hand, cash flow statement is another aspect of reflecting
business transaction related to different business activities. This includes income from operating,
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financial and investment transactions. Apart from this, balance sheet is prepared at last which
consists of detail related to liquidity, solvency and profitability of corporation. This in turn meet
the expectations of customers who are directly or indirectly engaged with operation.
4.2 Preparing different financial statement formats for different businesses
The format of financial statement are kept as per the requirement and nature of business.
Different businesses like sole trader, partnership and public limited organization. Here public
limited organization operate at broad level and it has to meet the expectations of number of
buyers. Owing to this, standard set by government are followed while preparing the financial
statement (Khan and Hildreth, 2004). For example, public limited organizations follow
International Financial Reporting Standard. On the other hand, partnership company has first
requirement to complete the ratio of each partner associated with business by preparing partner's
capital account at first. In addition to this, sole trader is single business owner who has prime
need to serve his own business. He just make simple profit and loss account for daily business
transaction.
(Source:Sole Trader Final Acounts Notes. 2015)
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Illustration 1: Format for sole trader

(Source:Dissolution of Partnership Firm. 2015)
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Illustration 2: Format for partnership firm