Accounting 2 Project Report: Financial Analysis of Sportech Ltd

This report presents a comprehensive financial analysis of Sportech Ltd, a shoe manufacturing company planning to diversify into a hybrid business. The analysis includes a cost statement indicating the current cost per pair and the suggested selling price to maintain a 30% profit margin. Break-even analysis determines the number of units required to cover fixed costs, while cash budgeting projects cash inflows and outflows. Financial statements, including income statements and balance sheets, assess the company's financial performance, projecting average performance initially but with potential for improvement. Capital investment appraisal evaluates the profitability of new machinery investments. The report also suggests improvements, such as managing fixed costs and increasing product demand to enhance profitability. The budgetary approach and variance analysis are discussed to forecast performance and identify deviations from the budget.

Running Head: Accounting
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Project report: Accounting

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Contents
Introduction.......................................................................................................................3
Case study.........................................................................................................................3
Cost statement and suggested sales price.........................................................................3
Break even analysis..........................................................................................................3
Cash budget......................................................................................................................3
Financial accounting statement.........................................................................................4
Capital investment appraisal.............................................................................................4
Alternative approaches.....................................................................................................4
Budgetary approach and variance analysis.......................................................................5
Conclusion........................................................................................................................5
References.........................................................................................................................6

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Introduction:
Accounting is a process and approach which makes it easier for the accountants and
the company to record all the financial transaction and makes it easier for the business to
make a batter decision about the performance of the company (Hoye, Nicholson, Westerbeek,
Smith and Stewart, 2012). In the report, a case study of Sportech ltd has been studied where
the company is planning to diversify the business and start a plant of hybrid business.
Case study:
Sportech limited is a shoes manufacturing company which is planning to product
hybrid business. In order to start the new business, company has to buy new machineries, hire
new staff members and change the process of production of the shoes. Here, the cost
statement, break even analysis, budget, cash flow statement, financial statement and capital
investment appraise methods have been applied on the new business opportunity to measure
whether it will be a profitable venture for the business or not.
Cost statement and suggested sales price:
Cost statement (refer to excel file) tool over the business explains that the current cost
of each pair is quite higher. It would cost £ 50.46 to the company to produce a pair of shoes.
If the company tries to maintain profit margin of 30 on the cost of the product then the selling
price of the shoes must be £ 65.60. Currently, the company has decided to sell the shoes in £
60 which is nearest to £ 65.6 and indicates that company can maintain the desired profit
margin.
Break even analysis:
Break even analysis tool on Sportech limited explains that the selling price and
variable cost per unit of hybrid shoes are £ 65 and £ 28.07 which indicates that the
contribution margin per unit is £ 36.93. It further explains that the fixed cost of the company
is £ 110150 (Horngren, 2009). Hence, the break even units of the company should be 2983
units. If the company would be able to sell 2983 units then only company would be able to
recover the incurred cost. The break even amount in dollars would be £ 193880 (Refer to
excel sheet).
Cash budget:

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Further, the cash budget has been calculated on the case study of Sportech limited to
measure that how much cash has been outflow and inflow in the company within a year. On
the basis of analysis, it has been found that the cash outflow of the company is bit higher than
the cash inflow of the company because of the loan repayment. However, the study defines
that the performance of the company would be better in near future because of the quality
product in competitive prices (Brigham and Daves, 2012).
Financial accounting statement:
further, the income statement, balance sheet, changes in equity etc statement has
prepared to measure the financial performance of the company and it has been found that
company will perform average in initial years but along with the time, the market share of the
company would be improved and it will help the company to be more profitable. Income
statement represents that the net profit of the company would be £ 71,539.54 at the end of the
first year (Hull, 2012). The shareholder’s equity of the company would be £ 71,539.54.
Overall financial statement of the company indicates that the performance of the company
would be average and it will attract the investors because of better performance at initial year.
Capital investment appraisal:
Capital investment appraisal process has applied further on the machineries of the
company to measure whether it will be profitable for the company to buy new machinery and
start the new production cycle or not. On the basis of net present value, it has been fund that
the company would be able to make better profits b the end of year 10. Hence, it is a better
opportunity for the company to make an investment and improve the profitability share and
market share in the industry (Kaplan and Atkinson, 2015).
Alternative approaches:
However, through the overall study, it has been found that few changes could be done
by the company to improve the performance. Fixed cost of the company is higher than the
variable cost. If the demand of the products could be improved in the market then it will
improve the profitability position and lesser the burden of the company (Krantz, 2016).
further, the management could also find some alternate to the fixed cost so that the overall
cost of the company could be reduce the net profitability level of the business could be
improved.

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Budgetary approach and variance analysis:
A budgetary control system is a process which determines various actual outcomes
along with the budgetary numbers to forecast the future performance of an organization. A
budget shows the operating plans of an organization for the upcoming period, it formalize the
management’s plan in terms of quantity to understand the future performance of the company
and the actual position of the company. Budgetary approaches forces all the management’s
level to think ahead, identify the entire future outcome and take few action to control and
remedy the possible future problems of the company (Moles, Parrino and Kidwekk, 2011). It
helps the management to set the goal and process to make it easier for the business to work
smoothly.
Variance analysis is a process which helps the organization to identify the difference
between the budgeted numbers and the actual numbers which have taken place. Variance
analysis helps the business to find the main root because of which the numbers have been
deviated than the budgeted number. Budgets could be of various types such as sales budget,
production budget, labour budget, cash budget, master budget etc. (Kraantz, 2016). Each
budget plays different role in a business to make different decisions.
Conclusion:
To conclude, financial planning over a business and the budgetary process make it
easier for the management to make better decisions. It helps the business to identify the
financial position and performance of the company in upcoming years. In case of Spartech
limited, it has been found that the performance of the business would be average in initial
year and in upcoming years, the position of the company would be better.

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References:
Brigham, E. and Daves, P., 2012. Intermediate financial management. Nelson Education.
Hoye, R., Nicholson, M., Westerbeek, H., Smith, A. and Stewart, B., 2012. Sport
management. Routledge.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Krantz, M. 2016. Fundamental Analysis for Dummies. London: John Wiley and Sons.
Hull, J., 2012. Risk management and financial institutions,+ Web Site (Vol. 733). John Wiley
& Sons.
Moles, P. Parrino, R and Kidwekk, D,.2011. Corporate finance, European edition, John
Wiley andsons, United Kingdom.