DD MFR Submitted File

8/19/2019 DD MFR Submitted File

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Task-1

I have been appointed as the CFO of M&M Company. Currently M&M organization is considering expanding the business. I have to analyze

sources of finance to CEO (Chief Executive Officer). M&M Co, ltd is SMEs. Normally, SMEs often have difficulties in raising finance. So this

report is about sources of finance, costs of different sources of finance and implications of finance etc. In addition, it is also discuss about

information for different decision makers and impact of finance on the decision making.

1.1

Sources of finance available to a business

For small business, there are three sources of finance;

Borrowing from bank

Other ways of borrowing(factoring, invoice discounting, leasing, hire purchasing and franchising)

Government aid

Borrowing from bank

To extend the business or set up a business, the business can borrow from the bank. There are three types of bank. They are clearing banks

and retail bank and wholesale banks. Clearing banks are the banks which operate the so-called cleaning system for settling payments. The

retail bank is used to describe the traditional high street banks. The wholesale banks refer to banks which specialize in lending in large

quantities to major customers. The clearing banks are involved in both retail and wholesale banking but are commonly regarded as the main

retail banks. Then, the merchant banks offer service to corporate customers. (BPP, 2010)

Other ways of borrowing


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Factoring: Factoring companies are financial organizations that will finance the receivables of businesses that need to accelerate payments for

merchandise that has been sold to customers but not yet received. The factoring companies take total control of the accounts receivable and

cannot look back to the customer if some of the invoices are not paid. After the factor buys the receivables, the seller's customers can be

notified to remit the payment to the factor, or the customer will manage the receivables and per iodically remit the receipts to the factor.

Ehow.com (©2013)

Invoice discounting-is similar to factoring and many factors will provide an invoice discounting service. Invoice discounting is the purchase of a

selection of invoices, at a discount. A business should use invoice discounting when it has not permanent cash shortage.

Leasing- is a form of rental. It includes lesser and lessee. A lease is an agreement between two parties, the lesser and lessee. The lesser owns

an asset, but grants the lessee use of it. The lessee hires the asset, and return to the lesser within the limited time and in return makes

payments to the lesser.

Hire purchase (HP )-is a form of borrowing whereby an individual or business purchases goods on credit and pays or them by installments. The

benefits of hire purchase are that a business can get assets now but needs to pay within a period of time. A business can reduce its costs and

cash flows accurately with Hire Purchase Finance. Hire Purchase is fairly simple to arrange and a useful alternative to borrowing from a bank.

Franchising- franchisor has a successful business and instead of establishing branches under its own name it licenses franchises. The franchises

actually run the business, employing staff as necessary. The franchises are trained before starting. Their premises are fitted out with the

appropriate equipment and decor. They must usually buy most or all of their trading stock and other supplies from the franchisor. They benefit

considerably from the marketing and advertising of the franchisor.(BPP, Pg-49, 2010).

Government Aid


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The Government keen to that business should start up and business because successful business provides employment and create wealth for

the country. The grant is usually a sum of money given to an individual or business for a specific project or purpose. BBP Media (©2010)

Sources of Finance for larger business

Share capital

Retained Earnings

Share capital- A share capital is the portion of a company's equity obtained by trading stock to a shareholder. The amount of share capital

present on balance sheet reports only accounts for the initial amount for which the original shareholders purchased the shares from the

issuing company. Any price differences arising from depreciation as a result of transactions in the secondary market are not included. (BPP

Media@ 2010)

Ordinary share- refers to the company's capital, which can be in form of money paid for ordinary shares. It is also, that portion of equity that is

received by trading stock to a shareholder for an equal item of capital or for cash. For instance, a company can exchange office furniture with

share capital instead of buying the furniture directly from the existing equity. (n.a, what is ordinary share capital , 2014)

Preference share- Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders,

preference share shareholders usually do not have voting rights. There are four types of preference shares: Cumulative preferred, for which


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dividends must be paid including skipped dividends; non-cumulative preferred, for which skipped dividends are not included; participating

preferred, which give the holder dividends plus extra earnings based on certain conditions; and convertible, which can be exchanged for a

specified number of shares of common stock. (investopeda.com)

Retained Earnings-The part of profits which is undistributed provides a common means of raising funds from shareholders. The funds belong

to shareholders and, if not retained, would be distributed as dividends.

1.2The implications of the different sources

Advantages of factoring is that a small business owner would expect it can be solved the cash flow problems. Factoring facility provides

immediate cash advances based on invoices raised, this means the business will always have cash in the bank. Small business factoring offers

alternative funding to small business owners who rely too much on overdrafts and business loans. A good factoring facility will make cash flow

more predictable. Disadvantages of factoring is that factoring is only for business to business trades and Factoring companies are usually more

aggressive at collecting debts and this may upset customers. (n.a, factoring helpline, 2014)

Advantages of leasing are that renting fixed assets costs is usually lower than buying the premises. The business may claim lease payments as

business expenses. Flexibility relocation is easier than depending on selling the property. A disadvantage of leasing is that rent money does not

contribute to business assets or capital growth. We cannot claim depreciation on the actual building.

Advantages of hire purchase is that hire purchase enables a business to have the use of an asset without immediately paying the whole cost of

it. Hire purchase firm rely entirely on the credit worthiness of their customers and do not require any collateral security f rom them.

Disadvantages of Hire purchase is that there is no doubt to the fundamental fact that when a business undertaking acquires assets whether on

hire purchase or on lease. Its main purpose is to employ them for productive purposes. Although goods bought on hire purchase provide an


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opportunity to the business undertaking to become its owner ultimately, it is less appealing than leasing.(Textbook of business finance by

Ashiq Hussein, Pg-40)

There are advantages to using retained earnings as a form of finance is that absence of costs simplicity and flexibility costs. All gains from

investment will still ultimately belong to existing shareholders. There are disadvantages is that shareholders expectation of dividends may

present a problem and insufficient earnings may be available (BPP, Pg-40, 2010)

Other implication of the source of finance is bankruptcy.

Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. All of the debtor's assets are

measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of

bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy. Bankruptcy offers an individual or

business a chance to start fresh by forgiving debts that simply can't be paid while offering creditors a chance to obtain some measure of

repayment based on what assets are available. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons

and businesses another chance and providing creditors with a measure of debt repayment. (investopedia.com)

2.1 Costs of different sources of finance

Interest rate-

Many companies use a combination of debt and equity to finance their businesses, and for such companies. The cost of debt fin ancing (loans)

is interest. The cost of equity financing (investments) could include dividends or a share of the profits. Comparing the two may involve a cost of

capital calculation and analysis. If the business can obtain loans from different banks, compare the interest rates and payment terms they

offer. The company wants to determine the total interest cost over the life of each loan to have a comparable base. Small differences in the


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interest rate can add up to significant amounts over a long-term loan. Keep in mind that short-term unsecured loans, such as lines of credit,

generally carry a higher interest rate than long-term secured loans, such as mortgages.

Opportunity costs- The cost of an alternative that must be forgone in order to pursue a certain action. The benefits we could have received by

taking an alternative action. The opportunity cost of going to the class is the money we would have earned if we worked instead.

Dividends in cash-The amount of dividend paid is up to company’s management, within certain legal constraints. However, shareholders

usually expect the amount they receive in dividends to increase over time and to be reasonably consistent from year to year. For some

investors dividends are significant a source of income as a salary is for an employment. (BPP,Pg-49)

Scrip dividends-Sometimes, instead of paying out dividends in the form of cash, a company pays them in the form of new shares. These are

called scrip dividends.

Share premium- A share premium is a type of business account which appeared on a company balance sheet. The purpose of the account is to

provide payments received by a shareholder for shares issued, when those payments exceed the actual cost of the share.

1.3Evaluate the appropriate sources of finance for a business project

For M&M travels and tours Company, we should choose selling the shares and borrow from the bank to expand the market.

Selling the shares

We can increase finance to improve business very quickly and easily. We can raise our capital by selling ordinary share and preference

share. We have to notice that if we sell ordinary share the shareholders have the authority and involved in decision making process. So that we

have to aware not to sell more than 50 percent share. Issuing preference share we only need to pay normal interest rate

Borrowing from the bank


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We can get great amount of money whenever we want. Bank does not take any ownership position in business. Bank never involved in running

a business to which a bank grants loan. The interest on business bank loan is flexible. In addition, interest rate that does not change during the

borrowing period. It can support for business to budget and plan for monthly loan payments. On the other hand, we need to pay interest

monthly and need to show financial statement and profile of our company. Above these facts, I want to recommend choosing that borrowingfrom the bank and selling shares.

2.2 The importance of financial planning for our business

The importance of financial planning is that financial planning is a systematic way of organizing the company in the most effective and

efficient to get the goals. It can help to achieve the short and long-term financial goals and manage income more effectively through forecast

planning. To know how much money our company need for buying asset, payment labor and expanses. The outflows will increases than

inflow, our company need to reduce the expenses. And then, we can forecast successful and failure of the business if the company drawfinancial statement. The result of the company get negative, we can reduce our expanses and buying power as much as possible. Financial

planning requires a good analysis of business current liabilities, owner’s equityand the amount of money to get. Financial planning in any

business is very importance. A good business need to plan to get better result in financial statement. Planning the financial statement by

accountant, the owner and BOD will know easily profit at the business and they can also know the expenses of the organization. The

accountant might draw the financial statement such as income statement, balance sheet and cash flow. Those are very important for the

organization because if the company needs finance, they can easily know where they can get it or they should do it or not. So all the business

planning to know about it, they try to know about income, cash flow, capital, financial understanding, assets, financial security, investment,

saving etc. And it is also very important on family security and standard of living. If the company is not planning the financial statement, they

will get trouble for that and unfortunately lack of planning makes the company bankrupt.


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2.3The information needs of different decision makers

Nowadays, company need information to entry on the market and become a top in th e market. Therefore, companies need to create

information that supports business performance. If we survive for a long term success, we need to know all of information concerning with

business. Decision making is essential role for the company. If the decision markers decide mistake, it can negatively impact on business. For

example, the net profit get losses, projects are not successful and so on. There are more decision makers in relevant place if the business is big.

There is lot of managers for company such as sale manager, investor, banker, employee and regulator. Decision makers are those participants

who decide on a course of action. In a sense, every participant is also a decision maker. Each participant decides how much to be involved,

what priority it has in relation to other activities, what to expect, and what resources which means money, time, resources to provide. All

decision makers have to think about those non-financial factors before they decide something. Those non-financial factors are legal issues,

ethical issues, regulation changes, political issues, personnel issues, etc. The most important issues is political issues because if the political is

not stable in the country, the decision makers might get trouble to think.

Sale Manager

Sale manager arrange the business discipline which is focused on the practical application of sales techniques and the management of

firm’s sale production. Responsibilities for increasing the product’s demand and guide a team of sale person. Sale manager need to know the

amount of competitor products, how to promote and advertise their product, the customer needs, wants and demands.

Investor


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The reason of preparing financial statements is to provide investors. For limited liabilities companies there is distant between

ownership and day to day management of companies. Therefore financial statements are the medium through which report from managers to

owners or investors. Investors have the interest in the company and have the biggest risk in the business that’s why they are worried about the

performance or profitability of the company. Investors also look at if the company is generating cash flows that are sustainable.

Banker

Bankers are mainly interested in getting paid back their money. Bankers paid most of their attention on the balance sheet that they can

use to look at the financial strength or weakness of the company. If the balance sheet weak in working capital problems, it can be viewed as a

warning to the bank.

Employee

The duties of the employees are to work for a profitable company. Employees are also interested in job security of the company so that

interested in financial stability of the company. Employees are likely to be interested in profit and loss account and balance sheet of the

company.

Regulator

Tax office or government regulators have an interest in the financial statements because they want to ensure that the company is

paying its fair share of taxes. Relevant regulators will want to avoid what happened to the financial industry whose performance led to

significant debt being transferred to the tax payers or the state.


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2.4The impact of finance on the financial statements

There are three types of financial statements,

Balance sheet

Cash flow statement and

Income statement

Cash Flow statement

Cash flow statement is also one of the financial statements for our business. Creating a statement of cash flows is a rather straight forward

task. A statement of cash flows can easily be order to accomplish all that has what our future income and expenses will be. This is why the

statement of cash flows can be considered the important of financial plan. Cash flow statement presents only cash flow and inflow of the

business.

Balance sheet

Balance sheet is one of the three primary financial statements, which can be used to assess the financial condition of a business. The primary

function of the balance sheet is to showcase the financial stability of the company at a point of time. Balance sheet shows the financial

position of the business which includes assets, liabilities and capital.

Profit and loss income statement


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A financial statement measures a company's financial performance over a specific accounting period. It also shows the net profit or loss

incurred over a specific accounting period, typically over a fiscal quarter or year. Financial statement presents the p rofit and loss of the

organization which means that financial performance. It includes net Sales, gross profit, net profit etc. Finance statements provide various

financial information that investors and creditors use to evaluate a company’s financial perf ormance. Financial statements are also importantto a company’s managers because by publishing financial statements. Different financial statements focus on different areas of financial

performances. (Bank, 2014)

Knowing the financial statements, the business will know about their financial process and operation process clearly. And then will know how

to impact on their business. It can impact on the stock price because if the business gets more profit and can run continually, they might get

profit so that the stock share price will be increased. If the business doesn’t get profit they guess, the share price will be decreased. And then

the CEO can set the financial decisions after knowing financial statements. They can plan to expend their business and products line. In our

company, current assets are more than enough for the organization. There might have idle stock and cash, if the organisation has like idle

stock and cash, it can impact on the profitability. So they can those stocks by giving promotion and they can invest the idle cash in their own

business or the other company. For our company, there has less liability so that the organisation can purchase the raw material by taking

credit from the suppliers.


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Task-3

3.2 Unit Costs and Pricing Decisions

Unit cost for Mercury PLC by using Marginal costing

Direct Cost

Raw Material

Distribution cots

Other direct costs

11P

9P

1P

Profit margin

Profit (15%)

21P

3P

Selling price 24P

Unit Cost for Mercury PLC by using Full cost plus pricing

Raw material

Distribution costs

Other direct costs

Overheads

11P

9P1P

3P

Total cost 24P


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Profit (15% ) 4P

Selling price 28P

An unit cost is a ‘a unit of product or service in relation to which costs are ascertained’ (BBPlearning media 2010 Pg. 165)There are three unit

costs in every business: fixed costs, variable costs and opportunity costs. But some businesses don’t use the opportunity costs in their

organization. The owner of company always does which costs are suitable for them. Fixed cost is that part of cost which does not vary with the

level of activity or volume of production. (Ex. direct material cost, direct labor cost) Variable cost is that part cost which varies with the volume

of production or level of activity. (Ex. indirect labor cost, production overhead cost). All the pricing decisions are depend on those costs. The

decision makers will think how much did they spend when they produce the products and how much did they invest in it after they calculate

the percentage of overall costs and mark up those products. And then they have to think about products life cycle. At the introduction, most of

the company will launch their products with cheap prices and suitable prices if the market is perfect competition market. At the growth state,they will set the price by controlling the quality of the products. Monopoly market, the owners can make pricing decision whatever they want.

But the monopolistic competition market can’t do like pricing decision, they have to know the competitors weakness and control the quality

after set the price. Pricing decision can different depend on the segmentation, targeting and positioning.

To make pricing decision company must know what pricing strategy is best and suitable with the business. The company needs to research the

relevant information to make pricing decision. Company can get the financial information by looking at the financial statements of the

business, by making some marketing, by asking questionnaire to the customer directly about how they think of the business.

Pricing will be different according to the supplier payment. If the company has low cost of raw material from suppliers, the company can

decide the lowest price of the product easily. Company can use these various types of pricing strategy to make the pricing decision. The


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differential pricing is same product can be sold to different customers with different prices. Full cost plus pricing is determined by the full cost

of producing the product make-up with the profit [BPP textbook].

Task 4

3.1 Analyze Budgets and make appropriate decisions

A budget is basically a plan expected of income and expenditure for a set period of time.

There are (5) types of budgets. There are Sale budgets, resources budget, materials purchases budgets, overhead budgets. Most of the

decisions were based on the budget. Budgeting include people from sales department, production department, material requirement

department, HR department. When making a budget for a product it depend on how the product is produce, how much material need to

produce, how much time did the labor need to work for the product and how it will be sell on shops. Every money spent on the production of

the product adds to the budgeting plan. So the company will know how much profit does the product is going to make.

In the business, there have many decision makers according to their position so that Mercury PLC has different decision makers. All decision

makers decide for the budgets for the organisation. Financial managers are the most influence at the financial statements. All the finance and

budgets is depended on the finance statement they draw. When the marketing department claims sale and promotion budgets for them and

the finance department will give them to the budgets. The budgets can change anytime and anywhere because of non-financial factors. All

decision makers have to think about those non-financial factors before they decide something. The company’s decision makers have to think

about the non-financial factors and financial statement for the budgets.


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Budget for Mercury PLC are as follows,

Q 1 Q 2 Q 3 Q 4

Sale 11850( 111000-118500

118500)

x 100

=( 6 % )

( 113500-111000111000

)

x 100

=( 2 % )

( 137000-113500113500

)

x 100

=( 20 % )

Purchase 72000(

73500-72000

72000)

x 100

=( 2 % )

(62000-73500

73500)

x 100

=( 16 % )

(92500-62000

62000)

x 100

=( 49 % )

G-profit 46500(

37500-46500

46500)

x 100

=( 19% )

(51500-37500

37500)

x 100

=( 37% )

(44500-51500

51500)

x 100

=( 14% )

Expenses 30550(

44600-30550

30550)

x 100

=( 19% )

(27450-44600

44600)

x 100

=( 38% )

(20300-27450

27450)

x 100

=( 26% )

Drawings 30000 45000 15000 45000


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Internal rate of return (IRR)

Internal rate of return is calculating the rate of return which is expected from a project and comparing the rate of return with the cost of

capital. (BBP learning media Pg. 248)

Payback Period

Year Cash Flow Cumulative Cash

flow

Pay Back

0 (1.5) (1.5) -1 (0.25) (1.75) 1

2 0.5 (1.25) 1

3 0.75 (0.5) 1

4 0.75 Nil = 0.5x12 =8 months

0.75

5 0.75

6 0.25

Payback period is 3 years and 8 months. According to the payback period this company should invest because payback period is too short.


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Net Present Value at 15 %

Year Cash flow Discount factor Present Value

0 (1.5) 1 (1.5)

1 (0.25) 0.870 (0.2175)

2 0.5 0.756 0.378

3 0.75 0.658 0.4935

4 0.75 0.572 0.429

5 0.75 0.497 0.37275

6 0.25 0.432 0.108

0.06375

According to the net present value method, the project should be invested because the project gets positive.


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Net Present Value at 20 %

Year Cash flow Discount factor Present Value

0 (1.5) 1 (1.5)

1 (0.25) 0.833 (0.20825)

2 0.5 0.694 0.347

3 0.75 0.579 0.43425

4 0.75 0.482 0.3615

5 0.75 0.402 0.3015

6 0.25 0.335 0.08375

0.18025


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Internal Rate of Return (IRR)

A = lower discount rate

B = higher discount rate

NA = NPV at lower discount rate

NB = NPV at high discount rate

IRR = A+NA

NA-NB (B-A)

= 15+ 0.06735

(0.06735+0.28025) (20 – 15)

= 16%

Accounting Rate of Return (ARR)

ARR =Average Profit

Initial investment ×100

=1.25÷6

1.5×100


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=14%

Task 6

4.1 Main Financial Statements

An income statement or profit and loss account is one of the financial statements of a company. It shows the company’s revenue and

expenses during one year. It shows the sale of products or services before expenses are not include. The main target of income statement is to

show managers and investors whether the company profit or loss money during the period. The balance sheet shows that the company has

assets and liabilities. The differences between assets and liabilities show the net worth of the business. The net worth of the business is

importance because it can measure the time of the business is expected to stay in financial power. The balance sheet also shows the business

with information how to pay its debts and what ways is the best. On the other hand, the manager of business in marketing decisions regarding

the purchase of equipment for the business. Business changers depend on the balance sheet to analyze whether buying equipment on debt is

the right move for business at the times. And then, it needs to concern the best source of credit for the business at that time. The balance

sheet also shows the owner’s equity like as stock, share capital and so on, The balance sheet is also used by the Governmentagencies make

sure that the business is complying with the set laws. It also provides information to any potential lenders of the business on the credit

worthiness of the business.


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Cash flow is the net change in company’s cash position from one period to the next. If the company takes in more cash than outflow, the

company has a positive cash flow. If the company negative cash flow, the company have more cash outflow than inflow. Cash flow is a key

indicator of financial health. Cash flow is importance because it can help manager in planning financial requirements. Action could be taken to

prevent the negative cash flow. If negative closing balance is expected, the manger should to reduce cash outflows. When the manager

borrows money to buy building, equipment and inventory, company essentially use future cash flow to make the purchase. Company

commonly has long term loans and short term credit accounts with vendors. To investors, cash flow is main importance to invest their money

in company.


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4.2 Formats of financial statements for different types of business

Income Statement for the sole trader for the year ended 2014

$ $

Sale

Less: Cost of sale

Opening Stock

Purchase

-Closing Stock

xxx

xxx

(xxx)

xxx

(xxx)

Gross Profit

Add: Income

Discount Received

Income Received

xxx

xxx

xxx

xxx

xxx


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Less: Expenses

General Expenses

Wages and Salaries

Bad Debt

Depreciation of fixed assets

xxx

xxx

xxx

xxx

(xxx)

Net Profit xxx


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Balance Sheet of Sole Trader as at 31 Dec 2014

Fixed Assets Cost Acc Dep NBV

Building xxx xxx xxx

Motor Vehicle xxx xxx xxx

xxx

Current Assets

Stock xxx

Debtors xxx

Cash in hand/Cash at bank xxx

Total current assets xxx

Less: Current Liability

Creditors xxx

Bank overdraft xxx

Total Current Liability (xxx)

Working Capital xxx


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Total net assets less current liability xxx

Financed by

Capital xxx

Net Profit xxx

-Drawing (xxx)

xxx

Add: Long-term Liability – Bank Loan xxx

xxx

Income statement for the partnership account is the same with sole trader but at the balance sheet, there have different at part of finance by.

After knowing income statement, people have to show the ‘Appropriation Account’ and ‘Current Account’ to know the profit percentage for

each partner. Finally, balance sheet makes them to know the working capital at the business.


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Balance Sheet for Partnership as at 31 December 2014

At the Balance Sheet, there might be different at the “finance by “

$ $

Capital –A

Capital –B

Current –A

Current –B

Add: Long term liability

Loan

xxx

xxx

xxx

xxx

xxx

xxx

xxx

The company financial statement is more complex than the other. They need to explain about the ordinary share, preference share, share

capital and reserve fund. The income statement is actually the same with net profit before taxation. After, they get net profit before taxation;

they need to show their financial work at the “appropriation account”. The following statement is showing net profit after taxation


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$ $ $

Net Profit before tax

Less; tax

xxx

(xx)

Net profit after tax

Retain profit

xxx

xxx

xxx

Less: Preference share dividend

Interim preference share dividend

Proposed dividend

xxx

xxx

xxx

Less: Ordinary Share dividend

Interim ordinary share dividend

Proposed dividend

xxx

xxx


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xxx

Less: Transfer to general reserve xxx

(xxx)

Retain Profit xxx

After calculating Net profit, the company needs to pay taxes to government. After that, add the retained earning to net income. And then, the

company divided shares dividend to interim dividend before not to give the proposed dividend. The retain earning that less transferred to

general reserves and goodwill can calculate the company finance


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$ $ $

Ordinary share capital

% of preference share capital

Share premium

General reserves

Retain Profit

Add: Long term liabilities

Debenture

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx


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The cash flow statement is the same in soletraders, partnership and the company

July August September

Cash Inflows

Cash Sales xxx Xxx xxx

Cash Outflows

Purchases

Wages and other expenses

Rent

Utility fer /es

Bank interest

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

xxx

Total cash outflow xxx Xxx Xxx

Opening cash balance

Net cash flow

xxx

xxx

xxx

xxx

Xxx

Xxx

Closing cash balance xxx Xxx Xxx


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4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external

2010 2011

Gross profit Margin

100 Sale

ProfitGross

=

100

917491

188869

= 21%

=

100

886209

198749

=22%

Net profit Margin

100 Sale

profitNet

=100

917491

25442

= 3%

100 886204

34372

= 4%

ROCE 100 emoloyed capaital Total

PBIT = 100

38402)163412(

33616

=17%

100 55637)139627(

49102

=25%


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Liability Ratio

× 100

174604

337016× 100

=52%

190384

330011× 100

= 58%

Gearing ratio

100 reserveand Capital

debts Total

= 100 163412

17464

= 52%

=100

139627

190384

= 58%

Borrowing Ratio

Total borrowings

Net worth

174604

16242= 1.08:1

190384

139627= 1.36:1


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Interest cover = charge Interest

PBIT

=990

33616

= 34 times

= 1285

49102

= 38 times

Current ratio

1 : sliabilitie current

asset current

= 1 : 136202

94779

= 0.70 : 1

=1 :

134747

93847

= 0.70: 1

Quick ratio

1 : slitbilitie current

stock-asset current

= 1 :

136202

11478 - 94779

= 0.61: 1

=

1 :

134747

12493 - 93847

= 0.60 : 1

Debtor Turnover

× 365

75991

917491× 365

=30 days

76587

886209× 365

=32 days

Creditor Turnover

ℎ× 365

115283

740100× 365

= 57 days

118823

699953× 365


35/39

= 62 days

Stock Turnover

× 365

11478

728622

× 365

= 6 days

12493

687460

× 365

=7 days

For Mercury PLC , compared with internal ratios 2010 and 20122, Gross profit margin has increased significantly 21% in 2010 to 22% in

2011 at the same time Net profit margin has increased from 3% in 2010 to 4% in 2013, because the company uses a little expense in these two

years. The return on capital employed has increased from 17% in 2010 to 25% in 2011 which means company is in good situation. The

company current ratio is 0.7:1 in both Year 2010 and 2011. It means that the company has enough current assets to pay off its liabilities. Both

current ratio and quick ratio can show the liquidity of the company position. Quick ratio in the company is 0.61:1 in Year 2010 and 0.60:1 in

Year 2011. It means that the company is in the good position to pay off its debts. As a liabilities ratio, 51.81% has increased to 57.69% so that

we can say that business has decreased at 2011. The level of gearing has improved from 52% in 2012 to 58% in 2013. It reveals that the

company can pay their long term liabilities during this year. Debtor’s collection time is at around 30days in 2010and 32 days in 2011. It is better

than previous year, and credit’s period collection was around 57days in 2010 and 62 days in 2011. About these facts, the company had long

period to pay creditor and they can use cash flow cycle effectively. Stock turnover has risen from 6 days in 2010 to 7 days in 2011. The interest


36/39

cover ratio shows whether a company is earning profits before interest and tax to pay its interest cost or its interest are h igh in relations to the

size of its profit. An interest cover of the company is 34 times in 2010 and 38 times in 2011. Interest cover should be exceeding 3 times before

the company’s interest costs are to be considered within acceptable limits.

Industry Average for 2010 Mercury PLC for 2010 Industry Average for

2011

Mercury PLC for 2011

Gross Profit

Margin

20% 21% 18% 22%

Net Profit Margin 2% 3% 3% 4%

ROCE 20% 17% 22% 25%

Liability Ratio 50% 52% 50% 58%

Gearing ratio 18% 52% 18% 58%

Interest Cover 40 times 34 time 40 times 38 times

Current Ratio 2:1 0.70:1 2:1 0.70:1

Quick Ratio 1:1 0.61:1 1:1 0.60:1


37/39

By comparing external analysis of Mercury PLC, GP margin is increased from 2010 to 2011, GP margin of Mercury PLC is higher than

industry average in both 2010 and 2011. But in 2011, the industry average and GP margin are significantly different between 18% and 24.3%. It

may be due to increase in sale. The NP margin has increased from 3% to 4% and is now slightly faster than the industry average around 2 to 3

%. ROCE (Return on capital employed) is lower than industry average in 2010 and higher than industry average in 2011.The level of gearing has

inclined significantly from 52% in 2010to 58% in 2011 is above the industry average of 18%. The level of gearing is higher than the industry

average. Since the Return on capital employed is nearly twice the rate of interest on the loan stock, profitability is likely to be increased by a

modest increase in the level of gearing. Liabilities ratio is marginally higher than industry average. Interest cover is lower than the industry

average. And then time interest earned is really reduced than industry’s norm. The current ratio is slightly fall than the industry average. It is

much lower than the industry average of 2:1. And then, the acid test ratio of 1.9:1 has 0.60:1. It is also in line which averages the industry

financial ratios 1:1 above these suggest that the company has less short term liquidity problems and less money to pay the debtors. Stock

Debtor Turnover 30 days 30 days 35 days 32 days

Creditor Turnover 60 days 57 days 60 days 62 days

Stock Turnover 10 days 6 days 10 days 7 days


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turnover is much slower than industry average of 10 days in both 2010 and 2011. And this may partly reflect stocking up ahead of a significant

increase in sales. Alternatively, there is some danger that the inventory could contain certain obsolete items that may require writing off.

Debtor’s turnover period at around 30 days is not difference with the industry average of 30days in 2010 but 32 days in 2011and it is much

lower than industry average 35 days in 2011. . The period of credit taken from suppliers has 57 days purchases is much lower than the industry

average. Thus, it may be possible to finance any additional receivables by negotiating better credit terms from suppliers. This may be due to

the company is in good liquidity positions and pay discounts given to customers.


39/39

Bibliography

Bank, H. (2014, March 16). Building a financil plan for your business. Retrieved April 29, 2011, from What's on your

horizon?:http://www.blog.horizonbank.com

n.a. (2014, March 13). factoring helpline. Retrieved from advantages and disadvantages of factoring: www.factoring help line.co. uk

n.a. (n.d.). small business factoring . Retrieved from factoring help line.co.uk.

n.a. (2014, March 16). what is ordinary share capital . Retrieved from ask.com: www.ask.com

Ehow.com.2013. Managing Finance (Online)Available at: http://www.ehow.com/about_5084478_definition-factoring-companies.html (1st

April 2013)
http://www.ehow.com/about_5084478_definition-factoring-companies.htmlhttp://www.ehow.com/about_5084478_definition-factoring-companies.htmlhttp://www.ehow.com/about_5084478_definition-factoring-companies.htmlhttp://www.ehow.com/about_5084478_definition-factoring-companies.html

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