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

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 periodically 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

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

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 from 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

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 rateMany companies use a combination of debt and equity to finance their businesses, and for such companies. The cost of debt financing (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

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 companys 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

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 borrowing
from 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 draw
financial 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, owners equity and 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.

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
firms sale production. Responsibilities for increasing the products 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

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 thats 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.

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

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 profit 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 companys financial performance. Financial statements are also important
to a companys 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 doesnt 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.

Task-3
3.2 Unit Costs and Pricing Decisions
Unit cost for Mercury PLC by using Marginal costing
Direct Cost
Raw Material

11P

Distribution cots

9P

Other direct costs

1P

Profit margin

21P

Profit (15%)

3P

Selling price

24P

Unit Cost for Mercury PLC by using Full cost plus pricing

Raw material

11P

Distribution costs

9P
1P
3P

Other direct costs

Overheads
Total cost

24P

Profit (15% )

4P

Selling price

28P

An unit cost is a a unit of product or service in relation to which costs are ascertained (BBP learning media 2010 Pg. 165)There are three unit
costs in every business: fixed costs, variable costs and opportunity costs. But some businesses dont 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 cant 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

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 companys decision makers have to think
about the non-financial factors and financial statement for the budgets.

Budget for Mercury PLC are as follows,

Q1

Q2
(

Sale

11850

Purchase

72000

G-profit

46500

Expenses

30550

Drawings

30000

111000-118500
)
118500
x 100
=( 6 % )
73500-72000
(
)
72000
x 100
=( 2 % )
37500-46500
(
)
46500
x 100
=( 19% )
44600-30550
(
)
30550
x 100
=( 19% )
45000

Q3
(

113500-111000
)
111000
x 100
=( 2 % )
62000-73500
(
)
73500
x 100
=( 16 % )
51500-37500
(
)
37500
x 100
=( 37% )
27450-44600
(
)
44600
x 100
=( 38% )
15000

Q4
(

137000-113500
)
113500
x 100
=( 20 % )
92500-62000
(
)
62000
x 100
=( 49 % )
44500-51500
(
)
51500
x 100
=( 14% )
20300-27450
(
)
27450
x 100
=( 26% )
45000

Task 5
3.3
Mercury plc has a proposed project to set up a yogurt plan. The plant will cost 1.5 m pounds to build and has an expected life of six years. As
Mercury has not produced yogurt before, heave initial advertising will be needed, leading to a negative cash flow in year one. As a financial
advisor I have to assess the variability of the yogurt plant project using investment appraisal techniques.
Investment appraisal technique
Investment appraisal technique is evaluating the profitability or desirability of an investment project. Investment appraisal is undertaken by
using quantitative and qualitative techniques. At investment appraisal technique has many methods to use: Accounting rate of return (ARR),
payback period method, net present value method (NPV), and internal rate of return (IRR).
Accounting rate of return (ARR)
The average rate of return (ARR) processes the annual profitability of an investment as a percentage of the initial investment.
Payback period
The payback period is the length of time it takes for net cash inflows to pay back the original capital costs of the investment.
Net present value
The net present value is also known as the discounted cash flow. It measures the value of the estimated cash flows resulting from an
investment.

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

Pay Back

flow
0

(1.5)

(1.5)

(0.25)

(1.75)

0.5

(1.25)

0.75

(0.5)

0.75

Nil = 0.5x12

=8 months

0.75
5

0.75

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.

Net Present Value at 15 %

Year

Cash flow

Discount factor

Present Value

(1.5)

(0.25)

0.870

(0.2175)

0.5

0.756

0.378

0.75

0.658

0.4935

0.75

0.572

0.429

0.75

0.497

0.37275

0.25

0.432

0.108

(1.5)

0.06375

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

Net Present Value at 20 %

Year

Cash flow

Discount factor

Present Value

(1.5)

(0.25)

0.833

(0.20825)

0.5

0.694

0.347

0.75

0.579

0.43425

0.75

0.482

0.3615

0.75

0.402

0.3015

0.25

0.335

0.08375

(1.5)

0.18025

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

NA

= A+ N -N (B-A)
A

0.06735

= 15+ (0.06735+0.28025) (20 15)

= 16%

Accounting Rate of Return (ARR)

ARR

Average Profit

= Initial investment 100

=

1.256
1.5

100

=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 companys 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 owners equity like as stock, share capital and so on, The balance sheet is also used by the Government agencies 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.

Cash flow is the net change in companys 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.

4.2 Formats of financial statements for different types of business

Income Statement for the sole trader for the year ended 2014
$
Sale

$
xxx

Less: Cost of sale

Opening Stock

xxx

Purchase

xxx

-Closing Stock

(xxx)
(xxx)

Gross Profit

xxx

Add: Income
Discount Received

xxx

Income Received

xxx
xxx
xxx

Less: Expenses
General Expenses
Wages and Salaries

xxx

Bad Debt

xxx

Depreciation of fixed assets

xxx
xxx
(xxx)

Net Profit

xxx

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

Working Capital

(xxx)
xxx

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.

Balance Sheet for Partnership as at 31 December 2014

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

Capital A

xxx

Capital B

xxx

Current A

xxx

Current B

xxx

Add: Long term liability

xxx

Loan

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

Net Profit before tax

xxx

Less; tax

(xx)

Net profit after tax

xxx

Retain profit

xxx
xxx

Less: Preference share dividend

Interim preference share dividend

xxx

Proposed dividend

xxx
xxx

Less: Ordinary Share dividend

Interim ordinary share dividend

xxx

Proposed dividend

xxx

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

Ordinary share capital

xxx

% of preference share capital

xxx

Share premium

xxx

General reserves

xxx

Retain Profit

xxx

xxx

Add: Long term liabilities

xxx

Debenture

xxx

xxx
xxx

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

August

September

xxx

Xxx

xxx

Purchases

xxx

xxx

xxx

Wages and other expenses

xxx

xxx

xxx

Rent

xxx

xxx

xxx

Utility fer /es

xxx

xxx

xxx

Bank interest

xxx

xxx

xxx

Total cash outflow

xxx

Xxx

Xxx

Opening cash balance

xxx

xxx

Xxx

Net cash flow

xxx

xxx

Xxx

Closing cash balance

xxx

Xxx

Xxx

Cash Inflows
Cash Sales
Cash Outflows

4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external
2010
Gross profit Margin

Gros sProfit
100
Sale

188869
100
917491

21%

=22%

25442
100
917491

34372
100
886204

3%

Net profit Margin

Netprofit
100
Sale

ROCE

PBIT
100
Total capaitalemoloyed

2011

=
=17%

33616
100
(163412 38402)

198749
100
886209

4%

49102
100
(139627 55637)
=25%

174604
100
337016

Liability Ratio

100

Gearing ratio

Total debts
100
Capitalandreserve

Borrowing Ratio
Total borrowings
Net worth

=52%

17464
100
163412
= 52%

174604
= 1.08: 1
16242

190384
100
330011
= 58%

190384
=
107%
100
139627

58%

190384
= 1.36: 1
139627

PBIT
Interest cover = Interestcharge

33616
990

= 34 times

Current ratio

current asset
:1
current liabilitie
s

Quick ratio

current asset- stock

: 1
current litbilitie
s

94779
:1
136202

= 0.70 : 1

94779 - 11478
: 1
136202

49102
1285

= 34 times
38 times

93847
: 1
134747

0.70:= 1 1 : 1

93847 - 12493
:1
134747
=

= 0.61: 1
=

Debtor Turnover

365

Creditor Turnover

365

0.60 : 1

75991
365
917491

76587
365
886209

=30 days

=32 days

115283
365
740100
= 57 days

118823
365
699953

= 62 days

Stock Turnover

365

11478
365
728622
= 6 days

12493
365
687460
=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. Debtors collection time is at around 30days in 2010and 32 days in 2011. It is better
than previous year, and credits 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

cover ratio shows whether a company is earning profits before interest and tax to pay its interest cost or its interest are high 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 companys interest costs are to be considered within acceptable limits.

Industry Average for 2010

Mercury PLC for 2010

Industry Average for

Mercury PLC for 2011

2011
Gross Profit

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

Margin

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

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 industrys 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

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.
Debtors 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.

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