Williams limited Management report

Executive Summary

William Company limited is considering some options in an attempt to increase revenue. The reason being William has been facing a cashflow problem. The company depends so much on its parent company in South Africa. To solve the cash flow problem, the company wants to invest in a new Software known as an advanced suite. The software cost is 9 million and will generate annual cash flows. Secondly, the company wants to open a new Drop-In Center in London. The company will sell the advanced Level package (ALP) and Entry-level Package (ELP) in the new centre. The costs and estimated sales for April, May, June and July are available. The company will invest 6,000 as startup capital and will get a loan of 21,000 with an interest rate of 3.5%monthly. The report outlines some methods that are used to analyze the investments such as Investment appraisal methods, cash budgeting and breakeven analysis. The methods will evaluate the company to determines its position and performance during the period. Since William Company Limited has been relying on the parent company, the paper looks at some sources of finding a company can have.

Table of Contents

Executive Summary. 2

Introduction. 4

Literature review.. 4

Sources of Funding. 4

Investment appraisal 7

Cash budgeting. 7

Breakeven analysis. 8

Evaluation. of 10

Reference. 12

Appendix. 13

Introduction

Williams Limited Company  is attempting to

Literature review

The accounting models play a vital role the company evaluate its performance and profitability. Williams limited company analysis on three accounting models, namely; Break-even analysis, budgets and investment appraisal methods.

Break-even analysis model will help Williams to determine at what stage the new product it intends to invest in will generate profits. In other words, it will be able to repay the initial cost of capital. Analysis of this model helps businesses make the right decisions and enjoyable experiences for long-term planning, thus leading to the growth of the company.

Investment appraisal method is a significant evaluation method that values projects that companies want to invest in to determine if they are worth to be invested in them. This model has techniques which include; payback period, accounting rate of return, internal rate of return, net present value and profitability index. In the case study of Williams company based on the analysis, the project they want to invest in is worth and also viable.

Budgets are core for all business activities successfully. They allow the company’s management to concentrate on its cash flows, minimizing expenses and maximizing profits and returns from their investments. Williams limited company budget will enable them to make spending plan of the funds, ensure the funds are sufficient, to cater for their day to day activities. The analysis will help them track their position financially and make reasonable strategic long-term goals.

Sources of Funding

Companies need to raise funds both externally and internally to help them invest and expand their businesses. Williams limited company can consider the following sources of funding;

Retained earnings

Williams limited company to consider holding part of their profits to help them invest and grow their business activities.

Advantages

1. They are cheap to get since they are interest-free.
2. There’s no dilution of the company’s ownership.

• They are flexible.

Disadvantages

1. Retained earnings are not reliable since a business can make a loss
2. Sometimes shareholders receive any dividends and hence less retained earnings for the business to grow.

Borrowing

The company can opt to take bank loans and through issuing of debts known as corporate bonds.

Advantages

1. Some banks offer low-interest rates
2. Loans are flexible especially loan to established companies

• Loans can help a business to grow

Disadvantages

1. High-interest rates.
2. They are tough to qualify.

• If the company defaults to repay it leads to bankruptcy.

Equity funding

The management to consider selling part of the company’s shares to investors will help them raise funds.

Advantages

1. Less burden to the company in terms of interests or periodic payments
2. No credit record required

Disadvantages

1. Dilution of ownership control.
2. They Share of profits among all the shareholder.

Angel investors

The company management to consider searching for a group/individual who is wealthy seeking for investments to invest in their company; this is funding such as crowdfunding which is done online where they will contribute a pool of funds.

Venture capital

Seek to attract investments funds from investors that take a pool of funds from their customers to invest in their business.

Advantages

1. The company Huge network connections in the business world.
2. Has no obligation to repay the venture capitalists.

• Angel investors are a great opportunity for the company to grow.

Disadvantages

Dilution of ownership control.

1. The venture capitalist may redeem the investment in a short period.
2. The venture capitalist tends to expect high returns on the investment.

• The process to get this source of funding is tedious and complicated.

Government funding

The company should be highly competitive to get financing in the form of subsidies and grants that are usually available in aide range of varieties.

Advantages

1. The company is not required to repay the funds.
2. They are available to investors in a wide range

Disadvantages

• They are short term.
• They restrict the funds they offer to a specific line of projects only.
• Highly competitive, making them hard to get.

Williams limited company should consider increasing their sales by raising their revenues which will reflect on the overall profits. Williams limited company management should consider sourcing their funds internally rather than external sources because of their sufficient and efficient. The company also to take funding such as government funding which are free and an added advantage to them to expand their enterprise efficiently. Williams company management manages their funds efficiently through; preparing budgets, set clear goals and objectives, track their expenses and profits and invest wisely.

Investment appraisal

Investment appraisal is a process of assessing an investment project seeking its attractiveness by analyzing its profitability and risk. The method helps evaluate and compare different investments which are worth for investors to invest. The model plays a core role in business investment successes. The appraisal is carried out by the various methods namely;

Net present value

This method considers that the amount of money changes with time, therefore, it takes into consideration factors affecting time value of money, i.e. interest rates.Net current value is used in making budgets and planning of investments to analyze the profitability of the investment. Williams company has a net present value of 11,490,745 pounds, this value is positive, thus indicating the viability of the project. In other words, this suggests that the earnings realized from the investment exceeds the cost in the present pounds.

Payback period

This method assesses the time Williams will take to repay the original capital cost used in the project. The project William wants to invest in is excellent as the payback period is3.29 years, implying that it will manage to repay the initial cost of capital within its project lifetime.

Accounting rate of return

The method compares profits that the company generates by the cost used in the investment project. It helps determine if the project is worthwhile by analyzing their benefits and comparing different investment proposals. The company’s accounting rate of return is 58.6% this implies that the investment is worth being undertaken.

Internal rate of return

This method assesses the risk likely to be associated with the project; it helps determine the worth of undertaking the project. The technique helps measure the value of an investment that an investor seeks to invest. Williams limited the company’s internal rate of return is 41%

Profitability index

Profitability index is an appraisal method that compares the cost and benefits likely to arise of an investment. The technique measures the profitability of the investment and ensures that the management makes a proper decision.

Table 1. Investment Appraisal calculations

Cash budgeting

Table 2. Cash Budget.

From the table above, it is clear that the company will not have enough cash to run the activities of the company. The company had negative ending cash for all the three months. This means that the cash flow of the company is not good. Fixed and variable costs are too high to help the company make profits.

Breakeven analysis

Table 3. The expected sales for the company in units and cash amount for the three months.

Willian Limited expects to sell 132 units of the advanced level package and 308 units of Entry-level package. The total expected units’ sale for the four months is 1320 (396 ALP and 924 ELP). Entry-level package is expected to generate total revenue of £277,200 which is more than the £158,400 revenue generated by Advanced level package. The total expected revenue at the end of the period is £435,600.

Table 4. Fixed costs

The total fixed costs associated with both products is £140,985. However, each product has its associated fixed cost. ALP has a fixed cost of £59,500, and ELP has a fixed cost of £48,180. The fixed costs that are not associated with either of the product but the company is £33,305. Advanced Level Package has a higher fixed cost compared to Entry Level Package.

Table 5. Variable costs

The monthly variable costs are £88,440 totalling to  £265,320 for the entire period. ALP is expected to have a variable cost of £23,760 monthly, and ELP is expected to have a variable cost of £64,680 monthly. The total variable costs for ALP and ELP are £71,280 and £194,040 respectively. Entry-level package has high variable costs compared to Advanced level package.

Table 6. Gross margin

The expected Gross margin at the end of the period is 39%. The advanced level package is expected to have a gross margin of 55% while Entry-level package is expected to have a gross margin of 30%. Entry Level Package has a higher gross margin compared to the Advanced Level Package. Having considered the sales, fixed costs and variable costs, the total expected profit is £29,295.

Table 7. Total Break-even units and amount

Williams expects to breakeven after selling 1,093 units which are composed of 30% ALP and 70% ELP. The company will break even after it generates a revenue of £360,659. It will take the company to generate the amount of more than two months and hence the company will breakeven in June.

Table 8. ALP breakeven units and sales

By selling Advanced Level Package, the company can breakeven by selling 488 units with a revenue of £168,736.

Table 9. ELP breakeven Units and sales

By selling the Entry Level Package, the company can breakeven after selling 679 units with a revenue of £271,617. This breakeven point is high compared to the ALP breakeven point.

Figure 1. Cost Profit Volume Graph

Figure 1 is a graph of Cost profit Volume (CPV) for the two packages. The breakeven point in the graph is where the Sales line intersects with the total cost line. The left side of the point indicate that the company is making a loss in the number of units it sells. The right side shows that the company is making a profit in the number of units it sells. The breakeven unit’s sale is 1,093 units, and the breakeven sales amount is £360,659.

Evaluation

An investment in a new Software for the company is the best Idea. The company generates a positive Net present value of £8,150,000 for all the cash flows for year 1-5. Also, the company has a high internal rate of return (IRR) of 41% and an Accounting rate of return (AAR) of 58.6%. The Software Investment will pay back in 3.29 years before the end of the project. The company should venture into the software project to generate sustainable cash flows.

The company’s expected performance during April, May and June is good especially when

Management consideration for profits

Many companies consider very many options as they try to increase company profits. There is a say that you must spend money to make money. However, this is just a theoretical expression. Williams’s company has a great potential in making profits, especially with the new projects. One of the well-known ways of increasing profits in a company is cutting down expenses and increasing sales. The gross margin for the company for the ALP and ELP product is 39%. This means that variable expenses take 61 % of the sales revenue. The company need to reduce expenses in the company to increase profits. The Expenses entailing fixed costs and variable costs are high; that is why the company is making little profit. A company can have huge sales and lower profits because of highly variable and fixed costs. The company has to also venture in profit-making activities that will ensure that it does not rely on the parent company for cashflows.

Reference

d’Amato, M., & Kauko, T. (2017). Appraisal methods and the non-agency mortgage crisis. In Advances in Automated Valuation Modeling (pp. 23-32). Springer, Cham.

Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance. McGraw-Hill/Irwin.

Godsey, L. D. (2010). Economic Budgeting for Agroforestry Practices (2010).

Appendix

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