Oliver Santos-Edgar Student ID number: 201500836 ULMS 101 Business Exam A.) i.) - Gross Pro t margin = Gross pro t divided by revenue x 100 = £106,000 divided by £350,000 x 100 = 30.3% (rounded 1dp) - Net pro t margin = Net pro t divided by revenue x 100 = £50,000 divided by £350,000 x 100 = 14.3% (rounded 1dp) - Account receivable days = account receivables divided by revenue x 365 = £80,000 divided by £350,000 x 365 = 83 days (rounded) - Account payable days = account payables divided by costs of goods sold x 365 = £40,000 divided by £244,000 x 365 = 60 days (rounded) - Current Ratio = current assets divided by current liabilities = £250,000 divided by £166,000 = 1.5:1 ii.) Using the ratios calculated in part (i) comment on the performance of the business focusing on the cash operating cycle, giving any recommendations you have for Gold Ltd concerning management of its working capital. - As shown above in question (i), Zinc Ltd’s gross pro t margin is 30.3%, and net pro t fi ff fi fi fi fi fi fi margin is 14.3%. This shines a positive outlook on their cash operating cycle, as they have been able to generate enough pro t to reinvest in their business and expand, as well as repay their bank overdraft. Their current ratio also suggests that they have enough assets to be able to cover for their short term debts. However they have such a large inventory, that they would have to ensure they are able to sell the majority of it, otherwise they won’t be able to cover their debt. In addition, their liquidity could be improved. Their account receivable days are longer than payable days, which means for a period of time, the business is paying out money, before having received money from their receivable days payment. This makes sense why they have a loan and bank overdraft in place. I recommend the business delays their payable days until their receivable days come in to improve their liquidity. They can o er a discount/other incentives for an earlier pay date. Cash ow statements Month ended 31st of December Cash received from customers 30,000 Cash paid to employees + suppliers (14,000) Taxation paid (8,000) Net cash from operating activities 8,000 Interest received 4,000 Dividends received 20,000 Acquisition of equipment, property and plant (40,000) Net cash from investing activities (16,000) Proceeds from issue of share capital 100,000 Proceeds/(repayment) of bank loans (24,000) Interest paid (12,000) Dividends paid (6,000) Net cash from nancing activities (58,000) Increase/decrease in cash in year £25,000 C.) Explain why “cash ow from operating activities” may di er from “operating pro t”. Give examples to illustrate your explanation. - Cash ow is the actual money coming in and out of the business, whereas operating fi fi fi fl fi fi fl fl ff fl fi ff fl fi fl fi fl ff fl fl pro t is the total income after all of the expenses have been subtracted from the sales revenue. A business still can have a good/adequate cash ow and make little pro t, as well as a business can also be very pro table, but have an inadequate cash ow. Cash ow enables how much money you have at any given time, and operating pro t is a measure of how much it's making o of its products and services. For example the Net cash from operating activities is £8,000. This can be spent elsewhere in the business, like investing in more stock, better equipment etc. The net cash from nancing activities was £58,000, this is all the money they are left with after everything has been paid o (operating pro t), and can then be used in any way in the business. fi fl B.) Using the information above, prepare a cash ow statement for Copper Ltd. Ensure you use the headings: cash ow from operating activities, cash ow from nancing activities and cash ow from investing activities - Money is the most important aspect of any business, without it, the company won’t be able function and run its day-to-day activities. Cash helps grow a business; the larger the amount, the more money they have, to put back into their company (I.e. more stock, better equipment, more sta etc…). It is also used to pay suppliers, employees, leases for properties, and electricity bills. In a business scenario, lets say the account receivables are arriving late, but the companies account payables have had a reduction in days, having excess cash will enable the company to adapt to this unfortunate event, and allow them to carry on operating their business as normal. E.) Explain the accruals concept and the historic cost concept. For each concept, give examples to illustrate how these concepts can a ect the gures in the nancial statements. - The accruals concept is the record of all expenses and incomes in the speci c accounting period; it records wether the cash has been received or paid out, as well as cash amounts which are waiting to be received/paid out. All transactions are recorded, to ensure that all streams of revenue are recognised, so cash ow forecasts can be made without any inaccuracies. This is also used to re ect the economic activity in a business. For example: an airline sells tickets months and weeks in advance before the ight, but doesn’t record the payments as revenue until the ight has occurred, this is an example of how the accruals concept works. - The Historic cost concept is the theory, that assets should be shown on the balance sheet based on the cost of purchase, instead of the new and current value. If shown incorrectly on the balance sheet, the historical cost can easily be proved by looking at trade documents. For example: A property has been bought for £1,000,000. It has been recorded as £1,000,000 according to the historic cost theory, even though the market value in that particular area is rising, and is likely to be worth more in the future. 2.) ‘Discuss the value of the marketing concept to the modern business.’ fi fi fi fl fl fi fi fl ff Marketing is the process of promoting the right products and ideas to the correct audiences they are aimed at. This is all in correlation with the right promotion techniques, so the target market can provide their services in the right place, time, and price. The marketing concept is extremely valuable to the modern business, as the rise of technology, and globalisation has projected businesses into national scale; with the use of social media, advertisements are presented to us from the touch of our ngers. Technology has created access to user-based data, which are the most crucial aspect of modern marketing. This is because professionals can analyse the data, and observe their target demographics, and most/least successful products, and adapt their marketing to suit the needs of their consumers, as well as maximise pro ts. Marketing is the driving force of sales in a business. They create the exchange between two parties; the customer and the company. The customer views the advertisement on a billboard, online, on the television etc, and buys the product from the business, this is successful marketing, as the objective of the company was to promote their products, for other people to see, and ff fl D.) Explain the importance of cash to a business. then go on and purchase the product after seeing the advertisement. The way a business promotes their brand is just as important as the products they are selling. Over/ underselling a business can give negative setbacks to those who promote their company in the wrong way. As Levitt mentioned in his book Marketing Myopia, the railroad business is now in trouble as they undersold the industry. They claimed they were in the railroad business, rather than the transportation business. Ignoring the needs for customers, and focused more on their own products, they missed out on business expansion. The production concept is key into the success of any modern company. Cash is king, as well as pro t margins. Being able to sell a cheaply made product and convince customers it is worth the mark up retail price tag is very important. When marketing a product, the company will present the item in the most positive way possible; highlighting every new and unique aspect of the item which separates them from all the other competitors. This form of marketing is very e ective in industries with high economic demand, as well as markets with a very high growth potential, as they are able to meet customer demand, and also make large pro t margins. The marketing concept is very similar to this, as both concepts form around the basis of competition. The campaign made by a business, has to be made in a unique and informative way. A customer will recognise an advert, slogan, campaign etc, far more if the company has created something which ‘stands out from the crowd’. These ideas, however, can only be created through the needs and wants of the target market; as an amazing advertising campaign for a product which appeals to noone from that speci c demographic, will end up with the company losing money, rather than generating it. Technology has evolved the marketing world into a far more creative and widespread industry. Digital design, data farming, and various di erent platforms to place advertisements have changed the way businesses advertise their product; now marketing is more interpersonal and targeted at the individual far more speci cally. The social marketing concept is a new and valuable edition to modern businesses. This is the idea that companies can give back to society with better products, that are also sustainable. Using reused and recyclable materials, are very environmentally responsible in the modern era of business, and is positive for the welfare of society. Companies which are harming our environment have been held accountable, such as the fast food industry; and in the modern era businesses have to adapt to changes very quickly, due to the constant changes in society. For example Theodore Levitt talks about how Hollywood barely survived in the entertainment industry due to the evolution of television [in the book Marketing Myopia], and the misconception that Hollywood were only in the movie business, when in fact were in the entertainment business. fi ff fi fi ff fi fi fi fi ff fl One problem with the marketing concept in modern businesses, is the constant changes in society. Marketing is bene cial towards speci c industries, but once evolved, becomes ine ective. As Levitt says, industries are now endangering their own futures, as they haven’t properly de ned their purpose. Companies with low growth industries can’t in uence a new target demographic, as they are essential, but their new ideas can only improve quality of products, rather than change the industry. For example the railroad industry, as it can improve qualities of trains, but it is far more limited than the technology industry for example, as the room for growth isn’t as exponential as phones, computers, games consoles etc, in the modern business world.
