Financial Forecast:

Income Statement for the Year ended January 31, 2016
 ($ Million)
Sales              14.91
less: Cost of Goods Sold              (8.19)
Gross Profit                6.72
Less: Selling, Admin and Distribution expenses              (5.36)
Earnings before interest and tax                1.37
Less: Interest expense              (0.84)
Earnings before taxes                0.53
Less: Income Taxes              (0.21)
Net Income                0.32
Balance Sheet as at January 31, 2016
 ($ Million)
Current Assets
Cash                  0.1
Account receivable                  3.6
Inventory                  3.8
Total Current Assets                  7.5
Property, Plant and Equipment
Land, Buildings & Equipment                  1.0
Buildings                  2.8
Equipment                  0.9
Vehicles                  0.5
Total Property, Plant and Equipment                  5.2
TOTAL ASSETS                12.7
Current Liabilities
Bank Overdraft                  3.6
Accounts Payable                  1.8
Total Current Liabilities                  5.4
Long-term Liabilities
Debentures (secured on Land)                  3.5
Total Liabilities                  8.9
Shareholder’s Equity
Common Shares                  2.0
Retained Earnings                  1.8
Total Shareholder’s Equity                  3.8
Total Liabilities and Shareholder’s Equity                12.7
  1. Liquidity and Efficiency Ratios:
Activity RatiosDays of inventory365.0
Inventory turnover1.0
Average collection period88.1
Total Asset Turnover1.2
Liquidity RatiosCurrent ratio1.39
Quick ratio0.69
Working capital2.10

Activity ratios:

Days in inventory ratio reveals efficiency in the management of inventory. Days are expected to be higher here, which is not a good sign to the company.

Inventory turnover shows the inventory turns number on yearly basis. Expected to be higher here, this is not a good sign to the company.

Average collection period reveals the average span of time a company waits for sale proceeds. The period 88 days on average here is shorter one, which is favorable for the company.

The total asset’s turnover ratio of 1.2 is revealing that each $1 asset of the company is generating about $1.2 of sales.

Liquidity Ratios:


Current ratio reveals an entity’s capability of paying current liabilities utilizing the assets which are convertible to cash in a shorter time period. The ratio of 1.39 is showing that the company has $1.39 of current assets to pay the current liability of every $1.

Quick ratio reveals an entity’s capability of paying current liabilities through utilizing its quick assets. The ratio of 0.69 is showing that the company has $0.69 of current assets to pay the current liability of every $1.

Working capital ratio is showing that the company has $2.10 Million current assets in excess of its current liabilities.

  1. Amount to be paid to suppliers:

The formula for calculating the Days payable outstanding (DPO) is;

Days payable outstanding = (average accounts payable / cost of goods sold) * 365 days

Days payable outstanding = 1.8 / 8.19 * 365

Days payable outstanding = 80 Days

Therefore the current day’s payable outstanding of the company is 80 Days.

For the purpose of reducing the Account Payable to 40 Days span, the company should have to reduce the Account’s Payable to $0.9 Million, therefore;

Days payable outstanding = 0.9 / 8.19 * 365

Days payable outstanding = 40 Days

As the current Accounts Payable has the balance of $1.8 Million therefore in order to reduce the amount to $0.9 Million the Company should have to settle the accounts payable of $0.9 (1.8 – 0.9) Million to the creditor’s exceeding 40 day’s span.

  1. Impact of Increased in overdraft:

For the purpose of settling the Accounts Receivable amount from $1.8 Million to $0.9 Million, the company should have to pay $0.9 to the creditor’s exceeding 40 day’s span. Since the company is financing this payment through Bank overdraft therefore the company has to pay the additional interest charges on $0.9 Million, i.e. $0.108 Million to the Bank. Consequently the company’s earnings will also reduce by the amount of $0.108 Million.

  1. Sources of financing

The sources of finance available to the company for reducing the amount of Account’s Receivable include:

  1. Short term loans that have a small span of time, generally from a only some days to a only some months or only some years. The applicant gets the cash from the bank on a short notice, and returns the same within a limited span of time. They are quick to apply with simplicity.
  2. Debt having a Long term is a form of financing that is generally provided for a span of more than a year. Long term debt services are usually provided to those entities that face a capital shortage. The company is entitled of tax saving on the interest.
  3. Stocks that are issued to the general public. The shareholders are the owners of the business. They may be of two types:

-Equity shares and

-Preference shares
when you make issuance of stock, there is no obligation for repayment of the funds. Instead, you also have other owners to share the risk of the business investment with.

  1. Issuing Debenture to general public which are required to be secured against company’s asset’s including property.

Recommendation for picking the source of Financing is the Issuance of common stock to the public as it has there is no debt obligation, and no financial fees. Moreover no type of collateral is required for equity investment.

Maddox Smith

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