Assignment Part One (1250words)
BrightLawns Ltd (“BLL”) owns and operates three factories in London, Birmingham and Manchester producing valves and fittings for garden hoses. The company last year had turnover in excess of £50 million.
The company is managed by Simmo, the grandson of the founder. Simmo owns 25% of the shares in the company, while the remaining 75% is split between three other grandchildren.
Most of BrightLawns Ltd’s clients are large retailers in the UK and EU. Two key customers are C&P DIY Ltd and BricoFrance SA, which are both large chains of DIY and garden centres in the UK and France.
The other shareholders are concerned about the business. Although there seems to be plenty of work coming in and the last year has been reasonably profitable (Operating profit was £5 million last year before interest and tax), the company’s debt has increased to £18 million from £16 million the year before. Simmo has started talking about the need for the other shareholders to invest more money to reduce the debt.
Towards the end of last year BrightLawns Ltd acquired a 30% stake in a company that designs ornamental garden fountains and water features. BrightLawns Ltd invested £10 million in the company to acquire the shares and has agreed to pay an £8 million advance fee for exclusive use of the designs.
The company is owed £1.5 million pounds for a series of large orders placed by C&P last year. There is also an outstanding dispute about a £2 million consignment for BricoFrance completed in 2017. This has led to payment being withheld while negotiations continue between lawyers and technical specialists.
There is a further problem that Simmo believes the BricoFrance issue arose from faulty workmanship by a contractor which BrightLawns Ltd engaged in 2017. He has refused to pay the contractor who is now threatening legal action. Because this area of work has been suspended, a large stock of materials and supplies has built up at the company’s London site. Simmo insists that the company needs to have this level of stock for when the dispute is sorted out. He is also reluctant to press his key customers too hard for payment.
The other shareholders have approached BrightLawns Ltd’s accountants to review the situation.
Requirements:
Prepare a report of up to 1,250 words for the shareholders addressing the following issues.
i. Using the reading list provided on the VLE, explain:
a. what is meant by Profit and Cashflow and how they are different
b. what is meant by Working Capital and, the meanings of Receivables, Inventory and Payables
c. how changes in Working Capital affect Cashflow (25 marks)
ii. Apply the concepts in (i) above to this company to show how the way the company is being managed might affect its financial results. (10 marks)
iii. Analyse and recommend what steps should now be taken to improve this company’s cashflow through better Working Capital management. (15 marks)
Key Learning Outcomes
By the end of assessment task one, students should be able to:
- Demonstrate knowledge and understanding of management of cash and budget techniques.
- Explain the difference between cash flow and profit, identifying and explaining why the accounts of a business can report a profit but a shortage of cash.
- Use a case study to discuss the consequences to a business of being short of cash, including an understanding of the general causes of cash flow problems, particularly regarding the management of working capital and dealing with cash flow problems, and managing cash for a business.
1.0 INTRODUCTION
What is meant by Profit and Cashflow and how they are different? What is meant by Working Capital and, the meanings of Receivables, Inventory, and Payables? How do changes in Working Capital affect Cashflow? This report discusses and explains all these concepts. Using the case study company of BrightLawns Ltd, the report will apply these concepts to the case study company to show how the way the company is being managed might affect its financial results. The report will further analyze and recommend what steps should be taken to improve the case study company’s cash flow through better Working Capital management.