Golden Limited Financial Management Report
CASE STUDY: Golden LimitedGOLDEN Limited is a UK subsidiary of Awards Group whose head office is in Brazil. The company has been operating in the UK for the past 20 years, providing a range of services to SME’s, namely investment property funds. Over the past two decades, GOLDEN has been a profit-making firm, retaining its previous clients, in addition to capturing an increasing share of the market. However, the finance director of GOLDEN has recently got in touch with your professional consulting firm and has engaged your firm to provide them with an explanation of the cash flow problem that GOLDEN Limited had been facing. The company is also dependent on the parent based in Brazil for and when required.Following recent meetings of the senior managements in London and Brazil, it has been agreed that GOLDEN Limited should do expand the business further and raise the required capital in the UK, or perhaps in Europe, so as not to depend so much on cash coming from the parent company all the time. Consequently, the management of GOLDEN is considering the followings:New information systemGOLDEN’s current system that is used to provide specialised services to its clients’ needs to be updated. The company is considering an investment in a more modern system and two possible alternatives have been proposed as outlined below.Major packageMajor PackageDraft figures£’000Year012345New system’s costs9,800 Working Capital1,000700900400800 Sales Revenue 3,4006,5007,8008,8009,800Less: Subsystem A (520)(700)(900)(1,000)(1,250)Subsystem B (1,120)(1,510)(1,700)(2,220)(1,950)Overheads (310)(350)(420)(420)(420) All of the above estimates have been prepared in terms of present day cost and prices. Assume that cash flows arise at the end of each period. In additionRevenues are expected to rise by 4% in price terms per year from year 1 (start of year 2) the budget estimated selling price at start was £110.Overheads and working capital are expected to rise by 4% per year from year 1 (start of year 1)The cost of Subsystem A and Subsystem B are expected to rise in line with inflation of 4% per year from the beginning of year 1.The cost of System Designers, who have come from the Brazil have not been taken into consideration in the forecast and are as follows:System Designer 1 (SD 1): Will be paid £140 per hour and expected number of hours for SD 1 are 1,400hrs. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards.System Designer 2 (SD 2): Will be paid £120 per hour and expected number of hours for SD 2 are 1,400hrs. The rate paid is expected to go up in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 4% per year, every year from year 2 onwards.If GOLDEN Limited invests in Major Package, then the discount rate that would be required to assess the NPV would be 12%. The table above shows the estimated outgoings and inflows for the project. Major PromoThe second proposal is Major Promo, the expected life of this system will also be 5 years and its working capital requirements, the cost of the new system, expected revenue, subsystems cost and overheads are as follows: Draft figures Major Promo£’000Year012345New system’s cost9,500 Working Capital6005109009801250 Sales Revenue 6,1007,5009,99011,25012,050Less: Subsystem A (405)(610)(920)(1,053)(1,520)Subsystem B (1,430)(1,950)(2,390)(2,845)(3,080)Overheads (295)(315)(383)(411)(455) All of the above estimates have been prepared in terms of present day costs and prices. Assume that cash flows arise at the end of each period. In addition, you need to take into account the costs of System Designers, inflation and the rise in the revenue, overheads and working capital consideration, which are the same for the Major Package. The selling price per unit of the Major Promo is £615. The discount will also be the same as with Major Package.Should GOLDEN invest in Major Promo, then the discount rate that would be required to assess the NPV would be 12%.New Service HubSales Manager of Golden has just informed your company that they plan to open a centre in the UK, with a possible start date of business on 1stAugust 2019. You have also been informed that to start with, the company will only sell 2 new systems, that of Single Tool Sets (STS) and the Multi Tool Sets (MTS). The intentions here is to test the market and check whether they can achieve break-even in the same period. A recent market research has suggested that these two are the most popular systems and will be offered at £320 for STS and £450 for MTS.You have also been provided you with the following information regarding the costs and estimated sales for the period mentioned above.GOLDEN Limited intends to put in £5,500 as start-up capital and plan to sell a total of 1,305 (combined) of STS and MTS for the same period. They are not sure which of the two systems will produce the most profits for GOLDEN.Total budgeted sales for each month are as follows: August 435, September 435 and October 435, of which 33% of each month will be for STS. You will be required to assess the best product combination of sales for the period.To help with the setup of the new Hub, the company has just concluded a deal with one of the high street banks to get a loan of £20,000 on the 1st of September 2019. The interest on this loan will be 3.5% to be paid every month. The company will be required to make 12 equal payments to repay the loan starting end of October 2019.Financial informationAs mentioned above the company plans to sell a total of 1305 units of the system between 1stAugust and October 2019. The fixed costs for the period are as below:Rent£ 17,500 Cleaning£ 1,600 Loan Interest£ 1,400 General insurance£ 7,100 Light and heating£ 3,800 Local authority charges£ 4,380 Fixed cost specific to productsSTSMTSMarketing25,100£ 26,400Admin costs£ 8,500£ 12,900Staff Salary£ 19,500£ 25,200 From their costs estimates, the variable costs of the services are £200 for the STS and £240 for the MTS. The fixed costs are for the whole period, so they are not affected by the level of service. However, the variable costs will increase with services output (ie sales output multiplied with variable cost per product).Revenue from the sale of STS and MTS will be on the basis of 40% cash in the same month, and the remaining 60% credit to be paid the following month.Requirement:You will be required to write a management report to the management of Golden Ltd directors, discussing the following issues: Provide an explanation on the different sources of funding the company can have and their advantages and disadvantages. You should make recommendations as to how the company can manage the same to help in the planned expansion program.Analyse the Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Golden Limited may use, and the limitations of using those techniques The use of management tools such as Breakeven analysis and Budgets. A computation of your breakeven analysis and the cash budget for the first 3 months.An evaluation of the estimated company performance or position during the same period.A detailed Literature Review of the tools you have used such as breakeven analysis and budgets and their importance to business.Other issues for management to consider that you think are vital for them to survive and make a profit.
