Accounts+&+Finance

(Sources of finance, investment appraisal, working capital, budgeting, final accounts, ratio analysis)  
 * ACCOUNTS AND FINANCE **

21) For each of the options identified by Sophie, there would be financial implications. Identify these and evaluate appropriate sources of finance in each case. In response to challenges of the external environment, retain the present focus of the business but improve business operations and profitability. This will involve improving cost control, marketing the business more effectively and creating a more flexible workforce. This option is favoured by her parents; they depend on the success of the business for their retirement and they believe eco-tourism to be a passing fashion. Option 2 ** To demonstrate her commitment to the eco-tourism movement, develop an education centre to promote the ideals of sustainable tourism and fulfill the objectives of the //AFE//: • to favour the adoption of sustainable practices within the tourism industry • to contribute to conservation solutions and local projects • to market French eco-tourism operations to domestic and international travellers. The existing accommodation will be modified to be energy efficient and carbon neutral. All outdoor activities will be cut, one barn will be converted to provide an education centre and restaurant operations will be restricted to guests at //Les Maisonnettes//. Reposition //Les Maisonnettes// as a luxurious eco-tourist retreat. This will involve developing a new USP to differentiate itself from local competition, particularly the //Sanctuary// complex. The key principles of eco-tourism will remain, but the retreat will be targeted at a higher income market segment than currently. High quality locally sourced produce will be offered, including wines, organic vegetables, meats, fish and poultry. Clients will be offered a range of services, such as beauty treatments, saunas, meditation and yoga classes. Substantial investment will be required to upgrade and expand existing facilities and recruit and train new staff. This will significantly increase the gearing of the business. Sell the whole business to a timeshare operator who will redevelop the premises. The proceeds of the sale can be split between providing financial security for her parents’ retirement and renovating the shop. Sophie will focus her energies on the shop, selling local produce such as cheeses and wines. Although this is the lowest risk option, this is Sophie’s least preferred option as she would lose control and ownership of //Les Maisonnettes//.
 * Option 1 **
 * 
 * Option 3 **
 * Option 4 **

22a) Carry out a full financial analysis of Les Maisonettes final accounts.

= = __** Profitability Ratios **__ __ **Profitability ratios:** __ This ratio analysis mainly focuses on ‘profit’ rather than other figures. It helps in evaluating business’s performance which benefits profit seeking business rather than non-profit seeking business. This part of analysis would then attract mostly managers, employees, and potentially, investors and creditors.     It was found that the GPM of Les Maisonettes in year 2005 is 94.03%, and it decreases by 1.67% to 92.36% in 2008. The decrease in GPM has negative effects on the company because there is less profit available for paying overheads and business’s expenses. This might resulted from the decrease in sales revenue. Shows the percentage of sales turnover that is turned into net profit. Measure of the firm’s profitability. <span style="font-size: 120%; color: windowtext; font-family: 'Arial','sans-serif';"> <span style="font-family: Calibri; msofareastfontfamily: 'Times New Roman'; msofareastthemefont: minor-fareast;">The calculation reveals that Net Profit Margin of Les Maisonettes decreased from 1996 by 7.89% which is significantly high. This might be unfavorable for Les Maisonettes as it means that there is less profit available for the business. =__Liquidity Ratios__= Shows the relationship between a firm’s current assets and current liabilities. It measures the firm’s liquidity, and ability to pay back debts. Ideally, most of the firm prefers ratio between 1.5 to 2.0. Current ratios of both years are given as 1.75:1 for 2005, and 0.55:1 for 2008. We can see that their latest current ratio is in undesirable ratio. This could resulted from higher current liabilities, and very low current assets. Measures the short term liquidity without stock. Since stock cannot always be turned into liquid cash, the Acid test can give a more accurate representation of the liquidity. <span style="font-size: 120%; color: windowtext; font-family: 'Arial','sans-serif';"> In 2005, acid test ratio is 1.25:1 which in 2008 decreased by 1.03:1 to 0.22:1 This ratio is preferred when it is 1:1 to 1.5:1. The increase in current liabilities, and decrease in current assets might caused the reduction of acid test ratio. =**<span style="font-size: 170%; color: windowtext; font-family: 'Arial','sans-serif';">__ Efficiency Ratios __ ** <span style="font-size: 120%; color: windowtext; font-family: 'Arial','sans-serif';"> = Indicates what the owners return for their investment in the business. It measures the financial strength of the business, and a larger return usually indicates that the business is doing well.
 * Gross Profit Margin:** is the difference between value of products sale to customer (sales turnover) and the cost of business in making such product. This GPM represents percentage of sales revenue that contributed to gross profit.
 * Net Profit Margin:**
 * Current Ratio: **
 * Acid test Ratio:**
 * Return on capital employed ** :

<span style="font-size: 140%; font-family: Arial, Helvetica, sans-serif;">The calculations of the return on capital employed for Les Maisonnettes at 31st May 2005 and 2008 show that there has been a decrease in the return that Sophie Lagarde and the other shareholders will receive on their initial investment from 13.0 % to 10.0% (3.0 % decrease). This could be because of the combination of decreased gross profit and increased expenses which has led to a lower net profit before tax in 2008. ** Stock turn over ratio: **

Measures the number of times a firm sells its stock within the time period given, usually one year. It indicates the speed at which firms sell. Stock turnover = ( Ave Stock / COGS ) x 365

2005 = (2000 / 11,340) x 365 = 64.37 times per year 2008 = (6,000 / 14,000) x 365 = 156.43 times per year

Stock turnover = COGS / Ave Stock

2005 = 11340 / 2000 = 5.67 days 2008 = 14000 / 6000 = 2.33 days <span style="font-size: 90%; font-family: Arial, Helvetica, sans-serif;"> <span style="font-size: 120%; font-family: Arial, Helvetica, sans-serif;"> Stock turnover has improved from 64 times per year (5.67 days) to 156 times (2.33 days) per year. Considering the type of stock Les Maisonettes would be holding (e.g. cooking ingredients for the kitchen, shampoos / soaps etc for the rooms) this is suitable. The fact that it has improved could be a reult of better stock control eg with the use of just in time stock control?? <span style="font-size: 90%; font-family: Arial, Helvetica, sans-serif; msobidifontweight: bold;"> Debtor days ratio: ** Measures the number of days it takes a firm on average to collect money from its debtors. The lower the number of days, the better, as the company will receive their money faster.
 * <span style="font-size: 90%; font-family: Arial, Helvetica, sans-serif; msoansilanguage: EN-GB;">

<span style="font-size: 110%; font-family: Arial, Helvetica, sans-serif; msobidifontweight: bold;"> Debtors days has increased from 2 to 4 days. Where this might initially seem like a set back, Les Maisonnettes should be pleased with this result as it shows that the average stay for guests has increased from 2 to 4 days. (Customers will settle their accounts when they check out).

Measures the number of days it takes, on average, for a firm to pay its creditors. <span style="font-family: Arial, Helvetica, sans-serif;"> <span style="font-size: 80%; font-family: Arial, Helvetica, sans-serif; msobidifontweight: bold;">Les Maisonettes' suppliers are local producers who supply them with fresh ingredients for their kitchen and other supplies for the hotel. Les Maisonnettes will want to maintain a strong relationship with these suppliers (cummunity economy) and therefore by paying their accounts earliy, they are likely to achieve this.
 * <span style="font-size: 110%; font-family: Arial, Helvetica, sans-serif; msoansilanguage: EN-GB;">Creditor days ratio: **

Les Maisonnettes' cusotmers pay early and this enables them to pay their suppliers early.

<span style="font-size: 120%; color: windowtext; font-family: 'Arial','sans-serif';"> Gearing Ratio = Loan Capital/Total Capital employed x 100
 * Gearing Ratio**

2005: 260000/603000x100 = 43.1% 2008: 210000/610000x100 = 34.4%

Gearing has decreased which is an improvement and may allow Sophie to consider increase future borrowing to finance one of the options. Loan lapital has decreased ,indicating that a substantial sum of this (50,000) has been paid off. Retained profits have also increased further contributing to this decrease in gearing.

(Note the loan capital has decreased from 260000 in 2005 to 210000 in 2008 despite the addition of 15000 in 2007 ?(line 90) and don't be too confused but this is not the same 15000 as appears as short term borrowing in 2008 ! Short term borrowing does not affect the calcualtion of gearing. The decreas in loan capital (long term) would be Sophie repaying her loan over the three year period at approx 2000 per month.

22b) Evaluate possible financial and other strategies to improve the value of Les Maisonnettes’s ratios. <span style="font-size: 10pt; color: windowtext; font-family: 'Arial','sans-serif';">