Cash Flow Forecast Statement in Hidetoseek Ltd. Table of Contents Solution 1 2 Solution 2 3 Solution 3 4 Solution 4 5 Solution 5 6 Bibliography 7 Solution 1 Cash Flow Forecast Statement for the period of June 01, 2010 to November 30, 2010 Particulars June July August September October November Opening Balance (4,500.00) (9,754.60) (36,788.23) (23,232.09) (10,592.23) 1,117.77 Sales 18,500.00 16,500.00 18,000.00 17,000.00 20,000.00 18,000.00 14,000.00 6,745.40 (18,788.23) (6,232.09) 9,407.77 19,117.77 Purchase 12,400.00 35,000.00 - - - - Annual Factory Rent 4,000.00 4,000.00 - - 4,000.00 - Salaries and Wages Expenses 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 Cost of Heating and Lighting 360.00 360.00 360.00 360.00 360.00 360.00 Interest on capital and long term loan 650.00 650.00 650.00 650.00 650.00 650.00 General expenses 780.00 780.00 780.00 780.00 780.00 780.00 Tax Liability 3,000.00 - - - - - Total Expenses 23,690.00 43,290.00 4,290.00 4,290.00 8,290.00 4,290.00 Gross Balance/(Overdraft) (9,690.00) (36,544.60) (23,078.23) (10,522.09) 1,117.77 14,827.77 Less: Interest on Overdraft 64.60 243.63 153.85 70.15 - - Closing Balance/(Overdraft) (9,754.60) (36,788.23) (23,232.09) (10,592.23) 1,117.77 14,827.77 Note: Assumption is made that overdraft limit has been increased with same rate of interest. Solution 2 Analysis of Hidetoseek Ltd’s cash flow from June 2010 to November 2010 shows that company’s liquidity ratio is picking up from August 2010.
From June 2010 till July 2010, Hidetoseek Ltd has shown steep decline on liquidity position of the company due to decrease in cash in hand. Reasons behind reduced cash amount in month of July are because of decrease in monthly sales or revenue and increased liability and expenses.
In the month of June, Hidetoseek Ltd adopted new strategy of bulk buying. This strategy adopted for getting price discounts on raw materials purchased form United Kingdom has increased liability in June and expenses in July. In July, the company had to pay the whole credit amount because of its credit agreement between Hidetoseek and United Kingdom suppliers. These lead to the wide difference between revenue and expenses. It is from August that the company cash flow is showing positive flow of profit. Only in the month of July, cash flow has declined because of huge liability payment made by company for its bulk purchase of raw material.
In the coming six months period, main issue that Hidetoseek managers can face is that of increasing sales. The second major question in front of company is how to fill this cash huge gap of loss and profit and the third issue will be if diversification will be helpful to enhance profitability. Huge gap will lead to liquidation problems. Cash helps fulfilling working capital needs of every organization and for formulating reinvestment too.
So, increase in incoming cash flow is very essential for Hidetoseek’s growth in future. Solution 3 Profit and cash are both very different accounting terms used for different purposes. Profit is what we get when we deduct all expenditures like purchase and manufacturing costs, selling and administrative expenses from sale. Profit consists within both transactions i. e. credit and cash sale. But cash of the business represents only cash transactions. Form the following cash flow analysis of Hidetoseek Ltd. , the company is facing liquidity deficit in the month of June which is followed by the huge crisis in July.
Hidetoseek Ltd. has large portion of fixed cost and small portion of variable cost. This limits the great fluctuations in cost incurred by company. On the other side, its sale or revenue is increased compared to previous month. When purchase and all operational expenses are deducted form company’s total sale it has been analysed that Hidetoseek has made profit in this month of June but due to extra expenses on payment of tax liability and outstanding rent of May its cash balance has reduced.
Due to cash deficit faced by Hidetoseek in the month of June its liquidity position declined. Liquidity position of any company is directly related to cash and those equivalents of cash. Solution 4 Diversification of product helps in diversifying risk associated with single product entity. It also increases target market segment and opens more opportunities to capture the market. Hidetoseek’s investment to machinery for production of leather wallet is £ 120000. The main two sources of finance that Hidetoseek can get are through issuing right issue or long term loan.
It is right issue because as per the company’s performance a chance of getting IPO is less. Its advantages are it will get the requisite funds, don’t have to pay interest, increase market capitalization and most important its stakeholders will be motivated. Disadvantage faced by Hidetoseek will have to give discount per share. Second method that can be adopted for getting finance is through long term long. Its advantage is that of easy availability of cash. Disadvantage related to this option is Hidetoseek will be legally obligated to pay interest on principle amount and also there will be long term increase in liability. Solution 5 Hidetoseek Ltd.
is formulating its new strategy for importing raw material. Earlier it has been supplied with raw materials, accessories and leather form United Kingdom companies. Target market of Hidetoseek is that of high end customers. There most important element in Hidetoseek’s products will be focused on quality. South American market products are cheap but of low quality and this may lead to decline in brand image of company and also decline in sale margin in the long term.
The second issue Hidetoseek can face is increasing operational cost due to increase in transportation cost of raw materials from South America. Operational cost will also increase because of trade policies followed by South American government and fluctuating global market effect on South America currency. If currency value rises Hidetoseek would have to pay increased price to the importing companies whereas United Kingdom companies are offering them discount in bulk purchasing of raw material. Purchase of raw material form United Kingdom will help them to reduce transportation cost with enhancing strong relationship which will help them in long run.
If Hidetoseek import raw materials from South America, it has to face country risk, currency risk and also quality risk. Bibliography Dropkin, M. & Et. Al, 2007. The Budget-Building Book for Nonprofits: a step-by-step guide for Managers and Boards. John Wiley and Sons. Jawaharlal, 2002. Cost Accounting. Tata McGraw-Hill. Khan, M.Y. , 2004. Financial Management: Text, Problems And Cases. Tata McGraw-Hill. Khan & Jain, 2005. Cost Acc & Fin Mgmt Ca Pe Ii. Tata McGraw-Hill. Khan & Jain. , 2000.
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