PART A – RATIO ANALYSIS

1. Calculate the comparative ratios for the three additional companies. These calculations
and the information contained in the pdf will be needed to answer 2, 3, 4 and 5.
Extra Sheet with Calculated Comparative Ratios is attached.

2. All four companies are in the retail sector. Based on the limited information available,
comment on their similarities.

All four companies being a retail seller, one common thing among all is that they all purchase
their merchandise or inventories from manufacturers in large quantities, these bulk purchases
allows them to benefit from the economies of scale and their per unit cost is low. They all have to
bear direct and indirect costs to earn their profits from end consumers.

All these retailers differ from each other in terms of product segment they deal in, as such unlike
industrial companies they do not produce tangible products. Some of these have their own home
brands.

In terms of profitability, Briscoes efficiently converted the money used to purchase assets into
net profits compared to other 3 companies. Whereas Kathmandu and Briscoes shown better profit
margins overall compared to standard 5%.

From a efficiency perspective, JB Hi-Fi and Warehouse debt ratio is higher than the generally
accepted or good debt ratio (below 0.4) compared to other 2 companies.

3. Although these companies are all in the retail sector, they sell different types of
merchandise. Comment on how their differences might be seen in the calculated ratios.

JB Hi-Fi has the highest EPS among other 3 companies, that shows that the company has higher
earnings, and their financial position is strong and, therefore, it’s a reliable company to invest
money. Whereas this is not the only indicator that should be considered. JB Hi-Fi debt ratio is
higher than the generally accepted ratio.

The interest coverage ratio that we use to understand how easily a company can pay their interest
expenses on outstanding debt. Briscoes is very comfortable position with no interest expenses
that they have to bear. Warehouse on the other hand is on the lower end but certainly well above
the accepted rage of 3 or above.

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 A quick ratio “acid test” among four companies shows that only Briscoes is can meet its current
financial obligations with the available quick funds on hand. Other three companies has quick
ratio lower than 1:1 and indicates that these company relies too much on inventory or other assets
to pay its short-term liabilities.

4. Compare the operating profits for each company (i.e. you do not need to consider total
comprehensive income).

Operating profit margin ratio shows how much profit a business makes, and its efficiency, how
effectively business can controll the costs and expenses associated with business operations.

Comparing the four retail companies, Briscoes is showing the heist operating profit of 10%
compare to Kathmandu 8% in similar speciality retails products and services sector. Both JB
Hi-Fi and Warehouse have higher net sales revenue compared to other two companies but JB Hi-
Fi with its 6% operating profit is more likely to gain investors attentions and have better returns
on investment or the long run.

5. The Income Statement is prepared on an accrual basis, reflecting when activities occur and
not when cash settlement happens. The Operating Cash Flows (the first section in the Cash
Flow Statement) reflects the same activities, but from a cash perspective, without reference
to when the reported activities occurred. For any one of the four businesses, consider the
two together and comment on your conclusions.

The cash flow statement is quite similar to the income statement in a way that it records a
company's performance over a specified period of time. But the difference between the two is
that the income statement also takes into account some non-cash accounting items such as
depreciation. Cash flow statement helps to determining the short-term viability of a business,
most importantly its ability to pay the bills.

It is possible for a business to show that its profitable according to accounting standards but
when comparing cash flow statement you may find that there isn't enough cash on hand to pay
bills. Operating cash flow ratio, determines the entity’s ability to pay its loans and interest
payments. If there are signs of drop in a company's quarterly cash flow, it could question its
satiability to make loan payments, business will be considered in a riskier position compared to
with less net income but in relatively a stronger cash flow position.

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 For Warehouse their current cash flow ratio is below 1% of acceptable of the generally accepted
range, that shows that this company generated less cash from operations than needed to pay off
its short-term liabilities.

Operating Cash Flow 32,195

0.08
Ratio 418,137

I have taken closing cash flow position to the best of my knowledge.

PART B – BUDGETS

1. The Sales Budget for May, June and July

Extra Sheet with Sales Budget is attached.
2. The Purchases Budget for May, June and July
Extra Sheet with Purchase Budget is attached. Assumptions were made to calculate August
purchase budget using last three months average.
3. A comparison of budgeted operating profit (accrual based) and budgeted cash flows
Budgeted Income Statement: Budgeted Cash Flows
Revenue May Jun July Total Cash Receipts May Jun July Total
Gift Packs $ 7,920 $ 11,880 $ 5,280 $ 25,080 Gift Packs $ 7,788 $ 11,814 $ 5,390 $ 24,992
Cups of Tea $ 4,840 $ 7,260 $ 3,300 $ 15,400 Cups of Tea $ 4,759 $ 7,220 $ 3,366 $ 15,345
Total Revenue $ 12,760 $ 19,140 $ 8,580 $ 40,480 Total Receipts $ 12,547 $ 19,034 $ 8,756 $ 40,337

less Expenses less Payments

Gift Packs $ 4,620 $ 4,840 $ 3,153 $ 12,613 Gift Packs $ 1,320 $ 4,620 $ 4,840 $ 10,780
Cups of Tea $ 704 $ 2,376 $ 1,564 $ 4,644 Cups of Tea $ 704 $ 2,376 $ 3,080
Rent $ 990 $ 990 $ 990 $ 2,970 Rent $ 990 $ 990 $ 990 $ 2,970
Salaries $ 1,500 $ 1,500 $ 1,500 $ 4,500 Salaries $ 1,500 $ 1,500 $ 3,000
Other Expenses $ 250 $ 250 $ 250 $ 750 Other Expenses $ 250 $ 250 $ 250 $ 750
Total Expenses $ 8,064 $ 9,956 $ 7,458 $ 25,478 Total Payments $ 2,560 $ 8,064 $ 9,956 $ 20,580

Net Operating Profit $ 4,696 $ 9,184 $ 1,122 $ 15,002 Net Cash Flows from Operations $ 9,987 $ 10,970 $ (1,200) $ 19,757

Sales revenue projection for each month and cash receipts respectively are quite balanced and
credit receivable in each month are not big amounts that could affect the cash flow
requirements. Moreover 30 days credit payment terms with suppliers also allows to hold cash
in hand. Initial cash investment also balanced the accounts payable in the month of May.
Negative cash flow in the month of July is not effecting the overall cash in hand position as
earlier collected cash will be sufficient to pay the bills and other variable and fixed expenses.

4. Write a brief comment about this new business based on the information available.
Take the position of a bank being asked by the owner to consider approving a loan of
$10,000 to expand into providing a wider cafe selection. What other information you
would find helpful.

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 $ 15,002
Profit Margin : = 37%
$ 40,480

New Teahouse Centre projected a profit margin of 37%, which seems to be a good start
provided sales projection are met and company can show positive results for next 9 months.
Sales projection for the month of July are a concern as it shows in decline in projected sales.
As a Bank I would also like to ask for the Company Budgeted Balance Sheet and Statements
of Owner’ Equity. Additional information on company status such as partnership, company
or a sole-proprietor is required. Since this company has just started their business much of the
success of the business model depends on their performance in at least 6 months of
operations. Growth and expansion plan is important to understand if their future expansion
goals are realistic and achievable, this new funding’s will be used on purchasing new
equipment, leasing a bigger place or acquire more inventories. As the cash flow projection
show company position is strong and they are able to pay their bills, with additional loan
amount how it’s going to affect their ability to pay finance interest payable needs to be
established.

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