# Bagpuss Import Ltd: Company Analysis

## Introduction

This report is made for Bagpuss Import Ltd, a company that is in the business of wholesale of a new brand of ginger ale which is imported from New Zealand for distribution in Australia. It is a new business and we are to make a budget for the past six months in terms of cash flow, income statement and balance sheet as well as determining the break-even point.

## Analysis

To begin with, the company will have a cash flow problem beginning the month of February when they will need to borrow 38,000 to help them carry out the operation. In the month of March they will need to borrow 65,000 to enable them to continue doing the business. However, in the month of April they will need to borrow only 6,000 for them to have a positive cash flow that month. From the cash flow statement the company will start repaying the borrowing from the month of June when they will pay 65,000. By the end of six months they will have a borrowing of 44,000. This is because the company has a poor credit policy of paying creditors in one month’s time while they collect a debt from a customer in two months this policy should b changed.

The company has negative cash flow throughout however, it can be observed from the income statement that the company was making a profit of 17% in January, 26.9% in February, 13.9% in April, 34.5% in May and 34.8% in June. These rates have been taken into considerations on the ground that expenses paid during the month are fully recognized as expenses of that month. From the income statement, the only month that the company has not recorded profit in the month of March when they have incurred advertising

expense of 50,000. The balance sheet shows an improvement in total liability and equity.

The break-even point for the company is arrived as follows:

Break-even point = Fixed costs/Contribution margin per unit

In this case fixed costs are those costs which do not change from each month and these costs are salaries of 6,500 plus depreciation of 583 per month. The contribution margin in this case will be assumed to be net profit plus fixed costs. The net profit in January was 11,451.

Therefore total contribution was = 11,451 + 6,500 + 583 = 18,534

Contribution per unit = 18,534/38,500 = 0.48

Therefore break-even point = 11,451/0.48 = 23,857

In this case the company will need to sell more than 23,857 units in order to break-even.

There three decisions that I have to make, the first would be improving my cash flow condition (Ormiston and Fraser, 2004). One means of doing so would be to reduce the cash expenditure and increase credit period, however this method of improving the cash flow will only serve the short term purpose and in the long run, I will issue since the cash flow may even become adverse due to the lack of foresight on my part while planning my expenditure. The other decisions would be to reduce the expenditure. At present the expenses are not in proportion with the income (Jae and Shim, 2008). The problem lies in the fact that the expenditure pattern is made around the old income which due to the lack of inflation was sufficient.

In order to balance my financial position and to prevent my financial assets from becoming indebted to the banking corporations and loan sharks, the most appropriate means of action would be to reduce in the variety of products present in the expenditure. The last thing, which would be the first practical decision, after reviewing the information presented in the financial statements would to increase my income. Income cannot be increased without additional efforts since the present income has already been adjusted for inflation and despite the adjustment the income is not able to keep up with the expenditure. In light of the information presented in my financial statements, finding a second part-time job would be most effective step (Eugene and Brigham, 2010).

## Conclusion

Reviewing the information of the financial statements, it came to my knowledge that I need to improve the positions since most the debts are raising at an alarming rate and they are not being paid back due to the increased cost of other commodities. In light of this information, I will firstly acquire a new job to increase the income, and then steps will be taken to reduce the expenditure and subsequently, focus to be given to generation more cash flow (ICFAI Center for Management Research, 2004).

Therefore from the analysis above I will conclude that the venture is profitable. However, its profitability is not reflected in this cash flow generation because of poor credit policy. The company break-even the first month in business therefore, they should review their credit policy in order to make the cash flow of the company health. In any business cash is the king. Without cash this company will be in financial turmoil (Keown, Martin and Petty, 2005).

## The Excel Model

The excel model designed has many features which will help the company increase their management efficiency through managing their income. I have started designing the financial model with assumptions. The model in the assumption model has sales commission rate of 2% and I have indicated that if there is no commission 0 will be used and all the figures relating to the sales commission will be adjusted from the income statement to the cash flow statement. I have assumed interest rate of 4% for short term credit and this rate is connected with the figures in the cash flow statement. If the company borrows money and records in the cash flow statement as money inflow, the whole set of statements that are income statement, cash flow statement and balance sheet will be readjusted.

The model only can be protected from alteration by inserting a password that is required before making alteration to the model. This model will also be protected from misuse by people by ensuring that the server computer room where the model is saved is assessable by few individuals.

## Reference List

Eugene, F., & Brigham, M., 2010. Financial Management: Theory & Practice. New delhi: South-Western College Pub.

ICFAI Center for Management Research ICMR. 2004. Financial Accounting & Financial Statement Analysis. Hyderabad : ICFAI Center for Management Research..

Jae, K., & Shim, J., 2008. Financial Management.London: Barron’s Educational Series.

Keown,A., Martin, J. & Petty.J. 2005. Financial Management principles and applications. New Jersey : Pearson/Prentice Hall.

Ormiston, L. & Fraser, A. 2004. Understanding Financial Statements. New Jersey : Pearson-Prentice Hall.

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BusinessEssay. (2022) 'Bagpuss Import Ltd: Company Analysis'. 31 October.

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