Pooma Sports Ltd is a UK based company that specialises in the distribution of sports equipment and clothing. Presently, the company lacks an effective operational budgeting system. Additionally, it does not use a strategic planning process in its business activities, and as a result, it has not been making any profits for the past few years. Pooma Sports has not been doing well for the past few years and has had to rely financially on bailouts for it to survive, which has led to a increase of debts. The report analysed the budgeting and strategic planning of the company to improve it. First, the report provided the importance of budgets and strategic planning. Budgeting will enable Pooma Sports map out its resources and also utilise them well in the future. The report will use strategic planning to map out a direction for the company. It will also make a proposition on the mode of manufacture of its new rugby boots after conducting an analysis. Moreover, the reasons for the difference between the net cash flow and the operating profit were given, as well as the reason why net cash flow of Pooma Sports remained negative when the company returns to profit after the six months. The paper also provided a discussion of the original and proposed costing methods. The company needs effective costing methods to aid in reducing costs incurred during production. Lastly, the report appraised the results of the capital investment appraisal of the two machines. Pooma Sports has to choose one of the machines; Superstitcher and Gluemaster to obtain as it is considering purchasing a new piece of equipment to help save costs and make the production process more efficient.
Pooma Sports Ltd is a United Kingdom-based company that specialises in the re-apportioned of sports equipment and clothing. Presently, the company lacks an effective operational budgeting system. Also, it does not use a strategic planning process in its business activities, and as a result, it has not been making any profits for the past few years. For instance, the past seven years have been very hard for Pooma Sports, and it has had to depend on the support of the parent company for its survival. Pooma Sports now owes the parent company, and the company debts are approximately £10,039,000, which affect its operations. After carrying out some background research on budgeting and strategic planning, relevant information that would assist the company was obtained. This report will provide an analysis and recommendations on how to improve Pooma’s financial statements for the company to start making profits.
Needs For Budgets and Strategic Planning
Practically all business entities, irrespective of complexity, size, or industry depend greatly on budgets and budgetary systems to attain its strategic objectives and goals. The significance and the success of budgeting are linked to identifying the organisational goals, focusing on resources to achieve the goals, as well as its implementation. Budgeting is one of the most successful and useful management tools that get excellent results if properly understood and executed (Bhojraj and Libby, 2015, p. 1714). Therefore, Pooma needs to create an effective budgeting system to address its current challenges.
The budgeting process is setting strategic goals and objectives, creating predictions for income, expenses, cash flows, production, as well as other important factors that determine the success of a business (Abdallah and Langley, 2014, p. 263). By creating a financial and investment plan, the investors or financiers of a company can determine the investments to be made, as well as how the investments can be financed (Scapens, 2006, p. 329). According to Grant (2001), A budget is a mathematical analysis before a particular time frame. Its a policy pursued during that time to achieve a given goal. The main purpose of a budget is to assist in the achievement of objectives and control managerial effort across an organisation. Budgeting will enable Pooma Sports map out its resources, as well as how to use them in the future (Grant, 2001, P. 66). The success of the budgeting system and strategic planning will depend on how the employees view and accept it, therefore the managers should involve the employees and let them know how the strategy will improve the company’s performance (De Waal, 2003, p. 667).
Analysis of the Proposed New Rugby Boot
Fixed costs are the expenses that are not dependent on the volume of business activities while variable costs are those that depend on the company’s output. On the other hand, fixed mixed cost are those that have both elements of fixed and varied expenses. Stepped costs are those that do not change whenever they are within a high or low threshold. Stepped cost are in reality fixed costs since they are dependent of output incline and decline.
The break-even point is the point in which the costs are equal to the gains, it can also be said to be the point where both costs and gains balance. It is beyond this point that a company will start making profits in its productions (Phelps et al., 2016, p. 124). The break-even point if Pooma manufactures the rugby boots in-house stands at 4,223 boots and 3,000 boots if it outsources the production. This means that if it manufactures the boots by itself, it will have to sell 4,223 boots to start making profits. However, for the outsourced production, the company will have to sell only 3,000 boots to start making profits. This means that the company will be more likely to achieve the projected profits if it outsources the production rather than producing from its new factory.
From the above analysis, it is recommended that Pooma Sports should outsource the manufacturing of the new rugby boots to a partner company. The recommendation is founded on the high income to be generated from the sales. The break-even point of outsourced production is very low, meaning that the company will enter profits earlier, therefore the company will be able to improve its financial performance.
Reasons for the Differences between the Net Cash Flow and the Operating Profit
It is an important thing for business companies to understand their cash flow. It is also good that they understand all the elements of the business since this affects their profits. The cash from business operations is net cash inflow entered on the first segment of the cash flow statement. The money documented is focused on the inflows and outflows from main operations such as buying and selling of products (Proctor et al., 2006, p. 23). The money from business activities does not include the cash spent on capital expenditures like new equipment or facilities, cash taken from selling company assets, and the money spent on other long-time investments. In some instances, a difference between the net cash flow and operating profit may occur due to various reasons. The cash statement of Pooma Sports exhibits this difference between the net cash flow and the operating profit. The cash movement from the business operations includes particular items that are handled differently on the income statements. The expenses that are non-cash like depreciation, amortisation, and share-based compensation, needs to be incorporated to calculate the net profit (Raghunandan, 2012, p. 116). These forms of expenses are included back into net income on the detailed flow statement. As such, they lower the net income but do not impact net cash flow. The money borrowed to balance the cash flow issues can also bring out the difference. For instance, when the cost debt rises beyond the break-even point it causes a decrease in the cash flow.
Cash-Flow and profits are related variables for financial measurements in accounting, although they are not linked directly. Cash flow is the measure of the ability of a company to pay its bills as they are due, while profit is the measure of the company’s continuous sustainability (Birnberg et al., 1983, p. 111). The net cash flow of Pooma Sports remains negative when the company returns to profit after the six months. This can result from a positive depreciation entered on expenses, whereby the depreciating expense lowers a firm’s net revenue (raises the net loss). Another reason can be the accumulating accounting, whereby the company’s expenses are not reported immediately as they are collected (Boxall and Purcell, 2011, p. 26).
A Discussion on the Original and Proposed Costing Methods
Costing methods are commonly used by companies to aid in reducing costs incurred during production. Pooma Sports Ltd is a company that obtains sports commodities both Sports Clothing and Sports Equipment, yet both of the commodities have not been making good sales and profits over the past few years. To create more sales and increase the profits, a new proposal is drafted. The drafted plan indicates that the Sports clothing new financial plan is set to be at £562,611 on clothing and £515,453 on equipment’s standing costs respectively. From the old plan that was at £669,442 of sports clothing and the cost for equipment’s stand at £696,283. This plan will reduce close to £106,831 on what’s spend on clothing and £180,830 that is spend more on equipment. The new overhead absorption charges are to be charged at £34.04 on sports equipment and at £40.82 on the cost of equipment hired and used as per machine rates. Unlike the old way of been charged at £35.58 on the cost of clothes produced, and £47.43 on sports equipment being manufactured. The new plan is effective since the amount to be charged would be reduced to £1.54 for clothing production and £6.61 on the entire equipment being produced. As a result, total amount reducible would amount to £8.15 as from the new proposed cutting method. The new plan costs is to have prices at £657,735 being spent on sports production while £664,209 being spent on equipment’s used during production. This will be unlike the old strategy that saw sports production being at £687,423 while the costing used on equipment being cited at £711,452. The new plan will save £29,658 being overspent on clothing and £47,243 being spent more on equipment resulting in saving £76,901, therefore the new method is clearly better.
Reducing production costs have some advantages as from the sales Director’s view of the new proposed method. A reduction in production will make profits remain rigid and constant thereby assist company having an amount to help them in financing. The new cost-cutting is effective since it lowers costs as cited; it does reduce close to £106,831 on what’s spend on clothing and £180,830 that is spend more on equipment. The new method is also effective as it reduces the cost from the old plan that was at £669,442 of sports clothing and the cost for the equipments stand at £696,283 to £562,611 on clothing and £515,453 on equipment’s standing costs respectively. The new proposal is superior too as it reduces new overhead absorption charges to £34.04 on sports equipment and at £40.82 on the cost of equipment to £35.58 on the cost of clothes produced, and £47.43 on sports equipment. The re-apportioned chosen is appropriate. The statement is supported by the fact that it will aid in reducing costs and increase the number of sales. Since prices will be reduced the propensity of customers to buy more products will be increased. The basis for re-apportioned may not be appropriate as it limits flexibility. The revised method is superior and the purpose of overhead cost absorption is to guarantee that any unpredicted expenses in the future will be accounted for which involve two principles, which are the administrative and manufacturing overhead. Lastly, the impact of the sales director’s proposal will be cost saving.
Critical Appraisal of the Results of the Capital Investment Appraisal of the Superstitcher and Gluemaster
Pooma Sports Ltd has to choose between Superstitcher and Gluemaster depending on which among the two is effective. Both machines are aimed at reducing the costs of production, to make it more efficient. The Superstitcher does automate production while Gluemaster only improves production processes. Gluemaster enhances good and best quality, while Supersticher’s quality produced is not high. The Supersticher is to produce goods like football and baseball mitts that require stitching, while Gluemaster is to produce tennis balls and squash balls that only require adhesives. To repay back its cost, the Supersticher would take four years and five months, while Gluemaster would only require three years and four months to repay its cost.
An accounting rate of 14% and 9.1% on the internal return rate would be seen on Supersticher while an accounting rate of 9.0% and an internal rate of 9.6% would appear in Gluemaster machine output. Profit obtained from Supersticher would result to £400,000, while Gluemaster would have brought a profit of £325,000 after an accounting period of five years. The depreciation rate on Superstitcher would have a constant £-200,000 per year, resulting in a total depreciation of £1,000,000 on end accounting period of five years. While the Gluemaster would have a depreciation of £-260,000 yearly to have a total depreciation of £1,300,000 by the end of an accounting period of five years. The Net Present value (NPV) on Superstitcher at end of five years would be £158,844 while Gluemaster’s machine would cite a £140,775 after five years. On implementation, Supersticher machine shows an increase in cash flow throughout the years. The cash flow in the first year is at £70,000, the second year being at £140,000 and the third year cash at hand being at £238,000. At the beginning of the fourth year, the cash flow is cited as being at £350,000 and the fifth year being at £490,000. By the end of the fifth year, total closing cash flow amount is £112,000. This is unlike Gluemasters machine whose cash flow reduces with progress in years. This is because, the first year cash flow being at £487,500, the second year being at £406,250, the third year reducing to £357,500. The fourth-year cash flow is at £162,500 as it reduces to £81,250 on the fifth year. At the end accounting period, cash flow is at £130,000.
The risk on the Supersticher is at 14% on the accounting rate of return being cited after the end of five years, while the risk on accounting rate return on Gluemaster is on 9%. The internal rate of return on Supersticher is at 9.1%, while compared to Gluemaster that possess a 9.6% internal rate. Based on bases of risk involved and return rate of both machines, Gluemaster has an advantage over Supersticher. This is because the machine does not require new product lines for the machine to work effectively. This is unlike Supersticher that require new product lines in stitching to it to work effectively. The Gluemaster machine would be best recommended for usage at Pooma Sports Ltd since it will not require time for new products to be introduced, unlike the Supersticher machine. The fact that Gluemaster aims at reducing costs of production is more recommended than the Supersticher machine. The Gluemaster machine improves the efficiency of existing products and have an advantage over the Supersticher machine, as it does not require time to improve on goods to be manufactured in the future where Supersticher machine depends on this.
Pooma Sports Ltd is a UK company that deals in the distribution of sports equipment and clothing. The company has not been making profits because it does not have an operation budgeting system and does not use strategic planning. Therefore, the company needs to implement an effective budgeting system to address its present challenges. It should also outsource the production of boots in its proposed new rugby boots project. The company statement also shows a variation between the operating profit and the net cash flow. Pooma Sports Ltd are contemplating if they should buy a new piece of equipment to assist cut costs and improve the production process, then they should obtain the Gluemaster machine.