CASE STUDY: Williams Limited
WILLIAMS is a limited company, whose head office in based in South Africa. The company has been operation in the UK for the past 10 years. WILLIAMS provides financial services to a number of organisations which include SME’s, property developers and investment property funds in the UK and Africa. For the past 10 years, WILLIAMS has been a profit making firm as it has retained its previous clients, in addition to capturing an increasing share of the market. However, the finance director of WILLIAMS has recently got in touch with your professional consulting firm, and has engaged your firm with the mandate to provide them with an explanation of the cash flow problem that WILLIAMS Limited had been facing. The company is also dependent on the parent based in South Africa for and when required.
In the past month there has been a number of meetings in London and South Africa where it has been agreed that WILLIAMS Limited should do their best to expand the business and raise the required capital in England, or perhaps in Europe, so as not to depend so much on cash coming from the parent company all the time. Consequently, the management of WILLIAMS is considering the followings:
New Software
The current product that Williams Limited has to offer mostly to specialist developers and investment funds companies is outdated. The company is looking to invest in a new product, and the details of this proposal is outlined below.
Advanced Suite
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Advanced Suite
Draft figures
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£’000
|
|
Year
|
0
|
1
|
2
|
3
|
4
|
5
|
|
New Software cost
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9,000
|
|
|
|
|
|
|
Working Capital
|
850
|
610
|
790
|
310
|
730
|
|
|
Sales Revenue
|
|
3400
|
6300
|
7500
|
8900
|
9500
|
|
Less:
|
|
|
|
|
|
|
|
Module A
|
|
(420.00)
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(600.00)
|
(800.00)
|
(900.00)
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(1,110.00)
|
|
Module B
|
|
(1,010.00)
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(1,400.00)
|
(1,600.00)
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(2,100.00)
|
(1,900.00)
|
|
Overheads
|
|
(230.00)
|
(240.00)
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(330.00)
|
(300.00)
|
(300.00)
|
All of the above estimates have been prepared in terms of present day cost and prices. Assume that cash flows arise at the end of each period. In addition
- Revenues are expected to rise by 4% in price terms per year from year 1 (start of year 2) the budget estimated selling price at start was £120.
- Overheads and working capital are expected to rise by 4% per year from year 1(start of year 1)
- The cost of Module A and Module B are expected to rise in line with inflation of 4% per year from the beginning of year 1.
- The cost of Technicians, who have come from the South Africa have not been taken into consideration in the forecast and are as follows:
Technician (T1): Will be paid £120 per hour and expected number of hours for T1 are 1,300hrs. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards.
Technician 2 (T2): Will be paid £110 per hour and expected number of hours for T2 are 1,400hrs. The rate paid is expected to go up in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards.
If WILLIAMS Limited invests in Advanced Suite, then the discount rate that would be required to assess the NPV would be 6%. The table above shows the estimated outgoings and inflows for the project.
New Drop-in Centre
The manager in charge of sales has just informed your company that they plan to open a Drop-in Centre in London and it is hoped that this Centre will be opened for business on 1April 2020. You have also been informed that to start with, the company will only sell 2 types of service as packages: Entry Level package (ELP) and Advanced Level package (ALP). This will be done to test the market and see if the business will break-even in the same period. These two are the most popular asked for packages and will be offered at £300 for ELP and £400 for ALP.
The company has provided you with the following information regarding the costs and estimated sales for the period mentioned above.
WILLIAMS plan to put in £6,000 as start-up capital and plan to sell a total of 1320 (combined) of ELP and ALP for the same period. They are not sure which of the two services will produce the most profits for WILLIAMS.
Total budgeted sales for each month are as follows: April 440, May 440 and June 440, of which 30% of each month will be for ALP. You will be required to assess the best product combination of sales for the Aril and May 2020.
To help with the setup of the Centre, the company has just concluded a deal with one of the high street banks to get a loan of £21,000 on the 1st of April 2020. The interest on this loan will be 3.5% to be paid every month. The company will be required to make 12 equal payments to repay the loan starting end of May 2020.
Financial information
As mentioned above the company plans to sell a total of 1320 product packages between 1st April and June 2020. The fixed costs for the period are as below:
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Rent
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£ 15,500
|
|
|
Telephone
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£ 1,900
|
|
|
Loan Interest
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£ 2,205
|
|
|
Insurance
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£ 6,200
|
|
|
Electricity and Gas
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£ 3,000
|
|
|
Business Rates
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£ 4,500
|
|
|
Fixed cost specific to products
|
ELP
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ALP
|
|
Marketing
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£21,000
|
£ 25,000
|
|
Administration
|
£ 7,500
|
£ 11,500
|
|
Staff Salary
|
£ 19,500
|
£ 23,000
|
From their costs estimates, the variable cost of the services are £180 for the ELP and £210 for the ALP. The fixed costs are for the whole period, so they are not affected by the level of service. However, the variable costs will increase with services output (ie sales output multiplied with variable cost per product).
Revenue from the sale of ELP and ALP will be on the basis of 30% cash in the same month, and the remaining 70% credit to be paid the following month.
Requirement:
You will be required to write a management report to the management of Williams limited directors in which the following points should be discussed.
- Provide an explanation on the different sources of funding the company can have and their advantages and disadvantages. You should make recommendations as to how the company can manage the same to help in the planned expansion program.
- Analyse the Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Williams Limited may use, and the limitations of using those techniques
- The use of management tools such as Breakeven analysis and Budgets.
- A computation of your breakeven analysis and the cash budget for the first 3 months.
- An evaluation of the estimated company performance or position during the same period
- A detailed Literature Review of the tools you have used such as breakeven analysis and budgets and their importance to business.
- Other issues for management to consider that you think are vital for them to survive and make a profit.
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