Case Study No 1 - Display Fitters Ltd – Part 1

Background
Display Fitters Limited has maintained an account with your bank since it began
in business. The account is well-run with an overdraft limit of BDT 185,000. In
recent months you have noticed that the overdraft does not always return to
credit and you have made a note to take this up with the Directors when the
overdraft is renewed. There have never been excesses and you know that the
Directors run the company finances very tightly.
It is now October 2014 and you have received a request for a meeting from the
directors. They enclosed a business plan which explains their future strategy.

Business Plan Extracts

Background
This building contractors business started just under ten years ago. Initially it
accepted all types of small contracts but after about seven years it that general
shop-fitting work was accounting for more than one quarter of its work. Analysis
identified that its methods of customising (using any material from mahogany to
suede to raw silk) basic modular shop fitting systems were particularly attractive
to small independent retailers. As a consequence it adopted a new sales
strategy two years ago. The implementation of this strategy was well under
within six months and has been dramatically successful subsequently.
Both Directors are both in their early thirties, hard working and enthusiastic
about their business. To mark their company's changed sales emphasis they
renamed it Display Fitters Ltd. All their sales effort is now directed at sports and
leisure shops. Some of their customers are in the High Street and have only a
single shop; a few have small chains of shops. The rest, making up nearly half
of their turnover, are sports clubs and sports and leisure centre shops.
Premises
The business location has proved ideal for the initial development of the
business. The company receives enquiries from all over the country. The
existing premises are now too small for the business and will hinder further
growth. They intend to relocate the business locally to larger premises next
year. They have found ideal premises, which will be ready for occupation in the
middle of next year. The premises will be again rented and will obviously involve
additional costs both in terms of 'one-off' relocation costs and extra fixed
assets. The fixed assets are likely to cost from BDT 115,000 - 130,000. We also
plan to sell an asset for BDT 10,000 - 20,000.

Staff
In addition to the two Directors Display Fitters now employs six office staff
(Manager, Book-Keeper, Secretary, Clerks, and Receptionist), a Site
Supervisor, a Works Manager, three Sales Designers and a direct labour force
of fourteen – 27 in all. This has grown over the last 3 years. Year1 – 20, year2 –
23, year3 – 27)

Business Plan Analysis

Case Study No 1: – Display Fitters 1 1
Finance
Balance sheet figures prepared by the auditors are attached.
No projections have been made. The directors believe during the next 12
months they will achieve sales of BDT 1,200 000. Overhead costs are likely to
rise to BDT 531,000 for the year, although this will include some one-off costs
associated with the move of premises. They believe that despite the additional
'one-off' costs, profits before interest and tax next year will be at least BDT
71,000.
The directors believe that they will need a larger overdraft facility of BDT
220,000 (an increase of BDT 35,000) for the next 12 months.

Required
1. Conduct an appraisal of the plan.
2. Note any other information that is required

Business Plan Analysis

Case Study No 1: – Display Fitters 1 2
 Profit And Loss Account - 30 June 2012 2013 2014

Sales 525,000 626,000 911,000

Cost Of Goods Sold 226,000 266,000 396,000
Gross Profit 299,000 360,000 515,000

General Overheads 233,000 271,000 372,000

Depreciation 36,000 48,000 76,000

Profit Before Interest Paid 30,000 41,000 67,000
(Interest Paid) 8,000 10,000 19,000
Profit Before Tax (PBT) 22,000 31,000 48,000
Taxation 7,000 10,000 14,000
Minority Interests
Extraordinary Items
Attributable Profit (Loss) after Tax (APAT) 15,000 21,000 34,000
(Dividends)
Residual Profit (Loss) 15,000 21,000 34,000

Business Plan Analysis

Case Study No 1: – Display Fitters 1 3
Balance Sheet Display
Fitters
Balance Sheet Date 2012 2013 2014 2012 2013 2014
Quick Assets Current Liabilities
Cash and Bank 2,000 2,000 2,000 Payables 35,000 52,000 82,000
Receivables 100,000 136,000 207,000 Bank 51,000 80,000 180,000
Sub Total 102,000 138,000 209,000 Taxation Current 7,000 10,000 14,000
Inventory 10,000 17,000 25,000
Work In Progress 24,000 41,000 78,000 Total 93,000 142,000 276,000
Total Current Assets 136,000 196,000 312,000
Fixed Assets Term Liabilities 0 0 0
Opening Book Value 87 101 111
Additions 66 69 139 Shareholders’ Funds
153 170 250
Disposals 6 11 11 Capital – Issued 10,000 10,000 10,000
Depreciation 46 48 76 Profit Reserves 134,000 155,000 189,000
Total Fixed Assets 101,000 111,000 163,000 144,000 165,000 199,000
Total Assets 237,000 307,000 475,000 Total Liabilities 237,000 307,000 475,000

Business Plan Analysis

Case Study No 1: – Display Fitters 1 4
 Financial Analysis

Operating Performance
Sales Growth 19% 46% 32%
Profit Growth (PAT) 40% 62% 0%
Headcount Growth 15% 17% 0%
Sale Per employee 26250 27217 33741 44444
Profit per employee (PAT) 750 913 1259 1259
Value Added Per Employee 14950 15652 19074 25111
Use Of Fixed Assets (Sales/Fixed Assets)% 520% 564% 559% 580%
Use Of Total Assets (Sales/Total Assets)% 222% 204% 192% 194%

Liquidity
Current Ratio 146% 138% 113% 107%
Quick Ratio 110% 97% 76% 71%
Cash Ratio 2% 1% 1% 1%
Liquid Surplus : Sales 8% 9% 4% 2%
Working Assets (Investment) / Sales 19% 23% 25% 25%
Retained Profit :Sales 3% 3% 4% 3%
Debtor (Receivables) collection days 70 79 83 83
Stock/Inventory Turnover 55 80 95 95
Creditor (Payables) payment days 57 71 76 76
Payables : Sales % (15 - 20%) 15 20 21 21
Cash Conversion Cycle days (AR + Inv - AP) 68 88 102 103

Profitability
Gross Profit (Gross profit ÷ Sales) % 57.0% 57.5% 56.5% 56.5%
Operating Profit Margin (PBIT ÷ Sales) % 5.7% 6.5% 7.4% 5.9%
Net profit Margin (Net Profit ÷ Sales)% 2.9% 3.4% 3.7% 2.8%
Operational Costs : Sales 44.4% 43.3% 40.8% 44.3%
Operational Gearing (Gross Profit : Operating
Profit) 13.6 11.6 10.7 14.1

Cash Flow
Operating cash flow / Sales 5% 3% 3%
Free cash Flow / Operating cash flow 0% -257% -124%

Return
Return on Equity (PBIT ÷ Equity) x 100 21% 25% 34% 30%
Return on Capital Employed (PBIT/ROCE) 15% 17% 18% 14%
Return on Assets (PBIT)÷ Total Assets)% 13% 13% 14% 11%

Solvency
Total Liabilities : Total Assets 39.2% 46.3% 58.1% 62.3%
Shareholders : Equity Total Assets 60.8% 53.7% 41.9% 37.7%
Gearing Ratio (Total Borrowing ÷ Net Worth) 35.4% 48.5% 90.5% 112.9%
Term Debt Amortization - Profits basis 0.0% 0.0% 0.0% 0.0%
Term Debt Amortization - Cash Flow basis 0.0 0.0 0.0
Interest Cover - Profit Basis 3.8 4.1 3.5 3.1
Interest Cover - Cash Flow Basis 2.9 1.5 1.6

Business Plan Analysis

Case Study No 1: – Display Fitters 1 5