Financial Management for Global Decision Makers Coursework 2
Smith Construction Ltd
Smith Construction Limited was formed in January 2019 by a brother and sister, Ted
and Freda Smith. Ted had been in the construction industry for many years and had
grown frustrated by the inflexibility of the industry to meet customers’ requirements
speedily and with appropriate quality and inventiveness. Freda had worked herself up
in management circles after having gained an excellent first class honours degree in
business studies. However, she felt she had more to offer especially in the area of
entrepreneurial flair and marketing.
Both siblings therefore started the business by investing £200,000 each receiving for
this 200,000 £1 shares. Ted looked after the operational side of the business whilst
Freda looked after the marketing, human resources and administration functions.
The first year proved difficult as the firm sought to build up a customer base and had
to invest heavily in marketing and building up the infrastructure of the business. By
the second year the business had started making profits. As the business grew both
siblings realised that there were inherent weaknesses in their business planning and
financial management and hired James Blond to assist in the financial side of the
business. After a year of James being with the company the siblings decided to ask
James if he would be willing to become a shareholder and financial director due to the
skills he brought to the management of the business. James was delighted with this
prospect as he saw the firm’s potential as well as the possibilities for him to influence
further the direction and profitability of the company. He therefore bought 60,000 of
each of the siblings’ shareholdings in November 2021 for a price of £3 per share.
The company however has had a setback in 2022. The profits planned for the first six
months did not come to fruition with instead a heavy loss having been made (the first
loss since the company’s first year of trading). Given the upward trend of the sales and
profit figures in the recent past this has caused great and heated debate at the
directors’ board meeting. Unfortunately, the discussion became somewhat heated
with James Blond accusing the siblings of having cheated him into investing into the
company at an inflated price and then having sat back and expected the business to
run itself while they have taken holidays and “taken their foot off the pedal”. In private
he has stated to his friends that he would not be surprised if one or both of the siblings
was “milking” the company, siphoning off the business’ (and his) assets. At the Board
meeting Freda Smith accused James of not running the financial side of the business
appropriately and even hinted at the fact that since he was in charge of the finances
he could be “helping himself to some of the cash for all we know”. At her book club
Freda has also commented to her friends that she is a bit concerned about the
business and also Ted’s role in the business. She has stated that she thinks Ted seems
to have “very close relationships” with customers and suppliers and might be more
interested in their (and possibly his) well-being and profits rather than the company’s.
She also noted that these days Ted seems to be spending a lot of money on himself
including £70,000 on a new Tesla. This concerns her as although the business has been
making profits this sort of expenditure was flamboyant.
Freda, herself, has started building her own house on the back of the past profits made
but this was backed up by a personal loan from the bank.
The profiles of the 3 directors are as follows:
Ted Smith
Age: 38
Position: Operations director
Salary: £60,000 per annum
Responsibilities: Construction planning, site management and materials
procurement.
Duties: Finalising drawings
Planning materials
Hire of equipment for contracts
Site management and supervision of site staff
Recruitment and cash payments of casual employees (labourers
hired by the day)
Signing off on completed contracts
Liaison with external contractors, architects and surveyors
Freda Smith
Age: 36
Position: Managing director
Salary: £60,000 per annum
Responsibilities: Marketing, Company Secretary, Human Resources
Duties: Hiring and firing of staff
` Other staff related issues
Security and maintenance of company property and assets
Insurance of company property, equipment and staff
Customer liaison
Marketing of company
James Blond
Age: 28
Position: Financial director
Salary: £45,000 per annum
Responsibilities: All financial responsibilities, including billing sales, receipt of
cash, payment for payroll and expenses, banking
Duties: Invoicing customers
Paying suppliers
Paying staff (except casual employees who are Ted’s
responsibility)
Maintenance of company bank account
Preparation of monthly accounts
Preparation of business plans
Appendix A shows the company accounts for the last 3 years in addition to forecast
figures for the next financial year.
Coursework Requirements
You have recently been engaged as a Management Consultant for Smith Construction
Ltd. After a recent meeting, where certain accusations were made between the three
Smith Construction Ltd directors, you have been asked to review the company’s
situation.
You have been asked to submit your report to the directors by 2 pm on November
18th 2022
Your report must include the following:
Part One
The directors are extremely concerned about the fall in working capital. Provide a
comprehensive analysis of the accounts of Smith Construction Ltd using an
appropriate range of financial ratios in order to investigate. For the ratios you
calculated, comment on any areas of concern identified and suggest reasons as to why
these changes in performance may have occurred. Your workings (e.g. ratio
calculations)should be attached as an Appendix in your final report and the ratios you
have calculated should be placed in a table at the appropriate point of the report.
Part Two
Extend your report to discuss findings regarding possible areas of misappropriation
of company assets, outline what internal controls are and highlight the components
of internal control that you feel the directors of Smith Construction Ltd should focus
on for the forthcoming year. This should be based on your review of the case study
and should be informed by further reading on the subject area of Internal Controls.
Part Three
The directors have independently assessed that they need funding of £250,000 to
invest in projects and to secure the future competitiveness of the business. The
directors are unsure as to whether to approach a bank for a loan or other potential
investors in order to secure the money required. Advise the directors on both forms
of financing. Your discussion should cover the advantages and disadvantages of
these forms of finance, it should be based on your review of the case study and
should be developed through further reading on the subject area. You should
conclude by providing a justified recommendation for the directors.
Rules
Any report submitted late will receive a zero mark.
Marking Criteria
A marking scheme is available in appendix B
NOTE: The overall pass mark for the module is 50%. The minimum mark required in
either course work is 45% but you must get 50% overall.
This is an entirely fictitious scenario and the financial impact of the pandemic had
no effect on the company’s finances in this scenario*
Appendix A
Smith Construction Financial Statements
Profit & Loss account 2019-2021
* Materials are purchased on credit from a single supplier
£’000 £’000 £’000 £’000 £’000 £’000
Sales 1800 1350 2900
Construction Costs:
Labour costs -590 -420 -900
Materials * -670 -400 -1000
Subcontractor -60 -30 -80
Production overheads -275 -1595 -200 -1050 -350 -2330
Gross Profit 205 300 570
Other costs:
Administration salaries -150 -100 -180
Administration overheads -25 -10 -26
Marketing expenses -20 -195 -20 -130 -20 -226
Net Profit 10 170 344
Interest expence (Finance cost) -20 -40 -20
Taxation 0 -20 -70 -110 -120 -140
Net Profit after Tax -10 60 204
Actual 2019 Actual 2020 Actual 2021
Profit & Loss account 2022
* Materials are purchased on credit from a single supplier
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Sales 4100 1800 1700 2300
Construction Costs:
Labour costs -1240 -600 -850 -640
Materials * -1150 -600 -610 -550
Subcontractor -220 -100 -170 -120
Production overheads -360 -2970 -180 -1480 -175 -1805 -180 -1490
Gross Profit 1130 320 -105 810
Other costs:
Administration salaries -280 -100 -100 -180
Administration overheads -32 -16 -18 -16
Marketing expenses -24 -336 -12 -128 -14 -132 -12 -208
Net Profit 794 192 -237 602
Interest expence (Finance cost) -20 -10 -30 -10
Taxation -180 -200 -60 -70 0 -30 -120 -130
Net Profit after Tax 594 122 -267 472
Forecast 2022 Forecast Actual
1st Half of 2022 2nd Half of 2022
Forecast Actual
Balance Sheet 2019-2021
* Current assets – current liabilities
Actual 2019 Actual 2020 Actual 2021
£’000 £’000 £’000
Fixed assets 400 584 674
Current assets:
Inventory 110 140 220
Debtors 160 180 340
Bank balance 20 36 40
Total current assets 290 356 600
Current liabilities:
Creditors 100 150 160
VAT 0 40 60
PAYE 0 60 80
Corporation tax 0 40 120
Bank overdraft 0 0 0
Total current liabilities 100 290 420
Working capital * 190 66 180
Long term loan 200 200 200
Net assets 390 450 654
Equity:
Share capital 400 400 400
Reserves -10 50 254
390 450 654
Balance Sheet 2022
Forecast Forecast Actual Forecast Actual
£’000 £’000 £’000 £’000 £’000
Fixed assets 1064 774 860 1064
Current assets:
Inventory 260 232 230 260
Debtors 444 340 336 444
Bank balance 200 50 0 200
Total current assets 904 622 566 904
Current liabilities:
Creditors 160 200 260 160
VAT 80 70 80 80
PAYE 100 90 100 100
Corporation tax 180 60 60 180
Bank overdraft 0 0 106 0
Total current liabilities 520 420 606 520
Working capital * 384 202 -40 384
Long term loan 200 200 200 200
Net assets 1248 776 620 1248
Equity:
Share capital 400 400 400 400
Reserves 848 376 220 848
1248 776 620 1248
1st Half of 2022 2nd Half of 2022
* Current assets – current liabilities
Appendix B
COURSEWORK 2 MARKING SCHEDULE
MODULE &
ASSESSMENT
INSTRUMENT
Financial Management for Global
Decision Makers
Marks
available
Smith Construction Limited
Part 1 (approx. 500
words)
30%
Analysis of the
accounts: Ratio
analysis and critically
discuss (drawing on the
academic literature) any
areas of concern that
require further
investigation
Part 2 (approx. 750
words) 30%
Discussion of
misappropriation and
identification of weak
areas of internal control
and suggestions to
resolve.
You should define,
summarise, critique,
apply relevant evidence
and display an ability to
logically develop your
argument. This should
be a discussion and not
a series of bullet points.
Part 3 (approx. 750
words) 30%
Review of the sources
of finance identified by
Smith Construction Ltd
given the need to raise
£250,000 for investment
in the business.
Recommendation along
with justification
required.
You should define,
summarise, critique,
apply relevant evidence
and display an ability to
logically develop your
argument. This should
be a discussion and not
a series of bullet points.
Presentation of report,
references and
reference list
10%
*It is good practice to include a brief introduction to your report
