Corporate Finance Foster Brewing Company

Case 42

Submitted To: Sir Shujahat Hashmi Submitted By: Muhammad Rafeeq MBE 103042

Zeeshan Khan

MBE103031

Program MBE

Dated: 30-05-2012

Mohammad Ali Jinnah University, Islamabad

What areas of operations would you recommend be changed to improve the profitability and financial performance of the firm?

Foster Brewing Company should follow that step to improve the profitability and financial performance:

Poor Firm Management:

Foster Brewing Company lacks a management system that provides for long-range planning, day-to-day administration and appraisal of results. A well-administered firm requires mechanisms for overseeing the firm's finances and operation and for on-going communication among firm members.

Lack of a Marketing Map

As firm grows, the ad hoc marketing strategies and efforts which may work for a smaller firm become less effective. So, Foster Brewing Company should make a strong marketing plan.

Lack of a Financial Plan

Unless a firm has a projected financial plan for income and expenses against which actual performance may be measured, the firm will have little opportunity to identify and correct economic problems. A basic financial plan that includes income and expense projections based on the firm's past experience will enable attorneys to prepare for unusual contingencies and avoid financial surprises.

Liquidity Ratios
Profitability ratios also play an important role in the financial positions of enterprises. Every stakeholder has interest in the liquidity position of a company. Suppliers of goods will check the liquidity of the company before selling goods on credit. Employees should also be concerned about the companys liquidity to know whether the company can meet its employee related

obligationssalary, pension, provident fund, etc. Thus, a company needs to maintain adequate liquidity so that liquidity greatly affects profits of which some portion that will be divided to shareholders. Liquidity and profitability are closely related because one increases the other decreases.

Following Are the Steps to Improve the Financial Position

Analysis Your Business Plan
Every business must have a business plan. Firstly 54% of businesses have no formal business plan. So if you do not have one, get a business plan. Many businesses often tend to deviate from the plan and fail as a result as of the lack of preparation. Your plan should be guiding the path that your growing business takes to ensure mistakes are minimized. You should have regular management accounts to ensure you are meeting or exceeding your targets.

Take the time to look at how you can better manage your cash flow
Everyone knows that cash is king! The biggest key to the success of any business is to ensure your cash is managed well. Being able to identify ways you can manage costs and improve your cash flow is crucial. Frighteningly, many businesses are unaware of their true financial position as they do not take into account their current and future cash position. It is essential that businesses of all sizes have a financial cornerstone to advise in their business, for example a professional bookkeeper, will be able to advise you on how to better manage your cash flow.

Start running credit checks and develop an age debtor system

They say the best cure is prevention; this cannot be truer, when it comes to customers that will not pay on time. 18.6 billion is owed to small businesses by unreliable customers and a great proportion of these could be avoided with an effective credit control system in place. It can be difficult for a small business that does not want to risk losing business to place a more forceful hand on a regular customer and feel they cannot spare their time from the main focus of the business so outsourcing this system is ideal.

Start assessing your progress on current reports instead of historic end of year accounts
Having Management Accounts allows business owners see what direction their business is heading in now instead of seeing the damaging effects of something that happened 18 months ago in an end of year report when they are then unable to do anything about it. Having the benefit of seeing what is happening to their finances on a regular basis, allows the business owner to be fully equipped to make sensible decisions to guide them away from any foreseen difficulties and promote a healthy cash flow. A qualified bookkeeper will be able to supply you with this financial assistance.

Dismiss the myth that any business is too small for a professional financial help or does not need it
As long as your business has incoming and outgoings, you will need a professional. A qualified and experienced bookkeeper will take away the burden of the paperwork to help business owners apply their time to the more important everyday running of the business. In some ways, smaller businesses need this help even more as their small cash flow could be better utilized or even increase by a trustworthy bookkeeper, allowing them to make the investments they need to grow larger or save them from failing.

Question # 2 Pro-Forma Statements

Followings are the assumption while preparing pro-forma income statement and balance sheet for next five years:

Sales Growth CGS Operating Expenses Tax Current Ratio Depreciation Dividend Plant & Machinery of Sales

10% 70% 15% 35% 1.50 10% 20% 23%

Loan from Familly

Interest Free loan

Question#3 what other sources of financing could the firm rely on for reserve borrowing capacity?
Followings are the source of financing which that company can use:

Friends and Family Members

If you're lucky, friends and family members might be the most lenient investors of the bunch. They don't tend to make you pledge your house, and they might even agree to sell their interest in your company back to you for a nominal return. Already this company get loan from family and now bank refuse to give more loan. Company has opportunity to get interest free loan from family members and make progress in his business.

Retained Earnings
For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as a dividend. In pro-forma statements we assume that now company not announce dividend until make some high profits and compensate previous losses.

Floating Rate of Interest while issuing Debentures

These are debentures for which the coupon rate of interest can be changed by the issuer, in accordance with changes in market rates of interest. They may be attractive to both lenders and borrowers when interest rates are volatile.

Smart Leases
Leasing fixed assets conserves cash for working capital (to cover inventory), which is generally tougher to finance, especially for an unproven business. Warning: Don't put so much money down that you end up spending the same amount of cash as you would have had you bought the asset with a down payment. The cost of a lease may be slightly higher than bank financing but the cost of the down payment you did not have to make is likely to be less painful than the dilution you suffer from giving away equity.

Customers
Advance payments from customers--assuming the terms aren't too onerous--can give you the cash you need, at a relatively low cost, to keep your business growing. Advances also demonstrate a level of commitment by that customer to your operation.

Internal Revenue Service

No, the Internal Revenue Service does not lend money. But it does allow you to deduct expenses. If you are paying a heap in taxes, evaluate whether you can use your profits to expand your business--and reduce your tax bill.