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BSBFIM501: Manage Budgets and Financial Plans - Big Red Bicycle Pty Ltd Case Study - Financial Management Assessment Answer

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Internal Code: 6DJAA Code: BSBFIM501

Big Red Bicycle Pty Ltd Case Study Assessment Answer

Assignment Task: BSBFIM501 Big Red Bicycle Pty Ltd is a bicycle manufacturer based in Bendigo, Victoria. The company produces bicycles which it sells to retailers in the domestic Australian market. BSBFIM501 According to company strategic plans, the company had aimed to achieve a net profit before tax of $1,000,000. Actual figures showed the company fell short approximately $175,000 of this goal. After successful labor cost-cutting measures and improved sales team performance, the company aims to generate a net profit before tax of $1,200,000 from Australian operations alone. BSBFIM501 This year, in addition to Australian operations, the company is considering manufacturing overseas to take advantage of reduced costs. The company is also considering diversifying its product range to reduce exposure to poor sales of one product. The board of directors of Big Red Bicycle feels that more cash will be needed to make investments to achieve strategic aims. One significant risk to plans is bad debt and poor cash flow due to large and unsustainable trade debtor balances quarter by quarter. BSBFIM501

Role

You are the Senior Accountant. As part of your role, you will need to complete the following tasks.

Task A - BSBFIM501

As you are aware, one risk to the strategic plans of Big Red Bicycle (BRB) is bad debt and poor cash flow due to large trade debtor balances. Consider the following:
  • According to its policies, BRB offers 30 day terms to debtors.
  • BRB does not currently train sales staff on credit terms.
  • There is currently no enforcement of credit terms.
  • Warehousing of stock is expensive at current leased premises.
  • Many bicycles need to be thrown out if parts rust; this problem exacerbates the problem of waste expense. BSBFIM501
You have the following information from the Statement of Financial Position and current ledger accounts in the electronic accounting system (MYOB AccountRight).
Account $
Trade debtors  362,500
Trade creditors  80,000
Opening stock  100,000
Closing stock  300,000
Purchases  1,000,000
Complete the following - BSBFIM501
  1. Review the Statement of Financial Performance in Appendix 2 to calculate:
The average debtor days (Debtor days is the average number of days required for a company to receive payment from its customers for invoices issued to them.  A larger number of debtor days means that a business must invest more cash in its unpaid accounts receivable
    • asset, while a smaller number implies that there is a smaller investment in accounts receivable, and that therefore more cash is being made available for other uses.)
The calculation of debtor days is: (Trade receivables ÷ Annual credit sales) x 365 days                   362,500 / 2,900,000) X 365 = 46 days The average creditor days (The Creditor (or payables) days number is a similar ratio to debtor days and it gives an insight into whether a business is taking full advantage of trade credit available to it. Creditor days estimates the average time it takes a business to settle its debts with trade suppliers. The ratio is a useful indicator when it comes to assessing the liquidity position of a business) As an approximation of the amount spent with trade creditors, the convention is to use cost of sales in the formula which is as follows: BSBFIM501 (Trade creditors/purchases) * 365 80,000 /1,000,000 *365 = 29 days The average stock turnover (One commonly used measure of stock performance is the stock turnover rate. This rate indicates the number of times the stock in a business has 'turned over', or been replaced, in a year. Stock turnover rate is considered to be a measure of sales performance; usually the higher the stock turnover rate, the better your stock/business is performing. The lower the rate, the longer the stock is taking to turn over. Funds are invested in stock for longer periods, which, in turn, has an adverse effect on cash flow. To calculate your stock turnover, you first need to work out your average stock value by looking at the value of your opening stock and the value of your closing stock) BSBFIM501 Average stock value = (opening + closing stock) x 0.5 (100,000+300,000)*0.5=200,000 Stock turnover ratio = Cost of goods sold ÷ average stock holding =380,000/200,000=1.9 times per year. Show calculations and results on your response document for this assessment task.
  • Consider the existing BRB ageing debtors budget in Appendix 2. On your response document, make two written recommendations for improvement to existing financial management processes to improve cash flow. To support your recommendations, refer to data sources, organisational needs, and analytical techniques, for example: BSBFIM501
    1. Statement of Financial Performance
    2. ledger accounts
    3. scenario information
    4. ageing debtors budget
    5. ratios.
Recommendations:
  • According to policies BRB offers 30 day term to debtors while it is going till 90 days as well for some cases in debtors budget. Average debtor is 46 days. To avoid cash flow issues, Big Red Bicycle should consider stricter terms for debtors and/or enforce trading terms. Currently, team members do not have the capacity to enforce debt terms effectively. Team members should be informed of policies and trained if necessary.
  • Consideration of the ageing creditors ratio indicates that Big Red Bicycle is paying creditors in less than 30 days on average. There is a large gap of 15 days between average payment to creditors and receipt of cash from debtors.  To avoid cash flow issues, Big Red Bicycle should consider negotiating more favourable terms with creditors. BSBFIM501
  • Consideration of the stock turnover ratio reveals that the stock of bicycles is sold out approximately twice per year. Big Red Bicycle has problems with stock spoilage and wastage. Therefore, in order to avoid cash flow issues and wastage problems, Big Red Bicycle should consider options such as JIT (Just-In-Time) manufacturing and distribution. The company may also be able to save money through leasing a smaller warehouse. The company may consider discounting products to sell excess stock as a last resort.
  • On your response document, list three sources of information of use to complete this activity.
For example:
  • Statement of Financial Performance
  • Statement of Financial Position
  • ledger, journal balances
  • ageing debtors summaries and budgets.

Task B - BSBFIM501

In addition to its Australian business, Big Red Bicycle is considering manufacturing a new range of cheaper bicycles in Indonesia. The following information is available:
  • The Indonesian plant has capacity to manufacture 8,000 units.
  • Big Red Bicycle’s strategic goal is to generate a pretax profit of $1,000,000 for the next financial year for Indonesian operations.
  • Clients will pay a maximum of $500 per bicycle
  • Possibility exists for move to Indian plant with capacity for 10,000 units.
  • Market for bicycles is growing rapidly and BRB will be able to sell all units produced.
  • Limited ability to renegotiate costs with suppliers.
  • Pricing and cost information is as follows. BSBFIM501
Bicycle price per unit $500 (excl. GST)
Current variable costs per unit $250
Fixed costs $1,280,000
  • On your response document, work out:
    1. how many units at current variable cost would need to be produced to achieve profit target (show calculations)
    2. what the variable costs per unit would need to be to achieve profit target at current manufacturing capacity (show calculations).
  • On your response document, make one written recommendation based on your analysis. To support your recommendation ensure you refer to the organisational needs or situation, and any analytical techniques used. You may also suggest possible actions for BRB to take depending on possible future scenarios.
  • On your response document, list three sources of information of possible use to complete this activity.

Task C - BSBFIM501

Soon you will need to prepare a Business Activity Statement (BAS) for the first quarter on 2012/13. Complete the following.
  1. State how many years you will need to keep GST records in order to satisfy ATO requirements.
  2. Complete the GST budget on the following page to anticipate GST liability.

Task D - BSBFIM501

Choose one of the recommendations from Task A or B and develop an action plan to implement and monitor the recommendation. Ensure you include appropriate activities, monitoring, timelines and accountabilities.

Task E - BSBFIM501

Reflecting on the tasks you have undertaken and on your knowledge of financial management and planning principles:
  1. describe basic accounting principles
  2. describe cash flows
  3. describe ledgers and financial statements
  4. describe profit and loss statements.  
Summarise your reflections in a short, written statement and submit this to your assessor. You may revisit the five fundamental principles of accounting. For example, the list is said to be crucial to effective management decision-making: BSBFIM501
  1. Control – managers need to control and monitor the business.
  2. Relevance – decision-makers need information that is timely, useful etc.
  3. Compatibility – the accounting systems should match the aims of a company.
  4. Flexibility – the accounting systems need to adapt to the company’s needs.
  5. Cost-benefit – the benefits of the accounting information system need to outweigh the cost.
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