The assignment is based on the case of Alpha Ltd. a manufacturer of casual and leisure clothes aimed particularly at the younger, higher income market. The firm is current facing a financing problem and is considering short-run funding solutions. You are expected to analyse the financial reports provided in the case using the relevant techniques in order to evaluate its performance.

Based on your evaluation, you should recommend appropriate actions that would help the company overcome the weaknesses you have identified and to sort out its cash constraint.

1,500 words maximum

report structure

Executive summary

Table of Contents

Introduction ( A few words about the companys background)

Computational Work(You need to show your computations)

Evaluation - Based on the computational work you should provide an analysis of the companys

financial performance

Recommendations: Based on the analysis suggest specific actions which can help the

company to alleviate its problems ( cash needs) and put it back on track.

Conclusion(s)

References

Alpha Ltd

The managing director of Alpha Sportswear Ltd, and had just received a letter from the businesss bank requiring a significant reduction in the overdraft. This is ridiculous agreed, the production director. We had a big order in from a major customer just this morning. If we cant keep up the overdraft, we wont be able to fulfill that order. The client was one of several national chains of casual and sportswear stores which was placing substantial orders with Alpha, usually to be sold under the ABC label, but in some cases under the stores own brand label.

Alpha Sportswear was started by John smith and Patricia Willson five years ago. The business is a designer and manufacturer of casual and leisure clothes aimed particularly at the younger, higher income market. Before starting the business both owners had been employed as senior managers with a large UK clothes manufacturer. They decided to create Alpha after their ideas for developing a new range of clothes for younger people had been rejected by their ex-employer. Although their former employer liked the ideas proposed, it was restructuring its operations after three consecutive years of losses and had decided to focus on certain core brands aimed at meeting the needs of older people requiring smart day and occasion wear.

From the very outset, they decided that Alpha would be a design and marketing led business. Much of the forward planning was concerned with integrating the product design and development with the sales and marketing operations of the business. The new business had taken a lot of trouble and spent a lot of money on employing a young and talented design team, led by Mary Walker who had been employed previously as a chief designer for a leading sportswear brand. The range of clothes designed by Mary and her team was greeted with enthusiasm by the major buyers and this was converted into firm orders by the marketing team led by John. The order book began to grow and, for the new season, orders had reached their highest ever level.

Alpha grew slowly at first. However, sales started to increase significantly as the brand gained acceptability in the UK and as export markets in France and Switzerland were opened. John and Patricia and Mike were both surprised and delighted by the speed with which the sales of the business had grown in recent years and by the growing base of regular customers. The order just received from the chain store was seen as particularly important. If it became a regular customer, the sales of the business were likely to increase rapidly over the next few years and would establish Alpha Sportswear as a major player in the market.

John and Patricia had both invested their life savings in the business and had also taken out large mortgages on their respective houses to help finance the new business. However, this provided only a relatively small amount of the total ordinary share capital needed. In order to raise the remaining share capital, friends, family and business contacts were approached. The largest shareholder of the business was Scott Estates Ltd owned by George and Joe Scott. The two Scott brothers had made large profits by land speculation over the years but were keen to diversify into other areas as their business had been particularly hard hit by the recent recession. They had known Patricia for many years and were convinced she and John would make a success of the new business.

Alphas directors and their shareholdings were as follows: Patricia Willson

Managing Director and Marketing Director (700,000 shares)

John Smith

Production Director (700,000 shares)

Mary Walker

Design Director (200,000 shares)

George Scott

Chairman (2,000,000 shares owned jointly with brother via their Real Estate firm

Joe Scott

Non-executive director

Both Patricia and John had, before the meeting, hoped that the Scott brothers would be prepared to help out by purchasing further new shares in Alpha or by making a loan. However, it was soon made clear by them that further investment was not a possible option. Scott Estates had been experiencing considerable problems over recent years, as a result of a couple of unprofitable overseas projects, and simply did not have the money to invest further in Alpha. Indeed, the Scott brothers would be prepared to sell their shares in Alpha to generate much-needed cash for their own ailing business.

Finding a prospective buyer for the shares was not, however, a likely prospect at this point. Both Scott brothers had been heavily involved in recent years with the problems of Scott Estates and had taken little interest in Alphas affairs. The board meeting made them realise that they should have been much more attentive and now faced the prospect of being major shareholders of two failed businesses unless things could be radically improved.

The companys financial statements for the past two years are set out below:

Income Statements for the years ended Dec. 31st 000

2017

2018

Sales

14,006

22,410

Cost of Goods sold

7,496

11,618

Gross Profit

6,510

10,792

Operating Expenses

4,410

6,174

Operating Profit (before interest & taxation

2,100

4,618

Interest Payable

432

912

Profit before taxation

1,668

3,706

Taxation

420

780

Profit after taxation

1,248

2,926

Changes in Shareholders Equity Dec. 31st 000

2017

2018

Shareholders Capital

Ordinary shares 1 each 3,600

Shareholders Capital

Ordinary shares 1 each 3,600

Retained Profit brought forward from previous years 2,626

Retained Profit brought forward from previous years 3,274

Profit (after tax) for the year 1,248

Profit (after tax) for the year 2,926

Dividend paid (600)

Dividend paid ( 800)

Retained Profit carried forward 3,274

Retained Profit carried forward 5,400

Total Equity 6,874

Total Equity 9,000

Balance sheets ended Dec. 31st 000

2017

2018

Current Assets

Current Assets

Cash

56

Cash

8

Accounts Receivable

1,882

Accounts Receivable

4,146

Inventories

2,418

Inventories

5,820

Total

4,356

Total

9,974

Long Term Assets*

Long Term Assets*

(Net of depreciation)

8,600

(Net of depreciation)

14,470

Total Assets

12,956

Total Assets

24,444

Liabilities

Liabilities

Short-Term

Short-Term

Accounts Payable

1,214

Accounts Payable

2,612

Other short-term liabilities

248

Other short-term liabilities

402

Taxes payable

420

Taxes payable

780

Bank overdraft

600

Bank overdraft

5,050

Total short-term

2,482

Total short-term

8,844

Long Term Liabilities

Bank Loan

3,600

Bank Loan

6,600

Total Liabilities

6,082

Total Liabilities

15,444

Equity

Shareholders Capital

Common shares 1 each

3,600

Shareholders Capital

Common shares 1 each

3,600

Retained Profit

3,274

Retained Profit

5,400

Total Equity

6,874

Total Equity

9,000

Total L & SE

12,956

Total L & SE

24,444

The market value of the long-term assets at Dec 31, 2018 is 25, 965

The net cash from the operating activities has been computed to be 1,172 at Dec 31, 2018.

The board of directors was not able to agree on a way of dealing with the financial problem faced by Alpha Sportswear. Patricia felt that there was still a chance that the bank could be persuaded to change its mind once the draft financial statements for last year were made available and the bank was informed of the implications for Alpha of paying off such a large part of the overdraft in such a short period of time. Both, on the other hand, were not optimistic about the prospects of changing the banks position. The company had breached its overdraft limit on several occasions over the past few years and they knew that the patience of the bank was now wearing thin. They believed that the only real solution was for the board to look for someone who was prepared to make a significant investment in the business. They felt that only a large injection of new funds could keep the company on track. They firmly believed that the draft financial statements demonstrated the success of Alpha Sportswear over recent years and that this evidence would make the business attractive to a potential investor. The Scott brothers rejected both of these views as being impractical. In addition, they were against the idea of introducing another major shareholder as this was likely to dilute their influence over the future direction of the business. The brothers believed that the board required drastic and immediate action, although they were not sure what form of action should be taken.

After several hours of discussion, it was clear that the financial issue was not going to be resolved at the meeting. Instead, it was agreed that expertise from outside the company should be sought to help the business find a feasible solution to the problem. The board decided to approach Beta Management Consultants, which specialises in helping businesses with financial problems, and to ask the firm to produce a plan of action for the boards consideration. They were, however, apprehensive about what the proposed plan of action would contain. "It seems we have to pay a penalty for our success. I only hope this penalty wont involve undoing all our good work over the years."

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