Vertical analysis, Horizontal analysis, Cash flow analysis, Liquidity ratios, Profitability ratios, Debt Management ratios, Asset Management ratios. a complete analysis of micro tile limited question case 1 look before you leap

Micro Tiles Limited Case 1: Look Before You Leap Micro Tiles Limited In 2014, Micro Tiles Limited was showing substantial growth. Revenue went from $1.0 million in 2011 to $2.0 million in 2014 (see appendix A). This huge gain was a result of some sales agreements that Bill had signed with several giftware retailers. His catalogues also helped his business to gain some recognition. A wide variety of consumer outlets and consumers were becoming acquainted with Micro Tiles products. Even some major retailers began to show an interest in carrying his product lines. Bill signed a sales agreement in March 2014 with a major retailer. The retailer would market Bills products on a trial basis in several stores across Canada. After several months, the consumer response appeared to be positive and Micro Tiles was becoming recognized as a leading monthly sales consignment supplier. This helped generate a 48% sale increase in 2013 (from $1,058,000 to $1,564,000). As the relationship with several retailers matured, Micro Tiles introduced several changes in the way of manufacturing and marketing the products. In the past, the company created a tile followed by a promotional plan. Now, the development of new products would be based on consumer research and social trends. For example, the company would develop new product lines as a tribute to successful sports heroes. Retailers and consumers both showed considerable interest in this marketing scheme and this was considered the cornerstone of Micro Tiles success. The following paragraphs describe the planning assumptions for the statement of income and the statement of financial position for the year 2015. Financial Statements Micro Tiles three financial statements: the statements of income, the statements of changes in equity and the statement of financial position for the years 2011 to 2014 are presented in Appendix A. Although revenue doubled between the years 2011 to 2014, the companys profit for the year remained relatively flat. Bill was able to increase the companys revenue but had problems keeping his costs in line. The statement of the financial position indicated that total assets increased substantially from $450,000 in 2011 to $1,132,000 in 2014. In 2011, approximately 67% of the companys assets were financed by debt, a ratio that remained unchanged during the four-year period. This meant that every time assets were purchased, 67% was financed by debt, and the rest, equity. In 2014, Bill decided to invest $300,000 in his business to purchase new production equipment in order to meet product demand and more importantly, improve plant efficiencies. Bill re-mortgaged his house and obtained $100,000 from the bank for the purchase of these assets. Financial Projections When Robert considered joining the company in October of 2014, he realized that his first task was to bring about changes in the business that would have positive effects on both the statement of income and the statement of financial position. If the company wanted to invest $2.0 million to expand its operations in 2016, he knew that some cash would have to be generated internally. He could not continue relying on 67% external funding. This meant going through a cost-reduction program in addition to reducing the level of working capital accounts such as inventories and trade receivables. Statement of Income Planning Assumptions Roberts first objective was to boost operating efficiencies. He wanted to improve the companys return on revenue from 2.3% in 2014 to 9.0% in 2015. He was confident that this could be realized by substantially cutting back on production costs. Based on some preliminary figures, he estimated revenue to increase by 8% in 2015, or reach $2.2 million. In 2014, the cost of sales as a percent of revenue was 76.6% and he wanted to bring it down to 64.0% by 2015. Here are Roberts 2015 cost of sales estimates for individual expense items: As far as marketing activities are concerned, Robert wanted to be more aggressive. Distribution costs for 2015 were estimated as follows: The administrative expense projections for 2015 were to remain flat compared to 2014. However, as a percentage of revenue, these expenses would also show an improvement in efficiency. Finance costs would show a substantial increase in view of the extensive debt financing obtained from the bank for the purchase of new assets. He estimated administrative expenses and finance costs to be as follows: Statement of Changes in Equity Planning Assumptions The only four numbers to be inputted in the statement of changes in equity (retained earnings) are: In the first template under the year 2011: under common shares, for the balance at the beginning of the year: $25,000. under retained earnings, for the balance at the beginning of the year for retained earnings: $87,000 In the second template under the year 2013: under common shares, common shares issued: $25,000. under retained earnings, for the balance at the beginning of the year for retained earnings: $171,000. Statement of Financial Position Planning Assumptions There were two major improvements that Robert wanted to realize in 2015. Reduce the level of investments in inventories and trade receivables. His objective was to increase the inventory turnover (based on the cost of sales) from 5.3 times to 8.1 times in 2015. This target was also based on industry averages and benchmarks. He also wanted to reduce the average collection period from 71.1 days in 2014 to 47 days in 2015. This objective was based on some financial benchmarks that he had obtained from his banker. With these changes in inventories and trade receivables, he felt that he could increase Micro Tiles internal cash flow which would then help finance the purchase of the $300,000 in non-current assets. The current asset accounts were estimated as follows: As previously indicated, Robert expected to invest an additional $300,000 in non-current assets in 2015. As a result, the estimated accumulated depreciation/amortization would increase by $60,000. Goodwill would be maintained at the $14,000 level. On the equity and liability side of the statement of financial position, Robert wants to reduce working capital loans and long-term debts. His strategy was to improve the companys debt-to-total assets ratio in order to have some leverage for obtaining additional financing in 2016 that would be used for the $2.0 million investment. The following are his estimates for the year 2015: Micro Tiles weighted average cost of capital for the years 2013 to 2015 is estimated at 10%. Break-Even Point Cost Assumptions Robert felt that the companys break-even points for the years 2013 and 2014 were not healthy and by going through a cost reduction program, he was aiming for a significant improvement in 2015. He estimated that 75% of the cost of sales for labour to be variable and the other 25%, be fixed. Cash Budget Assumptions for the Year 2015 Robert understood that the only way to realize his 2015 financial objectives would be to follow his monthly expenses like a hawk; therefore he decided to prepare a cash budget. Instead of waiting for quarterly or year-end results, he wanted to follow every cost item as the year progressed. The monthly revenue and cost breakdown is as follows: As far as revenue is concerned, 20% of the customers paid on a cash basis and 80%, the month after. For purchases, 50% was paid on a cash basis and the rest, the following month. The monthly breakdown for other costs is as follows: Freight in: $7,000 (Jan. to Dec.) Salaries-Distribution: $5,000 (Jan. and Feb.) and $6,000 (March to Dec.) Advertising: $2,000 (Jan. to April and Nov. to Dec.) and $3,000 (May to Oct.) Salaries Administration: $10,000 (Jan. to Dec.) Leasing: $3,000 (Jan. to Aug.) and $4,000 (Sept. to Dec.) Other Administration: $1,000 (Jan. to Nov.) and $2,000 (Dec.). Finance costs: $7,000 (Jan. to May), $9,000 (June to Aug.) and $12,000 (Sept. to Dec.) Beginning bank balance: $70,000 .