Background
You came across a business for sale advertisement on one of the media sites that you were browsing. Since you have not been working since you completed your Advanced Diploma, you decided to discuss this business opportunity with four of your graduate friends, who are also looking for job opportunities. You considered closely looking at this opportunity.
The advertisement
Clean It Up (CIU) is a private company operating in the Buffalo City Metropolitan (BCM). Its primary business is refuse collection and disposal, mainly focussing on removing building rubbles from construction sites as well as garden refuse. The business has been operating in the BCM area for the past thirty-two years. With a number of active clients with long-term contracts, including Buffalo City Metropolitan Municipality, CIU is being disposed as a going concern. The business currently owns four delivery trucks, which are all in good working condition. All trucks are currently operating at full capacity. Financial statements for CIU will only be shared with those who show serious intention of buying the business.
Your situation:
Whilst you are interested in grabbing this opportunity, you and your friends, do not have the required capital. However, one of your friends, suggested that you prepare a business plan, which can be used to source funding from prospective funders. In the business plan, each of you will have to take leadership of public relations and marketing function; human resources function; operations function; and financial management function. As you are the only one with finance related background, you will lead the financial management function.

Before applying for funding, you decided to evaluate the current business to see its viability. After convincing the owner of CIU of your solid intensions to purchase the business, he provided you with the statement of income and statement of financial position for the last five years. These are presented below:

Five-year Comparative Statements of Income for CIU

Five-year Comparative Statements of Income for CIU

Your friend, who is responsible for public relations and marketing, predicts the market share for the coming financial year to increase by 10%.

REQUIRED:
Q.1
Q.1.1 As the financial director in the business plan, discuss the kinds of decisions you and your function will be responsible for. You need to provide various examples based on the provided business and operations. Three marks will be awarded for examples provided. (12)
Q.1.2 Provide reasons why the primary objective of your function (financial management) will not and should not be to maximise the profits of the business. (10)

Q.2 As part of the business evaluation/analysis, carry out the following:
Q.2.1 Prepare a statement of cash flows for 2022 financial year. (18)
Q.2.2 Prepare standardised financial statements for the 5-year period. How would you explain the performance of the company over the 5–year period based on the standardised financial statements you prepared? (28)
Q.2.3 Calculate and explain any three of the following ratios for the 5-year period:
Q.2.3.1 Profitability (21)
Q.2.3.2 Liquidity (21)
Q.2.3.3 Long-term solvency (21)
Q.2.3.4 Asset management (21)
Q.2.4 Based on you analysis and evaluation from Q.2.1 to Q.2.3, would you think the investment is worth the risk? Why or why not? (3)

Q.3 Prepare/calculate the following:
Q.3.1 The rate of growth required to sustain growth without seeking external funding (5)
Q.3.2 The sustainable growth rate (5)
Q.3.2 Prepare the following pro-forma financial statements using the percentage of sales approach:
Q.3.2.1 Statement of income (8)
Q.3.2.2 Statement of financial position (8)
Q.3.2.3 Discuss how the plug can be funded or be used. (4)

Answers to Above Questions on Financial Management

Answer 1: As a finance director in the business plan, the kind of decision that I need to make is to evaluate the profitability performance of the company in order to identify its viability in the long run, assist its revenues generating performance over the years, and assessment of its current assets and liabilities, and the major decision with respect to whether to acquire the business or not.