ACC127 Accounting and Financial Literacy Report

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Charles Sturt University *

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127

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Accounting

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Jan 9, 2024

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ACC127 Accounting and Financial Literacy Claire Willoughby (117196561) Assessment 3 Report: Budgets and Business Reports Value: 20% Due Date: 20-Sept-2023 Return Date:13-Oct-2023 Length: 700 words +/- 10% Submission Method: EASTS Assignment Portal Word Count: 770

Table of Contents Issues with Business Forecast Budgets ................................................................................ 3 Affordability of Repayments ............................................................................................... 4 Additional Factors to be Considered ................................................................................... 5 Recommendation ............................................................................................................... 6 Conclusion .......................................................................................................................... 7 References ......................................................................................................................... 8 Appendix A ......................................................................................................................... 9 Appendix B ....................................................................................................................... 10 Appendix C ....................................................................................................................... 11 Appendix D ....................................................................................................................... 12 Appendix E ....................................................................................................................... 13 Appendix F ....................................................................................................................... 14 Appendix G ....................................................................................................................... 15 Appendix H ....................................................................................................................... 16 Appendix I ........................................................................................................................ 17

Issues with Business Forecast Budgets Financial Considerations The cash budget for September and October shows a substantial discrepancy between the forecasted cash inflows and outflows, resulting in a cash deficit of -$1492.94 and -$862.03, respectively (See Appendix A). This discrepancy suggests probable liquidity issues during these months, raising concerns about the business’s capacity to meet any short-term financial obligations. The balance of accounts receivable steadily increases with the seasonal demand of Pegasus Stables’ services throughout the reporting period (See Appendix B). Whilst this can indicate an increase in sales, this can also represent delayed cash receipts, which further affects the business’s capacity to pay current expenses. The budgeted sales exhibit a declining trend from May to August, representing a reduction in expected income over the year, potentially leading to financial difficulties if not addressed (See Appendix C). Whilst this is explained through the seasonal demands of services provided by Pegasus Stables, this necessitates an examination of sales strategies to ensure capability to cover expenses. Non-Financial Considerations A consideration of the effectiveness of the marketing and advertising in increasing cash inflow is crucial. The budget for both expenses is relatively consistent throughout the year (See Appendix D). Due to the declining trend in sales through May to August, evaluating the effectiveness of these strategies and considering adjustments to increase sales is essential. It is crucial to evaluate the purpose of the loan and how it affects business operations. Currently, the total loan repayment and principal both fall due in March of each year (See Appendix E). Whilst the purpose for the loan has not been disclosed, the consideration of other payment options may prove beneficial to the business, easing financial burdens across the year. This may also help to alleviate any financial stress the business experiences during the period in which sales trends have shown a decline and periods when expenses are recorded as higher. The acknowledgement of the allocation of depreciation across the 12-month reporting period is vital when evaluating business profitability. Depreciation is a non-cash expense, and therefore, does not affect the outflow of cash for the business. However, it has the potential to affect the overall financial situation of Pegasus Stables by providing a clear representation of the value of current assets, all of which are necessary for the operation of a service-based business (See Appendix F).

Affordability of Repayments The affordability of repayments has been calculated based on the financial data and information provided up to June 2024 (See Appendix G). Any changes in the business or financial circumstances beyond this date may impact the capacity of Pegasus Stables to meet repayment obligations. Furthermore, the loan terms, interest rates and any additional financial obligations will determine the feasibility of taking out a loan in the current financial position of the business. In determining the affordability of repayments (See Appendix H), a monthly average of excess cash receipts has been calculated to meet monthly repayment obligations. A margin of 50% (See Appendix H) has been left from this average, to ensure financial stability and cushioning for predicted expense increases, coinciding with business expansion. This will also allow for a margin if sales are not to increase immediately after purchase of the land, given the predication that this expansion will generate further sales revenue through the offering of additional services for customers.

Additional Factors to be Considered There are additional factors that should be considered before purchasing the land. Increased Expenses The current amount of expenses incurred by Pegasus Stables, including all variable, most monthly and some annual expenses are likely to increase proportionate to the costs associated with purchasing land (See Appendix I). Whilst the total cost of these increases cannot be calculated, Pegasus Stables must be aware of this and ensure adequate cash flow to cover all loan repayment obligations and increased cash outflow. Market Demand and Competition An analysis of the current demand for additional horse related services in the area is crucial to informing the decision of purchasing land. Whilst the purchase of this land could prove beneficial to the performance of Pegasus Stables, this relies on increased customer demand that they cannot fulfil with their current assets.

Recommendation Based on the analysis, it is recommended that Pegasus Stables proceed with obtaining a loan for land acquisition. The business’s current financial position demonstrates that it is capable of supporting this expansion, however, continued financial diligence is advised.

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