Fin5004 Principles Of Finance : Assessment Answers
Questions:
One needs money to make money. Finance is the life-blood of business and there must be a continuous flow of funds in and out of a business enterprise. Money makes the wheels of business run smoothly. Sound plans, efficient production system and excellent marketing network are all hampered in the absence of an adequate and timely supply of funds. Sound financial management is as important in business as production and marketing. A business firm requires finance to commence its operations, to continue operations and for expansion or growth. Finance is, therefore, an important operative function of business.
Answers:
1.The company selected by us is Spar Inc. Spar Inc. is a world leader in merchandising retails and has its operations in six continents across the world. It was founded in 1967 and ventured into retail merchandising after acquiring Gelco (SPAR, 2017). It is also a leader in merchandising related to home entertainment. It was the first for implementing mobile handheld technology in retail merchandising industry.
2.Spar, listed on Johannesburg Stock Exchange is a distribution and warehousing business in drug retailers and food sector. The company pioneered retail analytics being data based and applied this retail knowledge in merchandising. They offer retail services further categorized into syndicated services, project services and dedicated services. They also provide merchandising services consisting of category resets, fixture installations and services, kiosk service & fulfillment, planogram maintenance, promotion services, pricing, speed to shelf and inventory services (SPAR, 2017). The company’s turnover increased by 23.8% consequently increasing profit after tax in 2016 by 23.8%, exceeding the growth of core business the house brands showed growth of 12.3%. The company acquired in April 2016 SPAR Switzerland which will diversify and broaden the business portfolio. The company opened 117 new stores in South Africa. The cash generation rose to R3.3 billion (2014: R3.0 billion) in the year 2016. The company distributed R1.153 billion to the shareholders during the year. Property, Plant and Equipment were acquired to the tune of R125.6 million (Spar Inc., 2017).
3.
(Source: Spar Inc., 2017)
Total Assets of the Company: R27, 355.8 million
Total Liabilities of the Company: R27, 355.8 million
4.Gross Working Capital of the Company
Gross Working Capital can be defined as the amount that is available with the company for financing its current assets. Current Assets include namely inventories, cash in hand and bank, debtors, accounts receivable, accounts payable or any other asset that is easily convertible within a year. The formula for the same is:
Gross Working Capital of the Company = Total Current Assets
Gross Working Capital always does not show the company’s true financial position as a loan can increase the current assets thus increasing current liabilities and gross working capital. The company’s Gross Working Capital has increased from R12364.6 million in 2015 to R16584.7 million in 2016. However, half of this increase is due to increase in current liabilities R12132.6 million in 2015 to R14122.8 million in 2016 (Spar Inc., 2017).
Net Working Capital of the Company
We get Net Working Capital after deducting current liabilities from current assets. It is used for determining the availability of liquid assets of the company. Current liabilities are short term liabilities falling due within 12 months period. It is a cash flow formula (Baños et.al, (2014). The formula is:
Net Working Capital of the company = Current Assets – Current Liabilities
If an increase can be seen in figure of negative working capital it can be regarded as negative cash flow and is considered as not being available for equity (Enqvist, et al., 2014). Short term operations require capital in increased amount and hence the same is not available for equity. In this case the company is having a negative working capital as it has increased from last year to R2461.9 million (2015: R232 million) (Spar Inc., 2017).
References
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.
Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital management on
firm profitability in different business cycles: Evidence from Finland. Research inInternational Business and Finance, 32, 36-49.
Spar Inc. (2017). Annual Report. [online] Pinetown, pp.50-180. Available at: https://www.spar.co.za/About-SPAR/SPAR-Financial/Annual-Reports-(1) [Accessed 3 Jul. 2017].
SPAR. (2017). SPAR -. [online] Available at: https://www.spar.co.za/About-SPAR/Company [Accessed 3 Jul. 2017].
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