CASE STUDY – PORTLAND LIMITED
Portland Ltd is a limited company and been trading in the UK for the past 15 years. The parent company Portland Holding is based in Egypt.
Portland Limited provides Consultancy services to different sectors of the market which include the Marketing, HR, Global financial services and General business consultancy.
Portland Limited has been a profit-making firm and has retained its previous clients while making some advances in its share of the market. However, in the past 2 years’ profits and cash flows for the company have not advanced sufficiently forcing the company to seek support from the Holding company in Egypt in terms of financial support.
The board of management recently met and have decided that they have to improve and take on some new projects in order to improve their profitability and cash flow, to this effect the Finance Director of Portland has recently engaged your firm to help them source Finance for their expansion plans and to also advise them on the planned projects.
New Programme Suite
The current software product that Portland has been selling to companies is now deemed to be outdated and the company is looking to invest in a new product. The details of the proposal are outlined below.
Specialised Suite
The expected life of this product is 5 years and its working capital requirements and the cost of new software, expected revenue, components’ cost and overheads are as below:
All of the above estimates have been prepared in terms of present-day cost and prices. Assume that cash flows arise at the end of each period. In addition
Revenues are expected to rise by 4% in price terms per year from start of year 2; the budget estimated selling price at start was £110.
Overheads and working capital are expected to rise by 4% per year from start of year
The cost of Module M and Module Z are expected to rise in line with inflation of 4% per year from the beginning of year 1.
The working capital is cumulative and will be recouped at the end of year 5.
The cost of two expert technologists, who have come from the Egypt have not been taken into consideration in the above forecast and are as follows:
Expert Technologist 1 (ET1): Will be paid £120 per hour and expected number of hours for ET1 are 1,200. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards.
Expert Technologist 2 (ET2): Will be paid £100 per hour and expected number of hours for ET2 are 1, 300. The rate paid is expected to go up in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards.
If Portland Limited invests in Specialised Suite, then the discount rate that would be required to assess the NPV would be 8%. The table above shows the estimated outgoings and inflows for the project.
New Office
Jennifer Mandel (the manager in charge of sales) has just informed your company that they plan to open an office in Northwest England, and it is hoped that this office will be opened for business on 1st Feb 2022. You have also been informed that to start with, the company will only offer two popular types of services of Starter Level (SL) and Tailored Level (TL). This will be done to test the market and see if the business will break-even in the same period. These two are the most popular asked for services and will be offered at £400 for SL and £500 for TL.
The company has provided you with the following information regarding the costs and estimated sales for the period mentioned above.
Portland Limited plan to put in £10,000 as start-up capital and plan to offer up to 1,200 services (combined) of SL and TL during the same period. They are not sure which of the two services will produce the best profit for the company.
Total budgeted services for each month are as follows: February 400 services, March 400 services and April 400 services of which 40% of each month will be for SL. You will be required to assess the best combination of sales for the period.
To help with the setup of the Office, the company has just concluded a deal with one of the high street banks to get a loan of £25,000 on the 1st of Feb 2022. The interest on this loan will be payments to repay the loan starting end of March 2022.
Financial information
As mentioned above the company plans to offer a total of 1,200 services from 1 February to end of April. The fixed costs for the period are as below:
From their costs estimates the variable cost of the services are £150 for the SL and £180 for the TL. The fixed costs are for the whole period so they are not affected by the level of service, on the other hand variable costs will increase with services output, and thus it is sales output multiplied with variable cost per product.
Revenue from the sale of services of SL and TL will be on the basis of 60% cash and 40% credit to be paid the following month.
Requirements
You are required to write a management report to the management of PORTLAND Limited directors in which the following points should be discussed:
Provide an explanation on the different sources of funding the company can have and
their advantages and disadvantages. You should make recommendations as to how the company can manage the same to help in the planned expansion program;
Analyse the Investment proposals by using NPV and provide recommendations. You
should also briefly comment on other investment proposal techniques that PORTLAND Limited may use, and the limitations of using those techniques;
The use of management tools such as Breakeven analysis and Budgets;
A computation of your breakeven analysis and the cash budget for the first 3 months;
An evaluation of the estimated company performance or position during the same period;
A detailed Literature Review of the tools you have used such as breakeven analysis and budgets and their importance to business;
Other issues for management to consider that you think are vital for them to survive and make a profit.
