Assignment Task
Smith Construction Ltd
Smith Construction Limited was formed in January 2017 by a brother and sister, Ted and Freda Smith. Ted had been in the construction industry for many years and had grown frustrated by the inflexibility of the industry to meet customers’ requirements speedily and with appropriate quality and inventiveness. Freda had worked herself up in management circles after having gained an excellent first class honours degree in business studies. However, she felt she had more to offer especially in the area of entrepreneurial flair and marketing.
Both siblings therefore started the business by investing £200,000 each receiving for this 200,000 £1 shares. Ted looked after the operational side of the business whilst Freda looked after the marketing, human resources and administration functions.
The first year proved difficult as the firm sought to build up a customer base and had to invest heavily in marketing and building up the infrastructure of the business. By the second year the business had started making profits. As the business grew both siblings realised that there were inherent weaknesses in their business planning and financial management and hired James Blond to assist in the financial side of the business. After a year of James being with the company the siblings decided to ask James if he would be willing to become a shareholder and financial director due to the skills he brought to the management of the business. James was delighted with this prospect as he saw the firm’s potential as well as the possibilities for him to influence further the direction and profitability of the company. He therefore bought 60,000 of each of the siblings’ shareholdings in November 2019 for a price of £3 per share.
The company however has had a setback in 2021. The profits planned for the first six months did not come to fruition with instead a heavy loss having been made (the first loss since the company’s first year of trading). Given the upward trend of the sales and profit figures in the recent past this has caused great and heated debate at the directors’ board meeting. Unfortunately, the discussion became somewhat heated with James Blond accusing the siblings of having cheated him into investing into the company at an inflated price and then having sat back and expected the business to run itself while they have taken holidays and “taken their foot off the pedal”. In private he has stated to his friends that he would not be surprised if one or both of the siblings was “milking” the company, siphoning off the business’ (and his) assets. At the Board
meeting Freda Smith accused James of not running the financial side of the business appropriately and even hinted at the fact that since he was in charge of the finances he could be “helping himself to some of the cash for all we know”. At her book club Freda has also commented to her friends that she is a bit concerned about the business and also Ted’s role in the business. She has stated that she thinks Ted seems to have “very close relationships” with customers and suppliers and might be more interested in their (and possibly his) well-being and profits rather than the company’s. She also noted that these days Ted seems to be spending a lot of money on himself including £70,000 on a new Tesla. This concerns her as although the business has been making profits this sort of expenditure was flamboyant.
Freda, herself, has started building her own house on the back of the past profits made but this was backed up by a personal loan from the bank.
The profiles of the 3 directors are as follows:
Ted Smith
Age: 38
Position: Operations director
Salary: £60,000 per annum
Responsibilities: Construction planning, site management and materials procurement.
Duties: Finalising drawings
Planning materials
Hire of equipment for contracts
Site management and supervision of site staff
Recruitment and cash payments of casual employees (labourers hired by the day)
Signing off on completed contracts
Liaison with external contractors, architects and surveyors
Freda Smith
Age: 36
Position: Managing director
Salary: £60,000 per annum
Responsibilities: Marketing, Company Secretary, Human Resources
Duties: Hiring and firing of staff
Other staff related issues
Security and maintenance of company property and assets
Insurance of company property, equipment and staff
Customer liaison
Marketing of company
James Blond
Age: 28
Position: Financial director
Salary: £45,000 per annum
Responsibilities: All financial responsibilities, including billing sales, receipt of cash, payment for payroll and expenses, banking
Duties: Invoicing customers
Paying suppliers
Paying staff (except casual employees who are Ted’s responsibility)
Maintenance of company bank account
Preparation of monthly accounts
Preparation of business plans
Appendix A shows the company accounts for the last 3 years in addition to forecast figures for the next financial year.
Coursework Requirements
You have recently been engaged as a Management Consultant for Smith Construction Ltd. After a recent meeting, where certain accusations were made between the three Smith Construction Ltd directors, you have been asked to review the company’s situation.
You have been asked to submit your report to the directors by 1 pm on November 18th 2021
Your report must include the following:
Part One
The directors are extremely concerned about the fall in working capital. Provide a comprehensive analysis of the accounts of Smith Construction Ltd using an appropriate range of financial ratios in order to investigate. For the ratios you calculated, comment on any areas of concern identified and suggest reasons as to why these changes in performance may have occurred. Your workings (e.g. ratio calculations) should be attached as an Appendix in your final report and the ratios you have calculated should be placed in a table at the appropriate point of the report.
Part Two
Extend your report to discuss findings regarding possible areas of misappropriation of company assets, outline what internal controls are and highlight the components of internal control that you feel the directors of Smith Construction Ltd should focus on for the forthcoming year. This should be based on your review of the case study and should be informed by further reading on the subject area of Internal Controls.
Part Three
The directors have independently assessed that they need funding of £250,000 to invest in projects and to secure the future competitiveness of the business. The directors are unsure as to whether to approach a bank for a loan or other potential investors in order to secure the money required. Advise the directors on both forms of financing. Your discussion should cover the advantages and disadvantages of these forms of finance, it should be based on your review of the case study and should be developed through further reading on the subject area. You should conclude by providing a justified recommendation for the directors.
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