Hound Aerospace Limited

The management of HOUND AEROSPACE LIMITED, a privately held corporation, was analyzing the company's first-ever negative financial performance. In its recently concluded accounting year ending as on 31st March, 2021, the company has incurred a loss of Rs. 37.13 lakh and was thus forced to borrow Rs. 100 lakh from the banks, resulting in high interest cost. Exhibits I and II contain the current balance sheet and the profit and loss account of the company. The management is concerned that if the current trend continues, the future would be extremely challenging. Mr. Avdhut Samant, the business's Chairman and Managing Director, stated during the review meeting: "Because the company has always been profitable in the past, we have never developed and reviewed the operational and financial plan in advance." The time has come to prepare a financial strategy for the fiscal year , since competition is increasing. This will help us determine whether we are heading in the correct way. On the basis of projected performance, we may then consider effective ways to repair any negative scenario. He listed the following items of information that a systematic financial plan must generate: The company should get the detailed view of its operations and their levels, during the next year. This should include the expected level of sales, and of purchases and the other operating expenses. Examining the projected profitability, he suggested that the company may draw out an action plan for achieving the desired level of profitability. The company should find out the financial requirements on account of operations and the future expansion programmes. In the past the company has been borrowing from the banks and their allied concerns as and when required. It has resulted in an increase in interest cost, and has adversely affected the profitability of the company. Through the systematic financial plan, the company will be able to make better decisions about finances so as to minimize the interest costs. Mr. Avdhut Samant asked Mr. D M Marfatia, Manager Finance, to prepare the project financial statements for the next year. After consulting the Production and Marketing Managers, Mr. D M Marfatia obtained the following information regarding the operations: Examining the projected profitability, he suggested that the company may draw out an action plan for achieving the desired level of profitability. Given the nature of the competition and the company's sales efforts, the company's sales are projected to increase by 12% during the following fiscal year. 90 percent of the goods will be sold on credit to clients. Dividends from securities investments provide the organization with a tiny stream of revenue of Rs. 2.61 lakh. The planned raw material usage for 2021-22 is Rs. 789.71 lakh. The forecasted consumption of stores and supplies is Rs. 230 lakh. The work-in-progress and finished products closing balances are projected to be Rs. 350 lakh and Rs. 361.64 lakh, respectively. The following manufacturing, administrative, and selling and distribution expenses, are expected to be paid in cash, except depreciation Wages are paid in cash at monthly intervals, while insurance is paid in advance for each quarter – in the months of March, June, September and December in equal amounts. All the other expenses, except depreciation, are paid when they are incurred. The company is expecting to collect Rs. 1,750 lakh from its debtors. It has planned to purchase on credit raw material worth Rs. 840 lakh and store and supplies Rs. 250 lakh worth. During the year, it will pay about Rs. 980 lakh to its creditors. There is an income tax payment of Rs. 10 lakh at the end of September 2021. Debentures worth Rs. 50 lakh would be redeemed during the year. The company has also an obligation to repay Rs. 75 lakh of term-loan to the bank. Mr. D M Marfatia expects that the company would collect loans and advances of Rs. 12 lakh and extend new loans and advances of Rs. 5 lakh to its employees during the year. The company has planned capital expenditure of Rs. 200 lakh for expansion. It has already got the sanction and received Rs. 150 lakh as a term-loan from a financial institution for financing the expansion projects. The interest liability on the total borrowing is expected to be Rs. 82 lakh.The shareholders of the company expect at least 10 per cent dividends. The company would like to maintain a minimum cash balance of Rs. 20 lakh; and, if there is any deficit, it shall be met by borrowing from the bank under the overdraft facility. QUESTIONS 1. Prepare pro-forma profit and loss account and balance sheet for the year . 2. Based on above statements what is your assessment of the financial strength of this company? Do you think bank will consider the request of the company to meet its financial requirements? Should the company review its requirements before approaching to the bank?