Case Study Edit4u

Case study Edit4U

After studying the situation of Edit4U, here are some of the issues that can have an impact on the future of the company, along with some proposal on how to improve the situation. We have identified several topics on which we think you need to work on: first one is the lack of reliable financial information system; secondly there is the undercapitalization and the insufficient cash flows, which are a danger for the future of the company. Finally, the joint venture project seems to be lacking a clear business plan at the moment.

The importance of accounting and management accounting

The objective of management accounting is to communicate economic information to improve the efficiency and effectiveness. It helps improving the decision making process by providing relevant information to the managers (Drury, 2004). Edit 4U doesn’t have any reliable accounting system, which means that all the decisions are taken by approximation. Having a real costing system will allow the company to have a better vision of its strength and weakness, and either put price below the competitor, or to take appropriate measure to reduce them to stay competitive. Most of Edit 4U costs are overhead, while revenue streams are irregular. It would be best to find a way to reduce fixed cost to make sure that they are covered by the actual turnover

Having bookkeeping in order is also necessary in order to take a new loan, to demonstrate to the bank and potential investor that the business is well run and reassure them about the management of the company.

“The balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year, and the profit and loss account must give a true and view of the profit and loss of the company for the financial year”. (Financial Reporting Council, 2013)

The accounting information system used by Edit 4U right now is not working, as it doesn’t reflect well the current situation of the company. Statutory accounts are a legal requirements and failure to comply can expose to company to financial penalties as well as legal pursuit in case of an audit. Inadequate declarations for tax purposes as well as the lack of justifying paperwork could be seen as an attempt to fraud. So it’s important that a clear accounting system is established. Since the company already have a computerised accounting system, using it would allow the company to have reliable financial information.

Undercapitalization and cash-flow

Undercapitalization is the first cause of failure for small business (Wilson, Bates, 2003). Currently, the company cover its capital need by a 10 years loan of €6,452 cover by a mortgage on Sean and Mary’s house, and an overdraft facility up to €8,065. The fact that the company is undercapitalized is a big problem. In Edit 4U case, having only 4 clients means that the revenue stream cannot cover the business expenses, while the lack of capital prevent the necessary investment to attract new clients and develop new business opportunities. This can lead to a downward spiral that leaves the company strangled by debts. Right now, Edit 4U is juggling with debts between overdrafts, income Tax and Vat debts to the county, and borrowing money from family. Using short term capital like and overdraft facility rather than a permanent loan is not a good option, because it means that the company is always using a new debt to pay for an existing one. From a financial point of view, this is a bad option because paying for overdraft or late tax payment penalty is more expensive than paying interest on a long term loan, and does not provide the same stability. It also undermines creditors’ confidence in the company and in Sean, and will make it more difficult to work with them in the future. The current borrowing is only €48,387, but the house is worth €725,806, which means that there is a possibility to borrow more to re-capitalize the company.

Edit 4U also have a cash flow problem, with a constant overdraft of €14,517. At the same time, the amount of outstanding invoice is €17,742. So it’s possible to improve the cash flow, either by negotiating longer payment terms with suppliers, or asking the clients to pay before the sixty days limits, possibly by giving them a small discount for early payment. Reducing the costs will also help to improve the cash-flow, and perhaps avoid