Finance in an SME Context

Q1. Critical analysis of Trainline’s performance over 2013-2016 using ratio analysis

For the purpose of calculating the Ratio's comparative balance sheet of Trainline is mentioned above:

Ratio analysis is a quantitative and financial technique that is often used by the number of businesses to measure their operational performance. It expresses a quantitative relationship between two or more variables of the financial statements and used to measure and compare the profitability, liquidity, efficiency and solvency position of the firm. It is considered as an effective method to examine and evaluate business performance over an accounting year.

There are different accounting ratios for the purpose of evaluating the operational efficiency of the firm and that is the Profitability ratio, Debt-equity ratio, and many more. For the purpose of evaluating Trainline operational efficiency Six ratios which are taken as:

Profitability ratios like gross profit ratio and net profit ratio are used to attain the efficiency of business to generate a return on their total sales. High ratio is a good sign of business performance or vice-versa. Gross profit ratio examines profit percentage on total sales whereas net profit ratio measures the relation between net yield and total turnover. As per the results, it can be seen that trainline's net profit is continuously declining which is it came down from 38% to 24% in 4 years. Trainline needs to think about this issue immediately. Trainline's turnover has been increased but still due to a high proportionate increase in cost of sales. Effective managerial control over indirect spending and overheads like rent, salaries, general, office and administration, and marketing expenditures may be the reason behind increase net profit indicating that in 2015, TUI performed comparatively well than the earlier year.

On the other hand, liquidity ratios measure the relationship between short-term (current assets) and short-term obligations (current liabilities). It is used to examine whether trainline has improved its capability or not to repay its short-term debts on decided time. The current ratio and quick ratio are the best way of examining the liquidity performance of the firm. Current Ratio measure relationship CA and CL, whereas QR examine liquidity position without taking into account closing inventory balance. Trainline's liquidity ratio does not show an increasing trend as well as a decreasing trend. In 2013 it is 1.86 and further, it decreases and then increases but in 2016 it again decreases.

The rising trend reflects that Trainline improved its current assets like debtors, receivables, and cash to repay short-term obligations on the correct time. Besides this, efficiency ratios are used to measure that managers have effectively utilized business assets or not to gather maximum revenues through operational activities. On the contrary to this, solvency ratios help to measure a firm’s capability to repay its long-term debt like loans as per the repayment schedule. But in the case of Trainline since debt is not there no solvency ratios can be calculated for measuring the payable capacity of the firm.

Q2. Projected Cash Budget For the year 2017, 2018, 2019

Since trainline needs to have an IPO in the future and for the growth of the business they need to think about the financial matters of the company. So in the order, they need to set up its projected cash budget to be used in the future. They need to forecast their cash needs as per the current operations of the businesses. Through projected cash needs they want in future, they will draw conclusions on their operation and try to make use of the resources in an efficient and effective manner so that in future they meet the required amount of cash needed to pay the people from cash has been taken or the funds have been acquired.

They have not borrowed from somewhere else. There may be certain reasons for which firm has not borrowed funds from anywhere else and they can be, the cost of debt may be high, volatile market demand, the risk-taking capability of funds, is not sure of their future earnings. Moving further they have seen an excellent profit in which has made their total equity capital raise. But being so good in 2013 it was a decline in the profits due to the transfer of premium reserves and payment to equity shareholders.

Q3. Critically evaluate the sources of finance in SOFP and techniques to evaluate investment proposal

Having a balance between your paying ability and savings ability that's what a company strives for and it is the need for them too, in order to make their business stable. The present case of Trainline's financial performance can be evaluated by having a look at its financial statements which is stated above in question 1. As it is seen that in the financial year 2012, Trainline's total equity capital & reserve was 95,715, among which share capital is 35882, Share premium reserve is 44,249 and profit and loss account showed the balance 15,584. This depicts that trainline is not having any investment in the form of debts. They have not borrowed from somewhere else. There may be certain reasons for which firm has not borrowed funds from anywhere else and they can be, the cost of debt may be high, volatile market demand, the risk-taking capability of funds, is not sure of their future earnings.

Moving further they have seen an excellent profit in 2013, which has made their total equity capital raise its bar to 135,585. But being so good in 2013 it was a decline in the profits in 2014 due to the transfer of premium reserves and payment to equity shareholders. Further in 2015 and 2016 profits were noted as 76821 and 56158 respectively. Among the years of operations, Trainline has never been into borrowing of funds, their capital structure was consisting of only equity capitals may be due to the high cost of borrowings on debt capitals. Since they have not been familiar with debt capitals their capital structure cannot be considered as efficient.

Further, if Trainline have thought of investing in some projects in order to have a look what they will be gaining in future for the funds invested today, they need to go through a deep study of techniques which will be best for them in order to make decisions regarding the projects that in which projects they should be investing. So, in order to make the right decisions regarding the best investment proposal to be chosen, here are the techniques which can be used by Trainline:

• Net Present Value: In Net present value investors discount their associated project’s cash flows using an appropriate discounting rate based on the cost of capital. The discounting rates can be fixed and can be variable too, it depends on the project's nature too. It is because; the amount that investors gain today will not be of the same value in the future, So, Trainline requires to discount their successive cash inflows and determine the current value. After that, NPV is the difference between cash inflows and outflows of a company. If NPV is positive and Zero then Trainline should adopt the investment proposal and if NPV is negative then the proposal should not be accepted.
• Internal Rate of Return: Likewise NPV, IRR also is of the belief that worth of currency that an investor has today is more than receiving a specified amount in the forthcoming period. IRR refers to the discounting rate which equates both the present value of future cash flows and initial outlay. IRR is the rate at which present cash inflow is equal to present cash outflow. Lower the rate much better it is.
• Pay-back Period: It is the simplest method of assessing and comparing various projects by just identifying the length of time that the project will take to repay the initial investment. It will enable Trainline to prefer such a project that indicates quick payback. It also avoids giving higher weight to a risky project and long-term projection also.
• Accounting rate of return: The accounting rate of return compares expected profit percentage on the amount of initial investment that Trainline needs to invest. In the case of a single project, the company can compare expected ARR with the desired or targeted return whilst in case of having the number of proposals, obviously, Trainline will prefer a higher ARR generating project.

Q.4. Discuss the extent to which the entrepreneurial ecosystem has been responsible for the development of Trainline

Trainline known as UK rail ticket retailers and a variety of services in its pocket it is a company that is founded and funded by the Virgin rail group, it sells its ticket through a call center. When it comes to the role of entrepreneurs who were part of the firm and contributed their services in developing the business. there are some entrepreneurs or rather chief executive officers they have impacted the business of a company in many ways, whether it is about increasing customer base or hitting new segments or targets. In 2008 Murray Hennessy joined trainline.com as chief executive officer and by joining it in a span of one year he increased investment of organization in advertisements which eventually benefited them in hitting new customers.

The company with its first TV advertisements campaign launched the ability for customers to print their own tickets containing a secure bar code. So what this did was customers were attracted to this feature and the practice of booking tickets from trainline.com was increased in a rapid manner. Furthermore, in 2009, Trainline launched it's first I Phone mobile app and started a new era of development of smartphone applications. Many further establishments and developments have been done in the leadership of Murray Hennessy. This shows that trainline without a CEO or the leader of Murray's kind was nothing, after the joining of Murray only these amendments have taken place so this shows the entrepreneur thinking skills and how can an entrepreneur lift the entire business with its capabilities.

Furthermore, in 2014 Clare Gilmartin was recruited as the chief executive officer of the firm and in 2015 what he did was he rejuvenated the whole concept of company to Trainline only which means he with his entrepreneurial thinking and capabilities not just changed the name of the company he changed the color combination and logos and everything which was looking old and set up a new trainline company which was new in every manner and matching with the modern world. The presence of the current trainline is bold, positive, friendly and is a modern brand, just as it was imagined by Gilmartin.

So, as per the history of trainline it is pretty clear that behind the developments in the decade the two entrepreneurs have played their part in most of them. Thus the emphasis which was on the entrepreneurship system as the factor of affecting trainline business has been clearly understood with the introduction of certain important measures by the two CEO's.

Q.5. A critical discussion of ethical consideration that must be taken into account for IPO issuance

An IPO is a huge task that can make the companies future and can destroy it too, so in order to make an initial public offer, a company should undertake an explicit examination of its environment internal and external both. The factors that training managers or financial advisers need to examine before IPO issuance are some of these:

1.Performance and Growth over the years: A finance manager should consider its profitability levels over the years, Considering what has been the performance of the company in terms of profitability as well as the 'year on year' growth in the company should be undertaken by a manager in order to know that IPO which needs to be undertaken will be fruitful or not. Revenue growth is one of the most important factors to consider while determining whether an IPO is worth investing in. Trainline should follow the above-discussed things in order to be successful in its IPO.

2.Promoter's Standing: promoter plays an important role in an IPO since he is the person who manages all the work of an IPO on the behalf of the company. So his status and symbol are important for the trainline in order to make their IPO successful in the markets.

3.Post-IPO Promoter Share Holding: Financial analyst of the company should consider the shareholding of a promoter in the company post IPO. If the promoter have high shareholding in the companies' shares they have great confidence in the future growth and profitability of the company.

4.The objective of the Issue: Consider what are the objectives of the current issue and how the proceeds from the issue are to be utilized by the company? Whether the company will utilize the proceeds to fund an expansion plan or merely repay existing debt, are issues to be considered in this regard.

5.P/E Ratio: P/E Ratio or the Price-Earning ratio is an effective tool to determine how attractively the issue price is valued. P/E Ratio is simply the ratio between the Market Price of a share and its Earnings per Share (EPS). A higher P/E ratio could mean that the IPO is over-valued. Note that the P/E ratio should not be considered in isolation but combined with other meaningful data to arrive at your conclusion.

6.Post-IPO Debt-Equity Ratio: What would be the post listing Debt-Equity Ratio of the company. The debt-equity ratio refers to the ratio which shows the proportion of equity and debt that a firm uses in its capital structure. Here training does not have debt so the future prospects should be kept in mind by the firm in order to implement successful IPO.

7.An outlook of the company: What is the future outlook of the company? How well are they placed in terms of competition? What opportunities lie before the company and how well are they equipped to explore and take advantage of such opportunities? What immediate threats does a company face?

8.Future Outlook of the Industry: Keeping up with the future operations that the firm is going to undertake should be known and considered because this will affect the price of its shares. The future outlook of the industry in which the company is operating is an important factor to consider while determining whether to invest in an IPO. A country's demographic structure, its economic and political environment as well as its laws and regulations have a significant impact on the future outlook of any industry.

Conclusion

From this report, it has been concluded that Trainline has developed at a very rapid pace in the recent 10 years and continues to do so with its thinking of offering IPO to the public. Further Trainline has been into the delivery of rail tickets then they have been personalized their apps for I Phone and now they are offering IPO to public. This all has been done by two of the entrepreneurs. So from this report, it has been concluded that for every small business that needs to be at the top have to have a good leader so that he can take decisions towards the growth of the sector. From this report, it has been concluded that Trainline, in order to make his impact on the world in the coming years, should acquire funds from financial institutions or somewhere else so that they can grow at a steady rate.

References

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• Mahmood, R. & Mohd Rosli, M., (2013). Microcredit position in micro and small enterprise performance: the Malaysian case. A management research review.

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