Financial Management 2

Financial Management 2

 

from my uni email

 

I reviewed your report, and in general I found it good, but I put notes on it in RED colour, don’t be offended by the colour but I wanted it to be clear when you check.

 

I put some comments and suggestions as well between brackets, it might help you in fixing one or 2 things here and there.

 

I attached as well a good article about Ratios that might help you in adding a couple of things or some ideas.

 

Please let me know if you need any more help.

   

Foundation Degree in Business & Professional Administration

BA2401 Financial Management 2

IN-COURSE ASSIGNMENT

Your organization has a canteen, Tulip Refractory, serving hot meals, snacks and refreshments during the working day. At some weekends, the staff may do some catering at private functions.

There are no shareholders. The canteen is a department within your organization. The canteen was set up with an initial loan of £60,000 from the head office. Interest is payable on the loan.

Your organization does not intend that the canteen charge commercial prices. However, the plan is for sufficient profits to be made to repay the loan with interest as well as to provide for the replacement of equipment and fixtures as necessary.

The canteen has been making losses over the last five years. The head office loan installments have not been repaid for the last three years. The head office would have to provide a further loan if the canteen is to continue providing a service to the staff.

Your head office would like to continue offering this facility to its staff but is concerned that it has not been run efficiently, particularly as a sister organization, operating on a similar basis is making year-on-year profits with Café 88.

REQUIRED:

You have been provided with the accounts of Tulip Refractory and Café 88. Your Finance Director has asked you to conduct a financial analysis, giving possible explanations for your results and your recommendations. Your report will underpin your Finance Director’s presentation to the main board for a further loan or for the sub-contracting of the catering to an outside company.

Sheet1

12

£ £ £

0

80,000

3,000 2,000

80,000

80,000

60,000

20,000 12,000

500

– equipment & fixtures

2,000

2,000

500

20,000

TULIP REFRACTORY CAFÉ 88
£ £ £ £

50,000

Depreciation

5,000

3,000 2,000

5,000 0

1,000

6,000 4,000

3,000 12,000

8,000

3,000

(20,000) 20,000

(17,000) 55,000

																																																																																																													PROFIT & LOSS ACCOUNT
YEAR ENDED AUGUST 31st 2		0
	TULIP REFRACTORY		CAFÉ 88
							£
Sale of refreshments and meals	140,000				80,000
Catering at outside functions				20,000
1	60,000
Opening food stocks					2,000	1,		500
Purchases	8	1,000	10,500
8				3,000			12,000
Closing food stocks
10,000
Gross profit	70,000
Wages	30,000
Rent
Cleaning		8,000			5,000
Repairs to equipment	5,500
	Depreciation		4,000
Miscellaneous expenses	400
Loan interest	100
100,000		50,000
Net profit/(loss)		(20,000)
BALANCE SHEET
AS AT AUGUST 31st 2012
EQUIPMENT & FIXTURES
At cost	62,000
45,000		6,000
56,000
CURRENT ASSETS
Stocks
Debtors – functions
Bank and cash	14,000
9,000	16,000
CURRENT LIABILITIES
Creditors
NET CURRENT ASSETS	68,000
Loan from head office	25,000	13,000
	(17,000)		55,000
ACCUMULATED FUND
Balance brought forward	35,000
Profit/(loss) for the year
Balance carried forward

Sheet2

Sheet3

FDBPA

FINANCIAL MANAGEMENT 2 – BA2401

IN-COURSE ASSESSMENT – guidance

This is an individual assignment.

The assignment must be submitted with a completed mark sheet including the following details:

Your ID number, name and degree

Module number and title: BA2401 Financial Management 2

Module Leader: Mark Farmer

Title of work: Financial management 2 assignment

GUIDANCE

The report should not exceed 2,000 words in length. It should have a title page (including your name, name of teacher, module name and number, appropriate report title and actual word count) and a table of contents. It should have a short summary of your findings. The body of the report should be structured as follows:

1. Introduction

· Aims of the report

· Overview of the main activities of the organization

· Brief description of how you conducted the financial analysis

(20 marks)

2. Findings

· The results of your analysis (note that the actual ratios may be given in the appendix)

· You may find it useful to use sub-headings

(60 marks)

3. Conclusions

· Give possible reasons for your findings

· Discuss the conclusions that may be drawn from your findings

· Consider implications to the organization from your results and give brief recommendations

(20 marks)

References

You should use the Harvard System of referencing to cite the source of your references. You should also list all publications cited in the text in a bibliography.

KEY SKILLS

This assignment will help you develop the following key skills:

· Communication

· Numeracy

· Information technology

· Improve your learning performance

LEARNING OUTCOMES

This assignment will assess that you can:

· Write a word-processed report

· Apply theoretical knowledge to interpret a real-life business situation

· Interpret the financial performance of an organization

FinancialAnalysis of Tulip Refractory

Where is the executive summary (300 words) ?

And the Introduction and methodology 300-400 words)?

The present report aims to provide a comparative analysis of Tulip Refractory and Café

88

. There are two canteens within the organization. Tulip is a loss making unit whereas Café 88 is a profit making. The present report will help the management decide whether to provide a further loan to Tulip so it can buy new equipment and continue to serve the employees, or to go for the sub-contracting of the catering to an outside company.

Facts

Tulip Refractory was set up with an initial loan of

£

60,000 from the head office. Interest is payable on the loan. The organization does not want the canteen to charge commercial prices for the employees but it should at least make sufficient profits to repay the loan with interest as well as to provide for the replacement of equipment and fixtures as necessary. The canteen has been making losses over the last five years. The head office loan installments have not been repaid for the last three years. The head office would have to provide a further loan if the canteen is to continue providing the service to the staff. The head office wants to continue offering this canteen facility to its staff but is concerned that it has not been run efficiently. In contrast to this canteen, the sister organization, operating on a similar basis is making year-on-year profits with Café 88. (I think you need to review this entire paragraph, as you are repeating what’s given to you in the requirements, try using your own words).

When we compare the accounts of both canteens, Tulip Refractory has double the income of Café 88. Tulip has good sales but it is not charging commercial rates. The cost of the food should be priced in such a way that at least all the

expenses

are met by Tulip. It should charge at least the cost of the food because the company is not paying it any subsidy. The company has supported Tulip by giving a loan but the loan granted is also at an interest rate. The canteen should undertake an analysis of its fixed costs and operating expenses.

In order to provide the facts to the management, a financial analysis of the two canteens has been done. The Income statement and the Balance sheet have been used to substantiate the decisions. Financial analysis refers to an assessment of the viability, stability and

profitability

of a project.

Financial analysts often assess the following elements of a firm:

1.

 

Profitability – Its ability to earn income and sustain growth in both the short – term and long – term. A company’s degree of profitability is usually based on the 

income statement

, which reports on the company’s results of operations. The sales and the Cost of goods sold help to determine the gross profit. After all the operating expenses, depreciation and interest has been accounted for, we get the profit. We can use ratios like gross profit ratio, profit margin ratio etc.

2. Solvency – It is ability to pay its obligation to creditors and other third parties in the long-term. The company should be in a position that it is able to honor all its financial commitments on time. When the company is not able to service its debt on time, it is considered insolvent.

3. Liquidity – It is the ability to maintain positive 

cash flow

, while satisfying immediate obligations. Normally

Both Solvency and Liquidity are based on the company’s 

balance sheet

, which indicates the financial condition of a business as of a given point in time.

4. Stability – the firm’s ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company’s stability requires the use of the income statement and the balance sheet, as well as other financial and non-financial indicators. Etc.

Financial analysts often compare 

financial ratios

 (of 

solvency

, profitability, growth, etc.):

· Past Performance – Across historical time periods for the same firm (the last 5 years for example),

· Future Performance – Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects.

· Comparative Performance – Comparison between similar firms.

Comparing financial ratios is merely one way of conducting financial analysis. 

Financial ratios

 face several theoretical challenges:

· They say little about the firm’s prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms.

· One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm’s performance.

· Seasonal factors may prevent year-end values from being representative. A ratio’s values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.

· Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values.

Financial analysts can also use percentage analysis which involves reducing a series of figures as a percentage of some base amounts. For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over a given time period expressed as a percentage is known as horizontal analysis. Vertical or common-size analysis reduces all items on a statement to a “common size” as a percentage of some base value which assists in comparability with other companies of different sizes. As a result, all Income Statement items are divided by

Sale

s, and all Balance Sheet items are divided by Total Assets.

(I can’t see any referencing,?)

Income statement analysis

£

%

100

 

 

 

 

 

 

 

 

 

 

80,000

 

 

 

 

 

63

 

 

 

 

 

TULIP REFRACTORY	CAFÉ 88
																						£		%
Sale	160,000		100		80,000
Purchases	81,000	51	10, 50 0	13
Gross profit	50	70,000	88
expenses	100,000		63	50,000
Net profit/(loss)	( 20,000 )	(13)	20,000	25

The above analysis clearly shows the mismanagement of Tulip. Sales of Tulip are double than Café 88 and expenses are same in percentage. The purchases are many folds and this causes the net loss that is 13% of sales. Gross profit ratio for Tulip is 50% and for Café 88 is 88%. The profit margin for Tulip is -13% and for Café 88 is 25%. As purchases are proportionately higher, it shows that either the goods are sold at less rates that they even do not cover cost or the purchased food is wasted. Tulip should think of increasing the sale price (or buy cheaper supplies). Every business runs for the motive of profit. When Tulip is not able to earn profit, it should either think of improving its performance or quitting all together.

Balance Sheet Analysis

Similar analysis cannot be done for the Balance sheet as details given are not sufficient. We tried to find some ratios that will present a clear picture to the management.

Current ratio is a measure of liquidity; Current ratio of Tulip is 2 and that of Café 88 is 4. This means that Café 88 has more liquidity than Tulip, and this means that the availability of cash is more in Café 88’s case. The cash has been generated from the sale of food, Tulip is not able to earn cash as it has priced it product too low, or purchased expensive or highly priced supplies. The company wants to give good food to its employees at a reasonable rate. Either the company should pay on the behalf of employees or the employees should be willing to pay higher prices. When the food is sold at cheaper prices, most employees are motivated to have their food in the canteen. This arrangement is good for all except Tulip. It has to bear the loss for the benefits of other. If there is some emergency, Tulip will not be able to handle it whereas in case of emergency, Café 88 can use cash and still continue its operations whereas such is not the case with Tulip. When Tulip does not have cash, it will not be able to pay the wages and salaries of the staff.

Analysis of purchases

Tulip has made purchases of £81,000 and has creditors of £6,000. This means company is paying either in cash or within few days. The canteen should negotiate with it suppliers either they give more discount or give extended credit period. The time till payment can be delayed will give Tulip some time to keep the cash in bank or in some other productive use. In comparison to Tulip, Café 88 has a purchase of £10,500 and has creditors of £4,000. The creditors form 38% of the purchases where as in case of Tulip, creditors form only 7%. Tulip is having a considerable amount of purchases. There seem to be mismanagement at this stage. The company should keep a track of its purchases and stock. The reason for such high purchase may be wastages being done by the canteen staff. The administrator at the canteen should see a vigilant watch that no employees takes any canteen supplies or is not wasting the resources. Tulip is not following the rules of business. The food business runs on cash. The customers pay cash and take food but the company can take the credit from its suppliers. From the analysis, it is clear that Tulip is not availing this facility. The reason could be that there is no fixed supplier. As the canteen is always in the tight cash position, it might not be able to continue its relations with the same supplier. When Tulip has been facing losses for three years, the suppliers in the market would be aware of this and would be unwilling to continue to work with Tulip. Tulip will have to pay cash and also get costly items due to its reputation in the market.

Depreciation

Tulip is spending £5,500 on repairs of equipment. Since they are in a cash tight situation, they can think of taking equipment on lease. They can also outsource if it is cost effective. When we look at the cost and depreciation of equipment and fixture, Tulip has recovered £45,000. The canteen cannot replace with new equipment but if it continues with the same, it will be incurring more costs than it is earning. (Looks like the depreciation is not being calculated correctly at Tulip, as it cannot be 75% of the initial loan amount, a review to the depreciation calculation is worthwhile looking at).

Credit policy

The canteen is extending lenient credit towards its customers. As the canteen is in food business, it should take cash from customers. The situation of the canteen is bad but it is following wrong practices. It is extending credit but not taking the credit facility from its suppliers. Café 88 has no debtors; it works professionally and extends no credit. .

Loan from the company

Both the companies have taken loan from head office. Tulip has taken an outstanding loan of £25,000 and it is paying a yearly interest of £500 and Café 88 which has an outstanding loan of £13,000 which is almost half of the loan taken by Tulip is paying only £100 as interest. Either the company is charging different interest rate from both the canteen and the rate of interest has decreased over the years. It is better that Tulip borrows from market at a cheaper rate of interest and pay off its outstanding with the company.

Conclusion

Tulip should study the working of Café 88 which is making half the sales of Tulip and still making more than double the profit. If the management wants its employees to have quality food at reasonable prices, it should either pay on their behalf or provide other financial support. The point is not only of providing finance but also of managing operations. The management of the company should think of giving the operations of Tulip to Café 88 as it is managing its operation in a better way by utilizing less resources and making more profit.

(Add the points of reviewing supplier prices, or increase selling prices, and review the depreciation calculation, 45000 out of 50000 is not realistic! And reduction on the overheads, reduce the number of staff, reduce wages, and have better management overlooking the financials and operations)

· Where is the recommendation this is the main body of the report ?

· Reference page say 50 words for reference use Harvard System of referencing

S U C C E S S S T R A T E G I E S by John Mautner

Ten Principles to Evaluate Operations

w hat does the word “opera-tions” mean to you? If I ask20 business owners, I’llprobably get 20 different
answers. I might get answers such as “It’s
how we do what we do,” or “It has to do
with making it and then shipping it,” or
“It’s the overall way the company runs.”
Those are good ideas, but in truth, oper-
ations is simply people and processes. If
you have 100 people in your company,
and each person does five repetitive tasks
weekly, then you have 500 processes
going on each week. Does each process
have a cost associated with it for labor,
materials and other manufacturing
costs? And if so, how much is each oper-
ation costing you? Costs for operations
are $.70-.90 for each $1 that enters your
company, so it is important to see how
well your operations are performing.

Take a Good Look
We often find that business owners
know and understand these principles;
they just have a hard time properly
implementing them. Use all 10 of these
tests as they apply to your company.

1. Value of Management Staff. Your man-
agement team should bring at least dou-
ble their salary to the bottom line. In
other words, your return on investment
(ROI) for management compensation
should be 2:1. For example, if compen-
sation for your management staff (all
managers, excluding the owners) amounts
to $400,000 per year, then net profit
should be at least $800,000 per year.
Remember, the ONLY reason for man-
agement is to create profit.

2. Inventory Management. To get a quick
idea of how your inventory is being

managed, use the following formula for
the past year:

Cost of goods sold X 2
Inventory value at first of the year +

Inventory value at last of the year

This formula gives you your inventory
turns. The proper level of this value
varies by the type of business, but a good
rule of thumb is no less than seven. The
cost for improperly managed inventory
is too great to ignore.

3. Reportitig. Can you answer “yes” to the
following five quesfions? If not, then you
have a problem in your operations
reporting.
• Do your managers know how to

budget on a weekly basis so they can
make smart decisions as the month
progresses?

• Are your management meetings held
around the results of your reports
(causing information to flow up the
chain, rather than down}?

• Do you know where your cash fiow
is on a daily or weekly basis in case
an emergency or opportunity sud-
denly arises?

• Are your inventory levels reported on
at least a monthly basis?

• Can you identify problems in orders/
projects due to lateness, rework or
bidding errors?

4. job Management. If you handle jobs
that take longer than a week from order
placement to shipping, try the following
test on them:
• Length of time into job/Total expected

length of job – X
• Dollars spent on job/Total budgeted

dollars for job – Y

This X/Y ratio should be close to the
value 1. If the ratio is greater than 1,
then the job may be running late; if
less than 1, then the job may be run-
ning over cost. If you cannot achieve
the time and dollar values required for
this ratio, then reporting systems
should be examined.

5. Profit Crowth. If your company is
being managed well, there must be a
continuous effort to lower costs
through process improvements. Look
at the trends in bottom-line profit. If
the trend is a constantly higher percent-
age of sales, even at a minimal increase,
then operations are being managed
properly. If the percentage drops, then
you have problems. Be careful not to
use dollars rather than a percentage—if
your company can sell more, then the
return should be as much or more on a
percentage basis, not less. Have your
before-tax profit percentages grown
over the past two years?

6. Work Planning. If you can answer
“yes” to these questions, then your plan-
ning processes are working properly.
• Do you have an accurate planning

schedule that shows this day’s work
plan?

• Have there been no problems the past
week on planning issues?

7. Standard Operating Procedures. Look
at the standard operating procedures
(SOPs) that your managers have written
in the past quarter. If there are few or
none, then the managers are operating
in a “fiying by the seat of their pants”
mode, where everybody simply does his
or her best. Unfortunately, people’s best
is not enough—activities must be

Speaker, author, business owner and entrepreneur John Mautner is the founder and senior partner of Advanced Profit Technologies and the Cycle of Success
Institute (www.advancedprofit.net). He can be reached at (312) 371-7929 orjmaiitner@advancedprofit.net.

1 6 April 2006 WWW.CERAMICINDUSTRY.COM

directed in a productive manner. To do
this consistently, written procedures must
be created and followed; SOPs are one of
the most needed-^yet most underused—
tools in operations management.
• Have your managers each written or

improved an SOP in the past three months?
• When a problem arises, do you put an

SOP in place as part of the solution?
• Do you hold quarterly reviews of SOPs?

8. Continuous Improvement. Your com-
pany must have a structured continuous
process improvement system. If you
answer “no” to any of these questions,
then you do not have a structured system.
Without one, you’ll fall behind your com-
petitors—it’s only a matter of time.
• Have there been improvements to your

processes in the past month?
• Were they done in a structured manner?
• Were they documented and properly

implemented?

9. Sales Management. Grab the last 10 com-
pleted orders, and ask your sales person
how much profit should be in them. Then
find out how much was actually made after
they were completed. Don’t forget to
include everything (latest overhead, ship-
ping, etc.). If these numbers do not match,
then your sales force is operating without a
clear understanding of costs. Many compa-
nies have gone into bankruptcy by increas-
ing sales this way (that’s right—they went
out of business while selling more].

• Did your projected profit on an order
match the actual profit?

10. Management Training. Take the sum of
your management salaries and multiply it by
.02 (2%). This amount is the very least you
should have spent in the past year on man-
agement training. If management is respon-
sible for the profitability of the company,
they are entitled to the tools to do the job.
• Did you spend at least 2% on manage-

ment training last year?
• When new managers are brought on

board or promoted from within, is

there a clear plan in place describing the
proper training required?

Know Your Score
Based on your answers to these key

operation management principles, how
are your operations doing? Constantly
finding room for improvement in your
business is key to evolving from good
to great. ®

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CERAMIC INDUSTRY April 2006 1 7