Assignment
On
Managing
Financial Principles and Techniques
INTRODUCTION:
Managing
finance is a one of the most important business factors in order to create
wealth, generate cash, and get the exact return and to improve portability. The
assignments will focus on the different viewpoints of financial analysis
regarding some companies and will show how to deal with financial analysis
appropriately.
There
is always a high risk in any business structure. But this can be reduced. In
order to do this, the total activity of any business can be divided or
subdivided into small tasks. These tasks then can be delegated among the people
of the respective fields. The whole process can be supervised by the managers.
Each of the tasks will have their particular goals and the sum up of all of
these goals will help achieving the total organizational goals. Among those
tasks financial responsibilities play a vital role that is controlled by the
department of finance.
From
the perspective of XYZ’s revenue and cost it is seen that the sale of this
company varies with its production unit. As a result, the pricing strategy needs
to be reviewed in order to keep pace with the rapid market change, cost of raw
materials and the impact of the factors of the external environment.
Followings are the
importance of cost in pricing strategy:
§
There
are ups and downs of the company’s sale when compared to its sale prediction.
For this reason, the unit of sales and cost need to be adjusted with proper
planning. The reason is that the cost needs to be shown higher by the firms for
safeguarding their income tax.
§
While
considering stock management, the ready stock for selling should be out as soon
as possible in order to avoid the problem of liquidation.
§ In order to avoid any discrepancy in the company’s
finance for inadequate pricing system company need to adjust the system that
complies cost based pricing, skimming and penetration.
For any
type of costing strategy it is important of design a costing system. The
prediction of future can be done through this based on the present condition.
Thus the organization can focus on the way of arranging cost and to redefine
pricing strategy for the market competition.
Following
are the recommendations how the cost of XYZ can be adjusted and how its profit
can be improved:
Present cost
|
Costs as
proposal
|
|
Per unit raw material cost
|
$19
|
$14
|
Per unit labor cost
|
$09
|
$07
|
Per unit changeable overhead (factory)
|
$4
|
$3
|
Per unit changeable overhead
(Selling)
|
£04
|
£03
|
Budgeted activity
|
2000 units
|
1800 units
|
This
costing method briefly shows the exact cost for XYZ’s each unit and activity.
After
analyzing the table above, it will be possible to improve pricing and costing.
The data that we have got can be upgraded according to three months as it is
done below. Thus the profitability target can be fixed by this.
Following
is the outcome that can be found by applying the recommendation above.
Name of Month
|
June
|
July
|
August
|
$
|
$
|
$
|
|
Raw(Direct) material
|
31000
|
15000
|
22500
|
Labors cost direct in nature
|
17000
|
8000
|
12000
|
Total primary cost
|
47000
|
23000
|
34500
|
Overheads permanent in nature
(factory)
|
16000
|
16000
|
16000
|
Overheads temporary
in nature (factory)
|
10000
|
5000
|
7500
|
Overheads permanent in nature (selling)
|
500
|
500
|
500
|
Overheads temporary in nature (selling)
|
7000
|
3000
|
5500
|
Goods’ Cost
|
77501
|
46501
|
62100
|
Sales
|
505000
|
301000
|
502000
|
Gross-profit
|
422499
|
253499
|
437900
|
The
future prospect of any business can be estimated through the forecasting method
where the future of the cost and revenue generation of the company can be
shown.
Forecasting technique
consists of two types:
1) Qualitative Approach
2) Quantitative Approach
The
judgment of focus is used in qualitative forecasting where the previous data of
specific verities is used in quantitative focus. The later method is used by
this company. There are also two kinds of quantitative method. One of which is
time series method and the other one is use of historical data. In order to
forecast the company’s cost and revenue, historical data is used by us. Here
the researchers collect various previous data and then predict the future based
on them.
Forecasting of Cost:
Fleming
and Koppelman (1995a) mentioned that cost performance index helps forecasting
model to calculate cost based on each earned value. Christensen (1990) and
Heise (1993) on their observation stated that, in the early stage CPI can be
forecasted appropriately. According to the selection of the company this
forecasting can be differed.
Forecasting of
Revenue:
In
order to focus revenue several models are available (Frank, 1993, Makridakis
and Wheelwright, 1987, 1989; Guajardo and Miranda, 2000). These models follow
quantitative and qualitative method as well. The quantitative one is more
sophisticated where complexity had done not indicate the accuracy. Again,
qualitative method is more informal. Sometimes more accurate ‘Guess’ is needed
by the expert in order to job to be done. For this reason, there are several
forecasting techniques where one can be better than others depending on the
nature of the source of revenue.
Analytics
method is used to forecast revenue that shows how much amount of finance is
available for future. The relationship between the factors driving revenues and
the collection of the company is attempted to be recognized by the forecasting.
Thus the shortfall can be avoided with the accurate revenue forecasting.
Based on
the given details, preparing account is not easy all the times. Because every-additional
information needs to be analyzed and based on this analysis the work has to be
done.
Followings
are the assumption that depends on the analysis of the company’s historical
data. The future cost and revenue of the company will also be focused through
them.
Forecasting of sales:
Title
|
Per unit sales expenditure
|
Sales expenditure
|
selling average per unit
|
selling average
|
Net sales
|
Star fruit
|
102
|
29.6
|
410
|
61.3
|
31.14
|
Avocado
|
23
|
23.30
|
350
|
41.10
|
18.50
|
Pineapple
|
23
|
35.20
|
253
|
64.20
|
39.30
|
Jackfruit
|
45
|
57.10
|
144
|
49.10
|
(8)
|
Walnut
|
43
|
80.10
|
250
|
121.30
|
41.20
|
Catered apple
|
11
|
30.12
|
150
|
33.05
|
3.13
|
Totality
|
247
|
255.42
|
1557
|
370.05
|
133.27
|
Budget
for operation within the organization
Name of months
|
July
|
August
|
September
|
October
|
November
|
Dec.
|
Jan.
|
Feb.
|
Mar.
|
App.
|
May
|
Jun
|
Balance (opening)
($)
|
21
|
116.5
|
212
|
307.5
|
473.2
|
567.7
|
664.2
|
759.5
|
743.5
|
839.0
|
934.5
|
1029
|
Sales (Net)
|
364.5
|
364.5
|
364.5
|
182.7
|
364.5
|
363.5
|
364.5
|
0
|
364.5
|
364.5
|
364.5
|
182.7
|
Sum of entire
receivables
|
385.5
|
481
|
576.5
|
490.2
|
837.7
|
933.2
|
1026.7
|
759.5
|
1108.0
|
1203.5
|
1298.0
|
1211.7
|
Expense
for Rent
|
15
|
15
|
15
|
15
|
15
|
15
|
15
|
15
|
15
|
15
|
15
|
15
|
Delivery expense
|
119
|
119
|
119
|
0
|
119
|
119
|
119
|
0
|
119
|
119
|
119
|
0
|
Coat in lab
|
79
|
79
|
79
|
0
|
79
|
79
|
79
|
0
|
79
|
79
|
79
|
0
|
Box for
exhibition
|
11
|
11
|
11
|
0
|
11
|
11
|
11
|
0
|
11
|
11
|
11
|
0
|
Box for funds
|
39
|
39
|
39
|
0
|
39
|
39
|
39
|
0
|
39
|
39
|
39
|
0
|
Sum of entire
payables
|
263
|
263
|
263
|
15
|
263
|
263
|
263
|
15
|
263
|
263
|
263
|
15
|
Closing
|
122.5
|
218
|
313.5
|
479.2
|
574.7
|
670.2
|
765.7
|
748.5
|
838.0
|
940.5
|
1035
|
1200.7
|
The
company receives some of its profits from its present operation at present
though these available sources can be used to expand the business:
Name of funding source
|
percentage of interest (£)
|
Total individual source money(£)
|
payment period(£)
|
Standard
chartered bank
|
1.5%
|
2500
|
Every
month
|
Royal bank of Scotland
|
2.2%
|
3,000
|
Every
month
|
Bank
of Ireland
|
2.6%
|
5000
|
Every
month
|
Totality
|
03.15
%
|
10500
|
Every
month
|
Target of
budget for ABC Co
Followings
are grounds upon which the company’s budgetary target can be found:
Depiction
|
Budgeted amount in terms of piece
|
Value
in pound
|
Exact obtained figure of piece
|
Value in pound
|
Cost of
direct material use
|
80000*1.5
|
120000
|
70000*1.30
|
91000
|
Cost of labor
(direct)
|
80000*1.60
|
128000
|
70000*1.70
|
119000
|
Primary expenditure
|
0
|
275000
|
0
|
240000
|
Temporary expenses
|
27000*3.77
|
101790
|
25000*3.62
|
90500
|
Permanent
expenses
|
0
|
110000
|
0
|
114000
|
Sales cost
|
0
|
493000
|
0
|
452000
|
Gross profit
|
0
|
409000
|
0
|
398000
|
Sales
|
100000*10
|
1000000
|
90000*9.63
|
866700
|
When
comparing the actual data with the target of the budget, sales diminish
comparatively due to last three months’ sales dropping. As a result, a range of
measures are needed for raising the sales.
The budget
cycle of any organization consists of four budget phases. First phase consists
of policy planning, resource analysis and revenue estimation. There are four
budget phases in any budget cycle of an organization. Second phase consists of
policy making and negotiate budget planning. Third phase includes policy
implementation following budget adoption and revision and execution of the
budget policy. The fourth phase comprises the whole budget process where it
evaluates the total budget system.
A
budgetary process includes historical data. This also considers the goal and
objectives of the organization during the budget preparation. Again it is also
impacted by the present condition of the country. The process also considers
fiancé allocation and utilization, profit generation while allocating further
revenue for the next project.
Comparisons
between the budgetary income & expenditure with the actual income &
expenditure:
The following table shows the judgment:
Particulars
|
Approximated
|
Real
|
||
Revenue
(£)
|
Expenses
(£)
|
Revenue
(£)
|
Expenses
(£)
|
|
Amount of sales
|
960000
|
920500
|
||
Direct
material cost
|
130000
|
120500
|
||
Labor cost
(direct)
|
160000
|
163000
|
||
Primary expenditure
|
280000
|
293500
|
||
Expenses
(variable)
|
12100
|
97300
|
||
Expenses
(Fixed)
|
126400
|
116300
|
||
Sales
expenditure
|
51410
|
49710
|
||
GROSS-PROFIT
|
200090
|
80190
|
||
At
present no direct relation is seen between the workload and sales, production
or other operation related determinant. The work of this determinant includes
administration, general marketing and the department of manufacturing. These
are determined by the management decision instead of volumes of sales. It
considers the fixed appropriations of any incomplete project in any fiscal year
as a fixed budget based on its expansion next year.
For
instance, this can be seen from the capital expenditure, major projects for
repairing and specific advertising program of ABC Co.
Some of
the specific mile stones of the budgetary monitoring process are provided here.
Firstly,
trying to reduce cost related to the activity of the production and then
building a compatible plane for the sales maximization
Then
analyzing the present financial statements of the business and deciding to
create alternative actions and thus making change in the present financial
business policy.
Detection
of the cost of sales:
Costing Measurement
|
Breads(Pound)
|
Jelly (Pound)
|
Cost
of material
|
600
|
600
|
Cost of labor
|
1000
|
500
|
Per
piece labor hours applied
|
26
|
26
|
Applied
labor hours
|
49
|
49
|
Cost
of fixed manufacture
|
9000
|
4000
|
Sum
of price of items Sold
|
10675
|
5175
|
Here
the path of revenue generation is shown. Again, net profit can be obtained from
the unit sales price.
Unit’s
sales price is used to calculate the sales revenue. The net profit can be
obtained with the deduction of the cost.
Net-profit
Measurement
|
Breads(Pound)
|
Jelly
(Pound)
|
Amount
of Sale
|
14000
|
12500
|
sales
expenditure for the product
|
(10675)
|
(5175)
|
Ne-profit
|
3325
|
7325
|
The
above mentioned net profit is received through the cost absorption method.
Workings
01. Labor-worked-hours = Expenditure of labor / rate of hours
=1200000/25.00
= 48000.00
02. Production (Fixed in nature) = hours of working * Cost per unit
= 48000*50.00
= 2400000
Consequently,
designed for Breads, unit price in favor of whole production = sum of entire
cost / units of manufactured goods
10675000
14000.00
= £76
Consequently, designed for Jellies, unitary expenditure
of total production = sum of entire cost / units of manufactured goods
= 517500 / 25000= £20
Consequently, designed for Breads, on sum of
production, net profit/unit = profit (net) / units of product
3325000.00
14000.00
= £238
Consequently, for Jelly, net profit/ unit on
production = profit (net) / units of manufactured goods
7325000
25000
= £293
Process of costing based on
action
The entire expenses are to
be paid, supported by the cost driver
Cost measurement
|
Pound(£)
|
Pound(£)
|
Expense
for Material
|
500
|
400
|
Expense
for Labor
|
1100
|
700
|
Cost of setting for manufacture
|
20000
|
20000
|
Client delivery expense
|
14
|
25
|
Stored element
|
13900
|
13900
|
Additional actions
|
12600
|
12600
|
Sum of total
|
48114
|
47625
|
Net profit Measurement
|
Pound(£)
|
Pound(£)
|
Total
amount of sale
|
14000
|
12500
|
Total
amount of sales Cost
|
(4811)
|
(4762)
|
Net
profit
|
9189
|
7738
|
Consequently,
designed for full amount production, cost per unit for Breads
Cost in Total
Total units of Product
4811000
14000.00
= 343
Consequently,
designed for Jelly, cost per unit on behalf of full amount of production
Cost in Total
Total units of Product
=
4762000 / 25000= 190
Consequently,
in favor of product-p, per unit net profit on full amount of production
Total Profit (Net)
Total units of Product
9189000
14000.00
= 656
Consequently,
designed for product p1, per unit net profit of production
Cost (Total amount)
Total units of Product
7738000
12500
=
620
Evaluate
the potential for the use of activity based costing
Title
|
Methodic assimilation within pound
|
Method of ABC within pound
|
Breads’ unitary
cost
|
75
|
344
|
Jellies’ unitary
cost
|
22
|
190
|
Breads, unitary
N/P
|
240
|
656
|
Breads’ unitary N/P
|
299
|
620
|
Accuracy and cost effective
method are ensured by activity based costing for keeping the cost lower. The
capacity of the profit is higher than that of absorption costing.
Again, firms’ strategy is to
minimize cost and maximize profit. Activity based costing is appropriate here
as well. So this firm tends to use this costing system. Activity cost is based
on the cost object consume activities and resources consumed by activities.
This consumption drives the cost of the company.
After analyzing this is obvious
that costing of a product is different in absorption costing and activity based
costing. Again, when the overall figure is taken, it is also seen that for this
firm ABC method is more profitable. The manufacturing team of this company use
ABC method instead of absorption costing so forth. ABC method is based on the consumption of
products and cost. This method is very useful for this firm’s investment as
based on this method the firm has established ac competitive strategy. Here
both of the projects depend on the finance of the project. There are some
opportunities for this purpose as this finance can be raised from the local
taxpayers, seeking funds, borrowing the form UK and international market. Again
some other sources available like by entering in the pubic private
relationship. The financial outcome of this project will ensure what project is
actually profitable and what project should be implemented. It will also show
what to do about finance like more or less investing and if how will it
benefits financially the private or public sector.
Depending on our details we
have got here some important appraisal method of this project are proposed:
§ Exact
time for payback will be fixed for both library and leisure centre
§ Net
present value will be find out for both the projects
§ Internal
return rate will be calculated.
§ Average
return rate will also be calculated.
We have to find out what
exact time for payback.
5 years maximum time has
been set my managers in order to pay back
Successively, in both the
projects, 2200 and 1600 are principally invested
Net present value and
internal rate of return can be found through the formula.
Calculation of NPV (net
present value)
Capital cost = 5% (discount
factor)
For library NPV = (£ 722.05) (negative value)
For Leisure Centre NPV =
(£702.48) (negative value)
IRR is,
£0
|
£0
|
-2200.00
|
-1600.00
|
00
|
00
|
60.00
|
-40.00
|
200.00
|
140.00
|
400.00
|
220.00
|
500.00
|
300.00
|
620.00
|
380.00
|
220.00
|
80.00
|
(12%)
|
(9%)
|
IRR = (12%) is in project
school which is negative
IRR = (9%) is in Project for community
health centre which is negative
10% is the objected percentage,
for that reason less than 10% will be our accepted standard
According to the research
above the following data are collected.
The IRR is less than 10% as
like previous target. But this is more suitable to the leisure centre project.
Again both are indicated negative value that show that both the project may
fall in loss. So, the return should be reviewed again as the investment is more
than the profit. Against the NPV is also negative that shows there may be the
cause of wastage and the production outcome will not be good. Payback work also
shows that the project of leisure will take less time than that of library.
Based on this analysis, it is proposed to think about both the project again
and to make the investment lower. If one project at least needs to be
implemented then it is better to go for the leisure centre.
Now I will go for the focus
on the different vital ratios making fundament 2010 and 2009 annual report of
HSBC Bank, renowned as the World’s Local Bank.
We know that liquidity ratio, gearing ratio, profitability ratio & efficiency
ratio will be considered as the most vital ratios within any organization. For
that reason we will go for the analysis of the ratios and interpretation for
the given information.
Ratios
|
Within 2010
|
Within 2009
|
Within total sum of assets return
|
7300/743256
=00.0090
|
8400/743251=00.0110
|
Within equity of ordinary
shareholder,
return is-
|
3010/32347=00.0930
|
3100/27518= 00.110
|
Margin of profit (gross)
|
2110/18010=00.110
|
2600/17800=00.140
|
Margin of profit (net)
|
3010/18010=00.160
|
3100/17800=00.170
|
Ratios for measuring
productivity or profitability:
Profit margin (gross)
Profit (gross)
Revenue
Profit Margin of 2010
2110
18010
=0.11 or 011.00 %
Profit Margin of 2009
2600
17800
=00.14 or 014.00%
Difference
in the profit margin (gross) in the two successive 2 years is= (14.00-11.00)
%=3%
Profit
margin (net)
Profit (net)
Revenue
Profit Margin of 2010
3010
18010
= 0.16 or 16.00(percent)
Profit Margin of 2009= 3100/17800= 0.17 or 17.00(percent)
Difference
in the profit margin (net) in the two successive 2 years is= (17.00-16.00) %=
0.10 or 1(percent).
Turnover of Capital
Revenue of the company
Employed Capital in the company
Turnover of capital of 2010
=3010/32347= 00.93 or 09.3(percentage) %
Turnover of Capital of 2009
=3100/27518= 00.11 or 011.0 (percentage)
%
Difference
in the Turnover of capital in the two successive 2 years is= (09.30-011.00) %=
0.017 or 01.70 (percent).
Liquidity ratio for
2010 & 2009
Current
Ratio:
In 2010, current ratio is=
743256/714670= 01.040 percent (%)
In 2009, current ratio is=
743251/721602=01.030 percent (%)
Quick
Ratio:
In 2010, Quick ratio is=
743256/714670=01.040 percent (%)
In 2009, Quick ratio is= 743251/721602=01.030percent
(%)
Ratio
analysis:
Liquidity Ratios
Current Ratio:
In 2010, current ratio is=
743256/714670= 01.040 percent (%)
In 2009, current ratio is=
743251/721602=01.030 percent (%)
In successive two years the
difference is =0.01.
Quick Ratio:
In 2010, Quick ratio is=
743256/714670=01.040 percent (%)
In 2009, Quick ratio is=
743251/721602=01.030percent (%)
Difference in the successive
two years is =00.01
Ratios for determine
efficiency
Operating ratios:
Cash Flow to Sale of 2010
37326
18099
= 206.00 percent (%)
Cash Flow to Sale of 2009
-11757
17944
= (65) percent (%)
The difference between the
two successive years of operating ratios is 141 percent (%)
Index for operations:
Index for operation of 2010
37326
3016
= 1237 percent (%)
Index for operation of 2009
-11757
3159
= (373) percent (%)
Difference
in the two successive years is 866 percent (%)
Gearing Ratio
Debt
Ratio = Total liabilities / Total Assets
Debt Ratio of 2010 = 766137
/ 798494 = 95%
Debt Ratio of 2009 = 723500
/ 751928 = 96%
The difference in debt ratio
in the successive two years is 1%
Ratio
based on Equity:
Equity ratio of 2010 = 32357
/ 798494 = 40%
Equity ratio of 2009 = 28428
/ 751928 = 37%
The difference in equity
ratio in the successive two years is 03 percent (%)
Ratio
based on capitalization:
Capitalization ratio of 2010 = 798494
/ 32357 = 24.67%
Capitalization ratio of 2009 = 751928
/ 28428 = 26.45%
The difference in equity
ratio in the successive two years is 01.83 percent (%)
After analyzing HSBC
§ Good
figures are shown in the profit with the revenue of 14-16%. This profitability
is the positive indicator for the investors of future.
§ The
ratio of liquidity of 1:1 is also very good as the assets are needed to be
covered up with the capacity for paying the liabilities in the exact time. So
it is good for future to retain the ratio.
§ Again
the ratio of efficiency is also good as this has been improved for the negative
cash flow to the positive one by showing the 200% or 2 times efficiency ratio
which is an important turning point.
Recommendations:
The
company is planning to retain the performance for a longer period based on
their financial record and the outcome they have got from their profitability
though change may come anytime in the business.
Liquidity
is now a burning question in the business world but as the company overcomes
this situation and economic crisis this performance and experience must be
retained that will help in future.
Though
negative cash flow was experienced by the company but it has been overcome with
the effective management and the cash flow is thus changed to positive by
achieving 200% efficiency. That is a very good threat for its competitors and
the company should hold this.
