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Financial Management

Table of Contents

Financial statements: Part B: Report Writing.

Introduction.

The Key Performance Indicators.

Financial Analysis.

Profitability.

Financial Position.

Conclusion.

Financial Statements – Cash Flow Statement: Part B: Report Writing.

Introduction.

Profit vs. Cash Flow at Ajax Building Company.

The Cash Flow Statement

The Ageing Summary – Accounts Receivable.

Conclusion and Recommendations.

Introduction to Budgets.

Importance of Financial Management, Budgeting and Planning.

Preparation of Budget for the Next Calendar Year

Structure, Guidelines and Management Responsibility in Setting the Budget

Impact of one department over other in budgeting process.

Financial Statements: Part B: Report Writing

Introduction

The report aims at critically analyzing as Key Performance Indicators (KPIs) of Ajax Building Company, a company engaged in the business of developing buildings. The report will acknowledge the management the company about how it has performed for the month ended June 30 20*3. KPIs typically include Net Profit, Gross Profit and other profitability measures and will indicate how well the company is performing regarding generation of profits and revenue. By monitoring KPIs a firm can determine whether it is able to achieve the specified long-term goals or not. The report will also investigate the financial position of the company by analyzing the balance sheet as prepared for the month ended on June 30 20*3. The report will measure the liquidity and insolvency risk of Ajax Building Company from an accounting perspective. Overall the report will critically analyses the financial performance, position, which is collectively known as financial health of the company (Fletcher and Bhide 2020).

The Key Performance Indicators

The Key Performance Indicators (KPIs) that the report is going to analyze to determine the financial health of Ajax Building Company are as follows:

Table1: The Key Performance Indicators

KPI

Figure

Revenue

600,000

Cost of sales to sales ratio

50.0%

Gross Profit Margin

50.0%

Operating Profit Margin

20.0%

Net Profit Margin

13.3%

Working Capital

135,000

Account receivable turnover

3.8

Account payable turnover

8.0

Inventory turnover

3.0

Current ratio

2.08

Quick Ratio

1.28

Financial Analysis

Profitability

As per the above table (Table 1), the company was able to generate overall revenues of $600000 for the month of June 20*3. The cost of sales remains 50% of the total revenues which results in a gross profit margin of 50 per cent. The cost of sales to sales ratio is very high and the company can be more efficient in its development of buildings or production of goods (Toussaint et al. 2017).

The business of construction and development of buildings is extremely labor intensive and requires heavy machineries and equipments at the same time, hence it is common to incur heavy operating expenses including depreciation, salaries, wages, etc. Now, since the company is able to achieve an operating profit margin of 20% for the month of June 20*3, hence it can be stated that it is managing its operations with greater efficiency and 20% operating profits is a positive indication.

Apart from that the net profit margin of the company that means the profits after meeting all expenses including taxation expenses remains 13.3%. This indicates that the company is paying taxes at the rate of 33% and then retaining profits of 13.3% for payments of dividend and investments in future growth of the company. Again a net profit margin of approx. 13% is a satisfactory figure for the month of June 20*3 (Rees et al. 2016).

Financial Position

In this section of the report, we will analyze, what is owned by the company and what does it owes to others in the form of loans and payables, etc. The company as a total assets of $ 505000 and total liabilities of $ 225000, this means the net assets (total assets – total liabilities) of the company remains $ 280000. The figure indicates the net worth of the company, in other words, if the company goes into liquidation immediately, then the overall value of the company will remain $ 280000. The net assets are more than 55% of the total assets, ratio above 50% says that the company has more assets available than the liabilities, which is a good indicator. Creditors like a high ratio as it assures them that their money (loans) is safe and will be paid back. Investors also appreciate a company with high net worth to total asset ratio as it indicates more assets, more funds and larger opportunities for growth and expansion in the future (Bian et al. 2018).

The working capital (or Net operating working capital) measures the liquidity of the company and refers to the difference between current liabilities and current assets. The working capital of Ajax Building Company is $ 135000 and determines company's short-term financial health, its liquidity and operational efficiency. The company has a substantial positive working capital that means its current assets are exceeding its current liabilities and it has the potential to grow and invest. The company will not have any liquidity issues in the near future.

Further the statement on liquidity will be verified by determining the liquidity ratios including current and quick ratios. The current ratio of the company is 2.08, and the ideal current ratio a business should have should also be 2.0 times, which indicates that company has ample pool of assets to meet or pay its current obligations. Also the quick ratio of 1.28 of the company is better than the ideal measure of 1.0 time (Fletcher and Bhide 2020).

Conclusion

On the basis of the above analysis, it can be concluded that the company Ajax Building Company is financially in a healthy condition and has a positive financial position. The company is generating high revenues, and earning higher profitability margins at all levels, it is just required to look after its cost of sales which is costing half of the overall revenue generation. Also, company’s financial position seems to be positive as all the measures and ratio indicates that the company has high levels of liquidity and ample pool of assets in its balance sheet (Toussaint et al. 2017).

Financial Statements – Cash Flow Statement: Part B: Report Writing

Introduction

Cash flows (operating cash flow specifically) are considered to be the lifeblood of a business entity and an important measuring tool for the management, creditors and the investors. When many professionals bends toward net income or profitability figures, the operating cash flow has proved to be a better measurement tool to determine the financial health of the company on the basis of the following two main reasons (Rees et al. 2016).

  1. The cash flows are harder to manipulate under the provision of accounting standards (domestic GAAP, AASB or IFRS) as compared to net income (however, there are possibilities up to a certain degree).
  2. In accounting and financial industry there is popular quote which states that "cash is king" and a company that is not able to generate cash in a long term period is considered to be on its deathbed, irrespective of the level of profits shown in the financial statements (specifically income statement) (Bian et al. 2018).

Profit vs. Cash Flow at Ajax Building Company

The Ajax Building Company as per the profitability analysis is generating an overall net profit for the period ending June 30, 20*3, but the bank account of the company is reflecting an altogether different picture where the balances in the bank account with a debit balance of $40,000 at the beginning of the year becomes negative by an amount of $50000, that means the company was required to avail a bank overdraft of the prescribed amount. This is a turnaround of $90,000 in 12 months.

The Cash Flow Statement

The cash flow statement is clearly showing that the receipts from accounts receivables is more than double than the cash sales, that means the company has received past periods cash payments from its customers in the current period with a huge amount. This indicates that the company does not have an appropriate credit policy, will discuss this further while analyzing the ageing summary for accounts receivable Faramarz and Amini 2016).

The payment to accounts payable of $ 400000 is the largest cash outflow visible in the overall cash flow statement including all the three activities. These payments must have been addressed in the previous periods but deferred in the current period. This is a suspicious discovery and the company might have engaged in manipulating the figures.

Due to unorganized and inefficient cash cycle of the company, where it is not paying its suppliers on time as well as not collecting the cash on time or is providing excessive credit period. All this factors are not in the benefit of the company and resulted in net operating cash (out) flow of $ 40000 (Holynskyy 2017).

The Ageing Summary – Accounts Receivable

The ageing summary of the company is as follows:

Table 2: Ageing Summary

Account name

Account No.

Balance

Current

30 Days

60 Days

90 Days and over

GB Cement Services

DL75

$50,000

$20,000

   

$30,000

Igor Bricks

DL78

$30,000

   

$30,000

 

Pits Constructions

DL89

$40,000

$40,000

     

JNK Housing

DL95

$40,000

$20,000

$20,000

   
 

TOTAL

$160,000

$80,000

$20,000

$30,000

$30,000

As per the above table, the company makes business with 4 clients, but there is no particular system or pattern to provide credit to the customers in identifiable. Account DL75 has a balance of $50000, the company has collected 40% within 30 days and provides a credit of 90 days and over for the remaining 60%. Account DL78 has a balance of $30000, the company has provides a full credit for 90 days. Account DL89 has a balance of 40000; the company has collected 100% within 30 days and provides zero credit. Account DL95 has again a balance of 40000; the company has collected 50% within 30 days and provides a credit of 30 days for the remaining 50%. This describes has no credit policy and therefore, there are high possibilities of bad debts (Fletcher and Bhide 2020).

Conclusion and Recommendations on Financial Management

From the Statement of Cash Flow of the company, it has been found that the reasons behind the company has generated a profit but the cash flow statement witnesses a net decrement in cash of $90,000 is that there is no specific credit policy within the cash payment and receipt structure or the accounts department. The company is not only making delayed payments to its suppliers which will rotten the company’s goodwill but also is not collecting payments from its clients which will cause liquidity issues. Therefore, the company is required to formulate and implement a well structured credit policy and make timely payments to its suppliers (Bian et al. 2018).

Introduction to Budgets

a. Importance of Financial Management, Budgeting and Planning

Financial management process is the most important duty of business managers and owners, especially in a small organization like Bill is operating in the name of BJ Wholesale Company. He is required to consider the potential consequences of the managerial decisions taken by him and his managers in relation with cash flow, profits, and on the financial condition of the company (Holynskyy 2017).

Planning involves development of company’s objectives and identifications of the work that is required for achieving them. It also formulates performance standards and timetables that are required for implementing the company’s strategy and also assignment of individual accountability for better results. This segment is totally ignored at Bill’s company which employs a large staff of around 40 people including managers for specific departments

Budgeting consists of identification, prioritization, acquisition, and allocation of resources which are required to carry out the business operations on a periodical basis. The managers at BJ only have a broad understanding of the KPIs and there is an absolute absence sales plan and periodical forecast which creates difficulty for the other departments in their planning and identifying their own expenses and requirements.

b. Preparation of Budget for the Next Calendar Year

Bill in September 20*3 has decided to prepare budget estimation for the next calendar year being 20*4. He can follow the following 3 steps to create a balanced business budget:-

Step 1: Identify the Income Sources

An important and initial element for a business budget to be successful is to figure out how much money the business can generate on a monthly (or periodical) basis.

Step 2: Determination of Fixed Costs

Fixed costs are those expenses that cost a similar amount each month or period. And indentifying and incorporating such costs are the easiest and important part of a business budget (Tsofa et al. 2017).

Step 3: Include Variable Expenses

The expenses or costs other than the fixed costs are called variable costs. These are difficult to identify but it will determine the margin of profits as per sales.

c. Structure, Guidelines and Management Responsibility in Setting the Budget

The management plays the most important role in setting up a budget as it involves the formation and implementation of financial principles that drive an organization to reach its main goal, which is to raise the value of the business. Moreover, financial management consists of debt financing, cash flow management, as well as data collection and analysis to make sound decisions. The budgeting process usually begins when managers receive top management’s forecasts and marketing project objectives for the coming year, along-with a time-table stating when budgets must be completed (Rees et al. 2016). The forecasts and objectives provided by the top management represent guidelines within which departments budgets are prepared. The fundamental principles of budget are:

  • Management Support
  • Employees Involvement
  • Statement of Organizational Goal
  • Responsibility Accounting
  • Organizational Structure
  • Flexibility
  • Communication of Results
  • Sound Accounting System

d. Impact of one department over other in budgeting process

The work on budgeting begins with the task of estimating sales because the total activity of a firm depends on the sales. The sales estimate prepared by the marketing manager. The sales budget is accompanied by budget covering selling and distribution expenses. The two budgets together give the net sales revenue expected to arrive in the coming year (Matějka, Merchant and O'Grady 2020).

After the above two Production Budget of the firm is prepared including Production Cost Budget, which is composed of Materials Cost Budget, Labor Cost Budget and Overheads Budgets. After the production budget, the firm can work upon Capital Budget to estimate receipts and payments on capital account as opposed to revenue account.

A Cash Budget showing expected receipts and payments on revenue account is prepared separately. Once separate budgets for sales, production finance and other activities have been prepared and finalized and the targeted sales, cost of sales, expenses are determined, the targeted profit and loss account and balance sheet can be drawn. These statements together are known as Master Budget (Fletcher and Bhide 2020).

References for Financial Management

Bian, Y., Lemoine, D., Yeung, T.G., Bostel, N., Hovelaque, V., Viviani, J.L. and Gayraud, F. 2018. A dynamic lot-sizing-based profit maximization discounted cash flow model considering working capital requirement financing cost with infinite production capacity. International Journal of Production Economics, 196, pp.319-332.

Faramarzi, M. and Amini, H. 2016. The substitution effect of shocks cash flow in companies with more tangible assets. International Academic Journal of Economics, 3(2), pp.89-95.

Fletcher, T.A. and Bhide, A.A., Splunk Inc. 2020. Defining a new correlation search based on fluctuations in key performance indicators displayed in graph lanes. U.S. Patent 10,565,241.

Holynskyy, Y. 2017. The importance of financial management principles in the State budget execution. Annals of Spiru Haret University. Economic Series, 17(4), pp.19-28.

Matějka, M., Merchant, K.A. and O'Grady, W. 2020. An Empirical Investigation of Beyond Budgeting Practices. Journal of Management Accounting Research, pp.0000-0000.

Rees, C.J., Gibson, S.T., Rutter, M.D., Baragwanath, P., Pullan, R., Feeney, M. and Haslam, N. 2016. UK key performance indicators and quality assurance standards for colonoscopy. Gut, 65(12), pp.1923-1929.

Toussaint, N.D., McMahon, L.P., Dowling, G., Holt, S.G., Smith, G., Safe, M., Knight, R., Fair, K., Linehan, L., Walker, R.G. and Power, D.A. 2017. Introduction of renal key performance indicators associated with increased uptake of peritoneal dialysis in a publicly funded health service. Peritoneal Dialysis International, 37(2), pp.198-204.

Tsofa, B., Molyneux, S., Gilson, L. and Goodman, C. 2017. How does decentralisation affect health sector planning and financial management? A case study of early effects of devolution in Kilifi County, Kenya. International journal for equity in health, 16(1), p.151.

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