Discuss About The Financial Management Nonprofit Organizations.
The issue that has been presented in the question is that the post the joining of the finance and business consultation firm, Business Smart, the manager of the firm Mr. James Brown had decided to take up a family leave. This has led to the preparation of a consultation report for an important client, Company A.
This particular study aims to focus on the particular aspect of the selected company A (Horizon Oil Limited) and the chosen benchmarking company, B with the particular name of Tap Oil Limited. Furthermore, the essential ratios have been computed for the purpose of evaluating the financial performance of the company and the related risks associated with the business operations.
It has been further mentioned in the case study that Company A that is the Horizon Oil Limited carries out the particular decision of appointing a new Chief Executive Officer. Thus before the arrival of the new CEO the management of the corporate entity has decided the fact that the assessment of the financial performance of the company and the particular risks faced should be carried out. This is essentially done in order to execute the preparation of the financial statements in an accurate way and the particular issues in regards to the performance of the business can be potentially identified. Moreover, it has been further mentioned in the case study that the particular Company A has been operating under public scrutiny due to the fact of high carbon emissions and consumption of the required amount of energy. In order to resolve this particular problem in regards to sustainability the members of the Board has been discussing the considerable improvement in the sustainability reporting of the company by improving the reporting of the company on environmental challenges and strategies for the protection of the environment. However, it must be noted here that a particular number of Board members have opposed to this particular strategy due to the consideration of the risk that has been associated with lifting such a report. These Board members have been of the opinion that the firm should focus on the major areas of business and the regaining of profit (Afonso, Baxa and Slavik 2018).
The particular company that has been more profitable in nature is the Horizon Oil Limited. This is because this particular entity has acquired a profit of $5,400,416. This means that the net profit acquired by the firm of Horizon Oil Limited has directly leaped from a negative figure of -$199729329 to $5400416. This is a huge success that has been managed by the entity of the corporate firm. It must be further explained with the help of the pre-tax profit component. The pre-tax refers to that particular component that has been derived after deducting the necessary expenses from the gross profit of the firm. The net profit is a potential indicator of the profitability of the firm. Therefore, it can be evidently concluded that in regards to the Tap Oil Limited that has been considered as a benchmark company, the particular corporate entity of Horizon Oil Limited has obtained a greater amount of profit.
Furthermore, the comparison of the different financial components can be carried out with the help of the essential or the significant ratios that aim to provide an overview into the financial performance of the company with the help of the carrying out of the computations of the different kinds of financial ratios like the asset turnover ratios, the efficiency ratios and the liquidity ratios.
It should be noted here that there are certain limitations that the significant ratios might be subjected to. These limitations are that the ratios have been conducted for a period of two consecutive years which limit the ability of the significant ratios to potentially reflect or forecast the financial health of a company. Moreover, the figures might have been affected by a certain economical event that might impose a certain effect that is short term in nature thus misleading the user who depends on the results forecasted by the significant ratios (Afonso, Baxa and Slavik 2018).
The ratios have been computed for the corporate entity of Horizon Oil Limited at first. The financial ratios that have been utilized for the purpose of analyzing the financial performance of the firm are the profitability ratios, efficiency ratios, stability ratios and the liquidity ratios. This profitability ratios that have been computed are the gross margin, operating margin ratio and the return on assets. The gross margin ratio as the name suggests indicates the gross profit that has been obtained by a particular firm in a stipulated financial year.
|
Profitability ratios |
||
|
Particulars |
2016 |
2017 |
|
Gross Profit |
115,917,048.00 |
89,786,791.00 |
|
Net Sales |
76,023,431.00 |
88,387,935.00 |
|
Operating Profit |
-199,729,329.00 |
5,400,416.00 |
|
Total Assets |
386,038,244.00 |
353,228,029.00 |
|
Gross Margin ratio |
1.52 |
1.02 |
|
Operating margin ratio |
-2.63 |
0.06 |
|
Return on Assets |
-0.52 |
0.02 |
The gross profit margin ratio of the corporate entity of Horizon Oil Limited reflects the particular fact that the gross profit margin of the firm has invariably increased from the financial year of 2016 to the financial year of 2017. Moreover, the firm had incurred a loss in the financial year of 2016 which had been turned into profit in the financial year of 2017. The second ratio that has been mentioned in this particular study is the operating margin ratio. The condition with such a ratio has been similar. The operating loss that had been obtained by the firm in the financial year of 2016 had been turned into a profit in the financial year of 2017. The return on assets on the other hand refer to the degree by which the firm optimally utilizes the assets and ensures a certain degree of return from the optimum utilization of such. The case with the particular component of the return on assets have been similar with that of the other profitability ratios (Li 2015).
|
Efficiency ratios |
||
|
Particulars |
2016 |
2017 |
|
Operating expenses |
-291,502,827.00 |
-32,706,708.00 |
|
Revenue |
39,893,617.00 |
1,398,855.00 |
|
Total Assets |
386,038,244.00 |
353,228,029.00 |
|
Asset turnover ratio |
0.10 |
0.00 |
|
Operating expense ratio |
-7.31 |
-23.38 |
The efficiency ratios that have been computed reveal the fact that the efficiency of the particular firm has declined in terms of the turnover that is acquired from the sale of the assets and in regards to the operating expenses that have been incurred by the firm for the manufacturing of the products or for the imparting of the essential services.
|
Liquidity ratios |
||
|
Particulars |
2016 |
2017 |
|
Current Assets |
40,544,034.00 |
46,333,853.00 |
|
Current Liabilities |
121,897,387.00 |
42,168,486.00 |
|
inventory |
2,413,143.00 |
1,946,177.00 |
|
Prepaid Expenses |
2,228,656.00 |
1,300,052.00 |
|
Cash |
21,652,302.00 |
31,888,975.00 |
|
Marketable securities |
235,390,519.00 |
227,250,390.00 |
|
Current Liabilities |
245,270,670.00 |
214,478,679.00 |
|
Current ratio |
0.33 |
1.10 |
|
Absolute liquidity ratio |
1.05 |
1.21 |
The liquidity ratios indicate the liquidity of a particular firm. To be precise, the aspect of liquidity refers to the ability of the current assets of the firm to pay for the short term obligations or the current liabilities in a particular stipulated time period. The liquidity of Horizon Oil Limited as evident from the table reveals the particular fact that the liquidity of the particular corporate entity has invariably increased for the financial year of 2017. This means that the liquidity position of the firm has been high further indicating a healthy business
|
Stability ratios |
||
|
Particulars |
2016 |
2017 |
|
Equity |
140,767,573.00 |
138,749,349.00 |
|
Total Assets |
386,038,244.00 |
353,228,029.00 |
|
Liability |
245,270,670.00 |
214,478,679.00 |
|
Equity ratio |
0.36 |
0.39 |
|
Gearing ratio |
0.64 |
0.61 |
Lastly, the stability ratios that have been discussed in this particular study are the equity ratio and the gearing ratio. The equity ratio conveys the rate of utilization of the shareholder’s equity and the gearing ratio indicates the debt position of the firm that is the amount of third party debt that has been borrowed by the corporate entity in addition to the utilization of the shareholder’s equity. Both the firms have displayed a stable position in regards to these ratios indicating that the equity position and the debt position of the firms have been stable (Wolfson 2017).
Next, the particular ratios that have been considered for the particular organization of Tap Oil Limited has been as follows:
|
Profitability ratios |
||
|
Particulars |
2016 |
2017 |
|
Gross Profit |
88,066,611.00 |
57,589,743.00 |
|
Net Sales |
88,007,186.00 |
60,476,923.00 |
|
Operating Profit |
-16,686,014.00 |
-2,184,615.00 |
|
Total Assets |
129,846,600.00 |
87,803,846.00 |
|
Gross Margin ratio |
1.00 |
0.95 |
|
Operating margin ratio |
-0.19 |
-0.04 |
|
Return on Assets |
-0.13 |
-0.02 |
On the other hand, the comparison with the benchmark company that is the Tap Oil Limited reveal the fact that the corporate entity has fallen aback in regards to the Horizon Oil Limited. All the profitability ratios have declined and the particular corporate entity has faced a major setback both in the financial years of 2016 and that of 2017. This has been further evidenced by the negative values of the profitability ratios that have been computed (Li 2015).
|
Efficiency ratios |
||
|
Particulars |
2016 |
2017 |
|
Operating expenses |
-291,502,827.00 |
-32,706,708.00 |
|
Revenue |
115,917,048.00 |
89,786,791.00 |
|
Total Assets |
129,846,600.00 |
87,803,846.00 |
|
Asset turnover ratio |
0.89 |
1.02 |
|
Operating expense ratio |
-2.51 |
-0.36 |
The case for Tap Oil limited has been worse. This is because the operating expenses ratio has reflected a negative value indicating the potential fact that the firm has not been able to save on the operating expenses.
|
Liquidity ratios |
||
|
Particulars |
2016 |
2017 |
|
Current Assets |
30,084,300.00 |
27,501,282.00 |
|
Current Liabilities |
33,099,778.00 |
15,134,615.00 |
|
inventory |
8,080,431.00 |
8,019,230.00 |
|
Prepaid Expenses |
2,468,214.00 |
439,743.00 |
|
Cash |
8,839,137.00 |
9,939,743.00 |
|
Marketable securities |
195,583,195.00 |
181,569,230.00 |
|
Current Liabilities |
33,099,778.00 |
15,134,615.00 |
|
Current ratio |
0.91 |
1.82 |
|
Absolute liquidity ratio |
6.18 |
12.65 |
In case of Tap Oil Limited, the liquidity position of the firm has improved. This is a good indicator that conveys the fact that the business position of Tap Oil Limited has been healthy (Li 2015).
|
Stability ratios |
||
|
Particulars |
2016 |
2017 |
|
Equity |
63,242,122.00 |
41,128,205.00 |
|
Total Assets |
129,846,600.00 |
87,803,846.00 |
|
Liability |
66,604,477.00 |
46,675,641.00 |
|
Equity ratio |
0.49 |
0.47 |
|
Gearing ratio |
0.51 |
0.53 |
A non-financial issue that has been mentioned in the annual report of the company of Horizon Oil Limited is that the beta value of its shares are 1.52 revealing the fact that these particular shares are exposed to the market risk as they will be highly influenced by the crests and troughs in the share market. Therefore, these shares are associated with a certain degree of risks and can also be associated with a degree of potential gain depending on the situation. There is no such impact of a high beta on the financial performance of the company. The revealing of such an issue might increase or decrease the stability ratios of the firm as the debt position would increase or decrease (Wolfson 2017).
The financial health of Tap Oil Limited is not up to the mark. This might be due to certain non-financial issues like the lack of employee motivation or morale or other related factors. This will directly hamper the profitability ratios as the profitability of the firm is likely to decline.
The Tap Oil Limited has not disclosed any degree of information in regards to the sustainability structure or contributions of the company. To be precise, there has been no sustainability report of the firm. It must be noted here that the accounting regulatory bodies have made it mandatory for the corporate entities to disclose enough information in regards to the sustainability structure of the firm for a particular stipulated year along with the accounting financial report of the firm. It is highly recommended for the management of the corporate entities to focus upon the environmental strategies and challenges. This is because it is the factor that essentially drives the profitability of the firm by attracting more clients and investors into business. Therefore, the aspect of business growth and profit regain will automatically be fulfilled with the help of the satisfaction of the sustainability standards (Wolfson 2017).
Conclusion
The particular recommendation in regards to this particular study is that the corporate entity of Horizon Oil Limited is at a much better position in regards to the particular corporate entity of Tap Oil Limited.
References
Afonso, A., Baxa, J. and Slavik, M., 2018. Fiscal developments and financial stress: a threshold VAR analysis. Empirical Economics, 54(2), pp.395-423.
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Dokas, I., Giokas, D. and Tsamis, A., 2014. Liquidity efficiency in the Greek listed firms: a financial ratio based on data envelopment analysis. International Journal of Corporate Finance and Accounting (IJCFA), 1(1), pp.40-59.
Gepp, A. and Kumar, K., 2015. Predicting financial distress: A comparison of survival analysis and decision tree techniques. Procedia Computer Science, 54, pp.396-404.
Leary, M.T. and Roberts, M.R., 2014. Do peer firms affect corporate financial policy?. The Journal of Finance, 69(1), pp.139-178.
Li, X., 2015. Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), pp.555-582.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
Wolfson, M.H., 2017. Financial crises: Understanding the postwar US experience. Routledge.
Zietlow, J., Hankin, J.A., Seidner, A. and O’Brien, T., 2018. Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.
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