The reports intend to conduct a financial analysis calculating the various types of the financial ratios such as gross profit., net profit and return on equity. Some of the liquid ratio analysis has been performed with the evaluating of the current ratio, quick ratio and the conduction of the equity ratio. The next aspect of the ratio analysis has conducted the ratio analysis of the accounts receivable. This section of the report has bee seen to be followed by the various types of the others discourse of the report which has been seen to be related to the evaluation of the business profitability. The next important aspect of the report has been further seen to be based on the conduction of the various aspects of the financial stability along with the evaluating the business asset utilization.
b. Purpose of financial analysis
The main purpose of the financial analysis will be able to state on the facility of the liquidity, efficiency and profitability of the company.
c. Description on the structure of report
The structure of the report has been divided into four main categories including several types of the subsections in the study. The first discussion of the study has been seen to focus on the main form of the evaluation of the financial ratios. The second subsection of the first part of the report has been seen to be related to the conduction of the profitability analysis of the company, evaluation of the nosiness financial stability and analysis of the business asset utilization. The third section of the report has stated on recommendation which has been abet to state on the relevant nature of the scope of the future financial improvements.
2. Financial Analysis
a. Calculation of the financial ratios
i. Profitability Ratios
The gross profit ratio has been calculated by dividing the gross profit by sales. Based on the evaluation of the gross profit ratio it has been see that the company has able to significantly increasing the total amount of the gross profit ratio from 2015 to 2018. Net profit ratio is calculated by dividing net profit by the owner’s equity. The several types of the depictions as per the net profit ratio has been able to state that the company has been able to make the significant nature of the improvement in this section. This seen to be evident with 16% improvement from 2016 to 26% in 2017 (Titman, Keown & Martin, 2017).
ii. Liquidity Ratios
The current ratio is calculated by dividing the current assets with current liabilities. The various types of the depiction on the current ratio has been able to state that the company has performed poorly in this section. This is observed with decreasing amount of the liquid cash to support the short-term liabilities. The quick ratio is calculated with subtracting the inventories from the current assets. The evaluation of the quick ratio for the company has not been able to perform well in this regard. The total quick ratio is seen to be decreasing over the years. This has been seen to be evident with the total amount of the quick ratio decreasing from the 1.56 in 2015 to 0.95 in 2016 to 0.75 in 2017.
The Depiction of the debt equity ratio for the company has been seen to be conducted by dividing the total liabilities and owner’s equity. The overall evaluation of the has been seen with increasing nature of debt to support the operating activities of the company. This is particularly seen to be a negative aspect for the company (Renz, D. O., & Herman, 2016).
iii. Inventory Turnover ratios
The inventory turnover has been computed by dividing the “cost of goods sold” by average inventory. The average inventory is the sum of the previous year’s inventory and present year’s inventory, the amount is then divided by 2. Based on the conduction of the inventory turnover ratio it has been seen that the company is not able to effective sell its existing inventory. The main from of the depictions has been able to state that the company has seldom ordered form new stock in 2017 and 2018. Henceforth, it needs to pay more heed to increase the overall amount of the times the inventory is freshly ordered. The conduction of the various types of the analysis on the inventory turnover in days has been further able to depict that the company has performed poorly in this section. This has been significantly stated with more number of days requiring for the company to replenish the present inventory. The different types of the conduction of the information in this aspect has been seen to be directly relevant to the different types of information on the efficiency of the company (Bekaert & Hodrick, 2017).
iv. Accounts receivable ratio
The accounts receivable has been computed with Net Credit sales divided with average accounts receivable. The ratio is conducted in tis aspect has been able to state that the company has performed poorly in this area. This particular consideration is seen to be evident with more amount of time required by the company to receive the payment due from the creditor. The next important aspect of the accounts receivable has been further based on the evaluation of the information of the total number of days for receiving the accounts receivable. The formula used to evaluate the accounts receivable is done with the dividing the net credit sales with the average accounts rece3ivable and this is further divided with 365 days. The main form the depiction of the accounts receivable in terms of the days is seen to be increasing in nature, which is unfavourable for the company (Finkler et al., 2016).
Figure: Calculation of all the financial ratios
(Source: As stated by the author)
b. Analysis and evaluation of the business’ profitability
The evaluation on the profitability of the business has been able to reveal business’ increasing nature of the gross profit for the business, however the net profit of the company has been seen to be decreasing in nature. In addition to this this, the various information on the net profit ratio has been further able to reveal that despite of the increasing nature of the gross profit ratio of the company this has been significant decrease in the net profit of the company (Zietlow et al., 2018).
|
Year |
Sales |
Gross Margin |
Net Profit |
|
2015 |
$310,001 |
$319,301 |
($9,300) |
|
2016 |
$496,001 |
$415,401 |
$80,600 |
|
2017 |
$744,001 |
$553,971 |
$190,030 |
|
2018 |
$620,001 |
$715,595 |
($95,594) |
The different types of the depictions on the pre-tax margin and PBT has been seen with a positive increasing from 2015 to 2017, however it decreased in 2018.
|
Sales |
Profit Before tax |
Pretax Net Margin |
|
|
2015 |
310,001 |
-9,300 |
-3% |
|
2016 |
496,001 |
80,600 |
16% |
|
2017 |
744,001 |
190,030 |
26% |
|
2018 |
620,001 |
-136,563 |
-22% |
Figure: PBT and pre-tax net margin the company
(Source: As created by the author)
c. Analysis and evaluation of business’ financial stability
The various types of the depiction on the finical ratio has been performed with the conduction of the debt equity ratio. The main findings in this aspect has shown that the company is not stable in with an increasing nature of the debt equity ratio (Barr, 2018).
d. Analysis and evaluation on the business’ asset utilisation
The asset utilization is calculated with dividing the revenue with average assets. The business asset utilisation rate is seen to be increasing from 2015 to 2017. This main form of the depictions as per the asset utilization in 2018 is identified as decreasing (McKinney, 2015).
|
|
2015 |
2016 |
2017 |
2018 |
|
Asset Utilization |
53% |
78% |
98% |
54% |
|
Asset Utilization |
53% |
78% |
98% |
54% |
Recommendations
Some of the main recommendations of the company has been seen to be based on the various types the depictions which are considered with the increasing the sales and net profit over the year. It needs to be further seen that the needs to take the necessary steps which are seen to be considered with the reducing the overall debt of the company. There should be more amount of the operating assets which needs to be allocated to finance the various type of requirements for the current assets. Some of the other are of the improvement for the company further seen to be based on the effective inventory turnover and reducing the time for accounts receivable.
Conclusion
a. Summarization of key points from the previous sections
The summarization of the key information is a have stated that he company has able to significantly increasing the total amount of the gross profit ratio from 2015 to 2018. The evaluation of the quick ratio for the company has not been able to perform well in this regard. The total quick ratio is seen to be decreasing over the years. Based on the conduction of the inventory turnover ratio it has been seen that the company is not able to effective sell its existing inventory. The main from of the depictions has been able to state that the company has seldom ordered form new stock in 2017 and 2018.The next important aspect of the accounts receivable has been further based on the evaluation of the information of the total number of days for receiving the accounts receivable. The various information on the net profit ratio has been further able to reveal that despite of the increasing nature of the gross profit ratio of the company this has been significant decrease in the net profit of the company.
b. Limitations of financial analysis
The ratio analysis limitations are seen with the non-consideration of the stock market performance.
References
Barr, M. J. (2018). Budgets and financial management in higher education. John Wiley & Sons.
Bekaert, G., & Hodrick, R. (2017). International financial management. Cambridge University Press.
Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016). Financial management for public, health, and not-for-profit organizations. CQ Press.
McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies. ABC-CLIO.
Renz, D. O., & Herman, R. D. (Eds.). (2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and applications. Pearson.
Zietlow, J., Hankin, J. A., Seidner, A., & O’Brien, T. (2018). Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.
Requirement Three- Financial Analysis Report
Part a and Part b Part c
The two main variances have been discussed with projected sales and cost of goods. The projected sales revenue of the company has been depicted to be favourable in nature due to the increasing nature of revenue in the third period. Secondly cost of goods has been seen to be unfavourable in nature which has been seen to be evident with the various types of the depiction related to the increased cost of sales compared to 2016.
Requirement Four – CVP Part a
|
Fixed Expenses |
|
Insurance |
|
Interest Expense |
|
Total Fixed Expenses |
|
Semi variable Expenses |
|
Wages & Other |
|
Total Semi variable Expenses |
|
Variable Expenses |
|
Advertising |
|
Sales Bonuses & Delivery |
|
Total Variable Expenses |
|
Budgeted Sales Unit |
|
Variable Cost Per Unit |
Part b
|
Categorisation of Expenses |
|
|
Fixed Expenses |
Amount |
|
Insurance |
12,400 |
|
Interest Expense |
17,066 |
|
Total Fixed Expenses |
29,466 |
|
Semi variable Expenses |
|
|
Wages & Other |
382,378 |
|
Total Semivariable Expenses |
382,378 |
|
Variable Expenses |
|
|
Advertising |
74,400 |
|
Sales Bonuses & Delivery |
17,360 |
|
Total Variable Expenses |
91,760 |
|
Budgeted Sales Unit |
10,000 |
|
Variable Cost Per Unit |
9 |
Part c and Part d
|
Break Even |
|
|
Total Fixed Costs |
29466 |
|
Variable Cost Per Unit |
9 |
|
Sales Price Per Unit |
12 |
|
Break Even Point |
9140 |
|
Desired Profit |
120000 |
|
New Break Even Point |
46360 |
List of Appendix- Budget
|
(1) SALES FORECAST |
|
|
|
||
|
Year |
0 |
2015 |
2016 |
2017 |
2018 |
|
Projected Sales |
|
310,001 |
496,001 |
744,001 |
620,001 |
|
(c) Cost of goods |
122,450 |
177,940 |
238,080 |
238,080 |
|
|
|
|
|
|||
|
(2) CASHFLOW FORECAST |
|
||||
|
Preop |
|||||
|
Year |
0 |
1 |
2 |
3 |
4 |
|
CASH INFLOWS |
|
||||
|
Cash from Sales |
310,001 |
496,001 |
744,001 |
620,001 |
|
|
Directors loans |
100,750 |
100,750 |
100,750 |
100,750 |
100,750 |
|
Capital Employed |
0 |
540,950 |
461,900 |
424,390 |
0 |
|
Other cash inflows |
|||||
|
TOTAL CASH INFLOW |
100,750 |
951,701 |
1,058,651 |
1,269,141 |
720,751 |
|
CASH OUTFLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for materials |
122,450 |
177,940 |
238,080 |
238,080 |
|
|
operating expenses ( ) |
0 |
||||
|
TOTAL CASH OUTFLOWS |
0 |
122,450 |
177,940 |
238,080 |
238,080 |
|
Cash flow summary |
|||||
|
NET CASHFLOW FOR PERIOD |
100,750 |
829,251 |
880,711 |
1,031,061 |
482,671 |
|
OPENING CASH BALANCE |
0 |
100,750 |
930,001 |
1,810,712 |
2,841,773 |
|
CLOSING CASH BALANCE |
100,750 |
930,001 |
1,810,712 |
2,841,773 |
3,324,444 |
|
(3) DEPRECIATION SCHEDULE |
|||||
|
Annual Depreciation |
|||||
|
Total annual depreciation |
18,600 |
27,900 |
37,200 |
27,900 |
|
|
(4) PROFIT AND LOSS FORECAST |
|||||
|
Preop |
|||||
|
Year |
0 |
1 |
2 |
3 |
4 |
|
Revenue |
0 |
310,001 |
496,001 |
744,001 |
620,001 |
|
Cost of sales |
0 |
122,450 |
177,940 |
238,080 |
238,080 |
|
Gross profit |
0 |
187,551 |
318,061 |
505,921 |
381,921 |
|
|
|||||
|
Gross Margin |
319,301 |
415,401 |
553,971 |
715,595 |
|
|
Expenses/overheads |
|||||
|
Advertising |
15,500 |
31,000 |
62,000 |
74,400 |
|
|
Sales Bonuses & Delivery |
10,850 |
17,360 |
26,040 |
17,360 |
|
|
Insurance |
12,400 |
12,400 |
12,400 |
12,400 |
|
|
Wages & Other |
142,523 |
144,755 |
145,933 |
382,378 |
|
|
Bad Debts |
4,650 |
14,880 |
44,640 |
14,880 |
|
|
Interest |
10,928 |
17,066 |
24,878 |
17,066 |
|
|
Total expenses/overheads |
196,851 |
237,461 |
315,891 |
518,484 |
|
|
Profit/Loss before tax |
-9,300 |
80,600 |
190,030 |
-136,563 |
|
|
0 |
0 |
0 |
-40,969 |
||
|
Before tax net margin |
|
-3% |
16% |
26% |
-22% |
|
Profit after tax |
|
-9,300 |
80,600 |
190,030 |
-95,594 |
|
|
|
|
|
|
|
|
ROC |
15% |
41% |
-23% |
Balance Sheet
|
Assets |
2015 |
2016 |
2017 |
2018 |
|
Current Assets |
||||
|
Cash |
$7,750 |
$0 |
$0 |
$0 |
|
Accounts receivable |
$31,000 |
$74,400 |
$148,800 |
$620,001 |
|
Inventory |
$9,300 |
$29,760 |
$89,280 |
|
|
Total current assets |
$48,050 |
$104,160 |
$238,080 |
$620,001 |
|
Fixed (Long-Term) Assets |
||||
|
Buildings |
$465,000 |
$465,000 |
$465,000 |
$465,000 |
|
Land |
$93,000 |
$93,000 |
$93,000 |
$93,000 |
|
(Less accumulated depreciation) |
$18,600 |
$27,900 |
$37,200 |
$27,900 |
|
Total fixed assets |
$539,400 |
$530,100 |
$520,800 |
$530,100 |
|
Total Assets |
$587,450 |
$634,260 |
$758,880 |
$1,150,101 |
|
Liabilities and Owner’s Equity |
||||
|
Current Liabilities |
||||
|
Accounts payable |
$24,800 |
$59,520 |
$159,960 |
$59,520 |
|
Bank Overdraft |
$0 |
$18,600 |
$38,750 |
$40,000 |
|
Total current liabilities |
$24,800 |
$78,120 |
$198,710 |
$99,520 |
|
Long-Term Liabilities |
||||
|
Long-term debt |
$100,750 |
$131,750 |
$178,250 |
$131,750 |
|
Total long-term liabilities |
$100,750 |
$131,750 |
$178,250 |
$131,750 |
|
Owner’s Equity |
||||
|
Owner’s investment |
$540,950 |
$461,900 |
$424,390 |
$461,900 |
|
Net Profits |
-$9,300 |
$80,600 |
$190,030 |
-$95,594 |
|
Drawings |
-$69,750 |
-$118,110 |
-$232,500 |
$552,525 |
|
Total owner’s equity |
$461,900 |
$424,390 |
$381,920 |
$918,831 |
|
Total Liabilities and Owner’s Equity |
$587,450 |
$634,260 |
$758,880 |
$1,150,101 |
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