MFRD
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The document contains a table of contents and summaries of 3 tasks related to analyzing financial ratios and budgets for a company called Archie's. Task 1 discusses manufacturing, sales, and inventory managers and the costs they should consider. Task 2 presents budgets for raw materials, production, and costs. It also discusses benefits and limitations of budgets. Task 3 shows Archie's financial ratios for profitability, borrowings, and shareholders' investment compared to industry averages for 2013 and 2012.
MFRD
- 1. Table of Contents MAJOR FINDING........................................................................................................................ 5 TASK 1. (UNIT 2, 2.3) .............................................................................................................. 5 1. Manufacturing manager ............................................................................................ 5 2. Sales manager ............................................................................................................. 6 3. Inventory manager ..................................................................................................... 6 TASK 2. (UNIT 2, 3.1) .............................................................................................................. 7 1. Budget and decisions .................................................................................................. 7 2. Limitation and solution .............................................................................................. 9 TASK 3. (UNIT 2, 4.3) ............................................................................................................ 11 1. Profitability and return on capital .......................................................................... 12 3. Borrowings ................................................................................................................ 12 4. Liquidity and working capital ................................................................................. 13 5. Shareholders’ investment......................................................................................... 13 APPENDIX .................................................................................................................................. 15 REFERENCES ............................................................................................................................ 20 4
- 2. MAJOR FINDING TASK 1. (UNIT 2, 2.3) 1. Manufacturing manager At first time, manufacturing manager will look into functional costs including production or manufacturing, administration and distribution cost to control how much and how to use money reasonably. Furthermore, it also helps Archie’s company avoid the situation of losses and wastes that is unworthy of production and manage their money effectively. Whereas production costs will come from the price of raw materials, administration costs cover the expense for general office departments with personnel department salaries, photo-copying and office stationery. In addition, spending for transportation or research for innovation should be noticed. Secondly, direct and indirect cost or overhead also should be evaluated by the manager. In direct costs, to manage their resources such as materials and labour, manager should find out how worthy it is for spending. These costs will measure how many necessary employees for manufacturing and how much to pay for their salaries, as well as expense for process of production. Moreover, manufacturing manager also see the costs of making a product, providing service and running a department as the cost related directly with manufacture. Another important cost is production and distribution indirect cost or overhead which cannot be traced directly. These overhead may occur as supervisors’ wages and cleaning raw materials. As a result, manager should consider it in order to avoid the case of losses. Thirdly, in order to fix problem,the information about cost centres and cost units are concerned to help manufacturing manager to find out the factors that cost most. Additionally, cost per unit mention the needed cost for producing an item used to choose suitable types of materials to reduce the total cost. Finally, if Archie’s company decides to expend their business, they will have to pay for changes in added renting and machinery. However, there are some kinds of cost such as direct materials and transportation will vary depending on the volume of production. 5
- 3. 2. Sales manager Sales manager is suggested to consider marketing cost in classification in function in order to manage the demands for products and put price at a certain level. The direct costs as well as indirect costs like selling overhead are seen to calculate the amount of money that company spends for and the ability to gain profit in future. Cost centres and cost per unit are also necessary information in making decision. Basing on this analysis, sales manager can set up a range for price and determine which level will be most reasonable to make profit. Also, in order to reach break-even point and maximize profit, Archie’s company can propose a specific volume of sales. 3. Inventory manager First of all, the costs of warehousing and transportation are concerned to show how necessary to manage inventory effectively by JIT (Just in time) or EOQ (Economic order quantity) model as features of functional costs. Inventory manager will analyze the need of materials and labour to avoid the situation of surplus in these categories when company has too much inventory.Furthermore, other costs are considered to identify exactly the volume of materials, employees and time they should spend for production. With the purpose of maintaining the business and making profit, spending for fix and variable cost should be in control and not be affected too much by market factors such as inflation and changes in demand through time. At last, relevant cost is mentioned as the cost that should be used in decision making (BPP Learning Media, 2010) including future cost and cash flow. By forecasting the market changes, inventory manager will have a decision making inventory be not only a risk but also an opportunity to remain or expand the size of business. 6
- 4. TASK 2. (UNIT 2, 3.1) 1. Budget and decisions Raw Material Purchase Badget Material X Material Y Kg Kg Using Requirement To product 18,300 units of A 91.500 109.800 To product 76,350 units of B 534.450 687.150 Usage Budget 625.950 796.950 1.878 2.391 627.828 799.341 Provision of losses (0.3%) Opening Stock 400 0 Closing Stock (55%) 220 0 Decrease in Stock 180 180 0 0 627.648 799.341 $ 4,60 $ 6,50 $ 2.887.180,11 Raw Material Purchase $ 5.195.715,53 Budget (kg) Cost per kg Raw Material Purchase Budget($) Total Purchase Cost $ 8.082.895,64 Figure 1. Raw material purchase budget of Archie’s company in 2014 7
- 5. Production Budget Product A Product B Units Units 20.000 80.000 100 Sales goods 400 Provision for losser (0.5%) Opening Stock 4.000 9.000 Closing Stock(55%) 2.200 4.950 Decrese in Stock 1.800 Production Budget 1.800 4.050 18.300 4.050 76.350 Figure 2. Production budget of Archie’s company in 2014 Materials 800 Opening stock (400kgx$2+ 0x$6.8) 1012 Closing stock (220kgx$4.6+0x$6.5) 8,082,895.64 Purchase cost Skilled labor 1,328,250 Variable overhead 1,593,900 900,000 Fixed overhead Production cost budget *Working 11,904,833.64 Product A Product B Unit produced 18,300 76,350 Hour per unit 1 1.5 18,300 114,525 Total hours 8
- 6. Skilled labor $1,328,250 Variable overhead $1,593,900 Figure 3. Production cost budget of Archie’s company in 2014 A budget in business is financial plan in exactly the same way, budget can encourage forward thinking and help Archie company can manage their monetary, income, expenditure, capital investment for future plans. Budgetary planning and control systems has some benefits. The Budgets set up targets for company. The budget show manager how much money they need to focus on their activities. Budgets improve communication. Budgets as the control tool the task, the results of company, monitor income and expenditure and identify any problems. Budgets motivate employees to improve their performance. Budgets provide a framework for responsibility 2. Limitation and solution Budgets is the job that take time and money. The development of budget for Archie company provides information for managers, they can be predicted for the future. However, Archie's budget planning also has a few minor drawbacks. Because budgets will good if the data being used to create them are good. Moreover, budget just provides only approximate numbers,thus,final results cannot be correctly one hundred percent. One of the most important limitations of Archie’s budget is not flexible because the data are not real and final, it was be predicted and prices change very often.If this is a financial plan for 2014, Archie Company will be able to take advantage in 2014, but that plan did not apply to the next and next year. Besides, budgets creates some problem about behavior and it takes costly, management of time. From the financial management, Archie company plans should split its budget into quarters rather than an entire year. It can help companies to easily predict more accurately the numbers. Perhaps, innovation cost, discount cost, changing cost, labor cost, work hour and other cost should be added more in plan. 9
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- 8. TASK 3. (UNIT 2, 4.3) Ratios Industry Average 2013 2012 (2013) PROFITABILITY AND RETURN ON CAPITAL 20% 296.76% 50.90% Profit margin 15.80% 71.92% 14.25% Asset turn over 3.6 times 4.13 times 3.57 times 26% 79.13% 26.36% 8.30% 71.9% 14,24% Liabilities ratio 50% 43.43% 50.34% Gearing ratio 18% 10.78% 14.85% Debt/Equity ratio 25% 14.02% 18.83% 190.77 times 36.26 times ROCE Gross profit margin Net profit margin BORROWINGS Interest cover 25.7 times Current ratio 120% 151.52% 171.78% Quick ratio (Acid 90% 145.51% 162.34% 55 days 64.27 days 85.02 days 13.8 days 14.71 days 9.36 days 90 days 174.13 days 56.2 days ratio) Debtor days ratio Stock turnover period Credit turnover SHAREHOLDERS' INVESTMENT RATIOS Earnings per share $0.45 per share (EPS) 11 $5.79 per share $0,71 per share
- 9. $0.1 per share $1.736 per $0.211 per share Dividend per share share Dividend cover 4 times 3.335 times 3,365 times P/E ratio 3 times 0.276 times 2.676 times 108.53% 11.05% Dividend yield 14% Figure 4. Financial ratios of Archie’s company in 2012 and 2013 1. Profitability and return on capital There is a great change for return on capital employed from 50.90% in 2012 to 296.76% in 2013. This percentage change rose nearly 6 times in comparison with 2012 and is much higher than only 20% of industry average at the same time. Along with an improvement of return on capital employed, profit margin in 2012 was a bit lower than the industry average but increased rapidly to 71.92% in 2013. This change reflects Archie’s good business and distribute to a higher asset turnover between these two years. It means that Archie’s company has had the first successful step in the market of electric components industry and has ability to make profit. The higher gross profit margin also leads to an increase for net profit margin in 2013. It can be explained by a decrease of cost of sales which is less than a half of it was in 2012, even the way Archie’s company manage their total expenses. 3. Borrowings In this criteria, the liability ratio was decrease a bit to under 50% compared with 2012 which means that Archie’s company are borrowing less than the previous year. The ratio has fallen from 50.34% to 43.43% helping company to improve its position and prove its ability to reduce the total debt in total asset. This change also attributes a great increase of profit margin and return on capital employed in 2013. The gearing ratio seems quite low and decrease through time can be seen as good news for Archie’s company. It proves that Archie’s has to pay less for preference shares and debentures. Technically, they have only 10% of debenture stock and do not exist any preference shares. Furthermore, debt/equity ratio is mentioned as the same sort of information as the gearing ratio 12
- 10. which also decreases in times of change. Lower percentage will show how better Archie’s company was in comparison with other competitors in 2013. As can be seen clearly, the interest cover of Archie’s company in 2013 is much higher than 2012. This ratio shows that Archie’s company has enough ability to pay for interest and tax easily. Although they have to face with effects from ordinary shareholders, they still create a high level of profit. 4. Liquidity and working capital With a high level of current and quick ratios, the assets of Archie’s company are considered better than its competitors. It distributes to make Archie’s company have a high volume of liquidity by their opportunity to transfer money from stock to cash based on higher ratio than the industry average. Debtor days ratio also decreased showing that Archie’s company has transferred credit sales to cash quickly. However, this ratio is still higher than the industry average with 55 days. Because Archie’s company has to sell a large number of components for each order, debtors of company will last longer than usual. Stock turnover days in 2013 are longer than it was in 2012 due to the consequence of reducing sales. Moreover, this ratio reflects that Archie’s company has invested more in managing inventory but it seems ineffective as in 2012. Because it take longer time, the performance is also slower. Creditors’ turnover is worse between 2012 and 2013 from 56.2 days to 174.14 days. Whereas the rate of industry average is 90 days, it means that company is in trouble with credit from suppliers and loan from bank. 5. Shareholders’ investment Earnings per share of Archie’s company have rose fastly in 2013, equal nearly 10 times of 2012 and even 12 times of the industry average. This high number show the return on each ordinary share which can be used to evaluated how good the business was. 13
- 11. High earnings per share lead to an increase in dividend per share from 2012 to 2013 which express the level of satisfaction of shareholders. Compared with $0.1 of the industry average, shareholders can have the general perception to evaluate how effective the business was between Archie’s company and its competitors. Dividend cover is nearly the same in these two years, however, both of these years having the lower rate than the industry average. Archie’s company can identify how many percent of profit should be used for future growth and dividends. A great decrease in price to earnings ratio between these two years proves that Archie’s company has run the business more effectively. Nevertheless, it does not mean weak shareholder’s confidence; the earning was too big whereas company is able to reduce the share price. Dividend yield also increased sharply which show how expectation of shareholders was. Its percentage is still higher than industry average nearly 10 times in 2013. Because they see a great increase in earning, they will expect to receive much more return in comparison with their competitors’ dividends. 14
- 12. APPENDIX TASK 3 2013 2012 $ $ Profit on ordinary activities before tax 5,479,318 666,773 Interest payable 28,874 18,909 Profit on ordinary activities before interest and 5,508,192 685,682 taxation 1,856,103 1,346,969 Capital employed Return on capital employed (ROCE) 296.76% 50.90% 2013 $ Profit before interest and tax 2012 $ 5,508,192 685,682 7,658,796 4,809,567 Sales Profit margin 71.91% 14.25% 2013 2012 $ $ Sales 7,658,796 4,809,567 Capital employed 1,856,103 1,346,969 Asset turnover 4.13 15 3.57
- 13. times times 2013 2012 $ $ Turnover 7,658,796 4,809,567 Cost of sales 1,598,709 3,541,780 Gross profit 6,060,078 1,267,787 Operating profit 4,988,816 305,331 Gross profit margin 79.13% 26.36% Net profit margin 65.14% 6.35% 2013 2012 $ $ Creditors: amount falling within one year 1,071,262 962,456 10% first mortgage debenture stock 2016/2011 200,000 200,000 Total debts 1,271,262 1,162,456 Tangible fixed assets 1,304,180 656,071 Current assets 1,623,185 1,653,354 Total assets 2,927,365 2,309,425 Liability ratio 43.42% 50.33% 16
- 14. 2013 2012 $ $ Prior charge capital 200,000 200,000 Total capital 1,856,103 1,346,969 Gearing ratio 10.77% 14.84% 2013 2012 $ $ Prior charge capital 200,000 200,000 Ordinary share capital and reserves 1,426,103 1,061,969 Debt/equity ratio 14.02% 18.83% 2013 2012 $ $ Profit before interest and taxation 5,508,192 685,682 Interest payable 28,874 18,909 Interest cover 190 times 36 times 2013 $ 17 $ 1,623,185 Current assets 2012 1,653,354
- 15. Current liabilities 1,071,262 962,456 Current ratio 151.52% 171.78% 2013 2012 $ $ Current assets 1,623,185 1,653,354 Current liabilities 1,071,262 962,456 Stock 64,422 90,850 Current assets less stock 1,558,763 1,562,504 Quick ratio 145.50% 162.34% 2013 2012 $ $ Trade debtors 1,348,592 1,120,252 Sales 7,658,796 4,809,567 Stock 64,422 90,850 Cost of sales 1,598,709 3,541,780 Trade creditors 762,701 545,340 Purchases 1,598,709 3,541,780 days days 18
- 16. Debtors day period 64.27 85.02 Stock turnover 14.71 9.36 Creditor turnover 174.13 56.20 2013 2012 $ $ Profit before interest and tax 5,508,192 685,682 Interest (27,000) (18,127) Profit before tax 5,481,192 667,555 Taxation (1,369,830) (166,693) Profit after tax 4,111,362 500,862 Number of ordinary shares 710,000 710,000 Earnings per share 5.79 0.71 19
- 17. 2013 2012 Dividend $1,232,847 $150,024 Number of ordinary share 710000 710000 Dividend per share $1.74 $0.21 Earnings per share $5.79 $0.71 Net dividend per ordinary share $1.74 $0.21 Dividend cover 3.33 times 3.38 times Current share price 1.6 1.9 P/E ratio 0.27 times 2.67 times Current market price of the share 1.6 1.9 Dividend yield 108.75% 11.05% REFERENCES Unknown.(2010) Managing Financial Resources and Decisions. BPP Learning Media, p.132145 Unknown.(2010) Managing Financial Resources and Decisions. BPP Learning Media, p.157171 20