financial management & control final copy
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1Financial Analysis
FINANCIAL MANAGEMENT & CONTROL
[Name]
[Afliation]
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2Financial Analysis
Table of Contents
Part A..............................................................................................................................................3
Financial Analysis Report for the Board of Smithson Plc...............................................................4
Calculating the Working Capital Cycle in days for Smithson Plc assuming 3! days" for the years
#$%3 and #$%#..................................................................................................................................&
Part B.............................................................................................................................................11
Feasi'ility Calculation 'y Capital Budgeting................................................................................%#
()aluating the Benefits and *imitations of (ach of the +iffering ,n)estment Appraisal
-echniues.....................................................................................................................................%
Part C............................................................................................................................................17
/ain Sources of Finance A)aila'le to Business and their Ad)antages 0 +isad)antages.............%1
Breake)en assumptions and Critical ()aluation............................................................................#%
References.....................................................................................................................................24
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3Financial Analysis
Part A
Financial Statements Analysis of
Smithson Plc
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4Financial Analysis
Financial Analysis Report for the Board of Smithson Plc.
From: Smithson plc.
To: Board of Smithson plc
Subject: Performance Evaluation Report
The financial performance of Smithson plc is evaluated on the basis of its
financial position which explains the details and results we have arrived upon. Following
is a detailed analysis of the financial position of the company.
Profitability Ratio
Profitability can simply be defined as firms potential to generate profit for the firm
!Shimerda" #$%#&.
'ross profit margin ( 'ross profit ) *et sales + #,,
For the year -,# ( /,-,)#%0,+#,, ( 0,.1$2
For the year -,#- ( /,,)#-0,,+#,, ( 0%.3,2
4t shows the profitability of services and goods. 4t explains as to how much it can
cost for producing the product. 4t is calculated as dividing gross profit !'P& by net sales
!*S& and multiplying the 5uotient by #,,. !Savelyeva" -,#-&
6perating profit margin ( EB4T) *et sales
For the year -,# ( -#30)#%0,+#,, ( #0.3$2
For the year -,#- ( 3-,,)#-0,,+#,, ( .1,2
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5Financial Analysis
6perating margin is calculated by dividing your operating profit !6P& by your net
sales !*S& and multiplying the 5uotient by #,,. !Siegel et al." #$$%&
*et profit margin ( *et Profit after tax ) *et sales +#,,
For the year -,# ( #,,,)#%0,+#,, ( /.--2
For the year -,#- ( -0%,)#-0,,+#,, ( -,.132
“4t is the percentage of revenue remaining after all operating expenses"
interest" taxes and preferred stoc7 dividends !but not common stoc7 dividends& have
been deducted from a company8s total revenue.9 !4nvestinganswers.com" n.d.&
:i5uidity Ratios
:i5uidity ratio measures a business8s potential to meet its short;
term financial liabilities on time. E.g. the ratio of current assets to current liabilities.
!TheFree<ictionary.com" n.d.&
=urren t ra tio ( =urren t asse ts ) =urren t liabili ties
For the year -,# ( 03,,)1,, ( #.0,
For the year -,#- ( --0)-0,, ( #.-$
4t simply estimates if the firm is capable of paying the debts due within a period of
one year out of the current assets.
>uic7 ra tio ( !=urren t asse ts ? inventory& ) =urren t liabili ties
For the year -,# ( !03,,;0,,&)1,, ( #.1
For the year -,#- ( !--0;-/0&)-0,, ( #.#%
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6Financial Analysis
4t is calculated by deducting the inventories or stoc7s from total current assets.
'earing Ratio
4t is the proportion of a firm8s debt to its e5uity. @ high gearing ratio represents a
high proportion of debt to e5uity" and a low gearing ratio represents a low proportion of
debt to e5uity. 4f the gearing ratio is high" it shows that the proportion of debt to e5uity is
also high. 4f the gearing ratio is low" it means that proportion of debt to e5uity is also
low. [email protected]" n.d.&
<ebt ) E5uity Ratio ( total debt ) shareholders e5uity
For the year -,# ( $,,)!%30A#%,0&
( $,,)010, ( 1$.,-
For the year -,#- ( -3,,)1,,A$-0
( -3,,)30-0 ( 0.,
<ebt;to;E5uity ratio is the ratio of total liabilities of a business to its shareholders8
e5uity. !c:aney and @trill" -,#-&
Times 4nterest Earned Ratio ( Earnings before interest and taxes ) interest payable
For the year -,# ( -#30)00, ( .$,
For the year -,#- ( 3-,,)0, (#-.,,
!Brigham and Couston" -,,3&
<ebt Ratio ( total <ebt ) total assets
For the year -,# ( /0,,)##0,+#,, (0/.,2
For the year -,#- ( 3$,,)$3-0+#,, (0#.$$2
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7Financial Analysis
D<ebt ratio is calculated by dividing the total debt over total assets.9
!TheFree<ictionary.com" n.d.&
@sset tiliation Ratio
4t represents the ability of management for ma7ing the best use of its resources
for generating revenue. 4t is very useful in a manufacturing concern where lesser capital
assets are used to produce products. !Bdc.ca" n.d.&
@ccounts receivable turnover ( *et credit sales ) @verage accounts receivable
For the year -,# ( #%0,)/0, ( .1$
For the year -,#- ( #-0,,)-1,, (3.%#
!Gandament and Hones" #$$&
@verage collection period ( 10 days ) @ccounts receivable turnover
For the year -,# ( 10).1$ ($%.$- days
For the year -,#- ( 10)3.%# (/0.%% days
DThe approximate amount of time which a business ta7es for receiving payments
owed" in terms of receivables" from the firms clients and customers.9 !4nvestopedia"
-,,$&
4nventory turnover ( =osts of goods sold ) @verage inventory
For the year -,# ( 1%,)0, (#$.0#
For the year -,#- ( 0-,,)--0 (-.##
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8Financial Analysis
sually a high number shows a higher sales efficiency. 6n the other hand" a
lower ris7 of loss through un;saleable stoc7. 4t is arrived at by dividing the cost of goods
sold over average inventory. !Gandament and Hones" #$$&
@verage age of inventory ( 10 ) 4nventory turnover
For the year -,# ( 10)#$.0#(#%./# days
For the year -,#- ( 10)-.##(#0./$ days
4t tells the number of days an inventory can be held. The longer inventory is held"
the greater is its ris7 of not being sold at full value. !Gandament and Hones" #$$&
Total assets turnover ( *et sales ) @verage total assets
For the year -,# ( #%0,)I!##0,A$3-0&)-J (#.-
For the year -,#- ( #-0,,)$3-0 (#.
4t indicates that how efficiently the management is utiliing its assets for the
enhancement of sales. !Tennent" -,,%&
6perating cycle ( @verage collection period A @verage age of inventory
For the year -,# ( $%.$- A #%./# ( ##/.1days
For the year -,#- ( /0.%% A #0./$ ( $#.1/days
!Tennent" -,,%&
4nterpretation
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9Financial Analysis
Giewing the profitability ratios it can be seen that although the gross profit has
decreased in the current year" its percentage to sales has increased considerably which
explain the cost efficiencies of the manufacturing division. Further the operating profit
and the net profit has also decreased although in relation to the percentage of sales it
has increased which explains the cost efficiency of the company on the whole. Ke can
see that an increase in the sales lead an increase in the costs but these costs have lead
to more profitable results. =urrent liabilities on the other hand" have also decreased in
relation to the current liabilities in the li5uidity ratios explaining the effective policies and
efficiency of the purchases divisions. The Turnover rate of inventory and Receivables
have also increased while the payables turnover have decreased considerably showing
a remar7able efficiency of the company" also the decrease in operating cycle shows a
positive move towards profitability.
=onclusionL
From the financial analysis of the detailed wor7ing in the above ratios and the
wor7ings it can be clearly concluded that the company has performed better as
compared to the previous year. The ratios on the whole are showing a favorable trend of
the increased sales situation.
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10Financial Analysis
Calculatin the !or"in Capital Cycle in days for Smithson
Plc assumin #$% days& for the years '()# and '()'
Kor7ing =apital =ycle( !@verage Kor7ing capital+10&)@nnual sales Revenue
For the year -,# ( !#%,,A/-0)-& + 10 ) #%0, (.-/ days
For the year -,#- ( /-0 + 10 ) #-0,, ( -#.#/ days
The wor7ing capital cycle of the company has decreased by about #,;## days
which leads to the conclusion that it is converting its wor7ing capital into revenue on a
faster rate now. This increased efficiency is the ultimate result of the better performanceof all the other factors that Mointly too7 part in increasing the profitability of the company.
=onclusion
The above ratios and their calculations show the positive trend towards
profitability of the company and efficient policies of management.
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11Financial Analysis
Part !
Feasibility Calc"lations by
In#estment A$$raisal Techni%"es
'ones Lt()
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12Financial Analysis
F(AS,B,*,-2 CA*C*A-,5 B2 CAP,-A* B+6(-,56
Capital Budgeting is the name of process in 7hich companies decide as 7hat long8term
in)estment should 'e made. A Capital Budgeting is e9pected to put out cash flo7s for se)eral
years. -he decision of accepting or re:ecting a Capital Budgeting pro:ect is dependent on cash
flo7 analysis produced 'y the pro:ect and its cost. ;Wilkes" %&<<=
-he Pay'ack Period
-he pay'ack period is the time period 'et7een the %st payment on a loan and the maturity
of it. ,n this period" the 'orro7er has to pay 'ack the loan. ,n case she or he has no funds to pay
'ack the loan" she or he has to take a different loan for this.
Pay'ack Period > Amount to 'e initially in)ested ? (stimated annual net cash flo7
> #<!"$$$ ? #4#!$#
> %.%3 years
(stimated annual net cash flo7
Year Cash Inflows Cash Expenses Depreciation al!a"e #al$e %et Cash flow
% 1!$$$ %#!$$ 31&!1 33!4#
# 1!$$$ %#!$$ 31&!1 33!4#
3 1!$$$ %#!$$ 31&!1 33!4#
4 1!$$$ %#!$$ 31&!1 33!4#
! 1!$$$ %#!$$ 31&!1 33!4#
1!$$$ %#!$$ 31&!1 4%#!$ <4<&#
%et &1'(''' 7&''' 23374) 412&' 242&'2
<epreciation ( 6riginal =ost ? Residual Galue ) Estimated life
( -/0,,,;!-/0,,,+#02& ) 1
( Rs.%$0%);
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13Financial Analysis
4nterpretation
The calculations illustrate a very constructive drift of returns from the venture and
therefore should be accepted.
@ccounting Rate of Return
D@ccounting rate of return shows the earning interest and taxes as a percentage
of the capital employed at the end of an accounting period.9 !Business<ictionary.com"
n.d.&
@ccounting Rate of Return ( @verage @ccounting 4ncome ) 4nitial 4nvestment + #,, ( !-3-0,-)1& ) -/0,,, + #,,
( #3./,2
4nterpretation
The @ccounting Rate of Return is greater than the cost of capital for this reason it
explains a very positive return from the proMect which is favorable for the business and
conse5uently should be accepted.
*et Present Galue
DThe difference between the present value of the future cash flows from
an investment and the amount of investment. Present value of the expected
cash flows is computed by discounting them at the re5uired rate of return.9
!Business<ictionary.com" n.d.&
*et Present Galue ( Present Galue of cash flows ; 4nitial 4nvestment
( #%$/0;-/0,,,
( 3$/0
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14Financial Analysis
Year Cash
Inflows
Cash
Expenses
al!a"e
#al$e
%et Cash
flow
Disco$nt
*actor+
12,
Present
#al$e
% 1!$$$ %#!$$ <#!$$ $.1&#& 4<3!
# 1!$$$ %#!$$ <#!$$ $.<&<# !<<&<3 1!$$$ %#!$$ <#!$$ $.<%%1 !%$
4 1!$$$ %#!$$ <#!$$ $.3!! 4$<4
! 1!$$$ %#!$$ <#!$$ $.!<4 4%%3<
1!$$$ %#!$$ 4%#!$ %%3<!$ $.!$ !<#
%et &1'(''' 7&''' 412&' 242&'2 31)-7&
Present Galue ( *et cash Flow + <iscount Factor
<iscount Factor ( !# N !# A i&O;n &) i
( !# N !# A ,.#-&O;n &) ,.#- Khere n is the number of year.
4nterpretation
Since the *et Present Galue of the venture is positive and returns are accumulated
within - years as a result this proMect should be accepted" moreover the rate of return is
also higher than the cost of the capital.
The 4nternal Rate of Return.
Year
%et Cash
flow
Disco$nt
*actor +
12,
%et
Present
#al$e
Disco$nt
*actor +
17,
%et
Present
#al$e
Disco$nt
*actor +
1),
%et
Present
#al$e
$ #<!$$$ %.$$$ ;#<!$$$= %.$$ ;#<!$$$= %.$$ ;#<!$$$=
% <#!$$ $.1&#& 4<3! .1!4< %& .14<! %444
# <#!$$ $.<&<# !<<&< .<3$! !#&% .<%1# !#$<$
3 <#!$$ $.<%%1 !%$ .#44 4!#& .$1 44%#4
4 <#!$$ $.3!! 4$<4 .!33< 31&3 .!%!1 3<3&
! <#!$$ $.!<4 4%%3< .4!% 33$< .43<% 3%&$
%%3<!$ $.!$ !<# .31&1 4434$ .3<$4 4#%33
%P# 43-7& 172'- /14&0
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15Financial Analysis
4nterpretation
The 4RR rule is as follows as where 4RR cost of capital ( accept proMect and
where 4RR Q cost of capital ( reMect proMect
From the above calculations 4RR is between #/2 and #%2 both of which are
higher than the cost of capital so according to 4RR we should accept the proMect.
=onclusion
@ccording to the illustrations and explanations the proMect is viable for the
business in every facet as a result additional investigations should be made for
amplification of non;finance factors and a decision should be made for a rapid reply.
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16Financial Analysis
()aluating the Benefits and *imitations of (ach of the +iffering ,n)estment
Appraisal -echniues
/ethod Ad)antages +isad)antages
Pay'ack period
,t gi)es an immediate
assessment on much time it 7ill
take to recuperate a cost.
,t is helpful 7here the time
scale is relati)ely less.
,llustrates ho7 uickly the cash
flo7 'ecomes positi)e and isaccommodating 7here firms
ha)e cash flo7 issues.
6i)es an e9tremely
fundamental outlook of the
situation. +oes not take account of
the authenticity that future proceeds may 'e less
imperati)e. ,gnores ualitati)e
position of the option.
A)erage rate of return
+emonstrates the profita'ilityof the pro:ect.
-akes consideration of the
importance of rate fluctuations.
sed to compare 7ith alternate
in)estment pro:ects.
+oes not take account ofthe facts that estimated
profits may 'e not as much
of )alue. Pays no attention to
ualitati)e feature. A)oids thinking a'out ho7
long it may take to restoreoriginal pay out and the
costs of in)estment
reuired.
5et present )alue
-akes financial notice of
interest rates.
Considers the yield of the
undertaking.
Permits for the information" the
future profits may 'e less
)alua'le than at hand income.
,gnores ualitati)e aspect
of the conclusion.
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17Financial Analysis
Part C
So"rces of Finance & Critical
E#al"ation of !rea*e#en Analysis
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18Financial Analysis
ain Sources of Finance available to Business and their @dvantages <isadvantages
Sponsorship
Sponsorship occurs when a company gives financial support to another company
in exchange for putting on display their company8s promotions. 4t is advantageous in
ways that it reduces the cost of company for promotions and development extension"
further helps out the small scaled business to add details to public side view in cost;
effective manners" also the prolongation of sponsoring companies in events set forth
public everyday Mobs and try to win more productively in opponent to other businesses inthe competition.
<isadvantages include the complicated tas7 to get permission this source of
finance and other individual company problems. !Ec7bo" -,,%&
Ban7 :oans
Ban7s are other good contributors of financial supply of capital. For some
companies" we may be capable of ma7ing safe a loan" for some other setups" wed
have to control properties li7e real estate" large stoc7s by using them as pledge for the
loan. The advantage of borrowing is that it ma7es it possible for us to 7eep cash in hand
and to use as in commission income or for personal sustained survival during a down
period in the company. 4n addition" if promotion and sales are down" we would be
capable of loo7ing after our most very important private assets by declaring ban7ruptcy.
!=umming" -,#-&
The disadvantages are that we would have to pay interest on the loan. 4n addition
to this" our costs will be due on time in spite of the fact of whether business is bad or
good.
Personal Savings and @ssets
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19Financial Analysis
Personal savings ma7e a great source of investment as getting hold of these
expenses is cost free" and we do not be pay interest on ban7 loan or give out proceeds
to investors.
=ertainly" if we invest our own resources into a business" we could lose it all.
Some assets and financial accounts are hidden from creditors and li5uidation benches"
investing of these assets at ris7 may not be good for us" particularly if we are in the near
future approaching retreating age and are running out of time to rebuild worn out
accounts it certainly is not a good idea. !Bhowmi7 and Saha" -,#&
'overnment 'rants and :oans
The 'overnments offer more than a few loans and grant facilities to help
companies set up and help out the readily available proMects in expansion" some state
have similar proMects on a smaller scale. 'rants are for the most part free money" and
government guaranteed loans are with interest rates that are typically far lower than
what we can get on our own.
nluc7ily" grants come with a lot of official procedures politics and may not be
on hand for every type of business. Financial arrangement issues from year to year may
have a conse5uence on the ease of access of finances. @s a final point" a government
assured loan is a loan and we would have to pay bac7 in the face of whether the
business is good or bad. !=rundwell" -,,%&
4nvestors
=ooperate with a group of lenders who can help us lift up problems of
establishing or addition of capital for our own company without adding all of the danger
of loss on one party alone. Such investors may be active contacts in the business" or
they may be still investors who only wait for their profits.
6n the other hand to bring in the investors is to give up a clear;cut part of
administration of the business. Even if we do hang on to a better part of interests" we
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20Financial Analysis
still would need to 7eep our investors at ease. 4nto the bargain" if we share the ris7 with
others" well also have to share the profits. !=umming" -,#-&
:easing
:easing companies own the e5uipment and lease it to the lessee. 4t is a fund
which includes strong early investment for new fangled businesses" in addition to these
services of maintenance and improvement" further such asset is categoried as an
expense" as a conse5uence the tax for lessee is reduced. <isadvantage includes the
difficulty that long term leasing is more expensive than purchasing the e5uipment.
!=umming" -,#-&
=onclusion
4nvestment comes from the different types of sources i.e. the internal sources"
which include money from the sale of assets" the control of capital" which includes the
submission of stoc7 to investors paying cash for their shares and ta7e a possession
business enterprise in the company. @nd to conclude" financial support can come fromnon ownership capital" which means grants" loans" lines of credit and outlay from Mob
lenders" who won8t ta7e a possession rights part in the company.
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21Financial Analysis
Brea7even assumptions and =ritical Evaluation
Brea7 even
@ research to bring to a close the point at which profits predictable e5uals the
costs associated with obtaining the proceeds. Brea7even analysis is a study that only
analyes the costs of the sales. 4t does not illustrate the demand;price relationship.
@ssumptions
4ts assumptions are as follows
#. Fixed costs remain invariable in total.-. Production e5uals sales.. Selling price is constant.3. =onstant expertise and e5uipments.0. =osts and revenues change with changes in sales volume.
=ritical Evaluation
Brea7even is a short run analysis. 4t assumes that unit variable costs and unit
revenues are fixed which is appropriate for undersied deviations from current
manufacture and sales" and also states a comprehensible division in the middle of fixed
costs and variable costs" even though in the long run all costs are inconsistent. Khen
we assess brea7even it is where we ma7e apparent the position at which there will be
neither profit nor loss which means that the company is under brea7even status.
Brea7even analysis will supply a sales point that can be expressed in either
dollars or units of sales" or whatever else is applicable. 4f brea7even is 7nown" it can be
a target to be achieved and exceeded by carefully planning and implementation of
policies.
This is a wonderful way to test far removed from alternatives. =learly" this is a
one;sided process but so is the rest of business research and analysis. The motive is to
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22Financial Analysis
ma7e the business verdicts as profitable as possible. Brea7even analysis can be one of
the most helpful tools available for this reason.
The Brea7 even has restrictions in conMunction with its paybac7s which are its
analysis is only a suppliers side analysis" as it demonstrates not anything about whatdemand is in fact li7ely to be for the manufactured goods at the a variety of prices. 4t
assumes that fixed costs are fixed" even supposing this is perfect in the short term but
an extension in the intensity of production is on the point of motivating the fixed costs to
increase.
@s it also assumes variable costs are fixed per unit of production" at least in the
range of probable 5uantities of sales. The 5uantity of goods produced is e5ual to the
5uantity of goods sold which is extremely improbable as it does no ta7es account of thenon;cost factors of the mar7et that motivates customers to alter their consuming
activities and behaviors. 4n multi product companies" the sales proportion is to be fixed
but in certainly it is understood to be a Must what the doctor ordered position.
Below example shows the wor7ing of the brea7even analysis.
4f the manufacturing cost of a table is 0,. @lso" the fixed cost is #",,,. The brea7even
point for selling the tables shall beL
-, tables" if selling for #,,
Brea7even ( Fixed =osts) !Sale Price;Gariable =osts&
Brea7even ( #,,,) !#,,;0,& ( -, tables
/ tables" if selling for -,,
Brea7even ( Fixed =osts) !Sale Price;Gariable =osts&
Brea7even ( #,,,) !-,,;0,& ( / tables
4nterpretation
4f the product is being sold at a higher price" the brea7;even point shall occur
more 5uic7ly.
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23Financial Analysis
=onclusion
Brea7even analysis is a powerful organiational method" noteworthy in setting
up" decision ma7ing" and expenditure management. This analysis is very useful in
determining whether to buy or lease" broaden into new vicinity" build a new plant" and
many other such decisions. 4t can also show the sound effects on businesses of varying
the price ma7eup. Thus it is on businesses on how they ma7e use of this facility for
ma7ing their businesses more profitable.
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24Financial Analysis
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