After carrying out ratio analysis, a number of inferences can be drawn. The firm will operate profitably as the return on equity, return of assets, gross profit, net profit margin, and gross profit margin show healthy results. However, if they try to reduce gross profit margin without checking the operating costs they will make a loss.
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The management ought to improve the profitability, performance, activity, through a cost reduction mechanism, adoption of a favorable marketing policy, and a sound full to capacity production. They also need to invest in machines to reduce person-hours that generate huge profits values for the benefit of the shareholders.
This report is based on published accounting and ratios, which are aimed at measuring the general performance of the company’s ability to generate revenue. The financial statement and ratios would help users to get an in-depth understanding of the company’s future profitability, cash generation, and efficiency with which it is utilizing its assets to generate sales revenue. For the management, their objective would be on how to improve on poor areas and maintain good performance. Its intended users are the management of the company. The sources of the figures used have been provided.
The financial statement as given in this assignment fails to include a number of necessary figures that make the accounts meaningful to the stakeholders. The account given in the assignment lacks the following figures.
- The cost of goods sold:-published accounts contains the cost of goods sold so that, it will enable the calculation of some ratios, which are necessary for all stakeholders like suppliers. Suppliers will be interested in the cost of goods sold and gross profit. Without the cost of goods sold, the suppliers cannot be able to know the strength of the company is paying their debts.
- Operating expenses:-this assignment accounts as presented do not have operating expenses, which are necessary to know which expense needs to be adjusted for improving profitability.
- Research and development expenses:-the published accounts of British airways as shown, do not show the research and development expenses, which are necessary to assist in knowing how, much of the expenses, were spend on research and development.
- Interest expense- they have shown us net profit before tags but they have failed to give us the most important expense of interest expense. Interest expense shows how the company pays its debts. If the company fails to pay, their debts and they are in the account they may face what we call technical default. Therefore, the interest expense and income should be shown.
The performance of the company as shown in the profit and loss account is not stable as in the year 2002 it’s making a profit of 2,280,000, 2003 435,000, 2004-1,871,000, 2005-2,586,000 and 2006-3,278,000. Although there is a fluctuation between 2004, there is a constant growth thereafter. Retained earning is also growing after the fluctuation of 2002 and 2004. Overall, the company is performing well as per the figure shown. Although they have failed to explain to us, the net profit, which is inserted in between loss profit on sale asset, and profit before tax. That is the figure of 257,000. 560,000, 724,000, 560,000, 525,000 for years 2002-2006 respectively. (b).
|Gross profit margin |
It is gross profit /turnover
|22343x 100 |
|28092 x100 |
|33532 x100 |
|Net profit margin |
|3055x 100 |
|754 x100 |
|2796 x100 |
|Return on capital employed |
Net profit after tax/capital employed
|2280 x100 |
|435 x100 |
|1871 x100 |
|2586 x100 |
|3278 x100 |
|Return on assets |
Net profit before tax /net asset
|754 x100 |
|Retention ratio |
Retained profit/net profit
|1786 x100 |
|1946 x100 |
|2478 x100 |
The gross profit margin for the company is constant with a slight growth in the years 2005 and 2006. However, the gross profit remained 39% for the years 2002, 2003, and 2004. From the gross profit margin, we deduce that the company has a constant policy on gross profit margin, which is kept. Net profit margin seems to be fluctuating from time to time. Although, there is an upward trend in the years 2004, 2005, and 2006. In the year 2002 gross profit margin was 5%, 2004 it was 3% which was an increase from 1% of the year 2003. In the years 2005, 2006 the trend remained 4%.
The figure-calculated return on capital employed shows that there is no constant growth but a fluctuation. Return on capital employed was 3.5% in the year 2003, which was a decrease from 18.5% in the year 2002. This is a large drop, which calls for the examination of operating expenses for the two years. In the year, 2004 the return on capital employed was 14.1 %, which was also an increase from 3.5% in 2003. In the year 2007, the ratio was 18.4%, which was an increase of 1.5% from the year 2005.
This shows a huge fluctuation in the year 2003, which can be attributed to a change of expenses, although at the same time there, is a loss of fixed assets of 336,000.
Return on assets also had a fluctuation similar to the return on capital employed. In the year 2004, the fluctuation was 21.1%from 6% of the year 2003. It looks like there was some abnormal expense, which has not been detailed for the year 2003. Since the year 2002, return on assets was 24.8% and it is normal to expect an upward trend instead of a huge fluctuation, which remains unexplained. In the year, 2005 and 2006 the return on assets was 26.2 and 28.6%, which was a huge difference from the year 2002.
The retention ratio is also not spared; it is fluctuating casting doubt on the dividend policy adopted by the company. The profit retained for the years were 78%, 26%, 73%, 75.3% and 75.6% for years 2002, 2003, 2004, 2005 and 2006 respectively. This means the company has either a dividend policy that is not constant or no dividend policy at all and the issue of paying a dividend is left to directors and shareholders. Secondly, the dividend paid out is not clear whether it relates to common shares, preferred shares, or preference shareholding.
Non-financial information that I will consider when evaluating the company will include the use of information technology, statement of corporate sustainability, employee turnover, and general industry performance. These are key non-financial things to be considered in evaluating the company.
Report for proposed changes in budget preparation.
After carrying out forecasting, a number of inferences can be drawn. The firm will operate profitably as the production budget, profit, and loss account show. The management ought to improve the profitability, performance, activity, through a cost reduction mechanism, adoption of a favorable marketing policy, and a sound full to capacity production.
This report is based on budgetary forecasting is aimed at measuring the general performance of the company’s ability to generate revenue. The budget would help users to get an in-depth understanding of the company’s future profitability, cash generation, and efficiency with which it is utilizing its assets to generate sales revenue. For the management, their objective would be on how to improve on poor areas and maintain good performance. Its intended users are the management of the company. The sources of the figures used have been provided.
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Budget Forecasting Report
There are a number of reasons why there should be changes in budget preparation. The manager of Rowland and Graham Hotel Limited has been preparing their budget at the end of the year but there are proposals to change to preparing budget half year. Preparing a budget at the beginning of the second half of the year is important because the company will have half a year to assess whether the changes will be applicable next year.
Using the above statement preparing the budget in the middle of the year will enable various adjustments in the budget, which was prepared at the beginning of the second year to be readjusted. By the end of the first six months after budget preparation, necessary changes could have been estimated. In this case, the difficulties of recognizing trends and patterns will have been eliminated and it will be easier to readjust the following year’s budget using the trends and patterns for the last half a year. Secondly, it will be easier after learning the budget for six months to know which factors that influence various changes.
After six months the budget of the following year should be adjusted with the ratios which are obtained from the current budget preparation. At this period, the management could have known political and economical changes, customer habits and opinions, competitor’s actions, and technological changes.
Sorting out the first problem where the divisional financial director is acting as the managing director at the same time carrying out his duties, poses a problem of accountability. To solve this problem a new managing director will have to be hired to avoid the misuse of assets of the company. The problem of launching a new product to aim the first quarter of this year is considered to carry a budget if there are assurances that the project will succeed. In sorting out the third problem of buying equipment and installing, it at the beginning of the year is a capital budget issue, not the current budget issue.
Rolling the budget. This is where the budget for the previous year is taking forward with a few adjustments. Instead of the management engaging in the flesh budget preparation, they use the current budget with few adjustments for the following year. One of the advantages is time-saving as the budget for the previous year is adjusted for a few figures. Another advantage for this is when the company is not expecting any new changes in the budgetary issues and there are no new additions to the budget preparation. Errors of budget preparation for the previous year will be transferred forward to the following year.
The cash budget is prepared with an aim of ensuring there is enough cash for the smooth learning of the company. If the company does not prepare a good, budget capable of indicating the amount of cash in hand for running the organization. When there is a surplus in the cash budget prepared by the company. If the surplus is short-term, the excess funds should be invested in short-term investments like treasury bills and bonds, notes, and other commercial papers for the period, which the money will be in surplus. However, if the surplus looks permanent the company should think of investing in a long-term project that will have a long-term effect on the profitability of the company.
In order to keep better future results, better or close to the industrial average, the firm needs to cut down its operating expenses, increasing marketing, and production capacity. This would considerably improve the profitability. They also have to review their various policies.
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