Financial Management Theory: Aims and Objectives Report

Introduction

Financial management is often regarded as the inevitable tool for achieving the improved rates of financial performance and the business performance of the company in general. The surgical kit production is the specific manufacturing, which is intended for the restricted (specialized) market. Thus, the analysis of the financial performance of the company will be required for considering the feasibility of the company, as well as group marketing potential of the industry. Thus, the aim of the paper is to consider the financial and operational data of the company, and compose the comprehensive financial plan for this project. The identification of the aims and purposes of the business performance will be regarded as the basis for the further analysis, thus, the further analysis will be based on the explanation of the basics f business performance. The next step is the detailing of the production costs, and origins of the services provided. The detailed monthly cash will be needed for the thorough analysis of the market development tendencies, and for the comprehensive investment analysis.

Business Overview. Aims and Objectives

First, it should be emphasized that the capital structure of the company is totally debt shared, as the share capital of 1,000,000 £1 shares provides an opportunity to implement the separate investment for the investment strategy implementation. It is stated that the company is totally financed by the share capital, moreover, the initial investment required loan for the following three years, as the necessity of the further business development originated the opportunity to reform the investment structure. (Khan and Hildreth, 2004)

The business aims of the company presuppose the spread of the personal protective equipment, thus, the company is focused on selling the surgical kits at a price of £400 per surgical instrument box. All the instruments are manufactured in the UK, and the company is mainly represented in the UK, without entering the international market and the markets of other countries. The sales and the cost incomes are spreading evenly, thus, the demand of the company is expected to increase. Moreover, in order to maximize the expected incomes and revenues, the company decided to set the fixed marketing and advertising costs.

The initial investment will be performed on December 2010, and the accounting period ends on December 31, 2011. The analysis of the financial flow and financial resources of the company presupposes that the tax year ends on the same date. As for the direct cost sales, it should be emphasized that these are based on the operating costs of the goods and services, provided by the company, thus, these are fixed for the analysis period. (Khan and Hildreth, 2004)

The aims of the project is closely associated not only with the spread of the surgical equipment but also with the economic and business development of the company. Thus, the aims are as follows:

• Selling of the surgical products for the available price of £400 per unit.
• Creating the legal entity for the formation of a new venture

Business data of the company entails the following statements:

• The business is invested with £3,000,000 share capital
• The issued shares cost of £ 1, and the premium shares are estimated in £ 2. (total amount of shares is 1,000,000)

Breakeven analysis. The Main Costs of the Products

Considering the fact, that the company needs to expand its financial activity with the fixed advertisement costs, the sales volumes should be gradually increasing. Thus 400 units should be sold during year one, 505 – during year two and 689 during the third year. These amounts will provide the necessary income for compensating the loans, and for guaranteeing the stability of the shareholders’ capitals.

It is assumed that the cost of the invested capital, and the operating financial resources of the company will be 5% over the next three years. The break even point of the sales is the 132% decrease, as if the sales levels reach this border, the present value will be nullified or even negative. The same is with the operating profit: if it is reduced by 47%, the net present value will be close to zero or negative. The analysis of the two and three year performance is represented in the table:

These are the values of the key financial indicators. Thus, if these rates will reach the stated points, the net present value of the company’s performance will be null or less.

The main costs of the products are as follows:

• Operating expenses
• Advertising
• Salaries
• Rent and Rates
• lighting and heating
• Other Operating Costs

These operating costs represent the essential part of the fixed and variable costs, associated with the company’s activity. These are the costs, which entail the normal activity of the company, and which are aimed to serve the main activity. Thus, effective operation costs management is significant for maintaining the sufficient level of profitability and effective production. In accordance with Khan and Hildreth (2004, p. 431):

Manufacturers need to evaluate how much inventory should be owned and what manufacturing capacities of this inventory should be. They need to consider different alternatives such as ownership, leasing, or custom hiring. Sound management requires decisions about those issues prior to actually acquiring the equipment or its use. Producers can find guidance to these management decisions by calculating the costs of operating and owning farm inventory.

In the light of this statement, the operation costs may be varied, nevertheless, it may impact the parameters of the medical outcomes. Thus, the quality of the manufactured production will be inevitably changed. Whether these changes will be positive or negative depends on the financial management in general, and the operation costs focus in particular.

Depreciation-it is the cost of noncurrent assets used in normal operation activity of the business. The property, plant, and equipment are assumed to be depreciated at rate of 25% per annum on reducing balance basis and motor vehicles are deprecated at the rate of 15% per annum on reducing balance basis. Rent and rates-includes the rent for the storage facilities, admin operations and business rates. Lighting and heating- includes the cost of electricity and gas supply. Other operation costs-it includes the other costs related to operations. (Alderman, 2000)

In general, the sensitivity impact of percentile variations is the important factor of the entire medical activity, as the health care sphere is subjected to constant changes of the operating parameters. Moreover, considering the fact that there are lots of other impacts and services in the sphere of health care and medical services, the sensitivity analysis of the company should be based on the analysis of the entire industry, and the activity of the health centres, medical insurance services and ambulance effectiveness. Thus, the extended networks and infrastructure of the regarded departments will affect the business performance of the analyzed company. Additionally, the sensitivity analysis of the company is required for the definition of the prioritized and worked out areas of the business performance. Additionally, the priority areas of the surgical kit business presuppose the in-depth analysis of the medical infrastructure in general, and the comparison of the performance with other companies.

Monthly Cash Flow

The analysis of the monthly cash flow of the company represents the effectiveness of its business performance from the perspective of the detailed analysis of the costs and financial operations. The fact is that the recession, represented the tendency for lowering the paying capacities of the patients and provided the large-scale medical intervention. The fact is that, there is a necessity to observe the prioritizing outputs based in the lowering of the economic inputs. Thus, the monthly cash flows should be analyzed from the perspective of the intervention of the medical standards and the application of the economic principles towards regulation of the health care sphere. Considering the reduction of the other operating costs, it should be stated that the rate of these costs strongly depends on the stability of the market. The offered monthly cash flow is intended for the stable development of the company with particular developmental limit in the circumstances of a stable market.

Investment Appraisal

The purchase of the required machinery, equipment and manufacturing rooms will be required for the beginning of the manufacturing activity and for the satisfying the customers’ needs, as well as developing the distribution networks. The fact is that, the investment appraisal practices are based on the necessity to evaluate the business performance of the company, using the business planning approaches and cash flow analysis, as these values will define the actual necessity of the investment, and will help to define the key necessities of the investment process. Thus, considering the necessity to increase the sales levels within the next three years, the investment should be accented on the manufacturing equipment and the distribution tools, as the company will need to extend its activity and the geography of sales. Thus, transport is the next point in the investment plans. Considering the investment sensitivity appraisal, it should be emphasized that the actual threat of the offered investment strategy is associated with the increase of other operating costs. On the one hand, these may be associated with the financial risks, nevertheless, the growth of the operating costs should be controlled. Moreover, in accordance with Lynch (2005): “In an investment appraisal only the incremental expenditure and receipts directly attributable to the project under scrutiny should be included; sunk costs ( i.e. those which have already been incurred) should be ignored as they are irrelevant to decisions about the future.” In the light of this statement, the values of receipts should be assessed for the proper estimation of the investment strategy, thus, the operating profit, represented in the analysis provides the required data for assessing the effectiveness of the expense management, and the investment strategy in general.

Budgeted Income statements

Income statements of the company are based on the necessity to balance the expenses, operating and manufacturing costs with the incomes and the necessity for the further development. Thus, the income statement entails the necessity to increase the operating profit by increasing the sales volumes. On the other hand, the necessity to increase sales causes the inevitable growth of advertisement expenses, as well as manufacturing and other costs:

Manufacturing cost- includes the cost of material storage plus the labour cost and cost of transfer from manufacturing facilities to the storage / warehouse facilities. Purchases- includes the costs of material bought for the manufacturing of surgical instruments.

In the light of this statement, it should be emphasized that the increased operating costs should be compensated by the increased sales rates:

The sales revenue is planned with the essential reserve aimed at compensating the growing costs, moreover, the increased sales rates will help to cover the investment reserves.

The analysis of the ratios should be based on the values of the margins and development principles of the business activity. Originally, the higher margins and ratios mean the better business performance and the higher incomes. Moreover, ratios define the effectiveness of financial operation. Thus, the net profit margin shows the effectiveness of net sales, and the planned growth of this margin is associated with the effective and accurate financial management.

Current ratios is useful for the analysis of the long-term financial performance, and ability to act in the circumstances of debt capital structure. The debt shares should be closely associated with the aspects of financial ratio stability. The represented values represent the stable development of the financial performance, and the slight valuations are explained by the growing operation costs, associated with the increased manufacturing and sales rates.

Level of Funding

Funding principles will be based on the requirements of the operating activity of the company. Originally, the growing sales will require the increased operation costs, associated with the increased manufacturing and the extended distribution activity. Thus, the further development of the company will be closely associated with the necessity to increase funding. On the one hand, the growing operation margin will inevitably decrease its necessity, on the other hand, instable development of the market, or fluctuations, associated with the risks will require the stabilization funding.

Conclusion

The financial analysis of the company, aimed at manufacturing and distribution of surgical kits should be based on the aspects of health care marketing activity in general. Nevertheless, the analysis of the investment practices helped to reveal the necessity of the constant increase of the sales volumes, and defined the limits of the operation costs growth, as well as the sales volume decrease.

Reference List

Alderman, K. C. 2000. The Joint Financial Management Improvement Program Strikes Gold. The Public Manager, 29(2), 5.

Khan, A. & Hildreth, W. B. (Eds.). 2004. Financial Management Theory. Westport, CT: Praeger.

Lynch, T. D. 2005. Federal Budget and Financial Management Reform. New York: Quorum Books.