Context
Hellenic Community Trust was incorporated in 1991. It is a charitable company whose main activity is providing a community center with recreational and leisure facilities. In addition, the company also provides public education on the traditions, culture, religion and history of the Hellenic community. The company is also involved in numerous activities to generate income.
As a charitable company, it is required by law to provide financial reports at least after every year and send the report if income exceeded £ 25,000. The trust has conducted a financial analysis. In this analysis, all the projects, activities and financial related entities of the company were evaluated.
This analysis was conducted to determine the stability of all the financial entities of the organization and to establish whether they are sufficiently profitable for investment. The statements of focus during the analysis included changes in equities, cash flow, financial position, and income.
Such an analysis is different from the financial reporting because the evaluation is conducted on more than one financial report and analyses the state of finances in the company within a broad period of time. This is unlike reports that are done annually, semi annually, or quarterly. In addition, the financial evaluation also constituted an analysis of the industry.
The need for investment
The need for investment is based on the outcome of the financial analysis conducted using the financial statements of the company within a five year period. From the analysis a conclusive financial position of the company in terms of liquidity and profitability was established. Hellenic Community Trust generates its income from both unrestricted and restricted funds.
This includes income from charitable activities and other fund generating activities that the company is involved in. The income generating activities contribute to approximately seventy percent of the entire income of the organization on annual basis, while the remaining percentage comes from charitable activities. This implies that unrestricted resources generate much income compared to restricted resource.
Each and every year since 2006 there has been a substantial change in incoming resources. However, from 2008 the company has witnessed a decrease in the net income resources. Unlike other businesses, the company’s capital structure is not made up of debt and equity financing. Even though the company has experienced growth in its accumulated funds, the increase rate has been declining after every year.
The lowest was in 2010 when it recorded 1.4 percent increase in accumulated fund. If the trend perpetuates for another one or two years, most likely the funds that the company accumulates will only be concentrated on its operations. Further continuation of this trend would imply that the company eventually will fail to be self sustaining.
Since 2008, the company’s net income resources, has been on the decline which is a direct reflection of the decline in accumulated funds. There is however, no substantial investment that Hellenic Community Trust has engaged in to account for the decline. This therefore is the reason why there is need for the company to make investments in order to increase its net income earning.
Similarly, the company has been experiencing a big liquidity ratio giving the implication that the company’s depriving state is likely to continue for a long a time. In order to prevent this prediction from happening, there is a need to begin investing the company’s cash on liquid assets.
Costing and best value
From the financial analysis conducted, the company is very liquid. This is not determined by the reduced profits experienced within the five year period. The company is in a perfect position to be able to give good returns for any investment done on short term basis.
Most of the assets of the company are held in form of liquidity or cash and therefore are in the hands of financial institutions. The main reason for the high liquidity ration of the company is because of its nature. Its main income generating activities is organization and planning of events. Other than that, it is also a charitable company that receives donations from sponsors.
The sponsors and trustees have expressed confidence with the future of the company since there are no uncertainties that would cause a significant doubt in the company’s potential to grow in the future. There is also no intention by the sponsors to consider a cessation of the company’s operations based on the previous decline in profitability.
However due to the high ration of liquidity, the company is in a good position to invests its money in financial assets. Failure to invest the money, the company will continue to witness a depriving situation and decline in its profitability.
The company management and the trustees have resorted to ensuring that the liquidity ratio is reduced. The reason for this is to be self sustaining. Even though Hellenic Community Trust is a charitable organization, it has the capability of being self sustaining based on the nature of its activities and its operation.
Predicted impact on cash flow
The investment on liquid assets by the company is likely to cause a positive impact in relation of cash flow. The investment is expected to increase the operating cash flow of the company. Once the operating cash flow is increased then the investors and trustees can be guaranteed good returns in their stock. The interest gained on the investment in liquidity assets is part of the cash flow.
This interest shall be adjusted for depreciations, receivables and liabilities. The company does not have numerous fixed assets and as a result, asset depreciation is not expected to occur. This also increases the chances of the company to grow in its net earnings by elimination of the effects of asset depreciation.
Using cash flow, it will also be possible to identify any earnings before interest and before taxation. In this way, evaluating the profitability of the company will be based on its working capital. With the increased cash flow, then the company can be able to calculate several financial related parameters that are relevant to the investors.
Net present value calculation for payback
The net present value is the worth of the company’s cash flow within specific series of time. The cash flow entails both incoming and outgoing cash of a specific financial entity. In the future, the company is expected to have incoming cash flow in the form of interests earned from the investment on liquid assets, donations from the trustees and sponsors, and income from the fund generating activities.
Cash inflow from restricted funds of the company is going to be from donations such as from the David memorial fund, equipment and piano fund, furniture fund and other earmarked fund.
Outgoing cash flow is mainly on the operation cost of the company. This includes the cost of employing all the permanent and part time administration staff, premises cost, administrative cost and depreciation of the fixed assets. The organization does not pay salaries to the trustees since they all are aware that the organization is charitable and therefore their working condition is on voluntary terms.
Each of the cash flow items has to be summed up and the net present value calculated as a total of all the terms. Therefore the time of the cash flow for this investment will be zero. The total amount of cash outflow for the company invested within a period of time is 3,851,143 sterling pounds. If this money is calculated at a discounted rate of 10 percent then the net present value will be
- 3,851,143/ ( 1 + 0.1)0 = £ 3,851,143
- This can be calculated on yearly basis by making t=1, 2, 3…
- For instance, if the company net value per year is £ 105,484 then the present net value for the first year will be 105484/ (1+0.1)1 = £95894
- For the second, the present net value will be 105484/ (1+0.1)2 = 87176.85
- For the subsequent years, the value for t only changes corresponding to the year number.
The stock current yield is a good scale for measuring the dividend income. It is calculated by dividing the annual dividend per share by the stock’s price per share. For instance, if the stock price of one share is £ 53 while the dividend is £2. This therefore implies that the stock current yield will be:
2/ 53 = 0.037778, which is equivalent to 0.04 => the stock current yield is 4%.
The capital gains yield is subtracting the beginning price from the end price and then dividing the result by the beginning price.
The capital gains yield therefore is (53 – 50)/ 50 = 0.06
Finally, the return is the total yield, which is calculated by addition of the current stock yield to the capital gains yield. The return is therefore 0.04 + 0.06 = 0.1. The return is 10%.
References
Adams, D. (2006). Management Accounting for the Hospitality, Tourism and Leisure. Massachusetts: Thompson Press.
Atkinson, H., Berry, A., & Jarvis, R. (1995). Business Accounting for Hospitality and. New York: Thompson.
Butterworth, B. (2009). Management and the Arts. Massachusetts: Focal Press.
Kotas, R. (1999). Management Accounting for Hospitality and Tourism. London: International Thomson Business Press.
Wiley, G. (1998). Accounting for Hospitality, Tourism and Leisure. London: Pearson.