Summary
Ladies and gentlemen, the financial plan of Acme City for the next financial year, 2022/2023, will cover various projections. The financial plan is driven by the last financial period’s unsatisfactory performance of Acme City in achieving the expectations of the stakeholders and its core objectives. Besides, the desire to achieve higher standards of excellence is another driver for the financial plan. We will focus on the town’s revenue and cost projections. I will feature the various items that make up the revenue and cost for the city. Some of the items I intend to cover in my financial plan under the revenue section are the program and general returns. Under the program gains, I will cover the charges for services, operating grants, and contributions. The other item I shall cover under program earnings is capital gains and contributions. Under the general proceeds, I plan to cover various items, including property taxes, state profit sharing, interest income, and other general revenues. Under the expenses section of Acme City, I intend to cover various expenses, including general government, public safety, and public works. The other expenses I will include under the city’s expenses include community and economic development, recreation and culture, water, and sewer. The interest on the long-term debt will also form part of the expenses for the city in the financial plan for the next financial year.
In this juncture, I will interpret the meaning of the projections in the various items subject to the city’s expectation of its performance by the end of the next financial year. My interpretation of the financial information will be aimed at making the stakeholders understand the significance of the financial plan in fulfilling their expectations of the city. The financial plan will be crucial to various stakeholders, including the suppliers of the city, the public, the municipality, and contractors of city projects. I wish to delve into the tabulation of data of the financial plan.
The next year’s charge for services is projected to be $1900000. The operating grants and contributions are projected to be $300000, while the capital gains and contributions will be $50000. I project the property taxes to be $1400000 while the state revenue sharing will be 400000. The other general revenues will be $5000 while the interest income is projected to be $7000. The general government expenditure is forecasted to be $400000, while I project the public safety expenses to be $500000. The public works will be $40000, while the community and economic development will be $150000. The recreation and culture are projected to be $130000, while water and sewer are projected to be $600000. Finally, the interest on the long-term debt will be $20000. Ladies and gentlemen, the following is the tabular representation of the financial plan before I elaborate on the financial ratio analysis principles, including the net profit ratio, gross profit ratio, return on investment, and operating profit ratio. The ratios are crucial in my presentation, given that they will clarify the projections and the prospects of the city.
Table 1. Projected comprehensive income statement as of 31 December 2023
I now want to elaborate on the financial data projected in my plan table. In this case, the gross profit, often computed as the company sales minus the cost of goods sold divided by the total company sales, is a crucial financial metric. The profit helps Acme City’s stakeholders to know the efficiency with which the city is managing labor and supplies, especially in the production process. The ratio is crucial given that it reveals the inputs versus the production pulpits of a given entity (Chang, 2019); hence, an investor can see the city’s efficiency at a glance. The gross profit is equal to: (4062000-0)/4062000 = 1
A gross profit ratio of 1 is recommended, given that a higher ratio indicates a higher efficiency in the entity’s conversion of products to sales. A higher ratio can be achieved by minimizing the cost of goods sold by way of using an activity-based costing method that could economically reduce and eliminate activities that are not value-adding. On the other hand, a lower ratio will indicate the inefficiency of the entity in covering the cost of goods sold besides providing a high margin for the coverage of the operating expenses. A higher ratio also indicates high prospects of reserves.
A Higher Margin to meet Operating Expenses and the Creation of Reserves
The other financial ratio that comes in handy to help me explain the projections made above is the net profit ratio. The net profit ratio is computed as the gross revenue minus the operating expenses divided by the total sales (Chang, 2019). The net profit provides the firm’s efficiency in generating revenue from its operational expenditure. The net profit also provides the most accurate figure to use for the computation of corporate profit. The net profit ratio should be higher to ensure the city’s efficiency in service delivery. In the projections above, the net profit ratio is equal to: [(4062000 – 1840000)/4062000] = 0.55
The ratio is appropriate given that it reveals the company’s high efficiency in generating profit. A higher ratio indicates the rate at which the entity converts a dollar of its revenues to profit. The other crucial ratio I wish to use in elaborating my financial plan data is the return on investment. In this case, the economic concept applicable is the cost-benefit analysis. The adoption of a cost-benefit economic model will inform the investor whether the return on investment is worthwhile. The ratio is computed as net profit before tax, interest, and dividend divided by capital employed. The return on investment ratio is equal to: = (2222000/25000000) = 0.89.
The projected return on investment is desirable at 0.89. A higher ratio is recommended, given that a higher ratio represents a high return on investment. The ratio indicates the efficiency with which the entity utilizes the capital employed in generating operating profits. The ratio is crucial, especially for investors and shareholders, given that it reveals the efficiency in utilizing their capital in the entity. Capital employed is obtained from the projected statement of financial position for the year ended 31 December 2023 table below:
Table 2. Projected statement of financial position for the year ended 31 December 2023
Reference
Chang, J. (2019). How to build a successful budget plan that works. Procurify.