PGBM01 Finance Management
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Transcript of PGBM01 Finance Management
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ASSIGNMENT COVER SHEET
UNIVERSITY OF SUNDERLAND
MASTER OF BUSINESS ADMINISTRATION (MBA)
Student ID: 139098196
Student Name: T NARISH TAMILARASAN
Module Code: PGBM01
Module Name / Title: Financial Management
Centre / College: SEGI COLLEGE
Hand in Date: 20th January 2015 Due Date: 20th January 2015
Assignment Title:
PGBM01 Financial Management - Assessment November 2014
Students Signature: (you must sign this declaring that it is all your own work and all sources of information have been referenced)
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PGBM 01 Financial Management
Student ID: 139098196
Student Name: T NARISH TAMILARASAN
Centre / College: Segi College, Penang
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Table of Contents
No Contents Page Number
1. Part A Ratio Analysis 1
2. Profitibality 1
4. Liquidity 1
5. Gearing 2
6. Efficiency/ Asset Utilization 2
7. Part B Break even point 3
8 Marigin of safety 3
9. Key assumptions of break-even analysis 4
10. Restrictions in break even-analysis 4
Part C
11. Section 1 5-6
12. Section 2 7-9
13. Bibliography 10
14 Appendices 11-16
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Part A Sterling Plc
Sterling Plcs company performance
Profitability
In order to know your business performance, monitoring and observing profitability is very
important. Attached is the information on income statement for the year ended 31 December and
statement of financial view of Sterling Plc, this report has discussed and calculated four relevant
ratios of profitability performance: Return on capital employed (ROCE), Return on equity (ROE),
Gross profit margin (GRM) and Net profit margin (NPM). From the results of these ratios, Sterling
have a bad profitability performance in 2013 year, the ROCE, ROE and NPM both has the significant
decline. The ROCE and ROE has the big change, ROCE has decline 13.89% and ROE has decline
19.30%. The main reason is the ordinary shares in equity increase 700,000 and net income
decrease by 850,000. Although the sale price and volumes can change significantly, but the gross
profit margin is usually quite stable, the GRM of 2012 to 2013 looks quite stable, 2012 GRM is
47.24%, 2013 is 42.50%, but due to the increase of the variable expenses that reduce to the
operating profit before interest and tax, the NPM also fall by 7.87%. Sterling Plc needs to think
about why the sales revenue increased 2,230,000 but the net profits has decline 850,000 at 2013
years.
Liquidity
Liquidity ratios are often used to determine a companys ability to meet its short-term debt
obligations. The rations calculation of liquidity includes current ratio, quick ration and working
capital cycle. From the results of calculation that shows Sterling Plc has a relatively low level of
liquidity, the current & quick ratio both has the minimal change between 2012 and 2013. But it
shows very low index. Current ratio has decrease by 0.08 times and quick ratio decrease 0.06 times.
It is worth nothing that the significant change on working capital cycle, it is the negative change
from -8 days of 2012 changed to 25 days of 2013, the trade receivables days from 56 days increased
to 65 days and the trade payable days from 94 days decreased to 70 days, it means company get
back the trade capital slows down but they need to faster pay the money for suppliers.
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Gearing
These ratios concentrate on the long-term health of a business. Particularly the effect of the
capital/finance structure on the business: gearing ratio and interest cover ratio. According
to the results can indicates Sterling Plc have a stable gearing ratio, although have decline by
4.97%, but this is the common change at the company development, it is due to the
increased of equity. Stable gearing ratio can shows that Sterling Plc managers still effectively
to use the shareholders capital, it can help the shareholders a larger scale operation with
fewer funds. A problem can be find in the interest cover ratio, company had 845,000 bank
overdraft at 2013 year, it takes the increased of interest payable directly. The interest cover
ratio has decline by 2.21 times from 2012 to 2013, it reflects debt-paying ability of Sterling
Plc has changed weaker. Of course, the increased of variable expenses also contributed to
the change.
Efficiency / Asset utilization
The ratios calculation of efficiency can given an insight into how efficiently the company is
employing those resources invested in fixed assets and working capital. Stock (inventory)
turnover days, accounts receivable collection period (ARCP) and accounts payable payment
period (APPP) has calculated in this areas. It is similar same with the working capital cycle
calculation. From the results of these ratios can know Sterling Plc have a bed cash flow. The
stock turnover days is 40 days in 2012 and 35 days in 2013, it can indicates a good stock
management of company. However, the big problem reflects on ARCP and APPP. It takes the
negative change at 2013 year, ARCP times increased 6 days and APPP times decreased 24
days. The reason for these changes are increased the sale revenue and credit purchase.
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Part B Grantham Ltd
Break-even point (BEP)
Break-even point (BEP) is a point that neither profit nor loss, that is, the activity breaks even. Where
the volume of activity is below BEP, a loss will be incurred because total cost exceeds total sales
revenue. When the volume of activity above BEP, there will be a profit. (Atrill and McLaney, 2011).
According to the BEP, the further of activity is below BEP, it could get the loss; the further of activity
is above BEP, it could get the profit. Followed the calculated break-even point for Grantham Ltd, it
can knows the break-even point in units sold is 128,571 units and the break-even point in revenue
45,000,000 in 2012 year; the 2013 year BEP in units is 61,429 units and BEP in revenue is 645,000.
It was a large movement from 2012 to 2013. At 2013 year, Freezer can more easy and quickly to
above the BEP and get the profits. The key movement reason is that management has decided to
increase the selling price by 20%, the selling price at 2013 is 420, it makes 70 increased of unit
contribution margin than 2012; at the same time, the increased of 1,950,000 in fixed costs also as
the important factors to effects the BEP. The decreased of BEP indicates Freezer has a strong anti-
risks of business operation.
Margin of safety
Usually, manager can be consider to uses the margin of safety with the break-even point. Margin of
safety is often used to ensure the safety of the sales when knows the BEP, it can be set to detect
whether company can avoid the loss of profits. When Freezer knows the BEP with its sale, it can
easy to set to the margin of safety. For example, in 2013, the calculated for the margin of safety in
units is 238,571 units, in revenue is 125,355,000. The set to margin of safety can not lower than
these data, it could insure when the sale above margin of safety, company can make profits.
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Key assumptions of break-even analysis
There are three key assumptions that affect the applicability of break-even analysis The
average sales price per unit: Which takes into account the sales discounts and special offers
Managers need to predict this numbers for the unit price from sales, in some company not
base on the unit, it should be a percentage to show that the per earnings unit in per unit of
cost. (Lynch, 2005). This is the most common problems in the same product sales market, so
managers need to predict the BEP according to the sales prices. Variable unit cost: this is
based on the production costs When use to the BEP, managers need to clearly determine
which cost belongs to the production cost It can calculate the contribution margin per unit,
it reflects the profit per unit produce by one sales product. Monthly fixed costs: Monthly
fixed costs includes the machine's depreciation, administrative costs and other fixed costs
that must paid by each month Technically, a break-even analysis defines fixed costs as costs
that would continue even if it went broke.
Restrictions in break-even analysis
Used to the break-even analysis can evaluate the economic of a project, it can determine the
financial benefit of the merits for several projects, which filter out the optimal solution.
Although the break-even analysis is only to discuss the impact of price changes uncertainties,
yield, variable costs, fixed costs, such as profit and loss generated by the project, but it can
not judge the profitability of project. On the other hands, break-even analysis is a static
analysis, it is not consider to the time value of money, the magnitude of change is
uncertainties by artificial, so it has some limitations.
(All the analysis data used from Appendix 2, it includes the relevant break-even point and
margin of safety calculations and a summary table for both 2012 and 2013 year.)
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Part C
Section 1
As the famous proverb says, Those who fail to plan, plan to fail is very true when it comes
to plan a business specifically on the budgeting aspect. There are many business owners
failed in their business due to a poor budget planning. Budget is the most prominent
element for a successful business plan. In fact, budget shows a detailed analysis on how an
organisation should spend money in future time periods. A typical budget helps the business
to plan its own strategy and to reach the goal of the organisation. At the same time, making
sure the earning income is in control of the cost related to that income keeps the business
owner on the right track in achieving the business goal. (Tracey Loubser, 2014)
Control expenditures
One of the undeniable benefits of budget is the ability to control or to limit on the cash flow
spent on certain departments within an organisation. Since, an accurate budget accounts
can show the expenditures of the departments, the management can plan a strategy to
control that cash flow so it can be channeled to some other needs within a company.
Literally, it refrain the company from wasting its capital and limits the economic resources.
Creates financial roadmap
When the year passes, budget review is a must for organisations. Its an essential activity for
companies to know where they spent the most and where they spent the least especially
when it comes to their operations. At times it makes them to come up with new budget
policies for the interest of the company.
Plan for future growth
On the other hand, it is very norm for companies to plan for future business development
and growth. Capital of the business is really saved on regular business expenditures where
the thougt of investing them into another business or needing them for business expansion
is a practice in business provided the companies has the budget plan . Budgeting for future
growth opportunities ensures that companies have capital on hand when needing to make a
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quick decisions for expanding business operations. This capital may also be used during slow
economic times as a safety net for paying regular business expenses.
Conclusion
Budgeting is very essential and an important activity for an organisation in the sense of
stabilsing the companys financial strength and not forgetting that planned and controlled
budgets always helps the organisation during a slow economic prgression. In order to
sustain in todays business competency , no matter what is the business nature but adopting
budgeting habit within an organisation or business will lead to a healthy financial growth.
(Tracey Loubser, 2014)
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Section 2
When it comes to financing business there are many times of business financing. They are
capital markets, which are more likely issuing the new shares. Stock market listing is one of
how capital market functions. The other financing methods are like, loan stock, retained
earnings, bank borrowing, government sources, and business expansion scheme funds,
venture capital and franchising. (Basic finance for marketers. 2014. [ONLINE])
Ordinary share
Ordinary shares are issued to the owners of a company. They have a nominal or 'face' value,
typically from a dollar to 50 cents. The market value of a priced company's shares bears no
liaison to their nominal value. A company can obtain additional equity funds through stock
exchange quotation. Apart from that, right issue provides a way of floating new share
capital by giving an offer to existing shareholders by inviting them to subscribe cash for new
shares in ratio to their existing holdings. On the other hand, preference shares have a fixed
percentage dividend where any dividend is paid to the normal shareholders. From the
companys point of view, preference shares dividends do not have to be paid in a ear where
the profits are poor while this is not the case with interest payments on long term debt.
(Basic finance for marketers. 2014. [ONLINE])
Loan stock
Loan stock is long-term debt capital extended by a company for which interest is paid.
Holders of loan stock are therefore long-term creditors of the organisation. Debentures are
a form of loan stock, legally defined as the written acknowledgement of a debt incurred by a
company, normally enclosing requirements about the payment of interest and the eventual
repayment of capital. (Basic finance for marketers. 2014. [ONLINE])
Retained earnings
For any company, the amount of incomes retained within the business has a direct effect on
the amount of dividends. Profit re-invested as engaged earnings is profit that could have
been paid as a share. The main reasons for using reserved earnings to finance new assets,
rather than to pay higher dividends and then raise new equity for the new investments like
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the organisation of various companies thinks that retained earnings are the finance which
do not cost anything although this fact is just a myth. But, it is factual that the use of
enclosed earnings as a source of funds which dont lead to a payment of cash. (Basic finance
for marketers. 2014. [ONLINE])
Bank lending
This is a very famous source of finance that available for business. Borrowings from banks
are an important source of finance for companies. Bank offering is still mainly short term,
although medium-term lending is quite usual these days.
Short term lending may be in the form of:
a) An overdraft, which a company should keep within a limit, set by the bank. Interest
is charged (at a variable rate) on the amount by which the company is overdrawn
from day to day;
b) A short-term loan, for up to several years which is very subjective according to the
banks.
Leasing
A lease is an contract between two parties, the "lessor" and the "lessee". The lessor owns a
capital asset, but permits the lessee to use it. The lessee makes payments under the terms
of the lease to the lessor, for an indicated period of time.
Leasing is, therefore, a form of rental. Leased assets have usually been plant and machinery,
cars and commercial vehicles, but might also be computers and office equipment. There are
two basic forms of lease: "operating leases" and "finance leases".
Operating leases are more to rental contract between the lesson and the lessee where the
lesson supplies the equipments or instruments to the lessee and the finance leases are lease
contract between the user of the leased asset (the lessee) and a provider of finance (the
lessor) for the most. (Basic finance for marketers. 2014. [ONLINE])
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Government assistance
The government provides financing aids in the form of loan with the lower interest
comparing to any private loan financing agencies to companies in cash grants and other
forms of direct assistance, as part of its policy of helping to develop the national economy,
especially in high technology industries and in areas of high unemployment. (Basic finance
for marketers. 2014. [ONLINE])
Venture capital
Venture capital is the investment money put into an enterprise which may all be lost if the
enterprise fails to earn profit or to reach its goal. Normally, a businessman starting up a new
business will invest venture capital of his own, but he will probably need extra funding from
a source other than his own sourcing. However, the term 'venture capital' is more
specifically associated with putting money, usually in return for an equity stake, into a new
business, a management buy-out or a major expansion scheme. (Basic finance for marketers.
2014. [ONLINE])
Franchising
Franchising is a method of expanding business on less capital than would otherwise be
needed. For suitable businesses, it is an alternative to raising extra capital for growth.
Franchisors include Budget Rent-a-Car, Wimpy, Nando's Chicken and Mc Donalds. Under a
franchising arrangement, a franchisee pays a franchisor for the right to operate a local
business, under the franchisor's trade name. (Basic finance for marketers. 2014. [ONLINE])
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Bibliography
Atrill, P, and McLaney, E. (2011). Accounting and Finance for Non-specialists with
Myaccountinglab. United Kingdom: Prentice Hall Financial Times.
Lynch, R. (2005). Corporate strategy. 3rd ed. United Kingdom: Financial Times Prentice Hall.
Chron. 2014. Why Is it Important for a Business to Budget?. [ONLINE] Available at:
http://smallbusiness.chron.com/important-business-budget-385.html. [Accessed 30
December 14].
Basic finance for marketers. 2014. Sources of finance . [ONLINE] Available at:
http://www.fao.org/docrep/W4343E/w4343e08.htm. [Accessed 16 December 14].
TRACEY LOUBSER . 2014. Why budgets in business are a must have. [ONLINE] Available at:
http://www.efinancialmanagement.com.au/accounting/why-budgets-in-business-are-a-
must-have/. [Accessed 23 December 14].
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Appendixes Appendix 1: Part 1 - Sterling Plc Profitability
Ratios Formula 2012 2013 Return on capital employed (ROCE)
Operating profit / Share capital + Reserves + Non-current liabilities * 100%
5285 / 5900 + 1985+5105 * 100% = 40.70%
4435 / 6670 + 2550+7325*100% = 26.81%
Return on equity (ROE)
Profit after tax & interest & preference dividends / (ordinary share capital + reserves) * 100%
3095 / 5900 + 1985 * 100% = 39.25%
1840 / 6670 +2550 * 100% = 19.95%
Gross profit margin (GRM)
Gross profit / sales * 100%
8150 / 17,250 * 100% = 47.24%
8280 / 19,480 * 100% = 42.50%
Net profit margin (NPM)
net profit before interest and tax / sales * 100%
5285 / 17250 * 100% = 30.63%
4435 / 19,480 * 100% = 22.76%
Liquidity
Ratios Formula 2012 2013 Current ratio
current assets/current liabilities
4105 / 3245 = 1.26 times
4560 / 3875 = 1.18 times
Quick ratio
(current assets - inventory) / current liabilities
3120 / 3245 = 0.96 times
3495 / 3875 = 0.90 times
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Gearing
Ratios Formula 2012 2013 Gearing ratio
loan capital/ share capital + reserves + long-term loans * 100%
5105 / 5900 + 1985 + 5105 * 100% = 39.3%
7325 / 6670 + 2550 +7325 * 100% = 44.27%
Interest cover ratio
operating profit/interest payable
5285 / 1110 = 4.76 times
4435 / 1745 = 2.54 times
Efficiency/ Asset Utilization
Ratios Formula 2012 2013 Stock (inventory) turnover days
Inventory/cost of sales * 365 days
985 / 9005 * 365 days = 40 days
1065 / 11200 * 365 days = 35 days
Accounts receivable collection period (ARCP)
trade receivables/credit sales revenue * 365 days
2650 / 17250 * 365 days = 56 days
3495 / 19480 * 365 days = 65 days
Accounts payable payment period (APPP)
accounts payable/credit purchases * 365 days
2260 / 8750 * 365 days / 7000 = 94 days
2165 / 11280 * 365 days = 70 days
Investor
Ratios Formula 2012 2013 Earnings per share (EPS)
earnings available to ordinary shareholders / number of ordinary shares in issue
3095 / 5900 shares = 0.52
1840 / 6670 shares = 0.28
Dividend yield ratio
dividend per share / market value per share * 100%
1220 / 5900 shares * 100% = 0.20 %
1275 / 6670 shares * 100% = 0.19 %
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Part 2 - Sterling Plc Working capital cycle Working for Part 2
Average inventory holding period + average settlement period for trade receivables - average settlement period for trade payables
Ratios Formula 2012 2013 Average inventory holding period
((Opening Inventory + Closing Inventory) / 2) * 365 days / Cost of Sales
[(1240 + 985) / 2] * 365 days / 9005 = 45 days
[(985 + 1065) / 2] *365 days / 11200 = 33.5 days
Average settlement period for trade receivables
Trade Receivables * 365 days / Credit Sales Revenue
2650 * 365 days / 17,250 = 56 days
3495 * 365 days / 19,480 = 65.5 days
Average settlement period for trade payables
Trade Payables * 365 days / Credit Purchases
2260 * 365 days / 8750 = 94 days
2165 * 365 days / 11,280 = 70 days
Working capital cycle
Average inventory holding period + Average settlement period for trade receivables - Average settlement period for trade payables
45 days + 56 days -94 days = 7 days
33.5 days + 65.5 days - 70 days = 29 days
Summary table 2012 2013 2012 - 2013 change Return on capital employed (ROCE)
40.70% 26.81% - 13.89%
Return on equity (ROE)
39.25% 19.95% - 19.30%
Gross profit margin (GRM)
47.24% 42.50% - 4.74%
Net profit margin (NPM)
30.63% 22.76% - 7.87%
Current ratio
1.26 times 1.18 times -0.08 times
Quick ratio
0.96 times 0.90 times -0.06 times
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Gearing ratio
39.30% 44.27% -4.97%
Interest cover ratio
4.76 times 2.54 times -2.22 times
Stock (inventory) turnover days
40 days 35 days -5 days
Accounts receivable collection period (ARCP)
56 days 65 days +9 days
Accounts payable payment period (APPP)
94 days 70 days -24 days
Earnings per share (EPS) 0.52 0.28 - 0.24
Dividend yield ratio
0.20% 0.19% - 0.01%
Working capital cycle 7 days 29 days + 22 days
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Appendix 2: Part B - Grantham Ltd 2012: Unit Contribution margin = Sales revenue per unit - variable cost per unit 225 - 125 - 45/3 - 20 - 15 - 10 = 40 Break-even point in units sold = Fixed costs / unit contribution margin (1,100,000 + 1,450,000 + 675,000) / 40 = 3,225,000 / 40 = 80,625 units Contribution margin ratio( CM ratio) = Contribution margin / sale 40 / 225 = 17.8% Break-even point in revenue = Fixed costs / CM ratio (1,100,000 + 1,450,000 + 675,000) / 10% = 3,225,000 / 10% = 32,250,000 Margin of safety in units = total sales units - Break-even units 220,000 units - 80,625 units = 139,375 units Margin of safety in revenue= Total sales - Break-even sales 225 * 220,000 units - 32,250,000 = 49,500,000 - 32,250,000 = 17,250,000 2013: Unit Contribution margin = Sales revenue per unit - variable cost per unit [225 + (225 * 25%)] - 125 - 45/3 - 20 - 15 - 10 = 281.25 - 125 - 45/3 - 20 - 15 - 10 = 96.25 Break-even point in units sold = Fixed costs / unit contribution margin (1,100,000 + 1,450,000 + 675,000 + 1,450,000) / 96.25 = 4,675,000 / 96.25 = 48,571 units Break-even point in revenue = Fixed costs / CM ratio (1,100,000 + 1,450,000 + 675,000 + 1,450,000) / 10% = 4,675,000 / 10% = 467,500
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Margin of safety in units = total sales units - Break-even units 220,000 units 48,571 units = 171,429 units Margin of safety in revenue= Total sales - Break-even sales 281.25 * 220,000 units - 467,500 = 61,407,500
Summary table
2012 2013
Break-even point in units sold 80,625 units 48,571 units
Break-even point in revenue 32,250,000 467,500
Margin of safety in units 139,375 units 171,429 units
Margin of safety in revenue 17,250,000 61,407,500
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