afzal hossin

8/8/2019 afzal hossin

1/21

1

Leeds Professional College

PgD in Strategic Management and Leadership

Assessed Coursework

Student Name: Md. Afzal Hossin

Reg. no: LPC/SBM/CMI/10117-ENR

College Number: 1046

Subject Tutor: Amir Reza

TITLE OF DEGREE: PgD in Strategic Management and Leadership

MODULE TITLE: Financial Management

STATEMENT OF AUTHORITY

I have read the University Regulations relating to plagiarism and certify that the above piece of

coursework is all my own work and do not contain any unacknowledged work from my other

sources.

Signature:

Md. Afzal Hossin

Date:


2/21

2

ACKNOWLEDGEMENT

I would like to express my heartiest gratitude to the course tutor Amir Reza, Leeds Professional

College, Leeds for her lecture notes and cordial guidance to prepare this assignment.

I am also grateful to Mr. Baseer Khan, Mr Sheikh Malik & Camaron lecturer, Leeds

Professional College, Leeds for their guidance on Assignment Writing.

.

I used MS Word to prepare this assignment.


3/21

3

SECTION 1

Ratios Analysis

Note:

All amounts are in $ and Millions. For example 610 means $610 Million. Income statement and

balance sheet for the respective company are given in appendix.

For the year ended 31 March 20X6

Liquidity Measurement Ratios:

Current Ratio

Current Ratio =

= 1.27

Quick Ratio

Quick Ratio =

= 0.75

Cash Ratio

Assuming that trade recievables are not cash equivalent as no information about trade

recievables is given in order to classify them as liquid asset.

Cash Ratio =

= 0


4/21

4

Profitability Indicator Ratios:

Profit Margin Analysis

Gross Profit Margin =

= 13.75%

Operating Profit Margin =

= 4.5%

Pretax Profit Margin =

= 5%

Net Profit Margin =

= 3.75%

Effective Tax Rate

Effective Tax Rate (%) =

= 25%


5/21

5

Debt Ratios:

Debt Ratio

Debt Ratio =

= 58.62%

Operating Performance Ratios:

Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio =

= 7.27



Current Ratio

Current Ratio =

= 2.34

Quick Ratio

Quick Ratio =

= 1.38


6/21

6

Cash Ratio


recievables is given in order to classify them as liquid asset.

Cash Ratio =

= 0.49




= 16%


= 7.94%


= 7.44%

Net Profit Margin =

= 5.84%


7/21

7

Effective Tax Rate


= 21.51%

Return on Assets

Return on Assets =

= 21.17%

Debt Ratios:

Debt Ratio

Debt Ratio =

= 69.36%




= 9.09



Current Ratio

Current Ratio =

= 1.50


8/21

8

Quick Ratio

Quick Ratio =

= 0.85

Cash Ratio


recievables is given in order to classify them as liquid asset

Cash Ratio =

= 0.24




= 4.65%


= 1.63%


= 1.33%


9/21

9

Net Profit Margin =

= 1.16%

Effective Tax Rate


= 12.28%

Return on Assets

Return on Assets =

= 3.74%

Debt Ratios:

Debt Ratio

Debt Ratio =

= 76%




= 7.82


10/21

10

Interpretation of Ratios

- Current Ratio is an indicator of liquidity and higher ratio is considered good. In 20X6 itwas 1.27, in 20X7 it was 2.34 and in 20X8 it was 1.50.

- Quick Ratio focuses on mote liquid assets of a company in comparison to current ratio.In 20X6 it was 0.75, in 20X7 it was 1.38 and in 20X8 it was 0.80.

- Cash Ratio focuses on most liquid assets of a company such as cash etc. Cash ratio for20X7 was better than 20X6 and 20X8.

- Profitability Indicator Ratios focuses on profits a company generates. The higher thebetter. The profit margin in 20X7 was better than 20X6 and 20X8. In 20X8 it was lowest

of the three years.

- Effective Tax Rate tells about the tax rate the company is facing. The lower it is thebetter. It was lowest in 20X8 and was highest in 20X6.

- Debit Ratio tells about the leverage being used be the company. If it has lowerpercentage then it means that the company is less dependent on leverage. In 20X6 it was

58.62%, in 20X7 it was 69.36%and in 20X8 it was 76%.

- Fixed Asset Turnover measures the productivity of a company. In 20X6 it was 7.27, in20X7 it was 9.09 and in 20X8 it was 7.82.

- Return on Assets tells that how much profit a company is making in relation to its totalassets. In 20X7 it was 21.17% and in 20X8 it was 3.74%.

Approach to Performance Appraisal in a NPO (Not-for-profit Organization)

Generally in performance appraisal we focus on

y Giving employees feedback on their performance.y Identifying how performance can be improved.y Giving incentives.y Improving communication between employee and administration.y Improving performance through counseling, coaching and development.y And applying other human resource techniques.


11/21

11

While approaching a not-for-profit organization (NPO) we can use some of the techniques that

we generally use for performance appraisal such as identification of how performance can be

improved. We can communicate with the staff to know what kind of problems they are facing

and can work on improving them. We can also start training the employees working in an NPO

to enhance their performance.

For an NPO we can focus on its goals and objectives to see whether it is taking right steps to

achieve its goals and objectives. So, instead of focusing on other things as we do in other

organizations we will focus on goals set by a NPO. In such organizations we will not focus on

the profits it is making because all of its profits are utilized in order to achieve its goals. But we

will certainly work to increase its performance and profits. We can apply Management by

Objective Method (MBO) of performance appraisal. It is a process of determining and agreeing

upon objectives within an organization by its management and its employees to understand why

they are in the organization.


12/21

12

SECTION 2

Budget is a document which documents the plan of the business (2). Planning include that of

revenues and that of expenses. This may include the objective of business, targets set, and results

in financial terms, e.g., the target set for sale, resulting cost, growth, and required investment to

achieve the planned sales, and financing source for the investment (2). Budgets are of two

categories: long term and short term. Long term budgets are for a term of more than 5 years and

short tem budget are usually for a term of one year.

Types of Budgets

1. Sales BudgetThe sales budget is an estimate of future sales, often broken down into both units and

dollars. It is used to create company sales goals (3). A sales budget controls the finances

allocated for achieving sales targets of a company (4). It is the standpoint for comparing

the actual sales performance and the budgetary sales performance of a company (4). The

budget guides the company with regard to how much money should be allocated to

selling distribution and sometimes for advertising and marketing (4). A sales budget that

sets realistic targets will help the company make a profit (4).

It helps a company achieve its sales targets and help in reducing sales loses. The

drawback of sales budget is that it can not forecast the future trends of sales and of other

events.

2. Production BudgetProduct oriented companies create a production budget which estimates the number of

units that must be manufactured to meet the sales goals (3). The production budget also

estimates the various costs involved with manufacturing those units, including labor and

material (3).

It helps a company properly manage its products.


13/21

13

3. Cash Flow/Cash BudgetThe cash budget is used to manage cash and controlling cash. It is a prediction of future

cash receipts and expenditures for a particular time period (3). It is usually short term and

it helps in determining the time when the income will be sufficient to cover expenses and

the time when the company will need to seek outside financing. It allows coordination

among different plans within an organization.

4. Marketing BudgetMarketing budget can also be called the advertising budget because it is an estimate of

the funds that will be needed for promotion, advertising, and for public relations in order

to market the product or service (3).

It lets a company plan how to utilize its funds to fulfill both production and functional

needs as well as advertizing needs.

5. Project BudgetThis budget as clear from name determines the budget of a particular project that a

company initiates. These costs include labor, materials, and other related expenses (3).The project budget is often broken down into specific tasks, with task budgets assigned to

each (3).

6. Revenue BudgetThe Revenue Budget consists of revenue receipts of government and the expenditure met

from these revenues (3). Tax revenues are made up of taxes and other duties that the

government levies (3).

7. Expenditure BudgetThis budget lets a company plan its spending on different items. It lets a company

control its expenditure so gain more profit.


14/21

14

Sources of information for a companys cash budget

Following sources should be taken into consideration for making cash budget of a company

Cash receipts. Bank statement. Dividends and interests expenses. Cash balance. Cash sales. Credit sales. Account receivables. Account payable. Inventory. Expenses. Salaries expenses. Administrative expenses. Taxes. Advertising cost. Sales expenses. Loans. Plant and equipment expenses/expenditures. Other expenses and income sources.

Suggestion for budgeting system

Rolling budgets are time consuming and very expensive because a number of budgets have to be

produced each year. Markfield Ltd can use zero-based budgeting system as they are not happy

with the current budgeting system (rolling budgeting system).

A zero-based budgeting system requires that every year, all costs and capital expenditure are

questioned and thus require justification and prioritizing before any decision is taken regarding

the allocation of resources (5). Zero-based budgeting changes the approach of traditional or

incremental budgeting from focusing on changes in expense items from year to year, to an

approach that looks at each department budget as if it were undertaking its activities or program


15/21

15

for the first time (5). It requires a detailed justification and cost-benefit approach to each expense

item in the department budget (5). It forces managers to prioritize activities and related expenses

based on a value for money concept (5).

The advantages of such budgeting systems are

It helps in determining the right amount of revenues and expensed while preparingdifferent types of budgets.

Inefficient tasks can be identified easily and waste can be minimized. It helps in better and efficient allocation of all resources.

Since Markfield Ltd has taken many initiatives to improve its performance such as stopping

production of particular lines of items, this budgeting technique will help them better utilize the

changes that they have made. Markfield has introduced many changes in the current year so this

system will help them plan resources from the scratch.

Reasons for each Variance

Units

Budget

330,000

Actual

330,000

Actual Variance

Sales 2,900 3,300 400F

Ingredients (40%) 550 680 130A

Labor and energy (10%) 130 133 3A

Gross Profit 2,200 2,487

Other variable expenses 1400 1500 100A

Contribution 820 987

Fixed overheads 300 340 40A

Profit 520 647

There are two types of variances


16/21

16

If actual results are better than expected results given variance is described as favorablevariance and is denoted by the letter F.

If actual results are worse than expected results given variance is described as adversevariance or unfavorable variance and is denoted by the letter A or the letter U.

Reasons

- Sales variance of400F is favorable and it is because the sales are more than that wereexpected by the company.

- Ingredients variance of130A is unfavorable and may be because of two reasons: eitherdue to more sales more ingredients were required or the cost of ingredients may have

increased.

- Labor and energy variance of3A is also unfavorable and is due to more usage of energyand labor which may be the result of more sales.

- Variable expense of100A is unfavorable and is result of increased number of sales andincreased usage of energy and labor resources.

- Fixed overhead variance of 40A is also unfavorable and seems to be due to abovementioned reasons.

Increase in sales also called other factors to change and this is the reason that we see variance in

the budget.


17/21

17

SECTION 3

Return on Capital Employed (ROCE)

Return on Capital Employed is used in finance as a measure of the returns that a company is

realizing from its capital employed (6). It is commonly used as a measure for comparing the

performance between businesses and for assessing whether a business generates enough returns

to pay for its cost of capital (6).

EBIT stands for Earnings Before Interest and Taxes.

ROCE should always be higher than the rate at which the company borrows; otherwise any

increase in borrowing will reduce shareholders' earnings.

Payback Period

It is the length of the time required to recover the cost of an investment. For example, a $5000

investment which returned $2500 per year would have a two year payback period

Payback Period is calculated as

There are two main problems with the payback period method

1. It ignores any benefits that occur after the payback period and, therefore, does notmeasure profitability.

2. It ignores the time value of money.


18/21

18

IRR Calculations

IRRis Internal Rate of Return.

Given the (period, cash flow) pairs (n, Cn) where n is a positive integer, the total number of

periods N, and the net present value NPV, the internal rate of return is given by r in:

Years Cash Flows

$

0 (99,000)

1 55,000

2 35,000

3 25,000

4 22,000

NPV = - 99,000 + 55,000 / (1+ r)1+ 35,000 / (1+ r)

2+ 25,000 / (1+ r)

4+ 22,000 / (1+ r)

4

Using http://www.datadynamica.com/irr.asp I calculated NPV and IRR which is

IRR = 17.569%

NPV = 38000

Since Markfield requires minimum expected rate of return to be 19% and the calculated rate of

return is 17.569% so it is not feasible for Markfield to invest in this proposal.


19/21

19

Appendix

Markfield Ltd.

Income Statement

20X6

$

Million

20X7

$

Million

20X8

$

Million

Revenue (25% cash sales) 4,000 5,000 4,300

Cost of sales -3,450 -4,200 -4,100

Gross profit 550 800 200

Operating expenses -370 -403 -130

Operating profits 180 397 70

Profit on disposal of plant (note (i)) 40 0 10

Finance charges -20 -25 -23

Profit before tax 200 372 57

Income tax expense -50 -80 -7

Profit for the period 150 292 50


20/21

20

Statement of financial position

Balance Sheet

20X6 20X7 20X8

$

Million

$

Million

$

Million

$

Million

$

Million

$

Million

Non-current assets

Property, plan and equipment(note(i))

550 550 550

Current assets

Inventory 250 430 300

Trade receivables 360 399 290

Bank nil 610 220 1049 110 700

Total assets 1,160 1,599 1,250

Equity and Liabilities

Equity shares of 25 cents each 100 100 100

Retained earnings 380 390 200

480 490 300

Non-current liabilities

8% loan notes 200 661 482

Current liabilities

Bank overdraft 10 18 11

Trade payables 430 400 450

Current tax payable 40 480 30 448 7 468

Total equity and liabilities 1,160 1,599 1,250


21/21

21

References

1. http://www.investopedia.com/university/ratios/2. http://en.wikipedia.org/wiki/Finance3. http://en.wikipedia.org/wiki/Budget4. http://www.ehow.com/about_4699902_what-sales-budget.html5. http://www.blackhallpublishing.com/webresources/html/solutions/ma_s09-03.htm6. http://en.wikipedia.org/wiki/Return_on_capital_employed7. http://www.datadynamica.com/irr.asp

afzal hossin

Documents

Transcript of afzal hossin