Managing Finances of two Australian Firms - Essay Example

?Manage Finance September 17, This paper compares two Australian firms, Woolworths limited and Wesfarmers ltd with respect to the budgetary process and the financial report of the two firms. Brief overview of both the firms: Woolworths Limited: Woolworths limited is a retailer whose primary activities are concentrated in supermarkets, especially regarding food and liquor, which represent the firm’s majority sales. Woolworth also deals with other businesses like consumer electronics and powerhouse business. Woolworths has been one of the important consistent and successful retailer in Australia with the adoption of various strategies like the ‘fresh food people’ and the ‘everyday low prices.’ Net operating cash flows show an increasing trend and also the firm has been paying higher interim dividends to its shareholders each year. The firm has witnessed a 10.1% increase in net profits after tax and an 8.8% increase in earnings per share according to its financial reports. There has been an efficient management of balance sheet and profit and loss statements and approximately $8.2 billion has been paid to shareholders. Wesfarmers: Wesfarmers is one of the largest retailers and listed firm in Australia and has retail operations in supermarkets, general merchandise, fuel and liquor operations etc. Wesfarmers has reported an increase of 15.8% earnings growth in 2010, as compared to 2009, with Cole’s supermarket alone delivering a 21% growth. a) Budgetary processes that exist in two of the Australian Public Companies: Budgetary process is used for formulating budgets by referring to certain principles, procedures and practices. This process should involve people at different levels in the preparation of a budget. It requires careful planning and appropriate fixation of authority and responsibility. The budget targets should be realistic, and a good accounting system should be incorporated within the organization. An efficient reporting system should be incorporated so that performance appraisal can be undertaken. Budgeting process should be established in all segments of business, therefore, there arises a need for the active participation of all employees. The budgets should be flexible because there should always be room for each employee of the firm to participate. The budgetary process involves the set up of an organization for budgetary committee, a budget officer, a budget centre and a budget manual. The budget officer presides on the budget committee. The budget committee can be further divided into various segments which consist of production manager, sales manager, finance manager, accounts manager, personnel manager and research and development manager. The production manager prepares the production and plant utilization budget. The sales manager prepares the sales and advertisement cost budget. The finance manager prepares the receipts and payments budget. The accounts manager prepares the cost budget while the personnel manager prepares the labor budget. The research and development manager prepares a research budget. A budget manual is a document in which the responsibility of several executives should be documented and the budgetary control systems are clearly defined. On the basis of time, budgets can be classified as long, short or current budgets. On the basis of functions, budget can be classified as operating, financial and master budgets. Similarly, budgets can also be classified as fixed or flexible. Both these firms follow an appropriate operating budget and there is a very important role of the CEO as well as the top financial management. b) Who is responsible to prepare the budget? Budget is thought to be one of the most powerful financial tools used by the companies. Budget is the plan or proposal, which determines the activities of an organization. As mentioned earlier, budget may be long term and short term budget, where short term budgets cover a period of one year whereas long term plans cover a period of three years. Budget will assist the business for planning activities, resource allocation, performance evaluation and so on. Budget will provide a guideline for the operations to be carried in the organization to achieve goals and to minimize the expenses. In the company, finance management will draft the budget and it is to be approved by the management committee. Once budget is prepared by the finance management, it will be revised by the management committee for final approval. Budget drafted by the finance management is finalized after getting approval from the top management. Many companies form a separate department for the preparations and the execution of the budget. Top management is authorized to provide guidelines and parameters for preparing the budgets for the company. Budget should be flexible and it should be set in an attainable level. If budget is fixed at a high level, it will discourage the employees to attain the organizational goals. Budgets should provide guidelines to employees. The top management is responsible to take necessary steps to gain targeted return. In some organizations, CFO is responsible for preparing and executing the budget and he is entrusted to attain the target budgeting that would enable the top management to make a comparison between the proposed standard and actual performance. The management can take necessary action on the basis of this comparison. When preparing the budget, the management should follow various steps such as identifying the short and long term organizational goals, calculating the previous year’s income, estimating the all costs involved as well as determining expected income and expenditure etc. While implementing the budget, the top management is to get support from all the employees and line managers. The top management should consider budgetary control during the process of implementing the budget in the organization. c) The methodology you believe the organization has adopted in preparing and managing its financial reports. Various cost savings measures have been initiated by way of efficient budgets in both the firms. The financial report of Wesfarmers is prepared according to the Australian accounting board, which follows the International Financial Reporting Standards. Woolworth’s and its group entities’ financial reports are prepared according to the IFRS. Revised IAS standards are followed in the cases of treatment of property, plant and equipment, employee benefits, foreign exchanges along with financial instruments. The five year financial history of both the firms is an indication of the efficient budgetary process that has been maintained by them. Both firms have maintained efficient operating budgets and have also maintained department wise budgets for careful analysis. Wesfarmers maintains separate budget for sale of goods and rendering of services. Similarly, expenses are also classified accordingly with raw materials and inventory in one category, employee expense in another category and so on. In Woolworths, revenue is considered as sales turnover and services are treated as other sources of revenue. Likewise, expenses are classified as depreciation, occupancy cost, employment cost and operating costs. Finance costs in both the firms are treated as an expense. Woolworths has been able to maintain a cost of doing business to sales ratio at 20%. Through the budgetary process, the firm has announced measures like off-market buy-backs in order to manage capital. The firm identified its core and sub businesses and accordingly budgets were prepared. The firm’s strong core business is Australian supermarkets. Both the firms have implemented and devised their own methodologies of preparing financial accounts in order to achieve success and growth. d. What consequences could impact the organization and its operating environment if the budget process is inadequate (i.e. social impact, resource etc)? Adequate budgeting is essential for the smooth running of business. Therefore, the top management should allocate necessary budget to the business in order to achieve desired results. If the budget proves to be insufficient, it would bring many problems in the business as well as the society. If top management reduces the budget, the firm will not be able to run smoothly and would have to face many problems in production, research and development, marketing, advertising the product etc. Insufficient budget will prevent the company from adopting expansion and development programs and will also affect its production capacity. The firm would find difficulties in making any innovative and advanced product. Poor budget will affect the company as it would make the firm unable to compete against its rivals and their products. If management does not allow adequate amount to production department, it will affect the production of the firm and the department cannot get required raw materials for the production, which would in turn render them incompetent to meet challenges. In the budget, if top management reduces the fund for employees for their incentives, it will discourage the employees and they may not put in their full strength and ability to achieve the organizational goals. All companies should give importance and spend accordingly on their research and development department, as insufficient budget to this department would prevent the company from getting innovative and advanced products. The company should spend adequate amount for the sales and marketing department in order to adopt more promotional programs to attract maximum customers and derive maximum satisfaction. Moreover inadequate budget will affect the company’s ability to meet its competition effectively. Inadequate budget causes social problems as it will prevent the company from attaining expansion and development programs, this will reduce the employment opportunity to society that would create frustration among youth. Sometimes if the management reduces charity fund in its budget, it will also affect the company’s reputation among the public. e) Balance sheet of Woolworth’s Limited (WOW.AX) and Wes farmers Ltd (WES.AX): Woolworth’s Limited (WOW.AX) Wes farmers Ltd (WES.AX) 2010 2009 2010 2009 Assets: Current Assets Cash And Cash Equivalents 713,000 763,000 1,640,000 2,124,000 Short Term Investments - - - - Net Receivables 691,000 467,000 1,891,000 1,759,000 inventory 3,439,000 3,293,000 4,658,000 4,665,000 Other current assets 126,000 140,000 388,000 317,000 Total Current Assets 5,201,000 4,883,000 9,674,000   9,944,000 long term Investments 127,000 131,000 598,000   547,000 Property Plant and Equipment - - -   -   Goodwill 3,078,000 2,992,000 16,206,000   16,273,000   Deferred Long Term Asset Charges 433,000 481,000 608,000   766,000   Total Assets 18,487,000 17,085,000 39,236,000 39,062,000   Current Liabilities Accounts Payable 4,211,000 4,055,000 5,131,000   4,054,000   Short/Current Long Term Debt 3,578,000 3,238,000 5,492,000   6,438,000   Other Current Liabilities 408,000 509,000 665,000  678,000   Total Current Liabilities 7,153,000 6,415,000 7,852,000   7,561,000   Long Term Debt 2,680,000 2,984,000   5,131,000   5,637,000   Deferred Long Term Liability Charges -   -   9,000 - Total Liabilities 10,917,000 10,272,000  14,542,000  14,814,000   Stockholders' Equity Common Stock 3,784,000   3,859,000   23,286,000 23,286,000   Retained Earnings 3,855,000   3,179,000   1,414,000   1,179,000 Treasury Stock (69,000) (225,000) (6,000) (217,000) Capital Surplus 5,000   3,000  - - Other Stockholder Equity - - - - Total Stockholder Equity - - - - Net Tangible Assets - - - - (Woolworths Limited (WOW.AX): Balance Sheet 1). (Westfarmers Ltd (WES.Ax): Balance Sheet 1). Income Statement of Woolworth’s Limited (WOW.AX) and Wes farmers Ltd (WES.AX): Woolworth’s Limited (WOW.AX) Wes farmers Ltd (WES.AX) 2010 2009 2010 2009 Total Revenue 51,785,000  49,698,000 51,827,000 50,982,000   Cost of Revenue 38,391,000 36,974,000  41,621,000   40,648,000  Gross Profit 13,394,000   12,723,000   10,206,000   10,334,000   Total Operating Expenses 48,703,000   46,882,000 49,121,000   48,036,000 Operating Income or Loss 3,082,000 2,816,000  2,706,000   2,946,000   Earnings Before Interest And Taxes 3,082,000   2,816,000  2,706,000   2,946,000 Interest Expense (239,000) (235,000) (518,000) (758,000) Income Before Tax -   -   - - Income Tax Expense 833,000  766,000   650,000   474,000   Minority Interest (17,000) (24,000) Net Income From Continuing Ops 2,021,000   1,836,000   1,565,000   1,522,000   Net Income 2,021,000   1,836,000   1,565,000   1,522,000 (Woolworths Limited (WOW.AX): Income Statement 1). (Wesfarmers Limited (WES.AX): Income Statement 1). Cash Flow Statement of Woolworth’s Limited (WOW.AX) and Wes farmers Ltd (WES.AX): Woolworth’s Limited (WOW.AX) Wes farmers Ltd (WES.AX) 2010 2009 2010 2009 Net Income 2,021,000 1,836,000   1,565,000   1,522,000  Operating Activities Depreciation 798,000   729,000  917,000   856,000 Adjustments To Net Income - - -   -   Changes In Accounts Receivables (86,000) (15,000) (225,000) 73,000   Changes In Liabilities -   -   -   -   Changes In Inventories (94,000) (273,000) 2,000  (49,000) Changes In Other Operating Activities 66,000  160,000  122,000   186,000   Total Cash Flow From Operating Activities 2,760,000 2,604,000   3,327,000   3,044,000   Investing Activities Capital Expenditures (1,818,000) (1,678,000) (1,656,000) (1,503,000) Investments -   -   - - Other Cash flows from Investing Activities -   -   - - Total Cash Flows From Investing Activities (1,960,000) (1,806,000) (1,696,000) (1,627,000) Financing Activities Dividends Paid -   -   Sale Purchase of Stock -   -   Net Borrowings -   -   Other Cash Flows from Financing Activities 15,000  8,000  (58,000) (178,000) Total Cash Flows From Financing Activities (833,000) (809,000) (2,115,000) 69,000  Effect Of Exchange Rate Changes -   3,000   -   -   Change In Cash and Cash Equivalents (33,000) (8,000) (484,000) 1,486,000   (Woolworths Limited (WOW.AX) 1). (Cash Flow 1). Financial analysis of Woolworth’s Limited (WOW.AX) and Wes farmers Ltd (WES.AX): This part of the paper deals with financial analysis. Here, it chiefly discusses about the current financial conditions of Woolworth Limited (WOW.AX) and Wesfarmers Ltd (WES.AX). With the help of ratio analysis, the major financial outcome in both the firms is shown, which occurs due to the current financial policies. Ratios can be expressed mainly in three ways as the quotient of one is not separated by the other. So time, percentage and proportion are the three factors that express ratio. These ratio analyses include profitability, liquidity, asset management and financial leverage. (Provide total calculations for all ratios): 1. Profitability Ratio: Profitability ratios measure the ability of the firm to create a sufficient return on sales, total assets and capital invested. Profitability ratios are normally designed either as related to sales or investment. This ratio concentrates on the following: Return On Capital Employed (ROCE): ROCE is one of the significant profitability ratios that can be used to evaluate corporate profitability. This ratio states the relationship between net profit made throughout a period and the average long-term capital invested in the business during that period. It is computed as follows: Return on capital employed = Earnings before interest and tax / Total capital employed. Gross Profit Ratio: Gross profit shows the connection between gross profit and net sales. It is generally expressed as percentage. Gross profit is calculated before tax and further indirect costs. It is computed as follows: Gross Profit ratio = (Gross Profit/ Net Sales) ?100. Net Profit Ratio: Net profit ratio demonstrates the relationship between net profit and net sales. It is also known as net profit margin. It is found out using the following equation: Net Profit Ratio = (Net Profit/ Net Sales) ?100. Ratio Woolworth’s Limited (WOW.AX) Wes farmers Ltd (WES.AX) 2010 2009 2010 2009 ROCE 1.82 1.36 0.14 0.15 Gross Profit 25.86 25.60 19.69 20.26 Net Profit Margin (before tax) 3.90 3.69 3.02 2.99 The profitability ratio above shows that Woolworths limited gave a better performance comparatively. Woolworths limited has improved in using their obtainable resources and has made more income in 2010. In 2009, however, Wesfarmers Ltd had a better gross profit ratio. Graphical representation of Profitability Ratio: 2. Liquidity Ratio: Liquidity ratio refers to the firm’s ability to assemble its current liabilities faster than the current assets when they turn into be paid. The following are the ratios used: Current Ratio: Current ratio is defined as the ratio of current assets to current liabilities, which means that current assets must be double than the current liabilities. It is computed as follows: Current Ratio = Current Assets/ Current Liabilities. Quick Ratio: Quick ratio is also known as acid test ratio or liquidity ratio. It shows the relationship between quick assets and quick liabilities. It is found out in the following way: Quick Ratio = Quick Assets/ Quick Liabilities. Ratio Woolworth’s Limited (WOW.AX) Wes farmers Ltd (WES.AX) 2010 2009 2010 2009 Current ratio 0.727 0.761 1.232 1.315 Quick ratio 0.25 0.25 0.64 0.69 The different liquidity ratios permit us to evaluate both the two companies’ capacity to pay current debts and also their temporary capability to survive as a business. Based on the above outcome, we can show that Wesfarmers Ltd has the benefit in liquidity, though Woolworths Limited did make important strides to progress this feature in their business. Graphical representation of Liquidity Ratio: 3. Asset Management Ratios: Asset Management Ratios try to calculate the firm's achievement in running its assets to generate sales. Inventory Turnover Ratio: Inventory or stock turnover ratio identifies how many periods the average stock stability has been utilized or replaced throughout the period under valuation. This ratio sets up the relationship among costs of goods sold by average stock. It is computed as follows: Inventory Turnover Ratio = Cost of Goods Sold/ Average Stock. Debtors Turnover Ratio: Debtor’s turnover ratio is also called receivable turnover ratio. It shows the relationship between net credit sales and sundry debtors. It is found out as: Debtor’s turnover ratio = Net credit sales/ Debtors including B/R. Fixed Assets Turnover: The fixed assets turnover ratio deals with how efficiently the firm manages its fixed assets to generate sales. Following is its formula: Fixed Assets Turnover = Sales/ Net Fixed Assets. Total Assets Turnover: The total assets turnover ratio identifies how efficiently the firm manages each of its resources to generate sales. Total Assets Turnover = Sales / Total Assets. Woolworth’s Limited (WOW.AX) Wes farmers Ltd (WES.AX) 2010 2009 2010 2009 Inventory turnover ratio 11.16 11.23 8.94 8.71 Debtors turnover ratio 9.96 1.48 2.08 2.13 Fixed Assets Turnover 14.23 13.79 2.98 2.89 Total Assets Turnover 2.80 2.91 1.33 1.32 Day’s receivables 36.66 246.15 175.75 171.23 Day’s inventory 32.7 32.51 40.85 41.89 The asset management ratios specify that both companies have taken steps so as to increase their skills in using the assets of the organization to generate more sales in 2010 as compared to 2009. The table shown above shows that Woolworth Limited company’s has a better turnover of its resources and receivables comparatively, whereas Wesfarmers Ltd does a better work in managing their stock. Graphical representation of Asset Management Ratio: 4. Financial Leverage Ratio: This is one of the important ratios used to evaluate the capital structure of a company. The term capital gearing of leverage refers to the amount of fixed income bearing funds and equity shareholder’s fund. It is also referred to as the debt equity ratio. Following is the computation of this ratio: Financial Leverage Ratio = Total Debt / Shareholders Equity. Woolworth’s Limited (WOW.AX) Wes farmers Ltd (WES.AX) 2010 2009 2010 2009 leverage ratio 0.35 0.44 1.39 0.23 The above result shows that Wesfarmers Ltd has been very aggressive while using borrowed funds in the business for the purchase of company resources. Woolworth Limited has been comparatively more reserved concerning leveraged savings. Graphical representation of Financial Leverage Ratio: f) Recommendations: Both Woolworth and Wesfarmers are making a good profit and are showing a good performance along the past few years, but it has to make improvements in the following areas: Return on Capital Employed (ROCE) of the Wesfarmer in the year 2010 is low as compared to 2009, so the company should pay more attention to get sufficient returns on the invested capital. The gross profit ratio of Wesfarmer has gone down in 2010 comparatively, this shows that the firm should take necessary actions to improve its gross profit ratio. In case of quick ratio, both in 2009 and 2010, the Woolworth Ltd was in a constant stage that makes room for correction. For Wesfarmer, quick ratio fell down in the year 2010 with regard to 2009, therefore, the company should take appropriate steps to improve the quick ratio. Woolworth limited should improve its leverage ratio. Work Cited Westfarmers Ltd (WES.AX): Balance Sheet. Yahoo Finance. 2011. Web. 17 Sep. Wesfarmers Limited (WES.AX): Income Statement. Yahoo Finance. 2011. Web. 17 Sep. 2011. Wesfarmers Ltd (WES.AX): Cash Flow. Yahoo Finance. 2011. Web. 17 Sep. 2011. Woolworths Limited (WOW.AX): Balance Sheet. Yahoo Finance. 2011. Web. 17 Sep. 2011. Woolworths Limited (WOW.AX): Income Statement. Yahoo Finance. 2011. Web. 17 Sep. 2011. Woolworths Limited (WOW.AX): Cash Flow. Yahoo Finance. 2011. Web. 17 Sep. 2011. Read More