A business conferences in North Wales - Assignment Example

?Introduction Business Conference PLC is a company which conducts business conferences for the companies such that different delegates, attendees andother guests and speaker participate in those conferences. This report basically analyses a business conferences which is going to be held in North Wales and many delegates are intended to participate in that conference. The report regarding this particular business conference is structured in such a manner that it highlights the short term and long term goals of Business Conference PLC in the beginning of the report followed by viability of the conference. The next section of the report analyses the cost behavior especially pertaining to this particular conference followed by a comprehensive breakeven analysis. The discrimination between relevant and irrelevant costs has also been made in the analysis. Appendix containing each component of the cost concludes this report. Long – term and Short – term Goals The short – term goal of Business Conference PLC under the current situation can be to successfully conduct the upcoming business conference. This short term goal can be achieved by the company by taking into account the overall cost and benefit analysis of the conference. If the benefits earned from the conference are higher than the costs incurred in conducting this conference, it leads towards the achievement of short-term goal. There are different points in time where the company can foresee whether the conference can be successful or not. For instance, at the time of initial planning the company can make best judgments whether the estimates are good enough for the successful organization of the conference. At the time of booking, the company can realize the success of the conference by considering the interest of the delegates. Under economic terms, the most relevant cost for short term decision making is the variable cost. There might be different long –term goals of the company including the expansion of the business in different geographical boundaries, growth in revenues etc. These goals can be achieve by conducting long – term strategic planning regarding the achievability of those goals. Every cost matters a lot when long – term time horizon is kept into consideration. Therefore, the company needs to evaluate it financial, human and technological resources in the long – term as part of its strategic planning. Viability of the Conference If the overall cost and revenue analysis of this particular conference is taken into consideration, it can be seen that Business Conference PLC will reap too much benefits from conducting this particular conference. The overall cost estimates of the company relating to this particular project are quite low and the determined price to be charged from the delegates is quite high. Under the existing situation, if the company expects around 200 delegates to attend the conference at ?750 per delegate fees, the company can successfully generate total revenue of ?150,000. However, if the costs are analyzed, it can be observed that variable cost pertaining to 200 delegates is just ?108, thus earning a huge contribution of around ?642 which is more than enough to cover the fixed costs of the company which are around ?20,970. Hence at the existing level of operations, this particular conference is highly viable for the company to conduct and the company can reap a benefit of around ?107,430. If the viability of the conference is considered with respect to other determinants in respect of breakeven level, profitability if the delegates are reduced or the price per delegate is reduced, the company is still in a good position to conduct this conference such that the company would be in no profit no loss situation if only 33 delegates attend the conference. If the number of delegates is reduced by 50% i.e. only 100 delegates attend this conference, even then the company can earn ?43,230. On the other hand, if the price per delegate is reduced by 50% and kept at ?375 per delegate, even then the company is in a sustainable position and can earn a chunk of net profit of around ?32,430. Therefore, by applying all these estimates, the company is strongly suggested to conduct this conference as it would be highly beneficial for them and earn massive revenues to them. The following table highlights the viability of the project in a comprehensive manner such that existing, breakeven, profitability level at different number of delegates and different level of prices are analyzed to check the viability of that particular conference.   Per Unit Current Breakeven Profitability if 100 delegates Profitability if price is reduced by 50% Number of Delegates 200 33 100 200   Revenues 750 150,000 24,498 75,000 75,000 Variable Costs - - Refreshments 20 4,000 653 2,000 4,000 Breakfast 8 1,600 261 800 1,600 Lunch 20 4,000 653 2,000 4,000 Dinner 15 3,000 490 1,500 3,000 Room Rate 30 6,000 980 3,000 6,000 Stationary 15 3,000 490 1,500 3,000 Variable Cost 108 21,600 3,528 10,800 21,600 Contribution 642 128,400 20,970 64,200 53,400 Fixed Costs Speakers Cost 8,170 8,170 8,170 8,170 Marketing Cost 7,800 7,800 7,800 7,800 Administration Cost 5,000 5,000 5,000 5,000 Fixed Costs 20,970 20,970 20,970 20,970 Net Profit 107,430 - 43,230 32,430 Breakeven Analysis The breakeven analysis relating to this particular conference suggest that the company requires only 33 delegates to achieve the breakeven level such that with the addition of every delegate to the conference after 33 delegates, the company will start earning the profits. The overall variable cost of the delegates is just ?108. The total fixed cost of the company is estimated to be ?20,970 which includes costs pertaining to speakers cost, marketing costs and the administration cost. The contribution margin of the company in terms of per unit is ?642 which is around 85.60% of the existing revenues of this conference only. The overall capacity of this conference is 200 delegates. Therefore in case of full capacity of 200 delegates, the company can easily generate a net profit ?107,430. However, if the capacity remains below, then at breakeven quantity of delegates i.e. for 33 delegates only, the company needs to generate sales of at least ?24,498 so that all the costs of the company relating to this conference can be easily recovered. The computation of the breakeven level of quantity and sales is shown below: Breakeven Sales = Fixed Cost = 20970.00 = 24,498     Contribution Percentage   85.60%     Breakeven Units = Fixed Cost = 20970.00 = 33     Contribution per unit   642.00     Identification of Relevant and Irrelevant Cost Relevant costs are the ones that have a substantial impact on viability of the project. These are the costs that are incurred only in the event of the project otherwise these are the costs that the company can avoid under normal situation. Thus we can say that any cost that is a sunk cost or unavoidable or irrecoverable cost is actually an irrelevant cost and that should not be taken into consideration at all which determining the viability of the project. For the purpose of this particular project, it can be observed that most of the costs are relevant including variable costs pertaining to delegates, fixed costs of speaker, marketing expenses and additional administration expenses. These are the costs that the company can avoid if that conference does not take place at all. The only irrelevant cost that is not considered for decision making regarding the viability of the project is the ?5,000 for secure accommodation which is totally irrelevant as it has already been paid and is non-refundable in case if the conference does not take place. This cost is just like a sunk cost and should not be focused for future decision making. Assumptions It is assumed that the conversion rate of GBP/Euro is 0.832 and for GBP/AUD is 0.6695. The fixed costs of speakers, marketing and additional costs are assumed to be relevant costs as these costs can be avoided in case if this conference does not take place. Appendix   Per Delegate Total Revenues Revenues 750 150,000 Costs Number of Delegates and Speakers Delegates 200 UK Speakers 2 EU Speakers 5 Australian Speakers 2   Per Delegate or Speaker Total Cost Delegates Refreshments 20 4,000 Breakfast 8 1,600 Lunch 20 4,000 Dinner 15 3,000 Room Rate 30 6,000 Stationary 15 3,000 Delegates Cost 108 21,600 Speakers Refreshments 20 180 Breakfast 8 72 Lunch 20 180 Dinner 15 135 Room Rate 30 270 Stationary 15 135 Speakers Fees 300 2,700 Travel Expenses - Speakers UK Speakers 100 200 EU Speakers 208 1,040 Australian Speakers 1,674 3,348 Speakers Cost 8,260 Marketing Expenses Advertising Budget 1,500 Thurst 800 5000 Brochures at 50p 2,500 Mailing Cost of Brochures at 60p 3,000 Additional Administration Cost 5,000 Other Expenses 12,800 Total Cost of Conference 42,660 1. Internationalization of Accounting Standards – Advantages and Disadvantages From the past decade, too many efforts have been witnessed towards the internationalization of the accounting standards. Mainly, there are two broader accounting frameworks that are generally used by the companies. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Generally, GAAP is mostly followed in America and the neighbor countries, whereas IFRS is adopted by rest of the countries mostly. Following are the advantages of convergence or internationalization of accounting standards. Advantages It would be easy for the users of financial statements to compare the financial statements of different countries provided they adopt the same accounting standards. In case of different accounting standards, the financial results may not reflect the intended meaning in which users are more interested. More harmonized financial statements can come up due to the convergence of accounting standards. The accounting profession may grow as the accountants and auditors can be employed anywhere in the world as they would be aware of the accounting standards which are followed worldwide. The internationalization of accounting standards may provide a benefit especially to the international companies who can set a uniform accounting standard for all of if its subsidiaries. Disadvantages Following are the disadvantages of internationalization of accounting standards: Due to convergence and internationalization of the accounting standards, local accounting standards and law will not remain effective anymore which may jeopardize the country’s local laws and legislation. The accounting professionals who passed out a decade or more ago and had the expertise of the local accounting standards may have to go through all the new accounting standards. There are possibilities that such professionals may lose their jobs and most recently qualified professionals are promoted. The research and development on crafting local accounting standards may go into vain due to internationalization of the accounting standards. 2. Usefulness of Breakeven Analysis in Decision-making Breakeven analysis provides a useful insight to the organization in its decision making strategies. The breakeven analysis has the quality of predicting the sales at which the company comes into breakeven position such that earning neither profit nor incurring any loss. The marginal costing approach basically leads a firm towards utilization of breakeven analysis. This analysis is also quite useful for the projection of future sales pattern provided that some realistic assumptions are used in the analysis. This analysis also allows the organizations to aim at different level of sales in different situations such as in breakeven position, having some target profit position, position of target profit given some tax implications, etc. Not only the sales (amount) can be projected by the breakeven analysis but also the breakeven units can be found out by this technique. Various levels of sales volumes can be figured out such as at breakeven level, some targeted profit level, some targeted profit percentage level, some target profit level with tax implications, etc. Breakeven analysis works on the basis of marginal costing approaches such that the all the costs need to be divided into two major categories namely as Variable Cost and the Fixed Cost. From existing sales, the variable costs are deducted to arrive at the contribution margin. From the contribution figure, fixed cost is deducted to reach at the net profit level. At breakeven level, there is no profit no loss situation such that the contribution becomes equal to the fixed cost. So if the fixed cost is divided by the contribution percentage, then breakeven sales level (amount) can be computed and if fixed cost is divided by the contribution per unit, then breakeven sales volume (quantity) can be calculated. The following are the basic formulae for the breakeven analysis: Breakeven Sales Level (Amount) = Fixed Cost / Contribution Percentage Breakeven Sales Volume (Quantity) = Fixed Cost / Contribution Per unit 3. Differences Between Financial and Management Accounting There are major differences in the financial and management accounting and these differences are present due to having different purposes for both types of accounting. The following are the differences between financial and management accounting. Financial Accounting mainly deals with the outside stakeholders of the organization such as investors, banks, government, suppliers etc, whereas, Management Accounting is intended to fulfill the requirements of the management and administration of the organization. Financial Accounting works on the basis of historical data that have already been occurred whereas management accounting works on the basis of projected/forecasted data to arrive at the estimated cost such that it is more of a future based approach. There are international accounting standards that have been set out for the Financial Accounting practices mainly in the form of IFRS and GAAP however there is no as such standardization of management accounting practices. For public listed companies, the financial statements based on Financial Accounting, needs to be audited by the independent auditors but in case of management accounting reports, there is no compulsory requirement for the auditing of management accounting reports. Financial Accounting practices require an organization to provide precise financial information of the company. However, for managerial accounting practices, timeliness of the information is more important than the precision of the information. Summarized information is obtained from the Financial Accounting such that overall financial performance and position can be obtained at a single page, whereas management accounting is based on the detailed information with regard to various departments, products, customers and other factors. For Financial Accounting, more focus is kept on the verification and objectivity of the financial data, whereas for management accounting, more emphasis is placed on the relevance of the data so that only relevant items can be considered while meeting the cost objectives of the organization. 4. Difference between the Net Income and Cash flow The discrepancy that arises as why the net income is different from the actual cash flows, have some significant reasons. Since financial statements are generally prepared on accrual basis such that income is reported in the financial statement when it is earned, but not when it is received. On the other hand, expenses are reported in the financial statements when they are incurred, but not when they are paid. Therefore, the net income is the figure that the company has earned, but not the income that has company actually received. Had there been a cash basis system of accounting, there would not have been such discrepancies between the actual cash flows and the net income. The other major contributing factor that causes the differences between the net income and actual cash flow is that of inventory. The amount of closing stock mainly decreases the cost of goods sold of the company which leads towards higher net income. But what actually happens is that by keeping too much inventory, the net income will definitely be increased but the cash flow position of the company will be worsened such that cash of the company would be blocked in those inventories, as a result the company would face a serious shortage of liquidity. It can be summarized that the inventory has the direct relationship with the net income but has an inverse relationship with the cash flows. Other reasons that also contribute in making the differences between net income and cash flow are the bad management of working capital. If more time is allowed to the debtors for the collection of credit sales, this blocks the cash of the company in the hands of the debtors. On the other hand, if creditors are paid their payables too early, then the company loses its cash more quickly too. 5. Ratio Analysis – Advantages and Limitations Ratios analysis is considered as en effective tool in understanding the financial statements especially for the purpose of comparative analysis. The following discussion highlights the advantages of ratio analysis and the shortcomings of it. Advantages Ratio analysis allows analysts to compare the financial information of one company with other company or companies or industry. It also allows for the comparison of company’s own performance in respect of previous years in order to find out the trends and the patterns that the company is following. It provides a brief insight to the users in order to understand and compare the financial information. Summarized and to the point analysis with ease of comparability is also a benefit of ratio analysis. Decision making on the basis of ratios is also quite convenient especially to the investors. Limitations The biggest limitation of the ratio analysis is that it makes every organization comparable to every other organization irrespective of the size, customers, financial position and other factors. Therefore, a relatively small organization seems to be competing with the industry giant courtesy ratio analysis. Therefore, the ratio analysis misleads the users in this way by comparing one organization which is different to the other organization in different aspects. The financial information represented by ratio analysis is based upon the assumptions, estimates and the judgments that have been made as per the accounting standards which may lead towards wrong and incorrect conclusions in the end. Ratios analysis also provides the information on the past data that has already occurred, but the analysts are more interested in finding out the current and the future outlook of the company which ratio analysis cannot provide. Investors do take decisions on the basis of ratio analysis but the rationale suggests that the decisions should be made by projecting the future rather than analyzing the past information as supported by the ratio analysis. References Baker, H. Kent . and Martin, Gerald S., 2011.Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. New York: John Wiley & Sons. Berk, Jonathan B. and DeMarzo. Peter M., 2010. Corporate finance. 2nd ed. New York: Prentice Hall. Bierman, Harold., 2003. The capital structure decision. New York: Springer. Brigham, Eugene F. and Ehrhardt, Michael C., 2008. Financial management: theory and practice. 12th ed. New York: Cengage Learning. Eckbo, Bjorn Espen., 2008. Handbook of corporate finance: empirical corporate finance. Oxford: Elsevier. Jaffe, Jeffrey. and Ross, Randolph Westerfield., 2004. Corporate Finance. New Delhi: Tata McGraw-Hill Education. Khan, M. Y., 2004. Financial Management: Text, Problems And Cases. 2nd ed. New Delhi: Tata McGraw-Hill Education. Shim, Jae K. and Siegel, Joel G., 2008. Financial Management. 3rd ed. Oxford: Barron's Educational Series. Vishwanath, S. R., 2007. Corporate Finance: Theory and Practice. 2nd ed. California: SAGE. Watson, Denzil. and Head, Antony., 2009, Corporate Finance Book and MyFinancelab Xl. 5th ed. New York: Pearson Education, Limited. Read More