International Accounting and Reporting Issues - Essay Example

Identify the main changes from one period to the other using analytical techniques, having calculated the ratios. From the overall apparent analysis the company’s position has deteriorated from last year with a very significant fall seen in the company’s profit, cash flow reserves and balance sheet position. The company’s sales has increased by 19.6% this year despite of the decrease in sales the company has reported a decreased profit of $ 11m only, which has affected all the profitability ratios making the company’s performance really weak this year. The Return on shareholder’s fund (ROSF) of the company has fallen drastically from 33% to 2%, which is alarming as one of the important ratios of profitability has gone down due to decreased profits this year. The Return on capital employed (ROCE) has also fallen from 35% to 5.9% in March 2012 which is also mainly due to deceased profits for the year. Since profitability ratios are all based on profits for the year the underlying problem is the drastic fall in profit as compared to last year which is concerning. The operating profit margin has fallen by 9% from 10.8% to only 1.8% this year. Despite of increase in sales revenue an immense increase was seen in the cost of sales and the operating expenses which both increased by 30% and 43.6% respectively, while the sales is merely increased by 19.6%. Another factor further contributing to the decrease in profit is high interest cost incurred this year which has increased from $ 18m to $ 32m this year making an increase of 77.7%. On the efficiency side the ratios seems pretty constant this year form inventories turnover days remaining at 56.7 days which was 56.6 days last year, the debtors days at 37.2 days which has an decrease of 2 days which was 39.1 days last year. The sales to capital employed ratio have also been increased a little which is 3.36 times this year. Since there was an increase recorded in sales the sales per employee shows an inverse effect which has decreased by 11.1% this year. The liquidity ratios seem decreasing too due to increasing liabilities this year accompanied by decrease in profits and cash flow position. The current ratio of the company decreased by 0.3 times and is at 1.6:1 times which is isolation is a good ratio above 1 but comparatively has fallen from last year. Similarly acid test ratio has also fallen from 0.8:1 times to 0.6:1 times where a slight fall was seen. However the cash from obligation has fallen from 0.9 times to 0.1 times, which can be quite alarming for the company, the reason causing such a change is the decreasing cash flow and increasing liabilities of the company. The gearing of the company has also increased from last year from 26.2% to 36% this year. On the other hand the interest cover ratio of the company has drastically fallen due to increased interest payment and decreasing profit this year which has fallen from 13.5 times to only 1.5 times this year. The investment ratios however seemed to increase for the period and weren’t as bad as other ratios. The dividend paid for the period was constant from last year at $ 40m despite of low profits this year. This situation made the dividend payout ratio increase from 24.2% to 363.3% and the dividend yield ratio was increased from 3% to 4.9%. The EPS of the company also decreased drastically because of low reported profits this year from 27.5c from last year to 1.8c this year. The price earning ratio of the company has dramatically increased from 9.1 times to 83.3 times. 2. Give possible reasons for variances, making whatever assumptions you feel may be appropriate, whilst stating the assumptions made. The ratios analysis shows few concerning areas in the company which have occurred this year. The company’s overall performance has deteriorated this year with decreasing ratios mainly seen in the profitability and liquidity areas. Other then that too the company has shown a low performance. The first and the foremost is the profitability of the company, the company’s profit has decreased from $ 165m to only $ 11m this year. However the sales for the year were increased by 19.6% this year, this falling profit of the company could be alarming. With further detailed analysis we can see that the company’s cost of sales has increased by 30% which is not in line with the increasing revenues. This means the company is lacking on the control of its cost of sales and expenses incurred which have adversely affected the gross profit of the company. An important point to make here is that due to recent investment made in the fixed assets it could be argued that company’s depreciation charge increased by 29% and other expenses could be related to the operation and installation of new assets as well. Further breakup of the cost of sales would make it easier to analyze and identify the areas where costs need to be controlled. On the other hand, another cost factor further contributing to the further decrease in profit is the operating expenses of the company which have increased by around 43.6%, which is so much questionable when compared to the increase in revenue. This also shows the company has poor operating cost control too which has lead to such drastic fall in profits this year. Another concerning area seen this year that caused the profitability to lower down too is the increase in the interest expense of the company, which has increased from $ 18m to $ 32m. Such high interest cost not only lowers down the profitability of the company but also adversely affects the cash flow position of the company. The reasons for such high interest costs are evident from the fact that the company is using overdraft facility from bank to finance its operation, which is an expensive source to finance due to high interest rates. On the other hand the company has obtained a further $ 100m loan notes on which further interest have to be paid. The company’s cash flow position also seems weak as compared to last year for which many factors are responsible other than the increased interest expenses. The company has invested further $ 110m in its fixed assets, this can be seen as a positive step and can be related to the increase in sales occurred this year. But in the short term it has affected the cash flow position of the company. The investment seems to be funded by the additional loan notes obtained during the period mainly. The working capital management of the company seems problematic this year and all the cash flow issues can be associated with this. The company has stuck its cash in inventories and its trade debtors by giving them excessive sales on credit. This has caused the company to face the shortfall of cash which they then fulfill from the overdraft facility from the bank on which additional high interest costs are to borne. Additionally with such liquidity position this year the company has continued to pay a dividend of $ 40m to the shareholders which have further made the cash flow position problematic. 3. Define your objectives for the next 12 months to improve the company’s position in those areas that have been looked at. The company has a few areas of concern, which if not tackled properly can convert into real problems for the company in the long run. The first and foremost problem seems to be the lack of control over costs incurred by the company. The managers need to analyze their cost incurring activities and proper steps need to be taken regarding the control of costs of sales and the operating expenses which increased drastically this year. The company needs to set targets for the cost minimization and avoid all the unnecessary costs possible. Cost incurring activities should be monitored, analyzed and budgets should be set for the cost centers to restore the profitability of the company. The second area of concern is the cash flow issues of the company which need to be addressed. The most evident problem for the company is the interest costs that company has to pay which includes cost on bank overdraft facility and loan notes. The loan notes have been obtained to finance the investment made in the company, which relatively doesn’t have very high interest rate of 9%. The major issue to solve is the bank overdraft facility which must bear high interest rate along with being payable on demand. In next 12 months, the company needs to improve its working capital issues so that they stop relying on the overdraft facility. For this the company needs to invest less in its inventory, for the purpose the company can use management approaches like just-in-time which will not only save cash from being stuck but also will save many costs associated with inventory holding and handling. The company also needs to recover its trade debtor’s days and put measures in place for early recovery of cash from credit sales. Further, to improve the cash flow position of the company, the board can stop or reduce the payment of dividends to the shareholders. The amount of $ 40m could improve the position of the company to a great extent. 4. The Management Board requires: a. Forecast/Budget for the next 12 months which you need to prepare. b. A defined monitoring system to be designed and used for reporting. This should focus on financial and activity based KPI’s. Budgeting is a control process where costs are planned, targeted and monitored in order to achieve the required results. As seen from the financial analysis undertaken, it becomes obvious that cost is one of the biggest problems in the company. Therefore the company needs to analyze and set targets for its managers to meet its cost targets so that required profitability could be achieved. The company can adopt one of various types of budgeting like zero based, activity based, and flexible budgets etc. which ever suits the needs of the company and the manager’s needs. Activity based budgeting can be a good option which will analyze the activities and the cost incurred for those activities, this budgeting process along with the activity based costing if implemented in the company can identify the reasons of costs and then steps to be taken for cost cutting. The company can decrease its cost of sales and operating expenses by setting the required cost targets for next 12 months i.e. the variable costs for e.g. salaries, utilities, transportation etc. which should be achieved by the managers and their rewards should be based on the achievement of those targets. In this ways the entire company will collectively work to achieve the profitability of the company. The budgetary process will also help the company to identify the areas where costs could be saved and will improve the efficiency of the company. (Shim, Siegel and Shim. 2012) For the implementation of a successful strategy it is absolutely essential that it should be measured, monitored and controlled. One the company discloses its objectives the critical success factors (CSFs) and the key performance indicators (KPIs) should be established. The CSFs are the factors that are necessary for the company, these include factors that will cause the company to succeed over it competitors. While KPIs are the measures to ensure the CSFs are achieved or not. In the company like Thonier Enterprises, the qualitative critical success factors would mainly base on its quality of food provided at reasonable prices to its customers and the speed of delivery. To measure the two crucial CSFs of Thonier Limited there are many KPIs available. The quality of food provided at reasonable prices to its customers can be measured by the number of complaints from the customers, the comparison of prices with the price list of competitors, market share of the company, number of orders fulfilled, number of orders returned etc. The speed of delivery could be measured by number of late orders delivered, customer’s complaints, late payments by the customers, revenue lost due to late deliveries and penalties related to late deliveries etc. Once these KPIs are established, these should be measured and reviewed on the regular bases in lines with the budgets set for the managers. Any deviation and variances should be questioned and corrective actions should be taken in order to solve the problem. Along with these factors the financial stability is essential for the company which could be measured in terms of ratios analyzed above in the paper. Some of the specifically associated KPIs to the mentioned CSFs can include sales revenue from the customers, cost incurred to deliver goods to the customer etc. (O'Connor. 2010; Havaldar and Cavale. 2007) 5. As potential investors a. What information would you wish to have now and what would you wish to receive on an on going basis. b. Would you invest? The investors are the most important source of finance for the company. It is very important for the investors to make sound decisions regarding their investments for which they need relevant information to base their judgment on. Mostly the investors are interested in evaluating the company’s potential to generate returns and the risks involved for the generation of these returns. A sound investor will carefully analyze the situation and then take investing decisions. For investing in Thonier Limited the investor would need information regarding the resources of the company, the obligations that the company currently has against these resources, the company’s ability to generate cash in the long term, company’s ability to convert resources into cash etc. This information could mainly be driven from the financial statements published yearly, which if would be analyzed would give a fair picture about company’s current position. However, a short tem investor would focus on the value of shares of the company in the market and the dividend paid on these shares as he usually has no intention to hold his investment for long term and want to gain from the investment as early as possible. (United Nations. 2007) Seeing the position of Thonier Limited, the investors would be mainly interested in the information about the evident problems faced by the companies, that is the decreasing profitability of the company and the cash flow problems. The information for current scenario can be obtained from the financial statements. However, the investors would be interested in receiving information about the status of overdraft facility, the interest paid by the company, the steps taken to control cost and the cash flow of the company which could be obtained from interim financial statements which would be published in the future. Investment in Thonier Limited can be very beneficial for the short term investors who are interested in the payment of dividends. The company pays dividends of $ 40m every year and has high dividend pay out ratios which could be an attraction for the investors. However, the long term investors could be a little reluctant to invest in the company because of the liquidity issues of the company faced right now. There is a question about the company’s ability to generate resources and pay off its obligation. The company has recently invested in its fixed assets which could provide the economic benefits in the future and the company might be able to pay off its debts and restore its profitability. Investing in Thonier could be a risky investment. 6. Within your planning you may invest in additional assets, how would you evaluate these decisions? Evaluating investment decisions is a technical task usually performed by financial managers. Any capital investment needs to be carefully evaluated in terms of current outflow related to this investment and future economic benefits this investment can provide to the company. The financial managers are required to assess the size, the timings and the risks associated with the future cash inflows that the investment could bring to the company. These should be positive and should be in line with the company’s shareholder’s aims to increase their wealth. At many instances, the company has more than one option to invest the cash resources; in this case the option which provides the highest net future cash inflows and will be able to earn the company an acceptable rate of return on its invested capital is selected. Further consideration needs to be given to the use of current assets of the company assets like the new assets should be replaced with the old assets or should be installed separately to expand the lines of production or to invest in new assets and to invest in new lines of business. These decisions are usually governed by the long term strategies adopted by the company. (Melicher and Norton. 2008) Works Cited Shim, Jae K, Joel G. Siegel, and Allison I. Shim. Budgeting Basics and Beyond. Hoboken, N.J: Wiley, 2012. Print. O'Connor, Thomas. Strategic Planning for Distributors: Execution Isn't Everything - It's the Only Thing!Washington, D.C: NAW Institute for Distribution Excellence, 2010. Print. Havaldar, Krishna K, and Vasant M. Cavale. Sales and Distribution Management: Text and Cases. New Delhi: Tata McGraw-Hill, 2007. Print. International Accounting and Reporting Issues: 2006 Review. New York: United Nations, 2007. Internet resource. Melicher, Ronald W, and Edgar Norton. Introduction to Finance: Markets, Investments, and Financial Management. Hoboken, NJ: John Wiley, 2008. Print. Read More