Report on the Financial State of Affairs of Central Pool and Taff View Pool - Assignment Example

Attention: Mr. Simon Bowen Managing Director FAIRWATER LEISURE (SOUTH WALES) LIMITED Report on the financial of affairs of: Central Pool, Cardiff and Taff View Pool, Pontypridd Dear Mr. Bowen I have made a study into the financial affairs of both Central Pool and Taff View Pool on the basis of the financial information for the year ended 30th April 2006 provided by the Leisure Service accountant. He also made me available some additional information concerning the working of these units. You had asked me to make a presentation on the profitability of both the units for the same period and asked me to provide you additional information on the units covering the improvement of the financial performance. I append below my item-wise report for your information. We can review this report together once you have gone through the basics. We can take up from there for the implementation of any suitable plan of action for the overall financial improvement of the units concerned. With Warm Regards Shane Jones Dated: 28th January 2007 Question 1 Profit and Loss Account for the year ended 30th April 2006 Taff View Pool, Pontypridd Particulars Amount Amount Income 1,570,000 Expenses: Employee Costs 840,000 Equipment & Materials (including Depreciation) 420,950 Heat & Light 93,000 Catering Provisions 162,000 1,515,950 Net Profit/(Loss) before Interest & Tax 54,050 Balance Sheet as at 30th April 2006 Taff View Pool, Pontypridd Amount Amount Land & Buildings 836,550 Machinery(Dep.Adjusted) 297,000 1,133,550 Current Assets Stock 17,000 Debtors 3,000 Cash 19,000 Employee Cost Payable 3,000 42,000 Current Liabilities Trade Creditors 56,000 56,000 Net Current Assets (14,000) Total Assets less Current Liabilities 1,119,550 Long Term Liabilities 120,000 Net Assets 999,550 Financed by:- Capital Account 895,000 Reserves 20,500 Profit & Loss 84.,050 999,550 Note: Overtime Payment due of 3000 shown as outstanding expenses in current assets and included in current liabilities. ________________________________________________________________________ Question 2 (a) Key ratios Central Poll, Cardiff Taff View Poll, Pontypridd Field park (competitor) Operating Profit/Operating Assets 1.55% 4.60% 21.00% Operating Profit/Sales 1.41% 3.44% 7.60% Sales/Operating Assets 1.10 1.34 2.80 909.09 746.30 357.14 Expenses/Sales 98.59% 96.56% 92.40% Sales/Fixed Assets 1.14 1.39 3.05 877.20 719.40 326.80 Sales/Current Assets 31.40 37.38 33.00 31.80 26.80 30.30 Sales/Stock 46.55 92.35 206.00 21.50 10.80 4.90 Sales/Debtors 675.00 523.33 118.00 1.50 1.90 8.50 Current Ratio 0.914 0.75 1.40 Question 2 (b) Analysis of the Key Ratios: The study of the key financial indicators of both the pools as compared to those of the Field Park reveals the following analysis: The important factor for consideration both in the case of Central Pool as well as Taff View is that there seems to be an immediate need for the sales to be enhanced since there is gross underutilisation of the operating assets. This is evidenced by the Ratios of Operating Profit to Operating assets and the Sales to Operating assets. As against the ratio of operating assets to operating profit of 21% in the case of Field Park it is 1.55% and 4.60% for Central Pool and Taff View respectively. These ratios are very low. Similarly the ratio of sales to operating assets is only 1.10% for Central Pool and 1.34% for Taff View, whereas the same ratio for Field Park is 2.80%. Comparatively the ratios for Central Pool and Taff View are poor. Similarly the profitability of both Taff View and Central Pool is well below the comparative profitability of the Field Park. This is quite obviously exhibited by the operating profit to sales ratio of both facilities. The operating profit to sales ratios stand at 1.41% for Central Pool and 3.44% for Taff View. These are very low as compared to the ratio of 7.60% for Field Park signifying the profitability of both the facilities is not up to the mark. An analysis of the total expenses as a ratio of sales shows 98.59% for Central Pool and 96.56% for Taff View which is high as compared to the competitor Field Park whose ratio is only 92.4%. This is the reason that both the units are unable to show any improvement in working in terms of profitability. Thus comparison of the ratios of operating profit to sales and expenses to sales with those of the competitor, Field Park, reveals that the working of both the units is quite unsatisfactory in terms of profitability and this necessitates a closer control on the spending of the units by fixing proper sales and expense budgets for them. The ratio of sales to fixed assets of Field Park is high at 3.05 whereas, it is only 1.14 and 1.39 respectively for Central Pool and Taff View respectively. This indicates that the assets of the company are not being properly utilised. This also presupposes the fact that there is a great potential for the units to augment their revenues by increase of sales through proper advertisements and campaigns as may be necessary. The sales to current assets ratios seem to be somewhat comparable with that of Filed Park. The ratio stands at 31.40 and 37.38 for Central Pool and Taff View while it is 33.00 for Field Park. Similarly As regards the current assets as a whole and with respect to stock and debtors both the units are comfortably placed as there appears to be no accumulation of unnecessary stocks and the debtors being less are assumed to be current. The ratios of sales to stock of 46.55 for Central Pool and 92.35 for Taff View are better placed as against that of206.00 for Field Park. The other ratio of sales to debtors at 675.00 for Central Pool and 523.33 for Taff View are considered good as against the ratio of 118.00 for Field Park. On this aspect the units do not pose a major concern even when compared to the ratios of the Field Park. The current ratio of above 1.40 for Field Park is considered good whereas it is only 0.914 for Central Pool and 0.75 for Taff View which signifies that the current liability is high with large creditors to be settled. Efforts should be taken to bring down the creditors by paying them off since all the sales are being done in cash unless the unit heads have some reason to keep the creditors at that level. The ratio for both the units needs to be improved by working on the creditors as the ratio for Field Park appears to be healthy. _____________________________________________________________________ Question 3 Profitability of the Pool and the Canteen of the Taff View Centre: For comparing the profitability of the canteen and the pool run by the Taff View Centre, I have allocated the income and expenses to both these divisions on the basis of the information provided by the Leisure Accountant. The presentation is as below: Particulars Pool Canteen Total Revenue: Income 1,003,690 561,110 1,564,800 Children's parties 2,600 2,600 5,200 Total Income 1,006,290 563,710 1,570,000 Expenses Employee Costs 417,110 294,890 712,000 Cleaners and Maintenance costs 20% apportioned to Canteen 102,400 25,600 128,000 Swimming pool chemicals 111,000 111,000 Canteen provisions 162,000 162,000 Sundry Small Equipments and cleaning materials 20% apportioned to canteen 147,200 36,800 184,000 Depreciation 20% apportioned to canteen 100,760 25,190 125,950 Electricity 20% of 48,000-12,500 apportioned to canteen 40,900 7,100 48,000 Gas 45000-20% for pool-12% canteen and in the balance 20% to canteen 33,480 11,520 45,000 Total Expenses 952,850 563,100 1515,950 % to Total Income 94.69% 99.90% 96.56% Net Income 53,440 610 54,050 % to Total Income 5.31% 0.010 3.44% From the above analysis of relative profitability of the Pool and the Restaurant, in addition to the overall poor performance, you may observe where the weakness is. Therefore it is quite imperative that the restaurant sales need to be improved forth with along with a stringent control on the spending of the Restaurant. A better option would be to consider the promotion of a campaign for more children parties, since such parties are becoming increasingly popular. Let us have a look at the present cost figures for the Children's parties: Charges per Party: 50.00 Cost of Food 10 max x 2.50 25.00 Wages to Lifeguards 4 x 4.75/hr 19.00 Wages to Catering Assistants 2 x 4.75/hr 9.50 Total Cost 53.50 You may observe that, the company is making a loss on this, otherwise interesting proposal to make money. You may also note I haven't included other fixed costs into the above calculation. Let us revise the calculation as below and rework the price to be charged to the children's parties. Cost as Calculated above 53.50 Add: Overhead Charges at 5% 2.675 Total Cost 56.175 Add: Margin at 7.50% 4.213 Price to be charged 60.388 Round it off to: 60 Being a Children affair it is worth considering enhance the price as people may not mind a small increase in the charges. With suitable advertisement to back up, this idea should be a winning proposal. Another area which can bring additional revenue is the revision of the Pool charges. The current admission charges of 2 per adult and 0.50 per child is being followed from 2004/05 without revision. It would be a great idea to revise these charges as: 3.00 per Adult and 1.00 per child per hour with immediate effect. There need not be any changes with the policy of not charging the spectators. To sum up: the following proposals may be considered for improving the overall profitability of the Taff View services. Revise the children party charges to 60 Revise the pool admission charges to 3.00 per adult and 1.00 per child per hour with immediate effect. Make a promotional campaign for the children parties Work out a Sales and Expenses Budget for the Taff View as well as for Central Pools fixing the responsibility for following the budgets on the individual unit heads making them as profit centre heads. Another idea would be to link up the incentives of the Unit heads with the profitability of the divisions concerned. _______________________________________________________________________ Question 4 Sources of External Finances: In general the companies resort to the following means of external financing for implementation of large projects involving huge capital outlay. Public Offering of Securities: One of the ways in which the limited companies raise additional funds for financing their projects is through the issue of new securities to the public by enlarging the capital base of the company. "The securities are offered to the public through investment banking firms. The investment banking firm acts as middleman in the distribution of new securities to the public. Its principal function is to buy the securities from the company and then resell them to investors. For this service, investment bankers receive the differences or 'spread' between the price they pay for the security and the price at which the securities are resold to the public. Investment banking firms have the expertise, the contacts, and the sales organization necessary to do an efficient job of marketing securities to investors" (James C. Van Horne 2004). There are two means by which companies offer securities to the public; a traditional underwriting and a shelf registration. In recent years, the shelf registration has come to dominate at least with respect to larger corporations. Advantages: The company can be sure of getting the required additional finance for the project as the investment banking firm would make a commitment on the sale of the securities underwritten by it. As dividend is to be paid only when the company is making profits there is no commitment on the company for the repayment of the additional finance raised by it. Disadvantages: The cost of raising capital through public offering of securities is high as it involves payment of hefty commissions to the investment banking firms apart from other associated costs. The procedures involved are very complicated especially with respect to the regulations prescribed by the Securities Exchange Control. Long term Debt: The second and more popular methods by which the companies raise long term funs for financing projects, is the long term debt. "The debt may take the form of notes or debentures or bonds. A debenture is an unsecured corporate debt whereas a bond is secured by the mortgage on the corporate property. However, in common usage the word bond is used indiscriminately and often refers to both secured and unsecured debt. Long term debt is a promise by the borrowing firm to repay the principal amount by a certain date called the 'maturity date'. Long term debt always has a par value equal to the face value and debt price is often expressed as percentage of the par value". (Ross, Westerfield, Jaffe 2004) The borrower using long term debt generally pays interest at a rate expressed as a fraction of par value. The interest payment schedules are in the form of coupons that are detached from the debt certificates and sent to the company for payment. Advantages: Since the interest payments on long term debts are deductible from the profits of the Company for income tax purposes, this means of financing carries a distinct advantage. As the maturity date is fixed the company can plan their cash outlays and financial planning well in advance. Cost of financing is less Disadvantages: The company carries the risk of interest rate fluctuations which is a high risk of capital financing through long term debts. In the case of secured debts, the companies properties stand earmarked against the guarantees for the long term creditors and hence the company can not use them for facilitating short term financing in case if there is an emergent situation. Since repayment and interest payment commitments are fixed the company sometimes find it hard to keep the commitment up at times of cash crunch for whatsoever reasons. Bank Borrowings: "A bank or insurance company term loan is a business loan with a final maturity of more than one year repayable according to a specified schedule. Banks tend to make term loans in the 3-5 year maturity area, whereas insurance companies are willing to make longer loans. For the most part, term loans are repayable in periodic installments - quarterly, semi annually or yearly. The payment schedule of the loan usually geared to the borrower's cash flow ability to service the debt. Typically this schedule calls for equal periodic installments, but it may specify irregular amounts or repayment in a lump sum at final maturity". (James C. Van Horne 2004). Sometimes amortized in equal periodic installments except for the final payment known as 'balloon' payment, which is larger than any of others. The interest rate on a term loan can be set in one of two ways; a) a fixed rate over the life of the loan or b) A floating rate, to be adjusted in keeping with changes in prime rate, in the London Inter bank Offer Rate (LIBOR) or in some cost of funds index. Advantages: The main advantage is flexibility. The borrower deals directly with the bank or insurance company, and the loan can be tailored to the borrower's needs through direct negotiation. Chances of renegotiating the terms and conditions depending on the changes in the circumstances is possible. Disadvantages: Usually the interest cost is higher than that could be obtained with a public issue. The application and processing is complex and time consuming. ________________________________________________________________________ Question 5 Budgetary Planning and Control: "A budget is a quantitative expression of a proposed plan of action by management for a future time period and is an aid to the coordination and implementation of the plan. Budgets are not only essential to planning but are also an integral part of control. A budget can cover both financial and non-financial aspects of these plans and acts as a blueprint for the organizations to follow in the upcoming period". (Horngren, Foster, Datar 2002) Budgets covering financial aspects quantify management's expectations regarding future income, cash-flows and financial position. Underlying these financial budgets can be non-financial budgets for say units manufactured or sold, head count, and number of new products being introduced in the market. "Budgetary control is: A control technique whereby actual results are compared with budgets Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets." (Chapter 4 - Budgetary control) Aim of Budgets: TO PLAN: Budgets aid the planning process of a business. MONITOR: Budgets allow managers to look at how their departments are performing in real life against planned activities. CONTROL: By having budgets and monitoring performance, managers can exercise control by ensuring departments are bought back under control. By ensuring departments operate in an efficient manner the business should be able to reward individual departments which outperform targets. Budgets are also good way of monitoring managerial performance in relation to achieving targets.(Article on Budgets) "Essential Features of a Budget: A budget lays down policies/targets which must be met, within a given time frame Budgets are based on both projected financial costs and revenues. Budgets are set at an agreed level between departmental managers and their peers for agreed performance targets. Generally sales teams will try to maximise sales revenue, while operational departments will aim to reduce expenditure as much as possible." (Article on Budgets) Well managed organizations usually have the following budgeting cycle: Planning the performance of the organization as a whole as well as of its sub units. The entire management team agrees to what is expected. Providing a frame of reference, a set of specific expectations against which actual results can be compared. Investigating variations from plans. If necessary corrective action follows investigation. Planning again in the wake of the feedback and changing conditions. Budgets typically have a set time period. The most frequently used budget period is one year. The annual budget is subdivided by months for the first quarter and by quarters for the remainder of the year. The budgeted data for a year are frequently revised as the year unfolds. "The effectiveness of budgets depends to a great extent on their relevance to the management processes of the organisation. Adequate steps are to be taken to ensure that: Budget data is compatible with the accounting system of the organisation, and uses common definitions. Budget documents are compiled in a manner that facilitates comparisons with the organisation's financial statements and other financial planning and performance reports. There is compliance with internal and external regulations and limitations. Budgets are produced in a timely manner that allows for their proper scrutiny by those responsible for taking decisions. Budgets are issued in time to monitor the whole period of performance to which they refer" (Article Budgetary Planning and Control). Benefits accruing out of budgetary control and planning: When administered wisely, budgets: Compel planning including the implementation of plans Provide performance criteria Promote coordination and communication within the organization. Clearly defines areas of responsibility Enable remedial action to be taken as variance emerges Motivate employees by participating in the setting of budgets Improve the allocation of resources Economise management time by using the management by exception principle Budgeting is most useful when does as an integral part of an organsiation's strategy analysis. Strategy describes how an organization matches its own capabilities with the opportunities in the market place to accomplish its overall objectives. Once plans are in place, budgets are extremely effective as performance measures. Budgeted performance measures can overcome the limitations of using the past performance as a basis for judging the actual results. The use of past performance to measure the actual may suffer from the limitation that the past results incorporate past miscues and substandard performance. Budgets help mangers administer their functions within the defined boundaries. Well defined budgets call for an efficient discharge of their responsibilities by the different functional executives. Coordination is the meshing and balancing of all factors of production or service and of all the departments and business functions so that the company can meet its objectives. Communication is getting those objectives understood and accepted by all the employees in the various departments and functions. Budgeting once exercised carefully and intelligently by the management will take care of both coordination and communication effectively. ________________________________________________________________________ CONCLUSION: A review of the financial statements as on 30th April 2006 and analysis of the key financial ratios, calculated on the basis of such financial statements, it may be concluded that, although there is ample scope to improve the profitability of the workings of both Central Pool and Taff View facilities, with lot of inputs in the form of sales promotion and tighter control on the expenses, the company should be able to maximise the profitability of both the units. A comparison of the financial ratios of the units with those of the competitor Field Park reveals that the facilities and assets of both the units are not being utilised to the fullest extent. Moreover, there is ample scope for augmenting the revenues from children parties. On the basis of the cost calculations indicated in the report these parties are currently resulting in losses. Similarly the restaurant in the Taff View facility is also not contributing much to the profits of the company. Although the stock and debtors position is under control, the current liabilities in the form of creditors need to be brought under control. In order to improve the profitability of the units, the following recommendations may be implemented: Recommendations: The implementation of the following measures would result in the improved working of the units and thereby contribute to the profits of the company: Revise the pool charges from the existing rates of 2.00 per adult and 0.50 per child to 3.00 per adult and 1.00 per child with immediate effect. Revise the children party charges to 60 per party and make an aggressive sales campaign for the promotion of the children parties. Introduce the budgetary control system to effectively control the expenses at the pools and in particular in the restaurant attached to the Taff View Pool. Draw up a sales budget for the units and make the in charge of the units responsible for achieving the desired sales targets. Consider the possibility of linking the incentives to the unit heads with the profitability targets. Have a review of the creditors list to analyse the reasons for the outstanding and try to reduce the creditors. Reference List: 1. Article on Budgets Accounting Strategies [Online] Available from: http://www.ecommerce-now.com/images/ecommerce-now/budgets.htm Accessed on 04th February 2007 2. Charles T. Horngren, George Foster, Srikant M. Datar (2002) Cost Accounting A Managerial Emphasis Edition X Prentice Hall of India Private Limited 3. Chapter 4 - Budgetary control FAO Corporate Documentary Repository [Online] Available from: http://www.fao.org/docrep/W4343E/w4343e05.htm Accessed on 04th February 2007 4. James C. Van Horne (2004) Financial Management Policy Edition XII Prentice Hall of India Private Limited 5. Stephen A. Ross, Randolph W.Westerfield, Jeffrey Jaffe (2004) Corporate Finance Edition VII Prentice Hall of India Private Limited Read More