How to Use Financial Ratios to Maximize Value of Business - Coursework Example

A.L. Music Ltd Discuss and describe the business a. A.L. Music is registered in Shanghai, China, as Always Longing Industrial Company, Ltd. AL will locate on top of the high-end shopping mall in the city center of Shanghai, China. AL is offering private instructions; master classes, music theory classes, moreover, ensemble experience and provide performance opportunities for our members. AL will offer all classes in bilingual format. AL will also offer services including assassinating members for applying to schools aboard and Visas. AL will be developing branches and sister schools in major cities in China and other countries. Provide outstanding new method of music education for students, excellent instructors and new experience for students. Full services to help students applying schools in any country to study music and students can feel safe being with us. b. We want to be the leader of Chinese music education, and make the revolutionary change. Every employee must be highly educated and/or has an international view of music education. We will arrange visits to US music schools for faculty and staff training later in time. The employees are able to express suggestions for improvements. Each leader will be specialized and expertise on required field of knowledge. Mostly the executive board is responsible for the operation of the corporation; employees’ input is encouraged, could be reported straight to the upper level of operation and is delivered to the executive board. We believe this structure would work better with our company since the amount of our employees is going to be large. Best-experienced instructors graduated from great music schools aboard and are great performers; employees are able to offer bi-lingual classes and western educational style classes. Staffs are able to connect and corporate with famous music schools aboard for summer programs and master classes. Textbooks are originally imported from music schools in western countries. Employees that are teaching in the classes are able to operate high-tech equipment. Employees are supposed to have overseas experience, are fluent in English and Chinese in case of dealings with foreign employees. They also have to have the ability to judge the level of people’s work and class quality. c. Right now we only have 4 employees and 5 members (customers); we had 10 members for our summer master class. We are looking to expand to at least 20 faculty instructors in our first Shanghai’s Center, and around 100 members, for summer master class we will look into 50 members. d. Capital Needs for startup/expansion Description Quantity Unit Price Cost Reception desk 1 $ 5,000 USD 5,000 Sets of office chairs and desks 50 $ 3,000 USD 150,000 Couch 1 $ 10,000 USD 10,000 Classroom desks and chair 50 $ 200 USD 10,000 PA system 10 $ 3,000 USD 30,000 Grand Piano 6 $ 50,000 USD300,000 Guitar Amp 20 $ 5,000 USD 100000 Bass Amp 10 $ 5,000 USD 50,000 Drum Set 6 $ 2,000 USD 12,000 Microphone 20 $ 1,000 USD 20,000 Upright Piano 10 $ 20,000 USD200,000 Chairs 20 $ 200 USD 4,000 Computers system 10 $ 100,000 USD 1,000,000 Total USD 1,891,000 2. Prepare a detailed list of 10 factors you must consider as you establish the business (1) Market demands (2) Executive board members (3) Business scope and target market (4) Capital for start-up (5) Perspective competitors (6) Marketing strategy (7) Education system (8) Human resource (9) Inventory needs (10) Effective company management system 3. AL is primarily for people who want to study music aboard soon or later in life, people who are interested in contemporary music, who want to learn music in a bilingual language environment, or wants to have more experience with a western educational style in music studies. It is also for people who simply want to learn spoken English in a more interesting way. The music education in China is quite traditional and rather out dated. We have a responsibility of leading the educational way to a revolutionary new style that supported with more technology and international. We will be the leader of Chinese music educations and our students will feel they are comfortable when they leave the country to continue their journey somewhere else. Also Chinese schools are usually not the safest places and many things could happen to students, also teachers are not trained with high educational levels that are not something we could change but at least try to lead to a right direction. The quality of each instructor’s class will be controlled strictly. Executive board and the investigation team will rate each instructor’s class after their interview and auction for qualification. After passing the investigation and performance appraisal we will offer the highest pay by hour rate among all schools or training centers in China. (Pay by hour rate is not a usual thing in China). We will also build high-tech security system for students, and make sure the safety of our students so both students and parents can trust us. AL’s headwater is going to locate in Shanghai. We will develop branches in major cities in China, and consider opening branches in other countries in Asia and America. We might have fewer branches in western countries than in Asian countries. The challenges we will face are our teaching style is not something new. We will focus on Asian community in the western countries, and offer new courses such as Chinese language. 4. AL’s ownership will be corporation, because of the initial capital needed for startup is going to be high and the amount of people needed to be employed and managed is large, corporation in this case is the best to give a better protection for share owner’s personal properties. The scope of business is also wide, so corporation is the best form to protect both shareowners and employees. 6. Calculate the ratios for your business and discuss the information derived from each one. The following is AL MUSIC Company’s statement of income as at December 31, 2014. A.L. Music Ltd. Statement of Income January 1, 2014 to December 31, 2014 Income     Gross Sales 346,400    Less allowances and returns 1,000     Net Sales   345,400   Cost of Merchandise    Commodities Inventory, January 1 160,000    Purchases 90,000    Shipment Charges   2,000    Total Goods Handled 252,000      Less Stock, December 31 100,000     Outlay of Products Sold   152,000   Gross Earnings   193,400   Interest Proceeds  500   Total Revenue 193,900   Expenses     Salaries 68,250   Utilities 5,800   Rental fee 23,000   Office Materials 2,250   Assurance 3,900   Advertising 8,650   Telephone 2,700   Travel and Amusement 2,550   Dues & Subscriptions 1,100   Interest Paid 2,140   Repairs & Maintenance 1,250   Taxes & Licenses 11,700   Total Expenses 133,290   Net Income $60,110   a) Net income to net sales Net income to net sales = Net Incomes/Net Sales b) Gross margin % ratio Gross margin % ratio = Gross Profit/ Revenue = 193,400 /345,000 =0.56057971014 = 0.5606 Analysis Gross margin shows the profitability of a business (Bull 87). Since the ratio is quite high (above 0.5), it shows that more amounts are being received per dollar of the total revenue. It is a favorable situation as it indicates that more profit is likely to be earned and this will carter for the costs of non-production. It may also imply that the business is charging a high markup upon the products sold. c) Net income to Assets Net income to Assets ratio = Net Incomes/ Net Assets = 60,110/3,295, 000 =0.0182 Analysis The ratio measures a company’s effectiveness in terms of earning returns from its assets’ investments (Bull 94). It shows how the business is converting the cash spent on acquiring assets into profits or net profits. Since the ratio is quite small (0.0182), it means that the company’s assets are not being utilized properly to yield more net income or profit. There is a growth though in the company’s profits as indicated by the positive ratio. d) Net income to equity ratio Net income to equity = Net Income/ Shareholders’ Equity =60,110/ 1,600,000 = 0.0376 Analysis The return on equity ratio shows the efficiency of a business in terms of using the financial contributions from shareholders in generating profits. It is always a ratio assessed by the investor and lies on the investor’s opinion (Bull 101). Since the ratio is relatively low (0.0376), it shows that AL Music Ltd. is not utilizing the stockholders’ contributions effectively. e) Liabilities to Equity Liabilities to Equity = Total liabilities/ equity = (1, 395, 000 /1, 600, 000) = 0.871875 = 0.8719 Analysis Since the ratio is high (0.8719), it shows that the business is not stable (Bull 89). The creditors will see the business as a risky venture. It is because it shows that the business leverages a high amount of debt and may hence be unable to effect the payments. f) Current Ratio Current Ratio = current assets/ current liabilities = (1, 439, 000/ 1, 695, 000) = 0.848967551 = 0.849 Analysis The current ratio reveals if the current liabilities of a firm can be settled by its current assets. It weighs the current liabilities against current assets (Bull 116). Since the ratio is below one, i.e. 0.849, it shows that the company is facing serious problems of liquidity. It, therefore, means that the business’ total assets are lesser than its total liabilities. g) Break even in dollars Break-even Sales Dollars = Price per Unit × Break-even Sales Units Hypothesizing; p to be the price apiece component sold, x to be the amount of components sold, v to be variable cost per component FC to be total fixed cost of the company. Price per Unit $15 Variable Cost per Unit $7 Total Fixed Cost $9,000 From the Al Music Ltd. Company’s profile, p = $15, v = $7, and FC = $9,000 The breakeven point in sales components will be; = 9,000 ÷ (15 − 7) = 9,000 ÷ 8 = 1,125 units So the break-even Sales in dollars = $15 × 1,125 = $16,875 7. Outline any changes you would make as a result of this analysis From the net income to assets ratio, the company’s effectiveness in earning returns from its assets’ is poor as the ratio is too small (0.0182). The company’s assets must then be managed (utilized) efficiently so that the company can yield more net income or profit. The company’s total assets ought to be increased to alleviate the serious problems of liquidity that it is facing. The company’s return on equity should be improved to promote its efficiency of using the financial contributions from stockholders in generating profits. The financial contributions of the shareholders need to get well spent. The company’s assets should be utilized properly to yield more net income or profit. 8. Write a summary of the project and identify the learning you experienced. The company’s gross margin ratio shows the profitability of a business that more amounts are being received per dollar of the total revenue. It is a favorable situation as it indicates that more profit is likely to be earned and this will carter for the costs of non-production. It also implies that the business is charging a high markup upon the products sold. From the net income to assets ratio figure, it is evident that the company’s assets are not being utilized properly to yield more net income or profit (Bull 123). The ratio is quite small (0.0182) much as there is an upward trend though in the growth of the company’s profits. Since the net income to equity ratio is relatively low (0.0376), it shows that AL Music Ltd. is not utilizing the stockholders contributions efficiently. The liabilities to equity ratio of the company is high (0.8719), showing that the business is not stable. The creditors may perceive the business to be unsteady. It is because it shows that the business leverages a high amount of debt and may hence be unable to effect the payments (Bull 132). The company’s current ratio is below one, i.e. 0.849, meaning that the company is facing serious problems of liquidity. It gives an intuition that the total resources of the firm are lesser than the total liabilities. Work Cited Bull, Richard. "Financial Analysis Ratios: How to use financial ratios to maximize value and success for your business." 84-106. Print. Read More