A Change in the Company's Balance Sheet - Assignment Example

Table of Contents III. Appendices 1 I. Part A 2 A. Executive Summary 2 B. Body 2 i. Changes in the balance sheet 2 ii. Basic findings 3 iii. Ratio analysis 4 II. Part B 6 A. Introduction 6 B. Body 7 i. Reasons for budgeting 7 ii. Benefits of budgeting 8 iii. Problems caused by budgeting 10 C. Conclusion 12 III. Appendices A. Figure 1. Total Assets Trend................................................................................................13 B. Figure 2. Financing Trend...................................................................................................13 C. Table 1. Basic Findings.......................................................................................................14 D. Table 2. Firm Liquidity.......................................................................................................14 E. Table 3. Operating Profitability...........................................................................................15 F. Table 4. Financing Decisions..............................................................................................15 G. Table 5. Return on Shareholder Funds................................................................................15 H. Table 6. Working Capital....................................................................................................15 I. Part A A. Executive Summary Blacks Leisure Group, Plc is a clothing wholesaler and retailer based in the United Kingdom. This report aims to probe the company financial health by looking at its financial statement and conducting ratio analysis in order to see the underlying relationships of the financial statement items. The changes in the balance sheet shows the company's contraction, where the decrease is mainly attributable to the decrease in its key current assets items such as cash, accounts receivable and inventories. This has some implication on the liquidity position of the company. By looking at the company's income statement, the company's losses are rooted from administrative expenses which are higher than the company's gross profits. Other ratios such as return on assets and return on equities show a negative figure which denotes Black Leisure Group's deteriorating profitability. The bad shape of the company's financials, as a result of these analyses, warrants further probing as regards the company's operations and business policies. These not favorable financial figures signify a lot of problems that the company needs to address in order to regain its financial health. B. Body i. Changes in the balance sheet The most notable change in the company's balance sheet is its contraction over one year, as apparent in the huge amount of reduction in its total assets. Looking at the breakdown of the total assets (see Figure 1 in Appendices), the major decrease in total assets is apparent in the large amount of decrease in current assets. Although the company's fixed assets have shrunk as well, key current asset items have faced a significant decrease such as inventories—from , and accounts receivable from 61,717 in 2007 down to 57,133 in 2008; a large decrease in accounts receivable from 8,063 in the previous year down to 4,764 in 2008; and a very huge decrease in cash from 2,892 in 2007 down to 565 in 2008. With these changes in total assets come significant changes in the financing side of the balance sheet. The most significant decrease in the company's financing is apparent in the decrease in the company's shareholder funds, from 91,888 in 2007 down to 52,716 in 2008. Black Leisure Group's long-term liabilities have increased over the year, from 15,983 in the previous year up to 17,623 in the current year. The company's current liabilities have also decreased from 52,716 in 2007 down to 48,863 in 2008. ii. Basic findings For 2008, Black Leisure Group has a turnover of 294,414. For every dollar of sales of the company, it has 0.54 in gross profit (see Table 1 in Appendices). However, as apparent the figures in its financial statement, the operating expenses are higher than gross profit, which gives the company -0.03 in operating profit and -0.02 in net profit for every dollar of sales (Blacks Leisure Group 2008, 32). iii. Ratio analysis Liquidity Black Leisure Group has decreased its net working capital from 2007 to 2008, from 27,921 in 2007 to 23,697 in 2008. This decrease in working capital is attributable to the large decrease in both the current assets and liabilities of the company. The company's current ratio is 1.5 in 2008. This means that for every dollar of the company's current liabilities, the company has 1.5 dollars in current assets (see Table 2 in Appendices). The acid-test ratio of Black Leisure Group is 0.1 in 2008 (see Table 2 in Appendices). This means that the company has 0.1 in cash, accounts receivable and short-term investments to pay for every dollar of liabilities. Black Leisure Group's accounts receivable are collected every 8.0 days, which makes it collects its receivables 45.9 times in a year (see Table 2 in Appendices). The company replenishes its inventories only 2.3 times within the year (see Table 2 in Appendices). Operating profitability The company's average total assets' efficiency is measured by dividing the company's profits from operation by the company's average total assets, which is negative 5% (see Table 3 in Appendices). In relation to sales, the company's operating income margin is negative 3%. The ratio of the company's sales to its average total assets is 1.9. The ratio of the company's sales to its average net fixed assets is 3.7 (see Table 3 in Appendices). Financing decisions In terms of funding, Black Leisure Group utilizes debt for about 40% for its total financing. The company's interest cover or times-interest earned ratio is 2.4 times the company's earnings before interest and taxes (see Table 4 in Appendices). Return on assets and return on shareholder funds The company's return on assets is determined by dividing the company's profit before taxes by the average total assets. Black Leisure Group's ROA is negative 5%, which is higher than the company's ROE which is negative 11% (see Table 5 in Appendices). The company's ROE is much affected because of its use of financial leverage as apparent in its utilization of debt as part of its total financing. A. Conclusion By looking at the changes in the company's balance sheet, the company's contraction in terms of the size of its assets has been apparent over the course of one year. The major decrease in the company's assets is most apparent in the decrease in the company's current assets. Consequent to this decrease, the company's current ratio has become small, leaving very little amount of current assets to match the company's current obligations. The drastic decrease in the company's key current asset items such as cash, accounts receivable and inventories has a huge effect on the company's liquidity position as apparent in its very low acid-test ratio. Apart from the company's deteriorating liquidity position, its profitability is also in bad shape. The company's negative return on assets is lower than the company's return on equity. This is due to the company's financial leverage, as Black Leisure Group utilizes debt for the 40% of its total financing. The analyses show Black Leisure Group's not so favorable financial condition in the year 2008. This deteriorating financial condition as apparent in the analyses signify problems that the company needs to address in order to regain its financial health. II. Part B A. Introduction Budgeting is one traditional process that organizations have used especially as a tool for planning. Because the use of budgets is crucial to an organization's effective use of resources, budgets have emerged over the years from a simple planning tool to becoming one powerful tool in order for businesses to achieve their objectives and compete in the modern marketplace. This paper aims to tackle the reasons and motivation behind budgeting, the benefits of budgeting and problems caused by the budgeting process. B. Body i. Reasons for budgeting Over the course of the years, budgeting has evolved from being a planning tool to becoming a major tool especially for strategy execution (Cokins 2008, 45). The emergence of many different reasons and motivations behind constructing a budget, according to Horngren, Harrison and Bamber includes: “to implement the organization's strategy, and then use these budgets to plan, act, and control business (2002, 925).” Uncertainty in the business environment encourages companies to plan well in order for them to survive and thrive. When a company has determined its corporate objectives based on its mission and vision, crafting a strategy in order to fulfill those objectives follows. After the strategy has been created, it is implemented according to a series of action plans, of which budget is one of the most important. A budget is a form of resource-allocation plan which aims to implement the company's strategy. Another reason why budgeting is crucial is that it serves as a tool for managers to plan, act and control the business. The creation of budget includes the activities that are included in the manager's plan for a given time period. With the budget being the plan, managers can track their subsequent activities based on the budget that they have created. After a given period, managers can then track their progress and compare the results of their actions against their initial plan which is contained in their budget. After assessing their results, they can modify their subsequent plans in order to fulfill certain objectives. Managers use budgeting in order for them to gain direction as regards their future decisions for the company. In line with the uncertainty factor of the business environment, a budget provides a company some degree of preparation for contingency. By trying to anticipate future events that may impact the company's operations, managers can provide some contingency plan in the form of budgets. This way, unforeseen circumstances will not be able to shake the company's financial position in just a short period of time. ii. Benefits of budgeting Orlando further specifically identified the reasons behind budgeting in an article in Strategic Finance. Based on his study, the reasons why budgets are perceived as an important process by many executives is because budgeting is “a cash flow management tool; a forecasting tool; a reporting/disclosure mechanism; a tool for measuring progress; a factor in compensation; and a crystal ball (2009, 49-50).” Because a budget determines the company's sources and uses of cash, budgets are a good cash flow management tool (Orlando 2009). When a company determines its sales forecast, it can determine cost forecasts which are associated to fulfillment of its sales objectives. This makes budgeting a good forecasting tool (Orlando 2009). Budgeting is also a 'reporting or disclosure mechanism' (Orlando 2009). As results are compared against the initially set plans when the budgets are created, the process enables individual divisions to report and disclose their financial results. With this process, companies can assess the different issues that divisions face based on the report that they have given. As results are compared against the original plan, budgeting serves as a tool in order to track the company's progress (Orlando 2009). Companies also use budgeting in order to reward managers who are efficient in their respective divisions (Orlando 2009). As many companies link performance to compensation, budgets are a crucial tool in order to determine who to reward in terms of productivity. Lastly, budgeting is said to be a 'crystal ball' (Orlando 2009). Budgeting techniques such as the use of flexible budgets alongside master budgets enable companies to probe for inefficiencies which are apparent in discrepancies when budgets are compared. Comparison of results against these budgets will help companies uncover problems that are related in its operations. According to Shastri & Stout, budgeting offers some other benefits which include the following: “to support strategic initiatives specified by top management; to estimate resources required for forecast operations or to anticipate financing needs; to ensure that actual results are consistent with planned results; to provide feedback/assessment regarding operating activities; to provide a road map for employees to deliver output/services as expected by management; to communicate how individual units of the organization contribute to the overall strategy; to encourage teamwork across business segments (divisions, product lines, etc.); to encourage teamwork across business functions (finance, marketing, systems, etc.); to encourage employees to put forth effort in terms of stated goals and objectives of the organization; to determine bonuses or other benefits based on comparison of actual vs. budget (2008, 20).” While some of these benefits include those that are already mentioned by Orlando, some of them include contemporary strategic management concepts such as teamwork and greater coordination among functions which provide a lot of benefits to managers. For example, budgeting in the modern sense enables an individual to take part and determine her contribution to the fulfillment of the company's corporate objective. As mentioned by Shastri and Stout, budgeting in the contemporary sense requires interaction among different business segments as well as business functions (2009). Thus, in order to come up with a plan, teamwork among these entities is encouraged. The development of greater coordination among these entities is a major positive behavioral benefit that budgeting provides. iii. Problems caused by budgeting Shastri & Stout has identified problems that are caused by budgeting. According to them, budgets have 'negative behavioral consequences', as a budget “blocks employee initiatives, pressures managers to make decisions with a short-term focus, inhibits management's response to change, pressures employees to achieve targets, inappropriately rewards those skilled in the negotiating process, and encourages a myopic planning horizon (2008, 23).” Because budgets pre-determine the activities that are associated with the decisions that managers will make in the future, budgets can 'block employee initiatives (Shastri & Stout 2009).' Another downside of budgets as according to Shastri & Stout is that budgets 'pressures managers to make decisions with a short-term focus (2009).' This is because of the short-term orientation of the budget. As the budget's time frame usually takes no more than a year, managers tend to focus on the short-term consequences of their decisions, which are pre-determined on the budgets instead of considering the long-term consequences to the company. Budgets can also block managers' responses to change as budgets only reward managers for pursuing activities that are initially included in the plans. There are other problems that Taylor has pointed out apart from the factors that Shastri & Stout have identified include: “the 'use it or lose it mentality' motivates managers to spend more knowing that budget cuts are the reward for being thrifty; and cooperation between the different departments is compromised when resource allocation is at stake (2009, 54).” Budgeting then tends to result in competition among business segments, as well as provide incentive for some managers to manipulate and lie in order to get their actual figures favorable according to the initially set budgets. C. Conclusion Budgeting has been a traditional process that is used by businesses as a major tool for planning. As the marketplace has evolved, budgeting's role in the company's operations have evolved, when more reasons for utilizing it have emerged over the years. Some of the major motivations for using a budget include its ability to implement strategy, as well as support to management functions such as planning and controlling. Budgeting is crucial to the organization as it enables an organization to more effectively allocate its resources in line with its chosen strategy in order to fulfill its corporate objectives. Apart from it, as a planning tool, it provides a starting ground for everything such as sales forecast and the costs that are associated with it. It also serves as a control mechanism, from which the company can compare its results based on the original plan, and look for reasons behind discrepancy between planned figures and actual results. Budgeting provides a lot of benefits to organizations as well. Apart from being a tool to help manage cash flow as well as a tool for forecasting, budgets also enables companies to reward managers who are efficient and effective in their use of resources. This is done by tying performance to compensation, where performance is judged by the managers' productivity. Also, budgeting provides positive behavioral consequences to people within the organization who participate in the process. As budgeting requires teamwork and cooperation among different business segments of the organization, greater coordination between these segments are a by product of the interaction. However, budgeting also poses some problems to organizations. Some of these problems arise from the budgeting's short-term nature, which tends to make managers to have a short-term orientation in terms of planning and decision-making. Some negative behavioral consequences also arise due to budgeting. Figure 1. Total Assets Trend Figure 2. Financing Trend Table 1. Basic Findings Table 2. Firm Liquidity Table 3. Operating Profitability Table 4. Financing Decisions Table 5. Return on Shareholder Funds Table 6. Working Capital References Blacks Leisure Group, Plc. (2008). “Company Annual Report.” BlacksLeisure.co.uk. Date accessed: March 29, 2009 from http://www.blacksleisure.co.uk/Investor_Relations/Financials/Annual_|_Interim_Reports/Blacks_Interim_Report_2008_(2.55MB)/File.aspx?id=255 Cokins, G. (2008 December). “Repairing the Budgeting Process .” Financial Executive. Date accessed: March 29, 2009 from http://web.ebscohost.com/ehost/viewarticle?data=dGJyMPPp44rp2%2fdV0%2bnjisfk5Ie46bVPtq%2buTLSk63nn5Kx95uXxjL6prUq3pbBIrq%2beTrimtFKvp55Zy5zyit%2fk8Xnh6ueH7N%2fiVbOmrky1qrJRsZzqeezdu33snOJ6u9jzgKTq33%2b7t8w%2b3%2bS7S7OrtkyvrbA%2b5OXwhd%2fqu4ji3MSN6uLSffbq&hid=109 Horngren, C. T, Harrison, W. T., & Bamber, L. S. (2002) Accounting. New Jersey: Prentice Hall, Inc. Orlando, J. (2009 March). “Turning Budgeting Pain into Budgeting Gain .” Strategic Finance. Date accessed: March 29, 2009 from http://web.ebscohost.com/ehost/viewarticle?data=dGJyMPPp44rp2%2fdV0%2bnjisfk5Ie46bVPtq%2buTLSk63nn5Kx95uXxjL6prUq3pbBIrq%2beTrimtFKvp55Zy5zyit%2fk8Xnh6ueH7N%2fiVbOmrky1qrJRsZzqeezdu33snOJ6u9jzgKTq33%2b7t8w%2b3%2bS7S7Stt0u1qbA%2b5OXwhd%2fqu4ji3MSN6uLSffbq&hid=109 Shastri, K. & Stout, D. E. (2008 Fall). “Budgeting: Perspectives from the Real World .” Management Accounting Quarterly. Vol. 10 No. 1. Date accessed: March 29, 2009 from http://web.ebscohost.com/ehost/viewarticle?data=dGJyMPPp44rp2%2fdV0%2bnjisfk5Ie46bVPtq%2buTLSk63nn5Kx95uXxjL6prUq3pbBIrq%2beTrimtFKvp55Zy5zyit%2fk8Xnh6ueH7N%2fiVbOmrky1qrJRsZzqeezdu33snOJ6u9jzgKTq33%2b7t8w%2b3%2bS7S7OvtE%2burrI%2b5OXwhd%2fqu4ji3MSN6uLSffbq&hid=109 Taylor, A. (2009 March/April). “How Strategic Budgeting Can Control Cost While Improving Performance .” The Journal of Corporate Accounting & Finance. 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