Corporate Financial Tools for Business Decision - Essay Example

Memo Board of Directors Financial Analyst CC All head Managers July 11, Recently there have been some questions regarding how the financial analyst’s office uses financial reports in budget preparation.This memo is intended to discus the relationship between the elements of our financial statements and the budgets we generate. Information provide here in, will clarify the function of balance sheet, income statement, statement of cash flows and statement of stockholders equity. Balance Sheets Balance sheets provide us with the information relative to cost of manufacturing a product that we sell. The cost of manufacturing and item is the cost of the raw materials, plus the cost of direct labor, plus the cost of manufacturing overhead. We determine the cost of raw materials as the inventory at the beginning of the period, plus the cost of materials purchased during the period, less the remaining raw good inventory at the end of the period. Manufacturing overhead consists of indirect labor, cost of facility repairs, insurance, utilities and miscellaneous office expenses. From this information we can generate the budget of expenses, for upcoming periods, as well as predict our sales. Income Statement Income statements provide us with the information necessary to see how well we do against our budgeted sales and expenses from the previous period. It also help us make adjustments in managing process to keep controllable expenses in line an sales up resulting in adding to our bottom line. We can see if there is a seasonal pattern to sales during the year. Our products sell more prior to the start of the school year, and prior to holiday season as the buyers gear up for higher sales of their products during this time of year. Statement of Cash Flows Cash flow statements are used in budget development of upcoming period cash flow needs. This is tackled last in the process. We can see if our cash flow has been adequate to meet our needs for operations. If not what has to happen to make it meet the needs. On the other side are we generating an abundance of cash lying around? If so we should evaluate investments based on the length of time, return on invested cash, and the future value of money. We also know that we have to keep some cash available to cover operating demands that fluctuate throughout the year. We also see from the income statement how much is added to the stockholders equity. Statement of Stock Holders Equity Stockholder’s equity shows in a brief snap shot how well we are meeting our stockholders goals of seeing a return on their investment in the company. Their goals are to increase the value of stock as well as see a return on their investment. We can see that we have generated a positive increase and if so how much is paid in dividends to our stock holders. Overtime we can make predictions of what future periods will generate in stock value dividends. In conclusion I hope to have cleared up your concerns. If any of you still have question or need further explanations please feel free to call the office or stop by. We will gladly discuss anything pertaining to budget generating with you. Sincerely, Enter your name. Financial Analyst 123 Any Street, Any town, Phone: XX-XXX-XXX-XXXX Ext, 345 To: [Recipient names] From: Clients Name CC: [Recipient names] Date: 7/11/2010 Re: Budget Planning Functions-Individual Company The financial Analysts office provides a valuable service to the company. Many have wondered just what goes on in the analyst’s office. We have three key functions that keep us busy. As well as we generate future budgets for the company, we review and analyze each segment company’s performance against budgeted guidelines for this year’s performance. The purpose in this memo is to clarify what and how we perform our duties. Creating and analysis of each company of EEC Last year our office provided a budget based on the historical performance of each individual segment of the company. All our individual segments produce the general information that is reported as our company’s financial statements. Each segment company has its own financial information, which is reviewed and analyzed. Taking the information provided from each company we find out what their sales are, what their costs are, and what capitol investments they have. We break down cost of production for each item a company produces and sells. We give this information to management of the company that is analyzed. This allows management to make operational decisions based on the financial performance of the individual company. Providing and analyzing cost for each company An area of particular close analysis is the cost of producing the product. To analyze cost we look at three major areas of the financials reported inventory expense, direct labor expense, and manufacturing overhead. We compare this with the budgeted expenses in each area. A figure that is abnormally high or low causes us to further investigate. We start to look for reasons that might give use these numbers. Inventory expense is an area of particular focus. Exceptionally high expenses here might mean internal theft, lack of good inventory controls, or receiving has not yet posted a received shipment of raw goods. Direct labor costs are a cost that is easily held in check by allowing no overtime and reducing hours if we need to. If overhead of the factory is high, it may mean we had a repair expense that was not planned for or a machine was replaced. If the latter is the case the depreciation will eventually take into account the expense of the machine that was replaced. By keeping expenses in check we will continue to see each company add to the bottom line of the corporation. Analyzing the major capitol projects submitted by each company When looking into major capitol projects that each company has, we want to know if they produce a good enough return on our investment to make them worth while, at the same time we want to minimize the risk of losing our invested capitol. How do we gain interest income or dividend income when the market is shaky and the world is facing market volatility? This is a key question that we have to answer when we make capitol investments. Are we diversified enough? When do investments need to be in bonds or other investment instruments or is stock investing a viable income producer for the capitol in question. We have to evaluate the ratio between price and earnings, book and market vale in order to determine what direction management should move in. Here we need to also look at what other investments make sense. Do we put funds for retiring employees medical in a volatile market or do go with safe instruments that guarantee the capitol to be safe, but if the market increases we can gain a portion of that gain? Questions of taxes on investments also need to be considered. Capitol gains taxes could eat away at funds if they are not planned right. Some tax shelters are good while others are bad ideas. Over all financial analysts office is a busy place. We calculate ratios determine outcomes predict future budgets and set performance standards for our investments. The board of directors determine what guideline we need a company as a whole, but each operating company requires direction and guidelines. It is the analyst’s office that evaluates the financial information against budgeted outcome. In turn guiding management to keep them on track and to make adjustments based on the information presented on the financial statements. The corporate analyst thus holds a lot of responsibility in accurately evaluating and generating future budgets for the company. In closing please feel free to direct any question you have to the financial analyst’s office. My assistant and I are happy to answer any concerns you may have. Sincerely, Corporate Financial Analyst Bibliography Gitman, L. J. (2006). Managerial Finance (11thed.). Boston, MA: Pearson Education Inc. Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2005). ManagerialAccounting Tools for Business Decision Making (3rded.). Hoboken, NJ: John Wiley & Sons, Inc. Outlines Memo: Analyst Functions A. Introduction B. Creating and analyzing the monthly performance of each company within EEC. 1. Checking against budgeted performance 2. Production on schedule C. Providing and analyzing costing information for each company within EEC. 1. Costs to budgeted costs 2. Evaluating large variances D. Analyzing the major capital projects submitted by each company. 1. Performance to expected performance 2. Risk of investment E. Closing Memo to Board A. Introduction B. Balance sheets 1. Information for determining costs budget 2. Information for production budget C. Income Statement 1. Information for details of costs 2. Information for details of production D. Cash Flow Statement 1. Determined by other budgets 2. Needs flexibility to allow for fluctuation of variable costs E. Stockholder Equity Statement 1. Determine if we are meeting investors goals 2. Dividend projection F. Closing remarks Read More