Chain & Gear Company Finance Budget - Case Study Example

FINANCIAL REPORT FOR CHAIN & GEAR COMPANY FOR THE YEAR ENDED 31ST DECEMBER, Introduction The financial report shows the operations, performance,financial position and recommendations of Chain & Gear Company for the fiscal year ended 31st December, 2015.The report is based on the joint financial statements for each of the three outlets of Chain & Gear Company. The report has been organized in chapters covering the above mentioned objectives. Performance The performance was measured based on the existing financial ratios. Profitability ratios, liquidity ratios and efficiency ratios were used as indicators of performance of the company. The company suffered a net loss for the first four months before recording a net profit in its next two months .The Company suffered a loss in the subsequent months apart from December. The company ended the year in a net profit of 248%.This is an unsteady growth recorded in the company profile. The ROCE (Return on Capital Employed) remained stable in the fiscal year yielding a 100% in all the months. This is a high percentage that reflects the efficient use of capital by the Chain &Gear Company. The current ratio of the company was stable for the first seven months giving positive attributes .It then changed into negative value in the subsequent months up to the closure of the closure of the 2015 fiscal year. It started on a current ratio of 0.78 before ending on a negative value of -1.07.This means that for the first seven months, the company was able to meet its short term obligations. However, in the subsequent months, it was a challenge to meet the short term obligations. The company recorded a positive acid test ratio in all the months of the year. It was a positive fluctuation in each month. It started on a low positive of 0.22 before ending in a high positive of 1.32.This means that the Chain & Gear Company was able to cater for all its short term obligations without having to sell the inventories. The higher the liquidity ratio, the lower the liquidity risk and vice versa. The business is able to meet its short term maturing obligations in situations where they fall due. Therefore if there is liquidity it means that the credit worthiness of Chain & Gear Company is good and this attracts more creditors. This can enhance high investments. The company had high account receivable days recording a high of 30 days in the beginning of the fiscal year .This was followed by steady fluctuation and ending in high of 29 days. The high account receivable periods indicate that the company takes a long time to turn its receivables into cash. This depicts inefficiency in collection of receivables. The company recorded a high payment period in the first one month. This is a high of 45 days and it ends in a negative of 15 days. This means that for the first nine months during the fiscal year, Chain & Gear Company had a lot of cash in hand therefore was able to facilitate some of its operations. This is because when the payment days are high, the company has a chance to employ the cash elsewhere. The company is therefore able to generate more income. This implies that the company was efficient in its payment to creditors within the first nine months. At the closure of the fiscal year, the company has pending days of 15 which mean it has delayed its payments to creditors by 15 days. This therefore means that the Company is inefficient at the closure of business because it delays payment of creditors. The company records a high inventory turnover of 77 and 71 within the first two months .It is followed by a very low inventory turnover within the subsequent months and closing at a high of 15days.The very high turnover means that at the beginning of the fiscal year, the company recorded strong sales of the stock. However, it also implies that the company was operating on a financial platform where there could be ineffective buying coupled with exposure to price falls. The very low days of inventory turnover means that the company experienced poor sales and therefore there was recording very low days of turnover. This shows inefficiency in sales Operations The branded company sales outlet recorded the highest volume of sales steadily across all the months of the 2015 fiscal year. The volumes sold were high with the highest sales price per unit. There was also a low cost per unit. This indicates that the best sales outlet for the company is the Branded company outlet. The lowest outlet was the retail outlet which recorded lowest sales volume and had almost the same cost per unit as the Branded company outlet. This can also be attributed to the overall low prices per unit. Financial position There was a steady increase in fixed asset base throughout the financial year ended 31st December 2015 by a constant value of 2000 £.This indicates that the level of sales generated by fixed asset base of the company is low. This implies the company’s inefficiency in utilizing its assets to generate sales but the net worth of the business increased on a monthly basis as additional assets were purchased. According to the statement of financial position, the return on equity for the shareholders is negative. This is because all the months of the fiscal year display a negative equity. It implies that the shareholders inject equity into the business but there is no return on investment. This can be attributed to the fact that the losses exceed the equity .Instead of the equity being used to generate cash; it is directed to cover the losses. In the statement of financial position, this has been presented in form of shareholders capital added to the losses and retained earnings. Recommendations The company should ensure liquidity at all times to ensure that they are able to meet their short term obligations. Chain & Gear Company should commercialize a lot on the Branded company outlet to ensure that they maximize on their profits in that market segment. REFERENCES 1. BPP (2008). Financial Reporting (int.) 2. BPP (2008).Financial Accounting. 3. KASNEB .Retrieved from http://www.kasneb.or.ke/bboard.htm 4. Frank Wood’s Business Accounting 1 and 2 5. Business daily. Retrieved from http://www.businessdailyafrica.com/ 6. EU (2010) Guidelines for financial reporting. Retrieved from http://fpa2008.dgecho-partners-helpdesk.eu/_media/financial_guidelines_final_en.pdf Read More