Manage Finances - Case Study Example

Executive Summary Organizations all around the world look towards having effective budgets where they work on the budgeted lines. This helps the business to gain operational efficiency and ensure that the costs are kept within the stated limits. This thereby facilitates the opportunity for growth and helps the business in achieving the desired outcomes. This report looks to present the actual and budgeted figures for XYZ Company and brings forward the reasons for discrepancies in the financial figures. It also provides various recommendations and improvement in forecasting techniques by using ways like trend analysis, market analysis and other factors to improve the outcome. The report also presents the analysis of different ratios and highlights the area that XYZ needs to work on for their future development and growth. Table of Contents Introduction 3 Purpose of the report 3 Actual and Budgeted Financial 3 Effectiveness of current financial management process 5 Issues faced by managers 6 Recommendations 9 Conclusion 10 Introduction Proper planning and execution of the budget helps business to control cost and ensure that they are able to grow by keeping a check on external constraints. Budgets provide the required framework which guides every department and organization to perform within it. XYZ Company needs to look into and ensure that they have a budget which is properly planned so that the financial effectiveness increases and the business is able to gain maximum efficiency in operations. Purpose of the report To identify the financial effectiveness of XYZ through the preparation of forecasted budget To identify the areas that XYZ needs to work upon so that they are able to ensure better performance To provide recommendations which will help XYZ to ensure better forecasting and have a budget matching their requirements Actual & Budgeted Financial The financial figures of XYZ which constitutes of both the actual and forecasted figures have been provided below. Also, the deviations both in numeric and percentage terms have been provided so that the management is able to identify their errors and take steps to correct them in the future. This will guide the management in ensuring effectiveness and will help to improve the financial planning process   Actual Result (in dollars) Budgeted Result (in dollars) Variance (in dollars) Variance in percentage Revenue         Sales $418000 $437000 -$19000 -4.35 C.O.G.S         Purchases $146300 $103500 $42800 41.35 Gross Profit $271700 $333500 -$61800 -18.53 Less Expenses         Advertising $16900 $8740 $8160 93.36 Promotion $10000 $8000 $2000 25.00 Printing $11500 $9000 $2500 27.78 Insurance $4300 $4200 $100 2.38 Telephone $8360 $6400 $1960 30.63 Rent $30000 $30000 0 0.00 Electricity $3605 $3500 $105 3.00 Salaries $200000 $200000 0 0.00 Depreciation $4250 $4250 0 0.00 Discount Allowed $4180 $2200 $1980 90.00 Bank Charges $2300 $2200 $100 4.55 Total Expenses $295395 $278490 $16905 6.07 Net Profit -$23965 $55010 -$78975 -143.56           Opening Cash Balance $164500 $164500 0 0.00 Add Cash Receipts         Cash Receipts $334400 $393000 -$58600 -14.91 Accounts Receivable $76000 $76000 0 0.00 Total Cash Receipts $410400 $469300 -$58900 -12.57 Less Cash Payments         Expenses $266985 $262040 $4945 3.01 Purchases $138300 $95500 $42800 44.82 Accounts Payable $15000 $15000 0 0.00 GST Payments $35000 $26200 $8800 33.59 Motor Vehicle $22500 $20000 $2500 12.50 Total Cash Payments $477765 $408740 $69025 16.86 Closing Cash Balance $97135 $225060 -$127925 -58.41 The above figures show the discrepancies in the financial figures and highlights the area that XYZ need to look into for the future Effectiveness of current financial management process The management after looking at the financial figures needs to identify various areas that they have to work on. Below are some of the financial implications for the management of XYZ Under Estimations of Cost: XYZ has underestimated the cost of associated with different expenses like advertising, promotion, printing, telephone and insurance which have increased. The underestimation of cost of individual items has resulted in the total cost to rise. The company has looked towards using cost cutting ways but the ways instead have increased cost resulting in the budget to be incorrect Over Estimation of Receipts: XYZ have overestimated their revenues in the tune of $19,000. The company has forecasted higher sales than they had achieved which resulted in procuring materials accordingly. This resulted in the purchase cost to rise by $42,800 and being unable to match it by an increase in sales resulted in the over estimation of receipts making the budget go haywire. Poor Forecasting: XYZ was unable to forecast the earnings effectively. The company had forecasted a profit of $55,010 but instead they have incurred a loss of $23,965. This resulted in the company having the allocated funds for different expenses appear more than they actually should have been. This resulted in complete lack of planning as incurring losses created a situation where the business gor stuck in a financial crunch leading to negative cash flow in the organization. Lack of policy execution by the department: XYZ Company was ineffective in having cost cutting measures as instead of reducing cost the cost increased. This highlights that the policies were ineffective and the use of cost saving ways proved expensive for the company. Improper collection of data: The data collection method employed by XYZ was ineffective as it resulted in the forecasted data of sales and purchases to be wrong. This made the data collection method to be wrong as the estimations of the receipts and payments became incorrect. Improper cost control measures: The cost control method employed by the different department were ineffective as despite providing them with the financial budgeted figures the departments were incapable of controlling cost. This resulted in more expenses than planned and created a liquidity crunch leading to excess cash flows and a negative cash flow balance Issues faced by managers The financial figures for XYZ present different issues that the managers have to deal with so that the effectiveness of the financial figures improves. The manager have to look into various ratios and find important and relevant findings based on it so that they are able to identify the areas that needs to be worked on. These will improve the financial planning and helpXYZ in their future endeavor. Current Ratio: This helps the suppliers and creditors to understand the ability of a business to meet their short term obligations. The ratio is as Current Ratio = Current Assets / Current Liabilities = 120000 / 60000 = 2:1 time The ratio is sound for XYZ and shows sufficient liquidity. The ratio highlights that the business has double current assets than liabilities which will enable the business to be able to meet their obligations easily. The ratio will be better understood after looking at the quick ratio as it will help to understand the liquidity position after removing inventories as inventory takes times to be converted into cash. Quick Ratio: This ratio holds special significance as it will help to understand the liquidity position of the firm after removing inventories. The ratio is Quick ratio = (Current Assets – Inventories) / Current Liabilities = (120000 – 40000) / 60000 = 1.33:1 time The ratio is sound for XYZ as they have more assets than current liabilities to meet their short term obligations. This ratio highlights proper planning and ensuring liquidity in the business as even after removing inventories the business is well placed to meet the short term obligations. The ratio shows that the business has developed ways to ensure that they don’t fall in a liquidity trap and have ensured sufficient funds to meet their daily obligations. Gross Profit Margin: This will identify the profit contributed to the business from the manufacturing process. The ratio is Gross Profit Margin = Gross Profit / Sales * 100 = 271700 / 418000 * 100 = 65% The ratio shows that XYZ has 65% of their profit contributed from the production process. This shows the efficiency of the business in controlling cost especially the direct cost and ensuring that the products are produced at minimum cost. This also highlights that XYZ has been able to craft stratgeies to control direct expenses and shows efficiency Net Profit Margin: This will identify the profit contributed to the business after meeting all the expenses i.e. both direct and indirect. The ratio is Net Profit Margin = Net Profit / Sales * 100 = - 23965 / 418000 * 100 = - 5.73% The ratio shows loss as the business has increased their indirect expenses. This is an area of concern as it will make it difficult for XYZ to finance the business and incurring losses continuously will make it difficult to sustain business. This makes it important that XYZ looks towards cutting down indirect cost and derives a method which will help to increase the final profits for the shareholders Recommendations XYZ o improve their financial effectiveness needs to incorporate the following in their planning process so that they are able to gain efficiency Improved Forecasting: XYZ should look toward using different forecasting methods like the trend analysis. This will help to understand the pattern of sale and will help the management to forecast the future expectations better. This will thereby help the management in ensuring that the budget is made accordingly and the organization is able to perform within the stated limits Proper execution of policies: XYZ need to develop strategies which will ensure that the organization performs within the stated budget. They should clearly state the policies and ensure that the different department works within the budgeted limits Cost reduction: XYZ need to use cost cutting ways so that the indirect expenses gets reduced. Indirect cost forms a huge part of the total expenses so XYZ need to look towards having ways to reduce the indirect cost. This will help XYZ to have profits and will ensure that the business is able to perform effectively. Proper management: The entire management of XYZ needs to look at the matter seriously and look towards finding strategies so that the organization is able to forecast better and perform within the limits prescribed for each department. This will increase efficiency and will help the management to be able to deal with the situation in a better way Conclusion XYZ needs to incorporate different things and look towards reducing the indirect cost so that their profits improve. In addition to it they need to look towards having better forecasting techniques so that they are able to ensure liquidity and don’t fall in a liquidity trap. Along, with it XYZ needs to use different cost saving ways so that the entire efficiency improves which will thereby increase the relevance of the financial figures and will help the management to achieve its stated objectives. Read More