Budgeting of Crown Ltd - Case Study Example

Budgeting Name: Lecturer: Course name: Course code: Date: Task 1.1 Preparation of income statement and balance sheet  WB Events statement of comprehensive income as at 30 June 2013 $ $ sales revenue 26500 Cost goods sold 16,000 Gross Profit 10,500 Less op expenses Gen operating expenses 4640 Depreciation 250 Dividend paid 2000 Total operating expense 6890 Net profit 3,610  WB Events Balance sheet as at 30 June 2013 fixed assets Plant 11,000 Accumulated depreciation 1020 1020 NBV Plant 9,980 current assets Cash at bank 2200 Debtors 1500 Inventory 400 Total C assets 4100 Total assets 14,080 current liabilities Accounts payable 2300 Net assets 11,780 Financed by Share cap 5,000 Earning 3,170 3,610 6,780 11,780 Task 1.2 From the WB income statement and annual report a) Gross Profit = 10,500 b) Net Profit = 3,610 c) Current Assets = 4,100 d) Non-current Assets =9,980 e) Total Liabilities = 2,300 f) Total Shareholder’s Equity = 11,780 Task 2.1 a) Potential readers of annual reports The potential user of the company’s annual report are as follows; Investors The company investors both current and potential investors are interest in information contain in annual report (Chordia, 2008). The company current investors uses annual report to obtain and evaluate the company financial performance in order to assess the effectiveness of realizing their predetermine business objectives and earn dividends. Potential investors uses the information in annual report to assess the company’s profitability, economic and financial stability to evaluate whether they should invest in the company. Management The company’s management uses the annual report to determine the performances of the company and provided corrective measures to realized shareholder objectives. Management asses the corrective measures on the business to enhance efficiency in its operations. Financiers Financiers are interested in the company’s information in annual report to assess the company’s credit worthiness as depicted in the credit rating to enables them to determine whether they should finance the company or limit their credit to the company. Government agencies Government agencies are interested in financial information in order control the company’s taxation policies on the basis for national income statistics as well as regulating the company’s activities. b) Information contained in annual report Annual report contains detail description of company information both financial and non-financial (Clyde Stickney, 2006). The information in company annual report is sequentially described according to the specific directives such as director’s report, financial statements, and governance report. Financial statement contained in annual report provides the company’s financial performances over the financial period. This information assist the users to assess the company’s financial condition and performance thus making valid investment decision. Director report in the annual report provides specific investment and managerial information on the company’s profile. This information reveals the company’s critical investment decisions. Task 2.2 Profitability ratios Profitability ratios are ratios used to determine the company’s aptitude in making profits in relative of the equity, turnover and assets. Profitability ratios measure the business entity’s ability in generating earnings and the cash flows in relative to the company’s investment. Return on assets Return on assets ratio is used in assessing the company’s profits relative to the average total assets employed in making profits (Clyde Stickney, 2006). The higher return on assets ratios indicate that the company operates efficiently in generating earnings while lower ratios discloses poor efficiency or the competitors efficiency in strategic ways that earnings as compared to the company’s profitability on the assets Return on assets = C Crown Limitedumn1 2012 2011 2010 EBIT 619,818 407,114 387,309 Total Assets 5,872,530 5,023,775 4,969,121 Return on Assets 10.55% 8.10% 7.79% From the return on assets graph, Crown Ltd reveals an increasing trend of return on the company’s assets from 7.79% in 2010 to 8.10% and 10.55% in 2011 and 2012 financial years. This describes that the company is efficient enough in utilizing its assets to generate earnings hence it is considered viable for investment. Gross profit margin Gross profit margin portrays the company's gross profit in relation to the sales revenue. It shows how well the company converts inventory into income through sales (Clyde Stickney, 2006). The higher values of gross profit margin portrays that the company earns more income for every dollar of revenue which is more favourable since extra earnings will be available to meet operating costs. Gross profit margin = C Crown Limitedumn1 2012 2011 2010 Gross Profit 733,402 482,659 471,435 Sales Revenue 2,808,870 2,409,241 2,342,248 Gross Profit margin 26.11% 20.03% 20.13% According to the Crown Ltd gross profit margin, The Company show an increasing trend of converting its inventory in to cash for 20% in both 2010 and 2011 and increase to 26.22 in subsequent year 2012. This unveils that the management have effective measures that ensures that company inventory is converted to cash to meet the operating expenses. Net profit margin The company’s profit margin is an accounting tool that assesses the company’s financial health in regards to earning capacity (Alisdair McGregor, 2013). This ratio shows the company’s inbuilt that indicates the efficiency of capturing the amount of surplus which is generated for every unit of the product or services the company sales. Net profit Margin= C Crown Limitedumn1 2012 2011 2010 EBIT 619,818 407,114 387,309 Sales Revenue 2,808,870 2,409,241 2,342,248 Net Profit margin 22.07% 16.90% 16.54% From the Crown Company net profit margin describes that the company has increasing trend in generating revenue from sales from 16.54% in 2010, 16.90% in financial year 2011 to 22.07% in financial year 2012. This describes that the company is effective in enhancing higher return attributable to shareholders thus good for investment. Return on investment This ratio describes the earning power of company’s equity in generating revenue. Return on investment measures the net income to the average company’s capital employed. C Crown Limitedumn1 2012 2011 2010 EAT 513,325 335,855 292,293 Capital employed 3,374,750 3,260,360 3,419,305 Return on Investment 15.21% 10.30% 8.55% From the above return on investment ratio describes that Crown Ltd has increasing trend on earning generated from the capital investments. Crown Ltd depict an increasing efficiency in utilizing its invested capital to generate earning from 8.55% in 2010 to 10.305 and 15.21% in 2011 and 2012 financial years. However this shows that Crown Limited is viable for investment. Part 3 Trend Analysis Trend Analysis Jan Feb March April May June Dinner 49600 44800 49600 48000 49600 48000 Lunch 46500 42000 46500 45000 46500 45000 Breakfast 18600 16800 18600 18000 18600 18000 Total Revenue 114700 103400 114700 111000 114700 111000 e) Gross Profit Margin Jan Feb March April May June Gross profit 80290 72380 80290 77700 80290 77700 f) Labor Cost g) Net Profit Margin Task 3.4 A. Internal and external factors that could contribute Variance 1. Internal factors 1. A Poor forecast. The company might have used poor forecasting techniques that consider the tome value of money at present years in projecting the revenue and expense to be incurred (Alisdair McGregor, 2013). Instigate on the relevance of the employed forecasting tool by the practitioner in order to ascertain the adequacy of the tool. 1. B Errors in estimation. The financial analyst might have entered wrong figure in calculating the forecasted revenue and expense and thus emergence of variance was eminent. Performance test of detail in order to ascertain the relevance of the errors and to consider whether the errors are fraudulent or innocent 1. C Negligence. The management might be reluctant in following the budget estimates and also ascertaining the time frame to beat in order to realize the budgeted profit. In this regards, reluctant on the side of management leads to variances whether adverse or favorable since what is expected to be followed in order to realize the set goals is ignored, Perform a forensic investigation on the subject matter. 2 External factors a) Inflation and adverse economic growth Rise of inflation renders the economy stunted and makes companies to close some of its production operation or reduce the numbers of goods to be sold (Chordia, 2008). In this regard, the budgeted estimates will not be realized and thus there will be emergence of variances. Check on the general economic condition as well as perform cross sectional and trend analysis of the company in current economic conditions. b) Adverse competition Adverse competition will make the busy not to realize its desired end result since, their competition will make their product more affordable and pleasing to the customers hence reducing the level of sales since, the company will not reduce beyond the break-even point. In this regards, there will be emergence of variance either favorable or adverse from the actual figures and the budgeted one, consider the performance of the competitor and ascertain the efficiency of their marketing strategy. c) Government policy The government might pass a law that will affect the general performance of the company and hence making the company not to realize its objectives as well as budget attainement.This will create variances B. control Measures The budget committee should review the appropriateness of the forecasting tools in order to ascertain the relevance of the tool to the business and whether it fits the general economic condition in forecasting the future revenue and expense to be incurred by the company (Clyde Stickney, 2006). This will go hand in hand together with the experience of the financial analysis and thus, a person with good budgeting skills should be assigned the job in order to get rid of errors in budgeting as well as guaranteeing on the accuracy of the forecasted data. C. Recommendation for improved budget management 1. Budget formulation The budget committee should formulate the budget by coming up with realistic budget estimates. This is achieved by considering the goals of the company as well as ascertaining gm the general economic condition that will affect the achievability of budget estimates And concluding on factors to be understating incase of adverse economic situation that might affect the achievability of the budget (Chordia, 2008). 2. Budget review Once a good budget has been formulated, it is advisable that a review should be made after a certain period. This will aid in checking whether the planned budget is as planned and incase of any deviation. Corrective, ensure to be undertaken in order to reduces chances of variances.\ 3. Budget coordination Each department in an organization should contribute in budgeting process. This will help in providing clear estimates of how each department is going to spend and what it requires. Brainstorming will hence aid in generating a conclusive budgeting with minimal errors or deviation. Task 3.5 Importance of communicating the budget objectives Budget achievability Budget can easily be achieved where members of the staff clearly understand the financial objectives of the company within a given financial period and what is expected from them in ensuring that the desired budget objective is achieved, Involving staff ensures that a clear set of objectives is well understood by all staff in every department and thus there will be enhancement of mutual benefit as far as the company goals and objectives is concerned. Timeline awareness Communicating the budget will enhance time awareness on budget achievability and thus avoid variances in budget since; the desired end result is achieved within the stipulated tine frame. In this regard, staff will aware of the budget estimates and time it takes for the budget to be completed (Alisdair McGregor, 2013). Good communication skills reduce conflict and misunderstand among staff of the organization and the budget committee. This will as a result lead to easy budget attainment and reduces variances in budgeting. Ways of communicating the budget 1. Company news letter, Budget can made available to all staff through company news letter and thus each worker will easily access the budget and ascertain the relevance of the budget and what is expected of them in budgeting. 2. Internal memo. The budgeting committee through the department managers will write a memo of the budgeting participation by entire staff member s and thus each worker will have access of the budget as well. 3. Electronic billboard The company might be having an electronic bill board within the company premises and thus the budget can be made available easily to every staff for comprehending and providing feedback if possible. References Alisdair McGregor, C. R. F. C., 2013. Comparability analysis on financial statements . In: s.l.:Routledge, p. 113. Chordia, T. R. R. &. S. A., 2008. Liquidity and market efficiency. Journal of Financial Economics, pp. 249-268. Clyde Stickney, R. W., 2006. Financial Accounting: An Introduction to Concepts, Methods and Uses. In: s.l.:Cengage Learning, p. 317. Read More