Forecasted and Budgeted Performance of Synovate FZ-LLC - Assignment Example

Table of Contents Executive Summary 3 Research Methodology 4 Organizational Background 4 Industry Background 4 Company Information 4 Mission 5 Services 5 My Role 5 Financial Management 5 Budgeting 6 Risks associated with In-accurate Budgeting 7 Styles of Budgeting 8 Approaches of Budgeting 9 Budget Preparation 9 Financial Statement Analysis 11 The balance Sheet 11 The Income Statement 12 The Cash Flow Statement 13 Ratio Analysis 14 Liquidity Analysis 15 Profitability Analysis 16 Capital Structure Analysis 17 Efficiency Analysis 17 Vertical Analysis 18 Horizontal Analysis 19 Income Budget for 2009 21 Capital Investment Appraisal 22 Report to the Management 24 References 25 Executive Summary The research analyzed current, forecasted and budgeted performance of Synovate FZ-LLC. Synovate FZ-LLC is a market research consultancy in Dubai. It is a free zone company registered with limited liability pursuant to regulations issues by Dubai Government and Media Free Zone Private Regulations, 2003. In this research we analyzed how the company could revive its position with the growth rate of 20% in revenues and would be the future impact of investment decisions and losses made at Kuwait by the company1. Research Methodology The research employs secondary research methodology for analyzing data and reaching conclusions. High emphasis had been laid on studying the annual statements of the company, e-journals, financial books and magazines. Organizational Background Industry Background The market research industry has grown globally into a number of areas and sectors including financial research, business research and marketing research. Companies like Grail Research, Global Insight and ICRA are one of the top most companies in this field globally. Companies with the help of innovative and latest technologies along with the use of various business tools, come up with results that are practical and profitable for many other companies. Also companies in this industry employ various pricing and differential strategies to be ahead of competition2. Company Information Synovate FZ-LLC is a market research consultancy in Dubai. It is a free zone company registered with limited liability pursuant to regulations issues by Dubai Government and Media Free Zone Private Regulations, 2003. The company current has revenues of AED 27.24 million with net loss of AED -5.4 million in 2008. The company is also having going concern issues currently. This is primarily due to negative equity of AED 6.6 million of the company along with the operating losses described above. The product and services of the company are basically related to industry research. The company has offices in over 60 countries and operates as a global brand in global market research firm3. Mission The mission of Synovate FZ-LLC is to showcase how market research is deriving changes in an enterprise, the market place as well as the society. Services As discussed earlier the company is into marketing research. The product and services of the company are basically related to industry research. The company has offices in over 60 countries and operates as a global brand in global market research firm. The company researches various companies, sector and industry for new investment opportunities of for some other specified reason. My Role I worked with Synovate FZ-LLC as a sales executive and I am in direct contact with the management team of the company and have thereby utilized my knowledge, experience and relationship for building this proposal. Financial Management The objectives of financial management are to maximise owners wealth by “Planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization”4. To achieve the above definition, financial management involves the following: 1. Financial Planning and control: how the resources will be managed effectively in order to achieve the financial objectives. 2. Managing of working capital: managing day to day operations, this includes managing current assets components: Cash and banks, inventory, receivables including collection. Current liabilities components: accounts payables including supplier’s payments, short-term overdrafts and staff accruals. 3. Evaluate capital investment: feasibility study of any new proposed investment to evaluate its suitability and its financial returns. 4. Financing of capital investment and the sources of financing for short term operations and long term assets utilization. Budgeting Budgetary control in an organization is defined as “The establishment of budgets relating to responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision”5. Budget plan of an organization outlines its financial as well as operational goals. Budget acts as an action plan for the organization, helping it in allocation of resources, evaluation of performance, and formulation of plans. Budgeting is an action plan that is necessary for controlling all the aspects of the operations of an enterprise for a definite period of time. A company Plc being a multinational company involved in manufacturing and retailing of petroleum products, budgeting and budgetary control is of utmost importance for the organization. As the company is into both manufacturing and retailing, separate budgets are required to be set for smooth functioning of both the units. Separate budget allocations are required for every division of the organization. Also as the organization operates in multiple countries, a separate budget allocation needs to be done for every activity in each country. Risks associated with In-accurate Budgeting Budgets are essential aids in planning because they force management to think ahead and look before they leap. The failure to make a proper budget and implement proper budgeting control in A company can result in the following: 1. Budgets reduce uncertainty by allowing executives to map out the future course of action. Failure of making a budget will create uncertainty for the company. This will risk A company in facing challenges with confidence. 2. Budgets increase coordination among the different departments because budgetary control forces executives to think as a group. Failure to develop accurate budget can result in a situation where all the departments in the organization will tent to function in a non-coordinated manner, and fail in an attempt to implement the planned courses of action systematically. Improper Budgeting will also risk A company’s management in coordinating the activities of business to the economic trends6. 3. Budgets identify weaknesses by finding out the reasons for inefficient performance. While failure to make proper budget will risk the company’s management trace discrepancies in any activity of the business and take suitable remedial measures. 4. Improper Budgets will hamper the ability of the company’s managers in analyzing the expenditures and keep it under check, thereby preventing wastage of all kinds. 5. Failure of an accurate budget will lead to the non-establishment of performance standards for operational activities and inaccurate adoption of standard costing technique. 6. Budgets in A company will help identify deviations from pre-planned courses of action. Management can later analyze the cause for the deviations and implement remedial measures. 7. Budgets will help establish standards of performance. Inaccurate budgets in the company will give a false representation of the performance against standards which won’t further enable employees to analyze strengths and weaknesses7. Budgeting is an action plan that is necessary for controlling all the aspects of the operations of an enterprise for a definite period of time. Styles of Budgeting There are 2 budgets styles namely top down and bottom up. In the top down budget approach, “the board sets the plans and passes them down through the organization”8. Whereas in a bottom up budget approach “the individual business components prepare plans individually and pass them to head office for consolidation into a corporate-wide plan”. Often the planning process is a mixture of both: the board sets the objectives, develops the strategic plan (with input from lower down the organization) and business targets; management develops the tactical plans and annual budgets for approval by the board. Approaches of Budgeting There are 2 approaches of budgeting namely incremental and zero base budgeting. In an incremental budget, a company primarily start with this year’s budget and add increments for planned and expected changes - product volumes, inflation, etc. Similarly in Zero base budgeting the company challenges legacy type activities (discretionary costs) works on the basis of decision packages. Though the incremental budget is simple and easy to understand, zero base budgeting is more stable, and changes gradually with the changing external environment9. Budget Preparation Information if essential for preparing a sound budget in the organization. Managerial forecasts and accounting reports are major source of data for budget preparation. Managerial forecasts provide data on the anticipated level of activity, while accounting reports provide data on the financial magnitude of past and current operations. The formulation of budget in the organization will involve following steps: 1. Organization: In the organization, there would be a budget department. The members of the budget department will report directly to the corporate controller of A company. Further the organization will have a budget committee consisting of the heads of various departments within the organization and members of the senior management such as the CEO, CFO, and financial VP etc. Now the first step towards the preparation of the budget at A company Plc would be the issuance of guidelines. The main source of these guidelines would be the strategic plan of the organization, which will be modified from time to time according to the company’s performance. After this, initial budget proposal for the company will be prepared. 2. Negotiation: The budget proposal will be discussed with the superiors. The superiors will judge the validity of each of the adjustments made in the budget proposal. 3. Review and Approval: The budget proposal developed by the budget goes up through successive levels in the organization. If at one level the budget is not found out to be satisfactory it will be sent back for reworking. 4. Budget Revisions: Budgets should be revised time from time in order to check discrepancies, if any. In A company, two procedures should be followed for revising budgets: Procedures that provide for systematic updating of budgets, and Procedure that allow revisions under special circumstances. The authority of the administration of budgets will vest with the top management. A budget can be successful only id it properly administered. A budget manual is necessary to facilitate the process of administration of budgets. Budgets are prepared and finalized in accordance with the standards set by the top management of A company. Since budgets are used to evaluate performance of various responsibility centers, management must set standards that are attainable. If standards are too difficult to attain the responsibility centers of A company may manipulate figures to please the top management10. Financial Statement Analysis Financial analysis deals with understanding the fundamental s of the company using three financial statements, theses are: 1. The Balance Sheet 2. Income Statement 3. Cash flow Statement The balance Sheet It is also called as the ‘statement of financial position’. It depicts the financial position of the company on a particular date. It gives the information of how the company has been financed and how the money has been invested in various productive resources. Company can obtain finance from its owners and outsiders. The balance sheet of Synovate FZ-LLC for the year ended 2008 is as follows: Balance Sheet (AED) 31-Dec-08 31-Dec-07 Non-current Assets Property, Plant and Equipment 728,729 842,181 Current Assets Trade and other receivables 8,270,375 6,050,071 Due from related parties 12,224,163 9,982,538 Bank balances and cash 1,505,965 2,162,935 Current Liabilities Trade and other payables 3,452,216 2,828,935 Due to related parties 25,365,988 17,072,860 28,818,204 17,901,795 Net Current Liabilities -6,820,710 -1,706,251 Non-Current Liabilities Provision for employees end of service gratuities -409,303 -236,481 Net Liabilities -6,501,284 -1,100,551 Equity Share Capital 100,000 100,000 Accumulated Deficit -6,601,284 -1,200,551 Total Equity -6,501,284 -1,100,551 The Income Statement An annual profit and loss (P/L) account, called the income statement, or income and expenditure statement in the US, records annual sales income, costs and expenses and shows business performance over a specific period of time. The preparation of the income statement is governed by the matching principal who states that the performance can be measured only if revenues and related costs are accounted for during the same time period. The income statement for Synovate FZ-LLC is as follows11: Income Statement (AED) 2008 2007 Revenue 27,237,651 22,667,639 Other Income 1,494,960 353,653 28,732,611 23,021,292 Direct Costs 16,356,466 12,779,429 Staff Salaries and benefits 7,315,214 5,920,976 Rent and License fees 1,228,160 1,284,194 Administration, Selling and general expenses 2,685,465 1,973,716 Management fees 3,059,091 1,027,595 Kuwait operation losses 3,470,961 Finance costs 17,987 15,271 34,133,344 23,001,181 Net (loss)/profit of the year -5,400,733 20,111 The Cash Flow Statement The cash flow can be used to evaluate the following: 1. Cash used in operating activities 2. Cash used in investing activities 3. Net cash from financing activities The cash flows statement for the company for 2008 is as follows: Cash Flows (AED) 2008 2007 Nat Cash (Used in)/from operating activities -570,179 1,393,487 Net Cash used in investing activities -89,800 -38,045 Net Cash used in financing activities -200,256 Net (decrease)/increase in cash and cash equivalents -860,235 1,355,442 Cash and Cash equivalents at the beginning of the year 2,162,935 807,493 Cash and Cash equivalents at the end of the year 1,302,700 2,162,935 Ratio Analysis Ratio analysis is the best and most popularly used for performing the financial analysis of the company. Ratios are best tool for measuring liquidity, solvency, profitability and management efficiency of the firm. The ration analysis helps in analyzing the probable casual relationships among different items after analyzing the past results. These ratios are derived after analyzing the past results and helps management to prepare budgets, to formulate policy and to prepare future action of plan. Ratio analysis also helps in making inter firm comparison and also comparisons between different divisions of the company. In order to determine whether a company is worth investing, analysts conduct a financial statement analysis using ratio analysis tools. Liquidity Analysis The term liquidity refers to the firm’s ability to pay its liabilities in the short run; Liquidity ratios are calculated to determine the relative strength of the concern in meeting its current obligations, so as to maintain the sound liquidity. Current ratio is the most important liquidity ratio. It indicates company’s ability to pay its current liabilities out of its current assets. It shows company’s commitment to meet its short-term liabilities (current liabilities). The ratio indicates the extent of ‘margin of safety’ or ‘cushion’ available to the current creditors. It is calculated by division of current assets with current liabilities. The current ratio of the company for the past 2 years is as follows: Current assets are defined as assets that can be converted into cash within an (one) accounting year. It includes cash, bank balance, short-term investments, bills receivable, sundry debtors, closing stock, prepaid expenses, short term loans and advances. Current liabilities are the liabilities which are payable within an accounting year. It includes bank overdraft, bills payable, sundry creditors, outstanding expenses, provision for taxation, proposed dividends, accrued interest, advances payments, long-term debt maturing within a year. In theory, larger the current ratio, greater is the protection available to short term creditors. The current ratio of our company in 2008 was 0.76 which is below the acceptable mark of 1. This shows short term liquidity risk to Synovate FZ-LLC wherein it would have trouble paying its short term liabilities. This ratio is a supplementary ratio to give double assurance as to the soundness of the current financial position of the business. It is calculated by the division of quick assets by current liabilities. It represents the number of times current liabilities are covered by quick assets or the number of rupees of liquid assets relative to total current liabilities. It indicates the firm’s ability to pay its current liabilities out of its most liquid assets. In the case of Synavate FZ, the liquidity ratio of the company is same as that of current ratio. This is because the company being in services industry does not operate with inventories. Profitability Analysis The gross profit ratio measures the relationship of gross profit to net sales and is usually expressed as a percentage. Gross profit ratio represents the excess of what a concern is able to charge as sale price over the cost of goods sold. This surplus is able to meet the operating expenses and non-operating expenses. The amount remaining after meeting those expenses represents the net profit, which belongs to shareholders. The net profit ratio establishes the ratio between net profits (after taxes) and sales, and indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. It gives the measure of net income generated each rupee of sales. This ratio gives an overall measure of the firm’s profitability. The gross profit ratio and net profit ratio for Synovate FZ is as follows: The ratio is very crucial because if the profit is not sufficient, the firm shall not be able to achieve satisfactory return on its investment. The ratio indicates firms capacity to face adverse economic conditions such as price competition, low demand etc. The firm is under the profitability pressure due to its high operating expenses. This can certainly be highlighted from the analysis. Capital Structure Analysis Synovate FZ is an all equity company, relying only on short term sources of debt from related parties. This ratio determines the soundness of the long-term financial policies of the company and also measures the relative investment proportions of outsider’s und and shareholder’s fund in the company. It is also and “External-Internal” equity ratio. The primary concern for the company is its negative net equity. The total equity of the company as of 2008 is AED -6.5 million. This indicates that the firm has negative retained earnings. Efficiency Analysis The efficiency analysis of the company could be done the asset turnover ratio. The ratio indicates to what extent fixed assets are contributed towards sales. We cannot access this ratio with one year data. This should be compared with the previous periods to assess the investment in fixed assets in reasonable or not. The asset turnover ratio of the company for 2008 and 2007 are 1.31 and 1.27. This means that in 2008, assets of the company are contributing 1.31 times to the sales of the company. Vertical Analysis The vertical analysis of the income statement of the company is as follows: Income Statement (AED) 2008 2007 Revenue 100.00% 100.00% Other Income 5.49% 1.56% 105.49% 101.56% 0.00% 0.00% Direct Costs 60.05% 56.38% Staff Salaries and benefits 26.86% 26.12% Rent and License fees 4.51% 5.67% Administration, Selling and general expenses 9.86% 8.71% Management fees 11.23% 4.53% Kuwait operation losses 12.74% 0.00% Finance costs 0.07% 0.07% 125.32% 101.47% Net (loss)/profit of the year -19.83% 0.09% The vertical analysis of the balance sheet of the company is as follows: Balance Sheet (AED) 2008 2007 Noncurrent Assets Property, Plant and Equipment 3.31% 4.63% Current Assets 0.00% 0.00% Trade and other receivables 37.60% 33.25% Due from related parties 55.57% 54.86% Bank balances and cash 6.85% 11.89% 100.00% 100.00% Current Liabilities 0.00% 0.00% Trade and other payables 15.69% 15.55% Due to related parties 115.31% 93.82% 131.01% 98.38% Net Current Liabilities -31.01% -9.38% Non-Current Liabilities 0.00% 0.00% Provision for employees ended of service gratuities -1.86% -1.30% Net Liabilities -29.55% -6.05% 0.00% 0.00% Equity 0.00% 0.00% Share Capital 0.45% 0.55% Accumilated Deficit -30.01% -6.60% Total Equity -29.55% -6.05% Horizontal Analysis The horizontal analysis of Balance sheet of the company is as follows: Non current Assets Property, Plant and Equipment 86.53% Current Assets Trade and other receivables 136.70% Due from related parties 122.46% Bank balances and cash 69.63% 120.89% Current Liabilities Trade and other payables 122.03% Due to related parties 148.57% 160.98% Net Current Liabilities 399.75% Non-Current Liabilities Provision for employees ended of service gratuities 173.08% Net Liabilities 590.73% Equity Share Capital 100.00% Accumulated Deficit 549.85% Total Equity 590.73% The horizontal analysis of the Income statement of the company is as follows: Income Statement 2008 Revenue 120.16% Other Income 422.72% 124.81% Direct Costs 127.99% Staff Salaries and benefits 123.55% Rent and License fees 95.64% Administration, Selling and general expenses 136.06% Management fees 297.69% Kuwait operation losses Finance costs 117.79% 148.40% Net (loss)/profit of the year -26854.62% Income Budget for 2009 The next part is to build the budget of the company for 2009. As the company is under the pressure in terms of revenues and profits, we will use the same growth rates for 2009. However the losses that the company had incurred in Kuwait in 2008 would be reduced to 20% of the total amount. This is because it was a one-time loss and the only charges to be incurred now in this regard are restructuring charges. The budgeted income statement for 2009 for the company is: Income Statement (AED) 2009 Revenue 32729021 Other Income 6319487 35860843 0 Direct Costs 20934737 Staff Salaries and benefits 9037759 Rent and License fees 1174571 Administration, Selling and general expenses 3653880 Management fees 9106737 Kuwait operation losses 694192.2 Finance costs 21186.05 Net (loss)/profit of the year -8762220 So according to our analysis and forecast, in 2009 the company would make a loss of AED -8.76 million. Capital Investment Appraisal The company also has in investment proposal of buying the assets of a firm in the same industry. Though the cash flows of the company are still under pressure, but we’ll like to analyze the capital investment with the company. This is done as follows: Cost 100000 Salvage Value 20000 Depreciation Cost 20000 Resale Value 30000 Gain 10000 Tax on Gain 4000 Profit 6000 Initial investment -306600         Net working Capital -29200         year 0 1 2 3 4 Investment -306600         Networking Capital -29200         Operating Cash flow   46720 46720 46720 46720 Released Working Capital         29200 Cash flow for years -335800 46720 46720 46720 75920 NPV Rs. -161,495.84         Fixed Cost 329000 Margin per unit 216.4 OCF 218200 Total Cost recovery required at NPV zero 547200 Breakeven Unit 512.0148     According to the NPV analysis, we would not go with the investment proposal with the company. Report to the Management The analysis of the company’s performance shows that the company is under earnings pressure. Despite the growth rate in revenues, the company had made losses in 2008 owing to one-time charges at Kuwait. But despite that, there is a positive outlook for the company. In 2009, the company is forecasted to make losses, but the position will improve as compared to that of 2008 and it is expected that it would again be a profit making company in 2010. As the company is under the pressure in terms of revenues and profits, we will use the same growth rates for 2009. However the losses that the company had incurred in Kuwait in 2008 would be reduced to 20% of the total amount. This is because it was a one-time loss and the only charges to be incurred now in this regard are restructuring charges. The investment proposal of the company yields negative NPV of AED 0.16 million. So going by that we would not invest money in buying the assets of another company in the same industry. 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