The Queen Elizabeth II Conference Centre - Assignment Example

Financial Management Inserts His Her Inserts Inserts Task Ratio analysis of The Queen Elizabeth II Conference Centre In order to sustain profitability and effectiveness of a business effective financial management and planning should be carried out. In 2012, the Gorvenment of U.K. reduced the number of conferences and meetings to be carried out in the QEIICC. This has deprived the business of its main source of income and a ratio analysis has to be carried out to enable planning for the future. Stockholders’ equity = Assets – liabilities = £13,509,000 - £3,071,000 = £10,438,000 a. Liquidity Ratios As the current ratio is greater than 1, the company has no liquidity problems. It can be seen that the current ratio is actually quite high thus signifying that the company has excess cash that should be used or invested in some other project within the QEIICC. Since the business deals with service provisions, its productivity is not dependent on the sale of inventories rather than service. b. Asset Management ratio These ratios assess the efficiency of the utilization of the principal assets in a company. The fixed assets turnover looks at how the company utilizes assets of the company. Looking at the two years of interest, we see that the ratio increases. This means that the company utilized its fixed assets more effectively in 2013 than in 2012. c. Debt Management Ratios Companies usually borrow money in order to finance their operations as debt capital is usually cheaper than equity capital. The debt ratio shows the ability of a company to meet its debts from its operations. As shown, the debt ratio is quite low for the QEIICC, hence it can meet its debt obligation. In 2013, the corporation managed to depend less on debts than in the previous year. For 2013, the debt to equity ratio was 3.5 to 1 a decrease from the previous year. d. Profitability Ratios The profitability ratios evaluate the ability of an organization to generate profits. The net profit margin for 2013 was lower than that for 2012. In 2013, the company was able to earn £0.118 for every £1 of revenue while in 2012 this value was £0.123. The gross profit margin of the company improved during the 2012/2013 period. The company has a positive gross profit margin for both these two periods and as such is capable of meeting its interest payments on time. As it can be seen, the return on assets decreased between 2012 and 2013. This can be attributed to the government’s mandate to decrease the number of meetings, conferences and overnight stays in the QEIICC. The decrease is however minimal, signifying that the company utilized its assets better in 2013 than in 2012. The return of common equity does not experience any major change between the two financial years. Stakeholders’ investments receive a good boost from the business activities in both these years. The QEIICC made a decision to retain cash and not pay any dividends for the period 2012/213. For this period therefore, the dividend pay-out ratio was zero. The main reason for retaining earning was so as to expand and invest in other projects within the company. Task 1b The Queen Elizabeth II conference centre is owned by HM Government and its activities are under the management of the Department of Communities and Local Government. The centre is government owned and as such has several advantages over private owned companies. First, the company has a dependable source of capital and can request additional capital for expansion activities without a lot of trouble. The company also benefits from government bookings into the company or on services to visiting foreign dignitaries who prefer to stay in the centre. The company is primarily debt-financed. In 2013, the company was 22.2% equity financed and 77.7% debt-financed. In 2012, the ratio of debt to equity was quite high with the company being 18% equity financed and 82% debt financed. Most companys have a high debt to equity ratio and as such, the QEIICC fits with most large corporations. Task 1c Looking at the liquidity ratios between 2013 and 2012, we see that there was an improvement in 2013. Since the company is a service provider, there are no inventories needed to be sold thus the current ratio and the quick ratios are equal. In 2013, the current ratio was 4.025 and increase from 2012 whose value was 3.0. The main reason for this improvement was diversification of the activites of the conference centre as well as better marketing and advertising strategies adopted by the company in 2013. The day sales outstanding decreased between 2012 and 2103. This is because the receivable in 2012 was higher in 2012 than in 2013. In 2012, the London Olympics boosted the earnings of the company as during the whole period the Centre was used as the Olympic house for the Italy. The decision by the government to cut down conferences and meetings held in the Center also affected the day sales outstanding. The fixed assets turnover between the two periods however increased. This is mainly due to better utilization of fixed assets and the adoption of a new strategy that focuses on both government corporations and private entities as a source of income. The debt management ratios for 2013 were better that they were in 2012. The debt ratio in 2013 was 0.23 a decrease from 2012. The company utilized less debts in 2013 to finance its operations than it did in 2012.The debt to equity ratio of 2013 was also lower in 2013 than it was I 2012. In 2013, the debt-to-equity ratio was 3.5 while in 2012 the same was 4.3. This decrease can be attributed by the decision of the company to retain cash and not offer dividends to its investors during this period. The money was then used to finance the operations of the Conference Center resulting in a lower debt ratio as well as a lower debt-to-equity ratio. The profitability ratios also show an improvement in the centres operations between the two periods. In 2013, the gross profit margin was 0.33 while in 2012 it was 0.24. This increase in gross profit margin can be attributed to better business practices that yielded more money from the same assets than in 2012. When we look at the net profit margin, we see that there is a decrease between the two periods from 0.123 to 0.118. This can be attributed to more taxation on the Centre as a result of fewer exemptions from the government. When the government reduced its business with the centre, the centre ceased receiving exemptions in taxations that resulted from government activities. Task 1d The only shareholder in the company is the Department of Communities and Local Government. For the sake of this question, we will assume that the Local Government intends to invest a further £50,000 in the company. In this instance, we have to compare the company’s return on common equity with the average deposit rate interests in the country. At the moment, the deposit rate interest in the country is 3% for easy access and 3.5% for fixed accounts. The return on common equity in 2013 was 0.12 as shown above. This means that the investor will have a 12% returns on his investments. If the client invests £50, 000 in the company we expect him to earn: 12%*£50,000 = £6,000. If the client decided to invest in a bank, his earnings will be compounded and even if it is not, banks only pay a interest of 3.5% which is much lower than the 12% possible from the company. I would thus advise the individual to invest in the company rather than the bank. Task 1e If the company requires a further £500,000 in capital I would suggest debt financing for this period. The first reason is that since the company has already decided to retain money thus declining to pay its investors dividends, equity financing will create panic with its main investor. Investors will be concerned that the company is failing as it has not paid dividend and still needs more money. The next reason for advising debt-financing is that the debt ratio of the company is quite low. In 2013, the debt ratio for the company was 0.21. This value is quite low and shows that the company is capable of meeting its debts with the existing assets. An additional £500, 000 with the same assets will yield: This is a very small increment in its debt ratio thus, it does not pose a major problem for the company. If we consider the debt to equity ratio we get: The debt to equity ratio while considerable is within an acceptable range showing that the company has enough equity and assets to meet its debts within the allocated time. The company has a sound financial standing and has been earning a very high income. Task 1f The company has had a some success over the years. In dealing with the working capital, I would advise the company to invest in more holdings or construct another facility to handle more corporate clients using long-term debt. The company’s fixed assets returns is very high for the period 2012/2013 having returns of 6.48 in 2013 a rise from the previous years. The company’s debt ratio is low thus it can add a long–term to its financial accounts. Task 2 The cash flow above has been able to account for all eventualities for the half-year period. The wholesaler has planned his finances such that he always has cash at hand at any given moment. From the cash flow projection, the business will remain solvent for a long time period. The budgeted costs for December are however perplexing as we expect that during the holiday season, there will be more sales that all the other period. Other than that, the budget is realistic and the cash flow projections are in line with what has been budgeted. Task 2b The business offers customers a one month credit. In my opinion, this is quite dangerous as the economy is still unstable hence, the wholeseller does not know what condition his consu,ers are in and if they will default on their payments. I believe the wholesaler’s decision to pay his electricity in quarterly arrears is correct as it offers him a chance to review his electricity usage and how it varies with the operations of the business. Finally, the wholesaler decision to buy a truck in November was foolhardy as the business was not quite stable as he had already made a large electric payment in September while at the same time, the sales revenue of the businesses were decreasing as of October. He should have scheduled the purchase for a time in which the sales revenue for the business were high. Task 3 Read More