Accounting Evaluation And Forecast - Essay Example

ACCOUNTING EVALUATION AND FORECAST 2005 Accounting Evaluation and Forecast Introduction According to Carter & Usry, activities of an organization can be divided to three large groups, which are Planning, Organizing and Controlling. Theoretical literature often divides these activities into different subjects. In practice however, it is hard to separate these activities into different groups. Carter and Usry mentioned that "In Reality, planning and controlling are simultaneous, cannot be separated, and an interconnected process". Within this elaboration we will evaluate performance of the "Aberdare - Super Service Mini Market" and furthermore describe Income Statement and Balance sheet forecast for planning purposes. II. Analysis on Strength and Weakness Comparison between available ratios Ratios Aberdare Pernarth Operating Profit/Operating Assets 34.72% 35% Operating Profit/Sales 17.36% 19% Sales/Operating Assets 2 x 1.84 x Sales/Fixed Assets 2.01 x 2.22 x Sales/Current Assets 7.58 x 10.75 x Cost of Sales/Sales 50% 50% Expenses/Sales 32.64% 31% Sales/Stock 10 x 16.39 x Interest Cover 31 x 20 x Gearing 33.33% 20% Current ratio 1.6 x 2 x Quick Ratio 0.39 x 1 x From available ratios we can conclude the following: II.1 Strengths Aberdare According to the financial ratios, Aberdare posses an overall weaker performance, compare to the Pernarth mini market. The only ratios that exceed Pernart mini market are sales/operating assets ratio and the interest cover ratio. The sales/operating assets ratios present a slight lead on Aberdare's effectiveness on using its operating assets to produce sale, while the interest cover ratio display Aberdare's better performance on taking advantage of debts to finance operations. However, financial ratios should not be used as a sole instrument of measuring performance. According to available data, Aberdare's sales in 2004 are amounted to $ 1,250,000 and the operating profit is $ 217,000. This has a relatively significant difference compare to Pernarth mini market, which produce a sales number of only $ 1,000,000 and operating profit of $ 190,000. Thus, in actual numbers, Aberdare mini market contributes more income to the business. Pernarth According to the financial ratio, Pernarth is overall better than Aberdare mini market. The ratios indicated that pernarth has a better performance in terms of: 1. Effectiveness of operation, displayed by the Operating Profit/Operating Assets ratio, Sales/Fixed Assets ratio, and Sales/Current Assets ratio. These ratios describe that Pernarth uses its assets more effectively to produce sales and profit. 2. Efficiency of operation, displayed by the Operating Profit/Sales ratio, Cost of Sales/Sales ratio, Sales/Stock ratio, Expenses/Sales ratio, and Sales/Stock ratio. These ratios describe that Pernarth's require less cost and expenses to produce equal sales number and profits compare to Aberdare's. 3. Liquidity of the mini market, displayed by the Interest Cover ratio, Gearing ratio, Current ratio, and Quick ratio. There ratios describe that Pernarth mini market require less debts compare to Aberdare mini market to run the business. II.2. Weaknesses Aberdare As stated before, compare to Pernarth, Aberdare mini market display a slightly poorer performance. Most of the ratios display only small difference between the two store, however, significant different appears on Sales/Current Asset ratio, Sales/Stock ratio, Interest cover, Gearing and Quick ratio. The Interest Cover and Gearing ratio indicate that Aberdare has too much debt within its financial structure. The Sales/Current Assets ratio, Sales/Stock ratio and Quick ratio on the other hand, describe that the mini market employ too much current asset on the current year, especially too much stock. Pernarth The mini market is superior according to any measurement of the financial ratios, however, in real numbers, the mini market does not seem to generate as much sales and profit as Aberdare. Thus, relating to the fact that Pernarth is the most profitable minim market according to the financial ratios, we suggest that Jeff employ more resources within this mini market to encourage sales growth. III. Analysis of Profit Centers Profit Centres Salaries ($) Salaries (%) Areas Used (%) Asset Value Asset Value (%) Employees Cost of Sales ($) Sales ($) Sales (%) 1 44,000 12.57% 10 80,000 12.91% 3 62,500 125,000 10 2 38,000 10.86% 20 70,000 11.29% 3 93,750 187,500 15 3 40,000 11.43% 22 230,000 37.09% 4 312,500 625,000 50 4 80,000 22.86% 28 120,000 19.35% 6 62,500 125,000 10 5 34,000 9.71% 10 70,000 11.29% 3 93,750 187,500 15 6 34,000 9.71% 5 30,000 4.84% 3 0 0 0 7 80,000 22.86% 5 20,000 3.23% 4 0 0 0 Total 350,000 100% 100 620,000 100% 26 625,000 1,250,000 100 According to the data displayed above, we will evaluate the performance of each Profit Center (PC) individually. PC 1 (fresh meat area) displays an average performance. It responsible for 12% of total salaries, 10% of used areas, 13% of total asset value and about 11% of total employee and contributes 10 % of the total sales. Although the percentage of salaries, areas used and asset value employed are slightly larger than the percentage of sales, the PC present a comparatively acceptable performance. PC 2 (dairy products) presents a relatively better performance than PC 1. It contributes for 15% of the total sales, but responsible for similar expenses to PC 1, and even lower salaries. The only resources it consumes, that is larger than the percentage of sales is the area used. PC 2 uses 20% of the total areas used. PC 3 (stores) is the most profitable profit center of all. It accounts for half the total sales number and responsible for only 11% of salaries and 22% of areas used. Even with the fact that it uses 37% of company assets, the profit center still generates the largest profit for the mini market. PC 4 (general groceries) on the other hand, produces losses for the mini market. It employs the most employees, uses the largest share of the layout and also takes advantage of a significant portion of the mini market's assets to contribute only 10% of the total sales. It is unprofitable to keep this profit center running. PC 5 (frozen food) performs slightly better than PC 2. It provides the same share of sales but employs slightly less area and spends less money on salaries. PC 6 (alcoholic drinks & cigarettes) is an unprofitable profit center. It employs 3 employees, 5 % of the total asset value and the total area, and 10% of the total salaries but presents no sale. PC7 is the administration office. The department has naturally generates no sales despite being responsible for a significant share of the expenses As a conclusion, the mini market has 4 profitable profit centers, the other two is currently contributing losses. IV. Financing Alternatives The Super Service mini markets can be classified as a small and developing business. The subject of providing financing alternatives for a small business is an independent field of study. There are basically 3 alternatives of financing alternatives, personal sources, debt financing and equity financing. We will elaborate the options available for small and developing business. 1. Personal Sources Personal sources are financial sources coming from personal savings and loans from friends and relatives. For Jean, this means to ask additional resources from her boss Jeff. Actually, this alternative has considerable positive effects. First, Aberdare mini market are producing presentable profit and have a good prospect of growth, thus, it is not a lost cost for Jeff to invest more on the mini market. Second, most lenders prefer to give credit for someone who invest a reasonable percentage on their own business, as an indication that they will work hard to ensure its growth ('Small Business Financing', 2005). 2. Debt Financing The biggest advantage of debt financing is the ability to retain control of tour business. No matter how much money you obtain from creditors, you still have full decision making authority and entitled to company profits. However, the most considerable disadvantages of the alternative is having to make monthly payments on a loan while cash might be scarce in the first few years of the business. Debt financing alternatives available for small business are loans from Banks, loans from commercial finance companies, leasing and outsourcing. Bank is still the must trustworthy agent when it comes to financing. They still offer the lowest rate of interest within the most reasonable time frame. However, Banks does not like risks. Aberdare mini market has a current gearing ratio of 33.33%, which means that 33.33% of the capital employed is funded by loans. This amount is still relatively presentable especially with Aberdare's reassuring present performance and future prospect; however, the Bank would most likely not lend money that would cause the gearing ration to increase to over 50%. A loan from commercial finance companies might charge higher interest rates from Banks. However, they are more likely to approve our loan because the commercial finance companies will require the loan to be collateralized. The biggest risk is, if we cannot make our monthly payment, then the equipment or other assets we purchase from the loan will be theirs to claim ('Small Business Financing', 2005). Leasing and outsourcing will allow Jean to save money from spending it all at once for initial investment of the expansion plan. Some equipment for the mini market can be leased or out-sourced, allowing us to divide the burden of large initial investment to several years of operation. 3. Equity Financing One of the most common forms of equity financing is venture capital. Venture capital is seldom chosen by small businesses because they believed that it is provided only for large and high-tech companies producing millions of dollars in profit. Actually, there are many companies who will grant us loans if we provide reasonable prospects ('Business Financing Alternatives', 2005). A similar form of equity financing is the private investment partnership. It is a deal with one or more individuals to provide funding for the business. They act as passive partners who provide funds and expect substantial return of the investment. The return is usually less than those of the venture capital ('Small Business Financing', 2005). V. Budgetary Control Budgetary control activities are closely related to the making of a budget manual. According to "Accounting and Finance", 2005 a budget manual is "a document which set out, inter alias, the responsibilities of the persons engaged in, the routine of, and the forms and records required for, budgetary control". The budget manual generally consists of timetables of all stages of budgeting, reports, statements, forms and other records to be maintained. There are many advantages of making a viable budget manual. For one, it is a formal record defining the functions and responsibilities of each executive, enhancing individual performance evaluation (Accounting and Finance, 2005). A good process of budgetary control should consist of: 1. Preparation of various budget 2. Continuous comparison of actual performance with budgetary performance 3. Revision of budget in the light of changed circumstances. (Accounting and Finance, 2005) It is a good idea to involve the mini market manager in the process of planning the budget; therefore they would have more commitment toward the budget. The mini market should also make the concept of responsibility centers effective by evaluating individual profit centers. Unprofitable responsibility centers must be reform or eliminated from the business. VI. Photographs investment Break Even calculation: No. Cost Driver (per 36 prints) Cost 1 Photographic paper 0.75 2 Chemicals 0.40 3 Album 0.80 4 Free film 0.75 Total cost (per 36 prints) 2.70 No. Item Cost 1 Average cost of films printed (yearly) 33,750.001 2 Average depreciation expense (yearly) 6,000.002 3 Assistant's salary (yearly) 15,000.00 Total average cost per year 54,750.00 Break even sales (Quantity) = Total Average cost per year / sales price per 36 prints = 54,750.00 / 5.50 = 9,955 films printed Sales with 10,000.00 profit = (total average cost per year + 10,000.00) / sales price = ( 54,750.00 + 10,000.00) / 5.50 = 64,750 / 5.50 = 11,773 films printed Nevertheless, there are several conditions that might results the break even analysis to become irrelevant. As we can see, there are two fixed cost involve within the calculation, which are the employee's salary and the depreciation expense. These two fixed cost are not necessarily constant during the years3. Thus, it is important to realize that the numbers above are resulted from several assumptions: Cost of materials is constant during the years Market price per 36 prints is constant during the years Salaries are constant during the year Depreciation are divided equally during the years If one or more of those assumptions are not meet, the break even analysis as calculated above are no longer relevant. VII. Providing credit for customers Working capital is defined as current assets minus current liabilities. It is the level of resources available for operating needs. Different industry requires different level of working capital. Insufficient working capital might results the business unable to 'capture' existing business opportunities, while excess working capital could mean inefficiency, or a large opportunity cost. According to 'Working Capital Management', (2005) the objective of working capital management is to "maintain the optimum balance of each of the working capital components". As a small retail business, the entity must have sufficient working capital to ensure that business is working efficiently. Providing credit for the customer will require a more careful supervision of the financial position, because sales do not always generate available cash. With the decision to provide credit for the customers, there is a great possibility that receivables would increase significantly; resulting working capital to be insufficient for the business's operating needs. Thus, it is the final decision, than the company must apply a system of credit selection on each independent business unit, which allows only those 'credible' customers to have an account. The system could offer credit based on prior purchase frequency, company collateral, company reputation, company's purchase capacity, etc. Giving credit to just any company with a canteen could in the end result negative cash flow for the business unit. VIII. Forecasts Profit & Loss 2005 Forecast Accounts 1/1/2005 - 31/6/2005 1/7/2005 - 31/12/2005 2005 Sales 687,500.00 728,750.00 1,416,250.00 cost of sales 330,000.00 349,800.00 679,800.00 gross profit 357,500.00 378,950.00 736,450.00 Expenses: Rent&Insurance 8,625.00 8,625.00 17,250.00 Heat&Light 3,120.00 4,080.00 7,200.00 Security 7,200.00 12,800.00 20,000.00 Salaries 181,125.00 193,803.75 374,928.75 Depreciation 12,500.00 5,000.00 17,500.00 Total 212,570.00 224,308.75 436,878.75 Net Profit Before interest and tax 144,930.00 154,641.25 299,571.25 Interest 3,500.00 3,500.00 7,000.00 Profit Before Tax 141,430.00 151,141.25 292,571.25 Corporation tax 42,429.00 45,342.38 87,771.38 Profit after interest and tax 99,001.00 105,798.88 204,799.88 Balance Sheet Dec 31, 2005 (forecast) Assets Liabilities & Equity Fixed Assets Liabilities Fixtures & Fittings 720,000.00 Current Liabilities Vehicles 140,000.00 Creditors 67,980.00 Total Fixed Assets 860,000.00 Corporation Tax 87,771.00 Current Assets Total Current Liabilities 155,751.00 Stock 100,000.00 Long Term Liabilities 100,000.00 Debtors 40,000.00 Total Liabilities 255,751.00 Bank 42,551.00 Equity Total Current Assets 182,551.00 Jeff-Capital 300,000.00 Reserves 282,000.00 Profit & Loss 204,800.00 Total Equity 786,800.00 Total Asset 1,042,551.00 Total Liabilities and Equity 1,042,551.00 Works Cited 'Accounting and Finance on Computer', 2001, [Online] Retrieved September 7, 2005, Available at: http://www.laynetworks.com/Accounting%20and%20Finance%20on%20Computers.htm 'Business Financing Alternatives', 2005, [Online] Retrieved September 7, 2005, Available at: http://www.peakconsultinginc.com/Articles/business_financing_alternatives.htm 'Small Business Financing', 2005, [Online] Retrieved September 7, 2005, Available at: http://www.access2000.com.au/Guides/Tips/Small_Business_Tips/small_business_tips_25.html Carter & Usry. 2005, 'Working Capital Management', [Online] Retrieved September 7, 2005, Available at: http://www.treasury.govt.nz/publicsector/workingcapital/chap2.asp Read More