Describe the Finance For Managers and Interpretation of the Budget.
Interpretation of the Budget
The main purpose of this assessment is to analyze the budget forecast which is done by the management of the company in order to come up with quarterly sales and estimate the overall expenses of the business. The report will also be including ratio analysis along with comparison for the same as shown. The significant ratios of the business are computed and the same are also compared with industry average. The assessment also includes cash flow forecast for the business during the period showing quarter wise payments and receipts.
The budget which is to be prepared by the management of Folkstone ltd shows that the management anticipates that the sales of the business will increase at predetermined growth rates of 2%, 2.5%, 5%, 2.5%. The sales of the business are estimated for the third quarter is shown to be the maximum. The sales figure which is estimated for the third quarter is shown to be $ 6,586,650 which is significantly more than previous quarter results which is shown to be $ 6,273,000. The gross profit of the business which is estimated to be 3,713,224 for the forth quarter. The gross profit of the business is shown to be on an increasing trend which is due to the anticipation of the management that the sales of the business has improved significantly.
The costs of the business which is relating the operating activities of the business is shown to have increased significantly over the four quarters of the business. The expenses of the business are on a rise which is increasing as the sales of the business increases. The profits of the business for the year 2019 is estimated to be $ 1,579,683. The sales of the business for the fourth quarter which is shown is much more than the sales which was achieved by the business for same quarter The profits of the business is also anticipated to grow from the last year’s fourth quarter which is shown to be $ 340,000 and the same is shown to have improved significantly in 2019 which is shown to be $ 550,910.
The recommendation which can be suggested to the management of Folkstone ltd are listed below in details:
- The costs of the business are shown to be on the rise as per the anticipation of the business and therefore the management needs to incorporate proper supervision and monitoring plan for the same in order to reduce the unnecessary costs of the business.
- The management also needs to improve the sales which means that the growth in sales of the business needs to be improved further.
Financial analysis is carried out a business organization in order to estimate the performance of the organization and also to predict the current trends and growth possibilities of the business. There are various techniques which are used for the purpose of conducting financial analysis of a business which are ratio analysis, vertical and horizontal analysis of the financial statements. From a stakeholder’s point of view, financial analysis of the financial statement helps the business to establish whether the business is performing as per the expectation of the shareholders or not. The importance of financial analysis in a business are discussed below:
- Financial analysis plays a vital role in measuring the financial performance of the business on the basis of expectation of the business.
- Financial analysis in the process of planning and forecasting of results which the management of the company wants to achieve in the long run.
- Financial analysis helps the management of the company to identify the resources which are required by the business which can be physical or monetary resources.
- Financial analysis in a business helps the management in identifying the problems which are faced by the business.
Ratio Analysis is one of the tools which is used by the management of the company for the purpose of conducting financial analysis. The financial analysis of the information for the business
Importance of Financial Analysis
The profitability ratio which is shown above covers key financial ratios of the company which are gross profit margin, operating profit margin, return on assets, return on equity. Gross profit margin and operating profit margin reveals the profits which is earned by the business at production level and operating level considering the sales of the business. The gross profit margin and operating profit margin of the business is shown in the above table is shown to have increased from estimates of 2017 which indicates increase in the profitability of the business. The return on assets and equity of the business shows the ability of the company to generate appropriate returns on the value of assets and equity used by the business.
On the other hand, current and quick ratio are related with the overall liquidity of the business. Both current ratio and quick ratio for the business is shown to have fallen which may be due to the investments which are undertaken by the business. The long-term solvency ratio of the business is shown to be made up of debt to assets and debt to equity ratio of the business. The debt to equity ratio of the business shows the relationship between the debt and equity capital in the capital structure of the business. The debt to assets on the other hand compares the debt capital which is available to the business in comparison to the assets which the business has during the year.
The efficiency ratios of the business are made up of stock turnover ratios and account receivables ratio. The stock turnover ratio shows how quick the stocks of the business can be converted into liquid cash and same goes for account receivables of the business. Both the estimates are shown to have fallen which may be due to the decrease in overall efficiency of the business.
The ratios which are computed in the above table shows profitability, solvency and liquidity ratios of the business (Industry benchmarks., 2018).
Basis |
Indicator |
Benckmarks |
Profitability |
Gross Profit Margin% |
56% |
Net operating Profit Margin % |
44% |
|
Return on Assets |
10% |
|
Return on Equity |
5% |
|
Short term Solvency |
Current Ratio |
1.04 |
Quick ratio |
0.91 |
|
Long Term Solvency |
Debt to Asset Ratio |
0.80 |
Debt to Equity Ratio |
0.65 |
|
Efficiency |
Stock Turnover Ratio |
14.9 |
AR Turnover Ratio |
15 |
The above table shoes the financial ratios which are shown for the industry in which the business operates.
The limitations which can be identified for the financial analysis in general terms for the ratios are given below:
- In many cases ratio analysis does not provide a true view of the financial statement of the company.
- The ratio analysis does not consider external elements such as inflation or other regulations which can affect the sales of the business.
- The comparison of ratios of other companies is unrealistic as the operational structure of different businesses are different and thus ratios might depict different results.
The limitation in specific results which can be identified are:
- The ratio of the business does not depict a true result as the growth in profits and sales are not clearly depicted in the same.
- The ratio analysis does not consider the company strategy and therefore might not be showing accurate results.
- In case of liquidity ratio, the ratio might have declined but the same may be due to investments made by the business.
The cash flow forecast which is shown in the above table shows that the sales of the business is anticipated to decrease after the first quarter and the same is shown to be $ 5,900,000 in the 2nd quarter. The maximum receipts from cash sales of the business is shown in the third quarter which is due to the fact that the management anticipates increase in demand of the business. The collection from debtors suggest that there will also be credit sales which is shown to be evenly throughout each quarter of the year (Mohanram, 2014). The annual rent of the business for the year starts from the third quarter which shows that the management plans to take a property or space on rent during the third quarter. The tax payments of the business are made on Jan to March quarter which shows the period during which taxes can be paid by businesses. The overall cash balance of the business is shown to have improved significantly during the period and growth is anticipated in the cash inflows of the business during each quarter. The cash forecast for the year shows a figure of $ 13,209,501 which is much more than the opening balance which was initially shown in the cash forecasting budget. The suggestion which can be suggested are listed below in details:
- The management of the company needs to reduce the cash outflows of the business which can improve the cash position of the company.
- The management needs to involve in more credit sales so that the overall cash position of the business can be improved and more cash inflows can be generated.
Conclusion
The above analysis clearly shows the budgets which are prepared by the management of Folkestone ltd is appropriate considering variable percentage of growths in sales and similar increase in the expenses of the business. The ratios of the business are also shown in the above discussion area which depicts the financial analysis for the company. Lastly the report shows cash flow forecast for the business.
Calculation of Profits and Selling price on the basis of Machine Hour and Labour hour
Activity based cost system identifies the main activities of the business and on the basis of the same assigns the costs of the business over the products of the business (Hada, Chakravarty & Mukherjee, 2014).
The traditional costing system does not consider such activities but considers the volume for allocation of costs.
Job costing is the costing which is done for products on the basis of jobs or batches and the cost of the business are allocated in a similar manner.
Process costing allows a business to go through various process to finish the product and the cost are allocated on the basis of the processes.
Reference
Hada, M. S., Chakravarty, A., & Mukherjee, P. (2014). Activity based costing of diagnostic procedures at a nuclear medicine center of a tertiary care hospital. Indian journal of nuclear medicine: IJNM: the official journal of the Society of Nuclear Medicine, India, 29(4), 241.
Industry benchmarks. (2018). Archive.stats.govt.nz. Retrieved 22 September 2018, from https://archive.stats.govt.nz/tools_and_services/business-toolbox/industry-benchmarks.aspx
Mohanram, P. S. (2014). Analysts' cash flow forecasts and the decline of the accruals anomaly. Contemporary Accounting Research, 31(4), 1143-1170.
To export a reference to this article please select a referencing stye below:
My Assignment Help. (2021). Finance For Managers And Interpretation Of The Budget - Analysis And Recommendations Essay.. Retrieved from https://myassignmenthelp.com/free-samples/78101-finance-for-managers/costing-system.html.
"Finance For Managers And Interpretation Of The Budget - Analysis And Recommendations Essay.." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/78101-finance-for-managers/costing-system.html.
My Assignment Help (2021) Finance For Managers And Interpretation Of The Budget - Analysis And Recommendations Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/78101-finance-for-managers/costing-system.html
[Accessed 07 September 2024].
My Assignment Help. 'Finance For Managers And Interpretation Of The Budget - Analysis And Recommendations Essay.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/78101-finance-for-managers/costing-system.html> accessed 07 September 2024.
My Assignment Help. Finance For Managers And Interpretation Of The Budget - Analysis And Recommendations Essay. [Internet]. My Assignment Help. 2021 [cited 07 September 2024]. Available from: https://myassignmenthelp.com/free-samples/78101-finance-for-managers/costing-system.html.