MBA Managing Financial Performance Assignment

MBA FT 2010/11

To

Mr Brian Parkes

From

Yogesh Bhujbal ID: 10497122 17 December 2010

Contents

1. Q. 1 Travin Prakins Pls - Narrative Report 2. Q. 1 Travin Prakins Pls- Appendix

3 6 12 15 17 18 19

3. Q. 1 Travin Prakins Pls- Financial Ratio Analysis .. 4. Q. 2 Drebbel and Fludd Plc - Appendix 5. Q. 2 Drebbel and Fludd Plc Conclusion 6. Q. 3 Answer 7. References . ........

Q1. Answer Narrative report

To: From: Subject:

Board of Directors Financial Analysis Financial Performance analysis of Travin Prakins Pls. 2008 -2007

1.

Introduction

To understand financial performance of Travis Perkins for the year 2007 and 2008 I have carried out financial appraisal of the companys performance. These report analyses consist of comparison between two years (2007 and 2008). First narrative report is explanation of the performance analysis which was carried out. The results from supporting calculative analysis consist of the two parts of the overall report. These results are based on vertical and horizontal analysis of the statement of comprehensive income and statement of financial position. It emphasizes significant changes that have occurred in the companys financial structure and performance over the period .

2:1 Trend Analyses The trend analysis is carried out for the year 2007 and 2008. It consists of vertical and horizontal analysis intended to categorize changes in the formation of the companys financial structure and performance during the period. . 2:2 Comprehensive statement position Vertical and Horizontal Trend analysis The Companys revenue was slightly lower than previou s years by 0.3%. The gross profit of the company was almost same which undoubtedly demonstrates the company had a strong hold on its cost of sales. For instance, inventory. The operating profit fell because of increase in operating expense which also includes increase in selling and distribution by 12%, administrative expense by 16%. The group has acquired an exceptional expense of 56.2 million which has resulted towards lowering the net profit. The company has received a tax rebate of 4.2 million in 2007 but it was not accepted in 2008. There was a slight increase in finance cost as well. As there was a reduction in over profit the amount of tax paid was also less when compared to last year. Economic slowdown had affected the financial performance af ter tax has been affected from exceptional charges and increase in operating expense. Detail s of analysis are available to view in the a ppendix at the end of the report.

2:3 Statement of financial position Vertical and Horizontal Analysis

The horizontal trend analysis disclose s that there has been an increase in non -current asset by 163 million this is mainly due to major growth in deferred tax assets and long term financial derivative instrument. Assuming that companys buys its raw material i nternationally and will need to make payment to its suppliers. These instruments will safe guard from any major adverse currency movement. In addition company has bought additional property . The company has received 19.6 million from the interest in association in 2008. There has been a decrease of 60.9 million in current asset. This is because the reduction in liquid cash by 18.6 million. The company has been maintaining less inventory compared to last year. There has been a reduction of 35.7 million in t rade receivable as well. There were not any important changes in companys financial arrangement as no new capital has been brought in by issuing share capital. Hedging reserve has turned to losses; this might be due to revaluation of financial instrument holding due to financial recession. Non- current liabilities have increased by 226 million. The company has increased its borrowing by 143.4 million in 2008 and the Retirement benefit obligation has increased 53 million. The company has increased there long term provision. It is an upsetting as there has been a major increased in companys long term liabilities. Current liabilities on the other hand have decreased. The company has decreased their short term borrowing and unsecured loan s. Also there was decrease in t ax liabilities. It looks as if the company has increased it long term loans to pay of f its short term liabilities. Overall the comprehensive statement of position analysis imitates not a significant overall structural change. More reference details are to be had in appendix below.

3:1 Financial Ratio Analysis - Profitability ROCE has reduced considerably which state that company is not utilizing its capital capably. The gross profit margin stays on stable which indicates that sales and cost of sales are constant. The net profit margin has reduced; this is because of the rise in operati ng expense. Also the company has acquired exceptional charges which have added towards a lesser net profit after exceptional expense. Company assets are not giving enough on the way to companys revenue. This is because t he return on assets and asset turno ver has decreased considerably.

3:2. Financial Ratio Analysis - Efficiency Trade receivable and trade payable analysing ratios is clearly presentations that company is paying their creditor after 3 month s of their purchases but are receiving cash for their sold products in 1.5 months. However, cash is believed to be held in the business over a peri od of time before paying out their creditors. The inventory turnover has not significant changed in these past two years with a marginal decline and the prototype has stays the same from previous year.

3:3 Financial Ratio Analysis Liquidity Liquidity ratio is shows how efficiently the company functions in order to pay off their short term debts and how efficiently the company manages. Appendix below is showing liquidity ratio can be seen that compared to 2007 the current ratio is his higher henceforth to put forward that the company is more liquid, this read between the lines that the Travis Parkins is proficient of paying off the short term lo ans. Current ratio and acid test ratio is showing that assets of the company have increased when compared to its liability which is good news for company.

5.

Gearing

Companys gearing ratio has improved in 2008, which shows that their dependence on borrowing has enlarged instead of raise funds all the way through equity and reserves. Company must make certain that they pays off their longs term borrowing from their current asset and profits instead of raising additional capital. Curren t finance charges attache d to the borrowings are covered which have decreased since last year point towards major monetary menace of the company if it is not capable to provision the debt interest from existing operating profit. This termination has been made from calculating ratios for that appendix working is available for reference.

Appendix
Q. 1

Vertical Trend Analysis Income Statements

Travin Prakins Pls. Statement of comprehensive income for year ending 31 Dec. 2008

2008 M

2008 %

2007 M

2007 %

Revenue Cost of Sales Gross Profit Operating Expenses Selling and Distribution Admin. Expenses Other operating income Share of result of associates Other Operating Profit before exceptional items Exceptional Items Operating Profit after exceptional items Finance Income Finance Costs

3178.6 (2080.3) 1098.3

100 (65.4) 34.6

3186.7 (2087.3) 1099.4

100 (65.5) 34.5

(728.1) (164.7) 11.2 (1.4) 56.2 271.5

(22.9) (5.18) 0.35 0.04 1.76 8.54

(649.1) (141.8) 11.4 320

(20.36) (4.44) 0.35 10.03

(56.2) 215.3

(1.76) 6.8

320

10.03

7.7 (76.7)

0.24 (2.41)

3.7 (62.2)

0.12 (1.95)

Profit before tax Income tax expense Profit / loss for the year

202.5 (58.6) 143.9

6.37 (1.84) 4.52

261.5 (80.3) 181.2

8.20 (2.52) 5.68

Travin Prakins Pls. Comprehensive Statement of Position as 31 Dec. 2008 Vertical Trend Analysis

Vertical Trend analysis of balance sheet as on 31 Dec. 2008

ASSETS Non-Current Assets Property, Plant and Equipment Goodwill Other Intangibles Assets Derivative financial instrument Interest in Associates Investment Property Available for sale investment Deferred Income Tax Assets Total Non Current Assets Current Assets Inventories Trade and other receivables Derivative financial instrument Cash and cash equivalents Total current assets TOTAL ASSETS

2008 M

2008 %

2007 M

2007 %

534.5 1351.4 162.5 80.3 19.6 3.4 2 19.5 2173.2

18.48 46.73 5.62 2.78 0.68 0.12 0.070 0.67 75.16

505 1329.7 162.5 3 3.5 2 4.5 2010.2

18.10 47.67 5.82 0.10 0.12 0.07 0.16 72.06

321.9 386.2 2.4 7.7 718.2 2891.4

11.13 13.3
0.083

330.2 421.9 0.7 26.3 779.1 2789.3

11.83 15.1
0.025

0.27 24.84 100

0.94 27.93 100

Travin Prakins Pls. Comprehensive Statement of Position as 31 Dec. 2008 Vertical Trend Analysis

Vertical Trend analysis of balance sheet as on 31 Dec. 2008

EQUITIES & LIABILITIES Capital & Reserves Issue Capital Share Premium Account Other Reserves Hedging Reserve Own Share Accumulated Profit Total Equity
Non-Current Liabilities Investment bearing loans and borrowing Derivative Financial Instruments Retained benefit obligation Long term provision Differed Tax liabilities Total Non Current liabilities Current Liabilities

2008 M

2008 %

2007 M

2007 %

12.3 179.5 23.8 (17.8)

0.42 6.20 0.82

(0.62)

12.3 178.9 24.2 2.9

0.44 6.41 0.87

0.10

(83.7)
904.1 1018.2

(2.70)
31.26 35.21

(83.9)
902.5 1036.9

(3)
32.35 37.17

1007.3 25.8 69.9 47.8 74.7 1225.5

34.84 0.70 2.41 1.65 2.58 42.38

863.9 29.8 16 13.7 75.3 998.7

30.94 1.06 0.57 0.47 2.70 35.80

Interest on bearing loans & borrowing Unsecured loan Trade and other payable Tax liabilities Short term provision Total current liabilities Total Liabilities
TOTAL EQUITY AND LIABILITIES

13.09 3.09 582.2 9.1 38.6 647.7 1873.2 2891.4

0.48 0.13 20.13 0.31 1.33 22.40 64.78 100

88.0 15.4 585 32.3 33 753.7 1752.4 2789.3

3.15 0.55 20.94 1.15 1.18 27.02 62.82 100

Horizontal Trend Analysis Income Statements

Horizontal Trend Analysis (using 2007 as the base year)

Travin Prakins Pls. Statement of comprehensive income for year ending 31 Dec. 2008 Revenue Cost of Sales Gross Profit Operating Expenses Selling and Distribution Admin. Expenses Other operating income Share of result of associates Other Operating Profit Finance Income Finance Costs Profit before tax Income tax expense Profit / loss for the year

2008 M

2008 %

2007 M

2007 %

3178.6 (2080.3) 1098.3

99.74 99.6 99.90

3186.7 (2087.3) 1099.4

100 -

(728.1) (164.7) 11.2 (1.4) 56.2 271.5 7.7 (76.7) 202.5 (58.6) 143.9

112.17 116.14 98.24 84.87 208.1 123.31 77.46 72.98 79.45

(649.1) (141.8) 11.4 320 3.7 (62.2) 261.5 (80.3) 181.2

Travin Prakins Pls. Comprehensive Statement of Position as 31 Dec. 2008

ASSETS Non-Current Assets Property, Plant and Equipment Goodwill Other intangible Assets Derivative financial Instruments Interest in associates Investment in Property Available for sale investment Deferred tax Assets Total Non Current Assets

2008 M

2008 %

2007 M

2007 %

534 1351.4 162.5 80.3 19.6 3.4 2 19.5 2173.2

105.7 101.63 100 2676.6 97.14 100 433 108.1

505 1329.7 162.5 3 3.5 2 4.5 2010.2

100 -

Current Assets Inventories Trade and other receivables Derivative financial instrument Cash and cash equivalents Total current assets TOTAL ASSETS

321.9 386.2 2.4 7.7 718.2 2891.4

97.48 91.53 342.8 29.27 92.18 103.66

330.2 421.9 0.7 26.3 779.1 2789.3

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EQUITIES & LIABILITIES

2008 M

2007 M

2008 %

2007 %

Capital and Reserves Issue capital Share Premium Account Other Reserves Hedging Reserve Own Share Retained Earnings Total Equity
Non-Current Liabilities Interesting bearing loans & borrowing Derivative Financial Instruments Retirement benefit obligation Long term provisions Deferred Tax Liabilities Total Non Current liabilities Current Liabilities Interesting bearing loans & borrowing Unsecured loan note Trade and other payable Tax liabilities Short term Provisions

12.3 179.5 23.8 19.8 83.7 904.1 97.15

12.3 178.9 24.2 2.9 83.9 902.5 104.6

100 100.33 98.34 (613.8) 99.76 100.17 98.19

100 -

1007.3 25.8 69.9 47.8 74.7 1225.5

863.9 29.8 16.0 13.7 75.3 998.7

116.60 86.57 436.87 348.9 99.20 122.70

13.9 3.9 582.2 9.1 38.6 647.7 2891.4

88 15.4 585 32.3 33 753.7 2789.3

15.80 25.32 99.52 28.17 116.97 85.93 103.66

Total current liabilities

TOTAL EQUITY AND LIABILITIES

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Financial Ratio Analysis

2008

2007

Profitability
ROCE Operating Profit x 100 Shareholders funds +long-term & shortterm loans Gross Profit Gross profit x 100 Sales Net Profit Net profit before interest and tax x 100 Sales Net profit before interest and tax and exceptional items x 100 Sales Return on Assets Profit before tax and interest x100 Total Assets Asset Turnover Revenue x 100 Assets

13.21%

16.8%

34.55%

34.50%

8.54% 6.76%

10.02% 10.2%

9.6%

11.7%

1.09 times

1.14 times

Efficiency
Receivables (debtors) collection period Trade receivables x 365 = x days Sales Payables (creditors) period Trade payables x 365 = x days Cost of Sales Inventories Turnover Closing inventories x 365 = x days Cost of sales

44.3 days

48.3 days

102.2 days

102.3 days

56.5 days

57.7 days

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Liquidity

Current / Working Capital Current assets = x: 1 Current liabilities

1.11:1

1.03:1

Quick or Acid Test ratio Current assets -inventories =x: 1 Current liabilities Gearing Fixed Interest Capital x 100 Capital employed Interest Cover Profit before Interest and Tax x 100 Interest Paid

0.61:1

0.59:1

54.62%

49.07%

3.5 times

5.4 times

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Q.2 Answer

Appendix
Drebbel and Fludd Plc
A. Cash Flow forecast July2011 Amount () Receipts Cash Sales Credit Sales Sale of scrap Total Receipts 38,000 400,000 6,000 444,000 38,000 480,000 518,000 38,000 560,000 598,000 38,000 640,000 678,000 38,000 720,000 758,000 38,000 800,000 838,000 228,000 3,600,000 6,000 3,834,000 August2011 Amount () September2011 Amount () October2011 Amount () November2011 Amount () December2011 Amount () Total Amount ()

Payments Materials Direct labour Production Overheads: Pay 70% in month Pay 30% next month Distribution & Admin. Income taxes New asset Total Payments (240,000) (64,000) (280,000) (80,000) (320,000) (96,000) (400,000) (104,000) (480,000) (96,000) (520,000) (88,000) (2,240,000) (528,000)

(22,400)

(28,000)

(33,600)

(36,400)

(33,600)

(30,800)

(184,800)

(8,400) (60,000) (394,800)

(9,600) (60,000) (80,000) (537,600)

(12,000) (60,000) (521,600)

(14,400) (60,000) (180,000) (794,800)

(15,600) (60,000) (685,200)

(14,400) (60,000) (713,200)

(74,400) (360,000) (180,000) (80,000) (3,647,200)

Net cash flow Opening cash balance Closing balance

49,200

(19,600)

76,400

(116,800)

72,800

124,800

186,800

(30,000)

19,200

(400)

76,000

(40,800)

32,000

(30,000)

19,200

(400)

76,000

(40,800)

32,000

156,800

156,800

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B. Breakeven Point

Revenue per unit Variable cost per unit Contribution per unit (a)

Month 6 Amount () 400 (260) 140

Month 8 Amount () 400 (260) 140

Distribution and admin. cost Depreciation

60,000 -

60,000 1,333

Fixed Cost (b) Breakeven point (units) (b a) Breakeven point (value) () (Breakeven point x selling price/unit) Month 6 breakeven point Month 8 breakeven point 60,000 429 171,600 61,333 438 175,200

429 units or 171,600 438 units or 175,200

C. Drebbel and Fludd Plc. Marginal Cost Comprehensive Income Statement for

July to December 2011

July Sales Price Marginal cost Contribution less fixed costs overhead Net profit 560000 364000 196000 60000 136000

August 640000 416000 224000 60000 164000

September 720000 468000 252000 60000 192000

October 800000 520000 280000 60000 220000

November 880000 572000 308000 60000 248000

December 1040000 676000 364000 60000 304000

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D. Cash Flow after production and credit sales increase

July Receipts Sales Credit sales Machinery Sold Total Receipt Payment Material Labour Overheads Distribution Tax Manufacturing Total Payment Net Result Opening Balance Closing Balance 240,000 64,000 30,800 60,000 394,800 49,200 30,000 19,200 38,000 400,000 6,000 444,000

August 38,000 480,000

September 38,000 560,000

October 38,000 1,200,000

November 38,000 1,200,000

December 38,000 1,200,000

518,000

598,000

1,238,000

1,238,000

1,238,000

280,000 120,000 51,600 60,000 80,000 591,600 73,600 19,200 54,400

320,000 120,000 60,000 60,000

600,000 120,000 60,000 60,000

600,000 120,000 60,000 60,000 840,000 398,000 201,600 599,600

600,000 120,000 60,000 60,000 840,000 398,000 599,600 997,600

- 180,000 560,000 38,000 54,400 16,400

1,020,000 218,000 16,400 201,600

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Conclusion:
Drebbel and Fludd Plc

A. From the observation of question a cash flow budget has been equipped for the month 712 which is available for review in the below appendix. From the current budget company is producing a positive cash flow every month. Company has experienced a negative cash flow in month 8 and 10 because of purchase of new machinery and payment of tax in month 10. Also company is receiving its credit sales payment after 2 month of their product sold, it has handled a positive come back almost every month. Company should try to enhance their receiving in a way that it should not affect by expected tax or unexpected machinery or other cash purchases. B. The breakeven point in sales and unit are available for review in below calculation and working is available in appendix - Break Even Sales 171,600 (The Company must generate a monthly sales of 171,600 so that the company will not make a profit or a loss either at given point, which therefore is considered as breakeven sales) - Break Even Unit 429 Units (Company must generate 429 units monthly to sustain its position so that it will not make a profit or loss either at given point) C. As per the calculation the appendix: marginal costing income statement reflects the marginal enhance of expenses with the significant level of production. The company is making a net positive effect every month. D. Since the purchase of new machinery in the month 7 and from the organization decision the production levels was raised from the month 8. Purchase of machinery has generated negative impact on cash flow. The credit cash has also increased with raise in production. The cash flow in below appendix presenting the monthly cash flow organization decision has resulted in increase of cash flow at the end of the 12 month. Initially with the increase in production resulted a negative cash flow in the month 8. However, after that company has observed increasing profit and further cash flow. There is a huge amount of cash outflow through tax but it has not have an effect on the company in a harmful way. Since the increase in production and credit cash which has managed to have a net positive result even if there will be unpredicted cash outflow.

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Q.3 Answers

Since the beginning of the nineteenth century corporate business accounting system had been searching for change to benefits by internalising (a trade between an investor and brokerage) two or more conversion process for a single economic activity. Corporate Management accounting system in m any firms such as distribution, manufacturing and transportation had single general principle was to calculate organisations internalised practice. Why the nineteenth century situation did nt require company accountant to generate more information which was crucial to corporate accounting in present days large scale organisation. Modern accountant now days are confusing to plan and manage capital investment because of the deficiency in accounting information. Todays corporate management accounting system is stimulated by the process and cycles of the financial report system. It is too slow to twist and to collective to make management planning and control decisions. Also internal accountings construct tapered monthly earning report. And the figure does no t match up with the actual increase or decrease in economic value that has occurred for the duration of period. The corporate management accounting information is facilitating less to the operating manager as they attempt to reduce costs and improve produc tivity. Often, the reports decrease productivity because t hey require operating managers to spend time to understand and explain report disagreement that have not much to do in their operation management. The corporate management accounting also fails to provide correct product costs. Which are distributed to products by unsophisticated and illogical measures, usually direct labour based, that do not correspond to the demand made by each product on the firms resources. The corporate accounting system treats many cash outlays as expenses of the period in which they are made even though these outlays will benefit future periods. Todays corporate management accounting systems are providing deceive information to grab white-collar attention and fail to provide the appropriate set of measures that suitably reflect the technology, the products, the processes, and the competitive atmosphere in which the organisation operate. For many organisations r eturn on investment has become only measure of success. Corporate management accounting is communicating entirely on periodic financial statem ents. Their view of the firm , become inaccessible from the real value creating operations of the organisation and fail to recognise when the accounting statistics are no longer providing appropriate measure of the organisations operations. [Johnson and Kaplan] [1987]

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Reference:
1. http://books.google.co.uk/books?id=yUgXuMBxAx4C&pg=PP4&lpg=PP4&dq=management+ accounting+system+are+inadequate+johnson+and+Kaplan+1987&source=bl&ots=eSsMip9L kE&sig=kLvtP8HCemUGvgzYOsjTjMirvRY&hl=en&ei=iUNTZaVGKKShAe_uv22Dg&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBYQ6AEwA A#v=onepage&q&f=true Access Date: 12 Dec. 2010
2. [Johnson and Kaplan] [1987]

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