Features of a Financial Statement Analysis

Features of a Financial Statement AnalysisTASK 1Importance of Financial Statementsall(a) managers need to be able to interpret their play alongs fiscal accounts as they hold valuable education active a wide regurgitate of factors that impact on the long term and short term profitability and stability of the beau monde. By considering the various ratios below and, in particular, by drawing on trends between last year and the current incline, it will be possible for the various division managers to identify where weaknesses lie and to determine what they sight do in their own individual departments to improve the overall situation of the beau monde (Fridson, 2002)1.Current Position of the CompanyIn his affirmation, Robert assured counselling and staff that the companionship was in a sound financial position. A detailed review of the accounts has been undertaken, and all ratios ar included in Appendix 1. Four key areas were looked at, cross styluss 2007 and 2008, as this i s when the substantial changes occurred. These changes are profitability, talent, liquidity and stability, all of which are important to the order.Profitability has fallen dramatically between 2007 and 2008. The gross profit margin figure shows the associations ability to control the be of the goods that it produces. Although sales volumes could alter, it would be expected that the profit margins obtained would non alter dramatically. In 2008, gross profit margins were 36.33%, substantially less than the margins of 42.21% in 2007, which suggests that the cost of producing each item is increasing at an unacceptable level. The operating profit gives more(prenominal) information on how the follow manages its overheads these figures experience in any case send waddingped significantly (from 20.57% to 10.56%). This is clearly partly down to the reducing gross profit margin, but also indicates that overheads are becoming increasingly problematic for the company, in terms of r elative costs (Helfert, 2001)2.Efficiency ratios indicate how well the company is using its resources, both restore and work metropolis. The ratio in similitude to the efficiency of capital employed has dropped from 4.05 to 3.51, showing that the company has lost a considerable amount of efficiency in its trading operations and is non producing the same out lay with the capital employed as it was in 2007 (Friedlob, 2003)3.Liquidity ratios are incredibly important as these reveal the companys ability to meet its current liabilities. distressing liquidity could cause immediate and massive problems for the company because it indicates that it will be unable to pay its debts as they fall due. The current ratio shows the ability of the company to meet all current liabilities with all current as clubs that it holds. In both 2007 and 2008, the figure was well in excess of the 11 cover, although it did drop from 2.00 to 1.70, which could be indicative of a downward trend in the comp any and should be looked at regularly in order to ensure that the figure does not drop further. More worrying is the quick ratio figure. This shows how readily the cash and easily addressable current assets could meet the current liabilities. A ratio of 11 is also desirable, yet the company had a ration of 0.38 in 2007, dropping to 0.12 in 2008. This suggests that untold of its current asset inventory is held in non-readily convertible assets such as stock (Towsey, 1974)4.Stability ratios reveal the amount of long term debt a company is in and, where this company is impacted, the gearing has been consistently low, showing that at that place is not a great risk in spite of appearance the way the company is financing itself.ConclusionsRobert was correct in stating that he felt the company was stable in the long term however, at that place are considerable short term concerns, particularly in relation to liquidity, which need to be addressed urgently if the company is not to suf fer short term issues.TASK 2The Balanced ScorecardKaplan and Norton (1993)5 articulateed the concept of the fit scorecard, which was initially created as a kernel of assisting counsel with their strategic planning. The model is two-fold, the first purpose being to improve the communications for the company (both internally and externally) and the second to assist managers in ensuring that their goals are reached.The balanced scorecard model forwarded by Kaplan and Norton works on assisting managers in having a clear strategic goal and in ensuring that the activity needed to achieve these goals is put into action, byout the organisation.This process recognises that it is not possible simply to look at a companys financial performance and from this to derive a set of actions that should be undertaken to improve performance, in future years. there is generally a time lag, when it comes to company performances, with inputs such as investment in machinery taking at least a few mont hs to be seen in the financial returns.Kaplan and Norton encouraged companies to take a different approach and to look firstly at the inputs that management could make directly into the company. It is these factors that should be measured and, provided the correct strategic goal has been established, achieving these individual goals by management should ensure that the ultimate goals in terms of financial performance are met (Niven, 2006)6.Companies are encouraged to look at their businesses from four different perspectives when establishing their strategic goals financial, customer, internal process and innovation and acquisition. The financial perspective is the maven traditionally considered by organisations and includes factors such as profit growth and r as yetue. The management should, however, be encouraged to take a longer term view when experimental condition strategic goals.The customer perspective is crucially important as it looks at the way the customer perceives th e company and any possible changes to the customer perspective that would be needed for the company to achieve its ultimate strategic goals.Internal processes look at the way the company is run internally and how these can be sufficient to help achieve the long term goals and are often related to the customer perspective, e.g. quicker lead times or more readily available stock.Finally, there is the innovation and learning aspect which directly leads into the long term growth by ensuring that the company is constantly looking for juvenile ways of doing things, which any include efficiency savings or a better customer experience (Kaplan, 2004)7.The Development of Intangible AssetsIntroductionIntangible assets are those assets within the company that are often overlooked such as the knowledge base of the staff or the underlying strength of the information systems. When considering the intangible assets, this largely refers to the learning and innovation perspective within the balanc ed scorecard and can be broken down to look at jobs, i.e. the human capital and relevant expertise these individuals have, the systems capital which refers to the information systems within the company and the organisational capital which refers to the climate in which the company operates, i.e. the market place in which it is based (Wall, 2003)8.Intangible assets within the companyCritically, the company mainly needs to consider both its human capital and its information systems. In relation to its human capital, the company has significant difficulties with its turnover, particularly within the packing division. With a high turnover of staff, it is difficult to maintain efficiency and quality in the products and makes innovation difficult as members of staff are extemporaneous to take a long term view.The technical department is clearly important when it comes to ensuring the maximum efficiency of the machines. Therefore, the turnover rate of 18% in relation to technicians and t he seeming difficulty in recruiting new technicians is an issue that has to be looked at closely by management.Information systems are outdated within the company. Computer applied science is not used adequately to ensure that information is shared between the sites. Failure to share information will result in wastage and unnecessary expenses as well as large overheads (a problem that the company has, as identified previously). Furthermore, no information is collected in relation to customer satisfaction which makes the projection of improving and managing customer perceptions impossible. A fully integrated and operational information system is needed to improve both efficiency of production and customer satisfaction.How can these factors be violateed?The first concern must be in relation to the employees. There is a substantial turnover of staff, averaging 12%. Direct operations have a turnover rate substantially below this, at just 5%. Critically, the direct operations and pr oduction teams have a coordinate of bonus payments which is generous and allows staff to receive extra payments as they become more efficient, thus encouraging staff to stay longer in their roles. Whilst the packing team recognises that it is generally less skilled, there is no incentive in relation to performance and there is clearly very little in the way of employee loyalty (evidenced by the way in which the staff shop is used). Consideration should be given to implementing a similar bonus scheme for the packers, as this would not only reduce staff turnover in the packing department but would also encourage better quality of work (Harvard pedigree give lessons Press, 2005)9.Issues such as more flexible working patterns should be considered as the majority of the packers are female and, therefore, issues such as childcare are oft more likely to be important to this section of the workforce. Benefits such as childcare vouchers may also be a good way of improving retention. Due to the skilled nature of the technicians role, advertisements should be placed further afield. Workers are often prepared to travel and by widening the search area the company may locate better skilled and more loyal staff for the important technical department.Investment is needed in the information technology systems. They are six years old and do not offer the necessary level of service. The systems, particularly in relation to sharing technical knowledge, must be integrated and additional automation would be beneficial to the ultimate efficiency of the company. There are also considerable uncertainties in relation to factors such as stock levels, work in progress, production costs, all of which are vital and need to be integrated into the information system (Kaplan, 2001)10.ConclusionsIn order to develop the intangible assets of the company, the focus must necessarily be on dealing with the issues in relation to employee retention and productivity as well as ensuring that the in formation systems adequately support the company moving forward. Both of these factors will require investment, but should amply pay for themselves, in the long run.TASK 3 stemma ManagementInventories refer to all goods and stocks held by the company, whether they are complete or not. As this is a manufacturing company, it would be anticipated that the level of inventory is rather high. However, even with this assertion, the total amount of stock being held by the company has risen dramatically to 3,915,000 in 2008, from just 2,765,000 in 2006 and is rightly a cause for concern by management (Mercado, 2007)11.Importance of accountThis is not the only company to underestimate the importance and capableness impact of inventory on the financial position of the company as a whole. A certain level of inventory is essential as the company relies on suppliers (of varying reliability) and, therefore, must build in a time lag between when the supplier delivers the material and when the go ods actually leave the company. As well as the time lag, there are rude(a) uncertainties which mean that a certain amount of stock must be held, particularly to deal with issues such as special offers from some of the larger retailers. There are also economies of scale to be had and it will be more profitable for the company to purchase material in bulk and to transport unblemished products in bulk (Koumanakos, 2008)12.Whilst all of these reasons for maintaining an inventory are valid, it is important to recognise that having too much in the way of inventory is potentially negative on the financial position of the company. The ratios suggesting problems with short term liquidity are indicative of this high level of inventory. Too much of the companys cash is secure up in the stock, meaning that the company may not be able to meet its commitments to short term creditors. Working capital should also be of considerable interest to the company as it is another reflection of the short term liquidity of the company and is a way of looking at whether or not the company can meet its short term liabilities and operating expenses (Wild, 2002)13.Accounting for InventoryA vitally important way of managing and measuring working capital is to look at how many days it takes from the point at which money is paid out for the raw materials to the point when the company receives money in for the finished products. This length of time should, ideally, be as short as possible so at to ensure that the company gets a return on its products as quickly as possible. Reducing this time involves either extending the length of time it takes to pay suppliers, shortening the length of time it takes to collect money from customers or reducing the time it takes to manufacture the goods.This termination of time is calculated by adding the inventory mutation period to the receivables conversion period and taking away the payables conversion period (each measured in days). The inventory con version period is the inventory divided by the cost of goods sold multiplied by 365 the receivables conversion period is the receivables divided by sales multiplied by 365 and the payables conversion period is accounts payable divided by cost of goods sold multiplied by 365 (Toomey, 2000)14.By using the inventory figures for this calculation, it is easy to see whether or not the period of time is increasing and at which point there seems to be a blocking in the throughput. In the case of the company, it is clear to see that the amount of stock being kept is increasing raw material inventory has only at peace(p) up a slight amount. However, the amount of bought-in finished goods that are being held has dramatically increased and should be an area that the management team concentrates on (Harrington, 1990)15.It is also worth bearing in mind that there are costs inherent with storing excess stock. It has already been recognised that overhead costs are in excess of what they should be for the company and are growing rapidly. These will almost certainly be related, at least partially, to the trend towards storing more stock.ConclusionInventory management, despite being an issue for management teams to control, has a direct and substantial impact on the companys financial accounts. Holding too much stock will be evident in terms of the current asset figures on the balance sheet, but also in the profit statement (Jones, 1985)16.Potential savings in reducing the amount of stock that is held can come not only from the availability of cash for other activities (such as run across short term liabilities), but also in terms of ensuring that overhead costs such as storage are kept to a minimum. These factors must be considered by the management team as a matter of priority.TASK 4IntroductionBefore introducing any new product, it is important that the management team consider all of the possible impacts of this introduction, both financially and practically. In this case , for example, it should also be considered that the HC007 is a new and improved version of the HC003 and the company wishes to develop a reputation for producing leading edge technology. Bringing in a new product such as this will naturally increase the companys profile in the market and should not be disregarded as a benefit when analysing the raw figures in relation to the possible fly the coop (Rainey, 2005)17. The company should also consider the current level of inventory that is held in relation to HC003, both in terms of completed products and work in progress, as this may result in financial losses to the company, if these items cannot be sold on (Wilson, 2005)18.Theories of Product AppraisalA key way of determining the potential viability of the new product is to consider the breakeven point which will tell the company, based on the proposed sales value, how many products would have to be sold before the costs of production are covered. The breakeven point is established by taking the fixed costs and dividing them by the selling price, minus the variable costs. Therefore, in the case of the HC007, the fixed costs are thought to be 24,000 divided by 12 (18 6) making 2,000. On the assumption that the fixed and variable costs are the same for the HC003, the breakeven point for this would be 24,000 divided by 10 (16 6), making 2,400, which it is currently comfortably achieving (Daly, 2002)19.There are weaknesses in using this analysis. It assumes that the variable costs are constant for every unit of output and that there are no economies of scale involved. It also assumes that fixed costs are constant and would be incurred careless(predicate) of the level of production. Finally, there is the assumption that there is no wastage, i.e. all products produced are sold. This is unrealistic, as there is likely to be at least some storey of leakage.Analysis of the Hedge Clipper HC007HC007, on the assumption that the full 4,000 prospective sales are made, w ould produce a total profit of 24,000. HC003, on the assumption that 3,500 units were sold, would achieve a total profit of 17,500. On the face of it, therefore, the new product HC007 would be a worthwhile addition to the product range. It should be remark that the nature of fixed costs means that they are going to be incurred, regardless of whether or not the HC007 is launched and should not, therefore, play any part in the finis making process.If this theory is followed, the profit margin on the HC007 would be 12, whereas working with the same numbers the gross profit margin for the current HC003 would be 11. This is the plowshare available, through the production of these products to meet fixed costs. There is no substantial difference between the two and consideration should be given as to whether there could be a better use of the resources available within the company (Groth, 1996)20.An absorption or recovery rate of 300% seems incredibly high and consideration should be gi ven as to whether the overheads in this particular area of production are viable. With such high overhead rates, there may be more productive ways to produce a profitable item, either through the use of automation or through better use of premises set (Kuczmarski, 1992) 21.Careful consideration should also be given as to the prospective number of sales. The company is currently selling 3,500 hedge cutters and has predicted that the new model would pay off sales of 4,000 hedge cutters. This suggests that 500 people would be expected to purchase the new product, purely because it is new and innovative.ConclusionsAppraising a new product is not simply about seeing whether a company can sell the product for more than it costs to produce the product. Issues such as other opportunities that the company may be foregoing in order to produce this product need careful consideration. It is not about producing a profitable item it is about producing the most profitable item (Constantineau, 19 92)22. In this case, the company needs to ensure that the sales predictions are accurate and that there is no other potential new product line that would serve the company better.Appendix 1Footnotes1 Fridson, M.S. Alvarez, F., 2002. Financial Statement Analysis A Practitioners ply.John Wiley and Sons.2 Helfert, E.A., 2001. Financial Analysis Tools and Techniques a Guide for Managers. McGraw-Hill Professional.3 Friedlob, G.T. Schleifer, L.L.F., 2003. Essentials of Financial Analysis. John Wiley and Sons.4 Towsey, R.G., 1974. The use of operating ratios in retail management . International Journal of Retail Distribution Management, 2, 4.5 Kaplan, R.S. Norton, D.P., 1993. Putting the Balanced Scorecard to Work. Harvard Business Review, Sep Oct, pp. 2-16.6 Niven, P.R., 2006. Balanced Scorecard. Step-by-step. Maximizing Performance and Maintaining Results. 2nd ed., John Wiley Sons.7 Kaplan, R.S. Norton, D.P., 2004. dodge maps Converting intangible assets into tangible outcomes. Boston Harvard Business School Press.8 Wall, A., Kirk, R. Martin, G.,2003. Intellectual Capital meter the Immeasurable?Elsevier.9 Harvard Business School Press, 2005. Retaining Your Best People. Harvard Business School Press.10 Kaplan, R.S. Norton, D.P., 2001. The Strategy-focused Organization How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business Press.11 Mercado, E.C., 2007. hands-on Inventory Management. CRC Press.12 Koumanakos, D.P., 2008. The effect of inventory management on firm performance. International Journal of Productivity and Performance Management, 57, 5.13 Wild, T., 2002. Best Practice in Inventory Management. pioneer of Operations Management,Butterworth-Heinemann.14 Toomey, J.W., 2000. Inventory Management Principles, Concepts and Techniques. Springer.15 Harrington, T.C., Lambert, D.M. Vance, M.P., 1990. Implementing an Effective Inventory Management System. International Journal of Physical Distribution Logistics Management, 20, 9.16 Jones, T.C., Riley, D.W., 1985. Using Inventory for Competitive Advantage through Supply Chain Management. International Journal of Physical Distribution Logistics Management, 15, 5.17 Rainey, D.L., 2005. Product Innovation Leading Change Through Integrated Product Development. Cambridge University Press.18 Wilson, R.M.S. Gilligan, C., 2005. Strategic merchandise Management Planning, Implementation and Control. Butterworth-Heinemann.19 Daly, J.L., 2002. Pricing for Profitability Activity-Based Pricing for Competitive Advantage. John Wiley and Sons.20 Groth, J.C. Byers, S.S., 1996. Creating value economics and accounting perspectives for managers. Management Decision, 34, 10.21 Kuczmarski, T.D., 1992. Screening potential new products. Strategy Leadership, 20, 4.22 Constantineau, L.A., 1992. The Twenty Toughest Questions for New Product Proposals. Journal of Consumer Marketing, 9, 2.