The main objectives of the task are
What Is Cost forecasting?
Benefits of Cost forecast for the future
Identify the available sources of fund.
Selection of suitable method to obtain the fund.
This task analyzes the cost forecasting techniques and its application for the real life situation. Also have to evaluate the price changes and the grounding sourcing for the future fund requirements.
No business can know exactly what the future holds. But budgeting reduces the level of uncertainty, helping you anticipate problems, learn from the past and improve your ability to control the business.
Forecasting is a technique to predict or estimate for an unknown situation mainly in the business criteria it's used to estimate the values for the future. It is one of the main important issues for a business.
Companies need to forecast the demand and the future trend of their business for effective decision makings.
Advantages of forecasting
Provides the ability to see the future
Helps to work according to the future
Help the organization to do their future plan and can coordinate with each other
Help to utilize the available resources.
Disadvantages of forecasting
It is difficult to predict the future
The changes may occur in any field and it'll affect the demand for the future
It is also difficult to achieve the forecasted figures in real time
Methods of forecasting
These are the commonly used methods for business level forecasting.
Scattered diagram
High-Low method
Linear method
Regression methods
Introduction for the Company 'X'
2005
2006
2007
2008
Sales (£)
306 357
309 640
398 459
428 295
Cost (£)
293 979
294 761
376 805
400 765
Profit (£)
12 378
14 879
21 654
27530Company 'X' is a film CD's provider company located in UK. 'X' provides its application focused on the satisfaction of their clients and according to their policy they are able to provide their products with good result. Since it's a profit making company in the market in the past years still they have the opportunity to continue their operations with a high profit. But they also have the impact of the economical crisis and in the position to forecast their future based on this crisis.
Detail of the company 'X'
Scattered diagram
Scattered diagram is an appropriate model to investigate the future trend of the data. This diagram shows the type of relationships among the variables.
Mainly choose the scattered diagram for the below reasons.
It gives the better understanding between the variables
Less number of data is enough for the decision making
Easy to illustrate non-linear values.
Easy to predict the future values
But in the real time situation it's advisable to use other methods also and compare the final results.
Forecasting for the future
Cost forecast
(£)
Forecasted value = £ 440 000
Revenue forecast
(£)
Forecasted value = £ 475 000
RPI
RPI helps to analyze the inflation rate of the particular country and it also provides the money value for based on the environmental changes.
RPI for UK
Year
Annual %
Index
2008
0.9
212.9
2007
4.0
210.9
2006
4.4
202.7
2005
2.2
194.1
1
RPI calculation
For Revenue
RPI = Sum of money (£) x (Later date RPI/ Earlier date RPI)
= £ 475 000 * (212.9/ 210.9)
= £479 504
For Cost
RPI = Sum of money (£) x (Later date RPI/ Earlier date RPI)
= £ 440 000 * (212.9/ 210.9)
= £ 444 173
Sources of fund
There are several sources available to get the fund for an organization. It is possible for an organization to get the fund from internal entities and external entities.
Internal sources
Personal savings
Pertained profit
Sales of assets
Equity shares
External Sources
Ordinary Shares
Preference shares
Debentures
Loans
Bank overdrafts
Factoring
Leasing
Since Company 'X' is earning enough profit, due to the current situation it is better for them to get some additional fund for the following period of time.
The internal sources are not suitable to make the money for the normal operations. It is reasonable to obtain the money from the internal sources whenever they want to invest somewhere.
To get the money from shares is not easy since they already have a prior plan to do so. And the other external methods than the bank loans is not suitable at this time.
So the suggestion for the company is to go for a bank loan which is more secure in the current situation since they have the capacity to get it.
The Manager,
Barclays Bank
Harrow
Dear Sir / Madam,
REQUEST FOR A BANK LOAN
We are one of the film CD's company in Wembley, earning a quiet amount of profit. The success makes us to expand our business further by getting more projects for the company which needs additional investment.
Currently we are doing business only in Wembley but we got the opportunity to start to start or to expand our business in other areas than Wembley where we have a high potential to succeed by earning a huge profit within a short period of time. Our market researches show that we will have good demand over there.
For initial investment we need at least £30 000 and from our current profit and savings we are able to get £ 5000 and for the rest amount £25 000 we planned to go for a bank loan which we believe we can get it from you. Since we are managing our accounts with your branch for a certain period of time hope you won't have any issues to provide us the loan.
I herewith attached the following documents for your reference.
Profit and loss account and Balance sheet for the past 5 years
Cash flow for the past 3 years
Estimated analysis for the next year.
We are maintaining a good cash flow which will help us to settle your loan within the next 3 years time.
Hope for an early and positive reply.
Yours faithfully
Mr. Bhumit
Financial controller
TASK: 2
Investment risk and sensitivity analysis
A active assessment of risks is needed. Supremacy practice, the biggest risk for numberless investments is delay. For model, irrefutable care receipts longer than expected to apparatus unaccustomed systems and train employees. The disruption blame besides cause to a loss of game.
Investment appraisal techniques
Investment is a interpretation quota of pigsty your racket. Neoteric assets consistent through equipment incumbency boost productivity, cut costs and award you a competitive edge. Investments force product boost, research and advancement, expertise and modern markets amenability unlocked up melodramatic upping opportunities.
At the identical bout, you ought to avoid overstretching limited money resources or restricting your know-how to pursue other options. Deciding locality to center your investment is an essential scrap of moulding the most of your abeyant.
Smooth a project that is unlikely to generate a profit should exhibit subjected to investment appraisal to distinguish the paramount journey to discharge its aims.
This pioneer highlights the answer money and non - cash factors you should returns into bill when considering an investment. Real and introduces the main budgetary appraisal techniques you responsibility use.
PUBLIC SECTOR Money BUDGETING
Determination constraint not betoken fabricated solely on monetary once.
Competent are issues to envisage alike now the social cost benefits.
The cost of finance that is advantageous to project cash flow is not the call one, but reasonably decisive by training on welfare of the dominion.
For central adjudicator attempts are imaginary to qualify the social costs & social gravy.
Models that are in conference rely on extensive estimation.
Further considerations exigency to epitomize liable to economical issues, political issues, social issues, technological issues.
Consideration for specific or void NPV.
Overall the verdict oftentimes larger sustained phrase fairly than the short period the instant, date, stability of power clock quantification is oftentimes difficult.
Other factors such as the environment also play a significant role.
NON FINANCIAL ASPECTS:
• Legal issues
• Ethical issues
• Change to regulation
• Political issues
• Quality implication
This task analyzes and compares two different types of projects in public and private sectors and makes the post audit appraisal for the mentioned projects. It also provides the recommendations for the projects
Advantages of NPV
It clearly shows the value of the future money
Since it shows the cash flow it's less biased.
The shareholders wealth is maximized
Disadvantages of NPV
The calculations are complex
The invest rate is assumed and the calculations are based on that assumption
May not give the fair results.
Project A
Project B
Initial investment
125000
125000
Cash flow year 1
109000
98000
year 2
97000
76000
year 3
91000
54000
year 4
76000
39000
year 5
58000
24000
year 6
47000
-5000
Notes:
The life of the project is 6 years
There is no scrap value at the end
Cost of capital is 12 %
The depreciation is calculated on straight line basis.
Depreciation is calculated according to IAS standards.
Annual depreciation
= 125000/6
=20833
Project A
Year
Cash flow
depreciation
Value
PV
Net Value
0
-125000
0
-125000
1.000
-125000.0
1
109000
20833
88167
0.893
78733.1
2
97000
20833
76167
0.797
60705.1
3
91000
20833
70167
0.712
49958.9
4
76000
20833
55167
0.636
35086.2
5
58000
20833
37167
0.567
21073.7
6
47000
20833
26167
0.507
13266.7
NPV =
133823.7
Project B
Year
Cash flow
depreciation
Value
PV
Net Value
0
-125000
0
-125000
1.000
-125000.0
1
98000
20833
77167
0.893
68910.1
2
76000
20833
55167
0.797
43968.1
3
54000
20833
33167
0.712
23614.9
4
39000
20833
18167
0.636
11554.2
5
24000
20833
3167
0.567
1795.7
6
-5000
20833
-25833
0.507
-13097.3
NPV =
11745.704
Both projects give a positive NPV hence both are acceptable. But obviously Project 'A' shows a massive return.
TASK-3
Objectives
The main objectives of the task are
Analyze the subsidiaries
Do the ratio analysis
Compare the ratios
Provide comments about the performance
This task analyses two different types of subsidiaries of a company and study the income statement and balance sheet of the companies and do a ratio analysis for both and provide the explanation of the analysis. Also provide comments on the statistics by concerning the internal and external factors.
Below is the income statement and summary balance sheet (with figures in 4m) for two subsidiaries.
Income statement AA BB
2005 2004 2005 2004
Turn over 31 30 20 35
Staff costs 3 2 5 6
General expenses 2 2 10 10
Depreciation 12 9 3 6
Interest 5 5 1 1
Total (22) (18) (19) (23)
Profit 9 12 1 12
Summary balance sheet
Non-current assets 1 65 134 22 22
Current assets 5 6 13 12
Total assets 170 140 35 34
Current liabilities (3) (6) (4) (4)
Debentures (47) (47)
Net assets 120 87 31 30
Shareholders' equity 120 87 31 30
TASK 3 A
As per the given financial information in task comparative financial performance of both Subsidiaries AA And BB
A) Return On Capital Employed.(ROCE) : ROCE is used to prove the value the business gains from its assets and liabilities, is used in finance as a measure of the returns that a company is realising from its capital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital.
ROCE
PBIT / Capital Employed
Comp. AA
(2005) 14/ 167= 0.0838
(2004) 17/134 = 0.1268
Comp. BB
(2005) 02/31 =0.0645
(2004) 13/30 =0.4333
It shows that company BB better utilise its capital in 2005 in compare to 2004 then
Company AA.
Profit Margin refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.
Net Profit / Revenue
Comp. AA
(2005) 14/31 = 0.0433
(2004) 17/30 = 0.5667
Comp. BB
(2005) 02/20 =0.1
(2004) 13/35=0.3714
The above calculation shows Company BB had 10% margin in 2005 which was 37% in 2004 .where as AA profit margins reduced from 56% to 4%.
Asset Utilisation
it measures the amount of sales generated by each pound of asset.
Turnover / Total Asset X 100 %
Comp. AA
(2005) 31/170 = 18.23 %
(2004) 30/140= 21.48 %
Comp. BB
(2005) 20/ 35 = 57.14 %
(2004) 35/34 = 102.9 %
The above ratio measured that company BB utilise 102% in 2004 and 57% in 2005 which was around 50% less and AA reduced by 15%.it means AA utilise better its Assets then BB.
Liquidity Ratios
Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.
The current ratio is the ratio of current assets to current liabilities:
Current Ratio = Current Assets/Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:
Quick Ratio = Current Assets - Inventory / Current Liabilities
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, higher the value of the ratio, larger the margin of safety the company possesses to cover short-term debts.
Current Asset/current liabilities
In order to measure liquidity we need to calculate
Current Ratio : Current asset / Current liabilities
Comp .A
(2006) 05/03 = 1.6667
(2007) 06/06 = 1.0000
Comp. B
(2005) 13/04 = 3.2500
(2004) 12/04 = 3.0000
It shows company BB had better liquidity to meet its liabilities then AA
Gearing Ratio
The Gearing Ratio measures the percentage of capital employed that is financed by debt and long term finance. The higher the gearing, the higher the dependence on borrowings and long term financing. The lower the gearing ratio, the higher the dependence on equity financing. Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increased volatility of profits. Utilizing gearing amplifies the potential gain from an investment or project, but also increases the potential loss.
The Gearing Ratio is calculated as follows: divide Long Term Liabilities by (Equity + Long Term Liabilities) X 100 which results in a percentage.
Comp. AA
(2005) 47/120 = 0.39167
(2004) 47/87 = 0.54023
As per above calculation, we can say that AA reduce its borrowing where as BB paid its some of long term liabilities.
TASK-3 B
There are all ratio analysis give intimation for the which project is better than other project so above calculation of project AA and project BB have measure difference in all ratio , for ROCE ratio of AA and BB company BB better utilise and its capital in 2005 in compare to 2004 than company AA .
Net Profit / Revenue ratio analysis of AA and BB so the calculation shows company BB had 10% margin in 2005 which was 37% in 2004 where as AA profit margins reduce from 56 to 4 %
And the utilise ratio measured that company BB utilise 102% in 2004 and 57 % in 2005 which was around 50 % less and AA reduce by 15 % it means AA utilise better is assets then BB
And current ratio shows company BB had better liquidity to meet its liability then AA.
Conclusion:
Above analysis give information to company BB is good for the company AA but company BB manages has not less their current liquidity and not control general expenses and company BB have no debentures so it is very small and not public limited company and company turnover is less than 2004 and staff cost is very high compare to company AA and main turnover is very low so sales is also low to 2004 so company not make profit more it's $12m to $1m reduce in only one year , profit trend analysis is down side not control staff cost and general expense.
