PTCL is the largest telecommunication company in Pakistan. This company provides telephony services to the nation and holds the status of backbone for the country's telecommunication infrastructure despite the arrival of a dozen of other telecoms.
Forecasting:
Definitions:
To estimate or calculate in advance, especially to predict (weather conditions) by analysis of meteorological data.
To save as an advance indication of foreshadow.
To calculate or estimate something in advance, predicting the future.
A prediction, as of coming events or conditions.
Cost:
Cost is the value of money that has been used up to produce something.
Q1:
Cost forecasting:
Prediction or estimate of cost for future is very important for a business. It provides basis on which all future decision making is concerned. For cost forecasting it is mandatory to have statistics of present & past cost of business.
Now we discuss the cost forecasting of PTCL:
For casting for upcoming years.
Years
Cost (Y)
(In millions)
X
2
X
XY
1999
320
-5
25
-1600
2000
355
-4
16
-1420
2001
390
-3
9
-1170
2002
410
-2
4
-820
2003
480
-1
1
-480
2004
525
0
0
0
2005
595
1
1
595
2006
650
2
4
1300
2007
675
3
9
2025
2008
705
4
16
2820
2009
800
5
25
4000
∑Y=5905
2
∑X=110
∑XY=5250
a = ∑y/n = 5905/11 = 536.81 (n=number of years)
b = ∑XY/∑X2 = 5250/110 = 47.72
Ỳ = a + bX
Ỳc = 536.81 + 47.72X
Revenue forecasting:
Years
Rev (Y)
(In millions)
X
2
X
XY
1999
370
-5
25
-1850
2000
408
-4
16
-1632
2001
439
-3
9
-1317
2002
461
-2
4
-922
2003
535
-1
1
-535
2004
580
0
0
0
2005
645
1
1
645
2006
701
2
4
1402
2007
731
3
9
2193
2008
760
4
16
3040
2009
860
5
25
4300
∑Y=6490
2
∑X=110
∑XY=6246
a = ∑y/n = 6490/11 = 590 (n=number of years)
b = ∑XY/∑X2 = 6246/110 = 56.78
Ỳ = a + bX
Ỳr = 590 + 56.78X
Year
X
Cost forecasting
Rev forecasting Yr= 590+56.78(X)
Yc=536.81 + 47.2(X)
2010
6
820
990.68
2011
7
867.21
987.46
2012
8
914.41
1044.24
2013
9
1008.81
1157.8
2014
10
Characteristics of good forecasting:
Accurate
Reliable
Timely
Easy to use
Easy to Understand
Cost effective
Qualitative Techniques:
The Delphi tech:
Uses a panel of experts to produce a forecast. Each expert is asked to provide a forecast specific to the need at hour.
Nominal group tech:
Similar to Delphi technique in that it utilizes a group of participants, usually experts. After the participants respond to forecast-related question, they vawk their responses in order of perceived relative importance. Then the rankings are collected and aggregated.
Sales forces Opinion:
The sales staff is often a source of information regarding future demand. The sales manager may ask for input from each sales-person and aggregate their responses into a sales force composite forecast. Caution should be exercised when using this technique as a member of the sales force may not b able to distinguish between what customers say & what they actually do.
Executive opinions:
Sometimes upper level managers meet & develop forecasts based on their knowledge of their areas of responsibilities.
Market Research:
In market research, consumer's surveys are used to establish potential demand. Such marketing usually involves constructing a questionnaire that solicits personal, economic, and marketing information. On occasion, market research collect such information in person at retail outlets and usually, where the consumers can experience, taste, feel, smell and see a particular product.
Quantitative Techniques:
They are generally more objective than that are qualitative counter pants. It can be a time series forecasting,
Trends, which are long time movement (up & down) in the data.
Seasonality.
Cyclical.
Irregular.
Random, which encompasses all non-typical behaviors not accounted for the other classification.
Sources of funds raising :
Despite all differences among companies, there are only a few sources of funds available to all.
They make profit by selling a product for more than it cost to produce. This is the most basic source of funds for any company and hopes fully the methods that bring in the most money.
Like individual, companies can borrow money. This can be done privately through bank loans or it can be done precisely through a debt issue.
A company can generate money by selling part of itself in the form of shaves to investors, which is known as equity funs. The benefit of this is that investor's do not requires interest payments like bond holders do.
In an ideal world, a company would bring in all of its cash simply by selling goods and services for a profit, but as the old saying goes "You have to spend a money to make money" and just about every company has to raise funds at some point to develop products and expand into new market.
Sales forecasting:
S.R is estimating what a company's future sales are likely to be based on sales records as well as market research. Information used for sales forecasting must be well organized and may include information. On the competition and statistics that affect the businesses customer base. Companies conduct sales forecasting I the hopes of identifying patterns so that revenue and cash flow can be maximized.
Proposal Obtain Funds:
Telecom Industry in Pakistan (RWP)
10 NOV 2010
Respected Sir
It is stated that I have performed my services in your esteem organization. It is a well developed organization in Pakistan and provide its services to your customers. Now organization is serving in high competition environment and they need to develop new sources through they can compete other well develop organization.
PTCL need to launch new product like Broad band services, share its services with mobile companies and attract international customers. These new products attract exist customer and new customer can attach to these products.
PTCL can raise its profit, but without product promotion it is difficult, so it is necessary to promote its new product in market. For product promotion, companies should adapt new strategies to raise its profit.
I suggest developing new market like international customers who living abroad. To provide facilities and packages because now Pakistani community living abroad and they are attached with families.
Task 2
Introduction
In this task I need to consider two competing investment projects in public and private sector, appraise and compare them. Drawing on the financial information provided, and post audit appraisal make recommendations accordingly.
Let us consider cash flow of three years of two companies Project A and Project B.
Year
Project A
Project B
2007
10,000
18,000
2008
15,000
12,000
2009
17,000
6,000
Net Present Value
The NPV of an investment is the summation of present value of all cash inflows and cash outflows.
Consider that company borrowed enough funds at 10% to finance its project under structure and at least minimum return on capital for the company is 12%. The difference between both projects is 2% that show the return of compensate for the risk. The first investment for project A and project B is Rs.30, 0000.
Net Present Value Discount Rate at 10% per annum
Fn = P(1 + r)n
Year
Project A
Discounted factors
Present Value
10%
0
(30,000)
1.0
(30,000)
2007
10,000
0.9091
9091
2008
15,000
0.8264
12396
2009
17,000
0.7513
12772
42,000
NPV = 4,259
Year
Project B
Discounted factors
Present Value
10%
0
(30,000)
1.0
(30,000)
2007
18,000
0.9091
16,363
2008
12,000
0.8264
9916
2009
6,000
0.7513
4507
32,000
NPV = 786
Net Present Value Discount Rate at 12% per annum
Year
Project A
Discounted factors
Present Value
10%
0
(30,000)
1.0
(30,000)
2007
10,000
0.8929
8929
2008
15,000
0.7972
11958
2009
17,000
0.7118
12100
42,000
NPV = 2,987
Year
Project B
Discounted factors
Present Value
10%
0
(30,000)
1.0
(30,000)
2007
18,000
0.8929
16,072
2008
12,000
0.7972
9,566
2009
6,000
0.7118
4270
32,000
NPV = (164)
Conclusions
From the above calculation it shows that both projects achieve a return in excess of 10% and therefore preferable to B. In other words, the size of the net present value indicates that the project earns a true return in excess of the discount percentage of the selected projects, the larger the NPV, the larger the rate of return.
We analyze both projects, project A pay back period is earlier than B.
Both projects purely on the payback criteria.
Project B has higher cash flow after coming year.
THE PAYBACK METHOD
• The payback period is the length of time that it takes for an investment to fully recoup its initial cost out of the cash receipts that it generates.
• The basic premise of the payback method is that the quicker the cost of an investment can be recovered, the better the investment is.
• The payback method is most appropriate when considering projects whose useful lives are short and unpredictable.
• The payback period is expressed in years. When the same cash flow occurs every year, the following formula can be used
WHY NET PRESENT VALUE IS PREFERRED
NPV assumes that project cash flows are reinvested at the company's required rate of return thus NPV is more accurate.
Often times, during the life of a project, cash flows must be reinvested to cover depreciation than calculating only 1 PAYBACK for the project is not reliable. NPV must be used for this type of project.
NPV measures project value more directly actually calculates the project's value. If there is more than one project lined up, the manager can simply add the values together to get a total.
Post Audit Appraisal
An important aspect of the capital budgeting process is the post-audit, which involves
(1) Comparing actual results with those predicted by the project's sponsors and
(2) Explaining why any differences occurred.
For example, many firms require that the operating divisions send a monthly report for the first six months after a project goes into operation and a quarterly report thereafter, until the project's results are up to expectations. From then on, reports on the operation are reviewed on a regular basis like those of other operations.
The post-audit has three main purposes:
1. Improve forecasts.
When decision makers are forced to compare their projections to actual outcomes, there is a tendency for estimates to improve. Conscious or unconscious biases are observed and eliminated; new forecasting methods are sought as the need for them becomes apparent; and people simply tend to do everything better, including forecasting, if they know that their actions are being monitored.
2. Improve operations.
Businesses are run by people, and people can perform at higher or lower levels of efficiency. When a divisional team has made a forecast about an investment, its members are, in a sense, putting their reputations on the line and will strive to improve operations if they are evaluated with post-audits. In a discussion related to this point, one executive made this statement: "You academicians worry only about making good decisions. In business, we also worry about making decisions good."
3. Identify termination opportunities.
Although the decision to undertake a project may be the correct one based on information at hand, things don't always turn out as expected. The post-audit can help identify projects that should be terminated because they have lost their economic viability.
Public Sector
Social Accounting
Social accounting is used to monitoring, evaluation and accountability to stakeholders both internal and external of the organization. This type of accounting is used for organization performance and it focus on economic objective and environmental factors. The main objective of it to evaluate that organization is working to accordance with its values.
Public sector is a main part because it deals economic and administrative sector. They provide facilities of delivery of goods and services by and for government. Public sector's organization took action, they funded through taxation. Generally, those organization that deliver goods has no requirement for success to meet commercial objective and production decision determined by government.
Risk in public sector:
Opinion of general people
Government policy essential part of company
Legal procedure need
Pressure from local government
Political issues
Taxation implementation
Short fall of electricity
Recommendations
The results of post-audits often conclude that
(1) The actual net present values of most cost reduction projects exceed their expected net present values by a slight amount
(2) Expansion projects generally fall short of their expected net present values by a slight amount, and
(3) New product and new market projects often fall short by relatively large amounts. Thus, biases seem to exist, and companies that understand them can build in corrections and thus design better capital budgeting programs.
Our observations of businesses and governmental units suggest that the best-run and most successful organizations put great emphasis on post-audits. Accordingly, we regard the post-audit as being one of the most important elements in a good capital budgeting system.
TASK THREE
Income Statement
AA BB
2005
2004
2005
2004
Turnover
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
(22)
(18)
(19)
(23)
Profit
9
12
1
12
Summary balance Sheet
Non- current assets
165
134
22
22
Current assets
5
6
13
22
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
A. The report for the Directors of CC
From: MANAGER, HILL PARNERSHIP
To : DIRECTOR, CC COMPAY LIMITED
Subject: FINANCIAL PERFORMANCE OF AA & BB
Date: 15 April, 2010
From the above provided data there is not enough information to make a solid case against the competence in making financial decisions by the management of company BB. Even though they have several indicators like
Lower ROCE in 2005 than 2004.
Lower profit margin in 2005 than 2004
The profit has increased over the period of one year drastically, this measure the average profit that we makes over every £ hence in 2004 we were making 34.3p per £ 1 and now we are making 50p per £ 1 We need to look at what's making our sales fall down like in that case.
BB BB
2004 2005
Asset utilization
35/34 20/35
= 1.0293 times =0.571 time
This measures how we are using our capital in relation to our sales. If ratio is low that means we are not utilising our assets fully and apparently utilisation has dropped from 1.0293 to 0.571
LIQUIDITY RATIOS
Current ratio 12/4 13/4
=3 times =3.25 times
This looks at how we can pay our creditors in relation to current assets.
We have improved from 3 to 3.25 times. Its good business that they don't get their supplies on credit.
Risk (gearing ratio 0 0
This ratio measures the relationship
Between ordinary shares capital and fixed interest capital
ï± Company with a large proportion of fixed-interest is said to be high geared
ï± Company with high proportion of ordinary shares is said to be low geared
FOR COMPANY AA
ROCE = Profit before interest and tax * 100 %
Net assets*
Where net assets = fixed assets + current assets - current liabilities. Therefore
AA AA
2004 2005
12/87 x100% 9/120 x 100%
=14% =7.5%
The ROCE has fallen over a period of 1 year i. e 14% to 7.5%, this is because of the fallen of turnover from 30 to 31.
Therefore the areas that are needed to look into are as follows
Comparing markets
The type of business they are doing mostly determines the Ratio that would be use, apparently there are two types of business, the service industry which is a competitive and the Product industry which is regulated. Both balance sheet are different because of the standard way of market regulation.
Time span
We need to consider the longevity of the measure and observe if the one year between 2004 and 2005 is enough to make a logical conclusion and to measure result. And we need to look into either adding more year maybe there would be a better result.
Benchmarks
In considering what measure we are using we have to consider if we are comparing it against the group our company or industries average, we need to establish benchmark for them and also use it for our measure.
Short & Long term investment
The time they are to get the return on investment is very important, if it's a short term investment the balance sheet the balance sheet would show a good appraisal while if it's for long term and the same measure is put in place for the figure, it would not show the exact information since they are using the wrong measure.
We also need to consider the other things like type of investment, if its production or services and if it's seasonal or continuous
Conclusively, the Ratio can only analyses the problem with the financial aspect but its always unable to explain the technical aspect or any other factor that is not finance, so from my own points of view I would recommend the company to look unto other factors that can effect the management choice of decision making which if look into properly it can affect BB positively.
For a better interpretation, understanding and further clarification the report to be produced below are the working calculation of the financial information provided.
ROCE = Profit before interest and tax * 100 %
Net assets*
Where net assets = fixed assets + current assets - current liabilities. Therefore
BB BB
2004 2005
12/30x100% 1/31x100%
=40% =3.2%
The ROCE has fallen over a period of 1 year i. e 40% to 3.2%, this is because of the fallen of turnover
From 35 to 20.
Profit Margin
(12/35) x 100% (1/20) x 100%
=34.3% = 50%
Profit Margin
(12/30) x 100% (9/31) x 100%
=40% = 29.03%
The profit has reduced over the period of one year drastically, this measure the average loss that we makes over every £ hence in 2004 we were making 40p per £1 and now we are making 29.03p per £1
Asset utilization
140/30 170/31
= 4.6667 times =5.4839 times
This measures how we are using our capital in relation to our sales. If ratio is low that means we are not utilizing our assets fully and apparently utilization has dropped from 4.6667 to 5.4839
Current ratio
12/6 21/3
=2 times =7 times
This looks at how we can pay our creditors in relation to current assets.
We have improved from 2 to 7 times. Its good business that they don't get their supplies on credit.
Risk (gearing ratio) 0 0
This ratio measures the relationship
Between ordinary shares capital and fixed interest capital
ï± Company with a large proportion of fixed-interest is said to be high geared
ï± Company with high proportion of ordinary shares is said to be low geared
LIMITATION TO THE RATIO ANALYSES
Different Accounting Policies
The choices of accounting policies may distort inter company comparisons. Example IAS 16 allows valuation of assets to be based on either revalued amount or at depreciated historical cost. The business may opt not to revalue its asset because by doing so the depreciation charge is going to be high and will result in lower profit.
Creative accounting
The businesses apply creative accounting in trying to show the better financial performance or position which can be misleading to the users of financial accounting. Like the IAS 16 mentioned above, requires that if an asset is revalued and there is a revaluation deficit, it has to be charged as an expense in income statement, but if it results in revaluation surplus the surplus should be credited to revaluation reserve. So in order to improve on its profitability level the company may select in its revaluation program to revalue only those assets which will result in revaluation surplus leaving those with revaluation deficits still at depreciated historical cost.
Ratios are not definitive measures
Ratios need to be interpreted carefully. They can provide clues to the company's performance or financial situation. But on their own, they cannot show whether performance is good or bad. Ratios require some quantitative information for an informed analysis to be made.
Outdated information in financial statement
The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the company's current financial position.
Historical costs not suitable for decision making
IASB Conceptual framework recommends businesses to use historical cost of accounting. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decision making.
Financial statements certain summarized information
Ratios are based on financial statements which are summaries of the accounting records. Through the summarizations some important information may be left out which could have been of relevance to the users of accounts. The ratios are based on the summarized year end information which may not be a true reflection of the overall year's results.
Interpretation of the ratio
It is difficult to generalize about whether a particular ratio is `good' or `bad'. For example a high current ratio may indicate a strong liquidity position, which is good or excessive cash which is bad. Similarly Non current assets turnover ratio may denote either a firm that uses its assets efficiently or one that is under capitalized and cannot afford to buy enough assets.
Price changes
Inflation renders comparisons of results over time misleading as financial figures will not be within the same levels of purchasing power. Changes in results over time may show as if the enterprise has improved its performance and position when in fact after adjusting for inflationary changes it will show the different picture.
Technology changes
When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology. For ratios to be more meaningful the enterprise should compare its results with another of the same level of technology as this will be a good basis measurement of efficiency.
Changes in Accounting policy
Changes in accounting policy may affect the comparison of results between different accounting years as misleading. The problem with this situation is that the, directors may be able to manipulate the results through the changes in accounting policy. This would be done to avoid the effects of an old accounting policy or gain the effects of a new one. It is likely to be done in a sensitive period, perhaps when the business's profits are low.
Impact of seasons on trading
As stated above, the financial statements are based on year end results which may not be true reflection of results year round. Businesses which are affected by seasons can choose the best time to produce financial statements so as to show better results. For example, a tobacco growing company will be able to show good results if accounts are produced in the selling season. This time the business will have good inventory levels, receivables and bank balances will be at its highest. While as in planting seasons the company will have a lot of liabilities through the purchase of farm inputs, low cash balances and even nil receivables.
Different financial and business risk profile
No two companies are the same, even when they are competitors in the same industry or market. Using ratios to compare one company with another could provide misleading information. Businesses may be within the same industry but having different financial and business risk. One company may be able to obtain bank loans at reduced rates and may show high gearing levels while as another may not be
Successful in obtaining cheap rates and it may show that it is operating at low gearing level.
Different capital structures and size;
Companies may have different capital structures and to make comparison of performance when one is all equity financed and another is a geared company it may not be a good analysis.
Conclusively, Ratio analysis is useful, but analysts should be aware of these problems and make adjustments as necessary. Ratios analysis conducted in a mechanical, unthinking manner is dangerous, but if used intelligently and with good judgment, it can provide useful insights into the firm's operations
Thank you,
