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Financial Analysis

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The need to maintain sound financial reports has become a necessity for any organization and business across the globe. It is notable that, maintaining healthy financial reports ensures transparency to all the stakeholders, thus attracting investors as well as enhances short as well as long-term sustainability of the business.  As indicated by Kieso, Weygandt, & Warfield (2007), the financial condition of a company is an area of main concern to creditors and investors. As providers of capital, creditors and investors significantly rely on these statements for both profitability and safety for investments. As argued by Peterson & Fabozzi (2012), financial reporting can be termed as periodic production of financial statements of any given organization. The financial statements include income statement, cash flow and balance sheet.  For instance, financial statements indicated by balance sheet addresses this issue by offering detailed information regarding the asset investments of the company. The balance sheet is also crucial also outlines the outstanding equity and debt components, therefore equity and debt investors can fully understanding in relation to the company capital mix. Further, financial statements of income statements significantly reports result concerning operating expenses, sales, losses or profits. Therefore, by using the income statements, investors as well as the stakeholders are able to evaluate previous income performances of a company and assessing uncertainties of flow of cash in foreseeable future (Peterson & Fabozzi, 2012).
 Peterson & Fabozzi (2012) indicates that, companies incur inflow and outflow of cash originating from operating and non-operating activities such as financing and investments and to investors, cash originating from all possible sources is what used by a firm in paying their investments. Generally, to most stakeholders,  financial statements are useful due to the fact that they indicates the ability of a company to prosper as well as the chances of a given firm to significantly adopt to any varying conditions. Therefore, by analyzing financial statements, it becomes possible to project on ways in which a firm will be able to respond to emerging situations in the future. Based on the above arguments, this paper will:

Analyze the balance sheet by the use of different ratios, compare and then explain the trend

Analyze the profit and loss and explain cause and its effects
Make recommendation and Forecasting how to improve it.
Analyze the budget and make suggestion.
Analysis of the Balance Sheet
In order to advice the investors among other stakeholders on the performance of the firm, it is crucial to investigate the performance of the firm for a given period of time. Kieso, Weygandt, & Warfield (2007) mentioned that, it becomes easy to for investors to have clear of the performance and position of a business, if the financial performance is carried out through ratios. Ratios are useful as they highlight the financial weaknesses and strengths, although they do not explain why the weaknesses or strengths exist by themselves. Peterson & Fabozzi (2012) noted that, there are various categories of ratios essential in analyzing the performance of any given firm. These include profitability, liquidity, financial leverage, and asset management. Further, Weygandt, Kieso & Kell (1996) mentioned that, it becomes easy to for investors to have clear of the performance and position of a business, if the financial performance is carried out through ratios. Ratios are useful as they highlight the financial weaknesses and strengths, although they do not explain why the weaknesses or strengths exist by themselves. Bodie, Kane and Marcus (2004) noted that, there are different categories of ratios, essential in analyzing the performance of any given firm. Some of them include profitability, liquidity, financial leverage, and asset management.  The table bellow consists of different ratios that make it easy to ascertain the effectiveness of the working capital management of the company.

Ratios

January

February

March

April

May

June

July

August

September

Liquidity Ratio

2.54: 1

2.399:1

2.594:1

2.468:1

2.164:1

2.485:1

2.388:1

2.403:1

2.165:1

Dept equity ratio

1.0524

1.0459

1.0103

1.0258

1.1240

0.9929

0.9952

0.9749

1.0025

Equity ratio

2.0524

2.0459

2.0103

2.0258

2.1240

1.9929

1.9952

1.9749

2.0025

Quick ratio

 

 

 

 

 

 

 

 

 

Working capital

$777848.4

$705111.1

$724771.4

$732544.7

$687469.1

$660223.9

$662763.6

$689968.9

$617934.3 

Liquidity Ratios
The liquidity ratio indicates the liquidity position of a company.  Liquidity ratios help a firm to know whether it can effectively meet the short term financial obligations. In other words, liquidity ratio measures the ability of a company to meet the current liabilities as they fall due (Bodie, Kane and Marcus, 2004). These ratios are of great importance to the creditors as they determine the credit worthiness in the short run. If a company has insufficient current assets in relation to the current liabilities, it may be unable to commit itself, hence forced into liquidation. Example of this ratio is the current ratios and the working capital (Peterson & Fabozzi, 2012).
Current Ratios
Current ratio represents a measure of current assets against current liabilities (Ehrhardt & Brigham, 2008). The ratio is given as:  

  • Current Ratios        
  • Current Assets
  • Current Liabilities

From the table above, it is notable that, the capital management power of the company keeps on changing significantly from time to time. For instance, between the months of January and February the company liquidity position was high in January at 2.54:1 in comparison to February which was 2.399:1. The decrease of current ratio in February is an indication that during this month the company reduced the problem in working capital and started utilising its short term financial obligations more efficiently than in January (Weygandt, Kieso & Kell , 1996). It is been argued that current ratios the higher the current ratio that a company has the more liquid the company passive to be. For most companies the acceptable current ratio is 1.5 and from the observations our company the value of 2 that we see in the current ratios may be comfortable financial position (Bodie, Kane and Marcus, 2004). The chart below summarises the above information.

Implication Recommendation and Forecast
According to Houston & Brigham (2009), companies are encouraged to maintain a current ratio of between 1.5 and 3.0. This is due to the fact that, cash requirements may be large at a times due to unexpected opportunities that often arise in the short terms. Based on the above argument, it is clear that for this organization can be able to efficiently use its current assets to meet all liabilities falling due in less than 12 month duration. To improve the current ratio in the future, there will be the need for this organization to finance the current assets through equity other than creditors. Further, inventory turnovers can be increased at a faster rate as compared to the way in which account payable falls due, thus improving the current assets (Bodie, Kane and Marcus, 2004).
Working Capital
This indicates whether the company is able to meet its current financial obligations (Ehrhardt & Brigham, 2008). It is calculated as follows:
Working Capital = Total Current Assets - Total Current Liabilities (Ehrhardt & Brigham, 2008).
Further, Working capital can be termed as one of the financial metric representing liquidity that’s that can be accessed by an organization at any given instance (Kieso, Weygandt, & Warfield, 2007).

Implication Recommendation and Forecast

From the company’s working capital it is clear that, the company is able to meet its current financial obligations as the level of current assets are greater than those of current liabilities (Houston, Brigham, 2009). From the balance sheet it can be seen that the month of January has the highest working capital with $777848.4, while the lowest being in the month of September with $617934.3. Though the working capital for this company is recommendable, there is an urgent need to reduce the operational costs, which would significantly raise this figure both in the short and long-term (Bodie, Kane and Marcus, 2004). The other way to do this is by raising the level of cash-flow as both profit and balance sheet will be enormously improved.

Capital Structure or the Gearing Ratio
This type of a ratio measures the contribution of financing by owners compared with the financing provided by the company’s creditors including the preference shareholders, debenture holders and other long term creditors (Ehrhardt & Brigham, 2008). 
Implication Recommendation and Forecast
From the company’s balance sheets it is clear that, in January where the dept ratio is 1.0524:1 an indication that the company is dependent of debt financing as the creditors has supplied $1.0524 for each $1.00 supplied by the owner. The debt ratio of the company hits its lowest at August where it is at 0.9749 an indication that the creditors have supplied $0.9749 for each $1.00 supplied by the owner. In future the company should work more on the reduction of the total liabilities and increase its net worth because the lager the portion of funds provided by the owners, the less the risk is assumed by the creditors hence creating a better opportunity for the company to borrow in the future at no significant risk to the firm operations (Peterson & Fabozzi, 2012). 
 Implication Recommendation and Forecast
In the above table, it is clear that the equity ratio for this company range between 2.0 and 3.0.  For instance, for the month of May, an equity ratio of $2.1240 implies that, for every $3 employed by the company, the creditor’s contribution to the company in that month is approximately $0.876 and the contribution of shareholder is $2.1240. This shows that the company has a better solvency position as a result of high equity ratio. The resultant effect to this is that, the company will not lose a portion of its earnings in paying interests, thus it will end up having more free cash on hand for future growth, expansion and better place of paying dividends to its shareholders (Bodie, Kane and Marcus, 2004). Further, the firm will be in a better position to obtain loans from banks and other financial institutions. From the different ratios that we have used above, it is clear to note that the firm is able to meet its current liabilities as they are falling due all along from January to September. Further, the organization has sufficient current assets in relation to its current liabilities (Ehrhardt & Brigham, 2008). It is also indicating that, the business is not so dependent of outsiders financing such as creditors. However, it is able to meet its finances through the total asset held by the firm. To improve this figure in the future, there will be the need to reduce equity balance or increase the value of ROE.
Analyzing the Profit and Loss
The Profit and loss is a summarized report of the revenues generated, cost and expenses incurred during a specified period of time. This is a key point that should be put into consideration while analyzing the profit and loss statements of a given period of the company’s operations (Weygandt, Kieso & Kell, 1996). For this company, it is important to note that, there is both the monthly report, that is the profit and loss account statements of every month from January to September, and also the annual report, that is of financial year 2011 and 2012. The company is using accrual basis of accounting for the profit and loss statements which means that the firm record its expenses and income as they fall due.
To start with, it is significant to determine the profit or loss incurred in individual months, which is from January to September. The following are the bottom figures of different months throughout the financial period.

Month

Jan

Feb

March

April

May

June

July

August

Sept

Profit or (loss)

44,614.82

2,789.05

22,500.24

9,206.95

(50,747.11)

65,785.26

60,816.03

44,249.32

(24,667.26) 

Implication Recommendation and Forecast
From the above table it can be clearly noted that, the profit and loss of the company varies significantly from one month to the other. In all other months except the months of May and September the company, bottom amount is a positive indicating that the company is attaining profits, while the negative amounts in bracket reflects the months that the company attained losses. The losses incurred by the business are as a result of the expenses incurred in the course of operation being higher than the income that the company generates. For instance, in the month of May, a loss of $50,747.11was as a result of extra expenses incurred in comparison to the previous months.  The expense was 8700-Fund Raising, which was as a result of the annual celebrations and the Love walk.
In this company it is worth noting that, the amount of depreciation has no effect on the change in profit and losses for the different months. This is due to the fact that it remains constant all through the financial period at $12,481.13. It can therefore be concluded that, the amount of profits and losses made by the company in the different months were as a result of normal operations as a sale of one of the fixed assets would have resulted to a write-off, hence a change in the depreciation in the months.
Profitability Ratios
In many instances, profit has been the main yardstick for determining the overall success of a given firm (Kieso, Weygandt, & Warfield, 2007). With this in mind financial experts have developed ratios that measure the ability of a firm to convert sales to profits, and then earn profit on asset employed. Further Ehrhardt & Brigham (2008) argue that, profitability ratios, such as gross profit margin, net profit margin, return on capital employed and return on ordinary shareholders, are used in an effort to clearly evaluate the ability of management to control and manage expense, thus earn profit on all resources committed to the business (Peterson & Fabozzi, 2012). The ratio is useful in measuring how efficiently the assets of a firm are used in generating net sales and income. Therefore, the higher the ratio, the better the firm is in using its assets (Ehrhardt & Brigham, 2008). Through profit margin ratios we will be able to analyze if the company is making improvements from time to time. The following are some of the important profitability ratios.

Implication, Recommendation and Forecast

From the table we can be able to see that the gross profit margins from month to month do not have significant fluctuations and this is a good swing to the company as significant fluctuating gross profit margins are normally a potential sign of fraud that the company could be experiencing or levels of accounting irregularities. The table also helps to see that the company has an efficient manufacturing and distribution in its production process as it is able to maintain its gross profit margin at relatively same level (Bodie, Kane and Marcus, 2004). However, the company needs to ensure that ,it increase the gross profit margins in future, as a this will enable the firm to  business to control its cost.

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