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Instant Assignment Help Australia Presents Sample financial Analysis
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TABLE OF CONTENTS INTRODUCTION ............................................................1 TASK 1: FINANCIAL STATEMENTS OF THE COMPANY ....................................................................2 Cash Budget .................................................................2 Budgeted Income Statement ........................................9 Budgeted Statement of financial Position ..................11 TASK 2: TO IMPROVE CASH FLOW AND PROFITABILITY ........................................................14 TASK 3: INVESTMENT APPRAISAL ......................19 CONCLUSION ...............................................................28 REFERENCES ...............................................................29
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LIST OF TABLES Table 1: Cash Flow Statement ..........................................3 Table 2: Income Statement ...............................................9 Table 3: Balance Sheet....................................................11 Table 4: Inflow................................................................24 Table 5: NPV Table ........................................................25
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INTRODUCTION Financial analysis of any company is not only beneficial for its stakeholders and investors, but organizations
also
benefits
from
it.
It
evaluates
businesses, budgets, projects, etc. to identify the financial sustainability of the investment. The basic purpose of using this tool is to evaluate the stability, profitability and liquidity of the firm, so as to decide whether to invest or not in a particular entity. It involves studying the past performance of a company to determine its future prospects. Under this, various financial statements of the firm’s are appraised such as, cash flow statement, balance sheet, income statement etc. The following study will analyze the financial sustainability of a new airport hotel,
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which is funded by Mrs. Miranda (Groppelli and Nikbakht, 2006). TASK 1: FINANCIAL STATEMENTS OF THE COMPANY Prepare the following documents for the first six (6) months of Miranda’s operations: • A cash budget • A budgeted income statement • A budgeted statement of financial position Discuss any reservations you have about the information that you have prepared. Cash Budget
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Table 1: Cash Flow Statement
Particulars
Owner's Capital
0 Per iod April
June
July
200 000 0
Revenue Total Income
May
Oct Nove Augu Septe obe mbe st mber r r
200 000
10242 878 5670 8100 12555 39150 62775 84915 0 85 0 10242 8100 12555 39150 62775 84915 0
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0 Monthly Expense on Food, Drink and Laundry Labour Cost Loss for China, Glass and Cutlery Losses for Bed Linen and
1080 5400
129 5994 9396 15264 22878 23328 60 8370 13500 22320 25110 16200
83.33 83.33 83.33 83.33 83.33 83.33 333 333 333 333 333 333 83.33 83.33 83.33 83.33 83.33 83.33 333 333 333 333 333 333
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Towels 10462 31387 202 6750 .5 16875 27900 .5 50
Overhead Costs Leasehold Property Furniture and Fittings Kitchen Equipments Laundry Equipments
160 000 0 150 000 500 00 250 00
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
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Gym Equipments China, Glass and Cutlery Bed Linen and Towel Initial Food and Drink Inventories Miscellaneous Items Including Toiletries
150 00 100 00 100 00
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
100 00
0
0
0
0
0
0
500 0
0
0
0
0
0
0
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Total Expenses
187 21280 33525 54625 76054 71082 500 6646. .6666 .1666 .6666 .6666 .1666 0 66666 6 6 6 6 6
Cash Flow
31337 125 1453. 8725. 5624. 8149. 8860. .8333 000 33334 66666 83334 33334 33334 4
Opening 12500 12645 11772 12335 13150 14036 Balance 0 0 3.3 7.6 2.4 1.7 2 Closing Balance 125 12645 11772 12335 13150 14036 17169
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000 3.333 7.633 2.433 1.733 2.033 9.833 3 3 3 3 3 3
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Budgeted Income Statement Table 2: Income Statement Amo Amo unt unt Particulars (ÂŁ) (ÂŁ) 30991 Revenue 5 30991 Sales 5
Direct Expenses Expense on Food, Drink and Laundry 77940 Labour Cost 90900 Loss for China, Glass and Cutlery 500 Losses for Bed Linen and Towels 500
16984 0
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14007 5
Gross Profit Operating Expenses Overhead Costs Operating Profit
93375 93375 46700
Total Depreciation 29250 Depreciation on Property 16000 Depreciation on Furniture and Fittings 7500 Depreciation on Kitchen Equipment 2500 Depreciation on Laundry Equipment 2500 Depreciation on Gym Equipment 750
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Net Profit
17450
Budgeted Statement of financial Position Table 3: Balance Sheet Amo unt (ÂŁ) Assets
Leasehold Property Furniture and Fittings Kitchen Equipments Laundry Equipments Gym Equipments China, Glass and Cutlery Bed Linen and Towel Initial Food and Drink
15840 00 14250 0 47500 22500 14250 10000 10000 10000
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Inventories Miscellaneous Items Including Toiletries Cash in hand Debtors
5000 17170 0 14458 5 21620 35
Liabilities
Owner's Capital Retained Earnings Creditors Miscellaneous Outstanding
20000 00 17450 33210 11137 5 21620 35
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While preparing the balance sheet, we have assumed that there will be some miscellaneous expenses that will be treated as liability, as when a hotel enters into full operations, there are various kinds of utility services expenses and other expenses which it has to bear during its operations. Thus, these have to be included in the balance sheet under the heading liabilities (Fernรกndez and et. al., 2007).
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TASK 2: TO IMPROVE CASH FLOW AND PROFITABILITY What actions could Miranda take to improve the profitability and cash flow of her business under the following conditions and situations? A: Less disposable income has meant that actual average spent has decreased by 15%. What options are there available to Miranda so that the total sales figure is unaltered? In the dynamic working environment it is very important for all the organizations to bring innovations or to add something new to its activities. Moreover, as the hotel industry is customer driven, so it becomes very
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important for a hotel to be prepared for the situation where it can face fall in its revenue. For the present case, as the disposal income of customers’ decreases, there will be definitely fall in its revenue. To overcome from this problem and to keep its sales figure intact, the hotel can work on some of the below given options: • Presently, the hotel is running a restaurant, but it serves only dinner to its customers. So, the first thing it can do is to add lunch in its menu. This will enable the management to make some extra income from its customers (Watts, 1977). • The management of the hotel can also generate revenue by giving out its banquet hall to some of its
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corporate clients for conducting meetings and gettogether. • Another option available to the management is to reduce the tariff charges of the hotel rooms and thus try to attract more customers. If they successes in this, they can keep their sales figure unaltered. • There is one more option available to the management; they can generate revenue by booking its garden for some marriage or reception ceremony. They can also let out it for small parties such as birthday parties or office parties. • Finally, they can tie up with some of the best travel agencies to provide accommodation to their clients at reasonable rates. This will enable them get consistent
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crowd so that they can make consistent income (Weygandt and et. al., 2009). B: Occupancy levels for the month of August are 80% rather than 90% expected due to bad weather and cancellations. What options are there available to Miranda so that the total profit figure is unaltered? At times companies have to keep themselves prepare to face some unavoidable circumstances. For example, in the present case, due to bad weather there are some cancellations and the occupancy level for the month of August falls to 80% from expected occupancy of 90%. Under such situations the management can focus on below stated options:
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• The first thing, it can do is to organise some event for the local public. The hotel can invite some celebrity to perform in their hotel. For this the management can issue tickets for the events and can generate revenue from it. It will help the management to maintain profit levels (Bennouna, 2010). • Another option available to the management is to offer some seasonal offers. For example, it can offer some sightseeing facilities to its customers at reasonable rate. As most of the tourist are interested in sightseeing and want to explore the exotic places as much as they can, so this is also a good option available to the hotel and will result in increase in
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revenue and thus will help in maintaining the profit levels. • One more option available to the Miranda is to offer some special offers such as offering lunch to its customers
at
discounted
rate,
or
to
offer
complimentary breakfast to the customers who opted for lunch or dinner. This will increase the sales from its restaurant and the hotel will be able to maintain its profit levels (Mao, 2012). TASK 3: INVESTMENT APPRAISAL A main shareholder argues that if the hotel does not offer the initial investment back within five (5) years, it is not a good investment for her.
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A: Argue against the method used by this shareholder The initial investment made by Miranda is £1875000. And the above table 2 of income statement shows that revenue generated by the hotel in first six months is £309915. So, it is assumed that the occupancy for the next six months will be same as for the given six months and it will generate similar amount of revenue. That is, the total revenue for the year will be: 309915 * 2 = £619830 So, by applying payback period method, it can be evaluated whether it is beneficial or not for Miranda to invest in the project. Payback Period = Initial Investment / Annual cash inflow
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Or, payback Period = 1875000 / 619830 Payback period = 3.025 years. The above method shows that Miranda will get its initial offer in just 3.025 years that is much before five years. So it proves that it is very good investment opportunity for Miranda to invest in the project (Haka, 1987). B: Discuss other methods which could be used to appraise this investment and calculate NPV for Miranda. Assume the following: • Discount rate of 10%. • Net cash inflow at the end of year 1 is £250,000 • Net cash flow will grow 3% year on year.
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• Miranda hopes to sell the business on her retirement after 10 years for £3,000,000 Apart from payback period, other methods that can be used to appraise the investment are: ❖Net Present Value Method: This method is used to evaluate the profitability of the project. I this, difference between present value of the cash inflow and present value of the cash outflow is calculated so as to find the net present value of the project. If the net present value of the investment is more that the initial investment then it is wise to invest in it, otherwise, it is not a good project to invest. It
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considers time value of money (Aggarwal, Edward and Mellen, 1991). â?–Internal rate of Return Method: IRR is the discounting rate which makes the present value of the cash inflow equal to zero. If IRR is higher, it means it is good to invest in the project. For example, if IRR is more that cost of capital, it means the project is attractive and one must invest in it. On the other hand, if IRR is less that cost of capital, it is not advisable to invest in the project. It considers time value of money. â?–Accounting Rate of Return Method: Another capital budgeting method used to appraise any project is ARR. It helps in determining the rate of return. In
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this average profit is divided by initial investment to determine the return. ❖Profitability Index Method: This tool is used to determine the benefits that an investment can reap to its investors. In other words, it can be said it shows relationship between benefits and cost associated with a project (Aggarwal, Edward and Mellen, 1991). Initial investment = £1875000 Table 4: Inflow Yea Inflo r w (£) 2500 1 00 2575 2 00 3 2652
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4 5 6 7 8 9 10 10
25 2731 81.8 2813 77.2 2898 18.5 2985 13.1 3074 68.5 3166 92.5 3261 93.3 3000 000
Table 5: NPV Table
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Yea r 1 2 3 4 5 6 7 8
Discou nting Pres Rate ent Inflo @ Valu w 10% e 2500 2272 00 0.909 50 2575 2126 00 0.826 95 2652 1991 25 0.751 84 2731 1865 81.8 0.683 83.1 2813 1747 77.2 0.621 35.2 2898 1634 18.5 0.564 57.6 2985 1531 13.1 0.513 37.2 3074 0.467 1435
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68.5 3166 9 92.5 3261 10 93.3 3000 10 000
87.8 1342 0.424 77.6 1259 0.386 10.6 1158 0.386 000 2878 818
Net Present Value = Present Value – initial Investment Net Present Value = 2878818 – 1875000 NPV = £1003818 As the net present value of the cash inflow is more that the initial investment, it means it is advisable to invest in the project. If NPV of the cash flow is more that the initial investment incurred in that case the project is
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considered attractive. So Miranda must invest in the project. CONCLUSION After applying different financial tools on the above case study it can be concluded that financial analysis is very important in evaluating the profitability of any investment project. It helps investors to determine whether they must invest in a particular project or not. So after working different tools on the given case study it can be said that it is advisable to Miranda to invest in the Hotel project as both payback period and NPV method suggests that it is an attractive investment.
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REFERENCES Books and Journals Aggarwal, R. Edward, J. and Mellen, L.E., 1991. Justifying Investments in Flexible Manufacturing Technology: Adding Strategic Analysis to Capital Budgeting Under Uncertainty. Managing Finance. 17(3). pp.77-88. Bennouna, K., 2010. Improved capital budgeting decision making: evidence from Canada. Emerald Group Publishing Limited. 48(2). pp.225-247. Fernรกndez, P. and et. al., 2007. Valuing companies by cash flow discounting: ten methods and nine theories. Emerald Group Publishing Limited. 33(11). pp.853876. Groppelli, A.A. and Nikbakht, E., 2006. Finance. 5ed. Barron's Educational Series.
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Haka, S.F., 1987. Capital Budgeting Techniques And Firm Specific Contingencies: A Correlational Analysis. Accounting, Organizations and Society. 12(1). pp.31-48. Mao, J.C.T., 2012. Survey Of Capital Budgeting: Theory And Practice. The Journal of Finance. 25(2). pp.349360. Watts, R.L., 1977. Corporate Financial Statements, A Product Of The Market And Political Processes. Australian Journal of Management. 2(1). pp.53-75. Weygandt, J.J. and et. al., 2009. Managerial Accounting: Tools for Business Decision Making. Managerial Accounting: Tools for Business Decision Making.