SECTION A G UIDE

THE

D IRECTORS

OF THE COMPANY ABOUT IMPORTANCE OF FINANCIAL

DATA,

HOW IS IT GATHERED A ND RELIABILITY OF FINANCIAL DATA .

Introduction: The purpose is to highlight the importance of financial data, the way by which it is gathered and what makes the financial data reliable. Two important tools for successful running of business are planning and control. Business plans sets out the guidelines for business and what it wants to achieve. Control helps to make sure that the established goals are being achieved and if any deviations are identified so corrective measures could be taken to make them congruent. Financial data is at the HEART of BUSINESS MANAGEMENT. It is essential for the director of business to know about the importance of financial data and its management. For business manager it is almost impossible to run the business if they do not know how to interpret and analyze the financial reports Financial Data: The significance of financial data is vital when it is converted into the meaningful information. Data alone is of no use. Its example is likely to be of a structure of the car whose engine is missing. They are merely facts, figures and other relevant materials representing past and present and which serve as bases for study and analysis. Types of data: The data needed by finance director is classified according to the need for which the data is required. Data regarding revenues, costs, assets, liabilities and owner's equity are of importance for preparation of financial statements. Directors are not only required to know the financial aspects of the entity but they are also expected to take into account the needs of other stakeholders of the organisation which in turns derive the need for social, environmental, political, Legal and technological data for the purpose of producing relevant reports. Importance of financial data: Financial data acts as the basis for analysis. Without analysing financial data no inferences can be drawn which will indicate the performance of the company. Inferences which are based on guesswork or imagination cannot provide fair view of the companys financial worth. The relevance, reliability and adequacy of financial data determine the quality of the outcome in forms of financial statements, budgets and management reports.

How data is gathered: Data can be gathered from various sources which are classified as primary and secondary sources. Primary sources include the internal and external sources. PRIMARY SOURCES: Internal Sources: Accounting Records: This include sales ledgers, purchase ledger, nominal ledgers and cost ledgers. These records provide the history of an organisations business. Some data is of high value within the accounts department like the employees PAYE codes are of purely administrative value while other data is of value outside the accounts department like for marketing department sales data will be of importance. Other internal sources: Some other types of data which are not merely the part of financial system are also related to the accounting system. 1. Personnel data: number of employees, level of pay, kind of labour can be identified from personnel records. 2. Production department: It includes data regarding machine capacity, fuel consumption, and movement of people, materials, and work in progress. This data will be useful in producing management report. 3. Service organisations: Accountants and solicitors need to record information regarding time spent on particular job to justify clients for fees.

External sources: Primary source: It includes the eye witness of an event, the place of the event and the document of origin. It has to be collected for the specific purpose. Secondary source: It provides second-hand data books, articles, verbal communication and written reports.

Secondary sources includes data collected from Governments; banks; newspapers; trade journals; information bureaux; consultancies; libraries and information services. Governments: The statistical data is produced by government mostly which gives details of prices, unemployment, employment, unfilled job vaccancies and inflation rates. Banks: Bank provides data regarding money supply, government borrowings and financial transactions.

 Financial newspapers: Financial times, The wall street journal and Economists provides data regarding exchange rates, interest rates, gilts and other share prices. Trade journals: Journal includes data about competitors products, industry needs and costs and so on. Data are often gathered via sampling. It is the way of picking sample rather than the whole population. Various sample methods are therefore applied to gather the data. These are probability sampling methods and non-probability sampling methods. Probability sampling methods include Random, stratified random, systematic, multistage and cluster method. Random sampling: It is a method of sampling in which every item in the population has an equal chance of selection. Stratified sampling: It is a method of sampling in which population is divided into various catgories and random sample is then drawn from each category. Systematic sampling: It includes selecting a random start and then every nth item is then selected from it. Multistage sampling: It is the way by which population is being divided into various subcategory and then random sample is selected from these sub-populations at random. RELIABILITY OF DATA: In order for the data to be reliable it should be free from material error, bias and faithfully represents the users what it purports to represent or could reasonably be expected to represent. 1. Faithful representation: Information should faithfully represents the transactions which it purports to represent. It is not always the bias which makes the information unreliable but there are inherent difficulties to identify which transactions should be selected and the appropriate method of measurement to be used. 2. Substance over form: The data will be faithful and reliable if it will be accounted for according to its substance and economic reality rather than its legal form. 3. Neutrality: Financial data should be free from bias. Neutrality is lost if data is influencing the decision makers judgement to arrive at a particulat outcome. 4. Prudence: Prudence in the financial data means the use of caution when judgements are being made. Directors should make sure that assets or income are not over stated or liabilities and expenses are not understated. 5. Completeness: Data acquire should be complete within the restrictions of materiality and costs. Omission of some data might make it to be unreliable. CONCLUSION:

This is an endeavour to higlhlight the importance of financial data, ways by which it can be collected and the significance of the reliability of the data for director. In order to better comprehend the realistic view of financial data director will be needed to carry out detail analysis as well.

(B)A NALYZE &

COMPARE THE FINANCIAL STATEMENTS OF

SIGNIFICANT ANALYTIC AL TOOLS FOR YEAR EN DING HOLDERS ABOUT PERFORMANCE OF THE COMPANY .

G ILL L IMITED WITH HELP OF 2008 & 2009. A ND INFORM STAKE

Ratio ROCE Markup Ratio Current ratio Debtors collection period creditors collection period EPS GP Ratio Net Profit Acid Test Ratio P/e Ratio

Formula Operating profit / capital employed Turnover-purchases / purchases Current assets / current liabilities Debtors / sales * 365 Creditors / purchases *365 Profit after tax / ordinary shares Gross profit / sales Net profit / sales Current assets stock / current liabilities Share price / eps

2008 35.9% 0.6 1.12 46days 37days 0.45 40% 11.3% 0.7 2.22

2009 19.4% 0.38 1.16 122 days 174days 0.33 33% 7.2% 0.84 3.03

Ratio analysis provides comparison between companies. They also help in finding out the weaknesses and strengths of a company. Ratio analysis plays an importamt part in the planning and forecasting of a company and helps the management in decision making. Ratio analysis also helps in assessing the effective and performance of a company and also helps the investors making investment decisions

Analysis The profitability of the company has decreased as shown by the decrease in its gross and net profit margins. This has also led in return on capital employed decreasing by about 16%. They is a possibility that the economic environment has lead to this downfall.

The liquidity position of gill ltd seems to be satisfactory as the current ratio is above 1 during both years and the acid ratio has increased which shows a good sign with respect to liquidy og gill ltd. Both debtors and creditors collection period have shown a high rise. With respect to working capital cycle this amy be seen as a good sign but the possibility of losing suppliers and having bad debts may be seen to be a bad point. As this may cause cash flows problems for gill ltd.. as they share price has been assumed to be 1 no proper conclusion can be made about the p/e ratio although using the assumed price it does show an increase but share price of both years are deemed to be different so no proper conclusion can be drawn. Eps has shown a decrease as profit figures have decreased. Suggestions and recommendation A huge increase in creditors and debtors period may lead to loss in suppliers and severe cash flow problems. Losing a supplier means that a new supplier required and loss of all previous credit history. New suppliers usually have strict terms and the terms loosen over time. Gill ltd is already facing cash flow probable it will be comparatively hard to convince a new supplier as firstly it reputation will be damaged by the old supplier leaving and secondly they will not be able to face a reduced creditor period as the debtors period has risen so high. To overcome the financial problems gill ltd may use the facility of an overdraft or try acquiring a loan. Another possibility may be the issuance of shares. Ratio of competitors should be acquired and compare to understand and assess the position of Gill ltd in the marketing environment. The management should have multiple plans and strategies in place covering all the possible undesirous results. All the plans and strategies should be reviewed and monitored on a regular basis hence every opportunity being availed and every threat being avoided or minimized and weaknesses being overcome

SECTION B E XPLAIN
HOW A BUDGET IS MADE EXPLAINING LIMITATIONS AND TARGETS OF BUDGETS .

BUDGETING & TYPES OF BUDGETING. Budgeting.

It is a traditional approach to control. Budgeting is usually used to monitor the performance of a business and that of individuals. the deviation from the standards are identified and actions are taken to acheive business targets. Budgeting is also used to motivate & reward employees by communicating what is expected from them. Budgeting has no fixed rule. It is an internal matter and companies may customize their approach accordingly. Here are a few types of budgeting Fixed budgeting. it is designed to predict the future performance and challenges the company may face so that the resources can be arranged properly and skills may be developed to face these challenges. it can also be used to motivate employees. Fixed budgets also communicate to employees the level of performance expected. Fixed budget helps to harmonize activities of an organization. Production Manager is informed beforehand about the quantity & quality of required goods . Incremental budgeting As the name suggests incremental budgeting are based on the previous years budget. The previous years budget is adjusted for inflation and the expected level of activity. It is also assumed that factors affecting a business shall continue as they were before. hence it is suitable for the stable business environments. This type of budgeting requires comparatively little time and little resources as compared with other types of budgets. It may be used by small businesses is well with fewer resource, less products and managed by the owners. it is widely used approach in particular the non-profit organizations

Rolling budgeting. it is not a one-time activity process that just continues throughout the life period of a company. initial budget is prepared mainly on a quarterly or annual basis. After that as each month passes by, another month is added on to the budget. By this way, it keeps the budget one step ahead. it gives comparatively more realistic budgeted figures. It is also quite timeconsuming but is effective with respect to cost management. It may be justified if benefits outweigh its costs. Is suitable for quickly changing environment

LIMITATIONS OF BUDGETING

Budgets are as good as data being used creating them.

Budgets may lead to inflexibility while making decisions they need to be changed with circumstances it is a time consuming process Managers may become over occupied while setting and reviewing them. They have behavioural implications for motivating employees they are de-motivating if imposed rather than negotiated budgets may set unrealistic targets that add to de-motivation Budgets may contribute to inter department rivalry in a company They is a possibility of Budgetary slack occuring incase targets are set a bit too low

P REPARE A PROJECTED P ROFIT & L OSS A CCOUNT FOR G ILL L IMITED F OR YEAR E NDED 2010. AND ADVISE MANAGEMEN T OF G ILL LIMITED ABOUT RISKS AND
OPPORTUNITIES AND FA CTORS THAT WILL AFFE CT THE BUDGETS AND TO IMPROVE THE BUSINESS .

Gill Limited Forecasted Trading Profit & Loss Account For the year ended December 31st 2010

2009 Sales (all Credit) Less : Cost of Goods Sold Opening Stock Purchases Less: Closing Stock Gross profit Less: Admin Expenses Loan Interest Selling and Distribution Insurance Net Profit Before Taxation Tax Net Profit After Taxation Dividends Retained Profit for the Year Retained Profit brought forward from Previous Year Retained Profit Carried Forward 24,000 1,000 16,000 (41,000) 19,000 (6,000) 13,000 (7,000) 6,000 12,000 14,000 130,000 24,000 180,000

2010 243,000

24,000 150,000 (120,000) 28,200 60,000 43,740 500 24,000 12,150 (80,390) 16,810 (9,000) 7,810 7,810 18,000 (145,800) 97,200

18,000

25,810

ANALYSIS AND RECOMMENDATIONS Compared to 2009 , the projected P & L statement of 2010 of gill ltd shows an increased of 35% of sales. All these sales are on credit terms hence they is a huge possibility of cash flow problems occurring as the debtors period has recently increased to a high level. This may lead to bad debts leading to more severe cash flow problems. Cost of sales have beeen limited to 60% of sales, also higher as compared to that of 2009. Gill ltd should make sure that materials are being purchased cheaply but at the same time quality is not being compromised. Interest has been decreased by an amount of 500. Although it is a good sign but an increase in administrative expenses and a huge increase in selling and distribution costs make this decreased very minor. The admin expenses and the selling and distribution expenses should be monitored closely and tried to be reduced. Costs are to be minimized in order to improve cash flows problems and increase profits thus increasing the companies worth The main problem of Gill ltd is managing its cash flow problems. Factoring may be used to minimize bad debts and better the debtors period and all types of expenses should be monitored closely and hence be reduced to a minimal level.

Q: U SING

INVESTMENT METHOD OF P ROJECT APPRAISAL, SUGGEST MANAGEMENT OF G ILL L IMITED WHICH PROJECT WOULD BE MORE PROFIT ABLE . A ND OTHER FACTORS THEY T HAT WILL AFFECT INVE STMENT DECISION . P LEASE ALSO ANALYZE THE VIABILIT Y OF P ROPOSAL IDENTIFY THE STRENGTHS AND WEAKNESS OF YOUR SUGGESTED METHOD . A ND IMPACT ON PROFITS OF THE COMPANY .
SUITABLE

INVESTMENT PROPOSAL Investment proposals are documents prepared usually by a firm for their clients that are prospective investors. Details included in a proposal are the projects nature growth potential of the projects projects objectives cash required security acquired or required repayment plan eg interest

Capital budgeting is a vital aspect in marketing decisions. They is no use of carrying out a project if it is not profitable in a long run except if it for the public aspect. several methods are used in capital budgeting. techniques include Accounting Rate of Return (ARR), Net present value (NPV), Internal Rate of Return (IRR) and so on. PROJECT VIABILITY Viability of projects depend on many things. Here are some important things to be kept in mind to make any project viable.

projects should be completed in the time that is set when they were started as going late on completing the project may lead to losing a high amount of profits and make a feasible project unfeasible. Things dont usually go according to plans hence a project should be monitored and reviewed and incase any change is required it should be made Quality plays an important role and part in making a project viable. Incase quality is not met they is a possibility that the project may lose it worth and may even turn out to be a loss for its investors. If half way through the project seems to be of no worth then it should be stopped right away. No use of running costs over an unfeasible project even though it is half way through..

Capital budgeting is a vital aspect in marketing decisions. They is no use of carrying out a project if it is not profitable in a long run except if it for the public aspect. several methods are used in capital budgeting. techniques include Net Present Value NPV Annual Rate of return ARR Payback period

NET PRESENT VALUE It is very important to know the advantages and disadvantages of the method used. The most most used investment evaluation methods is NPV. Advantages include it takes into consideration the time value of money it takes into consideration all relevant cash flows it provides a clear rule being if positive accept if negative reject the project

Disadvantages include Requires an estimate of cost of capital. A wrong estimate can determine a feasible project unfeasible & vice versa.

PAYBACK ADVANTAGES

It is Easy to calculate It is Easy to understand It is highly relevant for companies having liquidity problems It emphasizes speedy performance DISADVANTAGES it ignores money received after payback can be difficult to set a specific target recovery period of a company Short-term focus

AVERAGE RATE OF RETURN

ADVANTAGES Shown in term of percentage helps easy comparisons b/w projects shows profitability of the project

DISADVANTAGES highly time consuming it ignores time value of money

PROJECT A N .P . V ARR PROJECT B NPV ARR 11,910 60% 14,300 94%

As the values above show Gill Ltd should opt for project A as it is more feasible due to being more profitable,

APPENDICES Return of Capital Employed (ROCE) :2008 :Operating Profit / Capital Employed 33,000 / 92,000 * 100 = 35.9% 2009 :Operating Profit / Capital Employed 19,000 / 98,000 * 100 = 19.4%

Gross ProfitRatio :2008 :Gross Profit / Sales 64000 / 160000 * 100 = 40% 2009 :Gross Profit / Sales 60000 / 180000 * 100 = 33%

MarkupRatio :2008 :Turnover - Purchases / Purchases 160000-100000/100000 = 3/5 = 0.6 2009 :Turnover - Purchases / Purchases 180000-130000/130000 =5/13 =0.38

Net Profit :2008 :Net profit / sales 18000 / 160000 * 100 = 11.3% 2009 :Net profit / sales 13000 / 180000 * 100 = 7.2%

Current ratio :2008 :Current Assets / Current Liabilities 37000 / 33000 = 1.12 2009 :Current Assets / Current Liabilities 85000 / 73000 = 1.16

Acid Test Ratio :-

= 0.7 2009 :Current Assets Stock / Current Liabilities (85000 -24000) / 73000 = 0.84

2008 :Current Assets Stock / Current Liabilities (37000 14000) / 33000

Debtors collection period :2008 :Debtors / Sales * 365 Days 20000 / 160000 * 365 = 46 days 2009 :Debtors / Sales * 365 Days 60000 / 180000 *365 = 122 days

Creditors collection period :2008 :Creditors / Purchases * 365 Days 10000 / 100000 * 365 = 37days 2009 :Creditors / Purchases * 365 Days 62000 / 130000 * 365 = 174days

Earning Per Share (EPS) :2008 :Profit After Tax / Ordinary Shares 18000 / 40000 = 0.45 Share price is assumed to be 1$ per share. 2009 :Profit After Tax / Ordinary Shares 13000 / 40000 =0.33 Share price is assumed to be 1$ per share.

Price Earning(P/E)Ratio :-

2008 :Share Price / Eps

2009:Share Price / Eps

1/0.33 = 3.03 Share price assumed to be $1 per sharE

1 / 0.45 = 2.22

ACCOUNTING RATE OF RETURN

Project A

20+80+40 / 3 x 100 100 / 2 94% Project B

10+40+40+40+20 / 5 x 100 100 / 2 60%

NET PRESENT VALUE (NPV) Project A Years 0 1 2 3 Cash flows (100,000) 20,000 80,000 40,000 PV Factor x1 x 0909 x 0.826 x 0.751 NPV Project B Years 0 1 2 3 4 5 Cash flows (100,000) 10,000 40,000 40,000 40,000 20,000 PV Factor x1 x 0909 x 0.826 x 0.751 x 0.683 x 0.621 NPV 11,910 Present Values (100,000) 9,090 33,040 30,040 27,320 12,420 14,300 Present Values (100,000) 18,180 66,080 30,040

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