Financial Analysis and Statement Preparation

This document provides a detailed analysis of financial statements and statement preparation for a business. It covers topics such as business models, pricing strategies, cost analysis, break-even analysis, and pro-forma financial statements. The content is relevant for anyone looking to understand and analyze the financial aspects of a business.

Financial Analysis and Statement Preparation
1

Contents
Brief description of a business model and pricing strategy.......................................................3
Business model.......................................................................................................................3
Pricing strategy.......................................................................................................................4
The current and projected cost...................................................................................................6
Break-even analysis...................................................................................................................9
Pro-forma financial statements................................................................................................11
Sales forecast for the medium term..........................................................................................13
Potential challenges that company might face.........................................................................14
References................................................................................................................................16
2

Brief description of a business model and pricing strategy
Business model
Preparing a business model for a business organization to be established in the market is very
essential as it helps in identifying different factors that can affect profitability and
productivity. Business organization under consideration in this report is Queensland IT
Limited. The proposed business of this organization is the production of internal hard drives
for laptops and desktop computers. The main focus of this organization would be to
manufacture internal hard drives of 2 terabytes initial year of operations and then move to
other hardware accessories for computers and laptops. Business model canvas for this
organization would be as follows-
Partners- Partners can be defined as the stakeholder in the organization without which
business operation could not be completed. In simple word, it can be said that partners are the
stakeholders from which key resources of the organization would be received. Given the
scenario, the main focus of the organization should be on the acquisition of financial support
for starting a business organization (Lueg, Malinauskaite and Marinova, 2014). Therefore in
this scenario key partner of the organization would be a financial institution from which
business organization is taking a loan for starting the business.
Key activities- Key activities of Queensland IT Limited would be as follows-
Manufacturing- Primary business activity of this organization would be manufacturing as this
is a manufacturing organization that does not provide product and services directly to
customers.
Advertisement and marketing- One of the most important supporting activity of this
organization would be marketing as marketing will help in the identification of corporate
customers that are producing laptops and desktop computers.
Other supporting activities- other supporting business activities will include accounting,
human resource management, quality assurance, Internal auditing, etc. (Joyce and Paquin,
2016).
Key resources- Key resources required in this organization would be technological resources
and human resources. Technological resources will be required for the production of IT
3

Solutions with the latest technology. IT industry is very competitive and customers prefer
business organizations that are providing hardware and software with the latest technology
(Dudin et.al, 2015). In addition to the skilled and experienced, human resources will be
required for the implementation of technological resources. Without effective and efficient
human resources, efficient use of technological resources cannot be achieved.
Cost structure- cost structure of this organization will include variable and fixed cost and
details with relation to each element of cost is discussed in the later part of the report.
Revenue stream- Entire revenue of this organization will be from production and spelling of
internal storage devices for computer and laptop. There is a probability that certain amount of
revenue can be generated from other incomes such as repair and maintenance income and
interest income but these revenues are not considered in the business model as there is no
surety for such income.
Value proposition- Value proposition can be defined as a specific quality of a particular
business organization that makes them different from other business organizations in the
market. Queensland it limited will be providing quality internal storage devices at lower
prices as compared to other competitors in the market (Ovans, 2015). The balance between
quality and price will be the value proposition of this organization. Pricing strategies of the
company will be decided in accordance with this value proposition.
Customer relationship- This organization would not be dealing with the final customer as it is
very real call a computer user to purchase internal hard drive as it is already installed in the
laptop or desktop system. Marketing and advertising strategies of the company will be
prepared considering the characteristics of the corporate customer (Coes, 2014). A marketing
strategy that will be used in maintaining customer relationship would be personal selling.
Customer segments- This organization would have only one customer segment i.e.
manufacturing organizations that are involved in production and selling of computer and
desktop systems (Euchner and Ganguly, 2014). Personal selling will be used for maintaining
a relationship with such manufacturers. In addition to that regular rebates and discounts will
be provided on bulk orders.
4

Pricing strategy
Selection of pricing strategy before starting business operations is very important as it plays a
very essential role in the development of advertisement and marketing strategies. There are
various options available to the management of Queensland IT Limited for implementation of
a particular pricing strategy such as cost-plus pricing, skimming pricing, market pricing, and
penetration pricing (Kienzler and Kowalkowski, 2017). Best pricing Strategies for a new
business organization are skimming pricing and penetration pricing depending upon the
nature of the business environment in which the organization is operating.
On an overall analysis of the hardware information technology environment in Australia
specifically in Queensland, it can be said that the market is very competitive. Therefore it will
be very difficult for a business organization to establish a stable market share during the
initial phases of business operations. This is the reason that penetration pricing strategy will
be used by the business organization which will also compliment to value proposition
decided in the business model (Spann, Fischer and Tellis, 2014). The basic principle behind
penetration pricing strategy is to sell product and services at lower prices during the initial
stages of business operations. The unit price of product and services will be increased after
the significant market share is covered by the company (Zhang, Chiang and Liang, 2014).
5

The current and projected cost
After analysing the business model and strategy it is important to understand the various
components and elements of cost that will be incurred by the company.
All the elements of a cost in Queensland it limited are divided into two categories i.e. variable
cost and fixed cost (Kaplan and Atkinson, 2015).
Variable cost
Following is the statement showing estimated variable cost in the next financial years-
These are the cost that will fluctuate in accordance with the change in total revenue generated
by the organization. Following will be the critical variable cost incurred for the production of
internal hard disk-
Particular 2020 2021 2022 2023 2024
Sales
7525000.0
0
8277500.
00
9105250.0
0
10926300.
00
13657875.
00
Variable cost
Cost of
production
3386250.0
0
3724875.
00
4097362.5
0
4916835.0
0
6146043.7
5
Marketing
expense 150500.00
165550.0
0 182105.00 218526.00 273157.50
Commission 225750.00
248325.0
0 273157.50 327789.00 409736.25
Transportation
cost 376250.00
413875.0
0 455262.50 546315.00 682893.75
Total Cost 4138750.0 4552625. 5007887.5 6009465.0 7511831.2
6

0 00 0 0 5
Contribution
3386250.0
0
3724875.
00
4097362.5
0
4916835.0
0
6146043.7
5
Units 75250.00 75250.00 82775.00 95845.00 111950.00
Cost per unit 45.00 49.50 49.50 51.30 54.90
Contribution
margin 45.00 45.00 45.00 45.00 45.00
Cost of sales- This cost will be the purchase cost incurred by the organization for the
acquisition of raw material required for the production process. This cost is considered to be
the most important cost at it will measure around 45% of the total revenue generated.
Marketing expense- Marketing expense is also an important cost as this organization is very
new in the market and requires brand recognition. Sales and marketing activities will help in
establishing the brand of the organization among corporate customers.
Commission- This will be the additional compensation paid to employees of the organization
in accordance with their job performance. Majority of the revenue will be provided in the
form of commission as it will help in increasing the motivation level of employees
(Weygandt, Kimmel and Kieso, 2015).
Transportation cost- This will be the cost of a moving product and services back and forth
from suppliers and corporate customers. It is estimated that the total transportation cost would
be 5% of revenue.
Fixed cost
Following statement shows estimated the fixed cost in next to five financial years-
Fixed expense 2020 2021 2022 2023 2024
Salary & wages 350000.0 350000.0 350000.0 350000.0 350000.0
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0 0 0 0 0
Electricity expense 12500.00 12500.00 12500.00 12500.00 12500.00
Property tax 1800.00 1800.00 1800.00 1800.00 1800.00
Rent cost 15000.00 15000.00 15000.00 15000.00 15000.00
Total expense
379300.0
0
379300.0
0
379300.0
0
379300.0
0
379300.0
0
These are the cost that is not expected to change over the next 5 financial years and
estimation of the accurate fixed cost will also help in the estimation of break-even sales point.
Salaries and wages- These are the fixed compensation to be paid to human resources in
exchange for their services in production and management process. It is expected that a
number of employees in the next financial year will remain the same and compensation to
employees will be increased in the form of commission rather than salaries and wages
(Narayanaswamy, 2017).
Other fixed expenses- All the other fixed expenses such as rent, property tax, and electricity
expenses are general expenses that are required for ensuring that basic infrastructure is
available for the production process.
8

Break-even analysis
Break-even analysis in strategic management tool that helps to identify the business
performance of a business organization in terms of cost. Break-even analysis is an important
business tool that is required to be analysed before starting the business as it helps in
identifying a minimum number of units that should be sold by an organization in order to
keep themselves operating (Nagle and Müller, 2017). Break-even point can be defined as that
amount or unit of sale where there is no loss or profit for an organization i.e. total
contribution generated from operations is equal to the fixed cost of operations. Break-even
sales can be calculated by dividing the total fixed cost by contribution margin generated
through business operations.
Break-even analysis is considered as one of the most efficient methods of understanding the
relationship between cost volume and profit at a different level of business operation.
Management of Queensland IT Limited can easily understand the level of input that will be
required to keep business organization in operation for a long period of time (Bekaert and
Hodrick, 2017). This type of analysis will be very helpful where the total demand for product
and services in the industry is limited during a particular period. In this period management
can assess whether operating will be beneficial by evaluating whether they will be able to sell
units up to break even break- even point decided to recover all the cost (Scarborough, 2016).
Following statement shows break- even point of this organization in different financial years-
Particular 2020 2021 2022 2023 2024
Fixed cost 379300.00 379300.00 379300.00 379300.00 379300.00
Contribution per
unit 45.00 49.50 49.50 51.30 54.90
Contribution
margin 45.00 45.00 45.00 45.00 45.00
Break-even point
(units) 8428.89 7662.63 7662.63 7393.78 6908.94
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Selling price per
unit 100.00 110.00 110.00 114.00 122.00
Break-even point
(value) 842888.89 842888.89 842888.89 842891.20 842890.43
Total actual sales 7525000.00 8277500.00 9105250.00 10926300.00 13657875.00
Total break even sales are expected to be $842888.89 in all the five financial years. IN
addition to that total units require to achieve break-even point in net five financial year would
be 8428, 7662, 7662, 7393 and 6908.
On the basis of this calculation, it can be said that the total revenue expected to be generated
by the organization is significantly higher as compared to break even sales. Total break-even
sales in all the financial year will be similar as fixed asset and contribution margin in each of
the five financial years is equal to each other (Pandey, 2015). Break-even units are changing
total unit selling price is increasing over the period of time.
10

Pro-forma financial statements
In this section of the report, basic information in relation to financial statements required at
the end of every financial year will be discussed along with a basic discussion of their format
and component (Robinson et.al, 2015). There are majorly three components of financial
statements that are required to be filed to tax authorities in Australia i.e. profit and loss
account, statement of financial position and cash flow statement.
Profit and loss account-
Component- Summary of all the transactions that are related to expenses and revenue in a
particular business organization are represented in profit and loss account. It can be said that
the profitability of a business organization can be detected with the help of profit and loss
account.
Pro-forma- Account will be divided into two sections basis of nature of expenses incurred by
the organization (Nobes, 2014). All the direct expenses will be shown in the first section to
calculate gross profit whereas all the other expenses will be sold in the next section to
calculate net profit.
Cash flow statement
All the transactions related to cash will be summarised with the help of cash flow statement at
the end of the financial year. Format of this statement will be divided into three major
categories-
 Cash flow from operating activities
 Cash flow from financing activity
 Cash flow from investing activities (Brigham et.al, 2016)
Statement of financial position
This statement will show the value of assets and liabilities at the end of the accounting
period. This statement will be divided into two sections where one section will show the
value of all the assets whereas the second section will show the value of all the external
liabilities and equity.
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Combined analysis of these financial statements will help in understanding the financial
standing and profitability of the organization in the market.
12

Sales forecast for the medium term
It is very important for a business managers to identify the financial viability of a particular
project before proposing in such project to do investors. As it is already discussed that a
finance for the business proposal will be provided by financial institutions and banking
organizations (Hollmann, Scavarda and Thomé, 2015). It is common practices for financial
institutions and banking organizations to ask for financial plans of a particular business
proposal before providing finance. If the management of banking organization considers the
data provided in financial projections accurate and relevant then they will think for providing
finance to the applicant. Projection of financial data is one of the most efficient methods of
identifying the financial viability of a particular project (Samonas, 2015).
There are certain assumptions that are required to be made by the business organization
before making such financial projections are and in this scenario following are the
assumptions that are taken for evaluating financial viability for Queensland IT Limited-
 Total revenue generated by the organization is expected to increase by percent in the
second and third year where is it will increase by 20% and 25% in 2023 and 2024
respectively.
 There will be no drastic change in market variables such as bank interest rate and
inflation rate.
 Management of the organization would be able to use its assets to their full potential
(Hautsch, Schaumburg and Schienle, 2014).
 All the activities in the organization will be conducted in accordance with the
prepared plans.
Statement showing projected sales in the next financial years would be as follows-
Particular 2020 2021 2022 2023 2024
Selling price
per unit 100.00 110.00 110.00 114.00 122.00
Units sold 75250.00 75250.00 82775.00 95845.00 111950.00
Sales 7525000. 8277500. 9105250. 10926300. 13657875.
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00 00 00 00 00
Cost of
production
3386250.
00
3724875.
00
4097362.
50
4916835.0
0
6146043.7
5
Gross Profit
4138750.
00
4552625.
00
5007887.
50
6009465.0
0
7511831.2
5
Marketing
expense
150500.0
0
165550.0
0
182105.0
0 218526.00 273157.50
Commission
225750.0
0
248325.0
0
273157.5
0 327789.00 409736.25
Transportation
cost
376250.0
0
413875.0
0
455262.5
0 546315.00 682893.75
Salaries and
wages
350000.0
0
350000.0
0
350000.0
0 350000.00 350000.00
Electricity
expense 12500.00 12500.00 12500.00 12500.00 12500.00
Property tax 1800.00 1800.00 1800.00 1800.00 1800.00
Rent 15000.00 15000.00 15000.00 15000.00 15000.00
Total expenses
1131800.
00
1207050.
00
1289825.
00
1471930.0
0
1745087.5
0
Net profit
3006950.
00
3345575.
00
3718062.
50
4537535.0
0
5766743.7
5
Net profit ratio 39.96 40.42 40.83 41.53 42.22
Gross profit
ratio 55.00 55.00 55.00 55.00 55.00
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Potential challenges that company might face
 One of the primary challenges that will be faced by the business organization would
be to increase the total revenue of the company on a regular basis in a competitive
market like IT market.
 Achieving the full potential of human resources capital is also a critical challenge that
will be faced by Queensland IT Limited. Management of the organization would be
required to ensure that management strategies like employee motivation and
leadership followed for improving the morale of employees (Spieth, Schneckenberg
and Ricart, 2014).
 Controlling indirect cost in new business would also be a very difficult challenge for
the organization. Controlling cost is one of the most essential objectives for this
organization as management has selected a penetration pricing strategy for acquisition
of a market share in earlier stages.
 According to this strategy selling price of product and services are kept at a minimum
to undercut selling prices of competitors in the market. Cost controlling strategies
should be developed from day one that should be revised in accordance with the
changing the environment.
 Maintaining an effective relationship with suppliers will also be an important
challenge as overall direct expenses are dependent on the relationship between a
supplier and a business organization (Yin and Kaynak, 2015).
 Understanding the needs and requirements of the market is also critical challenge
responsible for maintaining stable profitability from business operations.
 Conducting performance evaluation for the identification of deficiencies in internal
processes would also be an important challenge that will help in the maintenance of
integrated resource management practices.
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