Financial Ratios and Firm Performance

This assignment delves into the analysis of financial ratios and their significance in assessing firm performance. It examines how various ratios, such as return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt-to-equity ratio (DER), and current ratio (CR), influence corporate profit growth. The assignment also explores the role of business intelligence technology and key performance indicators (KPIs) in understanding and managing firm success.

MANAGEMENT BUDGET FORECAST
ASSESSMENTs ACTIVITY 2

TABLE OF CONTENTS
Task 2.1......................................................................................................................................4
Cash Budget...........................................................................................................................4
Analysis of facts derived from Cash Budget..........................................................................5
Action Plan for upcoming year..............................................................................................6
Task 2.2......................................................................................................................................7
Annual Budgeted Expense for the year 2016.........................................................................7
Expenditure milestones..........................................................................................................9
Type of verifiable data and sources that can provide information to prepare budget and
forecast...................................................................................................................................9
Task 2.3......................................................................................................................................9
Sales Budget for August.........................................................................................................9
Assumptions and parameters for accuracy, relevance and compliance...............................10
Task 2.4....................................................................................................................................11
Budgeted Income Statements...............................................................................................11
Bank Account.......................................................................................................................12
Budgeted Balance Sheet.......................................................................................................12
Task 2.5....................................................................................................................................14
Financial risk and its control for BHP Billiton Group........................................................14
Task 2.6....................................................................................................................................14
Ethics and code of practice related to budget forecast.........................................................14
Importance of ethics.............................................................................................................15
Task 2.7....................................................................................................................................16
Forecasting trends- example................................................................................................16
Graphical representation of XYZ Pty Ltd’ Net profits of 4 years........................................17
XYZ Pty Ltd’s Performance................................................................................................18

Task 2.8....................................................................................................................................18
Key Performing Indicators / Ratios......................................................................................18
Other Key Performing Indicators helpful for forecasting estimates....................................19
Importance of feasibility study to compare projections with market growth and
development.........................................................................................................................21
References................................................................................................................................23

Task 2.1
Cash Budget
Maan Snack Bar
Cash Budget for the month of July, August and September
July
( in $ )
August
( in $ )
September
( in $ )
Opening Bank Balance 10500 1430.6 -6124.978
Cash sales 11000 11500 12000
Receipts 880 920 960
Cash receipts from Account Receivables
Other – Merchandise 300
Total Receipts 11880 12420 13260
Cash available 22380 13850.6 7135.022
Payments 2970 3105 3240
Payment to creditors 2909.4 1800.578 927.55286
Salaries and wages 9335 9335 9335
Interest Payment 1177 1177 1177

Operating expense 1223 1223 1322
Loan Repayment 3335 3335 3335
Total Payments 20949.4 19975.578 19336.55286
Surplus / Deficit Closing Balance 1430.6 -6124.978 -12201.53086
Analysis of facts derived from Cash Budget
(a) Cash Position at the end of each month
Maan Snack Baar has a surplus of $ 1430.6 at the end of July and deficit of $ 6124.978 for
the month of August and deficit of $ 12201.53 for the month of September. This shows a
declining trend in the cash position of the Maan Snack Bar.
(b) Consequences of persistent cash position of the Maan Snack Bar
According to Balance and et al. (2015), negative cash balance denotes increasing
short-term expenditures or increase in a long-term profit making capacity. If the cash budget
of the Maan Snack Bar continues to deplete, it is an alarming situation where the company
will have to rethink its financing options, its sales tactics, its product quality and statistics,
etc, otherwise it may lead to liquidation of company’s assets for generation of liquidity as
well as funds for continuance of business.
(c) Objective of Preparing Organisational Budgets
Organisational budgets help business provide a structure to follow a certain path. As
per Adam and et al. (2016), it helps organisations to predict their cash flows, allocation of
business resources, estimation of financial outcome of any strategic decision to be executed,
and it is taken as a measure of judging sales performance, managing operational cost,
reassigning surplus and managing funds to meet deficits. Therefore there is a straight

relationship among organizational budgeting and its attainment of objectives. It helps the
business to keep track of its strategic decision and planning so as to enhance its revenues,
improve its profitability, reduce cost and overall performance.
(d) Stakeholders and consulting methods to promote understanding, goodwill and
ongoing cooperation
Business owners, decision makers, suppliers, customers and employees are the
primary stakeholders who shall be consulted for the purpose of augmenting understanding
and cooperation and increasing the goodwill value. There are many consulting methodologies
to promote understanding, goodwill and ongoing cooperation which can be adopted.
According to the words of Pinheiro, (2014), few of such methodologies include focused
workshops, brainstorming sessions and social interaction activities. This brings these
stakeholders together to better understanding and enhanced cooperation between each other,
which eventually helps build goodwill of the business.
Action Plan for upcoming year
 Increase in cash sales: As per the words of Cox (2014), cash sales can be
increased by bulk sales customers by selling more quantities even for lesser margins,
also greater promotional activities may lead to broader network of clients, and making
attractive offers to retail clients may lead to generation of higher cash inflows. Higher
cash flows, better credit periods, higher net profits are some evidence that supports
future financial improvements.
 Reduction in cash payments: Cash payments can be reduced by giving new
suppliers an opportunity, who can give longer credit periods or discounts on cash
payments, chose last dates for huge payment settlements, reduced overstocking, late
invoices from suppliers, better negotiations, improving tax compliances, etc.
 Saving in overall labour cost: Overall labour costs can be saved by cross
training new employees, investing in technology and machinery with higher
production capacity, outsourcing certain activities, best employee retention, regular
reviews, Commission based payroll, reduced perquisites, etc.
 Improvement in operating expenditure: Operating expenses can be improved
or reduced through controlling the wastage and providing an order of products by
assessing the sales of the previous year. The same will result into ordering the product

which is in demand and reduce the chances of having dead stock. Further appropriate
budgets such as marketing budget etc. should be prepared so that we know the extent
to which we have to spent on same.
Task 2.2
Annual Budgeted Expense for the year 2016
Maan Snack Bar
Annual Expense Budget for coming the year 2016
Particulars Monthly
( in $ )
Budgeted
Annual
( in $ )
Expected Fee 450000
Marketing Expense
Fixed Advertising 7800
Variable Advertising 18000
Total Marketing Expense 25800
Financial Expense
Fixed Interest paid 2400 28800
Bank charges 300 3600

Total Financial Expense 32400
Administration Expense
Accounting Staff Cost 9000 108000
Stationery 380 4560
Depreciation of office
equipment 9500
Depreciation of motor vehicle 14400
Rent 3000 36000
Travelling Expense 30000
Work Cover ( 108000 x 4 % ) 4320
Superannuation ( 108000 x 9.5
% ) 10260
Telecommunication 2000 24000
Total Administration Expense 241040
Total Annual Expenses or Cost 299240
Profit / ( Loss ) 150760

Expenditure milestones
In the current situation expenditure milestones are expected to be set up based on
certain characteristics like specific - in terms of figures so as to measure at the year-end, there
should be deadlines so as to mark it timeliness, progressive nature and doable and
significance which does not portray a bigger picture and encourage procrastination.
According to the views of Klychova and et al., (2014), generally, expenditure milestones are
set up based on past experiences, practices, industry standards and adopted practices in past.
Therefore it is assumed that the assumptions and practices remain constant without any
change in the coming year 2016.
Type of verifiable data and sources that can provide information to prepare budget and
forecast
Type of verifiable data and sources for budget preparation and forecast are statements
of financial institutions, vouchers, receipts and invoices, documents of purchase orders and
from suppliers, statutory returns and taxation returns. As per the views of Brigham and et al.,
(2013), other sources like industry norms and standards, competitor’s statistics, market
scenario and economic trends also help budget and forecast.
Task 2.3
Sales Budget for August
Sales Budget of Streama of August
Particulars Apple Orange Total
Sales for July 2000 8000 10000
Selling Price in July ( in $ ) 20 40

Sales Revenue for July ( in $ ) 40000 320000 360000
Sales for August 1920 9280 11200
Selling Price in August ( in $ ) 22 37.6
Sales Revenue for August ( in $ ) 42240 348928 391168
Sales Commission paid ( in % ) 2 4
Sales Commission Paid in August (in
$ )
844.8 13957.12
Net Sales Revenue of August
( Sales Revenue - Sales
Commission )
41395.2 334970.88 376366.08
Assumptions and parameters for accuracy, relevance and compliance
According to the opinion of Chen and et.al, (2013), certain assumptions and
parameters that help to get more accuracy and compliance with regard to budgeting and
forecast are the previous and existing cash as well as business returns from the commercial
activities; behaviour of the existing and new competitors helps to plan, budget, forecast and

execute strategic decisions; the expenditure limits marked by the business helps keep track of
cash flows due any changes; statistics of market growth and market share helps decide best
options; levels of productivity of business outputs and the regulatory as well as governmental
stability.
Task 2.4
Budgeted Income Statements
Particulars Amount ( in $ )
Sales 110000
Cost of Goods Sold 25000
Gross Profit 85000
Selling and Admin Expenditure ** 14300
Income from Operations 70700
Interest -
Income Tax expense 2000
Net Income 68700
** Selling and Admin Expenditure:
Advertising 5500 + Courier 1100 + Office Supplies 550 + Insurance 1650 + Rent 5500 = $
14300

Bank Account
Particulars Amount ( in $ )
Opening Bank Balance 20000
Add:
Estimated Sales Revenue 110000
130000
Less:
Estimated Wages (20000 + 5000 ) 25000
Estimated Selling and Admin expenses 14300
Estimated PAYG paid 2000
41300
Estimated Closing Bank Balance 88700
Budgeted Balance Sheet
Budgeted Balance Sheet as on year ending 30th June

Current Assets
Bank 88700
Total Current Assets 88700
Fixed Assets -
Less: Depreciation -
Net Fixed Assets -
Total Assets 88700
Current Liabilities
Outstanding Wages 2000
Total Current Liabilities 2000
Shareholder’s Equity 66700
Total Liabilities and
Equity
88700

Task 2.5
Financial risk and its control for BHP Billiton Group
Financial Risk Mitigation Strategies
Interest Rates As per the opinion of Michalski, (2013), management of
interest rate risk falls within the overall limit of CFaR and
forms part of the Portfolio Risk Management Strategy.
Involvement in interest rate swaps as well as cross-currency
interest rate swaps, to hedge interest rate and foreign currency
in fair value hedge relationships.
Environmental compliance – health,
safety and regulatory laws - higher
litigation, regulatory compliance
costs and sudden environmental
remedial expenses
In accordance with Wu and et al. (2015), provision for site
rehabilitation procedures and closure of certain operations,
higher health security measures to minimise health hazards,
compliant corporate social responsibility strategic decisions
like employee development, tax payments, good payrolls and
investment in community development.
Commodity Prices – cycle of rising
and fall – substantially volatile
global market
In accordance with the words of McNeil and et al., (2015),
entering into a long-term contractual relationship with vendors
and suppliers to mitigate volatile market conditions and
diversification in more sets of commodities production to
mitigate the risk of single commodity influence on returns.
Task 2.6
Ethics and code of practice related to budget forecast
In accordance with the views of Puyou and et al., (2015), a business with a clear
ethical direction makes use of budgeting process to make healthy choices that help the
realization of financially sustainable vision and goals, while balancing their financial
considerations to make meaningful business activities, that are worth investing in. Certain

codes of practices while making assumptions are honesty, responsible attitude, conflict of
interest, decency and fairness. Honesty enables the best allocation of resources with clear,
exact and transparent business processes. Responsible attitude is reflected through an
understanding of all the stakeholders including the environment. Business practices shall be
focused on more human outcomes, kindles and mutual benefit of all involved. Conflict of
interest shall not prevent fair and true presentation of data and honest financial priorities.
Importance of ethics
In accordance with the opinion of Walker, and et al., (2013), application of ethical
code of practice while making assumptions and predictions is important as it raises image and
future standard; boost trust of stakeholders; gets a strong impression on moral mindset as well
as behaviours of individuals; progresses business relationships at various level; promotes
decision making which is fairer and decent; project risk is reduced; higher success possibility;
reduces anxiety and stress among employees and within business and ultimately raises
business turnover.
Assessment of work by trainer
Did the Candidate Yes/ No Comments
Researched about Ethics and
Budgets
Yes Research relating ethics and budget has
been done to ascertain its importance. It
has been assessed that being responsible
for allotted part of work is necessarily
ethical and required to be done. Further,
budgets are prepared to access the
approximation of figures so that the same
could be compared with actual figures
later on.
Worked as a team player Yes The whole assignment was discussed with

the team first, and every member was
provided with his part of work. It was
taken care that accomplishment of one’s
member work does not create an obstacle
for another.
Contributed to the
discussion
Yes Suggestions were provided so that the
allocated work accomplishes in fast as
well as appropriate manner.
Discussed the importance of
ethics
Yes It was made assure that the project gets
accomplished within time and no
plagiarism of work is done by any of the
members.
Task 2.7
Forecasting trends- example
With the help of trend analysis, future outcomes are measured with the help of more
measurable and certifiable outcome of businesses projection (Bourmistrov and et al., 2013).
This enables the owners to get early warning of approaching trouble. With the help of this
market trend, levels of inventory, sales growth and rate of interest can be forecasted. One of
these is “time-series forecasting” which measures collected data over a period of time to
classify trends. The period may differ from an hourly basis to yearly basis. Components that
make up the time series are a trend, seasonal, cyclical and irregular, referring to the gradual
shifting of data over a time interval. Mostly it is denoted by an upward or downward sloping
graphical line to represent either an increasing or decreasing inclination, respectively. The
cyclical component is an example of a business cycle that lies either above or below the trend
line with a repetition pattern of a year or longer. Seasonal components too are repetitive in
nature like cyclical component, but with the one-year occurrence. Lastly, irregular
components randomly happen and are not possible to be predicted.

XYZ PTY Ltd.
Net Profit Comparison
January
( in $ )
February
( in $ )
March
( in $ )
April
( in $ )
May
( in $ )
June
( in $ )
2007-08 15432.77 5319.35 8873.25 6646.47 -192.43 -8006.29
2008-09 5197.38 5960.08 10479.02 4901.35 8225.31 -1263.19
2009-10 17207.17 -8301.66 -3554.80 3.11 1230.26 -5540.06
2010-11 -9183.68 2327.37 -4067 -10641.82 -5304 1890
Graphical representation of XYZ Pty Ltd’ Net profits of 4 years
( in $ ) ( in $ ) ( in $ ) ( in $ ) ( in $ ) ( in $ )
January February March April May June
-15000
-10000
-5000
0
5000
10000
15000
20000
2007-08
2008-09
2009-10
2010-11

XYZ Pty Ltd’s Performance
The company started with a good profit of $ 15432.77 in January 2007, but the profit
kept declining over the subsequent months leading to huge losses in June 2007. In the year
2008, XYZ Pty Ltd. started making profits which gradually rose till March 2008 but then
declined April. It boosted in May 2008 but then dipped with loss of $ 1263.19 in June 2008.
The year 2009-10 was a mixture of profits as well as gains, where the year started with a
profit of $ 17207.17 then making losses in subsequent months, except for the month of May
2009. Lastly, in the year 2010-11 the company started with a loss and ended with some
profits. Therefore the net income of XYZ Pty Ltd. is very fluctuating and highly volatile. The
business owners need to make adjustments to its business projections, forecast and strategic
planning to improve its net gains (Obeidat and et al., 2015.).
Task 2.8
Key Performing Indicators / Ratios
Key Performing
Indicators
Ratio Meaning in terms of business
Gross Profit % Gross Profit / Sales Revenue
Or
( Sales Revenue – Cost of
Goods Sold ) / Sales Revenue
A gross margin, enable the company
to know amount needed to pay for
the operating cost (Parmenter,
2015). A stable gross profit margin
is expected to be maintained by a
business for long-term stability.
Current Ratio Current Asset / Current
Liabilities
This is also known as liquidity ratio
as it reveals short term as well as
long-term liabilities of the business.
It gives a measure of company’s

financial health of making payment
of its liabilities from higher asset
value (Rosemann, and et al., 2015.).
Net Profit % Net Profit / Sales Revenue The Net profit margin enables the
business to know the value available
to the shareholders (Delen and et al.,
2013.) after all operating, selling and
admin expenses, interest and taxes.
Higher the ratio means a higher
return to business owners, stock
prices and available profits.
Other Key Performing Indicators helpful for forecasting estimates
There are many key performing indicators which help to forecast and plan, like:
Key Performing Indicators Ratio Meaning in terms of
business
Quick Ratio ( Cash + Account
Receivable + Short-term
Investments ) / Current
Liabilities
This indicates sufficiency of
short-term assets to fulfil
immediate liabilities in
nearest future (Baños-
Caballero and et al., 2014.).
This has a higher relevance
in comparison to current
ratio to find out financial
health of the business.
Working Capital Current Liabilities – Current This reveals the current
assets needed to meet it are

Assets in hand liabilities. This
enables the company to plan
to invest any surplus for
more income or expansion
and manage deficits (Storey
and et al. 2016) by the
planning of removal or
adjustment of funds from
non-profit generating to
return-generating sectors.
Inventory Turnover Ratio Sales / Inventory This helps to find out the
efficiency of a company to
make sales and replacement
of needed inventory in a
specified period of time.
This helps to avoid over-
stocking which blocks funds
and under-stocking which
depletes image and sales
(Agha, 2014).
Return on Equity Net Profit / Total
Shareholders’ Equity
This reveals the proportion
of net income earned on
every penny of owner’s
investment (Bodie, 2013).
This shows the return
generated to the business
owners.
Debt Equity Ratio Total Liability / Total Equity This defines the capital
structure of the business.
Higher than one D / E Ratio