Financial Analysis and Performance Report for Bellovida Ltd

This report provides a comprehensive financial analysis of Bellovida Ltd, evaluating its performance using ratio analysis, including profitability, liquidity, efficiency, and gearing ratios. The analysis extends to non-financial aspects impacting business performance, such as customer retention and employee turnover. Furthermore, the report delves into break-even point analysis, calculating the break-even point in units and value, along with margin of safety. Investment appraisal techniques, including payback period, ARR, and NPV are applied to evaluate investment decisions. The report also examines working capital management, pricing strategies, and budgeting methods, providing a holistic view of the company's financial health and strategic planning.

MANAGING FINANCE

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
(i) Calculation of ratios...........................................................................................................1
(ii) Analysis of ratios..............................................................................................................2
iii) Explanation of four non-financial aspects which are used for improving business
performance............................................................................................................................3
QUESTION 2...................................................................................................................................3
A) Significance of BEP analysis............................................................................................3
B) BEP point in units and value.............................................................................................4
C) Margin of safety in units and value...................................................................................5
D) Profit and loss at sales of 8000 units.................................................................................5
E) P&L when selling price declines to $42............................................................................5
QUESTION 3...................................................................................................................................5
I) Comparing payback period (PP) and NPV.........................................................................5
ii) Evaluating and suggesting firm for investment decisions.................................................6
QUESTION 4...................................................................................................................................8
i) Listing out key functions and activities of a bank..............................................................8
ii) Explaining three terms.......................................................................................................8
iii) Significance of WC management for manufacturing company........................................8
QUESTION 5...................................................................................................................................9
i) Various pricing methods and suggesting the best strategy.................................................9
ii) Calculating unit selling price and advising the management...........................................10
QUESTION 6.................................................................................................................................10
i) Comparing Fixed and Flexible Budgets............................................................................10
ii) Importance of budgetary planning system.......................................................................11
iii) Calculating profit and loss..............................................................................................11
QUESTION 7.................................................................................................................................12
i) Discussing given statement of budgeting..........................................................................12
ii) Preparing different budgets..............................................................................................12
REFERENCES..............................................................................................................................14

QUESTION 1
(i) Calculation of ratios
Ratio analysis is the best technique which used for the purpose of quantitative analysis of
company’s financial performance including various aspects like profit performance, efficiency,
solvency, liquidity and others. Bellovida Ltd is a prestigious firm offering beauty products to the
consumers. Here, company’s financial performance is analyzed using various key ratios, as
follows:
Ratio Calculations 2014 2013
Gross profit 469648 628793
Sales 1164304 1344523
Gross profit margin Gross profit/total sales*100 40.34% 46.77%
Net profit -90364 47651
Sales 1164304 1344523
Net profit margin
Net profit before taxation/total sales
revenue*100 -7.76% 3.54%
Net profit after tax -147196 40711
Shareholder's fund 370989 515282
Return on capital
employed
(Profit before interest & tax/Aveage
shareholders fund) -39.68% 7.90%
Credit purchase 686906 709344
Creditors 81660 98420
Creditors settlement
period
Average credit creditors/Total credit
purchase*365 43.39 50.64
Current assets
$607,758.0
0
$657,679.0
0
Current liabilities
$274,031.0
0
$293,359.0
0
Stock
$338,826.0
0
$310,934.0
0
Current ratio (Current assets /Current liabilities) 2.22:1 2.24:1
Acid test ratio
(Current assets - stock)/current
liabilities 0.98 1.18
Average trade debtors 160806 186284.5
Total credit sales 1164304 1344523
Debtors collection period
(Average trade debtors/Total credit
sales)*365 50.41 50.57
Debt 356432 250000
Equity 370989 515282
Gearing ratio Long-term debt/(debt + equity) 0.49:1 0.33:1
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(ii) Analysis of ratios
Profitability performance
Bellovida Ltd’s gross profit came down from 46.77% to 40.34% in FY 2016 due to
huge decline in the total sales by 13.40% due to lack of market demand, poor quality products,
availability of organic beauty products by competitors at economical charges and others. In
despite of this, as company operates worldwide, therefore, at international presence, firm also
suffered issues like inflation, currency exchange rate and political landscape in different nations.
Besides this, although selling, general and administration expenses were under the control of
manger, still, high depreciation and rising cost of borrowing resultant fall in net profit. It has
resultant net loss of 7.76% on total sales indicates that firm had not performed strongly in the
market. Despite this, as company had made a provision of income tax worth 56832 which tends
to decline net profit, as a result, return on capital employed came downward from 7.90% to
39.68% loss.
Liquidity performance:
Current ratio fallen from 2.24:1 to 2.22:1, still, it is above ideal ratio of 2:1 which state
that liquidity is properly managed by the firm to pay-off timely all of its deferred payment to
suppliers and other short-term debt. Due to high availability of stock at the end of the financial
year, acid test ratio came down from 1.18:1 to 0.98:1 which is closer to the benchmark of 1:1.
Thus, the results presents that there is a sound management of liquidity status in the business.
Efficiency performance:
Creditor’s settlement period came down from 50.64 to 43.39 days shows that in this year,
firm decided to pay their suppliers quickly by arranging required liquidity. However,, debtors
collection period remain constant to 50 days which shows that firm did not change its credit
collection policy considering their current liquidity status.
Gearing ratio:
The ratio reveals that this year, firm increased its leverage in its capital structure through
more borrowings as in the earlier period, debt was just used in 33% out of total capital, which
grown up to 49% this year. It may be to get tax benefit through interest deduction. Despite this,
as due to loss, company may suffer issues to attract investors to put money in the business. The
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ratio came near to ideal of 0.50:1 which shows improvement in the existing capital composition
to enhance solvency.
iii) Explanation of four non-financial aspects which are used for improving business performance
When an enterprise operates in particular industry or market then wide range of non-
financial factors create impact on business performance. Therefore, management of Bellovida
Limited should keep in mind such aspects while operating in market. Such elements are
explained below:
 Customer retention: Basic factor which improve business performance is customer
retention. At the workplace when huge number of consumers retain for long term then
issue of sales declining will never occur (Aras, Aybars and Kutlu, 2010). Due to this,
cited firm easily able to enhance profitability and performance in the industry.
 Employee turnover: This particular factor leads to create financial burden on the
company and decline overall performance. As turnover of the employees is higher within
Bellovida Limited then part of sales will be covered in this aspect only. Moreover, when
employee turnover is low then performance of firm easily improve.
 Efficiency of workforce: At the working environment when employees are highly
efficient then company able to provide better quality of products and services (Brealey
and Myers, 2001). Due to this, productivity and sales of selected firm will improve which
is indication of enhancing business performance.
 Competitive advantage: At the end, when situation of competition in the market available
and company goes for gaining benefits over this then more number of customers will be
attracted towards it (Broadbent and Cullen, 2012). Therefore, sales, profit and
performance will ultimately enhance in the industry up to a great extent.
QUESTION 2
A) Significance of BEP analysis
 Break-even point helps in order to determine optimum output level as well as selling
price of every product within workplace.
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 Through BEP management of Norman Walsh Footwear Limited able to minimise costing
level within firm for provided output level.
 In order to decide that from which point divided paying policy should start also BEP is
important.
 It helps to the business for analysing impact of new item or product launch at the
workplace (Tanwar, 2016).
 Revenue as well as cost implications due to change in procedure of production also
analysed from BEP.
 Apart from this, BEP is helpful to chosen firm for assessing influence of change in price
and expenses on profitability condition.
B) BEP point in units and value
Particulars Formula Outcome
Selling price per unit Total revenue / No. of units 500000 / 10000
$50 per unit
Variable cost per unit Total variable cost / No. of units 400000 / 10000
$40 per unit
Contribution per unit SP per unit – VC per unit 50 – 40
$10 per unit
Particulars Formula Outcome
BEP point (in units) Total fixed cost / contribution per unit 5000 / 10
500 units
BEP point (in value) BEP units * SP per unit 500 * 50
$25000
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C) Margin of safety in units and value
Particulars Formula Outcome
MOS (in units)
Budgeted units – BEP units
(Margin of Safety (MOS), 2013) 10000 – 500
9500 units
MOS (in value) Budgeted sales – BEP sales 500000 – 25000
$475000
D) Profit and loss at sales of 8000 units
Particulars Outcome
Revenue as per 8000 units 400000
Total cost 405000
Loss at revised units -$5000
E) P&L when selling price declines to $42
Particulars Outcome
New revenue @ selling price $42 420000
Total cost 405000
Profit at revised selling price $15000
QUESTION 3
I) Comparing payback period (PP) and NPV
Both the methods of capital budgeting have one similarity that these help to assess
viability of one project among two or more simultaneous. On the other side, payback and NPV
have some differences also which are stated below:
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 Payback period shows numbers of years in which investment at the initial will be covered
whereas, NPV depicts amount which will be earned from the same (Cantillon, Maître,
and Watson, 2016).
 PP expressed outcomes in year terms while NPV expresses the same in absolute manner.
 PP not considers cost of capital whereas calculations of NPV based on this rate.
 PP ignores time value of money while under the NPV this is one of the very essential
part.
 PP not considers cash flows of all the years whereas NPV uses cash flows of all years of
project life (Riley, 2011).
ii) Evaluating and suggesting firm for investment decisions
a) Payback
Year Cash flows Cumulative cash flows
Initial investment $50000
1 25000 25000
2 20000 5000
3 20000 -15000
4 15000 -30000
Payback period 2.25 years
From the above stated calculation it can be analysed that initial investment made by CX
Limited will be recovered within 2.25 years only. Further, amount generated up to four years
from the new machine will be profit of the company. Therefore, this investment will be
beneficial where management of CX Limited should consider this project.
b) ARR
Year Net cash flows
Initial investment $50000
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1 18750
2 13750
3 13750
4 8750
Total profit 55000
Average profit 13750
ARR 27.50%
Looking at the aforementioned table of capital budgeting tool it can be seen that, on an
average return from initial investment will be 27.50% every year up to four accounting periods.
On the basis of standard values also this specific value of ARR is highly beneficial due to which
CX Limited should purchase the machine at cost of $50,000.
c) NPV method
Year Cash flows Discounting factor @ 10% Present value of cash flows
Initial investment $50000
1 25000 0.909 22727
2 20000 0.826 16529
3 20000 0.751 15026
4 15000 0.683 10245
Total 64528
Less: initial
investment $50000
NPV $14528
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Another tool of investment appraisal method is net present value which reflects profit or
return which will be generated at the end of project life from investment made. Positive NPV of
the project is advantageous for the firms. In the current case scenario, value of NPV is worth of
$14528 which is positive and better. Due to this, CX Limited must invest money in this project.
QUESTION 4
i) Listing out key functions and activities of a bank
 Key function of the bank is to accept deposits made by the people and corporations. The
deposits are like current account, fixed, recurring as well as savings.
 In order to provide loan or required fund to people and firms also bank comes into
consideration.
 Apart from this, discounting of bills of exchange is done by banks also which is another
key activity of them (Finkler and et.al., 2016).
 Further, bank has some agency functions which include transfer of funds, cheques
collection, periodic payments and collections as well as portfolio management.
ii) Explaining three terms
a) Bank Overdraft: Overdraft is one kind of extension or crossing limit of credit of
borrowing amount from bank when account becomes zero. Generally, it means that bank
provided loan to customers when balance of their account becomes minor.
b) Hire Purchase: A procedure in which one person pays amount to another behind using
asset in an instalment basis for using it is known as hire purchase. Herein, ownership transferred
at the end of agreement period.
c) Venture Capitalist: A person who makes investment in business ventures or any start-
up is referred as venture capitalists. It is one kind of equity financing where company has to give
shareholding of it to venture capitalist as cost of finance (Mao, 2013).
iii) Significance of WC management for manufacturing company
Working capital (WC) is a tool which reflects difference between current assets and
current liabilities of the company. It is very essential and significant part of each and every sector
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along with manufacturing. Further, some key importance of WC management for selected
industry is stated below:
 Key significance of better WC and proper management is that, it helps to manufacturing
businesses for gaining higher return on capital invested to manufacture products and
services (Walker, 2009).
 It helps to utilise available equipments of manufacturing in an optimum direction along
with maintaining them appropriately.
 By managing WC in proper way, companies of cited sector able to improve credit profile
among stakeholders as well as manage solvency. When solvency ratio is lower, then
interest burden on business reduces (Importance of Working Capital Management, 2017).
 It supports to raise profitability and liquidity position which is indication of improving
business performance.
 Through WC management, manufacturing firms can gain competitive benefits in the
industry.
QUESTION 5
i) Various pricing methods and suggesting the best strategy Market based: As per this method, on the basis of quantity demanded in market by
customers price of products is to be determined. Through this, BestCost can charge price
as demand fluctuations in the market of CEREAL6 product. Cost plus pricing: In this kind of pricing technique, at the initial level cost of per unit is
to be determined and then desired percentage of profit added. It is supportive for
recovering all the expenses associated with the production and selling (Arnold, 2013). Competitor led pricing: Herein, pricing level of existing rivals available in the market is
analysed by the management and then charges of own products are determined. Using
this particular method, BestCost Limited able to gain competitive benefits in the industry. Market penetration: At the last, when company introduces it in the market and start
selling products then charges low prices. As start to grow in the market then increase
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prices of products and services (Ward, 2008). It will support to BestCost for improving
market share rapidly.
Suggestion to BestCost Limited:
Considering to the above pricing strategies it can be advised to the management of
BestCost Limited that, it should apply cost plus pricing method. The reason is that, it will help to
recover every cost incurred at the workplace from production up to selling among customers.
ii) Calculating unit selling price and advising the management
a) Maximise profit:
Quantity Price Sales (Quantity * sales) Less: marginal cost Profit
5000 12 60000 50000 10000
4500 7 31500 45000 -13500
5500 17 93500 55000 38500
It can be seen from the above table that, at the sales unit and price of 5500 and $17
respectively profit is at the highest level i.e. $38500.
b) Maximise revenue:
When BestCost Limited will sell 5500 units at price worth of $17 then able to gain
maximum level of revenue which is $93500.
QUESTION 6
i) Comparing Fixed and Flexible Budgets
Fixed and Flexible both are tool or method of preparing budgets at the workplace of
PlanAhead Limited. Further, basic difference of these techniques are stated below:
 Design and percentage change in values at every year remain constant in fixed budget
while flexible is designed on the basis of change in business activity level.
 Nature of the fixed kind of budget is static whereas another is of the variable or dynamic
nature (Surbhi, 2015).
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 First budget cannot be changed on the basis of actual production while second budget can
be easily and smoothly modified or changes.
 Data used in fixed budget are on the basis of several assumptions. On the another side,
flexible budgets prepared on realistic as well as practical basis.
 Variance analysis cannot be properly made when budget is of the fixed nature while
flexible provides facility to make this analysis properly and assess financial performance
(Berry and Jarvis, 2005).
ii) Importance of budgetary planning system
 Budget is considered as financial planning tool which helps to forecast future financial
information of the company. On the basis of this, able to apply effectual strategies and
enhance financial performance in next year.
 This system helps to make plan of financial for future growth and become financially
sound in the industry.
 It provides facility to PlanAhead Limited for allocating financial resources among all the
organisational functions in adequate manner (Rockey and Collins, 2010).
 It supports to make decisions that whether some raw materials should be purchased from
the market or produced within workplace.
 On the basis of budgetary planning system, PlanAhead able to assess business
performance using variance analysis technique. If poor performance can be found then
corrective actions are to be taken for resolving occurred issues.
iii) Calculating profit and loss
Particulars 7000 units 9500 units
Sales @ $30 210000 285000
Total cost (Variable cost + Fixed cost) 170000 200000
Profit or Loss 40000 85000
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QUESTION 7
i) Discussing given statement of budgeting
A method in which firstly total budget is to made by the managers and then segregated
among small parts within particular budget is considered as top down budgeting. Apart from this,
when firstly components are made and then final budget is to be prepared is referred as bottom
up budgeting. When a firm know that up to which level budgeted data going and how many
incomes will be earned at the end of year then easily able to prepare strategies accordingly.
Moreover, top down budgeting gives clear outline of cash position of the firm at previous time
by which management able to make effective strategies. Apart from this, when costs are priorly
known by the business then able to make decisions then allocation of financial resources should
be done in which manner (Shapiro, 2008). Top down method is highly beneficial for determining
accurate estimations of the budget so that, firm can make decisions accordingly. On the another
side, bottom up method of budgeting is expensive and time consuming as compared to top down
which create negative impact on productivity of the firm.
Henceforth, it can be said that top down budgeting is effective and better technique as
compared to bottom up budgeting for businesses.
ii) Preparing different budgets
i. Sales budget (in units)
Particulars Ventilators (in units) Surgical Lights (in units)
Expected sales units 250 350
Selling price per unit 1400 800
Total sales revenue 350000 280000
ii. Production budget (in units)
Particulars Ventilators (in units) Surgical Lights (in units)
Expected sales units 250 350
Add: Desired closing stock 150 250
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Number of units required 400 600
Less: Opening stock available 100 200
Number of units to produce 300 400
iii. Material usage budget (in kilos)
Raw materials Material X (in Kg) Material Y (in Kg)
Ventilators (300 units) 0.8 1.5
Surgical Lights (400 units) 0.5 0.6
Total material requirement or usage (Kg) 1.3 2.1
iv. Material purchase budget (in kilos and $)
Raw materials Material X (in Kg) Material Y (in Kg)
Total material usage (Kg) 1.3 2.1
Add: Desired closing stock of raw material 3 1.5
Material required (Kg) 4.3 3.6
Less: Opening stock available of raw material 2.5 1
Material to purchase (Kg) 1.8 2.6
Purchase price per kg ($) 50 40
Total material purchase cost ($) 90 104
v. Direct labour budget (in hours and $)
Labour Skilled labour Unskilled labour
Ventilators (300 units) 5 4
Surgical Lights (400 units) 2 4
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