Comprehensive Financial Analysis: Funding, Performance, and Budgeting

This report offers a comprehensive financial analysis of XYZ Ltd, examining various sources of finance, including equity, debt, and retained earnings. It delves into the legal and financial implications of each source, evaluating their respective costs and impacts on financial statements. The report includes a detailed cash budget analysis, assessing sales and expenditure trends over several months. Furthermore, it compares costing methods, specifically markup and ROCE, to determine optimal sales pricing strategies. The payback period for different projects is also calculated and analyzed. The report concludes with a ratio analysis to evaluate company performance, identifying both positive and negative aspects, and providing recommendations based on the findings. This detailed analysis is crucial for understanding financial planning and making informed business decisions.

MFRD

INTRODUCTION
Financial sources of different types are available to firms but it is hard for them to select
specific one. Varied avenues of finance are analyzed and best one is picked for the firm. way in
which cost can be control is reflected by preparing and interpreting cash budget for the firm.
Along with this, way in which debt equity mix have impact on income statement and balance
sheet is also discussed in detaail. Ultimately, ratio analysis is conducted and positive and
negative sides are identified and comments are made on company performance.
TASK 1
1.1
External source of finance
 Equity: Under this business firm can raise money from the general public. In this regard
it need to launch IPO in the primary market. Contact need to be made with the investment
banker and they determine issue price of shares for the business firms (Christensen,
2017). Under this source of finance business firms raised huge amount of money in their
business and it can be said that it is source of finance commonly used by companies.
 Debt or bank loan: Debt or bank loan is the one of the important source of finance which
is used by all size of business firms. There is interest rate that is charged by the banks on
principal amount and it may be fixed or flexible in nature. Firms need to cautiously select
specific sort of interest rate that best suit to their busines requirements.
 Bank overdraft: This is also variant of bank loan and under this loan for few days is
taken to meet working capital needs of the business. Interest rate may be low on bank
overdraft (Smith, 2014).
Internal source of finance Retained earnings: In case of retained earning there is not cost of finance as it is
internal to business. It is basically a portion of profit that is earned by the firm in its
business. Usually, companies kept aside some part of profit so that it can be used to
finance business requirements whenever required.
1.2
Sources of finance Legal implications Financial Dilution of control
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implication
Equity In case of equity it is
not mandatory to
make payment of
dividend each and
every year but it is
necessary to pay
dividend first of all to
preference
shareholders (Epstein
and Buhovac, 2014).
Cost of equity is high
in case of equity as it
can be seen that rate
of dividend is quite
high then rate of
interest that is
charged on bank loan.
In case of equity
dilution of control
takes place in the
business.
Debt It is mandatory to pay
debt amount within
fixed duration. In
case of failure to do
so bank may go to
court and can sue
company.
Cost of debt is very
low but it is
necessary to pay
interest on time as
there is no flexibility
in payment,
Control remain
unchanged and does
not diluted.
Bank overdraft It is also variant of
debt and as per rules
banks only to specific
limit can extend
specific amount of
money to business
firm. company need
to pay relevant on
time to maintain its
good image among
banks.
Same as of debt
(Malik, Field and
Gorwood, 2016).
Same of debt.
Retained earning After making
payment of dividend
There is not cost of
mentioned source of
Same of debt.
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and interest retained
earning can be used
for business purpose
finance.
1.3
XYZ is the small or medium size company and currently it is looking for expansion of its
business. For same funds are required in the business. On analysis of all facts that are related to
sources of finance in terms of merits and demerits it can be said that bank loan is the one of the
suitable source of finance. This is because cost of finance in its case is low relative to other
source of finance (Ho and Peng, 2016). Equity is also an option that is available to the busines
firm which give firm flexibility feature in terms of payment of cost of finance in the business.
Then also equity can not be considerd as source of finance because cost of equity remain quite
high even there is flexibility feature when firm pay dividend its costs high to the firm. Apart
from this, if shares are issued in the market then in that case control of owners on the firm will
reduce which can negatively affect interest of business owners. By considering this bank loan is
considerd on of best source of finance. Bank overdraft is all time favourite as it is the only
source of finance by using which business firm can meet its short term requirements in easy and
effective maner. In case of retained earning there is no cost of finance and because of this
debt,bank overdraft and retained earning are assumed suitable for company.
TASK 2
2.1
Cost of varied sources of finance for the busines firm is given below. Equity: Under this dividend that is paid to investors is asumed cost for them. usually, it is
the firm choice whether it will pay dividend to the shareholders or not (Davies, 2017). In
case dividend is paid then its cost always remain high. Due to heavy cost of finance cash
outflow of large amount is observed in the business. Debt: Cost of debt is lower then equity as it can be observed that its cost is lower then
same of equity because interest charged is of small percentage. However, it is very
important for the firm to make payment of finance cost on relevant time. In case of
failure firm image tarnished among creditors and they further abstain from giving loan to
the business firm.
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 Bank overdraft: Bank overdraft is the another source of finance from which fund can be
raised (Anderson and et.al., 2015). Its cost is relatively lower then bank loan but both of
them can not be interchangebly used by the firms in their business. Retained earning: In case of retained earning opportunity cost is assumed as cost
because mentioned source of finance can be used in multiple ways. If firm failed to make
second best use of fund then amount that firm failed to earn due to end of possibility of
next best use of asset is finance cost of business.
2.2
Financial planning matter a lot for the business firms like XYZ ltd as it can be observed
that in every business there is limited availability of fund. Firms have to make best use of this
limited available fund in the business. In this regard, financial planning is required in the
business. Under this 60% portion of fund can be used in basic business operations ansd 20% can
be used for investment purpose and remaining amount can be kept aside in the business that can
be used in the buisness to meet working capital needs of the business. In this way in best manner
allocatiion of cash can be done in different busines activities. 60% of portion can be further
allocated to different activities that are related to varid departments. By doing so in best manner
cash can be used in the business and firm can abstain from taking loan from banks (Wilhite,
Sivakumar and Pulwarty, 201). Further, by generting good amount of return in the business bank
loan can paid off and by doing so debt burden can be reduced in the business.
2.3  Managers: These are thoe people that maange day to day operations of the busines firm.
Managers needed company related information in order to make business decisions. It is
the analysis of the company accounts that help firm managers in analyzing firm internal
condition and determining steps that need to be taken to improve that condition. Hence, it
can be sasid that managers needed financial statements to make decisions. Employees: Employees needed company financial statements in order to identify whether
it is in profit or not. In case firm is consistently running in loss then in that case
employees can make decision in respect to switching on new company. Thus, employees
of the firm also need company financial statements (Massingham, 2014). Creditors: Creditors needed income statement and balance sheet to identify whether debt
amount they given to company will be repaid on time. By using varied ratios like current
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ratio creditors measure firm liquidty condition and take decision whether they will further
give loan to the business firm. Shareholders: It is the one of the important entity that needed income statement, balance
sheet and cash flow statement so as to evaluate firm from different sides and measuring
firm fundementals and identifying whether it is strong. On basis of analysis shareholders
decide whether investment must be made in the firm or not.
2.4
In case firm take bank loan then in that situation liability increased in its balance sheet
and at same time because cash is received in business current assets also increased. Hence, in this
way balance sheet become equal in size. However, due to increase in debt proportion of equity in
capital strucuture reduce which is not good for the firm (Peou and Zinn, 2015). On other hand, in
case of derivative instruments assets side increased and at same time shareholder equity section
also increased which is further added to the liability. In this way both sides of balance sheet will
be made balanced.
TASK 3
3.1
Figure 1Cash budget of XYZ Ltd
Interpretation
Cash budget is used in the business firms for projection and cost control in the business.
It can be observed that total sales amount is increasing consistently in the business. Its value was
5,40,000 in June month and same increased to 551500 in month of July. Further, sales value
increased to 563000 in month of August and 574500 in month of September. Thus, it can be said
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that sales value is increasing rapidly in the business. On other hand, total expenditure increased
from 511500 from month of June to 523000 to month of July. Further, as seen in case of month
of August total expenditure increased to 534500 and 546000 in month of September. Hence, it
can be said that total income and expenditure are increasing at same rate and firm is in good
condition.
3.2
Table 1Costing of products on basis of mark up and ROCE method
Major business expense 90000
Stationary cost 35000
Overall expenses 125000
Project 1200
Employed capital 150000
Mark up on cost price 15%
ROCE 10%
Cost per unit 104.1667
Mark up on cost price 15%
Sales price 119.7917
Cost per unit 104.1667
ROCE 10%
Sales price 114.5833
Interpretation
Mark up costing method is totally different from ROCE method as it can be observed that
mark up sales price is 119.79 which is computed by dividing total cost by number of square
meter. Then in order to compute sales price by using mark up cost 15% addition is done to the
relevant value. In this way sales price computed by using mark up percentage is 119.79. On other
hand, by using ROCE method 10% increment is done in cost per unit and its value is computed
at 114.58. Hence, on this basis it can be said that higher sales price is in case of mark up cost.
Mark up cost is giving higher return and on this basis it can be said that it is one of best approach
of determining sales price and on it higher return can be earned.
3.3
Table 2Pay back period
Project A Project B
Initial -250000 -250000
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investment
1 35000 -215000 100000 -150000
2 100000 -115000 45000 -105000
3 35000 -80000 60000 -45000
4 65000 -15000 115000 70000
5 120000 105000 60000 130000
Analysis
It is approach as it is used to identify duration in which investment on project can be
covered (Huang and et.al., 2013). It can be observed that on project A investment can be covered
in four years. On other hand, in case of other project investment can be covered in three years.
Project B is viable for company as it is covering investment amount in less time period.
Table 3Calculation of ARR
Project A Project B
Initial investment 250000 250000
1 35000 100000
2 100000 45000
3 35000 60000
4 65000 115000
5 120000 60000
Total 355000 380000
Average 71000 76000
ARR 28.40% 30.40%
Interpretation
ARR reflect mean percentage that can be generated from the project. ARR of first
alternative is 28.40% and ARR of second alternative is 30.40%. Thus, it clear second alternative
or option is more viable then first alternative. Hence, project B must be selected if only ARR
results are taken in to account.
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Figure 2Calculation of NPV
Interpretation
NPV reflect residual value of project after considering capital expenditure of project.
Project B is viable because its NPV is higher then same of project A.
Table 4Calculation of IRR
Project A Project B
Initial
investment -250000 -250000
1 35000 100000
2 100000 45000
3 35000 60000
4 65000 115000
5 120000 60000
IRR 11.32% 10.31%
Interpretation
IRR is another method of project evaluation as it hep managers in computing actual
return that can be gained on investment amount (Roper. and Payant, 2014). On project A
11.32% is the actual rate of return that can be earned. On other hand, IRR of project is 10.31%
and second alternative is profitable.
For project B NPV is high and ARR is high as well as payback period is low and second
alternative is profitable.
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TASK 4
4.1
Income statement and balance sheet have due importance for the business firms. Main
purpose behind preparing income statement is to identify profitability of the business firm and to
find out cost that are incurred in the business. On basis of comparison of income statement of
two years it is identified whether firm have strict control on expenses of its business. Balance
sheet is another technique that is used measure financial position of the business firm (Bekaert
and Hodrick, 2017). By using this statement managers identify changes that comes in the capital
structure of the business firm. Apart from this way in which other variables move can be also be
identified in balance sheet in respect to current assets and current liability etc. Thus, on analysis
of statement it can be identify that in which area work need to be done to improve business
performance.
4.2
There is diffence in format of income statement and balance sheet for sole trader, partners
and company. It can be seen that in case of sole traders there is no specific format of income
statemement and balance sheet (Davies, 2017). However, in case of company and partnership
there are format of both statements that need tbe prepared by using GAAP and IFRS principles.
Apart from this, in case of sole trader it is not necessary to prepare balance sheet but in case of
company and partnership it is mandatory to prepare both statements.
4.3 Ratio analysis
Table 5 Ratio analysis
Ratios Standard
Current assets 665000
Current liability 367000
Current ratio 1.811989 2:01
Current assets 665000
Prepaid expenses 0
Inventory 325000
Current liability 367000
Acid test ratio 0.926431 1:01
Net profit 255000
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