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PROGRAMME : ADVANCED PROFESSIONAL DIPLOMA IN MANAGEMENT STUDIES UNIT TITLE : MANAGING FINANCIAL PRINCIPLES AND TECHNIQUES PURPOSE SUBMIT TO : ASSIGNMENT WORK : MR. TAWFIQ ELAHI
Declaration
Learners Name:. ID.. Class (Course).. Unit title Date assessment details issued.. Date handed in . Words Count: . I confirm that this is my own work and that I have not plagiarized any part of it. I have also noted the assessment criteria and pass mark .I declare that the work I am submitting for assessment contains no sections copied in whole or part from any other sources, unless it is explicitly identified by means of quotation mark or in the case of very long quotations, by means of wholly indented paragraphs. I declare that I have also acknowledged such quotations by providing detailed references in an approved format. I understand that unidentified and un-referenced copying both constitutes plagiarism which is a very serious offence
Acknowledgement
This is a work based on the financial analysis of business and the necessary tools and techniques to do this work. The work of this assignment is divided in three sections. In two sections, we have to select an organisation and we have to suggest them in financial measurement. For making this assignment, the class lecturer Mr. Tawfiq Elahi helped me. I am very thankful to him because he gave me all ideas and concepts to use in this assignment. I asked him everything in the class of this course and he explained me all the things in details and in friendly ways. So, it was be easy for me to understand and also in calculation of Free cash flow and NPV, he gave me a case study chart of another two projects. So, it was ideal for me in answering this assignment. The ratio analysis is very helpful in measuring financial viability of the business. we have considered all the rations here and again I am very happy to make this work. The whole work is with the quality and the all analysis is qualitative as Mr. Tawfiq told me to do the qualitative analysis and work in this assignment.
Contents
No. of Tasks I 1.1 1.2 2.1 2.2 2.3 3.1 3.2 Details Introduction Forecasting of costs and revenue Available and possible sources of finance Methods of investment appraisal Appropriate financial information Recommendations before implementation Financial statement for viability Performance audit by Internal and External stakeholders Calculations to improve the quality Recommendations on strategic portfolio Page No. 5 6 9 11 14 17 18 21
3.3 3.4
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Introduction
The assignment is on the financial principles and techniques. The work of the assignment is divided in three sections. In the section one, I have selected one company called Tata motors. The company is existing in the Indian market and the figures shown in the answers are in Indian currency and also in Crore. In the first task, there is a detailed about the costs and revenue of the business. That means the usable revenue of the company and costs of the company. I have mentioned the costs of the business over last 5 years and profit of the company over last 5 years. This will give the better ideas and opinions to use forecasting methods. The method of forecasting are linear regression, time series, trend method etc. we have used here co-relation method and also the inflation rate of the country is also shown because it will give the better ideas in calculating of future costs and revenue of the company. In addition, there is also finding the sources of the funds and it is a case study of one Rugby club. The possible sources are also shown in the answer of the question and on the basis of it, club can do improvements in the situation. The work of task 2 is depend on investment appraisal of the two projects. There are two projects shown and the calculations of ARR, Payback period, DCF and NPV is also calculating and it is shown in the chart. There are also some recommendations before implementing the plan and the projects. The last task is for the assessment of financial viability of the business. it will be possible with the help of ratio analysis. So, for this purpose, the calculations of ratio is mentioned and it is in profitability, utilization and also in risks analysis. The details of all ratios is mentioned with the help of complete formulas.
TASK: 1 Q: 1.1
Forecasting of costs and revenue
In the answer of this question, there is information about the one big reputed Public Limited Company called Tata Motors. The company is manufacturing vehicles called passenger vehicles, commercial vehicles, heavy loaded vehicles etc. in the answer of this question, there is a forecasting methods of costs and revenue on the base of last 5 years profit &Loss statement of company. we will discuss about the costs and revenue and on that base, we will do forecasting methods in this answer.
Costs:
Costs are a critical element of necessary information for successful maintenance of business. The types of costs are fixed costs and also variable costs. The term of fixed costs is linked with the time and it is not linked with level of business activity. So, there will not be easily changes in fixed costs. The variable costs are linked with the level of output. The examples of variable costs in business are inputs as labour, fuel and raw materials. The total of fixed and variable costs will be total costs for the business. if, Tata will have a high proportion in fixed costs in total costs then it may be seen the high efficiency of more profit and more sales.
Revenue:
The concept of revenue is income received by company as a result of trading activities of business. the revenue of the business can be calculate by using this formula, Sales revenue=volume of sold goods avg. Selling price. There is an alternative way for boosting revenue of company by charging low prices for consumers in products.
Inflation rate:
Inflation rate of Indian economy was 9.70% in October 2010. If, we talk about the inflation rate from January 2010 to October 2010, there is a constant reduction in the rate of inflation. The rate started from 16.22% from January 2010 then there was reduction of 1% every month and at the end of October 2010, it became 9.70%. Due to this rate gone down, the costs are also gone down because inflation rate is falling down and so, the costs of business are also falling down. The prices of Motors of today are too less in compare of last year and also in nearest future, it will fall down further because the rate of inflation is falling down constantly. (http://tradingeconomics.com/Economics/Inflation-CPI.aspx?... Refer online on 08th Dec. 2010 at 22:36pm)
Calculation of Co-relation:
The concept of Co-relation is a mathematical concept. This will show the inflation rate and the costs of the business of Tata motors. If, the inflation rate will be up then prices will gone down and revenue will be up and costs also will be up. If, the revenue will be up then production in company is also gone up. So, it will generate more costs in the business of Tata. This will be easy to understand with the help of chart of co-relation calculation. For forecasting of costs and revenue in the business of Tata Motors, the suitable method for that are linear equation regression analysis, the method of time series.
YEAR 1 2 3 4 5 6
X(Inflation rate) Y (Revenue) 13.73 871.67 11.25 924.31 9.7 1,019.42 8.6 1,143.21 7.8 1,219.42 6.9 1,306.21
0.95865
This is a examples of analysis of Indian economys inflation rate and the total last 5 years revenue of Tata Motors. The amount of Tata Motors are in crore and the rate of inflation is in percentage. So, there is a positive co-relation between the two factors.
Available sources:
The available finance of MRUC is membership subscription fees, Donation from the members of the club, Income of giving sponsorship to local chain of garages, the charges from spectators etc. The average numbers of spectators for the week are 8000 and the charge from each spectator is 10. So, the total charge will be 80k. The numbers of games in home ground are 16. So, total revenue will be 1.28 million. These are the present sources of finance for this club and the many can be generated for the club business.
Possible Sources:
The possible sources of revenue for the club are income from match and sponsorship details. Income from Match fees Community club Membership charges May Use Lottery Scheme for all spectators and can earn money from them Sponsorship of high amount with other companies Different financial institutions
Comment: This club is seeking to take part in league of National division one. The club MRUC has many sources of finance and revenue for the business. this club can create one more resource of income for the business. it can start the lottery systems for all the
spectators. There will be a lottery game on the day of the game and at the end of the game, the draw will be declared. So, it will be helpful in raise some money for club.
Advantages:
These all are resources of revenue are feasible for the business. There is only thing to see that the spectators for the game must be sufficient and as per requirements. The members are ready to pay and so, this will generate more cash for the club. The club will do reorganisation of ground pitch, changes in the sitting arrangements and dressing rooms of players, in parking facility of vehicles, in broadcasting systems of the game. So, there will be much publicity of the game and it will be helpful in possible source of revenue of this club.
Disadvantages:
If, there will not be possibility of these sources then the plan of the club will not be success and the activity of encouraging more spectators will not be successful.
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Task: 2
2.1 Use of Various methods of investment for Viability in business
Investment is a significant concept in the business. if, anyone will do investment then the business will be possible. The main aim of doing investment in business is to earn more profit from the business and to make the business viable in the market. Here, there is an example of two units of business. one is Sports Complex and another is Community Health Centre. We will measure the viability of business by use of investments appraisals. There are many methods to measure investment appraisals in business. But, we will use only two methods called Accounting rate of Return (ARR) and Payback period method.
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Project
Year 0 0
Year 1 1
Year2 2
Year 3 3
Year 4 4
Year 5 5
11,00,000 60000 11,00,000 60000 200000 200000 400000 400000 500000 500000 620000 620000
Sports Complex
Net Cash Inflow Cash Out flow Cost on capital Residual Value Net Cash Outflow FCF Equivalent PV ARR NPV
Cash Inflow Initial Investment Profit/Loss Net Cash Inflow Community Health Centre Cash out Flow Cost On capital Residual Value Net cash Outflow FCF
800000 800000 -40000 -40000 140000 140000 220000 220000 300000 300000 380000 380000
36738.6
36615.02
36592.14
36589.36
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So, the above mentioned chart shows the ARR of the projects and for the finding of Payback period, we will do the work now.
Payback Period:
The work of payback period is related to the time period of return on investments from business. there are two projects for the calculations and the work of it will classified like this. Sports Complex: Payback period= No. of years Initial investment Total amount received = 5 1100000 1780000 = 3.09 years Community Health Club: Payback period= No. of years Initial investment Total amount received = 5 800000 1000000 = 4 years If, we will do analysis of payback period of these both projects then we can see that the project of sports complex will take short time to recover the money from the investment. So, it is more effective than the community club.
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Project
Year 0 0
Year 1 1
Year2 2
Year 3 3
Year 4 4
Year 5 5
11,00,000 60000 11,00,000 60000 200000 200000 400000 400000 500000 500000 620000 620000
Sports Complex
Net Cash Inflow Cash Out flow Cost on capital Residual Value Net Cash Outflow FCF Equivalent PV ARR NPV
Cash Inflow Initial Investment Profit/Loss Net Cash Inflow Community Health Centre Cash out Flow Cost On capital Residual Value Net cash Outflow FCF
800000 800000 -40000 -40000 140000 140000 220000 220000 300000 300000 380000 380000
36738.6
36615.02
36592.14
36589.36
15
So, from the calculation, it can be measure that NPV of Sports complex club is high than the other project of Community Health centre. So, the project of sports club is measurable in the business and it will be more profitable. There is a suggestion to selectors of the project to select the project of sports club as all the values of high of this project in comparison of other project and payback period is also low in comparison of other project.
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Task: 3
3.1 Use of financial statements for financial viability
For measuring viability of organisation in Tata Motors, ratio analysis will do better help. The main rations of profitability, sales turnover, cost of capital etc. will give better knowledge in company information. The rations will be used in this question are Gross Profit ratio, Net Profit ratio, Return of Assets ratio, Operating Profit ratio. These rations will be helpful in identifying financial viability of business.
100
This ratio is 54.06%. it will show that gross profit on sales of the business is quite good.
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Operating Profit Ratio: Operating Profit 100 Sales = 14,032.83 100 35,773.26 = 39.22% The operating profit is less than gross profit because the expenses of interests and taxes are too high in the business. So, the rate of profit is reducing.
The ratio of Net profit on sales is quite good and also it is sound for the business. The profit of company is increasing day by day. Tata Motors is profitable business and it can be known by this ratio.
Current Ratio:
Current ratio is useful to know the situation of currents assets and Current Liabilities of company. if, the current assets will be high than liabilities then it will be profitable business. Current Ratio: Current Assets Current Liabilities = 12,329.48 19,672.73
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= 0.63: 1 This ratio will show that current assets of Tata are less than current Liabilities. That means, company has debt in this. This ratio will not be profitable in business. (http://www.bizfinance.about.com/.../financial ratios/.../Profitability_ratios.html refer on internet on 9th Dec. 2010 at 08:49pm)
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Internal stakeholders:
Internal stakeholders are employees managers and directors of the company Tata Motors. They will be helpful in making the significant decisions of the business. They are the main in the board of directors of the company. If, the profitable ratios are profitable in Tata and this is all because the efficient work of these stakeholders.
External Stakeholders:
The external stakeholders for the business of Tata Motors are shareholders, customers, suppliers, distributers, government etc. they all take an interest in the work of the business and they all are important to take decisions outside the business. So, they all are very important to measure viability in the business. (http://www.tutor2u.net/economics/gcse/revision.../work_staholders.htm refer online on 9th Dec.2010at22:55pm)
Macroeconomic factors:
The macroeconomic factors of the business can affect to the business. these factors are changes in income level, future prospects of employees, Political environment, natural disasters, changes in prices of raw materials, changes in the world market of world. These all are the macroeconomic factors and may have an effect on the financial viability of business. This performance audit of business can be well known with the help of ratios of utilization. It is as follows. Assts Turnover Ratio: Revenue 100 Total Assets = 35,775.56 100 1,03,212.42
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= 34.66% The assets turnover ratio is 34.66% and it is good. The assets of the company are turnovers very well. That means, the revenue of the company is increasing. So, the performance of the business is very good for the operations.
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= 3,257.40 1,246.25
= 2.61:1 The interest coverage ratio will show the improvements in profitability. The calculations are on the base of profit before interest and tax. It will show that the profit before interest and tax is very high. It is 2.61 more than 1. So, it will show that, if company will reduce the expenses of interests and tax of the business then the business will be more profitable. No doubt, the operations are profitable still, the changes can be done in it to maximise the profitability of the business. (http://www.investopedia>dictionary online refer on10th Dec. 2010 at10:45AM) Net profit Ratio: Net Profit 100 Sales = 10,421.19 100 35,773.26 = 29.13%
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So, it is also in good percentage in business. still the business profit is less than some business competitors. So, the cost of capital, costs of interests and taxes and other taxes of business should be reduced. It will increase the profitability of the business.
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=1,269.40 39.26 =32.33 The prices on earnings on each share are good of Tata Motors. The ratio analysis is showing that it is 32.33 per share. The recommendations of it are as per follows. (1) Company should have to provide attractive schemes to the shareholders of the company. So, the reputation of company will increase in stock market and prices of shares will be high in stock market. (2) Tata motors provide dividends on shares to the shareholders of the company. Among this dividend, company should have to maintain some reserve for the future of the company. So, in the real time of need, it will be helpful. (3) The extra reserve of the dividend should be invested in the operations of the business. So, it will be reinvestment and also more profit can be earn from them for the business. (4) The performance audit of company can do better help in financial viability of business. it should be done at end of every financial year of the company. so, it will give the better results of performance of the company and also will provide better guidelines in the future financial structure of the business. (http://www.investopedia.com>tutorials refer online on 10th Dec. 2010 at12:04pm)
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References
(1) http://www.investopedia.com>tutorials refer online on 10th Dec. 2010 at12:04pm (2) http://www.investopedia>dictionary online refer on10th Dec. 2010 at10:45AM (3)http://www.tutor2u.net/economics/gcse/revision.../work_staholders.htm online on 9th Dec.2010at22:55pm refer
(4)http://www.bizfinance.about.com/.../financial ratios/.../Profitability_ratios.html refer on internet on 9th Dec. 2010 at 08:49pm (5) http://tradingeconomics.com/Economics/Inflation-CPI.aspx?... Refer online on 08th Dec. 2010 at 22:36pm
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