Financial Analysis Of BB Ltd Assignment Sample

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Financial Analysis Of BB Ltd Assignment Sample

The cash budget

The department related to finance of BB Ltd has formed a Cash budget along with a statement of Budgeted income for a period of three months of 2021-2022. In the cash budget, the opening balance was valued as 10,056 in the first month, while the opening balance of the next two month showed a negative amount of cash flow. In January, the cash sales received by the company were 544,855 and that of February was 554,580. However, in March the cash sales received was 569,415. The credit sales for 3 months were valued as 1,260,000, 1,273,145 and 1,297,722 respectively (Weetman, 2019). Total receipts of BB Ltd. in the months of January and February came as 1,804,855 and 1,827,725 respectively. The company went through some payment procedures related to the cost and expenses of material purchases and many more. The total payments for 3 months were valued as 1,828,770, 1872365 and 1,911,824 respectively and it is recommended that the company should reduce some costs and expenditures. The cost incurred for labour was more than 300,000 in three months which is huge and it should be reduced by the company. As the company is focusing to reduce its cost and grow its sales, it is required to reduce the number of labour and hire more efficient labor for the production with appropriate skills. Sales revenue valued for the first three months of 2021-22 was 1,818,000, 1,852,302 and 1,903,755 respectively from which cost of sales has been deducted. BB Ltd. managed to generate a gross profit of 757,500 for January and 771,792 for the month of February. The company generated higher gross profit in March which was 793,231. As of the first 3 months the company managed to make a sufficient gross profit but it is still not sufficient enough as the expenditures of the company are too high (Robinson, 2020). Total expenses for the first two months were 761,156 and 775,100 which are much higher than the gross profit and it resulted in an operating loss of 3.656 and 3,307 for the months of January and February respectively. However, the total expenses of 782,398 gave an operating profit of 10,833 in March. Therefore BB Ltd. is highly recommended to decrease their expenses and raise the amount of sales for better enhancement.

New product line

The department of production has a concept of “Cost Volume profit” to enhance the process of production and provide new data and the process. The price of sales in the current process is £350.00 which remains unchanged in the new process. However, the cost of labor is reduced to £70.00 from £90.00 which is effective for BB Ltd. However, the new process showed a high value of overhead of manufacturing and it increased to £370.00. Using the new process the profit earned for 12 units was £155,000 which is £10,000 less than the profit earned by using the existing process. Also the safety margin in the new process at the level of budgeted earning is only 28.4% which is almost half of the margin came from the existing process.

The approach of this CVP is beneficial but it is not able to provide important changes in the new process (Koišová et al. 2017). As an example the price of sales, cost for buying direct materials, charges of distribution overhead remain the same as the current process which are required to be changed. Also the concept focuses on the specific areas and provides exact numbers which should be more accurate for making decisions for the manager. It leaves the managers to decide the cost factor on its own by normally providing the basic data which are required to be changed, nothing else.

Capital investment

BB Ltd. is planning to include in the process of production for two buildings in the same location. The two buildings are different from each other in terms of the investment where the production of small build requires an investment of 1,500,000, the investment for Medium build needs 1,900,000. Both the buildings give different values of net present where the NPV of Small build valued as 345,532 and that of Medium build valued as 339,764. The payback period for Small build computed was 14 years and 3 months (Bhattacharya et al. 2018). The payback period for Medium build computed was 14 years and 10 months. The “Internal rate of return (IRR)” for Small build computed was 7.33%. On the other hand, the “Internal rate of return (IRR)” for Medium build computed was 7.07%. According to this method of investment appraisal, BB Ltd. should go with the production of Small build which have higher NPV as compared to the Medium building and it means that the inflows of cash is much higher in the Small build. Also the shorter period of payback for Small build make the investment more desirable and efficient as compared to the period of payback for Medium build and therefore the Small build is recommended for the production. The Small build has also higher IRR which makes it more efficient than the production of Medium build and in this Small build is again recommended for investment appraisal which sounds very beneficial for BB Ltd (Gómez, 2019). As indicated by this technique for speculation evaluation, BB Ltd. ought to go with the creation of the Small form which has higher NPV when contrasted with the Medium structure and it implies that the inflows of money is a lot higher in the Small form. Additionally the more limited time of recompense for Small form make the speculation more attractive and proficient when contrasted with the time of compensation for Medium form and thus the Small form is suggested for the creation.

One of the important tools of investment appraisal is not considered here and this is “Accounting rate of Return (ARR)”. The cost of capital applicable by ABCD for the project appraisal is 6% and this is unnecessary to ARR and ABCD never uses ARR but this is also beneficial just like other tools of investment appraisal (Abbasi et al. 2017). But due to its lack of time value consideration into the account makes it inferior to the other methods of investment appraisal. Here the value of the money will fluctuate in future time which cannot be predicted and for this reason investing using this ARR method is highly risky.

Selecting the builder

Selecting the companies for building which will provide the best outcome at effective cost is very essential and could be done through financial statements of both the companies. The analysis of both the building companies, Harpers & Novus will be required here by going through their condition of finance in recent years. Accounting ratios are the best to evaluate the performance of finance of the organizations and by doing it effectively, one can possibly generate the value or importance of a certain company. BB Ltd (ELLIOTT and Elliott, 2019). is already going through financial issues and it has to form the building by reducing the cost and expenditures. According to the financial report of Harper in December 2020, the total value of current assets was 22,037,038, while the same year the current liabilities of Harper was valued as 18,804,248. As per the current liabilities together with current assets of Harper Group, the current ratio calculated as 1.17. The current ratio states the capability of Harper Group where the company’s 1.17 of the asset is equivalent to 1 of the current liability. As per the financial report of Novus in December 2020, the total value of current assets was 39,571, while the same year the current liabilities of Novus Property was valued as 25,191. As per the current liabilities together with current assets of Novus Property, the current ratio calculated as 1.57 (Mokhtarian and Lindgren, 2018). The current ratio states the capability of Novus Property where the company’s 1.57 of the asset is equivalent to 1 of its current liability. According to the current ratio of both the building companies, Novus Property sounds more effective and profitable which generates 1.57% of current assets to its 1 % of current liabilities. However, Harper will not be so effective for BB Ltd with a current ratio of 1.17. Bookkeeping proportions are awesome to assess the presentation of money of the associations and by doing it viably, one might perhaps create the worth or significance of a specific organization (Dogru et al. 2020). In the year 2020, the total assets of Harpers Group was valued as 22,386,875 while the total debt of the company in December 2020 was valued as 22,037,038. The gearing ratio of Harper Group was calculated by dividing its total debt by the value of its total assets and it was generated as 0.98. In the same year, the total assets of Novus Property was valued as 42,281 while the total debt of the company in December 2020 was valued as 25,191. The gearing ratio of Novus Property was calculated by dividing its total debt by the value of its total assets and it was generated as 1.68. In terms of gearing ratio both the building company exceeds the ratio of 50% where the ratio of Harpers group generated as 98% and that of Novus property generated as 168%. “A gearing ratio should not exceed 50%” and below that up to 25% is considered very ideal (Park, 2018). Since both the building organizations have more than 50% of gearing ratio, the chances of risk during the stability of finance will be very high (Kumaresan, 2019). The investigation of both the structured organizations, Harpers and Novus will be needed here by going through their state of money lately. BB Ltd. is now going through monetary issues and it needs to frame the structure by decreasing the expense and consumptions. Therefore both the companies fail the financial test due to the involvement of financial risk in the companies. Choosing the organizations for building which will give the best result at successful expense is exceptionally fundamental and should be possible through budget reports of both the organizations (Gryshova et al. 2019). Other than the ratio of accounting it is also important that how much turnover both the building organization could be able to make each year and it should also be considered effectively before choosing one over another.

Budgeting

BB Ltd. went through lots of ups and downs in its business in recent years and got into the situation where it was necessary to owe a debt from its parent company named as ABCD plc. for financial support. Both the companies have come through using the approach and method of traditional budgeting (Breuer et al. 2019). However, ABCD Plc wanted to adopt the “beyond budgeting approach” but it could not be able to decide if it would be a right choice or not. There are numerous drawbacks of utilizing the method of traditional budgeting which includes lack of flexibility while making an essential decision in the organization. On the other hand beyond budgeting is known for making robust decisions in the organization with more flexibility of data in a timely manner. Despite the fact that advocates of past planning have invested considerable energy into creating and advancing this idea, various observational examinations show that numerous associations being explored would in any case preferably work on traditional budgeting over leave it totally. This audit additionally features the fundamental reactions of this traditional approach, improvement of the board control frameworks under the utilization of beyond budgeting and some essential factors upsetting the execution of the use of beyond budgeting (Sefiani et al. 2018). There are various disadvantages of using the strategy for conventional planning which incorporates absence of adaptability while settling on a fundamental choice in the association. Then again budgeting beyond is known for settling on vigorous choices in the association with greater adaptability of information without really wasting any time. Traditional approach mainly focuses and highlights the financial condition of the organization which is sometimes disturbing and against the goals of numerous stakeholders of that organization. While the approach of beyond budgeting goes through detailed analysis of overall management areas, it goes beyond the performance of finance in an organization (Petrova et al. 2020). The traditional budgeting is known for making the standards very lower and the managers go through the targets set by the organization. While budgeting beyond set targets which are not only higher but also beneficial for the managers who get rewards based on their performance in the organization. Therefore it is clear that utilizing the traditional approach of budgeting has several drawbacks and it should not be considered for effective growth of the business. It is recommended to BB Ltd. that the company should adopt the approach of beyond budgeting in order to perform and enhance their activity in the organization.

Reference list

Journals

Abbasi, W.A., Wang, Z. and Abbasi, D.A., 2017. Potential sources of financing for small and medium enterprises (SMEs) and role of government in supporting SMEs. Journal of Small Business and Entrepreneurship Development5(2), pp.39-47.

Bhattacharya, N., Cho, Y.J. and Kim, J.B., 2018. Leveling the playing field between large and small institutions: evidence from the SEC's XBRL mandate. The Accounting Review93(5), pp.51-71.

Breuer, M., Leuz, C. and Vanhaverbeke, S., 2019. Mandated financial reporting and corporate innovation. NBER Working paper, (w26291).

Dogru, T., Kizildag, M., Ozdemir, O. and Erdogan, A., 2020. Acquisitions and shareholders' returns in restaurant firms: The effects of free cash flow, growth opportunities, and franchising. International Journal of Hospitality Management84, p.102327.

ELLIOTT, B. and Elliott, J., 2019. FINANCIAL ACCOUNTING AND REPORTING 19th Edition. FINANCIAL ACCOUNTING AND REPORTING 19th Edition.

Gómez, M.G.P., 2019. Credit constraints, firm investment and employment: Evidence from survey data. Journal of Banking & Finance99, pp.121-141.

Gryshova, I., Petrova, M., Tepavicharova, M., Diachenko, A.P. and Gutsul, T., 2019. A model for selection of a management team to ensure the sustainability and development of the business organizations. Entrepreneurship and Sustainability issues7(1), p.690.

Koišová, E., Habanik, J., Virglerova, Z. and Rozsa, Z., 2017. SMEs financing as an important factor of business environment in Slovak Republic regions. Montenegrin Journal of Economics.

Kumaresan, R., 2019. The Effects of Macroeconomics Factors towards the Starbucks Corporation.

Mokhtarian, E. and Lindgren, A., 2018. Rise of the Crypto Hedge Fund: Operational Issues and Best Practices for an Emergent Investment Industry. Stan. JL Bus. & Fin.23, p.112.

Park, J.J., 2018. Insider Trading and the Integrity of Mandatory Disclosure. Wis. L. Rev., p.1133.

Petrova, M., Koval, V., Tepavicharova, M., Zerkal, A., Radchenko, A. and Bondarchuk, N., 2020. THE INTERACTION BETWEEN THE HUMAN RESOURCES MOTIVATION AND THE COMMITMENT TO THE ORGANIZATION. Journal of Security & Sustainability Issues9(3).

Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.

Sefiani, Y., Davies, B.J., Bown, R. and Kite, N., 2018. Performance of SMEs in Tangier: the interface of networking and wasta. EuroMed Journal of Business.

Weetman, P., 2019. Financial and management accounting. Pearson UK.

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