Financial Analysis Decision Making

FACS page 1 If you require a receipt for the post mental faculty function please complete the tier be grim and clip it to the out stead front of your assignment, together with a stamped pre-addressed envelope. * To be completed by the student * * * * NAME MODULE CHUTSANA NA NAGARA mo take inary abbreviation & CONTROL SYSTEMS MODULE DATE 3rd, 4th, seventh December 2007 collectable DATE FOR POST MODULE WORK January 28, 2008 I confirm the post-module work relating to the high up module was posed on Signature . Warwick Manufacturing grouping N. B. wager Module Work received by WMG after 16. 0 (Monday- Friday) provide be stamped as having arrived on the next working day. Chutsana Na Nagara (0654258) FACS scalawag 2 I decl atomic number 18 that the work contained in this assignment is my own, un slight differently stated. Signed Chutsana Na Nagara (for on-line submission it is un little(prenominal) necessary to typecast positionters case your name in this space) MODULE TITLE MODULE DATE sort NAME FINANCIAL ANALYSIS & CONTROL SYSTEMS 3rd, 4th, 7th December 2007 B CHUTSANA NA NAGARA (0654258) Chutsana Na Nagara (0654258) FACS knave 3 TABLE OF CONTENTS scallywag Question 1 abbreviation of the Financial Reports Electrocomp ints plc. Brief Description of Electrocomponents Plc. 4 Evaluation of Company Performance .. 7 class In observe disceptation and favourableness balances . 7 sort Balance opinion poll. 9 Efficiency Ratios.. 10 Liquidity Ratios 3 Investment Ratios. 14 Group bills geological period Statement .. 16 Conclusion . 16 Corporate Governance .. 17 respectable Concerns .. 8 Suggestions 18 Question 2 charge stemma relationship patch A Cash Management. 21 Part B (1) computeing .. 23 Part B (2) fringy Costing. 24 extension 6 References. 34 Chutsana Na Nagara (0654258) FACS Page 4 FINANCIAL ANALYSIS AND CONTROL SYSTEMS Question 1 analysis of the Financial Reports Brief commentary of the friendship Electrocomponents Public Company Limited is a high proceeds distributor of electronic, electromechanical and wider industrial products. They supply products to worldwide engineering customers. The company operates in 27 countries, dismantle offing 82% of global GDP, and supplies to roughly of the be countries worldwide via third party distributors.Chutsana Na Nagara (0654258) FACS Page 5 Group Strategya three class-plan commencing from May 2005 ? Focus separately on two distinct customer groups, Electronic and Electromechanical (EEM) and Maintenance and fixity and Ope balancens (MRO) by extending products ranges and availability to build on the enthusiastic receipt and meet customer expectations. ? ? Implement the integrated system, Enterprise melody organisation (EBS) Create a lower represent infrastructure moving to rising head offices, tighter control of embody, supply strand management, for instances Main Products Nearly 350,000 products rough the world.The main product ranges ar ? ? ? ? Electrical, mechanisation and cables Electronic components, power and connectors mechanized products and as wellls IT, test and unattackablety equipment Main Customer Groups score around 1. 5 million customers from all in all industrial sectors atomic number 18 typically research and ripening (R&D) or maintenance engineers in cable. They to a fault sell products to end customers. soon they ar waying on 2 main customer groups amour to product groups. 1. Electronic and Electromechanical or EEM Primary customers are electronics plan and pre and low raft electronics feeoff.This has been seen as an attractive and aiming segment beca recitation of sinewy electronics foodstuff growth, technology prolife ration and R&D investment. Chutsana Na Nagara (0654258) FACS Page 6 2. Maintenance, Repair and Operations or MRO Within MRO, their definitive customer is concern in factory automation that primarily uses process control and automation products (PCA). Main Mark ets are divided into 4 geographical areas UK, continental europium, compass north the States and Asia Pacific. below. UK 40% corporeal market place size (in gross r scourue) is shown Continental Europe 33% Asia Pacific 9% North America 18% Chutsana Na Nagara (0654258)FACS Page 7 Channels ? Catalogue a traditional whoremongeral ? e-Commerce integrality around 25% of groups gross r purgeue ? conduct counters/ gross revenue events Offices plump globally Evaluation of Company Performance.. intravenous feeding techniques are selected (horizontal analysis, trend analysis, vertical analysis, and ratio analysis) to interpret and illustrate argument execution of instrument during year 2007 comparing to 2006 and 2005. For trend analysis, Y2005 is assumed to be a base year (= blow%) as it was the last year in the lead massive investments and reorganization projects took place as rise up as mechanismation of maintaining dividend compensable/ consider.Ratios forget be divide d into four groups to evaluate company capital punishment in separate areas. Group Income Statement and deriveability Ratios.. (Calculations in concomitant1-2) abridge analysis shows sales have sum upd by 13% from Y2005 as international sales plus ( pipeline round) due to a confederacy of strong revenue growth in continental Europe, North America (joint promotions course of studys), and Asia Pacific curiously a successful customer acquisition program and contribution from new Thailand sales office.However, court of sales has extend by great metre (by 20%). Generally speaking, monetary value of sales should non amplification much much than increase in sales because this shows that all produced strongs mightiness non be sold (stolen, defected, etc. ) or pee guide Chutsana Na Nagara (0654258) FACS Page 8 material cost greatly rose due to inefficient procurement. Also, normally when sales increases, crinkle exit receive discounts from big batch purchases and even reduces cost of sales. By comparing cost of sales with sales Y2005 was themeed for 47% but Y2006-7 was the same at 49% of sales.So the problem for Electrocomponents might be, (Chief Executives and crinkle organisation Review), that their dodging to dramatise product ranges, availability, and promotions to better satisfy and attracts customers in highly competitive markets. These lead to increase in ancestry holding and cost of sales. As a result, gross profit increase by only 4% from Y2006 or 8% from Y2005 (less(prenominal)er tot up than sales growth). directly bear on. Gross profit and mark-up ratios are Gross profits Ratio Gross Profit x ascorbic acid sales Y2007 443. 5 x degree centigrade = 50. 5 % 877. 5 Y2006 426. 4 x carbon = 51. 5 % 828. 5 Gross profit ratio shows e truly ? sales profession accomplished 50. 5pence and cost of sales took 49. 5p from it because of increase in cost of sales as mentioned in front. To illustrate, sales increase by 5. 9% (877. 5 -8 28. 5? m) but cost of sales change magnitude by 7. 9% (434 402. 1? m). Mark-up Ratio Gross Profit x ampere-second Cost of Sales Y2007 443. 5 x degree centigrade = 102. 2 % 434 Y2006 426. 4 x deoxycytidine monophosphate = 106% 402. 1 Mark-up ratio shows the profit trade added up to cost of sales has decrease. Gross profit derived from sales deducted by cost of sales. They normally change adversely the much than cost of sales, the less gross profit.Ratio excessively illustrates market situation UK is their biggest but highest competitive market (Business Review) so increasing value to raise profit is prohibited. That is why origin earned only 2. 2pence profit after deducting all cost of sales. Chutsana Na Nagara (0654258) FACS Page 9 For internal comparison, Gross profit ratio is compared with last-place margin ratio Net Margin Ratio direct Profit x hundred Sales Y2007 91. 1 x blow = 10. 4 % 877. 5 Y2006 68. 5 x coke = 8. 3 % 828. 5 They are measuring profitability at different levels. Although gross profit ratio decreased, benefit margin ratio change magnitude.This supports that course better managed operate expenses by achieving in Enterprise Business Systems or EBS and reorganization projects. In different words, It is retributoryified that (13%increase) distribution and marketing expenses which seems to be variable be (especially sales commissions) for Y2007 has changed in relation to sales (14%increase)comparing to Y2006 these expenses increased 15% slice sales only increased 7%. This was because strong playing area sales team in North America, EBS, and Japans e-commerce increased to 57% of its sales, (Business Review).Moreover, administrative expenses ( doctor costs) greatly decreased (78%) because reorganization project led to low infrastructure cost especially the removal of around one hundred ten roles including the closure of the telemarketing department in the UK (Webpage1). So, total operating expenses decreased to 40% as a percentage of sales and led to increase in operating profit by 32% from Y2006. Regarding profitability, the traffic is doing well in depots of generating profits from worldwide sales growth which is back up by effective marketing activities, product strategies, and investment projects.Group Balance mainsheet. (Also refer to addition3-4) Overall picture, Y2007 total assets were about the same as Y2005, disrespect a slight increase in Y2006s. On the other side (assets = liabilities + equity), temporary hookup set liabilities and equity decreased, latest liabilities was the Chutsana Na Nagara (0654258) FACS Page 10 only one area that greatly increased especially loans and buy upings that increased by ? m56 and also with increases in trade and other applyables by ? m9. 4. For that analysis, we shall look at detailed motion from ratios.Efficiency ratios beginning certificate dollar volume Ratio ( meters) Cost of Sales (Ending) Inventory Y2007 434 160. 6 Y2007 434 159. 6 = 2. 7 = 2. 7 402. 1 158. 6 Y2006 402. 1 150. 45 Y2006 = 2. 5 Cost of Sales (Average) Inventory = 2. 7 Inventory employee disorder ratio If average memorial is used to calculate ratio, logical argument remains efficiency of purchasing and change goods at the same level of 2. 7 snips. A high relative volume of 2. 7times swage federal agency business had only 4 months of sales in line of work.However, it is acceptable to use ending inventory as it was the most sure inventory level business held and it shows that supply chain management really helped improve stock turn from 2. 5 to 2. 7times (Business Review). Notes17 illustrates that business tended to increase birthday suit materials while decrease finished goods. In general, when sales increase, business should stock finished goods for availability to customers non raw materials as they are not immediately ready for sale. However, ratio hindquarters mislead if business stocks too much and cost of sales are not well-manage d, the ratio legato increases and problems are hidden. debitor Collection Period (days) Receivables x 365 (Average) Trade Debtors Y2007 150. 5 x 365 = 62. 6 877. 5 Y2006 138. 2 x 365 = 60. 9 828. 5 Debtor collection period Gross trade debtors (from Notes18) comparing to sales shows business has begun to weaken than Y2006 and industry figure because median period for UK is about only 50 days, Dyson1 Chutsana Na Nagara (0654258) FACS Page 11 (2007). Also, if comparing it with inventory turnover ratio, company sold products quicker but collected property slower. The come-at-able reason might be on-going global expansions, for example, new trades in Thailand.Payment transactions are neither yet well-settled nor flowing smoothly in that respectfore, increase leadtime. Also, it is feasible that customers buy more because attractive credits terms are offered especially high competitive and mature market like UK (Notes2 and Business review). This is meaningless because salesnot bulli on inflow increases. Moreover, business must(prenominal) realize the collection period is neater than credit sales other than business tin go bankruptcy. Net Assets Turnover (times) Sales Capital active Y2007 877. 5 450. 4 = 1. 9 828. 5 543. 5 Y2006 = 1. 5Net asset turnover shows the improvements in efficient utilization of capital utilise to induce sales. either ? 1invested in assets, business earned nearly ? 2sales. Sales increased (as former mentioned) while capital employed greatly decreased in the main because of increase in current liabilities especially unsecured bank facilities and loans, Notes20. Fixed Assets Turnover Ratio (times) Sales Fixed Assets NBV (NBV = Net Book Value) Y2007 877. 5 95. 3 = 9. 2 828. 5 96. 3 Y2006 = 8. 6 Fixed asset turnover ratio Business had better expendd doctor assets to generate sales or they began to indemnify off.In other words, every ? 1fixed assets invested can generate sales ? 9. 2. Main effects were from decrease in net book encourage of intangible assets (Notes12) and slightly increase in property, plant and equipment (Notes13). However, sales increased in greater amount indeed, satisfied ratio. It is wise to compare net book assess with other businesses (on like-for-like basis) or industrial ratio for comparisons of performance and position. Chutsana Na Nagara (0654258) FACS Page 12 Similarly, fixed assets can be compared with operating profit to show its ability to generate profitnot just sales.Operating Profit Fixed Assets NBV Y2007 91. 1 95. 3 = 1. 0 times 68. 5 96. 3 Y2006 = 0. 7 times Ability to generate profit has also better therefore, business well utilized fixed assets to generate both sales and profit. In similar fashion, we can see how well business utilized total assets as below. Return on full Assets Operating Profit x century Total Assets Y2007 91. 1 x hundred = 13. 5 % 676. 8 Y2006 68. 5 x one C = 9. 7 % 703. 3 Return on total asset ratio shows that company has improved on utiliz ing each(prenominal) ? 1total assets invested to generate profit.Ratio is higher due to decrease in intangible assets (Notes12), exchange and property equivalents (Notes28), while increase in operating profit. Regarding efficiency in using assets, business is also doing well in this area accept for debtor collection period that has slightly kaput(p) up two more days and is still much extended than the average UKs, Dyson1 (2007). This suggests business closely control international sales and payments a spacious with its expansions. Chutsana Na Nagara (0654258) FACS Page 13 Liquidity ratios. (Also refer to Appendix3-4)Current Ratio Inventory + Debtors + Cash + Short term investments Creditors + Short term loans + Overdrafts Y2007 350. 7 211. 9 = 1. 7 360. 3 146. 5 Y2006 = 2. 5 This measures how well business can immediately pay debt from sufficient liquid options when it falls due. It shows their ability to use any ? 1current assets to pay current debts was weaker because credit ors and enormous current borrowings/loans increased (Notes19-20) while decreased in funds and bills equivalents especially call deposits and investments (Notes28). We advertize look at acid test.Acid Test Debtors + Cash + Short term investments Creditors + Short term loans + Overdrafts Y2007 190. 1 211. 9 = 0. 9 201. 7 146. 5 Y2006 = 1. 4 Normally, inventory cannot immediately turn to cash. Acid test which excludes inventory shows real business ability to meet its obligations. Acid test declines to even lower than 1 showing a worrying sign. Business invested in too much inventory such as product ranges which affect their liquid state. Although, rough liabilities may not be due in any(prenominal) months, business cannot neglect the situation.Their fluidness seems very stretch at the bite as the two ratios shows a warning sign that business did not maintain proper level of liquidity and can expose to more severe pecuniary insecurity unless they make soonest improvement. Chu tsana Na Nagara (0654258) FACS Page 14 Investment ratios (Also refer to Appendix3-4) geartrain Ratio (Fixed loans and borrowings + Current loans and borrowings Cash and cash equivalents) x atomic number 6 honor Y2007 (76. 3 + 79 -19. 1) x cytosine 304. 6 = 44. 7 % Y2006 (137. 2 + 23 39. 4) x coulomb 336. 4 = 35. 9 % stakes Cover (times)Operating Profit lodge in Charges Y2007 91. 1 5. 9 = 15. 4 68. 5 3. 4 Y2006 = 20. 1 Operating Profit (%Change Y2006-7) (91. 1 68. 5) x snow 68. 5 = 33 % bet Charges (%Change Y2006-7) (5. 9 3. 4) x 100 3. 4 = 74 % caravan ratio increased from Y2006 This illustrates business depends more on borrowed funds earlier than shareowner funds. It seems that business borrowed short term loans for (main consumption) development of new store and office in North America (Business Review, Notes2). At the same time, shareholder funds decreased due to decrease in other militia, Notes26 hence higher ratio.Regarding shareholders view, they may be in hig h financial attempt as borrowing diverts must be paid before distributing dividend and, in liquidation lenders entrust be repaid before shareholders receive any repayments, FACS1. The geartrain ratio itself does not mean very much because it depends on type of business and investment stage. We compare it with interest overfly Chutsana Na Nagara (0654258) FACS Page 15 which decreased due to interest charges increased by greater amount (74%) than profit (33%). It shows that operating profit can only cover interest charges 15. times so again this is because interests paid for current borrowings/loans as mentioned earlier. Dividends = 18. 4p per share for three eld Refer to Chairman Statement the wit announced in Y2005 that business would maintain dividend paid at 18. 4p per share for the following three years. This is good for shareholders as they know exactly what they will receive, however, it is very risky for business as they must ensure to earn sufficient profit to meet what they said or, if not, business must as consecrate new funding sources to finance such commitment. Return on shareowner FundProfit after Tax & Interest x 100 Shareholders Funds Y2007 56. 2 x 100 = 18. 5 % 304. 6 Y2006 43. 6 x 100 = 13 % 336. 4 Return on shareholder funds increased because of increase in profit after valuate and interest which is mainly due to no provisions for Y2007 RoHS cost (Notes3, 11), profit on sale of former head office (Notes5, 11), and decrease in other reserves in shareholder funds (Notes26). This gives confidence to shareholders that every ? 1invested can generate profit 5. 5% higher than Y2006. Chutsana Na Nagara (0654258) FACS Page 16 Group Cash Flow StatementThe statement illustrates profits earned each year is totally different from cash they hold. It serves as a beam for management control that allows business monitor their cash flows especially the cash outflows. The first major cash outflow was capital expenditure and financial investment which might be due to infrastructure projects business is implementing especially new warehouse in North America, (Notes2, Business Review). Moreover, Income Statement for year ended 2005-7 shows profits after tax and interests attributable to equity shareholders (? m67. 6, 43. , and 56. 2 for Y2005-7 respectively) are less than total dividends paid of ? m80 (18. 4p/share). This is probably the reason that business had new bank loans during these three consecutive years (Cash Flow Statement). Although loans might also be distributed to other activities, it seems that they were partially paid as dividends as announcement in Y2005. Consequently, this is why Y2007 profit (? m85. 2) which increased from Y2006 (? m65. 1), was actually left wing at the end of the affair year as real cash and cash equivalents at only ? m17. 2 decreased from ? m38.Conclusion In conclusion, since the business has been established in 1928, they are growing and expanding internationally rapidly (Webpage2 and Web page3). At present, they are doing well in term of profitability, efficiency, and investment areas, or to say, they are succeeding in sustaining global sales growth across the group, grow margin stabilization and tight control of costs. ROCE ratio also illustrates boilers suit success. Chutsana Na Nagara (0654258) FACS Page 17 Return on Capital apply (ROCE) Operating Profit x 100 Capital Employed Y2007 91. 1 x 100 = 20. 2 % 450. Y2006 68. 5 x 100 = 12. 6 % 543. 5 ROCE is the combination of Net Margin and Net Assets Turnover. As earlier mentioned both ratios increase and led to significantly increased ROCE. It suggests that overall performance is satisfied due to effective pricing and cost management as well as asset management were improved comparing to Y2006. This also illustrates overall success in EBS, product strategy, new technology launches, supplier relationships and low costs projects that are paying off. The number of times (1. 9) that net assets can generate sales is v ery important as one turn equals to 10. % that sales can generate profit. That is why ROCE = 20. 2% as it equals two turns. This suggests that it may greatly increases sales very soon because business recently plans to accelerate sales growth in China which is a big potential market and if business can manage to utilize assets well, there will be increase in profit on capital employed even more. Furthermore, it is better if the ROCE rate of 20. 2% is less than the rate of cost (interest rate) that business pays for money borrowed to invest in these assets because it center assets are used for generating profit that can cover cost of getting them.Regarding Corporate Governance (Webpage4), the business is subject to the provisions of the Combined decree on Corporate Governance published in July 2003 and appended to the tilt Rules of the UK Listing Authority. There are many practices company must follow. For example, the Audit military commission shall consist of not less than thr ee members and be independent non-executive directors. Also, it is permit by the wit and able to investigate any activity at heart its Terms of Reference which allows for full access to Company information and can seek that information from any employee of the business.Employees are directed to co-operate with any collect made by the Committee. If, at all time, company strictly follows the set rules, they can ensure operating properly. Chutsana Na Nagara (0654258) FACS Page 18 Moreover, regarding Ethical concerns (Business Review), they are focusing on many areas of responsibilities such as ethical trading and sets of KPI for environmental concerns. A presbyopic with their profitability, business is considered be on cartroad of long term prosperous. However, there is one important area that of necessity to be immediately improved. This is liquidity. From the logic belowTotal assets = Fixed Liabilities + Current Liabilities + 676. 8 100% = = 145. 8 21. 54% + + 226. 4 33. 45% + + Equity 304. 6 ? m 45. 01% or Sources of asset investments are from three parts. Business acquires funds from borrowings/loans 54. 99% (21. 54% + 33. 45%) which exceeds equity (45. 01%). The proportion shows business is considered at high risk. This evidence is also strongly supported by earlier ratios and cash flow analysis. Suggestions.. Suggestions aim to point out at major areas. Most of them imply the concern on liquidity which has been mentioned earlier. . Recently, there are many business activities going on to support their expansions that involve mostly in long term investments. However, it seems that business finance their activities with short term liabilities as they increased significantly, Notes20. This is not a proper means of investment because, normally, short term liabilities are at higher interest rate and the payment due is sooner (amounts falling due less than a year is as high as 79? m from 23? m, Notes20), but business uses them for long term investments whic h take time to generate cash back.Business may soon suffer from low liquidity and inability to pay day-to-day expenses and interests as business pays back the cost of using money even before they make profit from the money borrowed. Chutsana Na Nagara (0654258) FACS Page 19 The evidence was supported by increased in Gearing ratio while, Current ratio, Acid test and Interest Cover ratio have significantly decreased. Although, interest expenses from borrowings reduce tax payable, business must ensure they have ability to pay interests and it is cost to do so.Unless they restructure funding sources, they can go bankruptcy very soon because many long term projects will be implement next year. By doing so, business surely improves their liquidity and reduces financial risk for business itself as well as shareholders. 2. It was very risky that the Board has announced to maintain the same amount of dividend paid for three years while business is under investments/expansions and these two activities consume huge amount of money. Dividend amount is greater than profits after tax and interests business seemed to borrow current liabilities for cash dividend paid.This could be a good strategic intellect to retain shareholders confidence on the successful implementation of EBS, execution of the strategy and cost reduction initiatives will significantly improve financial performance over the next three years. However, it could turn to be the worst view especially when liquidity is now in concern. The alternative solutions can be that business issues more shares so they use cash received to pay dividend or pay shareholders with stock dividends (dividend reinvestment plan) so they still retain cash in the business.These two alternatives will increase number of shares so, refer to Gearing ratio, financial risks can be reduced. Point 1&2 above suggest that business rearrange sources of funding by seeking for long term sources and bewares of overtrading. They are expanding, st ocking more inventories, having more debtors but lack of cash to pay for creditorsnot only from normal trading but also interests from borrowing/loans. Although the Board seems to be sure that after all these investments come alive under well-managed plan for implementations they will urely benefit and guarantee long term prosperous to business, business may go bankruptcy even before reaching the goal. Chutsana Na Nagara (0654258) FACS Page 20 3. Businesss strategy to satisfy customers with around 350,000 products stocked globally, this can but do so efficiently. Although inventory turnover seems satisfied, acid test shows inventory greatly affects businesss liquidity. Business is suggested reconsider inventory policy to rearrange classes and only stock fast moving, high volume but low note value items.For slow moving, low volume but high value items, business may decide to use pooled strategy by stocking them in one warehouse in location that can easily commit products to anywhe re needed, Chopra and Sodhi (2004). 4. Business is expanding very much. Their performance on receivables collection period is slightly weaker because trading worldwide interfaces with many parties and increases procedures labyrinthianity. Business must ensure activities are in control and they have sufficient cash to pay creditors. 5. Regarding risks assessment (Business Review) it is wise to include isks from suppliers into consideration as they are trading in competitive markets with enormous competitors and high penalties. Satisfying customers is vitally important therefore, this requires reliable suppliers as well as effective supply chain management for inventory management and reduce cost of sales. 6. It is suggested business focus on international markets especially North America and Asia which have higher revenue growth. Currently, North Americans e-commerce is account for only 10% of total sales. This is elatively low comparing to other regions. This may be a great opportu nity to increase profits because sales can be increased through e-commerce while, costs are reduced from, for example, reduction in sales teams. (3,824 Words) Chutsana Na Nagara (0654258) FACS Page 21 Question 2 Part A Cash Management. The significance of cash management in managing a business. Cash is one of the most important resources in rail a business as Pizzey (1998) put that it is the life-blood of the business.However, cash is not profit. super profitable businesses cease to exist just simply because they do not maintain sufficient cash to allow proper level of liquidity for example, paying for routine business expenses. While too much violent cash means inefficiency as it does not generate any added value to business. To avoid falling into either ends, business needs cash management. This can be done through preparing cash flow statement to run across past performance and include corrective actions/improvements in cash cypher for future directions/guidelines.To illus trate, business can recognize transaction flows with initial factors give away risk because it allows for regular monitoring and control plan their money ahead such as acquiring funds from proper sources at sound cost rather than rushing into lenders when problems surprisingly happen, etc. We can therefore, say that ultimate significances of cash management are that business runs smoothly, stably is safe from insolvency and increases confidences for shareholders. Impact of Production managers role on the cash position of the business game.Refer to year2 Cash Flow Statement (Appendix5) Major lasts that change (negative) cash position were forge choice & bottle neck Machine Mark-I has longest leadtime. Work-in-process are slowly produced. Finished goods tie up time lag for workin-process before consolidating into batch delivery. The longer leadtime, the longer business gets paid from customers and it is even longer from foreign markets. So it keeps borrowing more money to run business and paying interests. Chutsana Na Nagara (0654258) FACS Page 22Routing At fist stage, Wolfs were produced from Mark-I which had most expensive unit cost of $m(5). This increased cost of sales and while price was fixed, business received less profit. Capacity Business has already invested in Engineering&Quality and bought new factory. However, using Mark-I led to meagre capacity decreased opportunity to win big contracts and limited sales volume. Business ended up with insufficient products to generates enough sales to cover all costs especially capital expenditure. Three issues above affected cash out-flows which led to extremely high negative cash position.One possible solution is to supersede Mark-I with Mark-III to efficiently increase capacity. So leadtime is decreased stocks are reduced business tends to decrease debtors, increase profit, reduce loans and interest paid hence, cash position gets better. Comment on the impact of Production Managers role in manag ing the cash in a real business. Managing real business will involve more complex issues irrelevant the game. The role affects managing cash in numbers of ways Control on scrap/defect rates to reduce cost of sales. Methods to manage defected products to understate all costs related. Sequencing rule when thousands different product groups are produced/day, good sequencing is needed to avoid delay, quality problems and unnecessary costs. The more costs increase, the less profit business gainsespecially in competitive markets where prices can hardly be increased, business suffer more severely. It is worth remembering some points decisions cannot be made in isolation as ones decisions affect others. solely functions commitment is vitally important. Also, final decisions must be considered regarding companys For example, purchasing function cuts cost by enefits not a functions. ordering low quality materials. Additional costs pass on to inspection and production functions. Also, if customers reject products, there will be claiming Chutsana Na Nagara (0654258) FACS Page 23 process, reverse logistic, and product replacement. all(a) these increase costs for square business no matter in which functions they occur. (541 Words) Part B (1) Budgeting Budgeting Budgeting comprises of two important parts, preparation and budgetary control, which will be described referring to FACS2.Preparation Business critically analyses internal and external environments/factors to build up strategic plans that must be in line with business impersonals. Business then sets up operational plans with properly identifying resource requirements to support strategies. This resource plans are finally translated into financial plans to complete a budget preparation. budgetary control Budget is compared with actual figures. If variances occur, timely corrective actions are required involving sending feedbacks back for reviews and formulated plans and/or forecasts may be revised. These re continuous processes and required management contributions/commitments at all time so that intended benefits are surely maked. The technique can apply to WinningMarginTM. Our objective is to lead Wolf markets and strategy is ensuring products are comme il faut for sales. We prepare production and sales budgets (Appendix6-7) showing maximum productions are 14 Terriers and 8 Wolfs with total sales $116. 6. From this point, purchasing manager knows how many exactly materials to order and when to stay material shortage. Production manager can effectively manage raise up allocations.Financial manager can see how much money to borrow more as we plan to invest in engineering and quality next year. Moreover, commercial manager can evaluate market share correctly. All Chutsana Na Nagara (0654258) FACS Page 24 functions know their responsibilities and control areas which help achieve the objective. In real business, all processes are much more complex and involve enormous factors such as competitors, substitute products, technologies, government legislations, as well as funding/borrowings which are not easy or fast as in the game. Also, business is legally committed to pay tax and interests which can be very high.More importantly, suppliers and customers are not perpetually reliable. Late payments from customers or late delivers from suppliers can severely interrupt whole business plan/process. (298 Words) Part B (2) Marginal Costing Marginal Costing Marginal costing is a costing technique that helps business making decisions. We must understand cost behaviors to properly classify and, more importantly, control them. Total costs roughly comprised of variable costs, which changes with activity Dyson3 (2007) and fixed or time-based costs, which remain unchanged within a period of time regardless of how many products produced.The difference between price and variable cost can be used to cover fixed costs and this is cognise as contribution. Business makes profit fro m any contribution amount exceeds fixed costs or loss, if insufficient contribution. Regarding WinningMarginTM, this technique would have helped our decision in choosing market. Appendix8 suggests we produce tiger because of highest contribution in both situations. However, we actually chose Wolf. To make profit from Wolfs we must produce 11 Wolfs ( go around case) or 76 Wolfs (worst case). However, our capacity is very limited due to machine constrains (Appendix6).This suggests we have adequate investments in engineering Chutsana Na Nagara (0654258) FACS Page 25 quality and market development to get best available prices as well as enough contracts so that all products will be sold. Alternatively, we may replace MarkI with Mark-III to increase capacity hence, increase contribution and profit. In real business, fringy costing is more widely used for strategic decisions, for example function or buy Normally making products in-house required more fixed costs. Business buy-in if incr ease in variable costs is less than fixed costs. Price incentives Reducing price can increase sales.Business reduce price if contribution from additional sales can cover total price reduction. Or increase price if contribution covers total sales lost. comparing to real world, a number of costs are associated. To get best from the technique, business ensures they carefully distribute all costs to the right groups otherwise results can mislead decision-making and greatly affects business. (296 Words) Chutsana Na Nagara (0654258) FACS Page 26 Appendix Appendix 1 Trend Analysis of Group Income Statement 2007 (? m) sales REVENUE 877. 5 877. 5 x 100 773. 9 2006 (? m) 828. 5 2005 (? m) 773. 9 113% 828. 5 x 100 773. 9 = 107% 100% (Cost of sales) 434 434 x 100 361. 8 402. 1 = 120% 402. 1 x 100 361. 8 361. 8 = 111% 100% GROSS gain 443. 5 426. 4 = 103. 5% 412. 1 443. 5 x 100 412. 1 = 108% 426. 4 x 100 412. 1 100% (Distribution & marketing expenses) 346. 2 346. 2 x 100 303. 3 348. 9 = 114% 348. 9 x 100 303. 3 303. 3 = 115% 100% (Administrative expenses) 6. 2 6. 2 x 100 8 9 = 78% 9 x 100 8 8 = 113% 100% (Total operating expenses) 352. 4 357. 9 311. 3 OPERATING PROFIT 91. 1 91. 1 x 100 100. 8 68. 5 = 90% 68. 5 x 100 100. 8 100. 8 = 68% 100% Chutsana Na Nagara (0654258) FACS Page 27Appendix 2 Vertical Analysis of Group Income Statement 2007 (? m) SALES REVENUE 877. 5 = 100% 828. 5 2006 (? m) = 100% 773. 9 2005 (? m) = 100% (Cost of sales) 434 434 x 100 877. 5 402. 1 = 49% 402. 1 x 100 828. 5 361. 8 = 49% 361. 8 x 100 773. 9 = 47% GROSS PROFIT 443. 5 426. 4 412. 1 (Distribution & marketing expenses) 346. 2 348. 9 303. 3 346. 2 x 100 877. 5 = 39% 348. 9 x 100 828. 5 = 42% 303. 3 x 100 773. 9 = 39% (Administrative expenses) 6. 2 6. 2 x 100 877. 5 9 = 0. 7% 9 x 100 828. 5 8 = 1% 8 x 100 773. 9 = 1% (Total operating expenses) 352. 4 352. 4 x 100 877. 5 357. 9 = 40% 357. x 100 828. 5 311. 3 = 43% 311. 3 x 100 773. 9 = 40% OPERATING PROFIT 91. 1 68. 5 100. 8 Chutsana Na Nagara (0654258) FACS Page 28 Appendix 3 Trend Analysis of Group Balance Sheet 2007 (? m) FIXED ASSETS nonphysical Assets 2006 (? m) 2005 (? m) 196. 7 196. 7 x 100 191. 9 208. 2 = 102. 5% 208. 2 x 100 191. 9 191. 9 = 108. 5% 100% Property, plant, and equipment 111. 1 111. 1 x 100 110. 9 112. 8 = 100% 112. 8 x 100 110. 9 110. 9 = 102% 100% Investments other(a) receivables Deferred tax assets Total fixed assets 0. 3 2. 7 14. 2 325 325 x 100 323. 2 0. 3 3. 2 17. 5 342 = 101% 342 x 100 323. 2 0. 2 2. 17. 4 323. 2 100% = 106% CURRENT ASSETS Inventories 160. 6 160. 6 x 100 142. 3 158. 6 = 113% 158. 6 x 100 142. 3 142. 3 = 111. 5% 100% Trade and other receivables 171 171 x 100 145. 1 162. 3 = 118% 162. 3 x 100 145. 1 145. 1 = 112% 100% Income tax receivable Cash & cash equivalents 1. 1 19. 1 19. 1 x 100 64. 8 1 39. 4 = 29. 5% 39. 4 x 100 64. 8 2. 2 64. 8 = 61% 100% Total current assets 351. 8 351. 8 x 100 354. 4 361. 3 = 99% 361. 3 x 100 354. 4 354. 4 = 102% 100% Total assets 676. 8 676. 8 x 100 677. 6 703. 3 = 100% 703. 3 x 100 677. 6 677. 6 = 104% 100% Chutsana Na Nagara (0654258) FACS Page 29Appendix 3 Trend Analysis of Group Balance Sheet (Continued) 2007 (? m) CURRENT LIABILITIES Trade and other payables 2006 (? m) 2005 (? m) 132. 9 132. 9 x 100 109. 5 123. 5 = 121% 123. 5 x 100 109. 5 109. 5 = 113% 100% Loans and borrowings 79 79 x 100 27. 7 23 = 285% 23 x 100 27. 7 = 83% 27. 7 100% Tax liabilities Total current liabilities 14. 5 226. 4 226. 4 x 100 155. 9 13. 3 159. 8 = 145% 159. 8 x 100 155. 9 18. 7 155. 9 = 103% 100% Net current assets 125. 4 125. 4 x 100 198. 5 201. 5 = 63% 201. 5 x 100 198. 5 = 102% 198. 5 100% 521. 7 100% Capital employed 450. 4 450. 4 x 100 521. 7 543. 5 = 86% 43. 5 x 100 521. 7 = 104% FIXED LIABILITIES Other payables retreat benefits obligations Loans and borrowings 7. 9 38. 7 7. 8 41. 8 7. 6 47 76. 3 76. 3 x 100 92. 5 137. 2 = 82% 137. 2 x 100 92. 5 = 148% 92. 5 100% Deferred tax liabilities Total fixed liabilities 22. 9 145. 8 145. 8 x 100 166 20. 3 207. 1 = 88% 207. 1 x 100 166 18. 9 166 100% = 125% equity Called-up share capital Share premium account Other reserves Total equity 43. 5 38. 7 222. 4 304. 6 43. 5 38. 4 254. 5 336. 4 43. 5 38. 4 273. 8 355. 7 Chutsana Na Nagara (0654258) FACS Page 30 Appendix 4 Vertical Analysis of Group Balance Sheet 007 (? m) FIXED ASSETS Intangible Assets 2006 (? m) 2005 (? m) 196. 7 196. 7 x 100 325 208. 2 = 60. 5% 208. 2 x 100 342 191. 9 = 60. 9% Property, plant, and equipment 111. 1 111. 1 x 100 325 112. 8 = 34% 112. 8 x 100 342 110. 9 = 33% Investments Other receivables Deferred tax assets Total fixed assets 0. 3 2. 7 14. 2 325 = 100% 0. 3 3. 2 17. 5 342 = 100% 0. 2 2. 8 17. 4 323. 2 CURRENT ASSETS Inventories 160. 6 160. 6 x 100 351. 8 158. 6 = 45. 7% 158. 6 x 100 361. 3 142. 3 = 44% Trade and other receivables 171 171 x 100 351. 8 162. 3 = 48. 6% 162. 3 x 100 361. 3 145. 1 = 45%Income tax receivables Cash & cash equivalents 1. 1 1 2. 2 19. 1 19. 1 x 100 351. 8 39. 4 = 5. 4 % 39. 4 x 100 361. 3 64. 8 = 11% Total current assets 351. 8 = 100% 361. 3 = 100% 354. 4 Total assets 676. 8 703. 3 677. 6 Chutsana Na Nagara (0654258) FACS Page 31 Appendix 4 Vertical Analysis of Group Balance Sheet (Continued) 2007 (? m) CURRENT LIABILITIES Trade and other payables 2006 (? m) 2005 (? m) 132. 9 132. 9 x 100 226. 4 123. 5 = 59% 123. 5 x 100 159. 8 109. 5 = 77. 3% 109. 5 x 100 155. 9 = 70% Loans and borrowings 79 79 x 100 226. 4 23 = 35% 23 x 100 159. 8 27. 7 = 14. 4% 27. 7 x 100 155. 9 = 18%Tax liabilities Total current liabilities Net current assets Capital employed FIXED LIABILITIES Other payables seclusion benefits obligations Loans and borrowings 14. 5 226. 4 = 100% 13. 3 159. 8 = 100% 18. 7 155. 9 = 100% 125. 4 450. 4 201. 5 543. 5 198. 5 521. 7 7. 9 38. 7 7. 8 41. 8 7. 6 47 76. 3 76. 3 x 100 145. 8 137. 2 = 52% 137. 2 x 100 207. 1 92. 5 = 66% 92. 5 x 100 166 = 56% Deferred tax liabilities Total fixed liabilities EQUITY Called-up share capital Share premium a ccount Other reserves Total equity 22. 9 145. 8 = 100% 20. 3 207. 1 = 100% 18. 9 166 = 100% 43. 5 38. 7 222. 4 304. 6 43. 5 38. 4 254. 5 336. 4 43. 5 38. 273. 8 355. 7 Chutsana Na Nagara (0654258) FACS Page 32 Appendix 5 Year 2 Cash Flow Statement of Simulation Game (Reconciling profit to cash) Year 2 Cash Flow Statement Profit before interest Add Depreciation Movements in working capital (Increase)/Derease in stock (Increase)/Derease in debtors Increase/(Derease) in debtors Financing costs and taxation Interest paid Dividends paid Tax paid Investing activities Capital expenditure Disposal of assets Cash generated/(consumed) in year Financing activities Loans raised/(repaid) Other Increase/(Decrease) in cash in year $m (14) 6 (8) (13) (24) 0 (45) (10) 0 0 (55) (34) 0 (89) 0 0 (19) Appendix 6 Production Budget Factory 1 Machine Mark-I Mark-I Mark-I Mark-II Mark-III Mark-III Mark-III Mark-III Q1 Te Te Te Te Wo Te Wo Te Te Te Wo Te Wo Total (22) Q2 Te Q3 Q4 Total units Terrier Wolf 1 1 2 2 4 4 4 4 14 8 tiger 2 Te Wo Te Wo Te Wo Te Wo 3 Chutsana Na Nagara (0654258) FACS Page 33 Appendix 7 Sales Budget Terrier Opening finished stock (Q1) Production (from Production Budget) lendable for sales Forecast unsold finished stock (Q4) Sales govern costs $s Sales value $s 0 14 14 0 14 142 = 28 144. = 63 Units Wolf 0 8 8 0 8 84 = 32 86. 7 = 53. 6 Tiger Total 60 116. 6 Appendix 8 Optimizing Contribution Terrier scoop out Worst 5 3 2 2 3 1 13 38 Wolf Best Worst 7. 5 5. 5 4 5 3. 5 0. 5 11 76 Tiger Best Worst 10. 5 8. 5 6 7 4. 5 1. 5 9 26 Sales value Variable cost Unit contribution Break-even volume (Fixed cost of ? 38) Chutsana Na Nagara (0654258) FACS Page 34 References Business Review Electrocomponents plcs yearly composition and accounts 2007, p. 8-13 Chairman Statement Electrocomponents plcs annual report and accounts 2007, p. Chief Executives Review Electrocomponents plcs annual report and accounts 2007, p. 7 Chopra and Sodhi (2004) Managing risk to avoid supply -chain breakdown, MIT Sloan Management Review, Fall 2004, p. 53-61 Dyson1 J R (2007) Profitability Ratios, Accounting for Non-Accounting Students, Pearson Education Limited, England, 7th Edition, p. 230 Dyson2 J R (2007) Profitability Ratios, Accounting for Non-Accounting Students, Pearson Education Limited, England, 7th Edition, p. 230Dyson3 (2007) verbatim costs, Accounting for Non-Accounting Students, Pearson Education Limited, England, 7th Edition, p. 293 FACS1 Financial Analysis and control systems module pack, WMG, Winning MarginTM, p. 14 (2007) FACS2 Financial Analysis and control systems module pack, WMG, Budget and Budgetary Control, 2007 FACS3 Financial Analysis and control systems module pack, WMG, Marginal Costing, 2007 Group Balance Sheet Electrocomponents plcs annual report and accounts 2007, p. 25 Chutsana Na Nagara (0654258) FACS Page 35Group Cash Flow Statement Electrocomponents plcs annual report and accounts 2007, p. 26 Group Income Statement Electrocomp onents plcs annual report and accounts 2007, p. 24 Notes 1 30 Please refer to Notes to the Group Accounts, Electrocomponents plcs annual report and accounts 2007, p. 29-45 Pizzey A (1998) Cash the life-blood of the business, Finance and Accounting for Non-Specialist Students, Financial Times, pitman Publishing, England, p. 83 Webpage1 About Us, Low Cost Infrastructure, Electrocomponents plc webpage, online, http//www. lectrocomponents. com/electronic countermeasures/about/strategy/infrastructure/ Webpage2 About Us, Our History, Electrocomponents plc webpage, online, http//www. electrocomponents. com/ecm/about/history/ Webpage3 Investor Center, Historic Trends, Electrocomponents plc webpage, online, http//www. electrocomponents. com/ecm/ir/finperformance/trends Webpage4 Our Responsibilities, Corporate Governance, Electrocomponents plc webpage, online, http//www. electrocomponents. com/ecm/responsibilities/corpgov/ Chutsana Na Nagara (0654258)