Assignment 3 : Financial Assignment
Khuloudm1
MyAssignment3edit26-4.docRunning Head: SOURCING ESSENTIALS 1
SOURCING ESSENTIALS 2
Table of Contents
12 References
Executive Summary
Effective decision making is key to the success of any organization and this is enhanced by adequate and accurate information. For financial decision making, information concerning the various aspects of a company is obtained from the financial statements of the company in question and analyzed using techniques such as ratio analysis. This paper has analyzed a company whose statement of financial position and those of comprehensive income. The techniques used in this analysis were ratio analysis and trend analysis. The financial period considered was 2014 and 2013.This was as per the financial year ended 31st March. Ratios analyzed were profitability ratios for which both the net profit and gross profit margins were analyzed. The set benchmark for this is 15 to 20 percent. For these periods, there was poor profitability performance.
The efficiency ratios represented by the asset and creditor turnovers showed satisfactory performance for the company in question. The ratios exceeded the acceptable 1.20 criteria. The company in question should be considered for a sourcing exercise for Facilities Management Services. Its efficiency in meeting its obligations relating to creditors gives a good indication of the company’s commitment. The company will most likely be effective in facilities management services and therefore should be considered for a sourcing exercise. The company’s ability to manage bankruptcy implies a good resilience culture. This is imperative in sustaining a contractual relationship. Considering the company for a sourcing exercise will tap on this benefit and this should not be bypassed. For the consideration for a sourcing exercise, the financial analysis was expanded to include comparison with other supplies companies. In this context, the Ulai Enterprise PVT Limited was used. Both ratio and trend analysis were utilized for this analysis. The Altman Z-score was computed and the results showed that the company was not bankrupt. The computed value was in the range not considered bankrupt.
Recommendations to better performance in the company in question involve profitability measures. The company should consider alternatives to the operating expenses so as to keep the expenses as low as possible. Clarity and more comprehensiveness should be adopted in financial statements. This will help ensure adequate decision making as information is a key component in this undertaking. Generally, the company in question has a great improvement capability and this should be maximized so that effective financial decision making is realized.
Introduction
The main aim of the financial statement is to offer all the stakeholders with the relevant information on the financial position of the organization, performances of the organization, and the changes in the financial position of the organization. Such information is very important for various stakeholders in relation to making better business related decisions. A financial statement is expected to be comparable, understandable, and remain relevant according to the day to day operations of the organization. The assets, profits, liabilities, loss and equity relate directly to the financial position and operations of an organization. The stakeholders are expected to comprehend to these financial statements as well as those who have a reasonable knowledge and understanding of economic and organization activities in addition to accounting and are prepared to diligently go through and use such information (Beaver, Correia, and McNichols, 2011).
The financial statement should offer relevant financial information for an organization in a way that is well structured and in a manner that can be easily understood by any stakeholder interested in the financial progress of the organization. There are several types of financial statements and these include the statement of the financial position, statement of comprehensive income, statement of net changes in equity, and cash flow statements. In the organization in question, the financial statements that are provided are the income statement and the balance sheet. Financial analysis will be based on ratio analysis and benchmark across the other companies within the kingdom of Saudi Arabia. Computations of different ratios and the Altman Z-score will be included as an essential element of this analysis.
To sum up the whole analysis, trends in the figures and what they imply will be considered. Interpretation will be made on the basis of financial accounting and procurement principles. The company that was included in this was in the services industry and with an aim to evaluate the sourcing requirements option, the Ulai Enterprises PVT Limited company, a supplier to the Saudi Basic Corporation was also analyzed.
(a) Evaluate the finances of this organization highlighting the strengths and weaknesses of their position
The financial statements provided are the statement of financial position and the comprehensive income statement for the financial years ended 31st March 2013 and 31st March 2014.In the evaluation of the finances of this organization, the statement of comprehensive income will be the used. For the periods ended 31st March 2013 and 31st March 2014, the organization’s income was from the company’s turnover. This was 138,276,000 dollars in 2014 and 161,438,000 dollars in 2013.On a trend basis, this was an increase. The reported figure for 2013 was 1,352,000 but this rose to a profit of 2,672,000 dollars. Increased profits imply better performance.
Ratios relevant to evaluation of finances in this organization are the profitability ratios. These normally assess the levels of net income reported by the organization. For the profitability ratios, the higher the magnitude the better it is.Ratio types under this classification are the gross profit margin, net profit margin, return on investments and the return on assets. The gross profit margin in 2013 was 0 and 2014 had 0.016551.The gross profit margin was computed by dividing the profit before tax amount by the sales reported in that period. The set benchmark for this ratio in the services industry is 0.15.Through the analysis period; this was not the case as the 0.016 was less than the set 0.15.The profitability of this organization is therefore not ideal. The zero performance was due to the absence of the gross profit amount during the concerned period.
This situation was also portrayed by the net profit margin. This was computed by dividing the net income and the level of sales attained during the specific period. The net profit margin value in 2013 was 0 while that of 2014 was 0.026121. The zero performance was due to the absence of the net profit amount during the concerned period. With the agreed criteria in the services industry to which the facilities management sector lies, the company’s profitability based on these criteria was not ideal. Another technique to be utilized is the trend analysis and for this2014 was a better year than 2013 for both the gross and net profit margins. The other measure of profitability that will be incorporated in this analysis is the return on assets. For computation purposes, this was a division of the net income by the total assets value in both 2013 and 2014.The attached Excel sheet shows the workings and from it, the organization reported 0 for 2013 and 8% for 2014.The facilities management sector has an acceptable return on investment range of 0.14 and 0.20. The 8 percent attained by this organization is not within this range and therefore not ideal.
The finances of the organization in question can be assessed with reference to the statement of financial position. For this, trend analysis will be the most effective. Additionally, ratios relating to efficiency and liquidity were also analyzed. The attached Excel sheet shows the respective computations. The efficiency ratio being addressed in this section is the assets turnover. The asset turnover was calculated by dividing the net sales and the average credit sales. In 2013, this gave 6.8 and for 2014, the ratio was 6.2.The acceptable asset turnover ratio for the services industry is 1.20.Comparison with this means that the organization in question has been performing well in both 2013 and 2014.The creditor’s turnover ratio gave 4.09 in 2013 and 3.71 in 2014.The acceptable creditor’s turnover ratio for this company lies in the 0.15 to 0.20 range. For the company in question, this was exceeded and thus implies good company’s ability towards paying its creditors.
From the financial analysis using trend and ratio analysis, the strengths of the organization lies in its liquidity in that it pays off its creditors fast. Its efficiency is also high given the fact that its turnover ratios are higher than the industrial averages. The company’s statements highlighted the weaknesses to be less profitability. The company’s returns are comparatively low as shown by the profitability ratios. The reason behind this performance is the high operating expenses that the organization records in its financial statements.
(b) Provide a justified recommendation as to whether you would consider this organization for a sourcing exercise for Facilities Management Services emphasizing any limit that should be placed on the financial exposure (maximum contract value).
Consideration of an organization for a sourcing exercise for Facilities Management Services involves comprehensive financial and non-financial analysis. Having done the financial analysis while utilizing ratios as the technique, this section will involve additional comparison to the Saudi Basic Industrial Corporation suppliers. The supplier identified for this analysis is the Ulai Enterprises PVT limited. This company supplies materials to the SABIC and therefore lies in the facilities management sector. In general, this is in the services industry. There exist key elements of the facility management that the organization needs to take into consideration before it decides to source for the services. These key elements include; finance and business, communication, operation and maintenance, leadership and strategy, technology, quality, and environmental sustainability and stewardship.
The financial performance of the organization compared to the Ulai enterprises indicates less profitability in the margin ratios and the return on investments. To be specific, the organization in question recorded a 0 in 2013 and 0.01 in 2014 for the gross profit margins. Ulai enterprises limited had 0.62 gross profit margins in 2013 and a 0.60 in 2014.The net profit margin figure was 0 and 0.026 in 2013 and 2014.Ulai had 0.17 and 0.09 for net profit margin in 2013 and 2014. The values for the return on investment were 0 and 8 percent for the company for 2013 and 2014.In the same periods Ulai had 17 and 10 percent respectively. The company in question therefore had less profitability than its competitors. For the financial exposure the acceptable range is 25 to 30 percent. This company has achieved this and therefore can be considered for sourcing exercises.
The organization in question should be considered for a sourcing exercise because its efficiency is relatively high compared to that of its competitors and also the industry’s benchmarks. The turnover ratios, whose main purpose is to assess the level of activity in the organization, have been comparatively bigger for this company. The asset turnover of this company for instance was 6.88 and 6.22 for 2013 and 2014 respectively. Compared to the Ulai’s 1.95 and 2.07 during the same period, the company’s performance was better. The implication is that the company utilizes its assets relatively well so as to generate sales. It is therefore a better choice for sourcing.
To assess the organization’s bankruptcy, reference is made to the Altman’s z-score whose formula is z= 1.2A+ 1.4B+3.3C+0.6D+1.0E.For this metric A represents a quotient of the working capital and total assets,B is the quotient of the retained earnings and total assets. The C here is got by dividing the earnings before interest and taxes and the total assets and the D involved a quotient of the market value of the equity and the book value of the total liabilities. The last component, in this case E is the quotient of the sales and total assets. Computation of this ratio is shown in the attached excel sheet. For the company in question this ratio was 6.396919109 and 4.962574123 in 2013 and 2014 respectively. The Alai Company had 5.406895277 and 4.05752431 during these years.
The interpretation of the Z-score is based on their value. For the Z values greater than 2.67 this are in non-distress zones and therefore more preferred. A range of 1.81 and 2.67 is a grey zone and a value less than 1.81 is a distress zone. With this criterion, both the company in question and SABIC’s supplier, Alai was non-bankrupt. It is therefore recommended for sourcing in the facilities management division. The creditor’s turnover ratio for the two companies during 2013 and 2014 was 4.09 and 3.71 in 2013 and 2014 for the company under question. For the Alai Company, this was 0 for both years. This implies that the company pays its creditors faster than its competitors. It therefore has a higher affinity in honoring its obligations. With this, I would consider this company for a sourcing exercise for the facilities management services. In doing this, the acceptable financial exposure acceptable is a range of 34,569-41482.8 and 40,359.5- 48431.4 at 2013 and 2014 respectively.
Conclusion
In conclusion, the statements of financial position and comprehensive income have been utilized in assessing the financial position of this company. From these statements, the overall profit figure increased in 2013 and 2014.The profitability ratios that were assessed are the gross and net profit margins and the return on assets. For the profit margin, the services industry allows a 0.15.In comparison to the attained profitability ratios by the company in question; there was an under-performance in these periods. The return on assets also confirmed less profitability. This was such that the attained ratio in these two periods was 8% and 0 for 2014 and 2013 respectively. The acceptable benchmark for an ideal consideration in this ratio is a range of 15 to 20 percent. The company therefore did not meet the performance standards.
In terms of efficiency, the turnover ratios are the most preferred. This is because they measure the rate at which the company utilizes its assets and other possessions to generate sales. The company in question had a 6.2 in 2014 and 6.8 in 2013.The acceptable ratio in this classification is 1.20 and therefore the company had good performance in both years under analysis. The company’s credit turnover ratio exceeded the industry’s benchmark and therefore the company meets its obligations appropriately. I would consider the company in question for a sourcing exercise for Facilities Management Service. This is because it exhibits good financial strength from the analysis done. The ratios of both the company in question and a supplier to the Saudi Basic Industrial Corporation indicated high efficiency in meeting its obligations.
This was in comparison with the Ulai Enterprises PVT Limited which is a key supplier to the Saudi Basic Industrial Corporation and engages in facilities management services. The company in question performed comparatively well in utilizing its assets to generate sales. Its turnover ratios were higher compared to both the industrial averages and those attained by the competitor for example the Ulai Enterprises PVT Limited. The company’s strengths are its efficiency and liquidity in that it pays its creditors really fast. The company in question’s weaknesses are less profitability and this may cause a strain in the company’s long term sustainability.
The company’s bankruptcy is under less distress. The Altman’s Z-score value in 2013 and 2014 was 6.2 and 4.9 .This was a good indicator in that it indicated no bankruptcy. The reputation of this company is therefore good and hence a good justification for consideration in the sourcing exercises in facilities management service. The company’s ability to meet its debts implies business continuity and therefore its ability to provide the facilities management services when needed. This is a reason as to why this company would be considered for a sourcing exercise in facilities management service. The company’s good financial responsiveness and ability to meet its obligations is an action to consider for a sourcing supplies negotiation.
Recommendations
The strengths of the company lie in the efficiency and liquidity of the company. The company in question has high reported efficiency in utilizing its assets as well as meeting its obligations. The company has a relatively good financial health as indicated by the score in the Altman ratios. However the weakness of this company lies in the most convincing aspect of any partnership with this company. Its profitability is low from the computed values of the profit margin ratios and the efficiency ratios. This puts a doubt on the long term sustainability of the company and therefore needs to be addressed. The company in question should consider cutting down on the expenses so as to improve on its profitability ratios. The company can consider alternatives to this for instance insourcing so that some expenses are done away with. In doing this, the company should aim at increasing the profit margins to more than the 0.15.
The company in question should consider a long term perspective of their operations and therefore sustain their relationships with their partners. This will ensure the continuity of the business to ensure it meets its commitments such as procurement. The company’s effectiveness in managing bankruptcy should be stabilized through close monitoring. This will strengthen this competitive advantage and therefore put the company on a sustainable advantage position to even fit as a sourcing requirement for facilities management. With an aim to better future performance, the financial statements prepared and presented should be more comprehensive. This will facilitate an up to date ratio and trend analysis and therefore ease decision making for various contexts.
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References
Beaver, W. H., Correia, M. M., and McNichols, M. (2011). Financial statement analysis and the prediction of financial distress. Boston: Now
Bernstein, L. A., and Wild, J. J. (2000) .Analysis of financial statements. New York: McGraw-Hill.
Fridson, M. S., Fridson, M. S., and Alvarez, F. (2011).Financial statement analysis: Apractitioner's guide. Hoboken, N.J: Wiley
https://csimarket.com/screening/index.php?s=at
https://www.indiamart.com/ulai-enterprises-pvtltd/aboutus.html
Instructor Points for First submittion to be Incorporated for below : Note: I did not show him this draft yet so some of his points I already fixed but we need more :
Strengths and weaknesses of the Assessment:
It was good to see the inclusion of your contents page, but you should take care to complete this by including the page numbering. This was followed by your executive summary and whilst this included interesting discussion, you should note that a better summary would have been provided if you had underlined the main strengths and weaknesses with the potential supplier’s financial standing. This should comment on the main strengths and weaknesses with the potential supplier’s financial standing. You were also required to provide a recommendation on any limit to the financial exposure and should note that a limit of exposure to 25% - 30% of their turnover would be appropriate in this case.
You then produced an introduction section which was really an extension of the executive summary but did provide some general background into financial analysis which was useful. You then produced a section discussing the financial position of the company without including any evidence of financial analysis having been undertaken. You produced a discussion which was very generic in places that did not refer to ratios as required by the assignment task. You did however produce a recommendation on as to if the company should be selected but again you did not back this up with any specific financial information and analysis.
To achieve higher marks, you can carry out research into the facilities management sector and benchmark the ratios that should be calculated against any of the suppliers that may be used by SABIC or industry leading suppliers that operate in the Kingdom of Saudi Arabia. It would also be beneficial if you provide the Altman or Springate scoring calculations that were featured in the course content to assess potential bankruptcy.
A key part of the programme is the demonstration of the application of the tools and techniques taught on the programme by the candidate in the assignment and this was not evident in this report.
You did use several external sources but these appeared to replace rather than support your discussion in large parts of this report. You do produce a conclusions section but could also include some recommendations as well at the end of the report.
Areas for Improvement:
Better marks could have been achieved if you had expanded your discussion to include some of the ratios taught on the programme and then discussed the findings of this analysis as well as considering the implications. You could also have included an analysis of another FM organisation for comparison purposes. As well as considering the limitation of financial analysis as well. You should also have provided an executive summary in the format discussed above. A recommendations section at the end of the report would also enhance the structure. In terms of external sources you should use them to support your discussion and not replace it.
