Final Accounts Assgnmt

8/9/2019 Final Accounts Assgnmt

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STATEGIC ACCOUNTING FOR DECISION MAKING

Abhishek Meshram (09048790) Page 1

ANSWER 1:

a) The key financial ratios for Fitness First( Pontypridd)are calculated as below:Ratio 1: operating profit/operating assets = 125000/526000 = 0.237643*100 = 23.8%

Ratio 2: operating profit/ sales = 125000/165000 = 0.075758*100= 7.6%

Ratio 3: sales/ operating assets = 165000/526000 = 3.136882, 1000/3.136882= 318.8

Ratio 4: expenses/ sales = 1525000/ 1650000 = 0.924242* 100 = 92.4%

Ratio 5: sales/ fixed assets = 1650000/ 476000 = 3.466387, 1000/ 3.4667387 = 288.5

Ratio 6: sales/ currentassets = 1650000/ 50000 = 33, 1000/33= 30.3

Ratio 7: sales/ stock = 165000/ 8000 = 206.25, 1000/206.25= 4.8

Ratio 8: sales/ debtors = 165000/ 14000 = 117.8571, 1000/ 117.8571= 8.5

Ratio 9: sales / bank = 1650000/ 280000 = 58.92857, 1000/58.92857 = 17

Ratio 10: Current ratio = 1.4: 1Ratio 11: Quick Ratio = 1.2: 1

Ratio 12: Gearing ratio = 0.020833* 100 = 2.1%

Financial ratios for Fitness First(Pontypridd) forthe period ending 30/09/2009

SR.

NO FINANCIAL RATIOS PONTYPRIDD

MOST PROFITABLE

CLUB DIFFERENCE

1 OP/OA 0.237643 23.8% 36% 12.2%

2 OP/ S 0.075758 7.6% 10% 2.4%

3 S/OA 3.136882 318.8 278 -40.8

4 E/S 0.924242 92.4% 90% -2.4%

5 S/FA 3.466387 288.5 254 -34.5

6 S/CA 33 30.3 24 -6.3

7 S/STOCK 206.25 4.8 5.5 0.7

8 S/D 117.8571 8.5 6.5 -2.0

9 S/B 58.92857 17.0 12 -5.0

10 CR=CA/CL 1.388889 1.4 1.8 0.4

11 QR=(CA-STOCK)/CL 1.166667 1.2 1 -0.2

12 GR= LTL/(SHARE

CAPITAL + RESERVES +

RETAINED PROFITS) 0.020833 2.1% 15% 12.9%


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B)

Analysis of key ratios:

Sales/ operating assets ratio: analysing the firstthree ratios, we come to know thatthe

turnover ofthe operating assets of Pontypridd centre is 3.14 whereas that of most profitable

centre is 3.6. This shows that sales/ operating ratio of Pontypridd centre is less as compared

to most profitable centre. It willtake only 278 ofassets to generate sales of 1000 instead

of 318 forthe Pontypridd centre.

Operating profit/ sales ratio has an effect on the sales revenue. Between two clubs, profitable

club is having sales ratio over operating profit of 10% which is higherthan that of Pontypridd

centre (7.6%). Higherthe above ratio means higherthe sale which indicates that operating

assets are functioning properly.

Afterthis, the analysis oftwo ratios 1) sales/ fixed assets and 2) sales/ currentassets will

indicate which ofthe operating assets has problem.

Sales/ Fixed asset:

A low figure of sales to fixed asset ratio indicate thatthere is inefficient utilization or slight

development of fixed asset, which may be because of excess capacity or interrupted supply of

raw materials. 3.47 and 3.94 are the ratios of Pontypridd centre and most profitable centre

respectively which indicate thatto generate sales of 1000 ittakes 254 of fixed assets

whereas ittakes 288.5 for Pontypridd centre to do the same. Thus Pontypridd centre has

some problems with the fixed assets. The Pontypridd centre needs to start some new centres

like an additional fitness centre for Yogaand cardio games to benefit from the business.

Sales / currentasset:

It is also known as Working Capital Ratio. It is done to measure the extentto which the

currentassets are available to meetthe currentliabilities ofthe firm due within the next 12

months. The current ratio indicates ifthe business has abundant working capital which is

excess of currentassets over currentliabilities to meetthe shortterm obligation of finance

and also to take advantage ofthe opportunities of investmentand have a favourable credit

terms.


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Pontypridd centre has ratio of 33 whereas that of most profitable centre is 41.7 which means

that Pontypridd centre takes 30.3 to generate sales of 1000 and profitable centre takes 24

to do the same. The two centres almost have equivalent sales to currentasset ratio.

Splitting the currentassets gives a better picture of each element in the currentasset. There

are three types of currentassets: stock, debtors and bank/cash.

Sales/ stock ratio:

It is necessary to keep adequate level of stock in orderto meetthe customer demands. A bad

inventory can give a changed figure ofavailable funds. Stock in excess is leads to liquidity

being tied up and it is dead money. Stock should be adequate to meetthe contingency needs.

The ratios are 206.25 and 181.8 for Pontypridd centre and profitable centre respectively

which indicate that Pontypridd centre take average time of 1.77 days to sell its remaining

stockas compared to 2 days for profitable centre. In this case Pontypridd centre is doing well

to clear its remaining stock.

Sales / debtors

The people from whom the firm had taken creditare the debtors. The longerthe firm takes to

pay the debtors the less is the funds available with the firm during that period. Pontypridd

centre takes an average of 3.1 days to pay back its debtors whereas profitable centre takes

about 2.4 days to do the same.

Current ratio:

This is also known as the working capital ratio. The greaterthe current ratio, the better is the

companys ability to meetthe shortterm financial obligations and more is the liquidity ofthe

firm. Ifthe currentassets are twice the currentliabilities, then the company has a good short

term financial strength. Ifthe currentliabilities are more than the currentassets, company

could face difficulties in funding its shortterm financial obligations. Profitable centre is

betterthan Pontypridd centre to meetthe shortterm financial obligations as it has a current

ratio of 1.8 as compared to 1.4 ofthe latter.

Quick Ratio:

Quick ratio gives a more realistic picture ofthe companys obligation to meetthe shortterm

finance need as it excludes stock on the basis that it is leastliquid ofthe currentassets.


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Pontypridd centre has a quick ratio of 1.2 and profitable centre has a ratio of 1 which

indicates that Pontypridd centre is better in meeting it shortterm financial obligation

realistically.

Gearing ratio:

The gearing ratio gives a picture of capital employed whether financed by debts orlong term

finance. The higherthe gearing ratio, the greater is the dependence on borrowing and long

term finance and also there is high amount of risk with high gearing ratio due rise in volatility

of profit. Utilising gearing, amplifies the potential gains from the investment butalso

increases the potentialloss. Most profitable club is highly at risk with high gearing ratio of

15% as compared to just 2.1% ofthe Pontypridd club. Pontypridd club has to face less risk of

vulnerable interest rate change and this wontaffecttheir profits much.


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ANSWER 2:

Profitand Loss account for period ending 30/09/2009:

cost centres 1 2 3 4 5 6 7 8

particulars

Swimming

Pool

Childs

Pool

Rcpt/

Admin

Licensed

Bar

Gym Squash

Court

Table

Tennis

Snack

Bar

Total

Revenue 500000 120000 0 240000 250000 150000 60000 330000 1650000

Expense:

Rates and

Insurance

75000 25000 5000 12500 100000 12500 7500 12500 250000

Fuel & Power 20000 10000 0 10000 25000 10000 5000 20000 100000

Repairs &

Maintenance

15000 7500 0 7500 18750 7500 3750 15000 75000

Chemicals (for

swimming pool)

25000 5000 0 0 0 0 0 0 30000

Security 21875 4375 5000 1000 9375 3125 3250 2000 50000

Cleaning Materials 5000 2500 2500 6250 2500 1250 5000 25000

Salaries 95000 30000 175000 35000 45000 25000 35000 60000 500000

Salary Related

Costs

23750 7500 43750 8750 11250 6250 8750 15000 125000

Depreciation 17500 3500 4000 800 7500 2500 2600 1600 40000

SnackBar Supplies 0 0 0 0 0 0 0 100000 100000

Licensed Bar

Supplies

0 0 0 80000 0 0 0 0 80000

Head Off.

Overhead

30000 15000 0 15000 37500 15000 7500 30000 150000

Expenses Total 328125 110375 232750 173050 260625 84375 74600 261100 1525000

Profit 171875 9625 -232750 66950 -10625 65625 -14600 68900 125000


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According to the above calculations, it shows thatthe reception/administration, gym and

table tennis areas are in losses. The following suggestion can be useful for making the

Pontypridd centre more profitable:

y The salary ofthe reception and administrative areas are very high. The managementhas to reduce staff in orderto have an optimum salary pay-out. Instead ofthree, two

employees should be enough forthe reception. The administration should hire

employees which can have experience in baras wellas food which will in turn help to

avoid hiring separate staff for both the areas. Part- time workers should be considered

s option for reducing the pressure of salaries. There should be good combination of

full- time and part- time employees.

y Leisure staff can clean the poolas it will save the cost for cleaning the pool.y

As the table tennis area is going underlosses and also it does not have usage ratewhich is just 5%, it can be removed from the floor. This will reduce the cost of

maintaining the table tennis table and area.

y Gymnasium has the highest usage rate at 25% and it is still going underlosses. So tocoverthe losses, instead oftable tennis, new features should be added to gymnasium

like dance classes for children and adults, yogaarea, kick- boxing area etc. This will

attractthe customers more and willadd up to the revenues forthe club.

y Packages for family should be introduced to attractthe customers. Various offers andschemes for membership should be introduced. Lowering the price membership to

some extent will generate additional revenues.

y Various offers should be introduced in the snackand barareato entice the customersfrom buying.

y There should be trading area surveys to understand the preferences.

ANSWER 3:

The budget is a statement which forecasts and displays the annual revenue and expenditure

ofany kind of business. The main purpose of budget is planning for future strategies of

business and also to controlthe expenditures of business. Allison Street, the Head of Centre

along with the Department Heads namely Glenys Cooper(Head of Administration), Will


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Smith (Head ofBars), Dennis Young (Head of Gym)and John Rowe (Head of Pool) should

discuss the various elements of budgeting.

The main elements of budgeting are planning, organising, motivation, performance

measurement, communication and evaluation.

Organising:

y It is atype of planning and it is essential for well structured organising to makeorganisation more effective s wellas efficient.

y A good structured organisation helps to minimize losses due to duplicate work orunclear objectives. The work force is more efficientand they know exactly the tasks

they are performing and where are they leading the organisation in the direction of

their objectives.y A well organised company has a competitive advantage in the market place. Not only

the company earns high profits, but repeat business is enhanced.

y The company gets what it wants withoutany deal of compromising.y It can be a cheap as wellas some operators let you go free ifthe number of

participants are large enough, usually 12. Traditionally the money saved is shared

between the participants.

Planning:

y Planning is essential for decision makers to make guidelines and goals for futuredecisions.

y Planning enables a managerto exercise more control in a situation, establish goalsmore proactively and consider contingencies.

y Planning helps to easily quantify the goals and acta mean for measuring success.y Planning helps to insure thatalogical set ofactions are implemented thatare

consistent with the values and priorities ofthe decision maker.

y Planning enables allocation of resources like staff, materials and time in an orderlyand systematic manner.

Evaluation:

y Itasses the value ofthe value ofassignment, organisation ora service.


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y It helps the organisation to achieve theirtargets.y It facilitates the success rate and also enables to identify changes required.y Variations can easily be calculated.y It makes possible the analysis of budgeted results along with the current results.

Communication:

y This facilitates ease in transfer of knowledge between the employees.y Ideas can be betteraddressed.y Helps to understand others.y Effective self control.y Makes one more popular.y Better rate customer satisfaction due to good communication.

Control:

y It helps to assess the current situation in comparison with the plan.y Helps to improve the firms value.y Implement better managerial skills.y Improved product quality.y Helps to reduce wastage of resources.y Implementation ofadvance technology foe effective controlling.y Helps in improvement of performance of staff.y Effective in controlling cost.

Motivation and performance measurement:

y Motivation acts as the catalystto improve the creativity and productivity ofthe staff.Motivated staff can effectively deliverthe work with fewer mistakes.

y Motivated work- force feel secure abouttheir job and are more valued in thecompany.

y It helps to create an environmentand culture of high achievers.y It helps to reduce sick days and absenteeism among employees.y The rate ofturnover is low as wellas it helps to attract more talent forthe company.


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ANSWER 4

There are severallong term sources of finance as options forDan Brenna forthe funding of

future expansion of Fitness First Group. The mostappropriate sources oflong-term finance

suitable for Fitness First Group can be: 1)Bank Loan, 2) venture Capitaland 3)leasing.

Bankloan:

Bank is the most popular source of finance and in UK nearly 45 Billion has been borrowed

by small firms from banks to finance theiractivities.

Advantages:

y The interest paid along with principal helps to gain the tax benefits i.e. waiver oftaxforthe tax payer.

y The organisation retains the ownership ofthe property afterthe entire loan repayment.y There is much financial flexibility.y It helps to maintain a better cash flow.y Bankloan helps to maximize financialleverage.y It simplifies cash flow management.y Borrower ofthe loan is the legal owner ofthe property or equipment.

Disadvantages:

y There is risk oflosing the assets as the bankloan have a recurrent paymentrequirementand ifthe firm does not have enough operating income there could be

difficulties forthe firm.

y Some time bank charge high amount of interest overthe principalamount. So try topay as much debtas possible in orderto reduce the loan amountas wellas the

interest.

y There is risk of default on payment which could lead to a damaged credit history ofthe borrower.

y The collateral i.e. security forloan is another issue foraccepting bankloan.y Additional guarantees.


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While taking bankloans it is always advised to set clearthe terms and conditions of buying.

There are also opportunities to negotiate on the debts from banks as there are many

competitors in the market offering debts forthe firms on negotiable terms.

Venture Capital Investment:

Venture capital is a means of financing the start, development, expansion and take- over of

business ofthe company. The venture capitalistacquires a significant portion ofthe share

capital in return for requisite amount of funding.

The Advantages of venture capitalare:

y The venture capitalist provides an ongoing strategic, financialand operationaladviceto the company.

y They nominate the directorappointed to the company from the board which isinvolved in strategic direction ofthe company.

y It helps the firm to acquire network both in domestic as wellas international markets.y They help to acquire experience in preparing a company to facilitate trade sale.

Disadvantages:

y The venture capitalist could be reluctantto invest in a company on along term.y Raising a venture capital is nota cheap option as arrangement cost can run upto six

figures.

y The venture capitalist can have interest in taking overthe firm.y They have a great influence on the strategic decisions ofthe firm.y The deals with venture capitalare usually time consuming.

Leasing:

Leasing is a way of getting the use of plants and equipment or office premise without paying

the full costallat once. The operating leases are taken when one has to use the equipment fortime less than its full economic life. Leasing is justlike renting a part of machinery. The

business pays an amount on regular period for using the equipment butthe ownership belongs

to the leasing company.


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The advantages ofleasing are:

y Leasing of equipments on shortterm is cheaperthan buying the entire equipment.y There is no deposit requirement forleasing which enables the working capitalto be

employed for more profitable purpose.

y As the cost ofleasing is known from start, it enables ease in financial planning.y Limited risk ifthe value ofthe leased asset falls.y As equipments depreciate, leasing enables to reduce the risk of depreciation as the

equipments can be replaced easily.

y The period oflease can easily be extended atthe later years.Disadvantages ofleasing:

y More expensive in the long run as the leasing company charges fees, this makes thetotal cost greaterthan the original cost.

y The lessortakes the risk of equipment becoming obsolete and the assumes theresponsibility of repairs and maintenance and insurance ofthe equipment.

ANSWER 5:

Particular 01/10/09-

31/03/10

01/04/10-

30/09/10

01/10/09-

30/09/10

01/10/09-

30/09/10

Revenue 866,250.00 883,575.00 1,749,825.00 1,749,825.00

Expenses

Rate & Insurance 128,750.00 130,038.00 258,787.50

Fuel & Power 50,500.00 50,500.00 101,000.00

Repairs & Maintenance 37,500.00 37,500.00 75,000.00

Chemicals 18,000.00 18,000.00 36,000.00

Security 25,500.00 32,000.00 57,500.00

Cleaning Materials 12,500.00 12,500.00 25,000.00

Salaries 257,500.00 267,800.00 525,300.00

Salary related costs 64,375.00 66,950.00 128,750.00

Depreciation 20,000.00 20,000.00 40,000.00

SnackBar Supplies 52,500.00 52,500.00 105,000.00

Licensed Bar Supplies 42,000.00 42,000.00 84,000.00

Head Office Overhead 76,500.00 79,560.00 156,060.00 1,592,397.50

157,427.50


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Reference:

y Coombs, Hugh; Hobbs, David; Jenkins, Ellis, Management Accounting: Principlesand Applications, 2007. London: SAGE publications.

y Barrow, Colin; Barrow, Pauland Brown, Robert. The Business Plan workbook. Fifthedition-:2007. London: the Sunday times.

y Atril, Peter, 2006. Financial Management for decision Makers. 4th edition, Edinburgh:Pearson Education Limited.

y http://sbinformation.about.com/cs/benefits/a/033003.htmy http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=107

4301681

y http://www.earthlingcommunication.com/blog/the-benefits-of-communication-skills.php

y http://planningskills.com/askdan/14.phpy http://www.ukdivers.net/diving/holidays.htmy http://www.school-for-champions.com/business/organize.htmy http://ezinearticles.com/?The-Advantages-and-Disadvantages-of-Buying-a-Lease-

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5081582

y http://www.12manage.com/description_gearing_ratio.htmly http://www.investorwords.com/1258/current_ratio.htmly http://www.intoreal.com/bites/objects/balance_sheet/bal_sheet5B.htmy http://www.allinterview.com/showanswers/56992.htmly http://www.bizwiz.ca/sales_to_fixed_assets.html

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Final Accounts Assgnmt