Introduction
The 2020 ROCE is less than that of 2019. This is because of the increased bank overdraft and an increase in the Loan stock.
The existing shareholders experienced a loss in the amount of profit in 2020.
The margins of profit in 2019 are above average at 53.56% which means that the management was good and this may attract more market entries.The low margin of 2020 is due to poor performance and a negative gradient for improvement.
The profitability ratios of 2019 are generally higher than those of 2020. This is because of the poor decision making and performance of the fiscal year of 2020.
The 2020 ratio is higher which means that it is more liquid but is slightly lower than the average ratio for most businesses. A liquidity ratio of more than 1.5 is desirable as it implies ability to raise funds quickly (Saeidi, 2012; Abdul, 2017). However, the level is relative to the nature FridgeFeeze Plc which has high receivables as shown in the balance sheet.
The liquidity ratios for both years are in the range of the average for most companies (Voulgaris et al, 2002). For an improvement in the levels of inventory there should be an increase in the availability of funds (Kumoro et al, 2020; Masud et al, 2016). This will improve the company’s liquidity and consequently, the ability to pay off creditors.
Gearing Ratios
The money borrowed in 2020 was a bigger proportion which gives the result of a shooting gearing ratio. This is a big risk to the company because of the financial burden it posses to the next fiscal year (Susanti, 2020; Vologo et al, 2018). On the other hand, it is beneficial because of the tax relief it gives to the company.
The 2020 interest cover is low by a big margin and this will cause problems to the lenders as their interest payments might be due, and the shareholders will not be satisfied because of lack of reimbursements of the unpaid interests.
Asset Utilization Ratios
The days increased in 2020 which might be tied to a drop in the demand for the products and a poor inventory control. This also lead to large proportion of trade discounts and an increase in the stock count to avoid future shortage.
As discussed earlier, FridgeFreeze plc lack proper decision making which leads to the poor credit control and this increases the ARCP as shown in the evaluation.
The 2019 payment plan is generally a failure because the long period will cause a major liquidity problem and a bad debt. This will cause the possible cash discounts to disappear.
Investor potential
The 2020 P/E ratio is high and this shows that the business has a potential of growth.
The liquidity of the company in 2018 is slow moving when compared to that of 2017.
Limitations of using ratio analysis
- The ratios in this case could possibly have errors in the accounting stages because of calculation failures.
- The trading activities often vary in the trend, and the financial report could fail to showcase the peak and off-peak seasons.
- The financial reports often omit key figures of an entity’s operation.
- A company that has fixed assets will be at a disadvantage as the details might be excluded in the financial reports (Saleem, 2011).
- The different patterns to a company’s liquidity and profitability can sometimes be complex which will be hard to solve by just using the ratios.
The increase in the price per units did not give a change in the net profit, as it still remained at zero.
Assumptions That Underpin the Break-even Point Model
The break-even point only applies when the sales prices are equal at all stages of output, which is highly unlikely given the constant growth or decline of entities in the business environment. According to the model, the production and sales of goods are equal (DeYoung, Kowalik and Torna, 2018). While real events in the business environment can oppose that in every possible way, it is also not logical. The two events mostly vary in the prices because of either making losses or profits.
In today’s business environment, a recommended model is the one that can apply to multiple products, and in the case of the break-even point that only applies to one, it becomes a challenge.
The break-even point ignores the semi-variable expenses since its total cost can be classified into fixed and variable costs only.
In some situations, the cost of making the product and the price of the product can differ but the model assumes it to be constant which is clearly a disadvantage.
In the practical world, every financial element cannot be constant. This model tends to keep the selling price and cost expenses linear which disadvantages the equation.
It is also considered not correct to project the coming outcome with the use of previous functions in relation to keeping the function at a constant bay.
Long-range evaluation should use different tools as the break-even model is only applicable to short-range since the cost-linear-output is linear in a small range.
The analysis above has not detailed the profits, they are not just a function of outputs according to the practical fact, but involve some factors like technological change and improvement in the business.
When you base the break-even model on accounting figures, it is subjected to different disadvantages as a blockage to the structured costs. It could be of importance if the relevant company has a good accounting system.
Sales revenue and expenses cannot be handled easily by the break-even analysis. This is as a result of fluctuations in the expenses incurred during sales and poor results from the changes in output and sales.
The structured form of this model does not include provisions for taxes; corporate income taxes are usually an important player in the accounting statements. Sometimes the price of the output is not given and the model assumes that it is. The type of demand curve is only real in conditions where there is perfect competition.
A Source of Both Internal and External Finance That Can Be Used by Companies to Finance Further Investment Programmes
Equity Investment
Equity investment refers to a company giving up a part of ownership of the entity to one or more investors in exchange for funds. It is typically applicable to companies that are on the verge of quick growth (Lall et al, 2020). This type of funding is particularly beneficial to private entities, as it keeps the business from debt and the responsibility of repaying in instalments (Brown et al, 2020). On the other hand, the ownership you gave up means the investors will be part of the board members and make decisions on running of the business.
The investors will gain from the agreement if the value of the principal amount they invested increases. This is usually reimbursed as dividends and capital gains. This type of investment encourages the investors to stake a bigger amount as it would give a bigger reimbursement of profits despite the big risk they are taking.
The significance of equity is that it shows the importance of an investor’s stake in an entity, which is represented by the fractions of the ownership shares. This partial ownership gives investors an opportunity to get those dividends and capital gains as soon as the firm starts to grow.
When shareholders are paid earnings and a portion of the earnings remains, they are referred to as retained earnings. This can be converted into savings because they are part of the net profit that the company has made and later used to expand the business or any other expense that will benefit the company. For a company that has been operating for a long time, retained earnings are usually a big component of the shareholder’s equity and the figures can sometime exceed the amount invested initially. Capital gains as stated are above are usually as a result of a rise in the market value per share.
The investors can easily be attracted to investing since they are excluded in the sharing of the losses. Instead in such a case the company will sell the part of the assets that are equal to the shareholders’ equity in order to reimburse for the costs incurred.
Budget
A budget is referred to as the assessment of potential income and expenses through a specific period in the future and is often evaluated and structured in a timed basis. Budgets are used widely in cases where money spending is involved. In the financial world, budget is explain as s microeconomic model that displays activities made when trade-offs takes place.
When trade-offs happen, profits are usually projected and in a systemized budget it is assumed that revenues equal expenses in the bottom line, while in the case of revenues exceeding that would be referred to as a deficit budget.
When a company sets a budget, it considers the strategic objectives written for that fiscal year. The strategic objectives are usually set as the long-term goals of the company, and usually dictate what the company has to do to realize its full potential.
If an objective is put in place at the opening of the fiscal year, the company now answers the question of how to achieve the goals. This is where the budget comes in to show figures of the projected increase in profitability or a rise in the market share for the entity’s product (Bhattacharjeeet al., 2017). The company’s objective are therefore dependant on the basic factors like budgeting which helps a company realize its objective in the specified period of time.
The relationship between budget and strategic objectives is explained as interrelated, because the budget will follow the company’s objective and the objectives will be dictated by the funds available in the budget of the company.
In order to understand how the relationship of budgeting and strategic planning works, it is significant to study the reasons for strategic planning. For companies in the growth stages, planning is considered a marketing tool in the business funding process (Mauro, 2019). In the process of growth of the business, strategic planning transforms to a process of evaluating and giving feedback to the market changes.
In addition, the strategic planning process can also be used as a way to raise capital for the company when it basically directs and controls growth of the company. Formulating a useful budget is hard process (Rigby et al, 2020). It exceeds directing a bunch of figures and instructing a team. However, participating in the process of making a budget is useful to the communication of the employee and the management.
Budgets are keenly made to be trusted by employees as being fair and accountable which will project the performance of the employees over the period it has been made for. Strategic plans give the basis for budget planning in the form of guidelines, procedures and tactics for acquiring and applying the useful materials to realize the directions involved. Planning sparks the development of the budget (Bayrakdaroglu, Mirgen and Kuyu, 2017). The funds of the company maintain the planned structure and are needed to care for the varying and fixed expenses related to the company. The common term used to refer to the expenditure is “operational commitments”. Section of the annual budget making process is evaluating the cost of the operational commitments and if they are a main concern in the activities that balance the activities coming from the direction of the strategic planning efforts.
Funding is not a compulsory element in planning; relocation of resources could also be an element of planning supported by new procedures. In specific scenarios, the strategic planning ideas might result in a recommendation to provide fewer resources to certain ideas. An effective planning structure, displays all the possibilities that try to accomplish projected results.
Evaluation of the budgeting process
The board of a company is responsible for appointing the budget makers. In a company, the staff is usually more informed about the basic operations of the business and is reliable in the budget making process. What they present to the board is a draft of their suggested budget which goes into the vetting process.
Big investors require budgets for the next fiscal years at an early date as compared to those of small seized businesses. The earlier made budget has more time to be made feasible. For this to be made possible, the peak season of the business should be identified and give a time when the party responsible for making the budget can adequately focus on making it.
The budget items and the accounting state should match to give room for a simple relation between the budget and the actual figures. Accounting anomalies especially in the accounting statement exist with the corresponding budget line items and can result in budget distinctions.
Budget evaluation is the last step in the budget process when there is evaluation of how the company resources have been spent. It is a determinant of the effect that funds have had on the business operation and answers if they were used appropriately. For this final stage to be resourceful, the assessment of the budget must be carried out by a different party from the one that created the budget.
Reference List
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