Provide Financial and Business Performance Information

Ratio Analysis

Although, there are number of techniques available to ETG’s managers to interpret and evaluate their financial outcome like common-size, vertical, trend analysis and others, but out of all, ratio analysis considered best. The reason behind this is it helps to make quantitative expression, comparison or relationship between two or more element of the financial statements. Moreover, different type of ratios helps to know the reasons for deviating profits and financial health of an entity (Ak and et.al., 2013). In addition to this, comparative analysis over the years helps to examine that whether company’s performance got increased or decreased in current year. With reference to Ethical Trading Group (ETG), financial performance analysis has been conducted here under:

Analysis of Liquidity Performance

Liquidity measures that whether company has enough or sufficient amount of short-term resource or not to make short-term deferral payments on right time (Lim and et.al., 2013). In 2014, ETG’s current ratio (CR) has been improved from 1.58:1 to 1.85:1. Vast increase in CA from $6417 to $7592 by 18.31% and a little bit increase in CL from $4067 to 4104 by 0.91% are the reasons for high growth in CA. It is a favorable sign of ETG’s liquidity position which entails that ETG enhanced its resources by maximizing the amount of cash, inventory, receivables and other CA to repay suppliers on right time. But still, as company aims to achieve idle ratio of 2:1, henceforth, it can be interpreted that managers needs to pay a little more attention to maximize their CA and pay-off creditors (van den End and Kruidhof, 2013). However, on the other hand, quick ratio got improved from 1.05:1 to 1.23:1 and exceeds the target ratio of 1:1. It demonstrates that ETG enhanced its liquidity performance to a great level and now, it became able to meet their short-term obligations appropriately without having closing inventory (Marozzi and Cozzucoli, 2016).

Analysis of Activity/Efficiency Ratios

Receivable turnover ratio got improved from 4.74 to 5.26 times, resulted in minimized receivable days from 76.96 days to 69.41 days. It indicates that managers took decisions to get back earlier from the debtors for effective cash management (Hosseini and et.al., 2013). Further, high stock turnover ratio shows that ETG has sold its inventory items and goods instantly. At the same time, improvement in assets turnover ratio from 0.82 times to 1.02 times depicts that corporate assets are utilizing in the best manner to generate high revenue.

Analysis of Profitability Ratios

ETG aims at getting larger profitability on their total income or revenues. In 2014, its Gross profit ratio (GPR) dropped down from 29.73% to 28.69% is a clear indication that this year, company generated less return on their sales (Lartey, Antwi and Boadi, 2013). Less growth in turnover by 29.95% as compare to cost increase by 31.89% is the reasons for poor performance. Furthermore, its Net profit ratio (NPR) got inclined from 5.79% to 6.29% mainly due to effective control over indirect expenses indicates that this year, ETG performed well and generated more return on total turnover (Innocent, Mary and Matthew, 2013). However, ROA has been enhanced from 4.74% to 6.39% by 34.89% due to rise in net earnings is a favorable sign of ETG’s performance.

Analysis of Solvency Position

Debt-equity ratio came down from 0.09:1 to 0.07:1 is a sign of decrease in investment risk due to decline in debt mix by 17.18% and 0.07% more use of equity capital. It indicates that managers are focusing on risk minimization by decreasing excess interest burden of long-term loans (Sohn and Kim, 2013.). As a result, ETG’s interest coverage ratio got improved from 14.76 to 19.04 times indicate that firm increased its capability to meet-out their debt interest obligations appropriately, henceforth, it can be said that solvency position got improved.

Business Risk

With the changing era, there are different types of risk can be arisen in the front of business. It is mainly refers to the possibility of less net earnings as compare to the anticipated or target return (Blackman, 2014). Regards to Ethical Trading Group, several important type of risk along with their implication and responsibilities are enumerated hereunder:

Liquidity Risk

This risk refers to the situation where ETG will not be able to convert its short-term equity into liquid means cash fund. For instance, fall in organization capability to convert its inventory items or goods into cash may lead to arise cash problems. It may arise problems, henceforth, Certified Financial Manager (CFO) is liable to maintain adequate cash funds every point of time to mitigate the possibility of occurrence of liquidity risk,

Operational Risk

It is regarded as failure of business to carry out their operations and routine functions successfully. For instance, fall in workers’ productivity, insufficient skills and competency level, poor commitment, ineffective cost control, poor product quality and ineffective consumer compliant handling procedures may be some of the element of such operational risk (Blackman, 2014). Its potential impact will be harmful that may results in decline in turnover, profitability, customer base, strategic capabilities, competitive strength and damage reputation as well. It is the responsibility of every departmental manager to monitor their staff performance on a constant basis so as to conduct hazard-free operations.

Market Risk

Change in extragenous variables like sudden fall in consumer demand, high rate of inflation, high cost of borrowing, technological advancement, political instability, change in laws and regulations may arise market risk (Risk Management, 2013). Although they are outside the control of ETG, but still, top-manager like directors, executives, chairman and others are accountable to keep their eye upon volatile market conditions and make plans accordingly to overcome the same. Top-manager need to forecast or anticipate volatility in external environment and prepare plans, strategies and decisions accordingly to meet the targets.

Future Cash Flow and Budgetary Control

Importance of Budgeting

Budgeting is regarded as one of the important process of creating plan in order to analyze the future expenses to manage all the income earned by an entity from different sources. There is various importance of budgeting which is given as follows:

• It helps in creating a spending plan for an entity for a particular year
• It used as one of the tools of forecasting that keeps on track on the finance held with an enterprise
• The future financial requirements of an entity are analyzed in order to control them within a given time frame

Types of Budgeting and Frequency

Budgeting helps an entity in order to monitor their current financial requirement by meeting all kinds of expenses and losses (DRURY, 2013). The preparation of budgets will help in reducing external market pressures which are reduces by an entity by preparing different variety of budgets. There are various kinds of budgets which are given as follows:

Cash Budgets

The cash budgets are prepared by an entity which includes all expenses and income incurred in an enterprise. All these expenses and incomes will be involved in dealing cash within the business enterprise. These budgets are prepared on a monthly and yearly basis in order to ascertain the cash balance.

Managing Cash Flow

The cash flow of an entity will result into approaches such as positive and negative cash flows which will incurred in an enterprise (Bhowmik and Saha, 2013). The lower balance in the cash flow statement can be improved by reducing expenses and increasing all sources of income. The higher cash flow at the same time is not favorable for the business entity. This is not fruitful as availability of higher cash balance will increases pressure on an entity in increases profit. The increasing profit will created higher taxation pressure on an entity. The increased and situation of high cash flow in the business can be rectified by making investment. The increasing ratio of investments will in turn created interest on the amount invested by the corporation for every year out of the total year of investment. The balancing position created in an entity will further helpful for an enterprise in enhancing their overall profit within an entity.

Future Funding Requirements

Debt or equity

There are two different forms of sources of finance that can be used by an entity in order to fund their business requirements by taking two different methods which are given as follows:

• Debt- It is regarded as the cheapest mode of finance which an entity can take up by paying just interest rate on the bank loan taken by an enterprise (Figge and Hahn, 2013). The collateral security is used by the business in order to give guarantee against the amount taken by an entity from external parties.
• Equity- The ownership will be provided by the owner to all the shareholders who used this form of source of finance. The shareholders will get dividend in return for taking valuables from all the stockholders who will offered with share, voting rights in the business.

Leverage Ratios

 The financial performance of an entity will be assessed by using different leveraging ratios that assess an entity’s financial resources (Ahrendsen and Katchova, 2012). The leveraging condition of the business will help in taking further business decision of taking new opportunities in the form of taking finance from external parties.

Future Funding Options

There are various forms of funding available with an enterprise are given as follows which provides finance to an entity in accomplishing funding requirements:

Microloan

The loan can be taken by the business for short term with less amount and further complications in the business.
Venture capital- The entity can take this source of fiancé which is less risky for the business who establishes their new business.

Regulatory and Statutory Compliance

Corporations Act

The current act is recognized as common wealth act of Australia which frames rules which deals in regulating different business entities. This kind of act functions at federal and interstate level of the business (Abbasi, 2014). The organization structure in regulating their business functions such as partnerships and managed investment schemes. This section is regarded as the principal legislations which help in regulating different companies lies in the Australia. It regulates different matters of funding an organization in seeking further business opportunity.

Financial Reporting Requirements

These financial reporting standards need to be accomplish by different business entity in order to operate their business functioning. The generally accepted accounting principles are used by an entity in improving their existing business. The business operations will gets smooth as it helps in preparing different variety of financial statements that helps an entity in ascertaining the financial performance of an organizations (DRURY, 2013). The accounting assumptions and the accounting principles are used in preparing income statements and the financial position statements.