With the rapid changing market conditions, business managers and executives require to carry out an evaluation and assessment of corporation’s financial position. By making analysis and interpretation of business performance, companies can identify those areas where they lack or did not perform well, and make decisions accordingly. Ethical Trading Group (ETG) is Australian organization which operates a wholesale and number of retail outlets across different states of Australia. The aim of the company is to deliver sustainable and eco-friendly products to the customers to support the development of both the local as well as international community. The aim of present assignment is to carry out an analysis of ETG’s performance and financial status for two consecutive years, 2013 and 2015. In order to examine corporate position, range of ratios like liquidity, profitability, liquidity and leverage ratios will be used. Moreover, with the changing era, there are many type of risks exists in the market which may bring hurdle to the entity for conducting operations successfully. Therefore, this report will also examine the various type of business risk that ETG may face i.e. market, political, operational, credit and liquidity risk. At the end, report will assess the importance of cash flow management and budgetary control for ETG’s success.
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.
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:
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,
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.
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:
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.
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:
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
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.
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- The business corporation act of Australia has determined several responsibilities of directors in order to enhance their responsibilities in organizations. There are various duties of company’s director which are given as below:
- Exercising power and duty to take care due diligence in informing the financial position of an entity.
- Making decision in the business related to the good faith in the best interest of company
- Using existing powers held with an entity in order to gain competitive advantage over its rivals.
Meetings and Notices
The notices of conducting meetings in an organization are one of the important modes of communication as annual general meetings of the business entity (Brigham and Ehrhardt, 2013). The important matters of the business are discussed in informing different agendas in the meeting. These notices will supply to the different business users such as shareholders and proxy or representatives of all investors. The notices of the meeting need to be prepared by following standard format by considering various frameworks.
It is a cooperative reform framed by the Australian government along with additional support from different legislative authorities (Ahrendsen and Katchova, 2012). The primary aim of this this regulation is to protect the interest of all consumers from unfair trade practices of different business users. The laws are framed to avoid the consequences created by an entity due to excessive competition exists in the external business environment. The acts are enforced by an entity to safeguard the business from malpractices of every business entity.
3 areas of ETG
There are various areas which need to be considered by this business in operating their entity successfully which are given as below:
- Honesty and integrity needs to be maintained by an enterprise in forming good trade relations
- The vision and missions will be transparently presented among all kinds of customers
- The quality factors needs to be consider by this entity
PAYG- This form of tax applied on the Ethical trading group which defines as pay as you go which is payment of the tax in several installments as this entity has several investments.
BAS- These activity statements are prepared by this firm in order to assess the monthly taxation of the business.
Income Tax- The income tax is applied on the business income earned by an enterprise which imposes liability of paying tax in a particular year on a business entity. The taxation liability can get reduces by taking relief.
It can be articulated from the above mentioned report that Ethical trading group deals in different products or services are operating their business by complying with all regulations. The business entity has complied with the IFRS and GAAP requirements which are regarded as the apex authority in the business (Brigham and Ehrhardt, 2013). The financial performance of an entity will be assessed by applying ratio analysis of different categories. The current focus of this entity is on defining different taxation and legal regulations of the Australian government. The project has emphasizes on different finance and funding options used by an entity in accomplishing their business requirements.
It can be recommended to this enterprise to improve their existing business performance by maintaining their current financial conditions (Abbasi, 2014). The efficiency will be increases by making higher investments on a global level to get support from all the business entities that are using different financial reporting frameworks. In order to enhance financial performance, ETG needs to take following actions, mentioned below:
- ETG can be recommended to make some policies and decisions in connection with stronger receivable management so as to gather cash quickly from the receivables and minimizes the risk of bad debts.
- Effective cost-control mechanism like negotiation with the creditors to buy material at cheaper prices will also assist firm to control its cost of sale and resulted in maximum gross margin.
- In order to achieve target or ideal current ration, ETG can be suggested to maximize their short-term assets like receivables, cash fund, inventory and other current assets and minimize their current obligations. It helps to strengthen liquidity position of the business to a great extent.
- ETG must decrease the composition of debt fund till the time, when D/E ratio came to 0.50:1 as at that level, risk is considered acceptable and manageable.
- Abbasi, H., 2014. Role of Management Accounting Information System in Organizations. Journal of Business and Technovation.
- Ahrendsen, B. L. and Katchova, A. L., 2012. Financial ratio analysis using ARMS data. Agricultural Finance Review.
- Bhowmik, S. K. and Saha, D., 2013. Sources of Finance. In Financial Inclusion of the Marginalised (pp. 61-71). Springer India.
- Brigham, E. F. and Ehrhardt, M. C., 2013. Financial management: Theory & practice. Cengage Learning.
- Dollery, B. E., Kortt, M. A. and Grant, B. J., 2013. Funding the Future: Financial sustainability and infrastructure finance in Australian Local Government.