Introduction of Financial Accounting for Decision Making Assignment
The report will be highlighted about the financial performance of a British food company trying to capture market share and enhance their business turnover. Associated British Foods PLC is a multinational food processing and retail company located in London and their division of world’s second largest producer of sugar and bakeries East in Europe. The property vision is a major manufacturer for brand and private grocery products including the brand and others across the table countries freedom in Italy in the UK region (ABF, 2021). The company was founded in Canada and the investments rapidly increased to capture the market after 1950.
This report is physically covering different kinds of financial ratio analysis on profitability, efficiency and equality, which are incorporated in market growth. After the pandemic situations different kinds of Management related tools would be utilized which are discussed about the financial earring to capture the market. Financial to her physical utilization for understanding the critical financial ratios that depend on lower terms of all administrative expenses try to mediate and expand their management productivity (ABF, 2021). Management operation cost is dependent on the sales margin, which are contrary to the liquidity ratios of the company and ABF group try to utilize this kind of ratios for decreasing their management cost.
Analysis of financial performance
This part of the study will discuss the financial performance of Associated British Foods and evaluate how the company has performed financially within the last few years.
A) Ratio analysis
Ratio analysis is the way to know the liquidity position of the company, profitability of the company, solvency and after all the financial stability of a business organization. It is necessary to know the financial viability of a company to gain sustainability in business. In this section the financial ratio analysis of the renowned company, Associated British Foods will be done.
B) Profitability ratio
According to Chasanah and Sucipto (2019), profitability ratio of a company helps understand the state of profits like net profits, operating profits, Gross profit and others. Profitability ratios class of financial metrics that are used to assess the business abilities for generating the earning related revenue. Operating cost with balance sheet Assets and shareholder equity are utilized for specific points of time that compared with the consideration of company’s application internally generated the income (Bandy et al., 2021).
Net profit ratio of Associated British Foods
(Source: Created by author)
In the above graph, it is seen that the net profit of Associated British Foods is in a decreasing order. The profits of the company are decreasing in order as per the graphs of the associated British foods. Mein reason behind the reducing profits is the impact of covid 19. The covid reduces the sales of the company and increases the overall cost of production. The pandemic also increased the operational and administrative costs of the company but at the same time, it was also reduced by some strategic changes in the last couple of years. At the same time, this caused the company to face a lower amount of profit but in the last year the company managed to reduce their overall costs, as a result, the company enjoys a normal profit of 3.59 million.
C) Efficiency ratio
The efficiency ratios clearly define the ability of the company to use its assets in generating a profit and to overcome the losses. The efficiency ratio is mainly followed by the assets turnover ratio, inventory turnover ratio and the receivable turnover ratios. Through efficiency ratio the state of assets can be understood and liabilities can be managed accordingly (Arasy and Handayani, 2020). This kind of ratio is important to analyze the improvement of translations on profitability. The assets turnover ratio reveals how efficiently the assets of a company generate sales in a company.
Efficiency ratio of Associated British Foods
(Source: Created by author)
The figure 2 shows a fluctuating scale of assets turnover ratio from the year 2017 to 2022 respectively. From the year 2020, the assets turnover ratio has increased in 2021 from 0.20 to 0.22 (Annreports, 2021). The company has been able to utilize its assets in the year 2021 more than the year 2020 and generate profits.
Inventory turnover ratio:
| inventory turnover ratio | ||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | ||
| cogs | 3300 | 2300 | 3000 | 2600 | 1900 | |
| average inventory | 2000 | 1200 | 1800 | 1000 | 600 | |
| inventory turnover | 1.65 | 1.916667 | 1.666667 | 2.6 | 3.166667 |
Table 1: Calculation inventory turnover ratio
(Source: Created by learner)
According to the word of Farooq (2019), the inventory turnover clearly suggests the clearance and rolling of the inventory according to the sales. The inventory turnover stands at 1.65 in 2021, 1.91 in 2020, 1.67 in 2019, 2.6 in 2018 and 3.16 at the end of the year of 2017. The company used its stock very efficiently in the years of 2017 and 2018 respectively. On the other hand, they cannot manage the same in 2020 and 2021. These stats reflect that the company has clearly faced some issues regarding their stock clearance.
Receivable turnover ratio
| receivable turnover ratio | |||||
| 2021 | 2020 | 2019 | 2018 | 2017 | |
| net sales | 5500 | 4500 | 6000 | 6500 | 8000 |
| average receivable | 3000 | 3500 | 3600 | 4500 | 5000 |
| receivable turnover | 22 | 15.42857 | 20 | 17.33333 | 19.2 |
Table 2: Calculation of receivable turnover
(Source: Created by learner)
As per the statement of Yasir and Amman (2021), the receivable turnover ratio helps to states that the company’s collection power of their receivable according to their sales respectively. According to the calculation, the company had abilities to collect their receivables in their years of 2017, 2019 and 2021. The stats clearly show that the company lost the collection ability in the year of 2020 because of the pandemic on the other hand the company regains their ability in 2020 with a receivable turnover of 22 respectively.
D) Liquidity ratio
Liquidity ratio helps understand how far a company can pay its debts and maintain the margin of safety in business. The investors and creditors notice the liquidity ratio, as they have to know the liquidity status of a company. This ratio is known as the evaluation of company financial royalties of area that calculates dividing the total liabilities for shareholder equity. This reflects the ability to cover the outstanding debits. It is detected on the ability to cover the outstanding debts even the business expansion is followed. Liquidity ratio is an important part of the classical financial metrics for understanding the debater’s ability to pay the current applications without raising the external capital. In this context the common liquidity ratio consists of quick ratio, current ratio and of sales for outstanding for determining cover short time applications of cash flow purpose that solvency ratio on sending to the longer-term period basis (Herdiyana and Endri, 2021).
Liquidity ratio of Associated British Foods
(Source: Created by author)
The above graph shows a well liquidity position of Associated British Foods. As per the report of Annreports (2018), in the year 2018 there was a decreased in the liquidity ratio of the company but in the year 2019, 2020 and in 2021, the liquidity ration became 1.82, 1.82 and 1.86 respectively showing an increase.
D) Financial gearing /Debt Equity ratio
According to Amanda (2019), debt equity ratio reveals how far a company is able to finance its operations through debt versus wholly owned funds.
Debt Equity ratio of Associated British Foods
(Source: Created by Author)
Figure 4 above shows that the debt equity ratio fluctuated year to year and in the year 2021, the ratio was lesser than the year 2020. Hence, it is required to be increased in the future.
E)Critical analysis of financial ratios
From the above discussion, it can be remarked that the profitability ratio of Associated British Foods became lower from year to year. This means that the net profit became lower from year to year up to 2019. In the year 2021, the company’s administrative expenses has increased that in result decreases the margin of profit and hence it decreased then after the year 2020(ABF, 2020). In addition to that, the efficiency ratio of ABF did not increase as the company could not utilize its assets and manage its liabilities the company in the previous five years. Therefore, both the sales and value of assets of the company should be increased. Profit of the company is required to be increased in the future. On the contrary, the liquidity ratio of the company has been increased. This means ABF has been able to utilize its assets to repay its debts quickly in spite of the pandemic situation of COVID 19 (Annreports, 2019). The debt equity ratio increased in 2020 but it decreased again in 2021 (Annreports, 2021). However, in order to improve its operations, ABF is required to utilize its funds in the coming years.
F) Recommendations on financial performance
Based on the above analysis, the following are the recommendations through which improvements can be done in ABF:
- In order to increase net profit, the sale of ABF is required to be increased in the future and with this, the administrative expenses will have to be decreased. This will increase the amount of net profit.
- The positive liquidity ratio of ABF will help the company attract investors and thus, the company will be able to make a strong capital fund.
- The loans should be paid down to improve the debt-equity ratio in the company. Further, improved inventory management will also help the company improve debt-equity ratio.
1. Budget making of Associated British Foods
A) Advantages and disadvantages of making budget for the next year
Advantages of budget making
Budget making has lots of advantage in business. Funding a company can be managed in an effective manner and hence pioneers in business can be able to utilize resources of organization. Secondly, due to right budget making, all the resources in all departments can be utilized in an optimum manner and thus, the financial professionals can make their decision-making in their company. Thirdly, price escalation in a project is an important manner. Proper budget making reduces the chances of risks of price escalation of a particular commodity. Finally, it can be said that through budget making, the business pioneers can make a robust plan for the future. One of the major advantages of the budget making process is increasing the activity coordinates across different departmental activities.
In the food-associated companies who had raw material supply to the finished goods, different individual departments are working collaboratively and interconnections take some extra expenses that increase their performance level. Budget translates the strategic planning for taking the actions to provide the excellent record of organizational productivity (Zieli?ska et al., 2021). In recent times, this budget improves the Communications of every level of employees of organizations and any requirement that arises at the middle time of year is advocated by approval from the Finance Department of the organization. It provided tools for corrective actions throughout the real location as well as what kind of raw materials should be used and proper utilisations measured by the testing departments. A feedback report is also taken from the testing and other production-manufacturing units. That is why utilisations of Finance allocation are properly applied in the whole operation (Galankashi and Rafiei, 2021).
Disadvantages of budget making
As shown by Angelia and Toni (2020), sometimes-inaccurate budget –making causes loss in organization and thus, it makes the wastage of resources in an organization. Secondly, adequate time and cost are involved in budget making and those resources go to vain if there is no positive result from the budget. Finally, in most cases, it is seen that only financial outcomes can be achieve through a budget and other aspects of a business are ignored. Hence, in those cases, budget does not become very beneficial to the business of a company. The disadvantage of the budget making process where the applied mechanical approach is not effective on a real time basis. In addition to understanding that the budget cannot motivate employees due to the lack of participation at the arbitrarily management and top level of employers can also participate in this activity (Knai et al., 2021).
Any kind of requirement cannot be approved. Therefore, the commitment about the organization’s growth properly supervised where the budget is causing the perception of fairness and any kind of resource material or installation purpose allocation activity should be monitored at the time of implementation. Additional studies were structured to reduce the initiatives where the innovation is not being fully applied and making it impossible to obtain the money for ideas. In accuracy of the budget based on the assumption where the distinct point of view is not fully applied, a significant degree of company’s revenue structure changes radically. Authorize the certain level of spending for longer supportable revenue level unless the management acts quickly into overwriting the original budget authorizations (Çolak., 2021).
B) Approaches to draw up a budget for the business
The approaches to draw up budget are the following:
Zero-based budgeting: The zero-based budgeting reflects the method of funding in the organization only based on the current project efficiency. According to the budget, any previous measures are not taken into the accounts of the company and the stats relating to the previous achievements are to be neglected. This will help the company to get an initial investment according to their current situation although the company was making losses previously. On the other hand, this measure also helps the company to get the funding program in spite of their poor performance and it will support the company from a financial background.
Rolling budgeting: A rolling budget is a budget, which is always an updated form and it, starts when the former budget expires. It starts from the previous budget. The benefit from this budget is that it is always accurate as it takes the updated figures. Further, it reduces uncertainty in business. On the contrary, it can be demotivating to the staffs as it is time-consuming and costly.
C) Critical evaluation of performance management
Performance management in an organization helps in effective decision-making through reward and incentives. According to Islamiet al. (2018), managers in an organization evaluate the performance of employees and reward them to motivate. This leads to further improvement of the performance of employees in an organization .The pioneers in the business should be aware of the economic implications and they should take the necessary strategies accordingly. In addition to that,Jang (2019) has shown that budget helps in allocation of all the resources in different departments of an organization. Hence, it is the responsibility of the financial manger to make a robust budget and make appropriate allocation of financial capital in different departments so that all the resources can be utilized by the employees enthusiastically.
By contrast, faulty budget making cannot make proper allocation or resources and thus, it will lead to wrong decision-making. Additionally, performance-based budgeting helps employees understand what resource should be utilized in what activity and thus, the maximum benefits can be gained in an organization. The performance of the entire management team was enhanced by the seminar that was taken organized by the company. The management of the company should aware of the implication of the economy and the effect on the business. Therefore, the company needs to follow a well structured strategic plan to overcome the circumstances that the company faces. The pioneers of the company managed to develop some crucial strategies to operate the business very well ad to make it goal oriented. The seminars that the organizers held impacted on the work process very well and it also became very helpful for the company.
2. Investment appraisal
A) Critical evaluation on NPV and IRR techniques and their implications on investment (Table)
The meaning of the term ‘NPV’ is Net Present Value and the meaning of the term ‘IRR’ is Internal Rate of Return respectively Kusumaet al. (2021). Both are the tools for the investment in a business organization. The pioneers of Associated British Foods want to make their losses that arose during the outbreak of COVID 19. However, the application of both the tools is shown below:
IRR investment methods in ABF
(Source: Excel)
In the above table, the NPV represents the value of 11.45and the IRR represents the value of 15% respectively. ABF made an initial investment of £50 million in its business. 10 million returns are expected every year through cash flow and thus, NPV is giving a positive return every year (Excel). IRR shows the discounted value of NPV. NPV value is to be taken here as it shows the cash-flow position in business. In the capital budgeting process, the number of different approaches utilized to evaluate any project and in this context, the fruit company is trying to take advantage and increase their business in this competitive situation. Internal rate of return is used for estimation of profitability potential that are using the and dollar amounts and refer to the discovery of the economic rate of Returns. This method is simplifying the project for a single number on the management for determining the project of Economics (Achim et al., 2021). In addition to understand that this ratio is calculated for companies required rate on a particular period that may reject the project life and will you the rate of return facing with huge amount of loss.
Calculation of NPV
| NPV | Discount factor (a) | Amount in Million (b) | Discounted Cash Flow (a*b) |
| Cost of ferry | 1 | £ 146.00 | £ 146.00 |
| 18% Discount Rate Table | Discounted cash outflow | £ 146.00 | |
| Cash inflows for five years: | a*b | ||
| Year 2021 | 0.847 | £ 150.00 | £ 127.05 |
| Year 2020 | 0.718 | £ 80.00 | £ 57.44 |
| Year 2019 | 0.609 | £ 120.00 | £ 73.08 |
| Year 2018 | 0.516 | £ 200.00 | £ 103.20 |
| Year 2017 | 0.437 | £ 180.00 | £ 78.66 |
| Discounted cash inflow | £ 439.43 | ||
| Formula of Net Present Value | (Discounted cash inflow-Discounted cash outflow) | ||
| Discounted cash inflow | £ 439.43 | ||
| Discounted cash outflow | £ 146.00 | ||
| Net Present Value | £ 293.43 | 201% |
Table 3: NPV investment methods in ABF
(Source: Created by learner)
The net present value of the company clearly suggests that the company has an average investment of £146 million. As per the word of Marchioni and Magni 2018 with the help of the NPV, there can be some serious assumptions about the future inflows that the company is going to enjoy. According to the standard, the calculations have a perspective of converting the future cash inflows in a discounted value to evaluate them at present.
B) Suggestion of methods to finance
In order to make a strong source of funds, the pioneers of ABF are required to collect capital fund from market and that can be done in many ways.
Funds from Angel investors: The pioneers of ABF can arrange funds from the Angel investors. Angel investors are available generally on different websites for lending money to business organizations. The pioneers can get high amount of money from the Angel investors. However, apart from getting money, the pioneers of ABF can get financial advice for their business development.
Bank loan: Bank loan is a very easy and simple method of collecting money for business (Adhikari et al., 2021). The chiefs of ABF can borrow money at a simple rate of interest from different public and private banks in the United Kingdom. The rate of the bank loan can differ and will depend on different factors like loan amount, years of the repayment of loan and such others. This will be a way of collecting money with fewer risks.
C) Risk and uncertainty in investment and recommendations on the same
According to Priyadarshiniet al. (2019), Risk in investment is a vital factorbecause in business investment manyfactors are involved and if those factors cannot be assumed and controlled then the risks in business will increase leading to the loss of business. Therefore the financial manager of ABF isrequired to understand the NPV and IRR methods and return from them. In the above part, it has been proved that NPV shows the positive value of investment and it gives better return than IRR. Hence, in business, the positive NPV should be taken, as this is profitable for business. One other conflict in investment is that there can be many mistakes in preparation of financial report of a company and this would reveal a faulty financial status of a company.
Net present value is expressing the difference between a company’s present value in cash flow and outflow on a specific time. It is estimated for future cash flow of the project and the present value using the discount rate of representing capital cost at any risk arises. Investments of the future positive cash flow but reducing the single present and it is deducted for initial amount in cash required of further Investments (Malakauskas and Lakštutien?, 2021). Therefore, the pioneers of ABF should always make the financial report of the company evaluated so that it can reveal the true picture of the company always. This type of evaluation can identify any change in the NPV and IRR value and that would lead to make the profits of the company.
Conclusion
In this context different kinds of ratio analysis are discussed which are helpful to expand the business and understand the investments related matters to be identified. NPV analysis is utilized to understand the financial ratios for this food company. In the present situation, the value of companies, the value of company’s assets, are produced to the market as it is produced to the bank for any kind of loan sanction, helpful for expanding the business future purpose and equity ratio increasing in every year that improves their operational ratios. In addition to understanding that this kind of utilisations is properly helpful for better business recommendations and administrative expenses are also decreased.
These companies followed the budget marketing plan properly that enacted better propositions for value as setting purpose and finding out the advantages on current market basis. Simplification of different kinds of value is analyzed to project that the common discount rate is predictable for equal risk and shorter time period analysis. This estimation is effective for understanding the multiple positive and negative cashbooks and considered in the departmental marketing analysis to enhance the market Trend. It is also considered that Bottom line analysis can be followed for capital budgeting and any kind of issues arise that are easily overcome by using this competitive risk analysis.
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