Financial Management For Global Decision Makers Assignment Sample

Introduction of Financial Management For Global Decision Makers Assignment

The report addresses the concerns faced by the writers of a company known as Smith construction limited. The report provides a comprehensive analysis of the mentioned company using an appropriate range of financial ratios that will help in calculating the areas of concern related to the change in performance. It might have occurred after the company has been incorporated. It also discusses the findings related to the possible areas of misappropriation and how internal control affects the component of the company (Pakurár,et al. 2019).

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Part One – Ratio Analysis

Liquidity ratios

Smith Construction Ltd
Year	Current ratio	Formula	Amount	Ratio	Growth
2021	Current asset	(Current Assets /Current Liabilities)	£ 110,000.00	1.57	0.48
Current liability	£ 70,000.00
2020	Current asset	£ 180,000.00	1.09
Current liability	£ 165,000.00
2019	Current asset	£ 180,000.00	1.09	0.00
Current liability	£ 165,000.00
2018	Current asset	£ 180,000.00	1.09	0.00
Current liability	£ 165,000.00
Year	Net working capital	Formula	Amount	Ratio	Growth
2021	current assets- current liabilities	current assets- current liabilities/ total assets	£ 40,000.00	0.67	0.42
Total Assets	£ 60,000.00
2020	current assets- current liabilities	£ 15,000.00	0.25
Total Assets	£ 60,000.00
2019	current assets- current liabilities	£ 15,000.00	0.25	0.00
Total Assets	£ 60,000.00
2018	current assets- current liabilities	£ 15,000.00	0.25	0.00
Total Assets	£ 60,000.00
Year	Cash Ratio	Formula	Amount	Ratio	Growth
2021	Cash and Cash Equivalents	Cash and Cash Equivalents/ Current Liabilities	£ 927,000.00	13.24	7.76
Current Liability	£ 70,000.00
2020	Cash and Cash Equivalents	£ 904,000.00	5.48
Current Liability	£ 165,000.00
2019	Cash and Cash Equivalents	£ 1,082,000.00	6.56	-1.08
Current Liability	£ 165,000.00
2018	Cash and Cash Equivalents	£ 936,000.00	5.67	0.88
Current Liability	£ 165,000.00

Table 1: Liquidity ratios

(Source: Created by learner)

Analysis: The liquidity ratio shows the ability of a company to pay off its short-term obligations and the calculation of its margin of safety through the current ratio equation and operating cash flow. The liquidity ratio of smith construction private limited shows that the company has been making exact returns over the past 3 years but they have been facing issues due to the decision-making process and the appointment of a new financial advisor James Blond.

Profitability ratios

Smith Construction Ltd
Year	Net Profit Ratio	Formula	Amount	Ratio	Growth
2021	Net Profit	(Net Profit/Sales)*100	£ 642,000.00	13.62%	-2.53%
Sales	£ 4,714,000.00
2020	Net Profit	£ 631,000.00	16.15%
Sales	£ 3,908,000.00
2019	Net Profit	£ 339,000.00	9.91%	6.24%
Sales	£ 3,422,000.00
2018	Net Profit	£ 370,000.00	12.02%	-2.12%
Sales	£ 3,077,000.00
2017	Net Profit	£ 412,000.00	15.05%	-3.02%
Sales	£ 2,737,600.00
Year	Gross Profit Ratio	Formula	Amount	Ratio	Growth
2021	Gross Profit	(Gross Profit/Sales)*100	£ 3,019,000.00	64.04%	0.76%
Sales	£ 4,714,000.00
2020	Gross Profit	£ 2,473,000.00	63.28%
Sales	£ 3,908,000.00
2019	Gross Profit	£ 2,088,000.00	61.02%	2.26%
Sales	£ 3,422,000.00
2018	Gross Profit	£ 1,880,000.00	61.10%	-0.08%
Sales	£ 3,077,000.00
2017	Gross Profit	£ 1,128,000.00	41.20%	19.89%
Sales	£ 2,737,600.00
Year	Return on Assets	Formula	Amount	Ratio	Growth
2021	Net Profit	(Net Profit /Total Assets)*100	£ 642,000.00	321.00%	314.68%
Total Assets	£ 200,000.00
2020	Net Profit	£ 631,000.00	6.32%
Total Assets	£ 9,992,000.00
2019	Net Profit	£ 339,000.00	3.64%	2.68%
Total Assets	£ 9,325,000.00
2018	Net Profit	£ 370,000.00	4.06%	-0.43%
Total Assets	£ 9,112,000.00
2017	Net Profit	£ 412,000.00	6.96%	-2.90%
Total Assets	£ 5,922,800.00
Year	Return on Equity	Formula	Amount	Ratio	Growth
2021	Net Profit	(Net Profit / Equity)*100	£ 642,000.00	17.59%	-1.23%
Equity	£ 3,649,000.00
2020	Net Profit	£ 631,000.00	18.82%
Equity	£ 3,353,000.00
2019	Net Profit	£ 339,000.00	10.33%	8.49%
Equity	£ 3,281,000.00
2018	Net Profit	£ 370,000.00	15.23%	-4.89%
Equity	£ 2,430,000.00
2017	Net Profit	£ 412,000.00	22.61%	-7.38%
Equity	£ 1,822,500.00
Year	Return on Capital Employed	Formula	Amount	Ratio	Growth
2021	Profit Before Tax	(Profit Before Taxes/ Capital Employed)*100	£ 631,000.00	-21.96%	-27.19%
Capital Employed	-£ 2,873,000.00
2020	Profit Before Tax	£ 339,000.00	5.23%
Capital Employed	£ 6,488,000.00
2019	Profit Before Tax	£ 370,000.00	5.41%	-0.19%
Capital Employed	£ 6,837,000.00
2018	Profit Before Tax	£ 412,000.00	6.86%	-1.45%
Capital Employed	£ 6,005,000.00
2017	Profit Before Tax	£ 247,200.00	6.60%	0.27%
£ 3,747,900.00

Table 2: Profitability ratios

(Source: Created by learner)

Analysis: The profitability ratios are the tools that measure the ability of the business to generate an earnings compared to its revenue and operating cost over a specific period (Nurwita, and Rodhiah, 2022). It is usually compared with the efficiency ratios. In the case of Smith Construction Limited, the company has been able to earn profits. But the company has to pay a lot to its employees. Including Smith traders Smith and James Blond even though previous people were the founders but they still take a lot of revenue from the company in terms of their compensation which takes a large part of the profit.

Efficiency ratios

Smith Construction Ltd
Year	Inventory Turnover Ratio	Formula	Amount	Ratio	Growth
2021	Cost of Sales	(Cost of Sales/ Average Inventory)	£ 1,695,000.00	339.00	52.00
Average Inventory	£ 5,000.00
2020	Cost of Sales	£ 1,435,000.00	287.00
Average Inventory	£ 5,000.00
2019	Cost of Sales	£ 1,334,000.00	444.67	-157.67
Average Inventory	£ 3,000.00
2018	Cost of Sales	£ 1,197,000.00	399.00	45.67
Average Inventory	£ 3,000.00
2017	Cost of Sales	£ 239,400.00	79.80	319.20
Average Inventory	£ 3,000.00
Year	Fixed Assets Turnover Ratio	Formula	Amount	Ratio	Growth
2021	Sales	(Sales/ Fixed Assets)	£ 4,714,000.00	1.06	0.20
Fixed Assets	£ 4,461,000.00
2020	Sales	£ 3,908,000.00	0.86
Fixed Assets	£ 4,570,000.00
2019	Sales	£ 3,422,000.00	0.77	0.08
Fixed Assets	£ 4,429,000.00
2018	Sales	£ 3,077,000.00	0.68	0.10
Fixed Assets	£ 4,545,000.00
2017	Sales	£ 615,400.00	0.16	0.52
Fixed Assets	£ 3,863,250.00
Year	Asset Turnover Ratio	Formula	Amount	Ratio	Growth
2021	Sales	(Sales/ Total Assets)	£ 4,714,000.00	23.57	23.18
Total Assets	£ 200,000.00
2020	Sales	£ 3,908,000.00	0.39
Total Assets	£ 9,992,000.00
2019	Sales	£ 3,422,000.00	0.37	0.02
Total Assets	£ 9,325,000.00
2018	Sales	£ 3,077,000.00	0.34	0.03
Total Assets	£ 9,112,000.00
2017	Sales	£ 615,400.00	0.15	0.19
Total Assets	£ 4,100,400.00
Year	Working Capital Turnover Ratio	Formula	Amount	Ratio	Growth
2021	Sales	(Sales/ Working Capital)	£ 4,714,000.00	-1.64	-2.24
Working Capital	-£ 2,873,000.00
2020	Sales	£ 3,908,000.00	0.60
Working Capital	£ 6,488,000.00
2019	Sales	£ 3,422,000.00	0.50	0.10
Working Capital	£ 6,837,000.00
2018	Sales	£ 3,077,000.00	0.51	-0.01
Working Capital	£ 6,005,000.00
2017	Sales	£ 615,400.00	0.15	0.36
Working Capital	£ 4,076,813.00
Year	Cash Flow Ratio	Formula	Amount	Ratio	Growth
2021	Sales	(Sales/ Cash and Cash Equivalents)	£ 4,714,000.00	5.09	0.76
Cash and Cash Equivalents	£ 927,000.00
2020	Sales	£ 3,908,000.00	4.32
Cash and Cash Equivalents	£ 904,000.00
2019	Sales	£ 3,422,000.00	3.16	1.16
Cash and Cash Equivalents	£ 1,082,000.00
2018	Sales	£ 3,077,000.00	3.29	-0.12
Cash and Cash Equivalents	£ 936,000.00
2017	Sales	£ 615,400.00	1.01	2.28
£ 608,400.00

Table 3: Efficiency ratios

(Source: Created by learner)

Analysis: Efficiency ratios are tools that are used for analyzing the ability of a company to employ its sources including the capital and assets that help introduce a regular income.

Solvency ratios

Smith Construction Ltd
Year	Debt To Equity Ratio	Formula	Amount	Ratio	Growth
2021	Debt	(Debt /Equity)	£ 2,823,000.00	0.77	-0.09
Equity	£ 3,649,000.00
2020	Debt	£ 2,908,000.00	0.87
Equity	£ 3,353,000.00
2019	Debt	£ 3,416,000.00	1.04	-0.17
Equity	£ 3,281,000.00
2018	Debt	£ 3,474,000.00	1.43
Equity	£ 2,430,000.00
2017	Debt	£ 1,579,500.00	1.00	0.43
Equity	£ 1,579,500.00
Year	Debt To Total Assets Ratio	Formula	Amount	Ratio	Growth
2021	Debt	(Debt /Total Assets)	£ 2,823,000.00	0.27	-0.02
Total Assets	£ 10,364,000.00
2020	Debt	£ 2,908,000.00	0.29
Total Assets	£ 9,992,000.00
2019	Debt	£ 3,416,000.00	0.37	-0.01
Total Assets	£ 9,325,000.00
2018	Debt	£ 3,474,000.00	0.37
Total Assets	£ 9,112,000.00
2017	Debt	£ 2,258,100.00	0.55	0.55
Total Assets	£ 4,100,400.00

Table 4: Solvency ratios

(Source: Created by learner)

Analysis: The total debt to equity ratio for Smith construction limited is in positive terms and it can generate extra sources of income from the asset. It has as a debt-to-total asset ratio of 0.27 and the debt-to-equity ratio is 0.77. It is expected that the company will be able to general a long term regular source of income from the given assets.

Part Two – Internal Controls

Possible areas of misappropriation of company assets

Many cases of forgery in organizations occur around the world. Smith construction is a small organization and due to this many employees have a lot of special access to the companies’ capital and wealth. They have been able to use the wealth to their benefit the assets and acquisitions that have been reported and mentioned in the balance sheet. But what is not reported is not mentioned anywhere. This is also an act of saving the extra expenses and not showing them in the books (Harahap, and Purba, 2022).

Internal controls

Internal control is a process that is conducted by the board of directors and the management in an organization to prevent errors and irregularities in an organization. This also ensures that proper corrective measures have been taken to rectify the errors and irregularities and make the information reliable and accurate on a timely basis.

The components of internal control

Smith Construction has five components in the internal control system. The accountant was working at Smith control construction on all these components.

Control Environment

The first type of component is the control environment with the major role of an organization and influences the control consciousness of the employees. It includes factors such as the integrity, ethical values, and competence of the members. It also deals with the issue such as management, philosophy and operating style of the firm, which helps in the management alliance, the authority and responsibility of different individuals.

Risk Assessment

The Risk Assessment process is the step by which the business evaluates the most critical risk and design control accordingly so that the risk can be handled in the most effective way regularly.

Control Activities

The control activities include the use of information technology and other accounting systems to make sure that appropriate controls are put in place in Smith construction. For example, James Blond must conduct audits of the fixed assets periodically to minimize the risk of data loss (Sujana, et al.2020).

Information and Communication

The component of information and communication is the part where the members of the organization identify and capture the communication in a firm. That will help the members to carry out their responsibilities. James should produce reports that involve operational, financial and compliance-based information that makes it easy to run and control Smith construction effectively. The effective communication must include the vision and values of the engagement survey and how to resolve the issues of the customers (Fajariyah, and Susetyo, 2020).

Monitoring

The component of monitoring is the process that evaluates the quality of the system's performance over a given period (Sepindo, and Chomsatu, 2021). It establishes the ongoing monitoring activities that combine different evaluations in the course of operations. It also reviews the monthly performance of the reports and internal audit functions.

Part Three – Financing a Business

Approaching a bank

Considering banks for financing the businesses is ideal for Smith Construction Ltd. as it will lend money without taking any ownership in equity. The banks offer term loans and other lines of credit which helps the businesses to pay-back the loan amount in installments. The banks usually have an interest rate of around 7% to 8% for small businesses. If a business is profitable then it can easily pay off the amount in regular monthly or quarterly installments.

The banks also offer loan such as equipment financing and real estate financing. The loan is specifically for the purchase of an equipment or a buying a real estate property. Both type of loans are useful for Smith construction as they have to purchase a lot of equipment and they are basically involved in the business of construction. The advantage is that this type of financing is incredibly useful in building relationship with a bank so that they can help in the times of distress. But the biggest disadvantage of financing from a bank is that sometimes they deny to give loans if a company has a poor credit history.

Approaching potential investors

The biggest advantage of financing through a potential investor is that the finance given by them is not a loan. Therefore, the business does not have to repay it back to the investors. The major disadvantage of raising funds from private investors is that they ask for a major chunk of ownership in the company. In exchange for the investment the investors take a considerable amount of stake in the shares of the company and share the profits as well.

Conclusion

The report analyzes the financial position of a company and discusses how internal control is affected by the decisions of the founders of the company. It is also influenced by the employees who are responsible for finance and operations. The report analysis of various ratios helps to estimate the areas of misappropriation of company assets and how they are affects the business of the stakeholders. The report also measures the correct calculation and financial figure that helps in estimating the cost of sales and how different ratios such as efficiency ratios and profitability ratios help in accessing the formulas. Discussion on the different category of ratio is also presented as how they can affect the decision-making process in the organization.

References

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