Assignment: Financial Analysis
The Final Project for this module is a consultancy report to Anthony's Orchard, an expanding apple orchard and distributor. The company has been entertaining the idea of expanding its product line to include apple juice. In order to do this, a major investment in an apple press is needed. The aim of your consultancy report is to analyse all relevant data and make a recommendation to the management of the company in regard to this idea. Each of the remaining Individual Assignments Submission in this module will focus on one component of this consultancy report; in Unit 6 you will compile these, complete your analysis and submit the Final Project.
Measuring and regularly monitoring the financial health of a company, using budgeting and control methods, is a vital concern for managers. By acquiring and analysing timely and accurate financial data, decision-makers will have the tools to facilitate operational and strategic decisions. These decisions may concern reactions to business or environmental conditions, resource acquisition, expansion and more.
This Individual Assignment will provide the opportunity to analyse financial data for Anthony's Orchard. As you heard from company CEO Bob Frost in this unit's media piece, Anthony's Orchard would like to make aggressive plans for its future, including the expanded product offering described above. At the same time, unforeseen circumstances can impact the current health of the company as well as its future plans.
What-if analyses are valuable aids in assessing a variety of planned and unplanned events. You will utilise the analysis you conduct here as part of the Final Project.
To prepare for this Individual Assignment:
1. Review the readings and media for this unit, including the Anthony's Orchard case study media.
2. Familiarise yourself with the Anthony's Orchard company and its current situation; this can be done by exploring each of the tabs across the top of the screen in the Anthony's Orchard case study media. Hint: You should focus on the financial information.
To complete this Individual Assignment:
1. Review the Financial Statements: Analyse the current financial state of Anthony's Orchard and evaluate the impact of a major customer cancelling their expected order. This analysis should include the following:
Your view of the current financial health of the company Your assessment of the materials and labor costs
Your assessment of the income statement Your assessment of the cash flow statement
Your assessment of each of the business units in Anthony's Orchard C-V-P analysis of the current year's financials
2. Conduct a What-If Analysis: This what-if analysis concerns an unforeseen circumstance that could impact the company's current health as well as its future plans. A major customer is considering cancelling their order for prepared apple products. This customer accounts for 25% of the prepared apple product revenue. Evaluate the impact of this on the budgeted statements contained in the case study.
Assumptions
1. The provided budgets although not dated, they are applicable to the current year, 2011.
2. Administrative costs are allocated to the three business units using the provided transfer pricing formula.
3. Interest on debt is allocated in proportion to total expenses (variable and fixed costs) of each business unit.
4. The provided balance is for the year 2011.
5. If customer cancels order (the 25%), all variable costs and apple purchases are reduced in proportion (25%). Fixed costs remain unchanged.
6. Further assumptions made.
Part 1: Your view of the current financial health of the company
- All analysis must be done on spreadsheets.
- Once done, then you can check the financial health of the company using the following:
- Complete ratio analysis using 2011 financials (balance sheet, income statement and cash flow). Profitability, liquidity, management effectiveness, gearing and risk and cash flow ratios. If possible, find a similar company to compare with. Comment of the ratios.
Part 2: Your assessment of the materials and labour costs
- Compare 2011 unit and total materials and labour costs with those of 2010. Total costs of materials and labour should also be compared with the budgeted (see variance analysis below).
Part 3: Your assessment of the income statement
- Construct detailed budgeted and 2011 income statements as follows: 1). Breakdown the cost of goods into individual components: materials, labour and variable overheads. This information is available on the cost of goods sold budgets and actual cost for 2011; 2). The factory overhead cost is split into variable and fixed components (see cash flow statements);3). Apportion administrative costs using the provided transfer pricing formula. Please note that these costs are to be allocated to the three business units, so use the step down approach until all costs have been allocated to the three business units. 4). then allocate interest on debt in proportion to total products expenses. Analysis up to net profit before taxes.
- For income statement analysis, do ratio and simple variance analysis of the detailed income statements: compare budgeted income statement items with the actuals for 2011.
- Refer to ratios calculations above.
Part 4: Your assessment of the cash flow statement
- Reconstruct the cash flow, ensure that it balances.
- For income cash flow statement analysis, please do ratio and simple variance analysis of the detailed cash flow statement: compare budgeted cash flow statement items with the actuals for 2011.
Part 5: Your assessment of each of the business units in Anthony's Orchard
- Do product profitability analysis for both current year and budget: Use the detailed income statement constructed above.
- Ratio and Variance Analysis: Use ratio and variance analysis to evaluate the performance of each business unit.
Part 6: C-V-P analysis of the current year's financials
- Complete CVP analysis must include: BEP in revenue and sales units and margin of safety (MoS) in both revenue terms and in sales units.
- CVP analysis per business unit with administrative expenses and interest on debt allocated as above.
- CVP analysis with all fixed costs treated as common costs (unallocated): this is multiproduct CVP analysis.
Part 7: What-if-analysis
- Analyse the impact on current financial statements: income statement, cash flow and balance sheet.
- What will be the impact on calculated variances and ratios? (That's why it is important to use spreadsheets).
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Assignment: Analysis of the Investment
In the Shared Activity for this unit, you analysed projected financial data and assessed its value to making a physical expansion decision. As you have heard in the media presentation from CFO Mary Scott, Anthony's Orchard is faced with another type of expansion decision. CEO Bob Frost is eager to expand the product line to include apple juice.
Of course, a decision to expand a product line has very many variables. In this assignment, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice). You also will investigate the value of a number of financial measurements. Ultimately, you will develop a recommendation for the company, and this analysis will help you to support that recommendation.
To prepare for this Individual Assignment:
Review the Anthony's Orchard case study in the unit resources.
Consider the following:
- The company, according to Anthony's Orchard Strategic Plan, is hoping to purchase an apple press in order to start a new line of prepared apple products-apple juice.
- The company estimates this new product offering will generate an additional $95,000 net income per year and estimated cash flows of $90,000 per year. The cost of the apple press will be $950,000 and this expenditure, as shown in the budgeted cash flow statement, is expected to take place in the fourth quarter of 2012.
- The apple press is expected to have a seven-year life and no salvage value.
- The company requires a 10% return on investment for new capital investments and the company uses a cost of capital of 8%.
- The company's revenue goal for 2015 is $25 million.
- Assume a minimum 12% gross margin on revenue.
To complete this Individual Assignment, answer the following:
- Do you think the company's revenue goal of $25 million by 2015 is realistic?
- Explain how purchase of the apple press might affect the company's revenue goals. Based on this information, explain whether Anthony's Orchard should invest in the apple press. Support your response with relevant information provided in the case study, the previous year's financials for 2010, the current year's financials for 2011 and the budgeted year's financials for 2012.
- Draft budgeted financial statements from 2012 to 2015 under both options that provide a realistic assessment of expected revenues and costs, and explain how you have arrived at these budgeted figures.
STRATEGIC DECISION-MAKING: ANSWER PLAN
Assumptions
1. Please clearly state all assumptions made in the analysis.
Part1: Do you think the company's revenue goal of $25 million by 2015 is realistic?
i. Start with the budgeted revenue for 2012.
ii. How many years to 2015?
iii. What growth rate will be implied if revenue is to grow from the 2012 forecasted level to $25 million in 2015? What is the average growth rate per year over the period 2012 to 2015?
iv. What is the revenue growth rate between the 2011 actual revenues and the 2012 budgeted target revenues?
v. Compare items (iii) and (iv) growth rates.
vi. Based on this analysis, is the 2015 $25 million revenue target realistic?
Part 2: Purchase of Apple Press and its impact on revenue target
- Should the company invest in the Apple Press? Use the investment appraisal methods, justify methods used. Clearly state your assumptions as well (e.g. treatment of depreciation, etc.).
- Analyse the impact of the Apple Press on the targeted revenue of $25 million by the end of the year 2015:
o How much revenue is the Apple Press unit going to contribute to the 2013 budgeted revenue? (You may assume that fixed costs will not be apportioned to the Apple press unit, that is, all Apple Press operational costs are classified as cost of goods sold. The gross profit of this unit is therefore the net income. The given minimum gross margin on revenue is 12%. This assumption enables you to calculate the Apple Press machine revenues. Also assume that revenue contribution will be from 2013 onwards).
o What is the impact of the Apple Press revenue on the company reaching its 2015 revenue target of $25 million?
o Based on revenue contribution, should the company invest in the Apple Press? (Remember other non-financial factors to be considered?). What will be the impact on the financials?
Part 3: Budgeted Financial Statements: 2013, 2014 and 2015
- Clearly state all assumptions made (e.g. assumptions about revenue growth rates, costs as a percentage of sales, gross margins, tax rate, etc.).
- Use the given formats of financial statements.
- The principal budgeting factor is your business unit sales.
- Calculate the business unit sales revenue growth rates between 2011 actuals and 2012 budgets: then assume that this growth rate is sustainable.
- Express your costs as a percentage of sales: further assume that these ratios ratio will be maintained.
- Construct the budgeted income statements for 2013, 2014 and 2015 assuming that the Apple Press will not be purchased (Option 1).
- Prepare the budgeted income statements for 2013, 2014 and 2015 assuming that the Apple Press will be purchased (Option 2).
- Complete the other financial statements (optional).
- General comments on the budgets.
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Assignment: Developing a Balanced Scorecard
In this unit, you are exploring the need for organisations to measure and manage performance against objectives, as well as the potential effectiveness of tools such as Balanced Scorecards and Strategy Maps as aids in this cause.
You will now develop a BSC for Anthony's Orchard. The company has a number of strategic goals; measuring performance towards those goals will be critical to its sustained success.
To prepare for this Individual Assignment:
Visit the Anthony's Orchard case study in the unit resources. Review again the current and historical financials. Consider that one of the company's key goals in its strategic plan is to exceed revenue of $25 million dollars by the year 2015.
To complete this Individual Assignment:
Explain the potential value of a BSC to Anthony's Orchard. Describe specific ways that the introduction of a BSC can contribute to this organisation.
Develop a BSC that is aligned to the key goal in the strategic plan, i.e. exceeding revenue of $25 million dollars by 2015. Develop, quantify and justify suitable key performance measurement criteria for Anthony's Orchard in each of these four key areas:
Financial Customer
Internal Business Processes Learning and Growth
PERFORMANCE MEASUREMENT AND MANAGEMENT
Assumptions
1. Please fully state and justify any assumptions that you make in relation to the financial measurements you use.
Part 1: Explain the Potential Value of a BSC to Anthony's Orchard
i. Fully explain the potential value of a BSC to Anthony's Orchard.
Part 2: Describe specific ways that the introduction of a BSC can contribute to this organisation.
ii. Fully describe the specific ways that the introduction of a BSC can contribute to this organisation. What benefits will the adoption and implementation of the BSC bring to Anthony's Orchard?
Part 3: The BSC
- Key strategic Plan: exceeding revenue of $25 million dollars by 2015.
- Other objectives: read the following sections: About Anthony's Orchard; Mission Statement; Vision Statement and Strategic Plan & Growth Initiatives
- Develop, quantify and justify suitable key performance measurement criteria for Anthony's Orchard in each of these four key areas:
o Financial
o Customer
o Internal Business Processes
o Learning and Growth
- Include: objectives, measures, targets and initiatives.
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Assignment: Gap Analysis and Benchmarking for Anthony's Orchard
In the media piece for this unit, Anthony's Orchard Director of Operations Allison Sinclair expressed concern over the lack of successful efforts to measure organisational quality. Recall the following quote from her discussion of this issue:
As a family-owned business with a history of success, it is easy to fall into the trap of believing that we do things properly almost by default-the ‘we've always done it this way' and ‘if it ain't broke don't fix it' arguments. The danger with that line of thinking is what if it is broken? What if the way we've always done things is good but ignores some best practises that could lead to even better performance?
We are now at a point where we are ready to commit to a strategy of continuous improvement and quality management. This is a big step forward for us. But taking the next step is not so easy. Developing and implementing a process is new to us and will require careful analysis. In short, we know where we would like to be but are unsure how best to get there.
In this Individual Assignment, you will suggest an approach to address these concerns. You will propose strategies the company could implement to move from its current status towards its goals for 2015 using the processes of gap analysis and benchmarking.
To prepare for this assignment: Review the media in the unit resources. To complete this assignment:
1. Conduct a gap analysis for Anthony's Orchard. This should include:
A statement of where the organisation wishes to be by 2015 (use financial data for this, such as targeted revenues and/or profit)
A comparison of the current financial state of the organisation and the desired state by the end of fiscal year 2015
Your suggestion for ways the company can bridge the gap identified in your comparison above
2. Devise a benchmarking review for Anthony's Orchard. To do this, discuss recommended strategies and measures that will be useful to measure progress towards the objective in your gap analysis.