Company Financial Performance Analysis, Marginal Analyzed Income Statement and Budgeting

Question 1

Business Report

From: Financial Analyst

To: Board of Directors Vodafone Group Plc

Subject: Financial Performance Analysis for period ending 31^st March 2008- to 31^st March 2012

Introduction

It is always important for all business entities to carry out proper financial performance analysis from time to time. This is necessary since it makes the management of the organization to know the position of the company in terms of financial performance over a given period of time.

As requested by you, I have come up with a business report regarding the financial performance analysis that I carried out. I did a financial performance analysis covering five years ending 31^st March 2008 to 31^st March 2012. I relied on the statement of comprehensive income and the statement of comprehensive position of Vodafone Group Plc. With the help of the most appropriate financial ratios, I was able to analyse the financial performance of Vodafone Group Plc. According to Wickman (2000), financial ratio analysis gives a good view of a company’s financial performance.

Profitability

Profitability of an organization is one of the things which are very useful in determining the performance. The profitability of the Vodafone Group Plc is currently not impressive. For example, the company’s gross profit margin stands at 32.04%. As per the financial performance analysis I carried out, the gross profit margin for the year 2012 is lower than that of the previous years. In fact, the gross profit margin has been declining year after year since the year 2008. This calls for decisions which are capable of raising the level of gross profit margin. This has also been the case with the net profit margin. The ratio has also been showing negative movements since the year 2008. It is worth noting that this has been happening despite the positive movement of the revenue generated by the company.

The return on assets ratio of the company has not been able to show consistency. Since the year 2008, the return on assets ratio has been alternating from negative and positive changes. This shows that the company’s use of assets in generating profit for the company has not been well done. The assets of the company have not been used with consistency in generating profit for the company. The asset turnover of the company has shown some positive movement. The company’s revenue with regard to the assets of the company has shown a positive movement. Apart from the year 2009 when the asset turnover ratio showed a negative movement, the other years have been positive. This shows an area where the management can try to maximize on for the benefit of the company.

Efficiency

The company’s efficiency seems to be very poor. For example, the receivables collection days have been getting more each year since 2008. This means that the company’s receivables amount has been getting higher each year. This is an indicator that the company’s credit management function has not been performing well. Credit sanity means that a company is good in credit management (Grundy & Johnson & Scholes 1998). Even if the amount of receivables has been increasing each year, it would have been better if that amount was reflected in the cash balance of the company. This calls from an action to ensure that the company’s credit management department becomes more efficient. Additionally, the company’s payables payment days have been very high. Currently, it stands at 119 days which is very high compared to the laid down benchmark. This means that the company has not been able to grow in terms of debt payment discipline. This can also be an indicator of financial difficulties caused by many receivables collection days. This needs to be looked at so that the days may be reduced to the reasonable numbers. The company’s inventory turnover has not been consistent. The number of turnover days has not been getting better year after year. This means that some areas such as marketing have not been ambitious enough to push the company’s inventory more in the market. It is good to have all business functions giving the required inputs always (Pangarkar 2011).

Liquidity

One encouraging thing is that the liquidity of the company is good. From the financial analysis, the liquidity ratios show a positive movement in the liquidity of the company. The company’s liquidity in the year 2008 by looking at the acid test ratio was 0.38 and grew positively up to 0.81 in the year 2012 which is fair according to the ratio’s benchmark. Additionally, the fact that the company is able to take care of its financial obligations in the short run is encouraging. The current assets ratio of the company has also been showing a positive growth. The working capital ratio has been able to grow from 0.40 of the year 2008 to 0.83 in the year 2012. Even though the working capital ratio is below the benchmark level, the positive growth towards the standard level is encouraging. The movement in this ratio has been positive each year. This can be attributed to the positive growth in the company’s current assets against the lower rate of growth in the company’s current liabilities. The current assets are required to grow at a higher rate than the current liabilities for the liquidity to be good (Dyck & Neubert 2009). This can be seen well in the trend analysis carried out on the company. This means that the company’s capability to pay for its short-term obligations has been improving from year to year. This means that the company has been getting better year after year in terms of handling its financial obligations in the short-run. With a reasonable liquidity ratio, a company is able to sort short-term financial requirements (Palmer 1983).

Vodafone Group Plc

Comprehensive Statement of Position

Trend Analysis

31st March	31st March	31st March	31st March
2012	2011	2010	2009
£m	£m	£m	£m
Assets
Non-current assets
Goodwill	-15.22%	-12.74%	-3.93%	5.11%
Intangible assets	-9.25%	4.02%	6.86%	10.45%
Property, plant and equipment	-7.56%	-2.23%	7.23%	15.03%
Investments in associates	-7.87%	4.75%	4.79%	53.98%
Other investments	-42.72%	-81.81%	7.52%	-4.17%
Deferred tax assets	-2.38%	95.35%	63.97%	44.50%
Post Employment Benefits	-68.04%	185.29%	325.00%	-87.69%
Trade and other receivables	-10.19%	36.95%	-7.75%	187.63%
Total Non Current Assets	119,551	134,217	142,766	139,670
Current assets
Inventory	-9.50%	24.02%	5.10%	-1.20%
Taxation recoverable	18.86%	47.12%	148.05%	35.09%
Trade and other receivables	16.04%	5.41%	14.64%	16.96%
Other investments	96.29%	73.71%	0.00%	0.00%
Cash and cash equivalents	14.17%	41.35%	-9.33%	187.11%
Total Current Assets	17.77%	19.58%	9.13%	49.35%
Total Assets	-7.70%	-3.67%	2.81%	19.98%
Equity
Share capital	-5.29%	-1.71%	0.00%	-0.69%
Share premium account	0.24%	0.16%	256.93%	0.17%
Treasury Shares	-4.04%	4.62%	-2.81%	2.29%
Retained profits/losses	8.40%	-2.50%	-4.97%	2.24%
Other Reserves	-29.42%	-22.98%	-84.58%	8.36%
Total equity shareholders funds	-12.13%	-3.13%	4.90%	10.40%
Non-controlling interests	21016.67%	-98.60%	-130.97%	-11.90%
Total Equity	-10.69%	-3.58%	7.12%	10.86%
Liabilities
Non-current liabilities
Long-term borrowings	-0.05%	-0.90%	-9.82%	40.10%
Taxation liabilities	-28.57%
Deferred tax liabilities	1.71%	-12.08%	11.07%	30.01%
Post employment benefits	287.36%	-63.29%	-1.25%	130.77%
Provisions	-0.62%	-3.02%	-6.75%	74.18%
Trade and other payables	64.68%	-1.47%	0.62%	25.74%
Total Non Current Liabilities	2.09%	-2.60%	-6.04%	38.68%

Question 2

Question 2 (i) Marginal Cost Analysed Income Statement for 2014

In the preparation of Marginal cost analysed income statement for 2014, we have to make a clear distinction between the fixed and variable costs of The Harold Shipman Private Healthcare Clinic Ltd. In the preparation of the marginal cost analyzed income statement, one peculiar thing that ought to be mentioned is that the fixed costs are written off in the period thus only the variable costs are used in measuring the marginal costs of goods sold.

The Harold Shipman Private Healthcare Clinic Ltd

Marginal Cost Analysed Income Statement

For the year 2014

Hip	Knee	Shoulder	Total
Revenue for 2014	4,800,000.00	8,000,000.00	2,400,000.00	15,200,000.00
Surgeons fee	720,000.00	1,440,000.00	600,000.00	2,760,000.00
Surgeons consultation	180,000.00	240,000.00	120,000.00	540,000.00
Medical supplies	3,200.00	1,000.00	3,000.00	7,200.00
Marginal cost	903,200.00	1,681,000.00	723,000.00	3,307,200.00
Contribution	3,896,800.00	6,319,000.00	1,677,000.00	11,892,800.00
Overheads
Nursing and ancillary services	1,809,333.33	2412444.444	1,206,222.22	5,428,000.00
Other Overheads	307,666.67	410,222.22	205,111.11	923,000.00
Theatre preparation	288,000.00	384,000.00	192,000.00	864,000.00
Operating theatre usage	483,000.00	644,000.00	322,000.00	1,449,000.00
Total variable overheads	2,888,000.00	3,850,666.67	1,925,333.33	8,664,000.00
Net Marginal contribution	1,008,800.00	2,468,333.33	(248,333.33)	3,228,800.00

Question 2(ii)

Reconstructed Marginal analyzed income statement whose overhead apportionment has been done on the basis of hours spent on each procedure.

The Harold Shipman Private Healthcare Clinic Ltd

Marginal Cost Analysed Income Statement

For the year 2014

Hip	Knee	Shoulder	Total
Revenue for 2014	4,800,000.00	8,000,000.00	2,400,000.00	15,200,000.00
Surgeons fee	720,000.00	1,440,000.00	600,000.00	2,760,000.00
Surgeons consultation	180,000.00	240,000.00	120,000.00	540,000.00
Medical supplies	3,200.00	1,000.00	3,000.00	7,200.00
Marginal cost	903,200.00	1,681,000.00	723,000.00	3,307,200.00
Contribution	3,896,800.00	6,319,000.00	1,677,000.00	11,892,800.00
Overheads
Nursing and ancillary services	2,309,787.23	1385872.34	1,732,340.43	5,428,000.00
Other Overheads	392,765.96	235,659.57	294,574.47	923,000.00
Theatre preparation	367,659.57	220,595.74	275,744.68	864,000.00
Operating theatre usage	616,595.74	369,957.45	462,446.81	1,449,000.00
Total variable overheads	3,686,808.51	2,212,085.11	2,765,106.38	8,664,000.00
Net Marginal contribution	209,991.49	4,106,914.89	(1,088,106.38)	3,228,800.00

Question 2 (iii)

The NHS offer=£250,000

The decision on whether to take the order or not would be made after looking at the revenue to be earned on 50 knee operations under normal patient to hospital arrangement.

Cost per Knee operation= £10,000

Therefore 50 operations for knees would give 50*10,000=£500,000

The fact that the costs associated with the 50 knee operations would remain constant under the NHS arrangement and the normal arrangement, it would be a wrong decision for the hospital to agree on the contract. This is because it would lead to the loss of £250,000 in income.

Question 3

Introduction

Budgeting is one process which should never be ignored by any business entity. This is because budgeting is very important in creating the big picture of how things should be done in the organization. With the operation manager’s statement “Budgeting is a waste of time. I don’t see the point of it. It tells us what we can’t afford but it doesn’t keep us from buying it. It simply makes us invent new ways of manipulating figures. If all levels of management aren’t involved in the setting of the budget, they might as well not bother preparing one,” it is evident that many people do not know the objectives of a budgetary control system.

Objectives of a budgetary control system

One of the main objectives of a budgetary control system is planning. A budgetary control system is usually very useful in planning in an organization. It is known to come up with a very good opportunity for an organization to set up the way the organization should act on various business aspects. Once incorporated with the best strategies planning as an objective of budgeting helps an organization in understanding and defining its various functions within a given period of time (Wheelen & Hunger 2010). This makes identification of any problems that may arise easy thus giving the management of an organization the chance to come up with good solutions. This makes dealing with any occurrences that may take place easy since they were anticipated long before they took place.

The second objective of budgetary control system is concerned with communication. A budgetary control system aims at communicating the necessary information to the interested parties in an organization (Vineberg, Ahlstrand & Lampel 2004). For example, the budgets prepared are given out to specific concerned people. The budgetary control system in an organization becomes very useful in passing on information related to policies as well as procedures of an organization. This is also very useful in giving certain benchmark expectations within an organization.

Coordination is the other objectives of a budgetary control system. An organization exists with the availability of several aspects and functions which have to work together so as to achieve an organization’s set goals (David 2011). There are objectives for the organization which have to be achieved through bringing together the functions of each unit of a business. This requires certain coordination of each unit of an organization so as to achieve the overall goals of the organization. This is where a budgetary control system comes in to create the necessary link between all functions of a business entity. It is worth noting that with proper coordination, an organization is able to achieve its goals with ease (Mautz & Angell 2006). This helps in ensuring that the expected input of each function is put in the right way.

Another main objective of budgetary control systems is control. A budgetary control system is very useful in ensuring that what has planned is being handled in a fair way with regard to the actual situation (Wit & Myers 2010). It ensures that the functions of a business entity are being utilized in the best way possible. A budgetary control system helps in reducing the deviations from what is expected. It helps in making the management aware of the areas which require the intervention of the management to ensure that the most reasonable outcomes are achieved.

A budgetary control system helps in the evaluation of an organization’s overall performance (Johnson, Whittington & Scholes 2011). With a proper budgetary control system, the management as well as other interested people in an organization are able to see what the organization has managed to do over a given period. This ensures that the planned performance is measured against what has actually being done over a given period. This gives the management of an organization an opportunity to make the necessary improvements to an organization. With proper budgeting and SWOT analysis, an organization ends up learning much about itself (Fine 2006).This is very important since it helps in arresting the aspects of a business which are not able to generate the required input. This is very useful in ensuring that the areas where most strength is identified are concentrated upon to maximize on the benefit available from them (Pahl & Ritcher 2009). It is also very useful in giving potential investors an opportunity to see what the company has been able to do. This gives the potential investors an opportunity to evaluate whether the company has been able to achieve the set goals of the organization (Monks & Lajoux 2011). It also invites very useful information from well wishers. The opinions brought about by the presence of a budgetary control system helps a business entity in pushing its performance to higher levels.

There are several forms of budgeting. Participative budgeting is one of them. This form of budgeting involves almost everyone in the organization (Helms & Nixon 2010). It ensures that every person up to the subordinates give their contribution in the budgeting process. No imposing of a budget by the top management. According to Dyson (2010) this form of budgeting makes people feel that they are part and parcel of the budgeting process. Participative budgeting helps in the process of passing information from the lowest levels in employment to the top management. This is usually very useful in ensuring that the employees are able to experience higher levels of job satisfaction. According to William and Cobb ( 2012), participative budgeting gives organizations the opportunity to enjoy the benefits of consultation inform of the ideas provided by the various people in the organization.

Conclusion

From the financial performance analysis of Vodafone Group Plc, the company’s performance is not good. The profitability of the company is very low which makes the company unattractive to investors. Investors are usually attracted by profitable organizations (Campbell, Edgar & Stonehouse 2011). The company has not been able to collect amounts due to it and also pay amounts owed. Being able to collect and pay on accounts helps an organization in balancing its finances (Fama 1976). This means that the company risks losing its struggling liquidity. Inability to cater for the payables threatens the company’s chance of getting credit facilities from suppliers among other lenders. Wetherly and Otter (2008) explain that it is good to have good relations with the business environment. This form of inefficiency is working to the disadvantage of the company in terms of growth and stability something which reduces a company’s ability to compete (Porter 2008).

It is very important for all organizations to come up with the best budgetary plans (Jones & Hill 2009). It does not matter whether a company is small or big in size, budgeting is important (Analoui & Karami 2003). This is because this helps in meeting the objectives of an organization. Budgeting is an essential thing in fostering success of an organization (Gujarati & Porter 2009). The participative budgeting is very helpful to an organization because it helps in making the employees feel satisfied and motivated (Sandy 2005). The benefit of opinions offered is also useful to an organization since solutions are obtained easily.

References

Analoui, F & Karami, A 2003, Strategic Management in Small and Medium Enterprises. London: Thomson Learning.

Campbell, D, Edgar, D. & Stonehouse, G 2011, Business Strategy an Introduction. 3rd ed. Basingstoke: Palgrave. Macmillan.

David, FR 2011, Strategic management: concepts and cases. 13th Ed. New Jersey: Pearson Prentice Hall.

De Wit, B. & Myers, R 2010, Strategy: Process, Content, Context – An international perspective. 4th ed. Andover: Cengage Learning EMEA.

Sandy, D 2005. Budgeting, Lerner Publications.

Dyck, B & Neubert, MJ 2009, Andover: Cengage Learning EMEA.

Dyson, JR 2010, Accounting for non-accounting students. 8th ed. Harlow: Pearson Education.

Fama, F 1976, Foundations of Finance: Portfolio Decisions and Securities Prices, Basic Books, New York.

Fine, LG 2006, the SWOT Analysis: Using Your Strength to Overcome Weaknesses, Using Opportunities to Overcome Threats, Springer.

Grundy, T & Johnson, G & Scholes, K 1998, Exploring strategic financial management. London, Prentice Hall.

Gujarati, D & Porter 2009, Essentials of Econometrics, McGraw-Hill Education.

Helms, MM & Nixon, J 2010, Exploring SWOT analysis – where are we now?: A review of academic research from the last decade, Vol.3, no.3.

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Jones, GR & Hill, CW 2009, Strategic Management Essentials. 2nd ed. Southwestern: Cengage Learning.

Mautz, RD & Angell, RJ 2006, Understanding the Basics of Financial Statement Analysis. Commercial Lending Review, 21(5), pp. 27-34.

Monks, A & Lajoux, R 2011, Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, John Wiley & Sons.

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Palmer, J 1983, Financial ratio analysis. American Institute of Certified Public Accountants.

Pangarkar, N 2011, High Performance Companies: Successful Strategies from the World’s Top Achievers, John Wiley & Sons.

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Vineberg, H, Ahlstrand, B & Lampel, J 2004, Strategy bites back. London: Prentice-Hall.

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Appendices

APPENDIX 1; Vodafone Group PLC Financial Ratio Analysis

	Ratio	Formulae	metric	2012	2011	2010	2009	2008	CIMA Average
									Benchmark
Profitability	Overall ROCE	PBIT x100	%	12.21%	10.85%	9.55%	4.94%	11.77%	8%-11%
		Cap Employed

	Return on Assets	PBIT x100	%	6.84%	6.28%	5.53%	2.74%	7.07%
		Total Assets

	Asset Turnover	Revenue	x	33.26	30.34	28.33	26.86	27.88
		Total Assets

	Net profit	NP before int and tax	%	20.57%	20.70%	19.50%	10.21%	25.37%	3%-10%
	margin	Revenues

	Gross Profit	Gross profit x 100	%	32.04%	32.84%	33.80%	37.00%	38.30%
	margin	Revenues

Liquidity	Working	current assets /	x:1	0.83	0.63	0.50	0.47	0.40	1-1.5
	capital ratio	current liabilities

	Acid test	ca’s – inventories	x:1	0.81	0.61	0.48	0.45	0.38	0.75-1.25
	ratio	current liabilities

Efficiency	Receivables	Trade receivables x365	days	2.63	2.24	1.57	0.69	0.59	55-85 days
	collection days	sales

	Payables	Trade payables x 365	days	119.81	116.92	115.58	119.23	123.07	45-60 days
	payment days	cost of sales

	Inventory	Cl.Inv. x 365	days	5.62	6.36	5.37	5.82	6.95
	turnover	cost of sales

Appendix 2: The Harold Shipman Private Healthcare Clinic Ltd data

Medical Procedure	Hip	Knee	Shoulder
£ Income for 2014	4,800,000	8,000,000	2,400,000
£ Cost per procedure		8,000	10,000	6,000
Av time per procedure in hours			2	1.2	1.5
£ Surgeons fee per procedure		1,200	1,800	1,500
% of procedures with complications			8	5	10
£ surgeons fee consultation 2014			300	300	300
£ cost medical supplies per procedure 2014			400	200	300
Overheads	£
Theatre preparation		864,000
Operating theatre usage		144,9000
Nursing and ancillary services		5,428,000
Administration	1,216,000
Other overheads	923,000
Total overheads	9,880,000