Forecasting Business Revenue And Expenses Accounting Essay

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Forecasting business revenue and expenses during the startup stage is really more art than science. Proper financial forecasts will help in developing operational and staffing plans that will help in making the business success.

HANUNG TOYS LTD established in 2005. Here is its cost and revenue forecasting of the company.

COST FORECASTING

YEAR

20005

2006

2007

TURN OVER £

50,200

75,300

90,000

COST

45,200

48,250

60,200

From table given above, we can observe that cost increases from 45,250 to 60,540, from the year 2005 to 2007. By following this trend we can forecast the cost of year 2008 by using high and low method.

YEAR COST £ NO. OF UNITS

2005 45,200 4,000

2006 48,250 5,500

2007 60,200 7,000

Assumption: here we assume that the no. of units are the quantity produced for each year.

Units Cost

High 7,000 60,200

Low 4,000 45,200

Difference 3,000 15,000

Now, 15,000 °°°ï€ ï€½ï€ £ï€ ï€µï€  (the variable cost per unit)

Now, to find out Fixed Cost,

Total Cost = Fixed Cost + (Variable Cost per unit x number of units produced)

60,200 = Fixed Cost + (5 x 7,000)

60,200 = Fixed Cost + 35,000

Fixed Cost = Total Cost - Variable Cost

= 60,200 - 35,000

Fixed Cost = £ 25,200

COST FOR THE YEAR 2008

Here we determine the units in 2008 is 10,000

Cost = variable cost per unit x number of units projected for 2008

= 5 x 10,000

= £ 50,000

Total Cost = 50,000 + 25,200

= £ 75,200 Total Cost for the year 2008

REVENUE FORECASTING

Revenue forecasting involves the use of analytical techniques to project the amount of financial resources available in the future. Revenue forecasts can apply to aggregate total revenue or to single revenue sources.

For revenue forecasting, we assume that the product supplied by the HANUNG TOYS LTD is highly stable predictable. Though due to the recession the earning power of an individual has been reduced, our forecast is based on past sales and inflation to predict future sales.

So, Past revenue + Percentage of Inflation Factor = Revenue Forecast

YEAR £ REVENUE INDEX %

2005 50,200 100%

2006 75,300 150%

2007 90,000 179%

Here, we assume that the base year 2005 to be the 100% and then compute the percentages increases for the following years.

Increase the percentage:

From 2005 to 2006 = 50%

From 2006 to 2007 = 29%

Now we will take the average:

= 50 + 29

2

= 79

2

= 39.5%

So we can say that in the current year there will be 39.5% of market growth

So forecasted revenue will be:

Last year's revenue= 90,000

Projected market growth = 39.5%

So projected current year revenue = (90,000 x 39.5%) + 90,000

= 35,550 + 90,000

= £ 125,550 Revenue for the year 2008

THE IMPACT OF RPI

The Retail Prices Index (RPI) is the most familiar general purpose domestic measure of inflation in the United Kingdom.

The recent up tick (increase) in UK inflation has sparked inflation concerns to continue going into 2008. However the Market Oracle anticipated the recent up tick (increase) as a consequence of money supply growth earlier in the year as an indicator of future inflation and that the up tick (increase) would prove temporary as many factors converge towards deflationary pressures during 2008 that will allow the Bank of England to start cutting UK interest rates towards a target of 5% before the decline in UK inflation starts and for UK inflation to subsequently fall towards the Market Oracle targets of 3% RPI towards the end of 2008.Thus, it is concluded that the current upward trend continuing into the immediate future, UK Inflation as measured by the RPI is expected to fall sharply to or below 3% by November 2008 (current 4.2%).

SOURCES OF FINANCE

In every business there is a need of finance to run the business. Here are some possible sources of finance listed below:

UK Government Security

Fixed Interest gilts

Bills of exchange

Bank overdraft

Bank loans

Share capital

Debentures

Government, local authority or EU grants

These are some potential sources of finance to run the business.

Bank loans are very flexible. They can vary in the length of time that the loan has to be repaid. Loans arranged with a bank that are less than one year are regarded as short term finance. As with any other form of loan there are interest payments to be made and this can be expensive and also can vary.

PROPOSAL FOR BANK LOAN

To

The manager

HSBC Bank

Sub: proposal for a bank loan

Executive Summary:

with today's generation of children switching over to more modified toys, the toy industry has begun to flourish. There is a great revenue we are earning so far and to be earned so more.The cost of 2008 is £ 75,200. And we have £ 25,200 retain in the company as profit. So, on behalf of HANUNG TOYS LTD. want to borrow £ 50,000 from the HSBC Bank to target my cost for the year 2008. Though my projected revenue for the year 2008 is £ 125,550.

Objective:

Our objective is to break into the toys market with our company named HANUNG TOYS LTD. We are doing design, production, and sale of all our products.

Budget:

The following is our cost and revenue table:

YEAR

2005

2006

2007

2008

TURN OVER £

50,200

75,300

90,000

125,550

COST £

45,200

48,250

60,200

75,200

Conclusion:

With today's generation of children switching over to more modified toys, the toy industry has begun to flourish. There is a great revenue we are earning so far and to be earned so more. I want to borrow £ 50,000 from HSBC Bank to target my cost for the year 2008. Through my projected revenue for the year 2008 is £ 125,550. With HSBC Bank help. will be more successful company.

Thanks

On behalf of HANUNG TOYS.

REFERENCES

http://www.marketoracle.co.uk/Article2880.html

http://www.bized.co.uk/educators/level2/finance/lesson/sources1.htm

http://www.blackhallpublishing.com/webresources/html/solutions/ma_s02-08.htm

PART 2

With the usage of information from the organisation that familiar with me, I apply my knowledge to prepare a report.

Consider two compiting investment projects in public and private sector, appraise and compare them.

Public Sector

The Governments undertake a variety of activities. They provide a variety of services, such as education, health, defence, infrastructure, police and postal services. Many of these services involve large investments.

Government library has implemented two projects for last 5 years; one is for rennovation of the library building and another is for including computers in the library. Under are some notes for the both the projects:

Projects run for five years and no scrap value at the end is expected

Capital expenditure of both the projects is £ 45,000

The figures given are after inclusion of depretiation and to be charged on straight line basis method

Taxation is to be ignored

Cost of capital is 10%

The table below shows the profits of each year:

My calculations include:

Pay back period to decimal place

The NPV

The profits of each year are as under:

Years

Project A(£)

Project B(£)

1

15,000

10,000

2

15,000

10,000

3

20,000

20,000

4

10,000

20,000

5

10,000

15,000

Payback period

Years

Project A

£

Project B

£

Expenditure

45,000

45,000

1

15,000

10,000

2

15,000

10,000

3

20,000

20,000

4

10,000

20,000

5

10,000

15,000

Payback Period

3 Years

4.5 Years

The Payback Period methos shows that Project A is better than Project B. As in Project A, the return of the investment of 45,000 £ is returned in 3 Years. Where as in Project B, the Payback Period is 4.5 Years. So, as per the Payback Period method Project A is better than Project B. So, my suggestion is to invest in Project A.

The NPV

Capital expenditure £ 45,000

Depreciation is £ 9,000 yearly (45,000/5)

To find NPV: P = S/ (1+ r) ⁿ

Where P =original value, S= future value, r=rate, n=number of years

YEAR

Project A

NPV

P = S/ (1+ r) ⁿ

Present Value

Factor

NPV

Project B

NPV

P = S/ (1+ r) n

Present Value

Factor

NPV

(cashflow)

(45,000)

(45,000)

(45,000)

(45,000)

1

15,000

1/(1+0.10) = 0.909

15,000 - 0.909

13,635

10,000

1/(1+0.10) = 0.909

10,000 - 0.909

9,090

2

15,000

1/(1+0.10) 2 = 0.826

15,000 - 0.826

12,390

10,000

1/(1+0.10)2 = 0.826

10,000 - 0.826

8,260

3

20,000

1/(1+0.10)3 = 0.751

20,000 - 0.751

15,020

20,000

1/(1+0.10)3 = 0.751

20,000 - 0.751

15,020

4

10,000

1/(1+0.10)4 = 0.683

10,000 - 0.683

6,830

20,000

1/(1+0.10)4 = 0.683

20,000 - 0.683

13,660

5

10,000

1/(1.+0.10)5 = 0.621

10,000 - 0.621

6,210

15,000

1/(1+0.10)5 = 0.621

15,000 - 0.621

9,315

54,085

55,345

Net profit

54,085 - 45,000

9,085

55,345 - 45,000

10,345

Observing the above table we can see that the project A would give prfit 9,085 £ while project B would give profit £ 10,345. So comparision of the projects suggest to invest in project B. With the use of NPV method we can see the profit of both the projects.but the differrence of the profit is not that much high that we can ignore project A.there is a very less difference of profit in the project A and project B.

Private Sector

Now we will go to private sector. Private sector run for the profit. So profit is the main objective of the private sector.

XL Ltd. Is assessing two projects. Here I am comparing two projects with the help of following informations:

Capital expenditure of both projects is £ 10,000

Projects run for five years

Taxation is to be ignored

Cost of capital is 15%

No scrap value at the end is expected

My calculations include:

Payback Period

The NPV

Payback Period

Project A

(£)

Project B

(£)

Cost

10,000

10,000

(Cash flow ) Year 1

1,000

5,000

Year 2

2,000

5,000

Year 3

6,000

3,000

Year 4

7,000

2,000

Year 5

8,000

1,000

Payback Period

3.3 Years

2 Years

So, from the above calculations I will recommend that to invest in Project B will be better than to invest in Project A. because the Payback period in Project B is shorter than the Project A.

The NPV

To find NPV: P = S/ (1+ r) ⁿ

Where P =original value, S= future value, r=rate, n=number of years

YEAR

Project

A

NPV

P = S/ (1+ r) ⁿ

Present Value

Factor

NPV

Project

B

NPV

P = S/ (1+ r) n

Present Value

Factor

NPV

(cashflow)

(£)

(10,000)

(10,000)

(10,000)

(10,000)

1

1,000

1/(1+ 0.15) = 0.870

1,000 - 0.870

870

5,000

1/(1+ 0.15) = 0.870

5,000 - 0.870

4,350

2

2,000

1/(1+0.15)2 = 0.757

2,000 - 0.757

1,514

5,000

1/(1+0.15)2 = 0.757

5,000 - 0.757

3,785

3

6,000

1/(1+0.15)3 = 0.658

6,000 - 0.658

3,948

3,000

1/(1+0.15)3 = 0.658

3,000 - 0.658

1,975

4

7,000

1/(1+0.15)4 = 0.572

7,000 - 0.572

4,004

2,000

1/(1+0.15)4 =0.572

2,000 - 0.572

1,144

5

8,000

1/(1+0.15)5 = 0.497

8,000 - 0.497

3,976

1,000

1/(1+0.15)5 =0.497

1,000 - 0.497

497

14,312

11,751

Net profit

14,312 - 10,0 00

4,312

10,000 - 11,751

1,751

With the use of NPV method we can see the the profit and loss of both the projects. Project A would give profit of £ 4,312. Where as project B would give profit of £ 1,751. So it is advisable to invest in project A as there is a huge difference in profit margin.

Post audit appraisal and comparision of the projects

In public sector and in private sector also post audit is very important factor to analyse capital investment. The aim of the public sector and private sector is differs from one another. The public sector invests for the social benefits. Where as private sector invests for profit or work for value for money. Post audit is to monitor cash flow periodically untill the result of the project comes as per the investor's expectations. It includes the profit faactor, NPV, payback period etc. with help help of post audit company can determine the success of the project.

Appraising is a means of assessing whether an investment project is worthwhile or not. It is used in both public and private sectors. Every company compare the different projects and then find out the project which is the most profitable and effective for the company.

For private sector :

private company work for the value for the money. They take into consideration the 3 e's, that are : efficiency

effectiveness

economy

the private company aims to maximisation of the profit. It also take in to consideration the time value of money, payback period and also interest rate.

For public sector :

The public sector is not only consider the financial terms as payback period, interest rate, profit etc. but also consider services. Public sector is not for the profit.there are some other issues that public sector should consider. That are:

Social issues

Government rules and regulations and policies

Ethical values

Taxes

Economical development

REFERENCE: http://faculty.london.edu/icooper/assets/documents/InvestmentAppraisal.pdf

PART 3

Analysing the financial information of AA and BB and produceing a report for the dierctors of CC Holdings, showing comparative financial performance of AA and BB.

AA

BB

2004

2005

2004

2005

PBIT

17

14

13

02

TALLC

134

167

30

31

PROFIT MARGIN

56.67 %

45.16 %

37.14 %

10 %

ASSETS UTILISATION

22.39 %

18.56 %

116.67 %

64.52 %

LIQUIDITY

1 %

1.67 %

3 %

3.25 %

RISK

0.54

0.39

NIL

NIL

ROCE

0.127%

0.084%

0.433%

0.065%

BASE YEAR 2004

GROTH TURNOVER

3.33 %

( 42.85 % )

GROTH PROFIT

( 25 % )

( 91.67 % )

GROTH CAPITAL EMPLOYED

24.6 %

3.33 %

CALCULATIONS

Profit before Interest= net profit +interest

AA BB

Year 2004 12+05=17 12+01=13

Year 2005 09+05=14 01+01=02

Total Assets less Current Liabilities= Total Assets-Current Liabilities

AA BB

Year 2004 140-6=134 34-4=30

Year 2005 170-3=167 35-4=31

Profit margin = PBIT - 100 %

Turnover

AA BB

Year 2004 17*100%/30 = 56.67% 13*100%/35 = 37.14%

Year 2005 14*100%/31 = 45.16% 2*100%/20 = 10%

Asset utilisation = Turnover * 100% / TALCL

AA BB

Year 2004 30 * 100% / 134= 22.39% 35 * 100% / 30=116.67%

Year 2005 31 * 100% / 167= 18.56% 20 * 100% / 31=64.52 %

Liquidity

Current ratio = Current assets / Current Liabilities

AA BB

Year 2004 06 / 06 = 1 % 12 / 04 = 3 %

Year 2005 05 / 03 = 1.67 % 13 / 04 = 3.25 %

Risk = Debt / Equity (Debentures / Shareholder equity)

AA BB

Year 2004 47/87 = 0.54 NIL

Year 2005 47 / 120 = 0.39 NIL

Growth

Turnover = Turnover Difference / Turnover

= (Turnover 2005 - Turnover 2004) / Turnover 2004

AA BB

31-30 /30 20 - 35/35

= 3.33% = (42.85 %)

Growth

Profit = Profit Difference / Profit

= (Profit 2005 - Profit 2004) /Profit 2004

AA BB

9 - 12 / 12 1 - 12 / 12

= ( 25% ) = (91.67%)

Growth

Capital employed = TALCL Difference / TALCL

= (TALCL 2005 - TALCL 2004) / TALCL 2004

AA BB

167- 134 /134 31- 30 /30

= 24.6 % = 3.33 %

ROCE (Return on capital employed)

ROCE = Net Income /Equity + Longterm Liabilities

AA BB

Year 2004 17/134 13/30 = 0.127% = 0.433%

Year 2005 14/167 2/31

= 0.084% = 0.065%

Comments

For AA

Turnover has increased by 1. Staff cost has also increased by 1. Liabilities and assets are increased by 30 % and 50 % during 2005. There is no substantial growth in turnover . so it is clear that profit is gone negative by 25% during 2005.

As per the financial statement overall AA is not performing that good. If it continues to perform in this pattern then it may be collapse in nearer future. Labour turnover may because of competition, performance review and appraisal of labours.

For BB

Assets utilisation of BB during 2004 was 102%, which was decreasing to half as 57% during 2005. It may be because of labour turn over or lack of skilled labour. Liquidity ratio was 3 in 2004 and 3.25 in 2005. The marginal variation in this ratio may be because of same ratio of current assets during these two years.

ROCE for the 2004 was 43.33%, but it falls tremendously to 6.45% in 2005. It may be the cause of lack of skilled labours,they may not able to get desired returns on capital employed.

The total assets of BB are less, may be it has sold off some of its assets to pay off the debentures. As per the above analysis, it is clear that management of BB is incompetent in making financial decisions. It seems that it fails to perform in such keen competition.

A company who performs well can attract more investments. But BB is incompetent. In the company there may be a lack of technology upgradation. Turnover and profit growth ratios seem to be negative for BB, may be due to cut throat competition.

There is no borrowings of fund, and the gearing ratio is zero. It means struggles for it is less as compare to AA. But it has to face the high competition, that affects its turnover and revenue. As there is no borrrowings, the revenue can be largely utilised and re-invest in the business.

Limitations

Ratios are depend on the accounting methods. Different methods give different values of ratio. Account balance sheets which is used to calculate ratios may increase or decrease at the end of the accounting period. So average should be used then they are available.

For the assessment of the financial vialibility and feasibility, budgeted statement should be provided to make comparision between planned and actual financial statement.the financial statement does not give details of number of people employed, so we can not determine the cost incurred by two subsidiaries on their labour. There is a need of more historic financial details to compare the performance of two subaidiaries. It is dififcult to analyse the financial feasibility of AA and BB on the basis of only two years balance sheets. Most ratios must be compared to historical values of the same firm or the ratios of similar firms.

As the two subsidiaries of CC function in two different markets, they cannot be compared and judged as the different grounds.for actual performance accountability, comparision must be to the budgeted one, but there is no budgeted financial statement provided.

Recommendations

From the above conculations it is clear that both the subsidiaries of CC holdings have not performed really good during 2004 and 2005. It can be said that if they continue to perform in this method then they may not sustain for the long period. Though with the limited data we can not thoroughly analyse the performance of these two companies. But the management of AA and BB can take necessary actions to improve their performance.

For AA

AA should motivate and encourage the labour to produce more and enhance the outputs. It must reduce its assets to raise its liquidity and reinvest the same capital in its business. AA can increse the turnover by raising their prices.

For BB

BB must go for the analysis of their competitors for facing the competition and achieve its targeted turnover. It must motivate and train its labour for efficiency and more production. It must try to reduce its expences to reduce the overall cost. It should utilise its assets efficiently by producing more units from available resources and assets.

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