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Business analysis is the process of identifying the business needs and determining the solutions to those business problems. The business involves that financial and accounting, budget, decision making and risks. Here we are going to see about basic terms involved in accounting, impact of environmental factors upon the financial function, methods of business valuation and how the decision making process takes place in organization's business.
1. Accounting terminology:
The basic accounting terminology is necessary to make informed investing decisions on the business. The following terms are often used in the business.
It is an economic resource in financial accounting, it is owned by company or business. The tangible or intangible that one possesses, usually considered as an asset of a one's. Examples of some intangible assets are copyrights, patents, computer programs goodwill, trademarks and financial assets, including such items like stocks and accounts receivable.
Liabilities are accounts and wages payable, taxes and accrued rent, long and short-term loans and trade debt. Liability also termed as an owner's equity because it is an obligation of the firm to its owners.
c) Balance sheet:
It is a quantitative summary of a company's financial condition at a specific point in time, including assets and liabilities. All the productive assets of a company own are shown by the first part of the balance sheet and all the financing methods like liabilities and shareholders' equity are shown by the second part of the balance sheet. Also it is called as statement of financial position
d) Profit & Loss Statement:
Profit and Loss statement also referred as earning statement, statement of operations, income statement or operating statement. It is a company's financial statement that indicates how the company's revenue is transformed into the net income. The income statement can be prepared by following one of two methods. First one is Single Step income statement, it takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. Other one is more complex Multi-Step income statement. It takes several steps to find the bottom line, starting with the gross profit.
e) Cash flow:
Cash flow statement is financial statement that shows how income and changes in balance sheet affect cash and cash equivalents, and breaks the analysis down to investing, operating, and financing activities. Generally the cash flow statement is concerned with the flow of cash out and cash in of the business. This is also known as statement of cash flow and funds flow statement.
People interested in cash flow statements include:
Accounting personnel, who are need to know whether the organization can be to cover payroll and other immediate expenses
Potential lenders, who want a clear picture of a company's ability to repay
Potential investors, who need to identify whether the company is financially sound or not
Potential contractors and Shareholders of the business.
f) Cost of sales:
The cast of sale involves that cost of purchasing raw materials and manufacturing process on an income statement. It addresses the expense associated with the purchasing raw materials that are necessary to manufacturing process to produce the product sold by the company. Cost of sales = inventory + cost of goods purchased - ending inventory.
Equity is referred as capital comes from investment in the business by the owners, plus accumulated net profits of the business that have not been paid out to the owners. This is net worth of the company.
2. Impact of environmental factors upon the finance function:
There are many environmental factors affects the financial function such as the eco-financial environment, the regulatory environment and the socio-political environment, exert very great influences on the operations of the financial function. This is based on the evidence from the results, which revealed the regulatory index, foreign exchange market variables and socio-political index as the most critical predictors of the financial intermediation-output-related index. Other factors such as financial market imperfection, the growth rate of the economy, taxation and inflation appear not to exert statistically significant effects on the intermediation operations of the financial function.
Now we discuss those environmental factors in details as below:
a) Economic dimensions of environment:
Economic environment refers to the aggregate of the socio-economic infrastructure, the nature of economic system of the country, the nature of factor endowment, the structural anatomy of the economy to economic policies of the government, the capital market, business cycles etc. The successful businessman identifies the environmental factors that are affecting the business, and anticipating the prospective market situations and makes suitable to get the maximum profit and production with minimize cost.
b) Social environment:
The social environment affects the functioning of the business. Sociological factors such as conventions and customs, mobility of labour, costs structure, cultural heritage, respect for seniority, view toward income and wealth and scientific methods etc. have far-reaching impact on the business.
c) Political environment:
The political environment factors are influenced by the political organisations such as party in power, philosophy of political parties, nature and extent of bureaucracy influence of primary groups in country. And also foreign policy, political stability in the country, defence policy affects the company's financial function.
d) Legal regulatory environment:
Regulatory environment includes adaptability and flexibility of law and other legal rules governing the business.
e) Technical environment:
A company's technological development has brought the company to great position in a country. Technological environment influences the business in terms of the effects of technology on markets, consistent application of technology and investment in technology.
f) Pollution environment:
Pollution is the introduction of contaminants into an environment that causes instability, harm, or disorder. Pollution can take the form of energy or chemical substances such as noise, light, heat, hazards, coating fluid etc.
3. Role of accounting control technique to the management control and decision making:
The accounting technique takes the main part of the organization's development. The activities of management accountants provide inclusive of planning and forecasting, performing variance analysis, monitoring and reviewing costs inherent in the business.
There are some specific concepts are used to make decision making by using the accounting control technique.
a) Grenzplankostenrechnung (GPK):
It is a German costing methodology. It is developed in the year of 1940s and 1950s, designed to provide an accurate and consistent application of how managerial costs are calculated and assigned to a service or product. It has been working towards the mutual goal of identifying and delivering a sustained methodology designed to correct and enhance cost accounting information of an organization or company.
b) Lean Accounting:
It supports the lean enterprise to successful business strategy. Ii lean enterprise it seeks to move from traditional accounting techniques to a system that measures and motivates excellent business practices.
c) Resource Consumption Accounting (RCA):
It is formally defined as a dynamic, comprehensive, principle based, fully integrated management accounting approach that provides managers with decision support information for company optimization.
d) Throughput Accounting:
It is an accounting technique used as the performance measures in the organization. It is the business intelligence used for maximizing profits. It is the only management accounting technique that considers constraints as factors limiting the performance of organizations and make decision to the organization.
e) Sales and profit as a performance indicator:
This is the main key performance indicator to measure the company's performance. The sales and profit directly proportional to each other, because if the sale is increase the profit will also increase and if the sale is reduced the profit will also reduce automatically. The company's performance can directly measured by their profit.
3.Task 1 Example:
Let's take the Swiftprint Ltd as an example of this section. It is a printing company; it uses the lithographic printing technique to print. Lithographic printing is a old printing technique, it operates slow.
a) Inefficiencies of the present system and improvements needed:
As earlier said this printing company uses lithographic printer to print. It is old technique and it operates very slowly. But today's business environment is very fast. So we must change the printer in order to print fast and quick delivery and same time the printing quality should not affect.
And the next is the distance between headquarters and printing factory is so far, it should be near with each other. Because as you said in course work like the process of sending CD to leeds and producing the departmental summarise takes five days will be reduce if they near with each other.
Environmental effects of the current system:
Printing is estimated to be the world's fourth most polluting industry is printing factory because of chemical use, high energy and associated wastes. Here the recycled papers are used in printing. But the recycled paper is more damaging for the environment than non-chlorine bleached paper produced from sustainable forests. And during the recycling process inks pollute the environment when removed from the paper.
b) Reporting structure:
I personally recommend the following reporting structure to the departments placing emphasis on recognizing account document with explanation of key indicator performance such as sales and profit.
1. Executive Summary- A short summary of everything that follows below
2. The Market Opportunity
Clearly identifies the end user sector and segment descriptions.
Outline the strategic business drivers within sector
What are the factors that determine customers' priorities and needs
Explain existing solutions and their weaknesses.
Show and explain the routes to market
Outline the recommended products and services
Indicate typical contract sales values and margins achievable.
3. Strategic Action Plan
Actions with outputs, necessary to realise market sales and shares situation.
Strong emphasis on working with sales organization
Costs, timescales, resources where known and applicable.
Show costs and returns margins over time.
Show total return for this current year trading value and also indicate same for following year.
Action points, budgets, authorisation, product and service development, resources required, etc., required making it happen.
c) Incorporated control procedures:
The control procedure and in addition to the control environment which are established to achieve an organization's specific objectives. Particular procedures and designing techniques are included in that procedure. It is used to prevent or to detect and correct errors. Here the histogram control technique will helpful for ensure the accuracy of input data and already existing data. Histogram is a graphical representation.
d) Statistical test to department performance:
Here I am going to take marketing department to evaluate the department's monthly performance by using the statistical tools such as media and mode.
In today's competitive world the online marketing continues to be the most common activity in the web throughout the world. It is one of the fastest and most convenient methods of targeting customers easily and increasing sales profits. For online campaign the name of SPSS, software provider released their newest marketing tool such that the PASW Statistics. It maximizes the value of sales marketing campaigns by selecting customers. The feature demonstrations of these marketing tools are Automatic data preparation, postal code analysis and profile profitable customers. This tool will enable the monthly performance of the department which i selected that marketing automatically.
3. Non financial performance indicators to measure efficiency:
The traditional measurement techniques are the well known technique of measure organization's performance. But now day's under the influence of environmental crises, globalization, and widespread ethical breakdown there is some pressure to identify and report new for measurement. The non financial performance indicators are measures performance to get at newly recognized dimensions of organization value, success, and significance.
a) Customer satisfaction:
It is a measurement of how products and services supplied by a company meet customer expectation. It is used as a key performance indicator of financial performance within the business. In a competitive marketplace where businesses compete for customers, customer satisfaction is seen as a key element of business strategy. There is a substantial body of empirical literature view for customer satisfaction that establishes the benefits of customer satisfaction for firms.
b) Quality of product:
Characteristic of a product or service that should satisfy the customer's needs and wants in exchange for monetary considerations. If the consumer is satisfied that product or service, then the quality is acceptable. It is also a key performance indicator to the measure of organization's performance.
c) Non-Financial Performances and intangible assets:
As non-financial performance measurements make their debut into the standard organization lexicon as matters of management and strategy, the biggest challenge is in identifying metrics that meaningfully demonstrate causal relations across various industries, and that can be solidly linked to other financial metrics of an organizational performance.
The followings are leads to increasing the use of non-financial performance indicators to measure the efficiency of organization.
1. Changes in cost structures
2. Competitive environment and
3. Manufacturing environment
The non-financial performance indicators are better indicators of future prospects. And non financial performance indicators tend to focus on the both long and short term finance performance.
4. Budgetary control to make business decision:
The budgetary control is a continuous process that helps in planning, controlling of business decisions. The budgetary control system assists an organization in setting up the aim or goals and efforts are made for its achievements. The followings are the main objectives of budgetary control:
It is essential for planning and controlling and also it acts as an instrument of coordination to the business.
It coordinates the various departments' actions.
Budgetary control helps to eliminate wastes and raises the profitability position of a business organization.
It predicts about capital expenditure for future.
It is a centralized system for the control system.
Budgetary control operates various departments with efficiency.
It helps to business administration to think about the future that is the crucial characteristic of this system. By using this management can predict the future and take decision depends on the budget level. Thus the budgetary control is helps to make decision in a business of an organization.
5. Methods of cost analysis:
Cost analysis is used to determine how well, a planned action will turn out. Although a cost benefit analysis is used for almost anything, mostly common financial questions are done. It helps the following questions such as, Want to know whether the new machine is worth the cost. Whether that proposed marketing campaign is a good idea or not?
Types of cost analysis methods:
Several of cost analysis techniques are there, the suitability of any of which depends upon the purpose of an assessment and the availability of data and other resources. It is necessary to identify and quantify all costs and all outcomes.
a) Cost-minimization analysis:
It is used to determine the least cost alternative interventions that are assumed to produce equivalent outcomes
b) Cost-effectiveness analysis (CEA):
It is used to compare the costs in monetary units with outcomes in quantitative non-monetary units.
c) Cost-utility analysis (CUA):
It is used to compare the costs in monetary units with outcomes in terms of their utility.
d) Cost-consequence analysis:
It is used to analyze the presents costs and outcomes in discrete categories, without aggregating them.
e) Cost-benefit analysis (CBA):
It is used to compare costs and benefits, both of which are quantified in common monetary units.
6. Limitations of budgetary:
1. Budgets are based on plan estimates
2. Budgeting is not a substitute of management
3. Operation of budget plan is not automatic
4. It takes some time to preparing, during this period many changes may occur. So accuracy can not maintain.
5. Prohibitive cost
6. Effects of changing conditions
7. Constraints on managerial initiative
8. Conflicts among functional executives
5.Task 2 Example:
Let's take the Gorden Ltd to the example. It is a Desktop table lamp manufacturing company which is supply their product to the football merchandise industry.
a) The stakeholders are;
Employees- who are all working in the company.
Customers- general sports users, clups, suppliers and etc.
Management- the people who are organized the company
External organization- governing bodies, funders, creditors, and consultancy clients etc,.
b) Financial performance indicator:
The important financial performance indicators are sales profit, customer satisfaction, quality of product and some other non financial performance indicators. Here i am going to take sales profit as a performance indicator. Every time taking this performance indicator gives the accurate measurement to us.
c) Measure performance by other department:
There are different types of departments in an organization even in Gorden Ltd also such as production, marketing and HRM. The production department is also a good performance indicator to the organization. If the production is increasing means the sales increased, based on this factor we can measure the performance.
d) Break Even Analysis:
In a product sale, the break-even points the point in which the total revenue received equals the total costs. It is typically calculated in order to determine if business would be profitable to sell a proposed product, as opposed to attempting to modify an existing product.
Break Even Point = fixed cost / contribution per unit
1. Methods of business valuation:
Business valuation is a process to determine the value of a company. In today's competitive business environment, the companies prefer to do business world wide. Business valuation is an important tool to validate the true assets value of a company or organization.
Business valuation methods
Asset accumulation method
Discounted cash flow method
Market value method
Price earnings multiple valuation
True vale business valuation
2. Alternative forms of finance available to the firm:
Obtaining finance is the major problem to the business enterprise. The sources of capital available to any firm are quite numerous. But public companies have the great variety of sources available for their use.
The types of finance are the following and their impact to the corporate risk and cost of capital:
Several types of shares are available, each with different rights. The equity is the ordinary share of the company it represents the major ownership and risk bearing element of the entrepreneurship. A new issue of shares for sale will raise capital for the company.
These are loans made to the company. They differ from conventional loans insofar as they are offered to the market at a fixed interest rate and are repayable at a set time. The risk will increase for this source.
c) Bank Loans:
Obtaining loan is not easy. Merchant banks tend to be higher rate of interest than the clearing banks since they are normally dealing with a large loan to the organization.
d) Bank overdrafts:
A bank overdraft is a process of a commercial bank is permitted to overdraw on that account up to an agreed limit for a prescribed period of a customer. If the company has pass their overdraft, the risk will increase and the cost of capital is reduced.
e) Trade creditors:
Delayed payments to creditors and prompt ones from debtors it will make ease cash flow problems.
f) Short Term Loans:
Short term loans are available from banks, financial institutions and individuals. From the commercial bank short term loan are obtaining.
3. Effect of capital cost structures on corporate risk and cost of capital:
Capital structure refers to the way a corporation finances its assets through some combination of debt, hybrid securities or equity. A firm's capital structure is then the composition of its liabilities.
a) Capital structure for a perfect market:
Let's assume a perfect capital market; firms and individuals can borrow at the same interest rate; and investment decisions aren't affected by financing decisions. Modigliani and Miller, he invented two results under these conditions. Their first 'proposition' was that the company's value is independent of its capital structure. Their second 'proposition' is that the cost of equity for a leveraged firm is equal to the cost of equity plus an added premium for financial risk.
b) Capital structure in the real world:
If capital structure of an organization is irrelevant to a perfect market, then imperfections which exist in the real world must be the cause of its relevance. The following below theories are tried to address some of these imperfections, by relaxing assumptions made in the M&M model.
1. Trade-off theory
2. Pecking order theory
3. Agency Costs
7.Task 3 Example:
Here i am going to take Cadbury PLC as an example of this task. It is a chocolate company they deliver their product worldwide. They have a product in different flavours. Today's their business value must be higher than others.
a) Current value of the company:
The company's value must be based on the following factors such as asset value, current market value and cash flow method.
The above graph shows that the Cadbury's growth. They have grown up every month by month. It shows that current situation of this company is very well.
b) Possible forms of finance to this company:
When look at the company's last year balance sheet, we can identify that the company has more shareholders only. Many investors like to buy shares from this company.
C) Risks when raising finance:
Its give faith for their shareholders inâ€¦ a set of long-term targets never before achieved by Cadbury and subject to significant risk and uncertainty. its offer provided "certainty" and "potential" to shareholders.
Here we discussed about the business analysis and what are all the terms related to the accounting, what are the environmental factors does affects the finance function, what are all the risk arrive when raising the financial position, how the business has been valued and their cost analysis technique with the relevant examples.