Report on Financial Management of MD Co.

Introduction of MD Co.

MD Company is working in the manufacturing sector to produce and sell sports cycles and other sports products. The company owns the capital of more than $100000 and 300 plus workforce in the manufacturing and organizing departments. MD Company is seeking for opportunities to improve the financial health of the company through improvement in strategies and systems. In the present work, cash budget, budgeted income statement, and budgeted balance sheet are developed in the master budget of MD Company. Furthermore, present work is also based on financial ratios calculation, monitoring of strategic planning, and comparison of MD Company with market benchmark scores. Present work will also elaborate on Management Accounting skills sets and characteristics of effective management accountant in MD Company. 

Learning Objective: 3

Master Budget of MD Company

Cash Budget:

In the following table, the cash balance is projected on a monthly basis for MD Company. In accordance to this table, ending cash balance of each month (after meeting expenditures, cash outlays, and purchases) would be more than $50000 (Bebbington, Gray, & Laughlin, 2001).

Cash Budget	OCT	NOV	DEC	JAN	FEB	MAR	Budgeted Total	Actual	Variance
Beginning Cash Balance	$22,500.00	$55,500.00	$53,000.00	$50,000.00	$52,500.00	$52,500.00	$286,000.00	$314,600.00	$28,600.00
Current month sales	$25,000.00	$27,500.00	$27,500.00	$30,000.00	$30,000.00	$30,000.00	$170,000.00	$187,000.00	$17,000.00
Previous month sales	$             -	$25,000.00	$27,500.00	$27,500.00	$30,000.00	$30,000.00	$140,000.00	$154,000.00	$14,000.00
Add: Cash Collections	$25,000.00	$52,500.00	$55,000.00	$57,500.00	$60,000.00	$60,000.00	$310,000.00	$341,000.00	$31,000.00
Total Cash Available	$47,500.00	$108,000.00	$108,000.00	$107,500.00	$112,500.00	$112,500.00	$596,000.00	$655,600.00	$59,600.00
Less: Cash outlay on Administrative Expenses	$30,000.00	$30,000.00	$30,000.00	$30,000.00	$30,000.00	$30,000.00	$180,000.00	$198,000.00	$18,000.00
Less: Cash outlay on Purchases	$             -	$25,000.00	$25,000.00	$25,000.00	$30,000.00	$30,000.00	$135,000.00	$148,500.00	$13,500.00
Less: Cash outlay on equipment purchase	$20,000.00	$               -	$               -	$               -	$               -	$               -	$20,000.00	$22,000.00	$2,000.00
Utilities	$             -	$               -	$3,000.00	$               -	$               -	$3,000.00	$6,000.00	$6,600.00	$600.00
Interest	$2,000.00					$1,000.00	$3,000.00	$3,300.00	$300.00
							$0.00	$0.00	$0.00
Total	$52,000.00	$55,000.00	$58,000.00	$55,000.00	$60,000.00	$64,000.00	$344,000.00	$378,400.00	$34,400.00
Excess (deficiency)	($4,500.00)	$53,000.00	$50,000.00	$52,500.00	$52,500.00	$48,500.00	$252,000.00	$277,200.00	$25,200.00
Loan	$60,000.00	$               -	$               -	$               -	$               -	$               -	$60,000.00	$66,000.00	$6,000.00
Ending Cash Balance	$55,500.00	$53,000.00	$50,000.00	$52,500.00	$52,500.00	$48,500.00	$312,000.00	$343,200.00	$31,200.00

 

Budgeted Income Statement

Following table represents budgeted income statement for next half of the fiscal year. In accordance to the calculated sales, expenses, and cost, MD Company would have $70,800 as net income (excluding taxes).

Budgeted Income Statement
Sales	$ 310,000.00
CGS	$   51,200.00
Gross Margin	$ 258,800.00
Selling and Administrative Expenses	$ 180,000.00
Utilities	$     6,000.00
Operating Income	$   72,800.00
Interest Expense	$     2,000.00
Net Income	$   70,800.00

Budgeted Balance Sheet

Budgeted balance sheet shows the financial position of MD Company on 31 March, 2020.

Budgeted Balance Sheet
Non-Current Assets	$   61,000.00
Current Assets	$   85,500.00
Total Assets	$ 146,500.00
Equity and Liabilities
Ordinary Share capital ($100 per share)	$   81,500.00
budgeted closing stock	$   30,000.00
Reserves	$     2,000.00
Non-current Liabilities
10% loan notes	$   20,000.00
Current Liabilities
Accruals	$     7,000.00
Trade payables	$     6,000.00
Total Equity and Liabilities	$ 146,500.00

Analysis of master budgets shows that the cash budget is a basis to calculate ending cash balance for a company that we mention on the current assets section of the budgeted balance sheets. Cash budget also enables the financial managers to develop further plans about the execution of the future operations of the company (Bhagat, 2017). According to evaluation, ending cash balance of the previous month was used as the beginning cash flow of the next month. However, comparatively cash amount in the current assets of the budgeted balance sheet is greater than the actual historical data (balance sheets of 2019, 2018, and 2017) 

Advantages and Disadvantages of Planning Tools

1)      Budgets

Budgets are developed in the organizations to plan assets utilization, management of cash flows, and balancing cost in accordance with the profit. Budget assist managerial staff members as a guideline to control and manage the financial health of the company (Loughran, 2011). There are some advantages and disadvantages associated with budgeting technique which are detailed below:

Advantages:

·         The budget enables the managerial staff to see how cost occurs.

·         Budget support is the forecasting of future sales and profit.

·         The budget enables the management to MD Company to set prices

·         Budget is also supportive of capital and credit procurement.

Disadvantages:    

·         Budget only concerns with the financial outcomes of a company

·         The budget does not provide information about uncertainties in the operational market.

2)      Pricing:

Several pricing strategies are commonly in use of organizations. Various kind of pricing strategies is psychology pricing, price skimming, value pricing, and penetration pricing. Advantages and disadvantages linked to pricing strategies are presented below: 

Advantages:

·         Appropriate pricing strategies can enable MD company to win in the competitive market

·         Selection of right pricing strategies build customer equity for MD Company

Disadvantages: 

·         A wrong selection of pricing strategy can cause failure in the targeted market.

3)      Strategic Planning Tools

Strategic planning tools assist managerial staff members to develop better organizational policies and strategies concerning with the future operations of the company. Strategic planning tools include balanced scorecards, SWOT analysis, and PESTLE analysis, porter 5 model and balance scorecard. In this case scenario, only two strategic planning tools are explained and analyzed in details. 

1. PESTLE Analysis

PESTLE analysis is based on 6 major external environment-related factors which can draw an impact on the business outcomes and profitability of a company. The analysis shows that Political, Economic, Social, Technological, Legal and Environmental factors can bring change in the customer market of MD company thus the company would have chances of both increase and decrease in the sales. A PESTLE analysis has some advantages and disadvantages while we use such strategic planning tools for MD Company for budgetary control. Some key advantages and disadvantages are enlisted below:

Advantages:

a)      It provides information about possible risk factors associated with economic development in the targeted market which can influence sales positively or negatively.

b)      It provides information about the political policies that need to be considered in the planning stage before investing in a project. 

Disadvantages:

a)      PESTLE analysis only provide information about the external environment

b)      PESTLE analysis does not provide numerical and quantitative information that can assist in the budgeting process at MD Company.

2. SWOT Analysis

SWOT analysis represents the situation of the internal and external environment for MD Company. Managerial staff can use this kind of information to ensure accuracy and authenticity in the future organizational plans and budgets for operations execution. SWOT analysis has some advantages and disadvantages for budgeting and strategic planning which are enlisted below:   

Advantages:

a)      It provides information about gaps in improvement in the internal operations and environment of the company.

b)      It provides information about intangible assets and supportive factors (such as reputation, employee productivity, customer loyalty and goodwill) that can draw an impact on future sales of the company.

Disadvantages: 

a)      SWOT analysis provides limited information about competitive forces and customer market trends.

3. Balance score card

A balanced scorecard managed efficiently by the MD Company for the better management of the product. Balance scorecard strategies can help the company to monitor the strategies related to strategic planning. Effective management accountants should be trained for revenue growth, long-term survival, efficient calculation of the operating income, customer perspective, etc. Moreover, these strategies can bring management better accounting skills sets under the semi-standard structured report as consequences arising can be monitored and enterprise can understand the efficiency and effectiveness of internal business procedures.

4. Porter 5 model

a) Threat of substitutes

There is the threat of substitute products to the MD Company as the substitute products have attractive prices or better quality and thus the customers can switch from one product as they can switching from car to bicycle when they get good or better resell options.

b) Rivalry among existing competitors

It is a profitable industry so there is an intense rivalry among existing competitors and the market share is aggressive because of the high exit barriers and products that are not differentiated. The competitors have equal size and also in the industry, there is low customer loyalty.

Learning Objective: 4

Ratios of MD Company

Ratio analysis provides information about the financial strength and health of the company in the specified period usually a fiscal year. In the following table, ratio analysis of MD Company is presented. The following information is based on the budgeted financial statements for the next half year (ended at 31 March 2020) of MD Company (Brigham & Houston, 2012).     

Ratios for financial year	2018	2017
Gross profit ratio	0.36	0.375
Operating profit margin	0.18325	0.240714
Current ratio	4.576923	4.5
Quick ratio	3.423077	3.509434
Gearing ratio	-7.33	-13.48

According to the ratio analysis liquidity situation of MD Company is strong because of great contribution by cash in the current assets of the company. Liquidity ratios such as current ratio and quick ratios are greeter than benchmarking ratios of average competitors and historical ratios of MD Company. Quick ratio shows that the company had limited attention given to the inventory and stocking. Although, profit margin ratio and operating margin ratio represents the profitability of MD Company regarding future operations (Minterellison.com, 2016). The analysis shows that the gross profit ratio and an operating ratio of MD Company are 0.83 and 0.23 which are below the gross profit and operating profit margin ratio of companies similar to MD Company. The difference in the average (benchmark ratio) and calculated ratios of MD Company present variance level. The analysis shows that ratios calculated for MD Company half-year performance and similar company’s performance ratios have variance at a large scale. Conclusively ratio analysis and variance indicate that MD Company needs to bring changes in the business and asset management strategies to ensure high efficiency of asset and working capital utilization in the company for the execution of business operations.  

Management Accounting Skill Sets

In this section, management accounting and characteristics of an effective accountant are discussed in reference to the case scenario of MD Company. Here characteristics of an effective accountant are presented:

1)      Effective management account keeps competence to use knowledge about accounts appropriately.

2)      Provide assistance to the decision-making process on the basis of logical reasoning

3)      Performance all-important duties in MD Company while following law and regulations.

4)      Work with integrity and loyalty to the MD Company.

5)      Only follow up with credible information and disclose relevant information with stakeholders

6)      Communicate confidently in front of stakeholders (including investors and shareholder) about the policies of MD Company.    

a)      Financial Governance

Financial governance is the governing bodies who concerns with the financial details of the company. Financial governance of MD Company has a board who deals with the legal, financial, and moral responsibilities of the company (lexicon.ft.com, 2018). Board of governance develops strategies to ensure fair and accurate financial information presented to the shareholders and investors by encouraging internal and external audit system in MD Company. Financial governance is usually given names such as an executive committee, the board of governance, and executive’s council. Financial governance in MD Company ensures that funds to be used in the company are utilized for the benefit of organizational beneficiaries and stakeholders. They evaluate financial details and funds details to check that MD Company has enough funds for business operations. They also develop plans to get funding from external sources in case funds available in the company are unable to meet future requirements of production and operations department. Financial governance also has responsibilities in the MD Company to check and monitor internal and external auditing reports. They monitor organizational operations and efficiency of assets utilization as they are accountable to the stakeholders and beneficiaries of MD Company.     

b)     Management Accounting Skills Sets

Management accounting skills set in MD Company is based on five major skills which are presented below: 

1)      Decision Making Skills: Management accounting requires skills to manage and understand risk factors, develop suitable alternatives, and find out the best course of action or mitigation strategy. Effective decision-making skills increase chances of better risk management.  

2)      Leadership Skills: Management accounting also require leadership skills to lead and collaborate with other colleagues and team members at MD Company to avoid conflict and ensure better performance outcomes. 

3)      Operations skills:Accountants working the finance and accounts department must-have skills about the operations of accounts department including the recording of sales data, expense management, and budgeting plans.   

4)      Technology skills:Appropriate technological skills are essential to understand advanced accounts recording system in databases and analysis of big data for the decision making process.

5)      Planning and Reporting Skills:The basic requirement of management accounting skills set is the acquisition of planning and reporting skills. It concerns with the evaluation of financial details and performance to develop future plans and current financial reports of the MD Company. 

c)      Effective Strategies and System

Effective strategies and system are essential for the future better performance of MD Company. Management of the company has responsibilities to bring changes in the organizational system and strategies for the improvement of business operations and profitability outcomes. In MD Company, the managerial staff is focused on corporate social responsibilities (CSR) related strategies and fair accounts treatment system to build a trustworthy relationship with investors and get secure opportunities for future funding.

d)     Development of Strategies and Systems

Development of effective strategies of communication and application of international standards of auditing and financial reports presentation can support MD Company to accomplish their business goals. However, for this purpose management need to have a critical evaluation of each strategy prior to its implementation in the company. Development of risk mitigation strategy in the light of information about the likelihood of occurrence and impact of the risk factor on MD Company enables the company to ensure secure business operations. Concerning with successful management of MD company are also required to develop strategies and system about timely reporting, disclosure of financial details, and other key audit matters of the company.  

Conclusion of MD Co.

The whole discussion concludes that MD Company has strong market equity and chances of an increase in future profitability. Managerial staff and financial governance of the company are concerned with the improvement of financial position and increase in profitability while keeping in mind the benefits and advantages to the stakeholders and beneficiaries of MD Company. Characteristics of effective management accountant include integrity, confidence, leadership, knowledge, and loyalty to the company. Some important skills for management accounting relate to technological skills, leadership skills, and decision-making skills. Financial analysis including master budget analysis, ratio analysis, and variance conclude that company need to focus on improvement in asset utilization and asset management.  Moreover, MD Company need to focus on the selection of right strategic planning tool to develop a more realistic budget.