Financial performance of ABC Ltd

mo boodleary performance of first principle LtdIntroduction chronicle is concerned with collecting, analyzing, and communicate accounting information. The accounting information is helpful to those multitude who make plans about fear and in making important decisions tie in to the businessThe aim of this paper is to evaluate the monetary position of the ships company and the greatness of credit manager to earn credit sales tar put downed and importance of actual figures when estimating the figure.This paper consists of two main sections. In the first part, military rank of the fiscal position of ABC Ltd uses utter(a) realise margin and acquit service margin. The second part concentrates on things need to consider when preparing the cipher in order to prevent from biased reckon.Part AA) pass judgment the financial performance of ABC Ltd. Over the four year period.Financial ratio examines the financial health of the business. It helps to identify the financial strengt hs and weakness of the business. By calculating the ratio, it is possible to provide a substantially picture of the financial position and performance of a business. Financial ration can be represented in numerous elans. For fount, as percentage, as fraction and as proportion. Financial ratio can be classified into crystallisefulness, efficiency, liquidity, gearing and investment.ABC Ltd companys financial performance is evaluated by using profitability ration of unadulterated profit margin and net profit margin. coarse profit is the difference between the sales and cost of sales. And the ratio is a measure of profitability in buying ad selling goods and helping before any other(a) expenses be taken into account.For example arrant(a) Profit Margin = thoroughgoing(a) Profit x carbon Sales= 119800/296700 x 100 = 40% Gross profit for the year one is 40%.The around appropriate measure of operational performance for comparison purposes is the Net profit margin ratio. The ci strons which influence the net profit margin of a business ar the degree of competition, graphic symbol of client, economic climate and industry characteristics.For exampleNet Profit Margin = Net profit before reside and taxation x 100 Sales = 22500/296700 x 100 = 8%Net Profit Margin for the Year one is 8%Gross profit margin of ABC Ltd company has fallen down from 40% to 33%. And again growthd to 38% and fall down to 36%. The decrease of the gross profit margin of ABC Ltd was a get out of broad(prenominal) production cost of the company. The raw material used to engender goods and services has change magnitude. As a entrust the company is experiencing less gross profit margins.Nonetheless, the Net profit margin of ABC Ltd has been maintained for the in conclusion two years, Year 3 and Year 4. Whereas in Year 1 company had a high net profit margin and it step by step change magnitude and company experience loss of (2) % of Net profit margin. This whitethorn be because the companys Gross profit margin decreased from 40 to 33 and affected the companys net profit margin. Moreover, it may be the terra firma that, the company has high expense such(prenominal)(prenominal) as high selling and distribution expense, Administration and other oecumenic expenses. After experiencing a loss in Year 2, company gain 7% of net profit margin in Year 3 and year 4 also. This shows company has minimized their expenses and cost of sales and increase their revenue by generating to a greater extent sales.Below show graphical demo of ABC Ltd financial performance.According to the above table, all the accounts except the financial expense of ABC Ltd, all others drive increased. Total sales increased. essence that number of goods and services sold by ABC Ltd have increased and generated a huge amount of revenue. However, the cost of sales also has increased. nevertheless compared to sales achieved, cost of sales is less than the sales generated. Meaning that the cash generated by sales by the company was dog-tired to make the sales, such as raw material, Equipements, machineries cost. Therefore the company gross profit has increased.The expenses spent to generate the revenue are selling and distribution expenses, administration and other general expenses and financial expenses. All expenses have increased except financial expenses. This may be due to each years increase in sales of the company. As demand for the goods and service increases, more number of good and services are produced. And to deliver the products to customers, costs incurred will be high such as deli real cost, transportation cost and other administrative cost related to the delivery of goods and services. Financing expenses have decreased such as rent paid, electricity, fixtures and fitting etc. As a result Net profit of ABC Ltd increased by $10,845. Part BA) Why credit manager is to piece for poor credit assemblyThere are certain causes why credit manager is to blame for t he deterioration in the credit collection period which are beyond the credit manager.Downturn in the deliveryWhen the budget was formulated, during that time economy may have been in a very good correct like in a boom. Businesses earn profits and their ability to leave the suppliers would be strong. And ground on credit worthiness, ABC company Ltd has released goods on credit facility during that time. After two months of time, the economy turned into recession. During recession, companies loath to spend money and have difficulties in paying to debtors, lenders and suppliers. Henceforth customers, who have bought goods from ABC Ltd under the credit facility, would not able to pay as hold terms and conditions.Liberalize credit polityThe next contend which credit manager cannot be blamed, is a formulation of credit policy terms and conditions and implementation of the policy. When developing a credit policy in that respect are certain conditions which should take into account . For example, buyers strength in the grocery, available net profit margin, size and type of buyers, buyers creditworthiness and many more. Any credit policy should include the range of payment, terms, prepayment terms, installments, penalisation interest, conditions of sales, methods of assessing customer, explaining credit rating and risk codes, legal actions, follow up methods, rung responsibility and authority, relationship with another and arbitration process.If these clauses are incorporated into the policy, and customers are aware before getting into any sales and customer agree by signing the terms, then the customer will be covering to it. As a result the credit manager would able to exact for the payment checkly to the agreement, if a customer is disobeying the agreed terms and conditions. Therefore, it is a responsibility of policy makers of the company and senior management to come up with a strong policy and implementing it. And this could be done in coordination with a credit manager.Another reason could be that, even if the company has a strong policy, without acting upon it, we cannot achieve what we want. For example, if the sales persons or sales manager, or senior management, issue goods without checking the credit worthiness of customer with their friends or completion customers and they make own payment paying term their way without comply of credit manager.Increased competition among suppliersThe business environment is very volatile. disceptation among business increases steadily. Being proactive would be the best solution for the success of the company. During the tough competition, it is essential to revise the credit policy terms as accordingly to customer needs and affordability. Otherwise competitors would be offering more attractive conditions and they are likely to get all customers resulting gain the foodstuff share in the business sector. And ABC Ltd would not able to get enough customers to achieve the credit targets allocated in the budget.Quality of goods and servicesIf the prime(a) of the products offered by ABC Ltd is very low, then the customer will garbage to buy the products. Even if they buy the product if the quality is below their pass judgment level, then the payment will be held for some time. And its a responsibility of the production subdivision to produce the goods with good quality according to customer needs.The goods Delaying in deliveringIf the company is unable to deliver the goods at the agreed time, then the customer would not able to depend on the company. In other words, failure to deliver the promises will lead to loss of customer and low dependability. Therefore, it is important for production subdivision to provide raw materials and other necessary material to produce goods and its their responsibility to deliver the goods to customers on time. If the company fails to provide this, then the customers would prefer other competitors and faces low market share and g enerate low profit.Relationship with sales and credit departmentThe relationship between sales staffs (or sales manager) and credit manager is very important. The credit manager responsibility is that to provide further guidance to achieve sales to the sales staffs.Why manager might submit a budget estimate that is biased. And ways to Company guard against it.According to the CIMA translation of budget, it is a plan quantified in monetary terms, prepared and approved precedent to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be industrious to attain a given objective.There are types of budget, managers use when preparing the budget. hotshot of the methods is additive budget. The budget is prepared using the precedent year budget as a basis with incremental amount is added to the new budget. Resources are allocated based on previous years resource allocations. The main improvement of this type of budget is that it is easy to understand and implement and also further time. This could be one of the reasons why budget estimates are based. The main reason is that incremental budget does not take environment changing factor into considerations. Due to changing is economy, budget need to be revised essentially periodically and necessary amendments need to be done. Another problem is that, incremental budget does not have incentives to innovative ideas and to reduce cost.Another type of budget could be unbending budget. In improve budgets, figures are fixed at the beginning of budgetary period. Any change in circumstance, these cannot be changed. For example, due to high inflation, raw material costs (others as well, such as machinery cost, about cost, rent, electricity) increase more that which is estimated in the budget. In fixed budget this cannot be changed. Therefore, actual expenditure exceeds than the estimated value in the budget.A good way to mitigate the budget that is based is that having shorter review periods. For example, if estimated budget is for one year. Then managers can review the budget after triple month period or on quarter basis. The second way to guard the company from base budget is that to approach zero based budgeting. Budget starts from zero and items included in the budget should be justifiable to the budget holder. All expenses allocated for the whole project, should justify each activity one after another and develop a questioning attitude. This helps to minimize the over spendinging and inefficient. Therefore company cannot spend more that what it is estimated and from the estimated expenditure, expected profits will be generated. findingFrom above discussion, we can conclude that, increase in company gross profit would have a direct impact on net profit. Generating more sales will increase the gross profits and by minimizing the company expenses, the companies net profit would increase. And the profitab ility can be compared against the previous years by using ratios and trend analysis.Secondly, businesses normally prepare the budgets each year and quarterly. Regular evaluation of budgets prevents from overspending and adjust the budgets, according to changing the environment. And also in order to achieve high credit facility a budgeted, not only the credit manager should work on it. Other department staffs like sales and senior management should play an important function in doing so.ReferencesAtrill, McLaney, Harvey Jenner 2012, Accounting an introduction, 5th edn, Pearson Australia. FICM, GB 1986, 2004 FECMA , viewed 1 celestial latitude 2014, http//www.fecma.eu/Documents/FECMA%20Credit%20Policy%20chapt%20%201.pdf.McLaney, E Atrill, P 2010, Accounting An Introduction, 5th edn, Pearson Education Limited. Riley, Jim 2012, Tutor2u Limited, viewed 1 December 2014, http//www.tutor2u.net/business/accounts/incremental-budgeting.htm.Schaeffer, MS 2012, Essentials of Credit, Collect ions, and Accounts Receivable, John Wiley Sons, Inc., Hoboken, New Jersey, USA.Page 1 of 14