Index page
Index page………………………………………..…. Introduction…………………………………………. Background………………………………………..… Findings
Section 1………………………………………… Section 2………………………………………… Section 3………………………………………… Conclusion………………………………………….. Reference…………………………………………….
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Introduction
Background
SSP plc is a company operating in the food manufacturing industry. It is engaged in food processing, supplying all the main supermarket chains with first class process meat products. During the last few years the company has been difficult because of the BSE and Foot and Mouth disease made a declining demand for meat product. The bad outstanding achievement stopped in 2004 and a partial rebound in the market produced an increase in turnover by nearly 15%. It is expected that this rebound in the market will gather momentum over the coming year and the SSP plc is planning to take even greater strides forward by opening a new processing plant in Glasgow.
As requested in the chief executive’s memo of 30 December, here is my report summarising and analysising the financial position of the SSP plc for the year 2003 and 2004.
Outline
The main body of the report will evaluate five parts:
Part 1--- Analyze the users of financial information and the purpose of using. Part 2--- State of financial source and categorize with their characteristics. Part 3---Explain the cash flow statement of SSP plc.
Analyze the recent financial performance and position of the SSP plc.
(Including my recommendations about how to improvement of business performance)
Findings
Section 1. Users of financial accounts.
Users of financial statements are a group of people or organizations who use the information to make evaluations and decisions. Users of financial information can be divided into two categories: internal and external users.
Now, I will use a table to show you the users’ purpose and sources of information they use to get the statements.
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Section 2. Source of finances
To run a business, organizations require finance for different proposes and for varying lengths of time. In the finance, we divide sources of capital into two categories: equity capital and loan capital. Equity capital is the finance provided by the owner and there is no interest to pay. Loan capital refers to money that is borrowed from a source outside the business. The interest of loan capital must be paid. Sources of finances could be clarified into short, medium and long term. The short-term refers to finance that are borrowed for a period of no more than one year. The medium-term refers to funds that are borrowed for a period of between two and ten years. Long-term refers to funds that are borrowed for a period of more than ten years.
In the case study, the source of finances of SSP plc is: trade creditors, tax, bank overdraft, debentures, ordinary share capital and the retained profits from last account period.
Short-term sources: 1. Trade creditors:
Trade creditors are produced when the purchase of raw materials or stock is delaying to pay, thus, there is more cash which would be used for other uses. There is also an interest free way of raising finance. However, the credit could lead to poor relations with suppliers and the customers may forfeit discounts.
The credit is £544,000 in 2003 and it decreased to £405,000 in 2004. The percentage of decrease is 25.56%. The decrease of credit infers that SSP plc has a good financial situation that it has a strong ability to pay credits back to suppliers. This could improve the relationship with suppliers. 2. Bank overdraft:
Bank account holders can prearrange with the bank to draw cheques to a greater value than the actual balance in the account. Interest should be paid by customers and bank charges will apply where an overdraft limit has been exceeded. Bank overdraft is flexible and cheap. It has a low cost. Some small bank overdraft even has a free of charge.
SSP plc had no overdraft but the number increased to £86,000 in 2004. The increase shows that the company borrowed money from bank for its expansion in Glasgow.
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Long-term sources: 1. Debentures:
Debentures are loans make to companies that carry a fixed rate of interest. The company’s fixed assets normally secure debentures. Debentures have a fixed time period or an open time period. The shareholders are not debenture holders. A debenture interest is paid as an expense not an appropriation of profit.
SSP plc has a fixed debenture (£1,560,000) in the year of 2003 and 2004. It tells us the company’s fixed assets are steady. 2. Ordinary shares:
Ordinary shareholders receiving pay-outs from company after preference shareholders are paid. Ordinary share dividends are not fixed and subject to company’s periodical performances and decisions of management in paying dividend.
In SSP Company, the ordinary share capital is £1,950,000 in both 2003 and 2004. It infers that
the company has a steady operation situation. 3. Retained Profits
The retained profit is the finance brought from the last financial period. It is not fixed and may be a negative number. It presents operational situation of last period.
The retained profits decreased from £505,000 to £420,000. The percentage change of decrease is 16.83%. The lower ratio shows us the company had made fewer profits in 2003 then it was in 2002.
Section 3. Ratio Analysis
1. Major inflows is Net cash flow operating activates of £1,345,000.
Major outflow is Payments to acquire fixed assets, which takes £984,000. 2. Ratio Analysis
Profitability Ratios:
Gross Profit Percentage=Gross profit/Turnover x 100%
2003: GPP=£7,000,000/£11,674,000 x 100%=59.96% 2004: GPP=£8,037,000/£13,382,000 x 100%=60.06% Trend: Increase
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Analysis: The increase of ratio is a good sign. The positive trend can be an indication that stock control of meat product has improved, demand for the meat product has increased after the diseases, or purchasing policies have improved. The managers should keep the good trend and go on develop it, such as improving marketing strategy, setting better pricing policy, or improving stock control.
Net Profit Percentage=Net Profit before Taxation/ Turnover x 100%
2003: NPP=£1,182,000/£11,674,000 x 100%=10.13% 2004: NPP=£901,000/£13,382,000 x 100%=6.73% Trend: Decrease
Analysis: The decrease of the ratio is a bad sign that it indicates a low profit of the company. From the P&L Account of the SSP plc, we know that although the gross profit increased, the operation cost is much higher in 2004; it leads to a decrease in net profit. So the managers should think about how to decrease our operation cost to help our company earn more profit.
Liquidity Ratios:
Current Ratio=Total Current Assets/Total Current Liabilities
2003: CR=£1,195,000/£767,000=1.56 2004: CR=£1,248,000/£701,000=1.78 Trend: Increase
Analysis: the increase of ratio is a good sign. Generally speaking a healthy current ratio is at least 2:1. The 1.56 and 1.78 indicate the company is a little bit over trading and have difficulty in meeting its short-term debts. The main reason for the increase is the increase in the total current assets and decrease in the total current liabilities. I suggest that the company may keep more profit for the short-term debts.
The Acid Test Ratio=Liquid Assets/Current Liabilities
2003: (£1,195,000-£608,000)/£767,000=0.77 2004: (£1,248,000-£796,000)/£701,000=0.64 Trend: Decrease
Analysis: The decrease is a bad sign. The ratio should be 1:1. But the ratio in both of 2003 and
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2004 is less that 1. And unfortunately, the ratio is still decreasing. SSP plc meets a liquidity problem that the liquid assets decrease. The company managers should pay attention to this ratio and organization’s development.
Efficiency Ratios:
Fixed Asset Turnover=Turnover/Fixed Assets
2003: £11,674,000/£4,017,000=2.91 times 2004: £13,382,000/£4,318,000=3.10 times Trend: Increase
Analysis: Where this ratio gas increase, this is a good sign. It indicates that the existing fixed assets are generating more sales and maybe investment in new fixed assets gas could be been paid off. Managers of SSP plc should develop and focus on it.
Debtors Collection Period=Debtors/Turnover x 365
2003: £306,000/£11,674,000 x 365=9.57 days 2004: £452,000/£13,382,000 x 365=12.33 days Trend: Increase
Analysis: It is a bad sign that there is an increase in DCP. It indicates that SSP’s may have a poor credit control of poor invoicing system. The bad debts may also increase. The leaders of SSP should check their invoicing and reminder system to keep the ratio a proper range.
Investment Ratios:
Interest Cover=Profit Before Interest & Tax/Interest Charges
2003: £1,416,000/£234,000=6.05 2004: £1,135,000/£234,000=4.85 Trend: Decrease
Analysis: This ratio shows how capable the company is of covering its interest charges. The decrease is not good because the company is less able to meet its interest payments. But the ratio is still in a reasonable range. Leaders should try to increase company’s profit to keep this ratio a high level.
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Debt Ratio=Total Debts/Total Assets x 100%
2003: (£767,000+£1,560,000)/(£4,017,000+£1,195,000) x 100%=44.65% 2004: (£701,000+£1,560,000)/(£4,318,000+£1,248,000) x 100%=40.62% Trend: Decrease
Analysis: It is a good sign that the ratio increased. However, a healthy ratio should keep around 50%. It indicates that SSP has fewer liabilities or keeps more assets. The sign should be kept by managers.
3. Recommendation
After reading and analyzing three accounts from SSP Company, I found some problems with it and now I will present my suggestions about the future management in these two parts. Operational recommendation
A ratio of Net Profit Percentage shows us that SSP plc has a high expenditure in operation cost. It also indicates that the company has a low level of cost control. Therefore, I suggest that SSP should try to decrease the costs of sales and the operation cost, such as adopting new management system and using contractors to find distribution channels but to find them itself. Financial recommendation
For the source of finance, SSP has a bad performance of financial operating. In the Cash Flow Statement, the Financing is £0, but the company is planning expansion in Glasgow. The main inflow of the company is the sales. It is a dangerous phenomenon if the company wants to use the turnover to expanse its business because it is impossible to use the current cash to support long-term investment. So I suggest that the company may increase the number of share capital or make more debentures to get more long-term capital for expansion.
Conclusion
By analyzing the P&L Account, Balance Sheet and Cash Flow Statement, we can infer that SSP plc has a good operational performance. However, there are still many parts to improve and develop to help the company maximize profits.
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Reference
Ray H. Garrison, Managerial Accounting, Business Publications Inc., 1985, Printed in U.S.A.
J.R.DYSON, Accounting for Non-accounting Students, Financial Times, 2004, Printed in Great Britain.
Frank Wood & Alan Sangster, Business Accounting 2, Financial Times, Pitman Publishing, 1999, Printed in China.
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