Activity Analysis Report - Finance

Renata Ltd.

Muhammad Tanvir HossainStudent ID: 4325352

Activity Analysis Report: Finance 2

Table of Contents1. Introduction:......................................................................................................................3

2. Individual Activity: Finance:...............................................................................................3

2.1 Gearing:.....................................................................................................................4

2.2 Return on capital employed (ROCE):........................................................................5

2.3 Working capital management:...................................................................................6

2.4 Budgeting:..................................................................................................................7

3. Conclusion:.......................................................................................................................8

4. References:.......................................................................................................................9

5. Appendices:....................................................................................................................10

Appendix 1: Sales and marketing cost...............................................................................10

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1. Introduction:This is an activity analyse report based on Renata Ltd., where in round six, business decisions taken by me as a finance manager. This financial business report for the pharmaceutical industries in the major market in Finland, France and USA.

In this round six, the market condition is positive and negative either way in the perspective of finance. The rise of the demand for cement and steel production in Asian countries increase the costs of building materials approximately 40-50% all over the world. As a finance manager, I am using budgeting to gain economies of scale, to reduce production costs by 2% to expand competitive advantages over our competitors in the market and achieve 60% market share globally in this round six. In this case, investing minimum on buildings and taking advantages of advanced technology for machineries.

Euro is expected to strengthen against USA in the market and European central bank commence to lower the interest rates, it has both positive and negative effects on decision making process as a finance manager. To reduce the risk, I am considering gearing and risk management, as well as working capital management. My objective in this round is to reduce gearing ratio to 48% and hedge currency risk to gain more on return on capital employed, where the current gearing ratio is: 50.88%.

2. Individual Activity: Finance:Finance is a branch of economics concerned with resource allocation as well as acquisition, investment and resource management (Investor Words, 2012). It can be also describe money and market, where money rise through sales of debt and/or equity and insurance. There are three basic sources of company’s funds: which are shareholders (owner of the business), lenders (i.e. Banks, venture capitalists, government) and retained profit in according rounds (Proctor 2009: 45).

One of the main part of finance is investing. investment involves resources being laid aside now to produce a return in the future, for example, investing building and machinery tools to produce goods for next year (Arnold, G. 2008:20). In the chart 2.1 below shows how cash flows within the organization:

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Chart 2.1: Cash flow cycle

Source: Business Education

In this cycle, cash is used to purchase raw materials, wages and other production costs. Finish goods are sold to generate more cash and some external debts, which will allow me to have better understanding of gearing.

2.1 Gearing:Gearing ratio describe a financial ratio that indicates company's relationship between some form of owner's equity or capital to borrowed funds. This activity allow measure of financial influence by owner's funds versus creditor's funds (Investopedia, 2012). Organizations profit varies on how much the organization borrowed cause it has effects on profitability, as organization has to pay interest on borrowing funds. My objective is to reduce gearing ratio to 48% as Renata's current gearing ratio is 50.88%.

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The long-term liabilities also include preference shares and mortgages where capital employed includes share capital, retained earnings and long-term liabilities. Where Renata's long-term liabilities 75,000 and share capital is 5,000.

Graph 2.1: Current gearing ratio

Round Five Round Six47

47.5

48

48.5

49

49.5

50

50.5

51

Gearning Ratio

Gearning Ratio

Source: Cesim sim firm

In the graph 2.1 illustrate, as a finance manager, I was able to increase the profit of the organization to reduce gearing below 50% from previous round. The current gearing ratio is 48.43%, where my objective was to reduce 48%.

2.2 Return on capital employed (ROCE):ROCE referred to the business returns (profits) had made on the resources available on to it. It is calculate the percentage of profits earned before paying taxes and interest versus total (entire) amount of capital invested to earn profit. The higher percentage of ROCE is better for the business.

I have invested on production efficiency 10.0 (K Units) in USA and Finland, as well as I have invested on cost efficiency improvement to minimize the production cost to

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earn maximum profit. It allows me to gain more ROCE. After round six the return on capital employed is: 16.08%. The ROCE has few drawbacks, such as it measures return against the book value of assets in the business. As the assets has depreciated value, The ROCE will increase but cash flow will remain same.

2.3 Working capital management:Every firm need to invest in order to prosper. To invest new factory or new machinery is the part of long term investment. it is also necessary to expand in additional resources devoted to current assets (Arnold, G. 2008:529). The figure 2.2 shows the working capital cycle for a typical firm, such as Renata Ltd. as it is a manufacturing firm rather than business services.

Exhibit 2.2: The working capital cycle

Source: The working capital cycle

As on the diagram, in the upper part where capital invested in raw material inventories which are then used in the production process. Some of the finish goods then sold for cash and rest are sold on credits. As a finance manager, I have invested in raw materials and production efficiency as raw materials and wages

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prices are going up in global market. Current wages of production in Finland is 49 (K EUR) and 51 (K EUR) in USA respectively.

The bottom part of the diagram 2.2, shows non-working capital cash flow. These are generally long term expenses. In the market condition, building cost rises 40-50% and my objective is to reduce production cost by 2% in this round. As a finance manager, I did not invest any amount on new buildings because of investment expenses on building in Finland and USA are 215 (EUR/unit) and 158 (EUR/unit) respectively compare to round five 145 (EUR/unit) and 107 (EUR/unit) in that order. To manage the currency risk, I have cross currency swap agreement with my raw materials suppliers:

Exhibit 2.3 Cross currency swap:

source: Bank for international settlements.

and I was able to reduce my production cost by 5.62% compare to previous round, where my objective was to reduce by 2%.

2.4 Budgeting:I have used bottom up budgeting approach to reduce production, sales cost and effective use of logistic to use minimise unit cost. Considering the rise of material cost for building and raw materials as well as transportations. figure 2.4: bottom up budgeting

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Exhibit 2.4 Bottom up approach

Source: Government of Pakistan, ministry of finance

By using bottom up approach I have decided to utilize 100% production capacity to maximise the use of space and inventories. My sales and marketing budget (Refer Appendix 1) was to achieve our main objective to gain 60% market share globally. We have failed to capture 60% market share, where our global market share after this round is: 50.66% and at the same time our competitors Pharmateam and Ecolab Pharma has 9.35% and 39.99% correspondingly.

3. Conclusion:In conclusion, I would say the budget operations and finance is very important in an organization. As a finance manager I have faces many challenges to achieve our objectives, which ultimately we have failed to achieve.

The decision I have took without having more financial knowledge in previous round helped me to gain more experience and better understanding of some of critical financial aspects, such as gearing, ROCE, risk management and working capital management which allowed me to achieve my objectives as a finance manager in this round to reduce production cost by 2% and minimize gearing ratio to 48%.

Finally, I have developed couple of crucial skills during this round, such as currency and exchange rates, gearing etc. My personal development plan is to gain more knowledge in finance as it is a very vast subjects and there are few interesting concepts and which I will learn during my MBA at Coventry University, for example: shareholder value-based management, total shareholder return, dividend policies, value sharing and stock exchange.

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4. References:Arnold, G., (2008). Corporate Financial Management, 4th Edition, Pearson Education Limited, England.

Bank for international settlements. [online] available from <http://www.bis.org/publ/qtrpdf/r_qt0803z.htm>

Business Education. [online] available from <http://www.bized.co.uk/reference/diagrams/The-Flow-of-Working-Capital---Cash-Flow-Cycle> [16.07.2001]

Cesim Sim Firm. [online] available at <http://sim.cesim.com/results/se/IncomeStatementPage/wicket:pageMapName/wicket-0>

Investopedia. [online] available from <http://www.investopedia.com/terms/g/gearingratio.asp> [2012]

Investor Words.[online] available from <http://www.investorwords.com/1940/finance.html> [2012]

Government of Pakistan Ministry of Finance. [online] available from <http://www.mtbfpakistan.gov.pk/mtbf-process-bottomup.htm>

Proctor R (2009) Managerial Accounting for Business Decisions (3rd Ed) Harlow. FT/Prentice Hall

The Working capital cycle. [online] <http://withfriendship.com/user/boss/working-capital.php>

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5. Appendices:

Appendix 1: Sales and marketing cost

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Activity Analysis Report - Finance