Fore Casting

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Forecasting is the estimation of the value of a variable (or set of variables) at some future point in time.

Forecasting exercise is usually carried out in order to provide an aid to decision-making and in planning the future. Typically all such exercises work on the premise that if we can predict what the future will be like we can modify our behaviour now to be in a better position, than we otherwise would have been, when the future arrives. [1]

The organization I have chosen for the task 1 of the assignment is described below

Introduction:

Kamran Ahmad Marble Industries (KAMI), located at the North West Frontier Province (NWFP) Pakistan. They deal in different types of marbles found in different areas of Pakistan. They not just provide marble tiles to local industries / clients but also have business relation / partnership with some other companies at UAE, Bangladesh and Sri Lanka. They get their raw products from some remote areas of Pakistan like Buner, Swat and Tribal areas of Pakistan.

Fund Sources for KAMI:

Following are the available funds sources for KAMI

1. Take loan from banks
2. Get funds from marble association
3. Get loan from other business parties

Take Loan from Banks:

In Pakistan different banks provide loans to industries on different terms and conditions and interest rates. But in recent years some banks from gulf have opened their branches in Pakistan with Islamic banking (as interest in prohibited in Islam). Also a bank owned by Germany “The Bank of Khyber” in North West of Pakistan provides loans without any interest. “Meezan Bank” which is a premier Islamic banking system and completely interest free banking, also provides loans for industries. So in banking sector KAMI has two choices to get loan i.e. loan with interest or loan without any interest.

Funds from Marble Association:

The marble association (association of all marble industries in Pakistan) also has a funding system to help its members in the time of need. KAMI owner is the president of marble association Northern zone, so they have advantage of taking the “Helping fund” from marble association, because they are trustworthy and having good reputation in the market.

Loan from other Business Parties:

As a cultural value, in this area of Pakistan people often help each other financially in the time of need, even competitors in market help one another financially because it is consider “Good” in the culture and tradition.

So they can also loan from some of the good established marble parties in their area, because they have good repute in the area and a well known and respected family

Appraisal of Source:

I will recommend KAMI to get helping aid from marble association, because their company and its management is very active in the marble association activities, they always remain in front for the rights of marble industries in the courts and other public bodies offices, so they will face no problem in getting the required funds with zero interest rate from marble association.

Introduction Task 2

In this task a report is required to have an investigation of two competing projects in public and private sectors, use any of the appraisal techniques and justify your choice, then taking a project from public sector and doing post audit appraisal and at the end making recommendations for that organization on that project.

I have taken following two projects for the same company that in task 1 Kamran Ahmad Marble Industries and following are the two competitive projects.

Project 1: Purchasing Heavy truck for supply of raw materials to KAMI

Project 2: Installing new machinery (Bridge cutter and vertical cutter) to increase the productivity of the company.

Project 1: Purchasing Heavy truck for supply of raw materials to KAMI

Estimated project cost: 3500000

Cost of Capital: 10 %

Project run time: 5 years

The NPV for project 2 is positive

Suggestion for KAMI

As the NPV for project 1 is negative and NPV of project 2 is Positive, so I will suggest KAMI to go for project 2 instead of investing money in project 1.

Reasons for using NPV

Following are the advantages and disadvantages of NPV and the reason that I choose NPV instead of any other financial measurements method.

Advantages

• Consistent with shareholder wealth maximization:
• Consider both magnitude and timing of cash flows
• Indicates whether a proposed project will yield the investor's required rate of return
• Tells whether the investment will increase firm value or not
• Consider the risk of feature cash flow through cost of capital.

Disadvantages

• Many people find it difficult to work with a dollar return rather than a Percentage return
• Require an estimate cost of capital in order to calculate the net present value.

Post Audit Appraisal and Recommendations

“Comparisonof the actualincomeyielded by acapital projectwith the income projected at the time ofproject appraisal”

A post audit determines if a company's policies and procedures have been properly followed. The test may be to verify if paid invoices have necessary documentation and approvals. In an audit performed by a public accountant, period that exists between the completions of the auditor's field work and the issuance of the report on the financial statements. During this period, the auditor is in constant contact with the client while the audit report is prepared and the final review of the drafted financial statements takes place. The auditor has a responsibility to disclose subsequent events so that the financial statements are not misleading.

The post audit's effectiveness is to do proactive measures including the clarity in policies and guidelines are the effective thing in prost audit.

The post audit best efficiency is related to claims for pricing payments and allowance claims and most importantly for calculating the company's payment dues.

The growing trend reduced cycle time to verify transaction accuracy would have for reaching implication in post audit.

Social Accounting

It is a framework used for monitoring, evaluation and accountability to stakeholders both internal and external of the organization. The social accounting is used investigate organizations performance on social, environmental and economic objectives, and ensure that it is working in accordance with its values. In the private sector, social accounting is aligned with corporate social responsibility.

The public sector is the part of economic and administrative life that deals with the delivery of goods and services by and for the government, whether national, regional or local. The organization of the public sector can take several actions, including: Direct administration funded through taxation, the delivering organization generally has no specific requirement to meet commercial success objective, and production decisions are determined by government.

The amount of risk in public sector is,

• Company need to follow the government policies.
• The local people
• Need to follow the Legal procedure.
• Pressure from local government bodies,
• Need to handle the political issues,

Introduction to Task 3

In this task the requirement is the comparative financial performance of three companies AA, BB and CC, the last two companies are the wholly owned subsidiaries of CC. in this task its is required to analyse the given information and produce a report for the management of company CC by showing the comparative financial performance of AA and BB. Also comment on the potential limitations of such comparison, by considering issues like common management information system for both subsidiaries. Also provide information on whether there is sufficient evidence to conclude that BB managers lack competency in making financial decisions.

Comparative Analysis

Following are the various methods available for comparative analysis

• ROCE
• Profit Margin
• Asset Utilisation
• Liquidity
• Risk (gearing)
• Growth (turnover, profit, and capital employed)

ROCE is used infinanceas a measure of thereturnsthat a company is realizing from itscapital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital.

ROCE analyses give companies insight into the utilizing of the capital to generate revenue. It is required that ROCE amount should be higher than the borrowing amount. In the provided data the subsidiary BB is having a very high return on capital as compared to AA.

Profit Marginornet profit ratioall refer to a measure ofprofitability. It is calculated by finding thenet profit as a percentage of therevenue.

In Profit Margin low profit margin indicates a low margin of safety, higher risk that a decline in sales will clear the profit and results in net loss In the case of the BB subsidiary.

Asset utilization is the ratio between net sales and total assets. It provides understanding on how to utilize the organization assets by looking at total turnover and total assets.

The higher the asset utilization the lower the investment cost. And yield better results each year for company.

Liquidity is the business's ability to meet its payment obligations, in terms of possessing sufficient liquid assets, and to such assets themselves.

Advantages and Limitation of Comparative Analysis

Comparative analysis have many advantages in providing insight to the management of companies into the positive and negative aspect of their investment in different projects, but it also have some limitations due to the internal and external factors. Following are some of them

The comparative analysis provides the organizations an understanding of profit ratio it provide information that organization have plenty or resources to pay their expenses and whether shareholders are aware of the financial condition of the company. It also helps organizations to compare their business with other competitors.

• Credit analysts, those interpreting the financial ratios from the prospects of a lender, focus on the "downside" risk since they gain none of the upside from an improvement in operations. They pay great attention to liquidity and leverage ratios to ascertain a company's financial risk.
• To have looked at the operational and profitability ratios the Equity Analysis is important. To determine the future profits that will accrue to the shareholder.
• Financial ratio analysis is well-developed and the actual ratios are well-known, practicing financial analyses often develop their own measures for particular industries and even individual companies. Analysts will often differ drastically in their conclusions from the same ratio analysis.

Is BB management lack competency in making financial decisions?

The provided data and the above analysis show that the AA organization is applying monopoly principle and runs under local authorities. By having desired contract the company's profitability can be easily assumed. And they cannot increase their rate of investment as the revenue cannot automatically be generated. BB is completely different from AA's organization they have several issues like labor, cost of running the organization and they have to handle the continuity of their previous services. It is very difficult to compare both the organization AA and BB because the cost expenses are completely different. The subsidiary BB managers lacks efficiency on making financial decisions as the calculation does show the considerable results while appraising company's performance. BB is losing revenue, because it has got competitive market. So while competing in such a competitive market the BB management is lacking in taking financial decisions which is shown by above data and the competitive analysis.

AA is an organization which runs on the monopoly principle and it is in regulatory body and it runs under local authority. By having desired contract the company's profitability can be easily assumed. And they cannot increase their rate of investment as the revenue cannot automatically be generated.

On the other side we cannot compare both the organization AA and BB because the cost expenses are completely different (method of calculation and depreciation).

The process to compare other business in the same sector. Here we are going to make external benchmarking it means to compare through the trade association and the industry itself, external also includes comparing through activity.

Activities like learn from someone, who is very good in some other business, try to imitate the best from the performer, and looking at the management itself.

As a conclusion, above information shows BB managers lacks efficiency on making financial decisions as the calculation does show the considerable results while appraising company's performance. AA subsidiary is almost the public sector company; the company operates on the long term fixed contract. Even AA is not performing up to the expectation. It is reliable on having the contract.BB is losing revenue, because it has got competitive market.

Above maid analyses was made by having only the two years (2004, 2005) finance data's and I can't tell if the previous year's more or on the contrary less successful and productive. So I can't provide an accurate objective analysis of both subsidiaries AA and BB. But by doing the given 2 years financial calculation, BB subsidiaries are losing their business.

References

1. http://www.businessdictionary.com/definition/post-audit.html
2. http://people.brunel.ac.uk
3. http://office.microsoft.com/en-us/templates