Accounting and Financial Analysis Business of Raising Cattle

Question: Describe about the Accounting and Financial Analysis for the Business of Raising Cattle. Answer: Introduction The people in Australia have been carrying on the business of farming and raising cattle for many years to earn their livelihood. However, in the present era, farming has become one of the most attractive businesses. The advancement in the technology has taken the business of farming to another level. In the present days, the farming activities are not only carried by the individual farmers and their families, but big companies are also getting into this business. In the context, with the objective to analyze the attractiveness of farming and cattle raising business, a report has been presented here. This report covers the study of financial results of Windy Downs which is a family business carrying on faming and cattle raising business. Further, this report also covers the budgetary analysis, cost estimations, and optimizing the resource allocation. Moreover, the report also highlights organizational structures and benchmarking principles which are applied to help business grow. 1 (a) Windy Downs: Trend Analysis Income Statement: 2009/10 2010/11 2011/12 % Change 2010/11 2011/12 Gross Margin - Cattle 208,129 215,568 218,423.00 3.57% 1.32% Gross Margin - Wheat 46,898 48,789 79,348.00 4.03% 62.64% Gross Margin Sorghum 93,726 96,246 137,992.00 2.69% 43.37% Net Operating Income 348,753 360,603 435,763.00 3.40% 20.84% Operating Expenses 274,456 280,333 247,232.00 2.14% -11.81% Net Income $74,297 $80,270 248,063.00 8.04% 209.04% Cash Flow Statement: 2009/10 2010/11 2011/12 Beginning Balance 15,110 18,456 $10,358.00 22.14% -43.88% Cash Inflow 390,923 414,678 518,335.00 6.08% 25.00% Cash Outflow 387,577 422,776 383,515.00 9.08% -9.29% Ending Balance $18,456 $10,358 145,178.00 -43.88% 1301.60% Balance Sheet: 2009/10 2010/11 2011/12 Current Assets 565,956 568,958 159,179.00 0.53% -72.02% Long Term 475,290 432,099 950,499.33 -9.09% 119.97% Fixed Assets 4,289,970 4,437,980 4,490,016.00 3.45% 1.17% Total Assets 5,331,216 5,439,037 5,599,694.33 2.02% 2.95% Current Liabilities 2,456 2,705 - 10.14% -100.00% Non-Current Liabilities 300,000 260,000 220,000.00 -13.33% -15.38% Total Liabilities $302,456 $262,705 220,000.00 -13.14% -16.26% Net Worth $5,031,216 $5,179,037 5,379,694.00 2.94% 3.87% 2009/10 2010/11 2011/12 Trading Accounts Livestock 226,720 234,943 264,545.00 12.88% 27.11% Commodity 135,473 144,891 228,750.00 -30.38% 9.91% Gross Trading Profit 362,193 379,834 493,295.00 82.50% 137.01% Business Expenses 122,689 125,320 65,775.00 -39.79% -68.40% Depreciation 137,090 132,454 81,405.00 -36.36% -60.89% Business Income 102,415 122,060 346,115.00 -41.35% 66.30% Operator Expenses 55,000 55,000 100,052.00 -73.57% -51.93% Operating Profit 47,415 67,060 246,063.00 -67.78% 18.23% Financial Expenses 17,549 17,514 17,939.00 -91.59% -91.38% Business Return 29,865 49,546 228,124.00 -76.19% 9.61% 1 (b) From the chart presented above, it could be observed that the gross margin of cattle is consistent with slight ups and downs through the period of three years. However, the gross margin of wheat can be seen to be showing increasing trend over the period of three years. Same observation has been made in respect of the gross margin of sorghum as it can also be seen to be increasing year by year. The net worth of the business is also showing increasing trend contently over the period while significant improvements have been observed in the business return. The business return has shown sudden increase in the year 2012, which can be observed from the bar emerging higher in the chart. 2 (a) The small businesses in Australia at the initial stage are handled by individuals and their families, which is technically called sole trader. As the size of the business grows, more resources and capital is needed, thus, the sole trader form of business is transformed in to a partnership firm (Hoffman et a., 2014). In the partnership form, the business is managed and controlled by two or more individuals having predefined share in profits and capital. Though, the partnership form of business is quite flexible, but to take the business beyond local boundaries of a country, a separate legal entity is needed, which is created by forming a company (Hoffman et a., 2014). All the forms of business such as sole proprietary, partnership, and company have their own advantages and disadvantages. The individual business lacks in capital and other resources, while, partnership and company does not. Thus, is large capital is needed; company is the best suited form of business but there are various legal formalities. However, from the management view point, individual business is best suited because an individual can take autonomous decisions. Further, there are certain legal requirements which also make it compulsory to form a company from partnership, for example, if business is to raise money from public, it will have to be listed on the stock exchange (Hoffman et a., 2014). 2 (b) As discussed, all the business forms such as sole proprietary, partnership, and company has their own advantages and disadvantages. In regard to the rural business, the most appropriate form of business would be partnership firm (Fox, 2014). The most prominent reason for opting partnership as the most appropriate form of business for rural business is the flexibility. The partnership business requires fewer legal formalities and provides flexible legal environment to carry out the business. Further, partnership also overcomes the shortcomings of sole proprietor business such as small capital and lack of other resources (human resource). Moreover, the certain taxation benefits available to sole traders are also extended to the partnership firms but these not available to the companies (Fox, 2014). 5 (a) Partial budget: Barley to replace wheat (200ha) Losses Category Value Total Return Lost from wheat Wheat harvest $267 $133,500 Extra Costs involved in Barley Machinery Operations $19 $3,800 Fallow spraying $26 $5,200 Seed $24 $4,800 Fertilizer $52 $10,400 Herbicide $3 $600 Harvesting $43 $8,600 Total Losses $166,900 Gains Category Value Total Extra revenue from barley Barley Harvest $198 $114,840 Costs saved from wheat Machinery Operations $21 $4,200 Fallow spraying $23 $4,600 Seed $26 $5,200 Fertilizer $53 $10,600 Herbicide $5 $1,000 Harvesting $45 $9,000 Total Gains $149,440 Loss/gain difference -$17,460 5 (b) Partial budget: Chickpeas to replace wheat (250ha) Losses Category Value Total Return Lost from wheat Wheat harvest $267 $133,500 Extra Costs involved in Chickpeas Machinery Operations $15 $3,000 Fallow spraying $22 $4,400 Seed $70 $14,000 Fertilizer $16 $3,200 Herbicide $8 $1,600 Insecticide $43 $8,600 Fungicide $6 $1,200 Aerial spraying $19 $3,800 Scouting $10 $2,000 Harvesting $50 $10,000 Total Losses $185,300 Gains Category Value Total Extra revenue from chickpeas Chickpea Harvest $457 $137,100 Costs saved from wheat Machinery Operations $21 $4,200 Fallow spraying $23 $4,600 Seed $26 $5,200 Fertilizer $53 $10,600 Herbicide $5 $1,000 Harvesting $45 $9,000 Total Gains $171,700 Loss/gain difference -$13,600 5 (c) In respect of the budget being prepared to replace Wheat by Barley, it has been observed that the outcome is adverse. The results of the budgeted cost and benefit analysis depicts that replacement of wheat by barley would cause loses of $17,640 to Windy Downs. The incremental benefits of this proposal are negative and thus, it is recommended that the wheat is not to be replaced with barley. Further, another proposal was analyzed wherein wheat was proposed to be replaced with chickpeas. The results of the incremental cost and benefit analysis again showed negative outcome. The estimations show that if Windy Downs go to replace wheat with chickpeas, it will incur a loss of $13,600. Thus, considering the outcome of the budget estimations, it is recommended that wheat should not be replaced with chickpeas. 6 (a) In the business context, sustainability implies doing business in such a way that adequate balance is maintained between financial, social, environmental needs. In order to maintain the sustainability of the business of Windy Downs, two projects such as rural community development project (RCDP) and waste reduction and soil development project (WRSDP) have been identified (UCDAVIS, 2016). The rural community development project is aimed at working for the welfare of the people living in villages and improving their living standard. Through this project, it is expected that the local consumption of the products produced by Windy Downs would increase, which in turn will add value to the business and help expanding the business. The second project namely waste reduction and soil development is aimed at improving the business processes and technology. The improved processes and deployment of the advanced technology is expected to achieve a significant waste reduction, which will provide the business an opportunity to stand up with the competitors. Further, the soil development is an essential aspect of the farming business, which will also be taken care of through this project (UCDAVIS, 2016). 6 (b) Please note that the information presented in the statement given below is purely based on the assumptions. Estimation of Total Cost of the Projects S. No. Particulars Projects RCDP WRSDP A Labor Cost Labor Hours 520 1560 Hourly Rate $10.00 $10.00 Wages $5,200.00 $15,600.00 Superannuation cost $50,000.00 $100,000.00 Work cover cost $25,000.00 $50,000.00 Total $80,200.00 $165,600.00 B Consumable Cost Education material-Education centre $30,000.00 $0.00 Medicines-Medical centre $60,000.00 $0.00 Fuel $0.00 $150,000.00 Stores $25,000.00 $75,000.00 Total $115,000.00 $225,000.00 C Equipment Cost Education centre $100,000.00 $0.00 Medical centre $150,000.00 $0.00 Machine-waste reduction $0.00 $500,000.00 Tractors and trailers $0.00 $1,500,000.00 Total $250,000.00 $2,000,000.00 D Grand Total (A+B+C) $445,200.00 $2,390,600.00 7 (a) Ratio analysis: Windy Downs 2010 2011 2012 Formula Return to total assets 1.39% 1.48% 4.43% Net income/total assets Return on equity 1.48% 1.55% 4.61% Net income/net worth (equity) Debt service ratio 19.87 20.59 24.29 Operating income/finance expenses Debt to Owners equity 0.06 0.05 0.04 Debt/net worth (equity) 7 (b) The ratios provide a common base which is utilized in comparing the performance of the business with the competitors or the industry averages. The industry averages are considered appropriate for comparison in most of the cases, but in certain situations, the competitors could also be used to compare. However, in comparing with the competitors, it should be remembered that the chosen competitor is of the equivalent level. Further, it is easy to collect the industry average data. Thus, the ratios as computed above in question 1 (a) in respect of Windy Downs should be compared with the industry average (Beierlein, Schneeberger, and Osburn, 2013). 7 (c) Comparison with Industry Windy Downs (2012) Industry Return to total assets 4.43% 2.58% Return on equity 4.61% 18.60% Debt to Owners equity 0.06 1.33 From the data presented in the table given above, it can be observed that the return on assets of Windy Downs is better than industry average. However, return on equity of the business is lower than the industry average, which depicts that the capital has not been utilized in an efficient way. Further, it is also to be noted that Windy Downs is using lesser debt than the industry average. Use of lesser debt is also a reason for lower return on equity. Further, the return on equity may also be lower due to business being in the initial years. It is expected that with the span of time of 2 more years the business would get the economies of scale, which will improve the return on equity (Peterson and Fabozzi, 2012). 8. The sustainability of the business is not only measured by referring to the financial indicators, but the non financial indicators such as waste reduction and pollution control are also used. In order to measure the sustainability of the business of Windy Downs, two non financial measures such as waste reduction and erosion control have been identified as significant. The wastage in production could be measured by analyzing the input and output quantities. The pollution control equipment measures the hazard to the environment emanating from the business operations. 9 (a) In respect of the Windy Downs, it has been observed that the efficiency in the operations is the major factor that inhibits the financial performance. The lower return on equity clearly indicates that the management has not been able to utilize the capital efficiently. Therefore, the management of Windy Downs will have work on the efficiency to help business achieve its goals and objectives. Further, the non financial indicators such as increasing waste and soil pollution also indicate deterioration in the financial performance of Windy Downs. The increase in waste and soil pollution not only reduces the profits, but also affects the sustainability of the business adversely. 9 (b) In order to ensure that the capital and other resources of the business are used efficiently and effectively, the management of Windy Downs will have to analyze the situation critically and identify the gaps and weaknesses. The management should adopt new means and processes with the deployment of advanced technology to bring agility in the operations. Further, in respect of waste reduction and pollution, the management should take immediate steps to control both. The waste reduction measures such as advancement in the technology and strengthening the controlling environment should be taken as soon as possible. Further, the management should consider implementing the waste reduction and soil development project to ensure sustainability of the business operations. 12 (a) Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May June Original Surplus/ Deficit -54951 55206.5 -18195 -30722 46236.1 -14556 -33243 -16370 -8710.4 64510.4 97663.8 47951.4 Original Running Balance -44593 10613.7 -7581.7 -38304 7932.08 -6624.3 -39867 -56237 -64947 -436.66 97227.2 145179 Costs from Project 1 -111300 -44520 -22260 -44520 -22260 -22260 -44520 -22260 -22260 -44520 -22260 -22260 Costs from Project 2 -597650 -239060 -119530 -239060 -119530 -119530 -239060 -119530 -119530 -239060 -119530 -119530 New Surplus/ Deficit -708950 -283580 -141790 -283580 -141790 -141790 -283580 -141790 -141790 -283580 -141790 -141790 New Running Balance -753543 -272966 -149372 -321884 -133858 -148414 -323447 -198027 -206737 -284017 -44563 3388.56 The total cost estimated for the project 1 (RCDP) and 2 (WRSDP) is $445,200 and $2,390,600 respectively. This cost comprises of labor, consumable, and equipment cost. For the incorporation of this cost in the cash flows statement, it has been assumed that the labor and consumable cost would be incurred evenly throughout 12 months. However, the equipments and machineries have been purchased in the suppliers credit by paying a 25% of the down payment. Thus, it has been assumed that the rest of the equipment cost would be paid out as 10% in the first month of the quarter and 5% each in other two months of the quarter. 12 (b) The sustainability projects RCDP and WRSDP involves heavy amount of resource outlay. The impact of inclusion of the costs of these projects in the cash flow statement has been adverse as the deficit has increased. It can be observed that in some instances where there was surplus earlier that has also been turned in to deficit due to the inclusion of the sustainability development project costs. Prior to such inclusions, the cash position in the month of August, November, May, and June was positive, but after inclusion of the projects costs, there is negative balance in all months expect June. Since, the inclusion of the projects costs has increased the cash deficit; the organization will need to access additional funds for borrowing. The average cash deficit after including the cost of the projects is worked out to be $236,120, which means that Windy Downs will have to maintain bank overdraft of $236,120 each month. References Beierlein, J.G., Schneeberger, K.C., and Osburn, D.D. (2013). Principles of Agribusiness Management: Fifth Edition. Waveland Press. Creditguru.com. (2016). Key Business Ratio. [Online]. Available at: https://www.creditguru.com/ratios/inr.htm [Accessed on: 11 October 2016]. Fox, R. (2014). Tax Strategies for the Small Business Owner: Reduce Your Taxes and Fatten Your Profits. Apress. Hoffman, W.H., Raabe, W.A., Maloney, D.M., Young, J.C., Smith, J.E. (2014). South-Western Federal Taxation 2015: Corporations, Partnerships, Estates and Trusts. Cengage Learning. Peterson, P.P. and Fabozzi, F.J. (2012). Analysis of Financial Statements. John Wiley Sons. UCDAVIS. 2016. What is Sustainable Agriculture? [Online]. Available at: https://asi.ucdavis.edu/programs/sarep/about/what-is-sustainable-agriculture [Accessed on: 11 October 2016].