Ratio 6: Sales/Current Assets
The ratio describes the level of current assets in the organisation. Here we see that Central pool is having the least ratio, hence the highest amounts of current assets. Fieldpark has a better ratio than Taffview pool. The Fieldpark and Taffview pools need to work on disinvesting the unused fixed assets and convert them to cash or stock. If the ratios is going to high they can convert them into sales and then into fixed assets for future expansion. They all need to have healthy cash at bank.
Ratio 7: Sales/Stock
The ratio indicates that stock level in the companies. Here again we see that the stock levels in Fieldpark are very low. They are able to generate sales with less amount of stock. Taffview is doing better than Central pool. They both need to work towards reducing the level of stock to generate more sales. Stock should be at level, such that they can maintain a steady inventory and also serve customers according to their demand. Taff and Central pool need to establish a sales program like family passes and friends passes to reduce the level of stock in the company
Ratio 8: Sales/debtors
The ratio indicates the level of debtors in the organisation. On comparing the three pools we can see that Central pool has the best ratio. Taffview is also doing much better that Fieldpark. Central pool has been able to collect the bills from its customers in timely basis. Taffview and Fieldpark pools have to start collecting their debtor’s bills on a timely basis, or else they will have to get money through outside sources for the daily expenses. The pools can provide discounts to its customers to settle the bills, so that the cash at bank is increased.
Ratio 9: Current Ratio
Current ratio depicts the liquidity of the organisation. It gives us the information if the company has the ability to pay up its creditors in timely manner. 2:1 is a healthy ratio for a company to have. Fieldpark has the highest amongst the 3, followed by Central pool and then Taffview pool. The pools have to increase the level of current assets as they don’t have enough to repay the creditors. The pools need to work on removing the unused assets to convert them to cash. If the ratio does not improve it might lead to bankruptcy and insolvency.
Ratio 10: Gearing Ratio
The ratio gives us the information about the company’s long term liabilities. The values show that Fieldpark has borrowed more amount compared to Central and Taffview pools. This has helped it to run the business in an efficient way. Central and Taffview have borrowed considerably less amount to sustain the business. Borrowing money would help them in expansion of the business but they should consider the risk of non-payments in the future to sustain the business. Central and Taffview have a chance of borrowing money and investing it in improving the profitability and expansion.
Comparison of Relative Profitability of Canteen and Pool in Taffview
As per the values got from the profit and loss accounts we can see that Canteen is running at Loss and Pool is making Profit. The data shows that canteen has more expenses than the income it has got. There are many ways we can improve the Canteen’s profitability. At the same time we also need to work to increase the profitability of the Pool. The Canteen needs to work on reducing the expenses. The Pool has got better income compared to the Canteen but still is on high expenses which need to be reduced. The Pool and Canteen should work together to improve their profitability.
Here are some ideas to improve the profitability of the Pool and the Canteen:
-
Reduce Expenses: Canteen and Pool are running into a lot of expenses. They can try and remove unwanted assets and convert them into ones which are required the most. Staff salary expenses are the biggest part of their expenses. They can reduce staff which who are not necessary to run the pool and the canteen efficiently. For example the Assistant pool manager can be removed and that money saved can be utilised for other functions. The Management needs to do a check on the processes running in the organisation and eliminate the one that are not adding any value to the service and costing money to the business. They should also remove all the unused assets and convert them to money which can be then invested in future expansion.
-
Provide Good Service: Good service given to customers would help in retaining old customers and also get new customers. In a leisure environment people would come to have good food and the ambience to enjoy life. The area in and around the Canteen should be kept clean. The staff should be trained on how to treat customers when they come to the canteen. They should be friendly and ready to serve any person who comes in. They have to maintain an open relationship with the customers. The Pool area should also be kept clean. The Pool staff should ensure the place is safe for people of all ages. The staff at the pool should always be alert and also make the customers feel comfortable. The customer who is happy with the service not only come back but also bring new customers in, this would help us bring more sales into the company.
-
Advertising: The Pool and the canteen need to set an efficient and cost effective advertising program. They can advertise together to save cost. The advertising should be able to attract the target customers. The Canteen should attract people who are non-pool members; this would get the extra income to the Canteen. The format of the advertisement should be simple and attractive. The advertisement should be shown in media which would be cost effective and also reach huge population. It should highlight the points like cleanliness in the pool and the canteen, availability of life guards and also the variety of offers and services available.
-
Price Bundling: The Pool and the canteen should try and use this strategy to increase the sales. In the canteen they can start to serve combo meals like kids meal, family meals at a reduced price. This way they would sell more items to the customer. The Pool membership’s schemes can be redesigned to meet the customers need. They can be given at discounted price if the customer wants it for a longer duration. They can also give out coupons which can be used in the canteen for buying food for loyal customers. Customers can also be provided a free drink whenever they visit the pool, on choosing the life time membership. They can be a lot of offer like the previous one which would get the customers to come back to the pool and canteen. The offers in pool and canteen can be clubbed together to improve the income in both pool and the canteen.
-
New Services: The customers would like to enjoy their weekend with friends and family. The Taffview pool can work to get new business in. They can organise parties in the pool. The canteen can arrange the food for the parties. This way they can get customers to come to their pool regularly and also to have their parties for family and friends. The canteen can look at catering food to house parties to expand the business. This way they can expand the pool and canteen to a complete family and friends outing point.
Sources of Finance for Converting the Central and Taffview Pools into Fitness clubs
Equity Finance: The finance here is raised from external investors in return of handing over a share of business. Equity finance is a form of share capital which exchanges share of ownership and sometimes an element of control over the business. It can be a share of future profits but frequently its deals with sharing the ownership of the business to some degree. Equity finance is available from two sources for private businesses, which are Venture Capitalists and Business Angels. They don’t have the right to receive any amount of interest or expect the amount to be repaid. The money is returned to them in the form of dividends, they depend on the growth and profitability of the business.
The Central and Taffview can utilise this source of finance to buy the land and renovate the existing facilities to suit the needs of a fitness club. They would not have to sell any of their current assets or to go into a long term loan. All they need to do is to share the profits in form of dividends
Advantages:
- The funding is committed to your business and intended projects
- Resources for your business in form of venture capitalist and business angels.
- They have a common interest in the type of business you are.
- They are ready to provide follow up funding.
Disadvantages:
- Raising equity finance is demanding, costly and time-consuming.
- Depending on the investor the degree of influence over your management would vary.
- Regular feedback on the company’s progress has to be shared with the investors
- The share in the business will be diluted.
- There would be legal and regulatory issues to comply with.
Leasing: This type of finance would help the companies to hire the equipment which are necessary for the operation of the organisation. It’s done when the company doesn’t have the capacity to buy the equipment on their own. The Central and Taffview pools can lease out the equipment which are required for the gym from a leasing company. This would get them the required equipment and also not let them go into huge long term loan. This would be like renting the equipment. When the lease term is over they can return the old equipment and lease out new equipment. They would get to use the equipment without paying the entire cost of the equipment. The pools would have to pay small amounts as deposit and then a monthly rent for them.
Advantages:
- No large outlay: The cost is spread over a number of years.
- Security: They wouldn’t need to buy additional security for the machine.
- Tax Advantage: The expenses on the rent and the advance for the leased equipment are deductibles from the taxable incomes.
- Budgeting: The contract and the rates are fixed hence it fits into any kind of budget.
Disadvantages:
- No Ownership: The equipment is owned by the leasing company.
- Long Term Expenses: In a long run it turns out that you would have paid more than the cost of the equipment.
- Maintenance: The cost of maintenance and repair would fall on the company which leases the equipments, few leasing companies provide that at an additional cost.
Hire Purchasing: This is an instalment credit form of finance.These agreements mean that you don’t own the equipment legally until you've paid the last installment. If the payment made by you cross 1/3rd of the cost of the equipment the lender can take the equipment back only with a court order. The agreement involves a finance house. They get the goods from the supplier who then delivers it to the customers who purchase them. The Hire purchase agreement is between the finance house and customer. The finance company would ask for deposit and would set the size of the deposit based on its policies and the assessment of the hirer. Central and Taffview can use this kind of finance to buy out the equipment for the gym. They can sell them when they get outdated and get new ones in the similar fashion. This would help them get the equipment without increasing their long term loan and they would also get the ownership of the equipment when they pay the final hire purchase payment. Hire purchase and Leasing have similar advantages and disadvantages. The only difference is that the hirer would own the product at the end of the hire period.
Benefits of Introducing the System of Budgetary Planning and Control
Budget is a plan. It would be expressed in different quantities. The quantities can be money, hours for labour, and quantities like litres, meters or kilograms for materials. It’s often related to the money spent for operations of the company.
Purpose of Budget preparation:
- Planning: The helps the company organise the things they have to do in a period of time. Central and Taffview should have all the working areas to make a plan with all the requirements for a period of time. This would help the pools maintain the required cash level to run the operations efficiently.
- Control: Once the plan is made it gives a bench mark for its employees to work according to it. This would help the organisation to work efficiently with minimal problems. They would be able to identify the problems if the work is not going according to its plan. The corrective action can be taken immediately.
- Motivation and performance management: The employees can be reward if they meet the target mentioned in the plan for that organisation. For example in Taffview and Central, the catering staff can be planned to maintain a just in time philosophy to achieve less wastage of catering provisions. This way the company would not only encourage the employees to work but also would have them save the company from running into unwanted costs.
- Communication: A budget cannot be planned by an individual work area. It has to be integrated with the other working groups of the organisation. The finance team would need the details of catering provisions needed, the cleaning materials needed etc for a period to plan their budget. Central and Taffview pools should make sure that all the working groups in the pool are working with each other so that the unwanted costs are eliminated. This would help the companies save the costs and the profitability would increase.
- Co-ordination: All the work areas should be well informed about the plans in the other work areas of the organisation. If this doesn’t happen there would be a chaotic situation. For the pools Central and Taffview they should make sure the programs in the sales and advertising department is shared with the catering and the pool department so that they can be prepared for the period with enough resources.
Figure 1: Budget Planning
=
The Figure 1 shows the relationships among the various budgets but does not portray the time sequence of the budgeting process. The principal stages of this sequence are:
- Communicate the details of objectives and strategy to those responsible for preparation of budgets.
- Communicate the details of budget preparation procedures to those responsible for preparation of budget.
- Determine the limiting factor which restricts all our budget flexibility and forms the focus of the budget cascade.
- Prepare an initial set of budgets
- Negotiate budgets with line managers.
- Co-ordinate and review budgets.
- Accept budgets in final form
- Carry out ongoing review of budgets as they are implemented.
Benefits of Budgetary Control and Planning
-
Focus on Business priorities: Every business has a set of important achievements to make. First being profit. Central and Taffview need to indentify the critical and important achievements for their business and work towards achieving them. They can set them in their budgets and monitor and control them.
-
Over Expenditure Domains can be Exposed: During the evaluation of the budgets the Central and Taffview pools can identify the work areas where the expenses are going high and reduce them. If they don’t monitor or control them they would run into loss.
-
Extra resources can be created to invest in core business: The savings and the profit that arise from monitoring and control can be utilised by Central and Taffview for the expansion of the business.
-
Efficiency of Governance can be achieved: Budgetary Control and planning allows the pools to check if the plan set up is being followed. Thus helping them to track the expenses. They would not overspend on any requirement. This would help them to increase their profitability.
-
Helps to make Financial Decision or Financial Strategy: Budget would give a fair picture of the expenses the company would have for a period in future. This would enable the pools to check if they have enough working capital to operate on a daily basis for the period. They can strategically plan if they have to take any finance from outside.
Conclusion
The comparative analysis on the ratios of the three pools (Fieldpark, Central and Taffview) resulted in some important areas of improvement for them. Different ways of improving profitability of Pool and canteen of Taffview were found. The pools have got three sources of finance to set up their pools to fitness centre. Benefits of implementing a Budgetary Planning and control have also been highlighted.
Reference
Artill, P and Mclaney, E Accounting and finance for non-specialists Financial Times/Prentice Hall
Gildersleeve, Rich Winning Business: How to use Financial analysis and Benchmarks to outscore your competitor year 1999
Pillai, R S N and Bhagavathi Management Accounting
Gupta, R N Business organisation and Management
Weetman, Pauline Management Accounting An Introduction 2nd Edition Financial Times/Prentice Hall
http://www.fao.org/docrep/W4343E/w4343e08.htm#sources%20of%20funds
Appendix
Central Pool
Operating profit/Operating assets = 19000/(1180000 + 43000) * 100 =1.55%
Operating profit/Sales= 19000/ (1350000*100)= 1.40%
Sales/ Operating assets= 135000/(11800+43000) = 1.10 , 1000/1.10= £909.09
Expenses/Sales= 1331000/(135000)*100=98.6%
Sales/Fixed assets=1350000/118000=1.14, 1000/1.14=£877.193
Sales/Current assets=1350000/43000=31.39, 1000/31.39=£31.85
Sales/Stock=135000/29000=46.555. 1000/46.55=£21.48
Sales/Debtors=1350000/2000=675, 1000/675=£1.48
Current Ratio=43000/47000=0.91
Gearing ratio=150000/(988000+19000+19000+1500000)*100=12.75%
Taffview Pool
Operating profit/Operating assets = 51050/(1133550+39000)*100=4.35%
Operating profit/Sales=51050/1570000*100=3.25%
Sales/ Operating assets =1570000/117550=1.34, 1000/1.34=£746.26
Expenses/Sales=1518950/1570000*100=96.75
Sales/Fixed assets=1570000/1133550=1.38,1000/1.38=£722
Sales/Current assets=1570000/39000=40.25,1000/40.25=£24.89
Sales/Stock=1570000/17000=92.35, 1000/92.35=£10.82
Sales/Debtors=1570000/3000=523.33. 1000/523.33=£1.91
Current Ratio=39000/56000=069
Gearing ratio=120000/(8950000+120000+20500+30000+51050)*100=11.04%
Equity Finance:
- Business Angels are people who have entrepreneurial skills and wealthy and want to invest in new and growing businesses. They also invest the knowledge they have from running businesses in the past into the new one. They invest in all the stages of business development, predominantly in the start up and early stages of business. They invest in small businesses so that they have a share in the success of the organisations. They make their investment decisions quickly and don’t have a complex process in place to work. The investments from them are not regular and it is difficult to find them. They place a lot of emphasis on relationship and working together directly. Tracking down the right investor may take longer than expected.
- Venture capital is also known as private equity finance. Unlike business angels, venture capitalists (VCs) look to invest large sums of money in return for some of your business' shares. The biggest advantage of getting a venture capital into a business is that they not only get huge amount of money but also bring wealth of expertise along with them. If you find on venture capitalist successfully, you can use them for future funding as well. Venture capitalist take longer times to decide and the process is complex. For securing a deal with them you need to have a detailed business plan with financial projections (For which you may need professional assistance).