Accounting And Financial Analysis For Raising Cattle Business

Windy Downs: Trend Analysis

Describe about the Accounting and Financial Analysis for the Business of Raising Cattle.

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)

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).          

Small Business in Australia

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)

5 (b)

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.

7 (a)

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).       

Most Appropriate Business Form for Rural Business

7 (c)

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)

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 supplier’s 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 project’s costs, there is negative balance in all months expect June. Since, the inclusion of the project’s 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].

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