Financial Analysis Of Sky Studio – Budget, Ratio And Variances

Financial Analysis

The objective of this report is to determine the entire financial analysis including the budgeted analysis of the company Sky Studio. The objective of carrying out the financial analysis is to get a competitive advantage over the competitors and to be stable. With the assistance of the analysis the company can found out whether the company is worthy for investment from the point of view of investors. Further the financial analysis will also determine how the company operates and what variances can be found out and must rectify the same.

Financial analysis is the method used by the management of the company for the purpose of evaluation of business and the projects, budgets and the entities which are dealing in the financial means to determine their performance and long term sustainability. The four pillars of the organization can be judged by the financial analysis, as to whether the company is profitable, solvent, liquidity and the efficient or not to make an investment for. The financial analysis is carried out with the help of the financial statements such as income statement, balance sheet, and cash flow statement (Robinson Henry,Pirie & Broihahn, 2015).

The structure of the report is bifurcated in so many parts and it moves basically with the financial analysis is necessary from the point of view of not only management but also from the perspective of the shareholders and the investors. They compare the data either with the industry comparison or with the previous years. Moreover his report also talks about the details of the purpose of the financial statements followed by the ratio analysis. The budgets are prepared according to the assumptions and the requirements and the final CVP analysis is also undertaken to get to know the movement of the costs.

Ratio analysis is the technique which is used to determine the ability of the company on several categories. A sound company is a combination of the efficiency, profitability, solvency and the relevant market position and liquidity. The company is required to excel these categories in order to satisfy the customers and the investors (Uechi Akutsu, Stanley, Marcus & Kenett, 2015).

The profitability ratios of the company are calculates to measure the financial performance of the company in terms of the profitability over the period of years or in comparison to the industry averages. Profit is the king of the organisation which keeps the organisation stable and on-going and therefore the investors are also interested in calculating the profitability ratio of the company (Williams & Dobelman, 2017).

Ratio Analysis

The gross profit ratio determines the gross costs and the net profit ratio considers the amount after the entire costs are being reduced from the earnings. The profitability ratio of the Sky studio can be observed from the table. The gross profit being 98% and the net profit being 63% showcases that the company is performing better than the industry averages. However in terms of the return on equity the company is a bit behind. This may be due to the management does not involve much in data driven decisions and this lacks the motive of the shareholders to invest. This needs to be improved on emergency basis (Al-Jafari & Al Samman, 2015).

For any organization the financial stability is equally important and this can be judged on the basis of the liquidity position of the company. Further the liquidity position of the company is being determined by the current ratio and the quick ratio of the organization. The current ratio of the Sky Studio is presented below in the table (Fuhrer, Müller & Steiner, 2017).

 The current ratio of the Sky Studio ids higher than the ideal ratio, yet on the other hand the liabilities are quite increasing in nature, thus this suggests that though the company is able to pay back the liabilities and have enough cash in hand yet it is a risky position. Too much cash would reflect the negative aspect. To improve the company can expand its business with the help of long term liabilities so that the sufficient cash will also stay with the company. Similar is the case with the quick ratio as well (Saif-Alyousfi, Saha & Md-Rus, 2017). 

The asset utilisation is one of the core elements to decide whether the operations of the company are sound or not. The asset utilisation of the Sky studios is 14.41 in times whereas that of the industry is 8 times in inventory followed by 14.84 in accounts receivable and 9 times in industry. This clearly states that the company is performing better and efficiently and shall maintain this position till the longer duration to keep a sound cash conversion cycle (Caldecott, et al 2016).

Conclusion

From the above analysis it can be concluded that the Sky Studio is performing better than the industry averages and the few areas where the company lacks shall be rectified immediately. This will not only help the company in growing with the greater market share but the company will also be able to provide the futuristic returns to its shareholders as well as then investors.

Profitability Ratios

The summary suggests that the Sky Studio clearly needs to improve the return on equity and the liquidity positions (Easton & Sommers, 2018).

Though the financial statement analysis is healthy yet it is prone to have certain limitations which start with that there is no sound judgement that can be made just on the basis of the financial statements. The data is also prepared on the basis of the past and at times there is a problem in comparability when two different organisations are using different mechanisms to value inventory and such as FIFO or LIFO. Hence at times the data is not reliable (Mei, Fei, Zhilong & Jinghua, 2018).

The variance analysis is the key concept in the process of the budgeting. The budgeting ensures the gap between the actual and the budgeted figures. The key functions of the managers of the company are to perform the budgeted analysis to find out any variances if possible and rectifying those variances by taking the possible measures (Chiu, et al 2018).

The following is the budget report which determines the assumptions taken on the basis of the case option one. Under this report it can be observed that the figures are taken form the income statement prepared which can be found in the appendix. Further the variance is calculated by applying the formula of actual less budgeted. These variances are than converted into the percentage format. There are several variances which are unfavourable for the company and require immediate action from the company side (Webb, 2016).

The variances are determined as the favourable and unfavourable in the following manner.

The two variances that must be investigated at the first place are the cost of sales and the administrative and the general expenses. The reasons to choose these two expenses are they can move the market in a very short term and affects the performance for the company towards a greater extent. The cost of sales as assumed by the company was $6968 however the actual cost of goods sold incurred by the company are $5360. This is a positive reflection from the company’s side however the management must check the accounts carefully where at times the accountants may post the entries in the wrong head thereby creating a decrease in the cost. The second expense that must be controlled and checked on the regular basis is the administrative and general expenses. Though these expenses are of trivial nature however the company must carefully assess the reasons of the increase and shall immediately take the steps to curb it (Balaev, 2017).

 B

C

 D

References

Al-Jafari, M. K., & Al Samman, H. (2015). Determinants of profitability: evidence from industrial companies listed on Muscat Securities Market. Review of European Studies, 7(11), 303.

Balaev, A. I. (2017). Factor Analysis of the Russian Budget System Revenues. Economic Policy, 3, 8-37.

Caldecott, B., Dericks, G., Tulloch, D. J., Kruitwagen, L., & Kok, I. (2016). Stranded Assets and Thermal Coal in Japan: An analysis of environment-related risk exposure. Stranded Assets Programme, SSEE, University of Oxford.

Chiu, C. H., Choi, T. M., Dai, X., Shen, B., & Zheng, J. H. (2018). Optimal Advertising Budget Allocation in Luxury Fashion Markets with Social Influences: A Mean?Variance Analysis. Production and Operations Management, 27(8), 1611-1629.

Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.

Fuhrer, L. M., Müller, B., & Steiner, L. (2017). The liquidity coverage ratio and security prices. Journal of Banking & Finance, 75, 292-311.

Mei, Z., Fei, F., Zhilong, Z., & Jinghua, W. (2018, June). Limitations of the DuPont Financial Index System and Its Improvement. In International Conference on Intelligent and Interactive Systems and Applications (pp. 985-993). Springer, Cham.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.

Saif-Alyousfi, A. Y., Saha, A., & Md-Rus, R. (2017). Profitability of Saudi commercial banks: A comparative evaluation between domestic and foreign banks using capital adequacy, asset quality, management quality, earning ability and liquidity parameters. International Journal of Economics and Financial Issues, 7(2), 477-484.

Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, 488-509.

Webb, A. (2016). Budget Management. In Handbook of Intensive care: Organization and Management (pp. 339-357).

Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169.

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