Assignment on Financial Management and its Area of Activities - Assignment Point
Assignment on Financial Management and its Area of Activities
Subject: Economics | Topics:

Introduction :

In this Assignment, first try to give an idea about Financial Management, structure & its area of activities. Then I select a company named Reneta Ltd. is a listed public limited company in Dhaka Stock Exchange (DSE) for my work. After that I focus on company’s profile & analysis the annual report 2005 of Reneta ltd. In this assignment I am mainly focus on five major financial analysis (The financial results of the Company for the year 2005  & Compare with 2004 &2003, Balance Sheet as at 31 December 2005, Profit and Loss Account, Statement of changes in equity for the year ended 31 December 2005 & Cash flow statement for the year ended 31 December 2005). After this analysis I suggest some thing that I believe help the organization for improving there productivity. 

About Financial Management

Financial Management: Can be defined as the process of acquiring and using funds to accomplish a financial objective. The name of Financial Management is Managerial finance or corporate finance.

Role of finance in a typical Business Organization:

Role of finance in a typical Business Organization

Activities of Financial management in Business Organization:

The role of a corporation’s management is to increase the value of the firm to its shareholders while observing applicable laws and responsibilities. Corporate finance deals with the strategic financial issues associated with achieving this goal, such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with or acquire another firm.

1) Preparation of Balance Sheet Approach to Valuation:

A simple way of valuing the equity of a company is simply to take its balance sheet and subtract liabilities from assets to arrive at the equity value. However, this book value has little resemblance to the real value of the company. First, the assets are recorded at historical costs, which may be much greater than or much less their present market values. Second, assets such as patents, trademarks, loyal customers, and talented managers do not appear on the balance sheet but may have a significant impact on the firm’s ability to generate future profits

2) Measurement of Cash vs. Profits:

Another way to value the firm is to consider the future flow of cash. Since cash today is worth more than the same amount of cash tomorrow, a valuation model based on cash flow can discount the value of cash received in future years, thus providing a more accurate picture of the true impact of financial decisions

3)         Measurement of Cash Cycle:

The duration of the cash cycle is the time between the date the inventory (or raw materials) is paid for and the date the cash is collected from the sale of the inventory. A company’s cash cycle is important because it affects the need for financing. The cash cycle is calculated as:

Days in inventory + Days in receivables – Days in payables

4)         Calculating Revenue, Expenses, and Inventory:

A firm’s income is calculated by subtracting its expenses from its revenue. However, not all costs are considered expenses; accounting standards and tax laws prohibit the expensing of costs incurred in the production of inventory. Rather, these costs must be allocated to inventory accounts and appear as assets on the balance sheet. Once the finished goods are drawn from inventory and sold, these costs are reported on the income statement as the cost of goods sold (COGS). If one wishes to know how much product the firm actually produced, the cost of goods produced in an accounting period is determined by adding the change in inventory to the COGS.

5)         Assessment of Financial Ratios:

A firm’s performance can be evaluated using various financial ratios. Ratios are used to measure leverage, margins, turnover rates, return on assets, return on equity, and liquidity. Additional insight can be gained by comparing ratios among firms in the industry.

6)         Decision making Bank Loans:

Bank loans can be classified according to their durations. There are short-term loans (one year or less), long-term loans (also known as term loans), and revolving loans that allow one to borrow up to a specified credit level at any time over the duration of the loan. Some revolving loans automatically renew at maturity; these loans are said to be “evergreen.”

7)         Find the Sources and Uses of Cash:

There are two sources of cash: reducing assets or increasing liabilities or equity. Similarly, a company uses cash either by increasing assets or decreasing liabilities or equity.

8)         Ensure Sustainable Growth:

A company’s sustainable growth rate is calculated by multiplying the ROE by the earnings retention rate.

9)         Measurement of Firm Value, Equity Value, and Debt Value

10)       Assessment of organizational Capital Structure

11)       Organizational Risk Management

  • Business risk
  • Financial risk
  • Total corporate risk

12)       Assessment of Cost of Capital

13)       Free Cash Flows

14)       Decision Making in Cash Flows to Debt and Equity

15)       Decision Making in Hurdle Price

16)       Debt Assessment

17)       Investment Decision

18)       Optimal Capital Structure

19)       Share exchange

20)       Mergers and Acquisitions

Methodology:

For this assignment I went to Dhaka stock exchange to buy the financial report. And also personally visit the Renata Ltd Head office to collect necessary information.

Objectives:

First of all it should be mention that making an assignment is always challenging. For completing assignment on “The practices of Financial Management in Business Organization” needs time and hard work. I found lots of work for individual area but. But not too much work in full Financial Management practices. After working on this assignment I get lots of information about Financial Management practices which I believe some thing were unaware in past. Here is the summary of our objectives-

  • It helps me to get the basic knowledge about Financing in organization.
  • As a student of Business Studies I get lots of information about organizational practices.
  • Practical knowledge in financial management.
  • It helps me to find the how total financial activities are going on in the organization.

Limitation of the Work:

While I working on this assignment I had face some problem. Problems are-

  • Problem in getting information about total Financial Management structure.
  • Lack of primary data made this work little bit dry.
  • Not enough journal & magazines.
  • Lack of primary data
  • Sometimes non-cooperative people.
  • Lack of time is another big problem while I working on this assignment.

Company Profile :

Renata Limited

 

 

Historical High-Lights:

Renata Limited is one of leading Pharmaceutical company in Bangladesh. Founded in 1972 as a subsidiary of Pfizer Inc. Ownership transferred from Pfizer Inc. to local institutions and the general public in 1993. Company name subsequently changed from Pfizer Laboratories (Bangladesh) Limited to Renata Limited.

Type of Company :   Listed Public Limited (Dhaka Stock Exchange)

Turnover:                   US $21.0 Million

Retained Earnings:  US $5.0 Million

Net Asset Value:        US $11.0 Million

Main Business:

Manufacture and Marketing of Human Pharmaceuticals.

Manufacture and Marketing of Animal Therapeutics of Nutrition products (No. 1 in Market in terms of Sales.)

Renata 120,000 Square Feet (11,150 m2) Plant is located in Dhaka on 12 Acres of Land.

Quality Recognition: ISO9001 (DNV)

No. of Employees:     1267

Trade Mark Acquisition:

  • Trademarks for three Hoechst Marion Roussel (HMR) products perpetually assigned to Renata. These products are
  • Bactamox (Amoxicillin Tablet and Dry Syrup)
  • Alsporin (Cephalexin Tablet and Dry Syrup)
  • Pyralgin (Paracetamol Tablet and Suspension)
  • This acquisition was made following a three-year relationship with HMR. From 1997-2000, Renata manufactured 19 Penicillin and Cephalosporin formulations on behalf of HMR.

Export :          Human Pharmaceuticals to Myanmar, Nepal and SriLanka

Distributors and Affiliations:

  • Distributor for Chiron Vaccines (Rabipur)
  • Distributor for BASF (Animal Nutrition Products)
  • Distributor Evans Vanodine (disinfectant)
  • Distributor for Schering-Plough Animal Health (Vaccines)
  • Distributor for Pfizer, India (Animal Health)
  • Distributor for Zinpro, USA (Metal Amino Acid Complexes)
  • Distributor for Biomin Laboratories, Singapore (Mycotoxin Binders and Nutraceuticals)

Licensing Arrangement :

Providing technical assistance to Deurali Janata Pharmaceuticals Private Limited (Nepal)

Contract Manufacturing :Contract manufacturing Oral Dehydration Salt formulation

Investment :

100% Shareholding in Renata Agro Industries Limited (One of largest poultry breeding and hatching operation in Bangladesh).

Financial Analysis

For the year

 2005

In my personal finding, collect the annual report of 2005 & searching website of Renata Ltd, the financial department  of Renata Ltd doing all over the activities of Preparation of Balance Sheet Approach to Valuation, Measurement of Cash vs. Profits, Measurement of Cash Cycle, Calculating Revenue, Expenses, and Inventory, Assessment of Financial Ratios, Decision making Bank Loans, Find the Sources and Uses of Cash, Ensure Sustainable Growth, Measurement of Firm Value, Equity Value, and Debt Value, Assessment of organizational Capital Structure, Organizational Risk Management, Decision Making in Cash Flows to Debt and Equity etc. Renata ltd is a Public Limited (Dhaka Stock Exchange) company, So Financial Management play an important role in proper distribution for each share holder.

In following I discuss some financial Statement of year 2005 of Renata Ltd

FINANCIAL RESULTS :

The financial results of the Company for the year 2005  & Compare with 2004 &2003

2005

2004

2003

Taka

Taka

Taka

Profit before tax

279,387,690

208,308,833

150,434,885

Less: Provision for tax

86,819,430

62,820,892

44,873,677

Net Profit after tax

192,568,260

145,487,941

105,561,208

Add: Un-appropriated profit brought forward

313,458,030

216,734,815

152,689,300

Profit available for appropriation

506,026,290

362,222,756

258,250,508

APPROPRATION RECOMMENDED:
Tax holiday reserve

2,197,657

6,924,906

6,649,168

Dividend proposed:
a) Cash dividend @ Taka 50/- per Share

33,471,850

27,893,200

23,244,350

b) Stock dividend (Bonus Share) in the ratio of
one bonus share for every five (1:5) Shares held

13,388,740

11,157,280

9,297,740

46,860,590

39,050,480

32,542,090

Dividend distribution tax @ 10% of cash dividend

2,769,320

2,324,435

Balance Un-appropriated profit carried forward

456,968,043

313,478,050

216,734,815

506,026,290

362,222,756

258,250,505

Assessment of Balance Sheet as at 31 December 2005

Renata Limited

Balance Sheet as at 31 December 2005

2005

 

2004

Sources of fund

Notes

Taka

Taka

Shareholders’ equity:
Share capital

4

66,943,700

55,786,400

Proposed bonus shares

13,388,700

11,157,300

Revaluation surplus

5

156,482,355

156,774,863

Tax holiday reserve

46,862,514

44,664,857

Unappropriated profit

6

456,968,084

313,458,030

740,645,353

581,841,450

Deferred liability – staff gratuity

7

60,324,000

52,822,000

Deferred tax liability

8

55,975,450

57,663,916

856,944,803

692,327,366

Applications of fund
Property, plant and equipment:

9

At cost/revaluation

619,228,840

597,325,841

Less: Accumulated depreciation

219,989,057

194,770,823

399,239,783

402,555,018

Capital work in-progress

10

139,891,546

10,683,181

Investment at cost

11

63,070,376

63,070,376

Current assets:
Stocks and stores

12

388,384,007

361,664,208

Debtors

13

162,224,078

112,899,272

Advances, deposits and prepayments

14

32,294,635

28,141,978

Cash and bank balances

15

89,452,557

70,710,981

672,355,277

573,416,439

Less: Current liabilities:
Creditors of goods

16,645,268

3,653,923

Accrued expenses

65,951,508

39,594,897

Other finance

16

27,154,025

19,658,040

Short term bank loans

17

192,425,445

206,014,979

Provision for taxation

18

80,483,330

56,807,350

Unclaimed dividend

1,480,753

985,939

Proposed cash dividend

33,471,850

27,893,200

Dividend distribution tax

2,789,320

417,612,179

357,397,648

Net current assets

254,743,098

216,018,791

856,944,803

692,327,366

Profit and Loss Account for the year ended 31 December 2005:

Renata Limited

Profit and Loss Account for the year ended 31 December 2005

2005

 

2004

Non-tax
holidayTax holiday

Notes

Unit 1 & 2

Unit 3

Total

Total

Schedule-A

Taka

Taka

Taka

Taka

Turnover

19

1,535,985,743

72,570,096

1,608,555,839

1,351,797,184

Cost of goods sold

20

-772,535,952

-56,661,484

-829,197,436

-697,413,608

Gross profit

763,449,791

15,908,612

779,358,403

654,383,576

Other income

21

16,957,354

16,957,354

7,676,622

780,407,145

15,908,612

796,315,757

662,060,198

Operating expenses:
Administrative, selling
and distribution expenses

22

-478,827,482

-529,600

-479,357,082

-417,069,271

Operating profit

301,579,663

15,379,012

316,958,675

244,990,927

Non-operating expenses (net)

23

-22,826,562

-1,090,000

-23,916,562

-26,266,652

278,753,101

14,289,012

293,042,113

218,724,275

Contribution to WPPF

-12,973,993

-680,430

-13,654,423

-10,415,442

Profit before tax

265,779,108

13,608,582

279,387,690

208,308,833

Tax expenses:
Current tax

18

-85,567,896

-2,596,622

-88,164,518

-59,322,757

Deferred tax

1,345,089

1,345,089

-3,498,135

-84,222,807

-2,596,622

-86,819,429

-62,820,892

Profit after tax

181,556,301

11,011,960

192,568,261

145,487,941

Unappropriated profit brought forward

313,458,030

216,734,815

Profit available for appropriation

506,026,291

362,222,756

Appropriation:
Tax holiday reserve

-2,197,657

-6,924,906

Proposed bonus shares (1 share for 5 shares held)

-13,388,700

-11,157,300

Proposed cash dividend (Tk 50 per share)

-33,471,850

-27,893,200

Dividend distribution tax

-2,789,320

-49,058,207

-48,764,726

Unappropriated profit carried forward

456,968,084

313,458,030

Basic earnings per share (par value Tk 100) – Note 24

287.66

260.79

Statement of changes in equity for the year ended 31 December 2005

Renata Limited

Statement of changes in equity for the year ended 31 December 2005

Share

Proposed

Revaluation

Tax holiday

Unappropriated

capital

bonus shares

surplus

reserve

Profit

Total

Taka

Taka

Taka

Taka

Taka

Taka

Balance at 31 December 2003

46,488,700

9,297,740

157,410,748

37,739,951

216,734,815

467,671,954

Bonus shares issued

9,297,700

-9,297,700

Depreciation adjustment on revaluation surplus

-635,885

-635,885

Deferred tax on RS

Net profit after tax for the year

145,487,941

145,487,941

Tax holiday reserve

6,924,906

-6,924,906

Proposed bonus shares

11,157,300

-11,157,300

Proposed cash dividend

-40

-27,893,200

-27,893,240

Dividend distribution tax

-2,789,320

-2,789,320

Balance at 31 December 2004

55,786,400

11,157,300

156,774,863

44,664,857

313,458,030

581,841,450

 

 

 

 

 

 

Bonus shares

11,157,300

-11,157,300

Deferred tax onRS

343,377

343,377

Depreciation adjustment on revaluation surplus

-635,885

-635,885

Net profit after tax for the year

192,568,261

192,568,261

Tax holiday reserve

2,197,657

-2,197,657

Proposed bonus shares

13,388,700

-13,388,700

Proposed cash dividend

-33,471,850

-33,471,850

Balance at 31 December 2005

66,943,700

13,388,700

156,482,355

46,862,514

456,968,084

740,645,353

Assessment of Cash flow statement for the year ended 31 December 2005

Renata Limited

Cash flow statement for the year ended 31 December 2005

2005

2004

Taka

Taka

A.

Cash flows from operating activities:
Collection from customers and other income

1,836,005,683

1,563,365,046

Payment of VAT

-243,974,768

-207,944,797

Payment to suppliers and employees

-1,292,169,955

-1,189,842,753

Cash generated from operation

299,860,960

165,577,496

Financing cost

-23,916,562

-26,417,268

Payment of tax

-64,488,538

-48,129,584

Net cash from operating activities

211,455,860

91,030,644

B

Cash flows from investing activities:
Purchase of property, plant and equipment

-151,986,364

-89,370,581

Investment in shares

-2,499,900

Sale proceeds of property, plant and equipment

260,000

269,375

Net cash used in investing activities

-151,726,364

-91,601,106

C.

Cash flows from financing activities:
Medium term loan repaid

-10,000,000

Dividend paid

-27,398,386

-23,081,044

Net cash from financing activities

-27,398,386

-33,081,044

D

Net cash outflows for the year (A+B+C)

32,331,110

-33,651,506

E

Opening cash and cash equivalents

-135,303,998

-101,652,492

F

Closing cash and cash equivalents (D+E)

-102,972,888

-135,303,998

Beside This  Renata Ltd Management Practices following financial measurement & activities

  • Property, plant and equipment.
  • Capital work in-progress
  • Investment at cost
  • Stocks and stores
  • Debtors
  • Trade debtors
  • Advances, deposits and prepayments
  • Cash and bank balances
  • Workers’ profit participation fund
  • Short term bank loans
  • Provision for taxation
  • Turnover
  • Cost of goods sold
  • Cost of goods manufactured
  • Cost of raw materials consumed
  • Purchases, issues and stocks of raw materials
  • Summarized quantity of purchases, issues and stocks of raw materials
  • Administrative, selling and distribution expenses & other expenses
  • Basic earnings per share (EPS)
  • Cash and cash equivalents
  • Payments to directors and officers
  • Capacity utilization – single shift basis
  • Outstanding letters of credit
  • Cash flows from operating activities:
  • Cash flows from investing activities:
  • Cash flows from financing activities:

Recommendation:

While I researching in this assignment, there are some lacking. I feel that Reneta Ltd can improve them a lot. So I have some suggestion & this are-

  • Improving the infrastructure financial management.
  • Need more publications & proper explanation.
  • Improving the facility & trained professional.
  • Improving productivity the training facility should be increasing.
  • For costs minimize financial management suggest product bench marking & product value chain system.
  • Need to be developing according to the global needs.
  • Raw materials of the Reneta products are comparatively very high. So it needs new supplier.
  • Financial department need to give attention in EPS.
  • Decision making should be properly for new launch (Product & Technology).
  • Accounting system should be full computerized.

Conclusion:

After going through all the financial analysis of the company I think the company is in a good position. Although some analyses are falling gradually yet if the company pays a little attention to the related matters which can improve, they will do much better in later.

Finally, I would like to say that financial management is one of the core departments in the business organization point of view. A good business organization needs strong financial management department for achieving there mission & objective.

management

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