Financial Statement Analysis and Controls
The horizontal analysis of the Competition Bikes, Inc. would first take course from the comparison of Year 6 and Year 7 with Year 6 as the base year. Then the second comparison takes Year 7 and Year 8 data with Year 7 as the base year.
The Net sales for the Competition Bikes, Inc. for the year 7 and year 8 depicts a decrease of 15% from an increase of 33% in the year 6 and year 7 sales. This consequently impacted on the Gross profit figures in the same periods with the year 7 and year 8 showing a decrease of 16.3% from an increase of 37.5% period of years 6 and 7.
The decline in net sales in the most recent year has been attributed to the global economic situation in which a good of the company’s customers have been in the category of sponsored professional riders, whose orders is dependent on the sponsor’s commitment to their facilitation. The years 7 and 8 have encountered a cut back on the fundinglevels from some of the sponsors to their riders.
A similar trend is depicted in the company’s operating expenses. That is, the years 6 and showed an increase of 23.9% while the years 7 and 8 showed a decrease in the total operating expenses. This can be similarly attributed to the fact that the current periods has been hit by the cut back on funding on the funding levels by some of the sponsors of the professional riders. The cut back on funding has majorly impacted particularly on the selling expenses rather than the general and administrative expenses. This showed that the current period of Year 7 and 8 experienced a reduction in bicycle sales activities and thus expenses in connection to such sales activities, for instance distribution costs, as well as product delivery through a common carrier, experienced decline too.
The two periods (Years 6 and 7, and Years 7 and 8) have showed a great discrepancy in terms of the operating income between the two periods. The Years 6 and 7 had a huge operating income of 154.6%, while Years 7 and 8 shows a great decline in the operating income of 69.1% of the Competition Bikes, Inc.This is attributed to the decline in sales as some of the sponsors of the professional bikers cut back on the funding levels.
The decrease in sales in the current period due to cut back on the funding levels by some of the sponsors has been the result of decline in the net earnings of the Competition Bikes, Inc. from an increase of 313.4% in the years 6 and 7 to a decrease of 81.6% in the years 7 and 8. The sales of the bicycles had gone down and since this is the major source of the company’s earnings, there was drastic drop in net earnings consequentially.
The total current assets of the company shows an increase of 31.5% in the year 6 and year 7, while years 7 and 8 shows an increase of 16.5% which is approximately a half decrease in the two periods as the company had put in place much of the current assets, like the raw materials inventory, finished goods inventory, cash and cash equivalents among other current assets in the previous period (Years 6 and 7) and less of the same in the succeeding period (Years 7 and 8).
Competition Bikes, Inc. accrues a huge amount of current liabilities of an increase of 122.4% in the years 6 and 7 but in the Years the increase in total current liabilities is 28.5%. The shows potential of meeting its short term liabilities by showing the decrease in the total current liabilities in the two periods.
The decrease in bicycles sales as noted in the current period of Years 7 and 8 has also impacted on the overall shareholders’ equity of the Competition Bikes, Inc. with a total stockholders’ equity of 3.2% in the Years 6 and 7 and 1.4% in the current period of Years 7 and 8.
The Competitive Bikes, Inc. comparative income statements vertical analysis shows an analysis of the income statement items with the net sales as the base figure across the different years. This puts the sales of the various years to have a vertical analysis percentage of 100% each as it is the reference point for all the following income statement items. It is noted that the gross profit shows a relatively stable percentage figure across the three years with year 6 (26.6%), year 7 (27.4%) and year 8 (27.0%). Though, there is an increase in the gross profit from 26.6% in year 6 to 27.4% in year 7 since the professional bikers sponsors had not put the cut back on funding and sales experiences great increase, but in the year 8 sales are 27.0% from 27.4% of the year 7 due to a decline in sales as a result of the implementation of the cut back on funding by the sponsors of the professional bikers.
On the other hand, the total selling expenses did not experience a proportional change with respect to the slight variation in sales of the bikes that had declined in the year 8, $5,083,000 from $ 5,980,000 in the year 7. This is because the total selling expense shows a 6.7% across the three years.
Both the total general and administrative expenses and the total operating expenses are showing a higher percentage in year 8 since most of the huge expenses incurred are recurrent expenditures (like the administrative salaries and executive compensation) in which bit it the sales go down or arise they must be incurred and still raise the expenses high though there is a decline in total sales in year 8 as compared to year 7.
The decrease in sales has majorly impacted on both the earnings before income tax and finally the net earnings. When there had been no decrease in the sales in the year 7 net earnings figure was 2.8% while the decline in the sales as a number of sponsors cut back on the funding in the year 8 results to net earnings dropping to 0.6%.
The Competition Bikes, Inc. comparative balance sheet vertical analysis computes its percentages using the base figures of the total liabilities and equity for the items under stockholders’ equity, long-term liabilities and current liabilities, while the base figures of the total assets are used for the calculation of the vertical analysis percentages for the items under current assets, and property and Equipment items.
The company’s total current assets show an increase from 24.5% in year 6 to 31.5% in year 7 and finally 36.8% in the current year. This would be attributed to time to time expansion in the business operation making the input with respects to current asset increase as time goes.
The decrease in net property and equipment percentages from 75.5% in year 6 to 68.5% in year 7 and 63.2% in the current year shows invested hugely in the fixed assets in the previous years and such investments are not undertaken in the same scale in the preceding years but in declining trend as critical fixed assets had been acquired in the previous periods.
The current liabilities are high in the year 8 (7.0%) while it is 5.4% in year 7 and 2.5% in year 6. The trend shows the need to meet recurrent expenditures of the company like the accrued salaries and rented expenses, and accounts and notes payable while the company’s sales levels experience set back due to cut back on funding by the sponsors.
The net sales figures shows a calculated trend with the base year being year 6 for the years 6, 7, and 8. The figures depicts an increase in the year 7 with 133.3% from 100% in the year 6. Though this increase lasts no more in the year 8 when the company experienced a cut back on funding by some of the sponsors thereby resulting into a decrease in the overall sales of the company’s bicycles to the professional riders to 113.3% in that year.
The forecast on the next three years is evident that the company would recover from the cut backon funding challenge and pick up its sales trend to progressive levels of 103.2% in year 9, 107.6% in year 10 and 111.8% in the year 11 with the base year being year 8 for the comparison.
The ratio analysis for the Competition Bikes, Inc. is undertaken in the framework of making comparisons with the company’s major competitor, Two Wheel Racing, Inc. figures.
The current period (year 8) comparisons of the current ratio shows that Competition Bikes, Inc. is better placed than its major competitor, Two Wheel Racing, Inc. in the market. The current ratio of 5.25 for Competition Bikes, Inc. and 4.20 for Two Wheel Racing shows that Competition Bikes cover comfortably their amount of the short term obligations as compared to how the Two Wheel Racing would meet theirs. The values of the current ratio showing more than 1 for both the companies shows that there is additional provision for them to cushion against unforeseeable contingencies which could arise in the short term.
Though the decrease in the current ratio of Competition Bikes, Inc. in the year 7 (5.79) to year 8 (5.25) shows that there is no improvement in the liquidity levels of the company or rather the company has not adopted a more conservative approach to working capital management. This higher current ratio gives an idea of Competition Bikes, Inc. operating efficiency –indicating “safe” liquidity, but again it would signal that Competition Bikes has a problem getting paid on its receivable or rather it has long inventory turnover.
Acid Test Ratio
Competition Bikes, Inc. experience a decline in the quick ratio rating in the year 7 (4.41) and year 8 with 4.14 but both are higher than the competitors, Two Wheel Racing with 3.40 for year 8. This shows that the company can liquidate its financial obligation immediately by the most liquid assets than how its competitor would.
Both the Competition Bikes, Inc. and the Two Wheels Racing, Inc. have favorable debt ratio figures. Though, Two Wheels figure of debt ratio is more favorable since it has the lowest figure in the year 8 (0.38) while Competition has 0.462 for the same period. This indicates that the competitor is a more stable business with a greater potential of longevity since it has lower overall debt. That is, the competition’s creditors only claim 46.2% (the part financed by debt) portion of the company’s assets while the rest of the percentage is held by the company’s stockholders.
Net Profit Margin
The competitor’s net profit margin rates higher, that is 5.2% in the year 8 and the Competition’s net profit margin in the year 8 is 1.9%. Two Wheel shows a higher efficiency levels in terms of converting sales into actual profit. This is attributed to the fact that the competitor builds a chain driven product besides producing bicycles which weigh only a few ounces more than the bikes which Competition Bikes make. On the other side of the coin, the cut back on funding by some of the sponsors of the professional riders has hugely caused the large net profit margin in the current period as the company’s sales drops drastically to cope up competitively with its competitor, Two Wheel Racing.
Return on Total Assets
The year’s 8 for the two company’s ROA shows a higher figure for the competitor with 4.8% and Competition Bike having 0.7%. The indication depicted from these figures is that Two Wheels is highly efficient in managing its assets to produce profits in this year than Competition Bikes. That is, it shows how well Two Wheel Racing converts its investments in assets into profits.
Working capital of Competition Bikes, Inc.
Ways to improve the working capital
Ensuring an effective management of payment process
The company should ensure that it makes accurate invoices a measure of key performance for receivables billing. That is, bad debts, specifically retardate the working capital in tough times, and this can be basically reduced thorough credit checks on the new customers and making sure of a careful management of credit limits (Rich, 2012).
Negotiation of discounts with suppliers
The company would make a lot money as a result of the discounts from bulk buying, regular orders, and early payment.
Considering an alternative funding
The company should improve its working capital by ensuringthat it meets the most necessary conditions towards increasing its credit line. Though, it should be noted that bank loans and overdrafts are not the source of working capital for a company. The company would contemplate on the asset-based finance, for instance, invoice discounting, or even the power of web in raising finances.
Ways to use excess working capital in generating an increase in profits
The company can ensure that the debtors pay as quickly as possible while keeping the levels of stock as lean as possible. The executives who are ambitious would integrate a working capital management within their tactical and strategic thinking towards achieving operational rewards for the company(Haber, 2004).
Facilitation of a collaborative customer management
CFOs, CEOs, and treasurers employ working capital and cash management strategies in order to eliminate thinking linearly and concerning themselves only and their companies’ needs. It is critical to collaborate with the customers in order to ensure they plan effectively for their inventory requirements, thereby achieving inherent efficiency and direct cost savings. At this point the company and the customers can effectively negotiate payment terms.
Internal controls for Competition Bikes, Inc.
The Company undertakes an explicit framework of the product delivery to customers through a common carrier with the superior handling of the product and high levels of reliability.
A weakness depicted in the internal operations of Competition Bikes, Inc. is the high cost of component package for the carbon strips of $275 with eachstrip costing $9. The company should negotiate effectively with the direct materials (carbon strips) for the discounts and favorable purchase terms in order to ease the operating cost for the business.
Risks to the company
The company would experience the risk of how its communications (both the internal and external) would affected and the extent to what traditional communications technique that would be of relevance within such an industry for prosperity. A mitigation measure on this risk would be assigning a personal relations personnel to help fix the company’s public relations.
Another risk is the location technicalities of the business. That is, what could the impact be on facilities and buildings to staff, suppliers and customers. This can be mitigated through a thorough analysis of the convenience factors and the underlying purpose the location of the business would serve.
Competition Bikes, Inc. has highly maintained adequate internal control over its financial reporting. The designing of the company’s internal control system ensured provision of reasonable affirmations to the company’s management and the board of directors in accordance to preparing and ensuring presentation of published financial statements.
Recommendations on areas of non-compliance
The company should ensure that its financial statements are not only fairly prepared and presented but also fairly present the financial position of the company and the results in all material respects.
The company should ensure that issuers publish the relevant information in their annual reports with respect to adequacy and scope of the internal control procedures and structure for the institution’s financial reporting.
The negative figures in the Competition Bikes, Inc. projected budget of 2009, for instance, the figures of price variance for the direct materials, which is favorable, revenue and spending variances for the net sales which is favorable too are mean that there is more spending than the budget. On the other hand, the positive variances in the Competition projected budget of Year 9, for instance figures of the efficiency variance transportation out, revenue and spending variances of advertisement expenses are considered to be good news variances since the mean the company is spending less than the budgeted.
The other general and administrative expenses with a variance of 2,000 unfavorable was much more than the planned values, consequently the planned sales could never come as expected. It is worth noting that the negative variance for the total expenses of the Competition Bikes, Inc. in year 9 could be a good news to the company.
Recommendations for a corrective Action
At the time which the company if compiling the budget, there should be an elaborative consultation among the stakeholders to ensure that they estimate low revenues and high expenses in orders for them to easily meet the budget and achieve their compensation plans.
The company should have a group of professional in form of financial analysts in order to ensure that the company follows the budget requirement. These experts would track down and make reports on the variances from the plan.
Management by exception
Good managers generally establish criteria in determining the particular variances to give a close focus on rather than just simply investigating all the variances in the budget outline. Therefore, management by exception depicts a scenario I which the mangers give their focus specifically on those variances that are important to the business performance and progress (Haber, 2004).
Expansion and Opportunities
A capital structure approach that maximizes shareholders
A basic way out for the Competition Bikes, Inc. towards formulation of an optimizing capital structure is make a selection of the proportion of the various forms of debts and equities that would maximize the company’s value minimizing the average cost of capital. The best approach of capital structure for the Competition Bikes, Inc. is the Net Operating Income (NOI).
The Net Income (NI) Approach
When Competition Bikes Inc. deploys the Net Income (NI) approach towards its optimal capital it ensures that the total value of the company changes with a change in the financial leverage. The approach becomes more applicable in the case of the Competition Bikes, Inc. as the company’s capital structure gives a leeway to the approach’s assumptions. The assumptions include that the company’s cost of debt is lower than the cost of equity (Nikolai, Bazley, & Jones, 2010). Consequently, an increase in the proportion of debt in the company’s capital structure would automatically result in a decrease in the company’s average cost of capital. This lower cost of capital results in an increase in the value of company. Furthermore, the company’s stakeholders can use the Net Income approach can be used in determining the company’s optimum capital structure in which the value of the firm is highest while the cost of the capital is lowest.
The capital budget areas of concern to the Competition Bikes, Inc.
The aspect of the best alternative investment option to undertake is an area that Competition Bikes should look into. This is because all the investments, for instance, the capital projects tend to tie up money making the company not spend and possible profit from other ways.
A capital project may have everything best structured and designed but still experience set-backs. There is less a firm can do to influence the market and thus it is inevitable that the conditions in the market, thereby undermining the financial premise of your investment. The market changes comes from natural disasters, innovation, changes in the economy’s health, changes in the costs of inputs, and government regulation and legislation.
Obtaining and maintaining working capital
Competition Bikes has a favorable debt ratio which makes it to be a position apply for a line of credit to meet its working capital needs from a financial institution. The company will have to pay back the money withdrawn from the line with some interest.
The company can also source its working capital from making application for the short-term and long-term business loans from financial institutions and banks.
Accounts receivables financing
The company’s working capital need can be sort through selling of its accounts receivables to a financing company. This happens when the financing institution buys the company’s outstanding invoices at a discount in exchange of money in-hand (Nikolai, Bazley, & Jones, 2010). It is the responsibility of the financier to ensure the collection of the money owed to the company from its clients, and thus the company can use the upfront money in keeping the business afloat.
The merger option
The merger option seem an advantageous one rather than the option of acquisition of the Canadian Biking Inc. This is because the Canadian Biking, Inc. has got a grounded operational base in the Canadian bicycles market. A merger will make no outstanding changes in the Canadian Biking market share but a combined force of internal operations, performance and efficiency levels since the Competition Bikes, Inc. is capable of producing bikes with the use of titanium technology.
The merger option is still a better option for the Competition Bikes since it results into an increase in the earnings per share of the company after it has been undertaken to an EPS of 0.053 for the merger from an EPS of 0.032 for the Competition Bikes, Inc. on its own. A better option is further presented with the merger as Competition Bikes takes advantage of the $1.10 of the Canadian Biking’s market price per share as compared to the Competition Bikes’ of $0.70.
Manufacturing Cost Structure
The adoption of the activity-based costing method would be appropriate for the Competition Bikes, Inc. since this has brought the incorporation of both the Titanium and CarbonLite bicycle frames. The costing methodology would ensure would ensure that Competition Bikes, Inc. identifies its activities and assigning the cost for each activity adequately with resources in relation to the actual consumption of each.
Analysis of the breakeven point for the Competition Bikes, Inc.
The breakeven for both the CarbonLite and the Titanium bikes stand at figure 3249. The variable expenses for the manufacturing of both the CarbonLite and Titanium bikes increase with increase in sales, while the when the sales decrease it decreases too.
The two bicycle frames, CarbonLite and Titanium, are evaluated on very clear measures of both the cost structures and the appropriate number of units that need to be sold in order to cover the cost or even make a profit. That is, determination of the point at which the revenue received from the two bikes equals the total costs associated with the production of the bicycles.
Once the Competition Bikes, Inc. reaches the break even units of 3249 in units sold or in sales, all costs, both fixed and variable, have already been recovered. Above this number of units, any additional unit sold will cause an increase in profit for the company. The increase in the profit will then be by the amount of unit contribution margin, which is considered the as the amount of the additional revenues which goes in covering the profit and the fixed costs.
When the company add $50,000 in fixed costs to the production facility and a 10% increase in cost of the direct materials, first the addition of the fixed would increase the break-even point (units) since the $50,000 increase in fixed cost would increase the production cost thereby raising the number of units in terms of revenue to counter the cost increase. Secondly, the 10% increase in the cost of direct materials would again result in the breakeven point being raised up. This is because the increase in the direct materials would mean that there in need for the revenue figures to increase in order to equalize the increased cost of production for the breakeven figures to be attained.