Business ethics evaluations and intentions

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Business evaluation guideCPA Australia Ltd (‘CPA Australia’) is one of the world’s largest accounting bodies representing more than 132,000 members of the financial, accounting and business profession in 111 countries. For information about CPA Australia, visit our website First published CPA Australia Ltd ACN 008 392 452 Level 20, 28 Freshwater Place Southbank Vic 3006 Australia ISBN: 978-1-921742-12-5 Legal notice Copyright CPA Australia Ltd (ABN 64 008 392 452) (“CPA Australia”), 2011. All rights reserved. Save and except for third party content, all content in these materials is owned by or licensed to CPA Australia. All trade marks, service marks and trade names are proprietory to CPA Australia. For permission to reproduce any material, a request in writing is to be made to the Legal Business Unit, CPA Australia Ltd, Level 20, 28 Freshwater Place, Southbank, Victoria 3006. CPA Australia has used reasonable care and skill in compiling the content of this material. However, CPA Australia and the editors make no warranty as to the accuracy or completeness of any information in these materials. No part of these materials are intended to be advice, whether legal or professional. Further, as laws change frequently, you are advised to undertake your own research or to seek professional advice to keep abreast of any reforms and developments in the law. To the extent permitted by applicable law, CPA Australia, its employees, agents and consultants exclude all liability for any loss or damage claims and expenses including but not limited to legal costs, indirect special or consequential loss or damage (including but not limited to, negligence) arising out of the information in the materials. Where any law prohibits the exclusion of such liability, CPA Australia limits its liability to the re-supply of the information.Contents Background 2 Introduction 3 Before an evaluation begins 4 Assessing the business 4 Collecting the information 4 Industry information 4 Other considerations 4 Developing a business evaluation model 5 Profitability 5 Cashflow, liquidity and solvency 5 Efficiency 5 Business planning 5 External issues and trends 5 Business evaluation measures 6 Profitability measures 6 Cashflow, liquidity and solvency measures 7 Efficiency measures 9 Business planning 11 External issues and trends 11 Conclusion 12 Appendix A: Business evaluation case study 13 Bundalong retail plant nursery 13 Appendix B: Checklist of suggested information sources for business evaluation 26 Appendix C: Example of a template for business evaluation 27 Analysis of industry benchmark to current and previous year 27 1Background This guide to business evaluation is the first in a series of The third guide in the series is on dashboard reporting and three guides. Once the evaluation process is complete, then provides examples of how the results of both business business owners and managers need to focus on improving evaluation and improving business performance can be business performance in line with the recommendations reported in a short-form format outlining the key drivers, the from the evaluation. To assist in this next step, the second performance of these and any further actions or comments guide in the series provides practical approaches to that will enhance business decision making. improving business performance, covering both financial and non-financial aspects of business. 2Introduction Evaluating the performance of any business is an essential In order to provide a comprehensive and thorough practice to assist in early identification of potential problems evaluation of a business, the process should not be limited and noting both positive and negative trends within to a financial review. It is likely that many businesses will business activities. By undertaking regular evaluations, also have a number of key drivers that are non-financial the progress of the business activities will be clarified (although likely to have a financial impact on business and owners, managers and advisers will have credible operations). Including an assessment of areas such as information that can be used to form the basis for planning economic factors, competitive market influences, human for the successful growth of the business. resource issues and global events and trends, as well as any other non-financial drivers, will not only provide There is no standard template to evaluate a business. additional information on business operations, but may Each business will be unique in its own way and the key also support or explain the financial trends highlighted in drivers for each business will vary. When undertaking an the evaluation. evaluation it is important to understand how the business operates, and what the key drivers are for the business as To assist in developing a business evaluation model, a this will help develop a more structured and meaningful case study has been included in the guide. This case evaluation method. Appendix A provides a detailed case study provides an overview of the key drivers of a retail study of a business evaluation, Appendix B provides a plant nursery and how the business evaluation model has suggested checklist and Appendix C provides a business been developed (from reviewing historical financial data). It evaluation template. can be clearly seen in this case study that the analysis of financial data leads to further analysis of operational areas A business evaluation is most useful when you use current of the business. information. Nearly every business, regardless of size, will be required to complete financial compliance reporting This guide will help business owners, accountants and of some type. For example, in Australia, all businesses other business advisers implement a business evaluation registered for goods and services tax are required to method for their business (or their client’s business) that complete a business activity statement for the Australian will be relevant and provide useful information on current Taxation Office (ATO). By undertaking regular evaluations operating performance and trends that can be utilised to that align with reporting requirements, real benefits will improve the success of the business. materialise for owners and managers. Aligning frequent reporting with business evaluation provides sound empirical evidence on the operations of the business that allows owners and managers to become proactive in their decision-making processes within the business. 3Before an evaluation begins Assessing the business Industry information When developing a method of business evaluation, it is For advisers and managers developing and implementing important to assess each business individually. This can be a business evaluation method, another useful piece of achieved through a number of tactics, such as interviews information will be any information that can be obtained with key personnel, reviews of policies and procedures on the industry in which the business operates. This and reviews of historical financial and other key data. information can be both financial and industry-specific The objective is to familiarise yourself with the business information. When utilising industry-specific information and operations and the key drivers within the business. Some of comparing it to actual business results, the comparison the questions you may like to consider include: will provide information on business performance that is measurable against other businesses within the same • What is the overall objective (mission) of the business? industry. Of course, this comparative analysis must be • Are there any qualitative issues within the business undertaken with caution, as there can be many variables that are considered essential for the operations of between businesses within the same industry. the business? Industry-specific information is produced by a number • Have there been a history of financial issues, or other of companies and other sources such as the Australian major problem areas, within the business? Bureau of Statistics, the ATO and small business government websites. If the business is a member of an • What is the experience of staff? industry association, the association may also have industry • What is the culture of the business? information that can be used in the evaluation. Collecting the information Other considerations Once all relevant information regarding business operations There are two other issues that need to be considered and key drivers is obtained (including any additional when undertaking a business evaluation. Firstly, information information you believe relevant to the business in question from financial statements is historical. When analysing that has not been mentioned previously), a review of key historical information, the analysis should be undertaken information should be conducted. This review could include close to the preparation date to enhance the information’s an analysis of: utility. Secondly, when using financial information it should be remembered that there are various accounting methods • the past three years of financial statements that can be applied to recording financial information. This • documented policies on key operational areas, such as in itself does not necessarily become an issue, however, mark-up and pricing, buying, stock management, internal when undertaking comparatives, the analyst should ensure controls, staffing and rostering and more that the data has been prepared on the same basis in order • the organisation chart and job descriptions for the comparison to provide meaningful information. Appendix B provides a checklist to assist in gathering • compliance documents, such as bank loan agreements, relevant information to assist in the business evaluation. leasing agreements and accreditation policies. This list is not exhaustive. 4Developing a business evaluation model A starting point for evaluating a business is to review the Efficiency past performance of a business by comparing historical financial results with the current financial statements Business owners will want to achieve the best possible return from the business. This comparative analysis will provide on their investment in a business. Regular monitoring of the information on trends, which is very helpful for planning the efficiency of a business will ensure that the business is not future progress of the business. The key to success of any only operating effectively, but that all assets are being utilised business will be centred on five key areas that can impact to generate the best rate of return for the investment. business operations and financial outcomes. These are: 1. profitability Business planning 2. cashflow, liquidity and solvency The most successful businesses will have strategic plans 3. efficiency in place that align with the business objectives (or mission). 4. business planning, both financial and operational These plans will be supported by budgets and forecasts that reflect the financial position of the business. All business 5. external issues and trends. evaluations should include a review of the alignment of the Of course each of these areas within the business will strategic plans to the budgets and forecasts. In addition, all be interlinked. However, when developing the business good practice business planning will include development of evaluation model, it is preferable to separate each area policies for the key drivers of the business. so that the results of the analysis can be clarified prior to looking at any causal relationships within the results. External issues and trends Profitability Each business will be impacted by issues and trends that are external to the business. When developing a business It is very easy for profitability to be eroded if it is not evaluation model, it will be important to identify the key measured and monitored on a regular basis. Therefore, it external issues that both directly and indirectly influence the is important to understand how to use the tools available business outcomes and undertake an assessment of each to continually evaluate the profitability of a business and of these issues. understand the meaning of this information. Cashflow, liquidity and solvency Most businesses that fail do so because of a lack of available funding to manage ongoing operations. This is why regular monitoring of cashflow, liquidity and solvency is an important part of the business evaluation model. Monitoring these areas will include financial ratio analysis, cashflow forecasting and evaluation of funding sources. 5Business evaluation measures Profitability measures The ultimate success of any business will depend on profitability. One of the most important issues for any business is maintaining profitability. A profitable business will ensure that the business operations are in line with the overall strategic objective, whether it is to grow the business, sell at a later date, or any other objective. Evaluating profitability can be undertaken by using profitability ratios, return ratios and using the mark-up and break even calculations. Some examples are shown below: Gross profit margin Gross profit X 100 Net sales Description Gross profit margin is the percentage of sales dollars remaining to pay general expenses following the deduction of the cost of goods sold. Cost of goods sold can include direct costs such as materials/ merchandise costs, carriage inwards on these, processing costs and production overheads. Use Analysis of this margin will assist in assessing the efficiency of the business, including the efficiency of pricing, stock purchasing procedures and handling. Well-designed and executed processes keep costs low and increase the gross margin. Mark-up Gross profit X 100 Cost of goods sold Description Mark-up is the percentage difference between the actual cost and the selling price. Use It is generally only a meaningful figure when referring to the sale of products rather than services. It can be useful to use mark-up calculation to ensure you set the selling price at a level that covers all costs incurred with the sale. Earnings before interest Net profit before interest and tax X 100 and tax (EBIT) margin Net sales Description This EBIT margin is the percentage of sales dollars left after deducting the cost of goods sold and all expenses, except income taxes. Use This measure enables the business to accurately compare the profit results with other businesses in the same or similar industries. Interest and tax are excluded as tax and interest can vary for each business. The analysis will provide information on the return on sales of the business. This ratio is often quoted by analysts reviewing the performance of a business compared to other businesses in the industry. Net profit margin Net profit X 100 Total income Description The net profit margin is calculated after tax and interest and includes any other non-trading income. Use This measure should be used to compare the overall results of the business against other time periods. In deciding which periods should be used in the comparison, the type of business should be considered. For example, when analysing a seasonal business, such as a snow skiing equipment store, it would be more useful to compare the winter season of the current year with the winter season of the previous year rather than comparing the previous month with the current month. 6Break even analysis Fixed expenses 1 less (cost of goods sold)/(net sales) Description The break even calculation shows how many sales have to be made in dollars before all the expenses are covered and actual profit begins. Use This measure provides information on the correlation between sales, volume and price. It is particularly useful for setting sales targets for the business or for sales employees. Once the break even figure is known, then the business can monitor sales to ensure that all expenses for the period will be covered. Cashflow, liquidity and solvency measures Cashflow, liquidity and solvency should be monitored regularly to ensure the ongoing survival, both short-term and long- term, of any business. Liquidity is a measure of the ability of the business to meet short-term debt obligations while solvency measures the ability of the business to meet longer term commitments. Cashflow is an operational measure that ensures that the business has adequate cash to cover all outgoings during the period to be monitored. Some examples are shown below: Cashflow forecast The cashflow forecast is obtained by calculating opening bank balances plus all receipts for the period less all payments for the period. The period can be as short as weekly, however more commonly a cashflow forecast period is by month. For businesses experiencing cash flow difficulty, it is recommended that forecasting is done more regularly than what is usual for the business. Appendix A provides an example of a cashflow forecast. Description A cashflow forecast is a very important tool for business as it provides information on future cash resources and how they will be applied to the business operations. Cashflow forecasting is an integral part of business planning and indicates any additional funding needs of the business in advance (so that the business can address such potential gaps). Use The forecast will predict the ability of your business to create the cash necessary for expansion or to support the operations of the business. It will also indicate any cashflow gaps the business may experience – periods when cash outflows exceed cash inflows. Working capital to total Total current assets less total current liabilities sales Total sales Description Working capital to total sales provides an indication of how much working capital per dollar of sales the business should be holding. Use Analysis of this ratio must take into account the type of trading the business is undertaking to provide any meaningful interpretation. For example, a business that sells a lot of low-cost items and cycles through stock quickly (such as a cafe) may only need 10%-15% of working capital per dollar of sales. A manufacturer of heavy machinery and high-priced items with a slower stock turnaround may require 20%-25% working capital per dollar of sales. 7Current ratio Total current assets Total current liabilities Description One of the most common measures of financial strength, current ratio measures whether the business has enough current assets to meet its due debts with a margin of safety. Use A generally acceptable current ratio is 2:1; however, this will depend on the nature of the industry and the form of its current assets and liabilities. For example, the business may have current assets made up predominantly of cash and would therefore survive with a relatively lower ratio. Quick (acid) ratio Total current assets less stock on hand Total current liabilities less bank overdraft Description Quick (acid) ratio is one of the best measures of liquidity. By excluding inventories, which could take some time to turn into cash unless the price is discounted, this calculation concentrates on real, liquid assets. Use It helps answer the question: If the business does not receive income for a period, can it meet its current obligations with the readily convertible “quick” funds on hand? Leverage (gearing) ratio Total liabilities X 100 Total equity Description The leverage (gearing) ratio indicates the extent to which the business is reliant on debt financing versus equity to fund the assets of the business. This ratio is heavily used by lenders in banking covenants, therefore another reason to monitor this ratio is to ensure the business does not breach bank covenants. Use Generally speaking, the higher the ratio, the more difficult it will be to obtain further borrowings. Debt to asset ratio Total liabilities X 100 Total assets Description The debt to asset ratio measures the percentage of assets being financed by liabilities. Use Generally speaking, this ratio should be less than 1, indicating adequacy of total assets to finance all debt. Evaluation of funding You can evaluate funding sources by reviewing all loan documentation and finance facilities (such as sources overdrafts), including leases, hire purchase and debtor finance, and ensure that each finance facility is readily available when required. Areas of review should include loan terms and conditions and financial covenants and reporting compliance requirements. Description It is critical to evaluate funding sources in an evaluation on solvency in order to ensure that the business has adequate access to funding sources when required. Use The evaluation of funding sources can be used in conjunction with the financial ratios for cashflow, liquidity and solvency and will be particularly useful when reviewing cashflow forecasts and identifying cashflow gaps. 8Efficiency measures To ensure that the business is effectively utilising and controlling both the assets and liabilities within the business, there are a number of measures that can be reviewed. Some examples are shown below. Stock turnover Cost of goods sold Average stock held for the period Description The stock turnover rate indicates the number of times the stock in the business has turned over. Use The lower the rate, the longer the stock is taking to turn over. This can provide an indication of issues with stock management, such as aged or excess stock holding. Funds that are invested in stock for longer periods can have an adverse effect on liquidity. Total stock on hand to Total stock on hand X 100 total assets Total assets Description The total stock on hand to total assets ratio measures percentage of stock on hand included in the overall assets of the business. Use If a high percentage of a business’s assets are tied up in stock and it does not have a relatively high turnover rate (a high turnover rate would be less than 30 days), it may be a signal that something is wrong and there could be potential for a stock write-down/off. Debtor’s days Total debtors X number of days in the analysis period Total credit sales for the number of days in the analysis period Description The debtor’s days ratio indicates how promptly accounts from customers are being collected. Use When comparing the results of this calculation to the trade terms offered to customers, this will indicate slow paying customers as well as potential bad debts. The ratio is most useful when used in conjunction with an aged debtor’s report. Aged debtor’s report Description The aged debtor’s report is generated by a financial system that lists all outstanding customer payments by number of days. The list usually provides outstanding payments by current, 30 days, 60 days, 90 days and over. Use This report is particularly useful when used with the debtor’s days calculation noted above. It will provide information on all outstanding customer accounts and can be used to chase up late payments and identify potential problem customer accounts. Creditor’s days Total creditors X number of days in the analysis period Total cost of goods sold for the analysis period Description The creditor’s days ratio indicates how well accounts payable are being managed. Use When comparing the results of this calculation to the trade terms offered by suppliers, the results will provide information on supplier payments. If the analysis highlights that creditors are being paid on average before agreed payment terms cashflow can, potentially, be impacted. If payments to suppliers are excessively slow, there is a possibility that the supplier relationships will be damaged. 9Aged creditor’s report Description The aged creditor’s report is generated by a financial system that lists all outstanding payments to suppliers by number of days. The list usually provides outstanding payments by current, 30 days, 60 days, 90 days and over. Use This report is particularly useful when used with the creditor’s days calculation noted above. It will provide information on all outstanding supplier accounts and can assist when preparing forecasted cash payments. Total asset turnover Net sales Total assets Description The total asset turnover measures the ability of a business to use its assets to generate sales. Use The lower the total asset turnover ratio, as compared to historical data for the business and industry data, the more sluggish the business sales are. This may indicate a problem with one or more of the asset categories composing total assets – stock, debtors or fixed assets. Each asset class should be reviewed to determine where the problem lies. Return on assets (ROA) Net profit before tax X 100 Total assets Description The return on assets measure indicates how efficiently profits are being generated from the assets employed in the business when compared with the ratios of businesses in a similar business. Use The ratio will only have meaning when compared with the ratios of others in similar organisations. A low ratio in comparison with industry averages indicates an inefficient use of business assets. Return on equity/ Net profit before tax X 100 investment (ROI) Total equity Description The return on the business owner’s investment (ROI) is perhaps the most important ratio of all as it tells you whether or not all the effort put into the business is, in addition to achieving the strategic objective, returning an appropriate return on investment. Use If the ROI is less than the rate of return on an alternative, low risk or risk-free investment, such as a term deposit, this raises the question of the overall investment in this business. A high ROI means that investment compares favourably to investment costs. Total sales to number of Total sales sales employees Number of sales employees Description The total sales to the number of sales employees provides the average dollar value of sales made for each employee directly associated with the sales function for the analysis period. Use Although this measure will only provide the average value of sales per employee, it is helpful in identifying trends in the average dollar value of sales per sales employee. Employee sales Total value of sales made by each employee for the analysis period. Description The employee sales measure is useful to review productivity of each employee. Use Although this measure will only provide the total value of sales per employee, it is helpful in determining how productive the business is in generating sales. 10Business planning External issues and trends The most successful businesses will have strategic plans To complete the business evaluation, an assessment in place that align to the business objectives (or mission). of factors that can impact the business, but for which These plans will be supported by budgets and forecasts the business has little or no control over, should be that reflect the financial position of the business and take undertaken. For each business, these factors and the into consideration these plans. All business evaluations possible implications for the business will vary. Therefore, should include regular review of the alignment of the it is impossible to provide a comprehensive listing of budgets and forecasts with strategic plans. external issues and trends. However, the following list helps identify key external factors that could be included Both budgeting and forecasting are critical tools that a in the business evaluation: business should use to assist in planning for the future success of the business. When undertaking the evaluation, • economic factors, such as foreign exchange rates, a business should review both of these tools and the interest rates, commodity price, inflation rates, growth overall strategic plans to ensure that the current business rates and unemployment rates operations are on track to achieve the business objectives. • political factors, such as government policy, fiscal and The areas of review should include (but is not limited to): monetary policy, current and proposed legislation • the frequency of the preparation of a strategic plan, • global factors, such as free trade agreements and budget and forecasts international tariffs • where the information for the budgeting and forecasting • industry issues such as accreditation and a code tools is being sourced, i.e. which business units of conduct • the assumptions that have been used in developing the • environmental issues, such as droughts, floods and budgeting and forecasting plans, including credibility and climate change validity of the bases of the assumptions • markets, such as the global, domestic and industry- • the authorisation process for the development of specific markets. budgeting and forecasting, such as whether the forecasts are approved by the owner or board • which reporting mechanisms are in place for review of strategic plans, budgets and forecasts. To support strategic plans and ensure they are followed and achieved, a business should consider implementing policies for the key drivers of the business. Policies will provide guidance on procedures that will support the direction of the business objectives. Examples of key policies could include (but are not limited to): • mark-up policies • discount policies • expenditure policies (such as travel policy, vehicle policy, personnel policies) • authorisation policies (such as budget approval policy) • internal control policies (such as staff sales processing policy). 11Conclusion Business evaluation should be undertaken by every It is important to note that any stand-alone information business owner and manager. The overall performance of a will not be highly meaningful. What will be beneficial is business should be monitored on a regular basis to ensure to undertake regular business evaluations that can be the business is on track to achieve the overall objectives in compared to information obtained from previous evaluations a financially sound manner. A simple way of implementing so that trends and potential problems and opportunities business evaluation is to match this process with the can be detected and acted upon. With regular appraisal of reporting cycles of the business. business operations through structured business evaluation models, the business is most likely to achieve both efficient There are many different tools that can be used to evaluate and effective business operations that will ultimately lead to the performance of a business and the most beneficial business success. technique is to use the tools that are relevant and individually suited to the operations being analysed. Identifying the key Implementing an evaluation model suited to the operations drivers that impact business operations will be important in of the business will ensure that there is a process in place developing the business evaluation model and matching the to identify potential problems and opportunities and monitor relevant measures to these key drivers. the changing environment in which the business operates, providing information for the business to successfully evolve and achieve its overall objectives. 12Appendix A: Business evaluation case study To assist in developing a model for evaluating a business, the Bundalong retail plant nursery following case study is provided as a guide. As mentioned previously, each business will be unique in its own way and Bundalong retail plant nursery is situated in a rural town the impact of business drivers for each business will vary, which has a population of approximately 38,000 residents. therefore this case study should only be used as reference to The nursery has been operating for 15 years and in the developing your own business evaluation model. past few years has been recording operational losses. The business evaluation was undertaken in July of the current year. The business evaluation for this case study involves a review of the financial information against the benchmark information together with a review of documentation provided and physical procedures noted during site visits. Financial statements Profit and loss statement for year ended July Current year () Previous year () Sales 438,707.15 345,314.93 Cost of goods sold Opening stock 119,979.00 71,573.65 Purchases 224,938.00 214,050.11 344,917.00 285,623.76 Closing stock (96,490.49) (119,979.00) Total cost of goods sold 248,426.51 56.63% 165,644.76 47.97% Gross profit 190,280.64 43.37% 179,670.17 52.03% Operating expenses Salaries (233,294.80) 53.18% (200,236.01) 57.99% Overheads (85,903.42) 19.58% (96,691.18) 28.00% Total operating expenses (319,198.22) 72.76% (296,927.19) 85.99% Net loss (128,917.58) (117,257.02) Average stock held for each year 108,234.75 95,776.33 Areas noted for further review from figures above include stock holdings and salaries. 13Breakdown of operating expenses Operating expenses Current year Previous year % of expense % of expense Cleaning contract 1,740.00 2.03 1,160.00 1.20 Repairs and maintenance Buildings 794.26 0.92 656.39 0.68 Equipment 978.22 1.14 859.64 0.89 Furniture and fittings 1,702.80 1.98 1,626.81 1.68 Grounds 4,656.30 5.42 9,646.20 9.98 Electricity 2,821.48 3.28 2,729.10 2.82 Vehicles Fuel 3,220.07 3.75 2,578.55 2.67 Registration 355.00 0.41 352.20 0.36 Insurance 1,250.00 1.46 1,200.00 1.24 Repairs and maintenance 1,712.51 1.99 1,872.71 1.94 Transport – contract — — 460.04 0.48 Depreciation Equipment 5,152.84 6.00 5,421.84 5.61 Furniture and fittings 4,324.41 5.03 4,961.39 5.13 Motor vehicles 6,392.29 7.44 6,577.53 6.80 Advertising 14,515.12 16.90 15,954.60 16.50 Uniform costs 277.89 0.32 451.54 0.47 Printing and stationery 1,017.50 1.18 892.62 0.92 Telephone 2,655.50 3.09 2,960.61 3.06 Staff provisions 1,431.55 1.67 1,665.49 1.72 Rent 22,455.00 26.14 19,525.00 20.19 Equipment 620.00 0.72 1,222.22 1.26 Staff training 310.09 0.36 438.18 0.45 Travelling 191.07 0.22 76.63 0.08 Materials and supplies 529.48 0.62 581.65 0.60 Bank charges 3,013.19 3.51 2,809.30 2.91 Memberships and subscriptions 579.32 0.67 520.00 0.54 Health and safety 259.30 0.30 117.79 0.12 Postage 364.70 0.42 369.44 0.38 Computers — — 4,504.14 4.66 Sundry administration costs 2,583.53 3.01 1,681.39 1.74 Consultancy fees — — 2,818.18 2.91 Total operating expenses 85,903.42 96,691.18 Figures rounded to the nearest hundredth. Areas noted for further review from figures above include decrease in ground maintenance expense, increases in rent bank charges and why there is no computer expense for the current year (i.e. is technology not up to date?). 14Balance sheet Current year () Prior year () Assets Current assets Cash/bank 16,320.00 65,777.82 Debtors 14,280.00 32,000.00 Stock 96,490.00 119,979.00 Other 4,210.00 5,500.00 Total current assets 131,300.00 223,256.82 Non-current assets Delivery vehicle 75,000.00 75,000.00 Less accumulated depreciation (19,547.35) (12,969.82) Total 55,452.65 62,030.18 Nursery fit out 115,000.00 115,000.00 Less accumulated depreciation (66,955.45) (61,994.06) 48,044.55 53,005.94 Equipment 50,000.00 50,000.00 Less accumulated depreciation (41,021.20) (35,599.36) 8,978.80 14,400.64 Total non-current assets 112,476.00 129,436.76 Total assets 243,776.00 352,693.58 Liabilities Current liabilities Creditors 65,000.00 48,000.00 Credit card 15,000.00 12,000.00 Total current liabilities 80,000.00 60,000.00 Non-current liabilities Bank loan 20,000.00 20,000.00 Total liabilities 100,000.00 80,000.00 Equity Shareholders’ funds (including retained earnings, losses) 272,693.58 389,950.60 Less current year accumulated losses (128,917.58) (117,257.02) Total equity 143,776.00 272,693.58 15Operational activities Financial benchmarks As provided by Bundalong retail plant nursery from their Staffing industry association. Full-time equivalent 5.30, including: • Owner/manager 1.30 Financial benchmarks Total average income 446,556 • Apprentice 1.00 Cost of goods sold 48.99% • 6 Part-time 3.00 Gross margin 51.01% Part-time duties include: Selected overheads as percentage of income • General sales, orders, quotes 0.80 Advertising and promotion 2.26% Salaries and wages including staff on costs 13.77% • General sales, admin 0.60 Vehicle operating costs 3.74% • General sales, buying 0.60 Rent 3.32% • General sales 0.60 Bank charges 1.53% • 2 staff general sales (2 x 0.20) 0.40 Total overheads 37.25% Trading hours: 59.50 hours per week, 8.30am to 5.00pm Net profit margin 13.76% every day except Christmas Day, Good Friday, Easter Personnel numbers (FTE) Sunday and the morning of Anzac Day. Working owners 1.52 Documentation reviewed Sales staff and nursery people 2.36 Mark-up policy: The standard mark-up policy Any other staff 0.49 is 110 per cent. Total personnel 4.37 Buying policy: No formal buying policy held. Other benchmark information Job descriptions: No formal job descriptions held. Stock turn rate 3.50 Plants gr own in house as percentage Discount/VIP policy: The discount policy notes 20.00% of total sales the following: Trading hours per week 54 Discount Category Percentage of sales made to account 25.00% 2.5% Non-VIP members customers 10% VIP members Schools Businesses Garden design customers 15% Landscapers value to 200 20% Landscapers value 201 to 500 TAFE and other colleges 25% Landscapers value more than 500 Nursery staff 16Analysis of Bundalong retail nursery financial information in comparison to the benchmark in current and previous year Industry Current year Variance of Variance of Previous year Variance of benchmark current year to current to previous year benchmark previous year to benchmark Total income 446,556.00 438,707.15 (7,848.85) 93,392.22 345,314.93 (101,241.07) Cost of goods sold 48.99% 56.63% 7.64% 8.66% 47.97% (1.02%) Gross margin 51.01% 43.37% (7.64%) (8.66%) 52.03% 1.02% Selected overheads as a percentage of income  Advertising and 2.26% 16.90% 14.64% 0.40% 16.50% 14.00% promotion Salaries including staff 13.77% 53.18% 39.41%  (4.81%) 57.99% 44.22% on costs Vehicle operating costs 3.74% 7.61% 3.87% 1.40% 6.21% 2.47% Rent 3.32% 26.14% 22.82% 5.95% 20.19% 16.87% Bank charges 1.53% 3.51% 1.98% 0.60% 2.91% 1.38% Total overheads 37.25% 72.76% 35.75% (13.00%) 85.99% 48.75% Net profit margin 13.76% (29.39%) (43.15%) 4.57% (33.96%) (47.72%) Personnel numbers (FTE) Working owners 1.52 1.30 (0.22) 0 1.30 (0.22) Sales staff and 2.36 4.00 1.64 0.50 3.50 1.14 nursery people Any other staff 0.49 0 (0.49) 0 0 (0.49) Total personnel 4.37 5.30 0.93 0.50 4.80 0.43 Other benchmark information Stock turn rate 3.50 2.30 (1.20) 0.57 1.73 (1.77) Plants grown in house as a percentage of total 20.00% 22.00% 2.00% 2.00% 20.00% 0 sales Trading hours per week 54 59.50 5.50 0 59.50 5.50 Percentage of sales made to account 25.00% 58.00% 33.00% 3.00% 55.00% 30.00% customers 17Commentary on industry benchmark variances Total income The total income in the current year is up from the previous year and is within 5% of industry benchmark. Cost of goods sold Total cost of goods sold for the current year is 8.66% higher than the previous year and 7.64% higher than the benchmark. Recommend further investigation. Gross margin Gross margin variances in line with cost of goods sold variances noted above. Review cost of goods sold. Selected overheads as percentage of income Advertising and promotion Current year expense up slightly from previous year. This expense for current year and previous year are substantially higher than benchmark. Recommend further investigation. Salaries including staff on costs Current year expense lower than previous year, although increase in staff numbers (see FTE data below). However, figures are still substantially higher than benchmark. Recommend further investigation. Vehicle operating costs This expense for both current and previous year are higher than the benchmark. Recommend further investigation. Total overheads Current year expenses lower than previous year, however substantially higher than benchmark most likely due to high salary overheads. Recommend further investigation. Net profit margin Net operating loss reported for both current and previous year due to key areas noted above. Personnel numbers (FTE) Working owners The working owner data suggests that the Bundalong owner is working slightly below benchmark. Sales and nursery staff The current year staffing is higher than previous year (although overall salaries are Any other staff lower) and also higher than benchmark data. Recommend further investigation. Total personnel Other benchmark information Stock turn rate The current year stock turn rate is higher than the previous year, however, both figures are well below benchmark. Further investigation recommended. Plants grown in house as percentage of The current year plants grown in house is higher than benchmark. Further total sales investigation recommended. Trading hours per week Total trading hours remained constant for both current and previous year, and slightly higher than the benchmark. Percentage of sales made to account The percentage of sales made on account increased slightly in current year customers compared to previous year, however for both years this percentage is substantially higher than industry benchmarks. Given these sales are on discount, it means that most sales are below the mark-up stated in the mark-up policy. Further investigation recommended. 18