Deutsche Brauerei

Table of contents

Questions for report/discussion

  • What are the characteristics of Fund flow statement and its uses?
  • What do the financial forecast and sources and uses of funds statement of company tell us?
  • Discuss about breakeven analysis. What does the breakeven chart of the company tell us?

Fund Flow Statement

Financial statements mainly include profit and loss account and balance sheet. Profit and loss account lists out all the expenses made by the firm and revenue earned over a period of time. Balance sheet depicts the financial position of the firm at a particular point of time.

While fund flow statement is complimentary to both balance sheet and profit and loss account, it brings a clear idea about the movement of funds in and out of the firm, during a particular period of time. Meaning of Fund Flow The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business.

If the management wants to find out as to where the cash is being utilized, financial statement cannot help. Therefore, a statement is prepared of the sources and applications of funds from where Working Capital comes and it is utilized. This is called Fund Flow statement. Meaning of ‘Fund’ In a popular and generally accepted sense the term ‘fund’ is used to denote the excess of current assets over current liabilities: Working Capital     =    Current Assets – Current Liabilities Meaning of ‘Flow’ of Fund Flow of funds means transmigration (coming and going) of funds.

In other words, Flow of funds means change in Working capital, as in funds flow statement the words ‘funds’ mean net working capital. Hence Coleman rightly states that, “The fund statement is statement summarizing the significant financial changes which have occurred between the beginning and the end of a company’s accounting period. ” The flow of fund if is represented by changes in working capital, then it can happen, only if a transaction involves changes on both current item and noncurrent item. Every transaction has double entry. Various cases can be that transaction involves Change on current assets and on fixed assets (cash purchase of fixed assets)  Cash being current item and fixed assets are non current . Change on current assets and on current assets (credit sale of inventory) o Debtors is a current item and inventory is also current in nature .Change on current assets and change on current liabilities (payment made to creditors) o Cash is current asset and creditor, current liability .Change on current liabilities and change on current liabilities (short term loan taken to clear overdraft) .

Change on fixed assets and on fixed liabilities (sale of investments to redeem debentures) So, amongst all these combinations, transactions which involve change, on one hand on current item and on other hand on non current item, they would only lead to fund flow.

  • Sell investments in cash.
  • Issue of shares
  • Raising long term loans, etc.

Thus fund flow statement enumerates various sources from which funds come in organization and various applications which lead to usage of funds. It is an important tool to check the efficiency of management in the firm.

It can make future projections about working capital requirements and thus firm can arrange for those requirements and can allocate funds in a more efficient manner. Preparation of fund flow statement involves preparation of adjusted profit and loss account which is prepared by excluding the non fund and non operating items from the initial figure of net profit.

Different Names of Fund-flow Statement

  •  A Funds Statement
  • A statement of sources and uses of fund
  • A statement of sources and application of fund
  • Where got and where gone statement
  • Inflow and outflow of fund statement

Finally, the changes are classified under four categories:

  • long-term sources,
  • long-term uses,
  • short-term sources,
  • short-term uses.

It is also important to zero out the non-fund based adjustments in order to capture only the changes that are accompanies by flow of funds. However, income accrued but received and expenses incurred but not received reckoned in the profit and loss statement should not be excluded from the profit figure for the fund flow statement. Fund flow statements can be used to identify a variety of problems in the way a company operates.

For example, companies that are using short-term money to finance long-term investments may run into liquidity problems in the future. Meanwhile, a company that is using long-term money to finance short-term investments may not be efficiently utilizing its capital.

Steps in Preparation of Fund Flow Statement

  1. Preparation of schedule changes in working capital (taking current items only).
  2. Preparation of adjusted profit and loss account (to know fund from [or] fund lost in operations).
  3. Preparation of accounts for non-current items (Ascertain the hidden information).
  4. Preparation of the fund flow statement.

Importance of funds flow statement: Funds flow statement is an important analytical tool for external as well as internal uses of financial statements. The users of funds flow statement can be listed as under:

  1. Managements of various companies are able to review cash budgets with the aid of funds flow statements. They are extensively used by the management in the evaluation of alternative finance & investments. In the evaluation of alternative finance & investment plans, funds flow statement helps the management in the assessment of long-range forecasts of cash requirements & availability of liquid resources. The management can judge the quality of management decisions.
  2. Investors are able to measure as how the company has utilized the funds supplied by them & its financial strength with the aid of funds statements. They gauge can the company capacity to generate funds from operations. On the basis of comparative study of the past with the present, investors can locate & identify possible drains on funds in the near future.
  3. Funds statement serve as effective tools to the management for economic analysis as it supplies additional information, which cannot be provided by financial statements, based on historical data.
  4. Fund statement explains the relationship between changes in working capital & net profits. Funds statement clearly shows the quantum of funds generated from operations.
  5. Funds statement helps in the planning process of a company. They are useful in assessing the resources available and the manner of utilization of resources.
  6. Funds statement explains the financial consequences of business activities. They provide explicit & clear awareness to questions regarding liquid & solvency positions of the company, distribution of dividend & whether the working capital has been effective or otherwise.
  7. Management of companies can forecast in advance the requirements of additional capital & can plan its capital issue accordingly.
  8. Fund statement provides clues to the creditors & financial institutions as to the ability of a company to use funds effectively in the best interest of the investors, creditors & the owners of the company.
  9. Funds statement indicates the adequacy or inadequacy of working capital.
  10. The information contained in fund flow statement is more reliable, dependable & consistent as it is prepared to include funds generated from operations & not net profit after depreciation.
  11. Funds flow statement clearly indicate how profits have been invested, whether investments in fixed assets or inventories or ploughed back.

Financial forecast

A financial forecast is normally an estimate of future financial outcomes for a company. Using historical internal accounting and sales data, in addition to external market and economic indicators, a financial forecast is an economist’s best guess of what will happen to a company in financial terms over a given time period – which is usually one year. In this case, the company has forecasted its data for the years 2001 and 2002. Sources of funds

Net Income

Net income is equal to the income that a firm has after subtracting costs and expenses from the total revenue. Net income can be distributed among holders of common stock as a dividend or held by the firm as retained earnings. The items deducted will typically include tax expense, financing expense (interest expense), and minority interest. Net income is informally called the bottom line because it is typically found on the last line of a company’s income statement.  The forecasted net income is increasing in the projected year. It has been projected that there would be an increase in the net income of 28% in 2001 and 17% in 2002.

This can be credited to their expansion strategy in the coming years. There has been a dip in the net income in the year 1999 owning to the depreciation of Ukrainian currency by 125%.

Allowance for doubtful accounts

The allowance for doubtful accounts is a balance sheet account that reduces the reported amount of accounts receivable. Providing an allowance for doubtful accounts presents a more realistic picture of how much of the accounts receivable will be turning to cash. If a firm has made a sufficient provision in its allowance for doubtful accounts, reported earnings will not be penalized by bad debts when the bad debts occur.

If uncollectible accounts are larger than expected, however, the firm will have to increase the size of the account and reduce reported income.  There has been a sharp increase in allowance for doubtful accounts in the year 2001 which subsequently reduced. This can be linked to the increase in the credit they plan to give to the distributors owning to their expansion plans for the period and their recovery policy. The increase in doubtful accounts is a bad sign for the financial position for the company.

Depreciation

A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence.

Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. Because it is a non-cash expense, depreciation lowers the company’s reported earnings while increasing free cash flow.

Calculated by two methods:

  1. Straight Line Depreciation Method
  2. There has been gradual rise in the depreciation in the projected years. This can be related to increase in their number of assets (they are planning to buy more equipments and properties) which would lead to devaluation eventually.

Short-Term Debt

The account which comprises of any debt incurred by a company that is due within one year. The debt in this account is usually made up of short-term bank loans taken out by a company. The value of this account is very important when determining a company’s financial health. If the account is larger than the company’s cash and cash equivalents, this suggests that the company may be in poor financial health and does not have enough cash to pay off its short-term debts. Although short-term debts are due within a year, there may be a portion of the long-term debt included in this account.

This portion pertains to payments that must be made on any long-term debt throughout the year.In initial years they heavily depended on short term debts. Over the years the financial health of the company improved which lead to the reduction in the debts. Owning to their credit policy and increase in investment in fixed assets, the company is not able to recover the money. This could have lead to increase in short term borrowings.

Accounts Payable

An accounting entry that represents an entity’s obligation to pay off a short-term debt to its creditors.

The accounts payable entry is found on a balance sheet under the heading current liabilities. Accounts payable are debts that must be paid off within a given period of time in order to avoid default. Increase in accounts payable shows that the company is making more purchases on credit. It could be due to taking more time to pay bills, buying more products on credit, paying higher prices for credit purchases.

Other Current Liabilities

A balance sheet entry used by companies to group together current liabilities that are not assigned to common liabilities such as debt obligations or accounts payable.

Companies will group together these other current liabilities into one account on the balance sheet for the sake of simplicity. Since this category is made up of accruals and similar items, it increases as the company gets larger. It increased in 1999 owning to higher investment in Ukraine. The increase in the other current liabilities has been more or less stable in the projected years.

Total sources of cash

It is the sum total of all the components of sources of funds. Uses of Funds

Dividend Payments

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend. There is a sharp increase in the dividend payment as the company is projecting a higher increase in their profits.

The dividends are paid from the net income from the same year. Increase in dividend payments implies strong commitment to maintain higher level of dividends in the future

Increases in cash balance

Amount of available cash that a management decides to maintain in cash planning, to avoid or cover up cash shortfalls resulting from mismatch between cash inflows and outflows during an accounting period. The company is having optimum cash balance hence maintaining sufficient working capital.

Increases in accounts receivable

Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of customers who owe money to a person, company or organization for goods and services that have been provided to the customer. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms. In Germany, the company has maintained a tight hold on the credit that they supply to the distributors; thus there isn’t a significant change in the accounts receivable as compared to Ukraine.  Increases in accounts receivable (Ukraine) that is disproportionate to any growth in revenue may indicate the company is having trouble collecting money from its customers. Depending on the company’s cash situation, this could require the company to borrow money to plug the hole from the unpaid money it is owed by its customers. Eventually, the company might need to write-off some of these accounts receivable as bad debt, in recognition of the fact that some customers might never pay. In extreme cases, the company might run out of cash and have to shut down.

Increases in inventories

Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. An organization’s inventory can appear a mixed blessing, since it counts as an asset on the balance sheet, but it also ties up money that could serve for other purposes and requires additional expense for its protection. Inventory may also cause significant tax expenses, depending on particular countries’ laws regarding depreciation of inventory. Inventory appears as a current asset on an organization’s balance sheet because the organization can, in principle, turn it into cash by selling it.

Some organizations hold larger inventories than their operations require in order inflating their apparent asset value and their perceived profitability.The fragile distribution system in Ukraine pre-2000 lead to increase in the inventories of the company as company is working on improving the distribution channel due to which the product flow has been projected to be smooth in coming years leading to decrease in inventory which is a healthy financial sign.

Increases in other assets

Assets are economic resources owned by business or company.

Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include inventory, while fixed assets include such items as buildings and equipment. Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs, and financial assets, including such items as accounts receivable, bonds and stocks. There is a negative growth in the increase in the other assets because of the depreciation of other assets and they are not planning to acquire any new assets in near future. By 2002 they are planning to buy enough assets just to overcome the negative growth.

Reductions in long-term debt

Long-term debts are loans and financial obligations that last for over one year. For example, debts obligations such as bonds and notes, which have maturities greater than one year, would be considered as long-term debts. Reduction in long term debts from 1998 to 1999 could be due to overnight success of the company in Ukraine. The sound financial condition of the company has ensured the stable repayment of long term loans and would continue to do so in future.

Capital Expenditures

Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset ith a useful life that extends beyond the taxable year. Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. The sharp increase in the CAPEX can be explained by the inflow of capital through long term debts and the operating profit the company is planning to achieve in the projected period.

Total uses of cash

It is the sum total of all the use components in the fund flow statement.

The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC). A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative. Break even analysis can also be used to analyse the potential profitability of an expenditure in a sales-based business. Breakeven analysis is a management accounting tool used for profit planning of a firm.

Profit planning is a function of the selling price of a unit of product, the variable cost of making and selling the product, the volume of product unit sold and in case of multi-product companies, sales mix and finally, the total fixed costs. Breakeven point (for output) = fixed cost / contribution per unit. Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are “variable” (costs that change when the production output changes) and those that are “fixed” (costs not directly related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the “break-even point”). Break even analysis depends on the following variables:

  1. The fixed production costs for a product.
  2. The variable production costs for a product.
  3. The product’s unit price.
  4. The products expected unit sales. On the surface, break-even analysis is a tool to calculate at which sales volume the variable and fixed costs of producing your product will be recovered.

Another way to look at it is that the break-even point is the point at which your product stops costing you money to produce and sell, and starts to generate a profit for your company. Break even analysis solves various managerial problems:

Setting price levels

A price level is a hypothetical measure of overall prices for some set of goods and services, in a given region during a given interval, normalized relative to some base set. Hence with the help of BEP analysis a firm can determine the price level of product and particular sales volume which is necessary to produce an X amount of operating profit.  Targeting optimal variable/ fixed cost combinations

Determining the financial attractiveness of different strategic options for your company

A breakeven chart is a strategic tool used to plot the financial revenue of a business unit against time or sales to determine the point when sales output is equal to revenue generated. This is recognised as the breakeven point. The information used to determine and analyse the breakeven point includes fixed, variable and total costs and the associated sales revenues. The analysis of a breakeven chart considers whether a venture runs at a profit or a loss.

A sale above the breakeven point indicates continued and profitable growth. The principle of break-even theory is that during the early stages of a business venture, total costs, both fixed and variable, exceed sales. As output increases, sales begin to rise faster than costs and, eventually, they become equal (breakeven point). If sales continue to rise and exceed total costs, the business achieves profitability. The tool assumes that all the goods which are produced will be sold and that costs, namely the price, will remain constant.

A sale above the breakeven point indicates a continued and profitable growth, and venture makes a profit of €6081999.  Hence Deutsche Breuerei should stick to the current price level of beer and profit planning. Break even chart of Venture shows that if they can reduce the Production Cost in coming years through new facility and equipment they can increase the profits in long term. As the company is showing a healthy sales of good they can invest on production facility to reduce the per unit production cost and expenses to increases the overall profits

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