Assignment on Financial Management System

Executive Summary

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.

Introduction

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.

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. Visit www.renata-ltd.com for other 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.

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).

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
		holiday	Tax 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.