DRAFT| prepared on 01.10.
2024
XYZ Technologies| Financial Analysis and Forecasting
Project goal and limitations
The main goal of the project is the evaluation of the current financial
situation of the Company and preparation of a short-term budget which will
provide the smooth operation for the next year.
The information provided is limited encompassing only the financial accounts
of the current year. Hence, there won’t be any possibility to analyse the
comparative performance of the Company in relation to previous
years/periods indicating the processes movement trends.
The exact product/service type provided by the Company is also not defined,
which gives us an option to approximate the industry for benchmark
comparisons.
All calculations and assumptions are included in the Excel file attached in
this document.
Company overview
XYZ Technologies (Company) operates in a dynamic environment. The date
of establishment is not defined, nevertheless based on the ability of the
Company to generate positive cash flows, we can assume that the products
(services) provided are in a mature phase, which usually takes several years
from the launch date.
Executive summary
The Company operates in tech industry. Current year accounts show that the
financial health of the Company needs improvement. The main fields of
concern are working capital management, generation of additional revenue
streams and provision of long-term viability of the Company via
improvement of the capital structure.
Within the scope of this project a 12-month projection (budget) was prepared
addressing the issues revealed in this document.
Data quality
Financial accounts provided were not able to be used promptly due to some
inconsistencies which were corrected and amended:
- Loan principal payment was eliminated from the PL thus increasing the
Net income,
DRAFT| prepared on 01.10.2024
- Opening balance of the cash in the Cash flow statement was amended
to derive the closing balance of the cash which was reflected in the BS.
Another workaround will be necessary to confirm the balances for the
final version.
Analysis of the current situation
Several indicators were picked to analyse the current financial situation of
the Company including profitability, liquidity and gearing.
Gross profit margin for the current year was impressive amounting 48%
which will be unchanged for the coming year projection. Still, there’s room to
improve compared to industry average which is higher by 4%.
Operating profit margin amounted 10% indicating a significant level of
operational expenses. The level was lower than industry hence further
analysis will be necessary to reveal the main areas of efficiency
improvement and cost cutting.
The company doesn’t have liquidity issues (both current and quick ratios are
above the average for the industry) which is due the positive operating cash
flows.
Inventory turnover and receivables collection periods last almost one month
which is significantly higher that the industry average. Receivables’ days are
almost twice higher than payables payment days, which bring extra
difficulties for fulfilling the obligations of the Company. Agreeing these
indicators will bring additional funds to invest in operations improvement.
In the current year the Company is highly geared resulting the negative
equity amount. Leverage ratio is also above industry average. This is one of
the areas the immediate actions should be taken.
On the other hand, the long-term run of the company is not yet jeopardized
as the EBITDA is 5 times higher than the interest amount. If the company is
able to generate enough cash for principal and interest payments in the
future, this indictor will be improved continuously.
Coming year projection
Main assumptions used
DRAFT| prepared on 01.10.2024
Based on the financial information provided a monthly projection was carried
for the next 12 months. Here’re the main assumptions used:
Estimated total revenue will amount $25 mln. which is 67% higher than
current year. Taking into account the current economic situation of the
industry in average 10% MoM growth is anticipated (see monthly split in “BP
assumptions” tab of Excel file attached). A significant 20% growth is
expected for the last 3 month of the projected year based on the effective
operation of extended sales channels.
5% revenue allocation for capital expenditures was a plausible calculation
providing long-term sustainable growth for the Company (outside the scope
of this project).
Additional 8% growth on Revenue growth is anticipated for Operational
expenses which mainly comprise the variable compensation of sales
personnel.
For the calculation of the loan interest, it was anticipated that each year the
current portion of the loans is repaid on the last working day of the year.
A 5-year useful life was chosen for the new acquired PPE (Monthly additions
based on 5% of monthly revenue linearly allocated).
Improving the working capital efficiency, a goal was defined:
- to decrease the balance of trade receivables by 5% on a MoM basis,
- To decrease the overall level of inventory by 10% in the first month of
the projected year,
- To keep the prepaid expenses level constant,
- All remaining lines are kept constant.
Outcomes achieved
- Improved working capital ratios
- Improved gearing
- Improved interest cover
- Improvement efficiency based on continuous investment in PPE
Long-term action
- Profitability increase
- Finding alternative ways of financing
- Make the revenue growth stable
DRAFT| prepared on 01.10.2024
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