Financial Forecasting for Kamran Ahmad Marble Industries

Prediction is the appraisal of the value of a variable ( or set of variables ) at some future point in clip. Forecasting exercising is normally carried out in order to supply an assistance to decision-making and in be aftering the hereafter. Typically all such exercisings work on the premiss that if we can foretell what the hereafter will be like we can modify our behavior now to be in a better place, than we otherwise would hold been, when the hereafter arrives. [ 1 ]

The organisation I have chosen for the undertaking 1 of the assignment is described below

Introduction:

Kamran Ahmad Marble Industries ( KAMI ) , located at the North West Frontier Province ( NWFP ) Pakistan. They deal in different types of marbles found in different countries of Pakistan. They non merely supply marble tiles to local industries / clients but besides have concern relation / partnership with some other companies at UAE, Bangladesh and Sri Lanka. They get their natural merchandises from some distant countries of Pakistan like Buner, Swat and Tribal countries of Pakistan.

Following tabular array shows merchandise cost, unit produced and gross generated by KAMI in last 7 old ages ( 2003-2009 )

Year

Raw Materials’000 ( PKR )

Unit of measurement Produced’000

Labour Cost’000 ( PKR )

Electricity Cost’000 ( PKR )

Machinery Cost’000 ( PKR )

Entire Cost’000 ( PKR )

Entire Sales’000 ( PKR )

2003

110000

6000

6000

1520

117520

132300

2004

110200

6300

6300

1530

118030

133560

2005

111400

6400

6400

1540

119340

134190

2006

112300

6600

6600

1700

120600

158400

2007

114500

6700

6700

1720

122920

162140

2008

119500

8400

8400

3500

7000

131400

250000

2009

115000

4000

4000

2500

211500

140000

Cost Prediction:

To make cost-forecasting I will utilize the High and Low method. In the given informations the cost is high in 2008 and low in 2003

In 2008

Cost = 131400 Units produced = 8400

In 2003

Cost = 117520 Units Produced = 6000

To happen out the unit cost

= Cost difference / Unit difference

To happen the cost difference

= High cost – Low cost

= 131400 – 117520

= 13880

To happen out the units difference

= 8400 – 6000

= 2400

So Cost per unit = 13880 / 2400

= 5.783

Now to happen out the fixed cost

Fixed cost = Total cost – Variable cost

To happen fixed cost utilizing high value

= 131400 – 5.783 ( 8400 )

= 82820

Now utilizing Low value

= 117520 – 5.783 ( 6000 )

Fixed Cost = 82820

Gross Prediction:

Year

Gross saless ‘ 000 ( PKR )

RPI

2003

132300

100 %

2004

133560

115 %

2005

134190

132 %

2006

158400

140 %

2007

162140

155 %

2008

205000

160 %

2009

140000

172 %

Taking the RPI for 2003 and 2004

115-100 = 15 %

Taking RPI for 2004 and 2005

132-115 = 17 %

Taking RPI for 2005 and 2006

140 – 132 = 8 %

Taking RPI for 2007 and 2006

155 – 140 = 15 %

Taking the RPI for 2008 and 2007

160 – 155 = 5 %

Taking the RPI for 2009 and 2008

172 – 160 = 12 %

Calculating the Average addition in RPI for last 7 old ages ( 2003-2009 )

=5+17+8+15+5+12 / 6

= 10.3333

So the mean addition in RPI for the last seven old ages ( 2003-2009 ) in Pakistan is 10.333 %

So we can foretell the gross prognosis for 2010

= 3450000*10.3333/100

= 5934000 RS.

Fund Beginnings for KAMI:

Following are the available financess beginnings for KAMI

Take loan from Bankss

Get financess from marble association

Get loan from other concern parties

Take Loan from Banks:

In Pakistan different Bankss provide loans to industries on different footings and conditions and involvement rates. But in recent old ages some Bankss from gulf have opened their subdivisions in Pakistan with Islamic banking ( as involvement in prohibited in Islam ) . Besides a bank owned by Germany “ The Bank of Khyber ” in North West of Pakistan provides loans without any involvement. “ Meezan Bank ” which is a prime Islamic banking system and wholly involvement free banking, besides provides loans for industries. So in banking sector KAMI has two picks to acquire loan i.e. loan with involvement or loan without any involvement.

Fundss from Marble Association:

The marble association ( association of all marble industries in Pakistan ) besides has a support system to assist its members in the clip of demand. KAMI proprietor is the president of marble association Northern zone, so they have advantage of taking the “ Helping fund ” from marble association, because they are trusty and holding good repute in the market.

As a cultural value, in this country of Pakistan people frequently help each other financially in the clip of demand, even rivals in market aid one another financially because it is consider “ Good ” in the civilization and tradition.

So they can besides loan from some of the good established marble parties in their country, because they have good reputation in the country and a good known and respected household

Appraisal of Source:

I will urge KAMI to acquire assisting assistance from marble association, because their company and its direction is really active in the marble association activities, they ever remain in forepart for the rights of marble industries in the tribunals and other public organic structures offices, so they will confront no job in acquiring the needed financess with zero involvement rate from marble association.

Proposal to Obtain Fundss:

Nowshera NWFP

Pakistan

March 4, 2010

Mr. Zubair

Chairman All PaKistan Marble Association

Dear Mr. Zubair:

Kamran Ahmad Marble Industries ( KAMI ) is a member of All Pakistan Marble Association ( APMA ) , and actively participates in the association activities. The proprietor of the company Mr. Muhammad Hanif is the elective president of the APMA Northern zone, and is a good known personality within the association.

Presently KAMI wants to put in new machinery at their mill, which will be about RS. 1000000, and as per association policy that it assist its members financially by supplying loans with 0 involvement rate, KAMI besides apply the association to obtain loan of RS. 400000 which is about 40 % of the entire sum, KAMI will put the staying 60 % of the entire sum. KAMI will return the loan within the following fiscal twelvemonth.

Kamran Ahmad Marble Industries is looking frontward for your sort answer, we will supply you all the grounds and required paperss if you need it.

Sincerely,

Naeemullah

In this undertaking a study is required to hold an probe of two viing undertakings in public and private sectors, use any of the assessment techniques and warrant your pick, so taking a undertaking from public sector and making station audit assessment and at the terminal devising recommendations for that organisation on that undertaking.

I have taken following two undertakings for the same company that in undertaking 1 Kamran Ahmad Marble Industries and following are the two competitory undertakings.

Undertaking 1: Buying Heavy truck for supply of natural stuffs to KAMI

Undertaking 2: Installing new machinery ( Bridge cutter and perpendicular cutter ) to increase the productiveness of the company.

Undertaking 1: Buying Heavy truck for supply of natural stuffs to KAMI

Estimated undertaking cost: 3500000

Cost of Capital: 10 %

Undertaking tally clip: 5 old ages

Following is the expected hard currency flow for undertaking 1

Year

Cash flow

( PKR )

Cost of Capital

( 10 % )

NPV

( PKR )

0

( 3500000 )

1.00

( 3500000 )

1

405401

0.909

3685509.5

2

939719

0.826

776207.89

3

1211820

0.751

910076.82

4

1672437

0.683

1142274.47

5

1350214

0.621

838482.89

-2710277 PKR

So the above analysis make it clear that NPV for undertaking 1 is Negative

Undertaking 2: Installing new machinery ( Bridge cutter and perpendicular cutter ) to increase the productiveness of the company.

Estimated Undertaking Cost: 10000000 PKR

Cost of Capital: 10 %

Year

Cash flow

( PKR )

Cost of Capital

( 10 % )

NPV

( PKR )

0

10000000

1.00

( 10000000 )

1

1920431

0.909

1745672

2

2715793

0.826

2243245

3

3193247

0.751

2398129

4

3654176

0.683

2495802

5

39148213

0.621

2451840

1334688 PKR

The NPV for undertaking 2 is positive

Suggestion for KAMI

As the NPV for undertaking 1 is negative and NPV of undertaking 2 is Positive, so I will propose KAMI to travel for undertaking 2 alternatively of puting money in undertaking 1.

Reasons for utilizing NPV

Following are the advantages and disadvantages of NPV and the ground that I choose NPV alternatively of any other fiscal measurings method.

Consistent with stockholder wealth maximization:

See both magnitude and timing of hard currency flows

Indicates whether a proposed undertaking will give the investor ‘s needed rate of return

Tells whether the investing will increase steadfast value or non

See the hazard of characteristic hard currency flow through cost of capital.

Many people find it hard to work with a dollar return instead than a

Percentage return

Require an estimation cost of capital in order to cipher the net present value.

Post Audit Appraisal and Recommendations

“ ComparisonA of the actualA incomeA yielded by aA capital projectA with the income projected at the clip ofA undertaking assessment ” [ 2 ]

A station audit determines if a company ‘s policies and processs have been decently followed. The trial may be to verify if paid bills have necessary certification and blessings. In an audit performed by a public comptroller, period that exists between the completions of the hearer ‘s field work and the issue of the study on the fiscal statements. During this period, the hearer is in changeless contact with the client while the audit study is prepared and the concluding reappraisal of the drafted fiscal statements takes topographic point. The hearer has a duty to unwrap subsequent events so that the fiscal statements are non misdirecting.

The station audit ‘s effectivity is to make proactive steps including the lucidity in policies and guidelines are the effectual thing in prost audit.

The station audit best efficiency is related to claims for pricing payments and allowance claims and most significantly for ciphering the company ‘s payment dues.

The turning tendency reduced rhythm clip to verify dealing truth would hold for making deduction in station audit.

Social Accounting

It is a model used for monitoring, rating and answerability to stakeholders both internal and external of the organisation. The societal accounting is used investigate organisations public presentation on societal, environmental and economic aims, and guarantee that it is working in conformity with its values. In the private sector, societal accounting is aligned with corporate societal duty.

The populace sector is the portion of economic and administrative life that trades with the bringing of goods and services by and for the authorities, whether national, regional or local. The organisation of the public sector can take several actions, including: Direct disposal funded through revenue enhancement, the presenting organisation by and large has no specific demand to run into commercial success nonsubjective, and production determinations are determined by authorities.

The sum of hazard in public sector is,

Company need to follow the authorities policies.

The local people

Need to follow the Legal process.

Pressure from local authorities organic structures,

Need to manage the political issues,

In this undertaking the demand is the comparative fiscal public presentation of three companies AA, BB and CC, the last two companies are the entirely owned subordinates of CC. in this undertaking its is required to analyze the given information and bring forth a study for the direction of company CC by demoing the comparative fiscal public presentation of AA and BB. Besides remark on the possible restrictions of such comparing, by sing issues like common direction information system for both subordinates. Besides provide information on whether there is sufficient grounds to reason that BB directors lack competence in doing fiscal determinations.

Comparative Analysis

Following are the assorted methods available for comparative analysis

ROCE

Net income Margin

Asset Use

Liquid

Hazard ( pitching )

Growth ( turnover, net income, and capital employed )

ROCE is used inA financeA as a step of theA returnsA that a company is recognizing from itsA capital employed. It is normally used as a step for comparing the public presentation between concerns and for measuring whether a concern generates plenty returns to pay for its cost of capital.

ROCE = ( net income * 100 % ) / capital involved

AA BB

Year 2005 ( 9+5 ) * 100/120 + 47 = 8.4 % Year 2004 ( 12+5 ) *100/87+47 = 12.7 %

Year 2005 ( 1*100 ) /31 = 3.2 % Year 2004 ( 12*100 ) /30 = 40 %

ROCE analyses give companies insight into the utilizing of the capital to bring forth gross. It is required that ROCE sum should be higher than the adoption sum. In the provided informations the subordinate BB is holding a really high return on capital as compared to AA.

Net income MarginA orA net net income ratioA all refer to a step ofA profitableness. It is calculated by happening theA net net income as a per centum of theA gross.

Net income border = ( runing profit*100 ) /turnover ( including involvement )

AA BB

Year 2005 ( 9+5 ) * 100/31 = 25 % twelvemonth 2004 ( 12+5 ) *100/30 =56.7 %

Year 2005 ( 1*100 ) /20 = 5 % twelvemonth 2004 ( 12+100 ) 35 =34.3 %

In Profit Margin low net income border indicates a low border of safety, higher hazard that a diminution in gross revenues will unclutter the net income and consequences in net loss In the instance of the BB subordinate.

Asset use is the ratio between net gross revenues and entire assets. It provides understanding on how to use the organisation assets by looking at entire turnover and entire assets.

Asset utilization = net gross revenues / entire assets

AA BB

Year 2005: 31/167 = 0.18 twelvemonth 2004: 30/134 = 0.22

Year 2005: 20/31 = 0.6 twelvemonth 2004: 35/30 = 1.2

The higher the plus use the lower the investing cost. And give better consequences each twelvemonth for company.

Liquid is the concern ‘s ability to run into its payment duties, in footings of possessing sufficient liquid assets, and to such assets themselves.

Liquidity = current plus – stocks / current liabilities.

AA BB

Year 2005: 5/3 = 1.7 twelvemonth 2004: 6/6 = 1

Year 2005: 13/4 = 3.25 twelvemonth 2004: 12/4 = 3

Hazard ( pitching ) refers to the usage ofA debtA to supplement investing

Hazard ( pitching ) = loan capital / capital employed

( Loan capital = unsecured bond ; capital employed = stockholder equity )

AA BB

Year 2005: 47/120 = 0.4 twelvemonth 2005: 0/31 = 0

Year 2004: 47/87 = 0.9 twelvemonth 2004: 0/31 = 0

Growth ( turnover, net income, and capital involved )

Companies

Aa

Bb

Employee turnover

31-30/30 = 0.03

20-35/35 = -0.4

Net income

9-12/12 = -0.25

1-12/1 = – 11

Capital employed

120-57/87 = 0.72

31-30/30 = 0.03

Advantages and Limitation of Comparative Analysis

Comparative analysis have many advantages in supplying penetration to the direction of companies into the positive and negative facet of their investing in different undertakings, but it besides have some restrictions due to the internal and external factors. Following are some of them

The comparative analysis provides the organisations an apprehension of net income ratio it provide information that organisation have plentifulness or resources to pay their disbursals and whether stockholders are cognizant of the fiscal status of the company. It besides helps organisations to compare their concern with other rivals.

Recognition analysts, those construing the fiscal ratios from the chances of a loaner, focal point on the “ downside ” hazard since they gain none of the top from an betterment in operations. They pay great attending to liquidness and purchase ratios to determine a company ‘s fiscal hazard.

To hold looked at the operational and profitableness ratios the Equity Analysis is of import. To find the future net incomes that will accrue to the stockholder.

Financial ratio analysis is well-developed and the existent ratios are well-known, practising fiscal analyses frequently develop their ain steps for peculiar industries and even single companies. Analysts will frequently differ drastically in their decisions from the same ratio analysis.

Is BB direction deficiency competence in doing fiscal determinations?

The provided information and the above analysis show that the AA organisation is using monopoly rule and tallies under local governments. By holding desired contract the company ‘s profitableness can be easy assumed. And they can non increase their rate of investing as the gross can non automatically be generated. BB is wholly different from AA ‘s organisation they have several issues like labour, cost of running the organisation and they have to manage the continuity of their old services. It is really hard to compare both the organisation AA and BB because the cost disbursals are wholly different. The subordinate BB directors lacks efficiency on doing fiscal determinations as the computation does demo the considerable consequences while measuring company ‘s public presentation. BB is losing gross, because it has got competitory market. So while viing in such a competitory market the BB direction is missing in taking fiscal determinations which is shown by above informations and the competitory analysis.

AA is an organisation which runs on the monopoly rule and it is in regulative organic structure and it runs under local authorization. By holding desired contract the company ‘s profitableness can be easy assumed. And they can non increase their rate of investing as the gross can non automatically be generated.

On the other side we can non compare both the organisation AA and BB because the cost disbursals are wholly different ( method of computation and depreciation ) .

The procedure to compare other concern in the same sector. Here we are traveling to do external benchmarking it means to compare through the trade association and the industry itself, external besides includes comparing through activity. Activities like learn from person, who is really good in some other concern, seek to copy the best from the performing artist, and looking at the direction itself.

As a decision, above information shows BB directors lacks efficiency on doing fiscal determinations as the computation does demo the considerable consequences while measuring company ‘s public presentation. AA subordinate is about the populace sector company ; the company operates on the long term fixed contract. Even AA is non executing up to the outlook. It is dependable on holding the contract.BB is losing gross, because it has got competitory market. Above amah analyses was made by holding merely the two old ages ( 2004, 2005 ) finance informations ‘s and I ca n’t state if the old twelvemonth ‘s more or on the contrary less successful and productive. So I ca n’t supply an accurate nonsubjective analysis of both subordinates AA and BB. But by making the given 2 old ages fiscal computation, BB subordinates are losing their concern.