The Brown Bear Leisure Center - Assignment Example

The Brown Bear Leisure Center Task Table of Contents Table of Contents 2 Introduction 3 The financial performance and position of BBL 3 Profitability ratios 3 Liquidity ratios 5 Efficiency ratios 6 Performance measures 6 The Balanced Scorecard 8 Zero-Based approach to Budgeting 10 Advantages 10 Disadvantages 10 List of References 12 Appendix 1: Ratios 13 Introduction The paper seeks to present the analysis of the Brown Bear Leisure (BBL) case study. The Company’s primary activity is offering leisure services including gym classes. Brown Bear Leisure runs a fitness center on behalf of Domdon’s local council, from which BBL leased the center. The fitness center provides not only gym lessons but also a wide array of fitness classes like yoga, dance, and aerobics. The paper will primarily focus on the following: first, the financial analysis of the company for the past two years. Second is the performance measures provided by the local council. Third is the aspect of the balanced scorecard that would help the company improve its operations. Last are the benefits and drawbacks of zero-based approach to budgeting for the business. The financial performance and position of BBL This section contains the analysis of the Brown Bear Leisure’s financial statement, using relevant ratios, for the two-year period (2014 and 2015). The ratios are as follows: profitability ratios, liquidity ratios, and efficiency ratios. Profitability ratios Net profit margin- this ratio shows how well a company manages its operating expenses such as the administrative costs and interests on borrowed funds. The higher the ratio, the lower the operating expenses of the enterprise. Concerning Brown Bear Leisure Company, the net profit margin for the year 2014 and 2015 have been determined as 7.07% and -0.53% respectively. The ratio interpretation for the fiscal year 2014 means that only 7.07% of the company’s revenue were net profit, whereas, remaining 92.93% were consumed by the operating expenses. However, in the year 2015, the ratio is negative reflecting the loss made by the company during that period. Net profit margin decreased between the two periods due to a sharp decline in the profit from positive to negative (Loss). Based on the analysis, the company’s operating expenses are excessively high, which indicates the ineffectiveness of the company’s cost management methods. Therefore, it is justified to mention that the company’s value creation ability is dwarfed by the high level of operating costs (Baker & Powell 2005, pp. 3-10). Gross profit margin- the ratio indicates a company’s financial health after meeting the cost of sales. It also shows the company’s ability to pay for future operating costs. Concerning Brown Bear Leisure Company, the gross profit margin for the year 2014 and 2015 have been determined as 41.24% and 34.46 % respectively. The ratio interpretation for the fiscal year 2014 means that 41.24% of the company’s revenue were gross profit, whereas, the cost of sales consumed the remaining 58.76%. On the other hand, in 2015, 34.46 % of BBL’s revenue were gross profit while, the cost of sales consumed the remaining 65.54 %. The ratio decreased between the two periods due, possibly, to a decline in the level of the company’s gross profit. Based on the two analyses, the company’s cost of sales is fairly low. Therefore, it can be concluded that the business is capable of meeting both current and future operating costs. (Palmer 1983, pp. 99-107). Return on Investment- this ratio measures the return on profit from investing in a company’s total assets. Concerning Brown Bear Leisure Company, the return on investment for the year 2014 and 2015 have been determined as 84.08% and – 5.691% respectively. The ratio interpretation for 2014 indicates that 84.08% of BBL’s net profits were generated by the total assets. On the other hand, in 2015, the return on investment is negative due to the negative gains made during the period. Therefore, in 2014, the return on investments was a lucratively high while, the 2015 figure is quite discouraging (Peterson & Fabozzi 2012, pp. 150-155). Return on equity- this ratio measures the proportion of a company’s profits attributed to the shareholder’s equity. Concerning Brown Bear Leisure Company, the return on equity for the year 2014 and 2015 have been determined as 103.3% and – 8.518 % respectively. The ratio interpretation of the year 2014 means that a pound of equity generated £ 1.033 toward the company’s profitability. On the other hand, in 2015, a pound of equity generated £ - 0.08518 toward the profitability of the BBL. The ratio declined in 2015 due to the negative profit made (loss) (Gibson 2009, pp. 178-186). Liquidity ratios Current ratio- indicates the ability of an organization to pay its short-term obligations using the current assets. The ratio can be used to measure the financial health of an organization. Concerning Brown Bear Leisure Company, the current ratio for the year 2014 and 2015 have been determined as 5.37 times and 3.014 times respectively. The ratio interpretation of the year 2014 means that for every pound of current liabilities, BBL had £ 5.37 of the current assets. On the other hand, in 2015, for every pound of the current liabilities, BBL had £ 3.014 of the current assets. The ratio decreased in 2015 due to an increase in the trade payables (total current liabilities). Nevertheless, for both periods, the liquidity position of BBL was strong. In other words, the company was capable of taking care of the current obligations (Bull 2008, pp. 35-37). Cash ratio - is a modification of the acid test ratio that shows the ability of the firm to meet its current obligations using its most liquid resources. Concerning Brown Bear Leisure Company, the current ratio for the year 2014 and 2015 have been determined as 4.37 times and 2.09 times respectively. The ratio interpretation of the year 2014 means that for every pound of current liabilities, BBL had £ 4.37 of ready cash. On the other hand, in 2015, for every pound of the current liabilities, BBL had £ 2.09 of ready cash. The ratio decreased in 2015 due to a decline in cash and a simultaneous increase in the trade payables. Nonetheless, the BBL is still capable of servicing its current obligations using cash kept in the bank (Robinson, Munter & Grant 2003, pp. 200-205). Efficiency ratios Trade receivables turnover – the ratio measures the number of times the credit sales were converted into cash. In other words, the ratio shows the number of times in a financial period that creditors purchased services on credit after paying the previous dues. Concerning Brown Bear Leisure Company, the trade receivable turnover for the year 2014 and 2015 have been determined as 63.84 times and 34.96 times respectively. The ratio decreased in 2015 due to an increased in trade receivables (Vandyck 2006, pp. 50-53). Trade receivables collection period – the ratio shows the period it takes a company to collect all the accounts receivables. It is also the period within which all the company’s debtors must pay their dues. The shorter the period, the more the cash collected. Concerning Brown Bear Leisure Company, the trade receivable collection period for the year 2014 and 2015 have been determined as 5.717 days and 10.44 days respectively. The ratio interpretation for the year 2014 indicates that debtors had only 5.717 days to pay for the purchased goods. The ratio increased in 2015 due, possibly, to a decrease in trade receivables turnover (Vandyck 2006, pp. 50-53). Based on the financial analyses above, the revenue generation increased in the year 2015. However, the net profit decreased sharply to a negative figure. On that note, Brown Bear Leisure should consider the following two strategies to improve the performance: first, the cost of sales should be minimized. Second, the administrative costs should be kept low. Performance measures Year 2015 2014 Daily total attendance as percentage of local population 1.13% 1.30% WK 1 Annual membership fee £ 538 £ 528 WK 2 Annual membership fee: percentage rise 1.89% 0 WK 3 Daily membership fee £ 7 £ 7 WK 4 Daily membership fee: percentage rise 0% 0% Staff pay per hour £ 6.941/ Hr £ 6.49/ Hr WK 5 Staff pay % pay rise 6.95% 0% WK 6 Management salary % pay rise 12% 0 WK 7 Investment in equipment refreshment £ 0 £ 0 Customer satisfaction on rising scale 1 - 10 4.5 6 WK 1 = ((300 + 40)/30,000)*100 = 1.13% WK 2 = (511,100/950) = £ 538 WK 3 = ((538 - 528)/528)*100 = 1.894% WK 4 = ((100,800/360)/40) = £ 7 WK 5 = (279,860/360/16/7) = £ 6.941 WK 6 = ((6.941 - 6.49)/6.49)*100 = 6.949% WK 7 = ((28,000 - 25,000)/25,000)*100 = 12% Based on the performance measurement criteria provided by the local council, the following happened: first, the total annual attendance increased by only 1.13% as compared to the 5% limit provided by the local council. Second, the annual membership fee rose by less than 2% (1.89%), which met one of the criteria. Third, the managers and staff received a dissimilar amount of pay rise in 2015. That is, 12% and 6.95% for managers and staffs respectively, which falls short of the criterion. Fourth, BBL invested zero amounts concerning the acquisition of equipment, which falls short of £ 10,000 per annum suggested by the Council. Last, the customer satisfaction on a rising scale of 1 to 10 should exceed 5.5. However, BBL’s customer satisfaction scale for 2015 read 4.5, which is below the standard. Concisely, out of the five performance measurement criteria, BBL satisfied only one, which point number two (rise in annual membership fee). Therefore, it is safe to categorise BBL performance as poor based on the criteria provided by the local council. The Balanced Scorecard Brown Bears Leisure measures its performance based on the criteria set by the local council. Unfortunately, the criteria set by the council are narrow and does not cover critical aspects of business performance. On that note, the following aspects of the balanced scorecard should be part of the company’s performance measurement criteria: the financial perspective, the customer perspective, growth and learning perspective, and internal process perspective. Based on the financial perspective, Brown Bears Leisure should strive to implement strategies that create value and maximize the shareholder wealth. Value creation is driven by the ability of the company to pay cash dividends to its shareholder, which in turn, increases the market value of the organisation (Niven 2006, pp. 1-20). Shareholder wealth maximization is achieved by pursuing positive NPV projects that enhance the company’s cash generation ability in the long-run. That way, the shareholder wealth maximization and value creation becomes a sure objective. In addition, the company should adopt other methods of analysing the financial performance, such as the liquidity ratio, gearing ratios, turnover ratios and profitability ratios. The above-mentioned strategies and activities would certainly increase the company’s performance and ensure the achievement of both short and long-term goals (Niven 2006, pp. 1-20). Based on the customer perspective, the BBL should constantly meet the customers’ needs. Meeting customer needs involve a prior analysis of the customer’s requirement followed by the development of products and services that precisely meet the identified needs. Speaking of customer satisfaction, the 2015 scale is 4.5, which is below the standard (5.5) set by the local council. The mentioned strategy ensures customer satisfaction. A satisfied customer maintains loyalty to the company. More customers are attracted leading to an increase in the revenue. Therefore, the mentioned strategy should be strictly followed in order to improve the company’s performance (Niven 2006, pp. 1-20). Based on the growth and learning perspective, the BBL should develop cost effective methods of training employees on how to create a healthy customer relationships during the training sessions to ensure the delivery of top quality services. The company should also communicate to the employees the primary goal and the course of action for its achievement. In addition, the company should study the market further in order to come up with more new products and services for the customers. Using the mentioned strategy, the company’s employees acquire the requisite skills that steer the company toward the improvement of the internal process, provision of top quality products and services and the achievement of the financial objectives (Kaplan & Norton 2006, pp. 43-60). Based on the internal process perspective, the BBL should strive to improve the internal process and offer satisfactory services. Currently, the council is unhappy about the fact that BBL is still depending on the old, torn, worn out and inefficient training machines. New machines should be acquired to help improve service delivery. Therefore, the company should ensure that cost-effective and up-to-date machines and other necessary equipment are acquired in order to achieve the financial goal and provide quality services to the customers (Kaplan & Norton 2006, pp. 43-60). Zero-Based approach to Budgeting A zero-based budget is the process where managers estimate the resources required and must justify the figures without referring to the previous period’s budget. BBL is considering the implementation of zero-based budgeting to help solve the problems faced. The proposal might be effective, but the company should be aware of following advantages and disadvantages of zero-based budgeting. Advantages It enhances efficient allocation of resources. It helps improve the internal operations of the company. It helps detect over budgeting. The process motivates employees since it increases their participation in decision-making. The process improves correspondence in the company. It helps identify and eliminate out-of-date activities in the enterprise. It helps discover outsourcing opportunities. Disadvantages The process is time-consuming and exhausting. It is costly since managers should be trained to get a better understanding of the concept. Since the process requires details, large organizations with large volumes of information face the risk of multiple omissions (Accounting Tools 2015). The process requires a great deal of honesty, reliability and uniformity from the managers to avoid information distortion. Conclusion The performance of BBL in 2014 is strong as indicated by all the ratio analysis performed above. However, in the year 2015, the performance declined. The company made a loss due to high costs of sales and the administrative costs. The two sets of costs should be minimised in order to improve the business’s performance. From another perspective, the company’s performance based on the criteria set by the local council is poor since only one criterion out of five was met. List of References Accounting Tools 2015, viewed 17 May 2015 http://www.accountingtools.com/zero-based-budgeting Baker, H. K., & Powell, G. E 2005, Understanding Financial Management a Practical Guide, Blackwell Pub, Oxford. Bull, R 2008, Financial ratios how to use financial ratios to maximise value and success for your business, Elsevier/CIMA Pub., Amsterdam. Gibson, C. H. 2009, Financial reporting & analysis: using financial accounting information, South-Western Cengage Learning, Mason, OH. Kaplan, R. S., & Norton, D. P. 2006, Alignment: using the balanced scorecard to create corporate synergies, Harvard Business School Press, Boston, Mass. Niven, P. R. 2006, Balanced scorecard step-by-step maximizing performance and maintaining results, Wiley, Hoboken, N.J. Palmer, J. E. 1983, Financial ratio analysis, American Institute of Certified Public Accountants, New York, N.Y. Peterson, P. P., & Fabozzi, F. J. 2012, Analysis of Financial Statements, John Wiley & Sons, Hoboken. Robinson, T. R., Munter, P., & Grant, J. 2003, Financial statement analysis: a global perspective, Pearson Education, New York. Vandyck, C. K. 2006, Financial ratio analysis: a handy guidebook, Trafford, Victoria, B.C. Appendix 1: Ratios 2014 2015 Profitability ratios Net profit margin (Net profit/ Sales)*100 7.07% -0.53% Gross profit margin (Gross profit/ Sales)*100 41.24% 34.46% Return on Investments (Net profit/Total assets)100 84.08% -5.69% Return on equity (Net profit/ Equity)*100 103.30% -8.52% Liquidity ratios Current ratio (current asset/current liabilities) 5.37 times 3.014 tim Cash ratio ((cash + bank)/current liabilities) 4.37 time 2.09 time Efficiency ratios Trade receivables turnover (Sales/Debtors) 63.84 34.96 Trade recievables collection period (365/Receivables turnover) 5.717 10.44 Read More