MASTERS OF BUSINESS ADMINISTRATION LONDON METROPOLITAN

UNIVERSITY

ESOFT METRO CAMPUS ACADEMIC YEAR 2018 – 2020

ASSIGNMENT 2: INDIVIDUAL REPORT

Module name: Accounting and Finance for Managers

UNITED MOTORS GROUP

Module code: AC7052

Names: - Jancy Joseph Roy

Registration Number: 18028165

ESOFT Registration Number: COL/E-006847

This assignment is submitted in partial fulfillment of the requirement of the

Master of Business Administration of London Metropolitan University

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Contents

1.0 Introduction .......................................................................................................... 3

2.0. Company Profile .................................................................................................. 3

3.0. Usefulness of the Information in the Annual Report for the stakeholders ............ 4

3.1 Liquidity Ratio ................................................................................................... 4

3.2 Efficiency Ratio ................................................................................................. 5

3.3 Profitability Ratio ............................................................................................... 7

3.4 Leverage Ratio .................................................................................................. 9

4.0. Difference of financial statements comparing Limited Companies with Sole

Proprietorships & Partnerships ................................................................................. 13

5.0. The Budgeting processes .................................................................................. 15

6.0. Working Capital Cycle ....................................................................................... 18

7.0. Company’s Sources of finance .......................................................................... 20

8.0. Conclusion ........................................................................................................ 23

Reference................................................................................................................. 24

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1.0 Introduction
Accounting and finance are great challenge to a business since it deals with money.
More risk is involved in financial planning. If a wrong decision is taken the entire
business process could be affected. So, it is necessary for an organization to have a
good understanding about their financial resource management. This report contains
information’s about United Motors.

As the researcher, I have analyzed about company profile financial position,

profitability and liquidity of the company, financial ratios, financial statements,
budgeting process, working capitals and uses of different sources of finance of the
organizations. This report will give adequate information’s about the financial
resources and how to manage them more effectively.

2.0. Company Profile

United Motors (UM) is a Sri Lanka-based company found in 1939 which engaged in
the import, sale and repair of passenger cars, commercial vehicles, material handling
machinery, construction machinery, agricultural machinery, power tools; the import
and sale of vehicle spares, components, and accessories; as well as the provision of
lighting solutions and storage systems.

The UM Group, which markets a range of automotive products, from top-end luxury
vehicles to three-wheelers and motorbikes, and from car parts to lubricants and tires,
has consistently developed its portfolio to serve the widest possible market base
across Sri Lanka.

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3.0. Usefulness of the Information in the Annual Report for the stakeholders
Ratio analysis is the process of determining and interpreting numerical relationship
between various items given in the financial statements. Since various users of
financial statements require information for quite different purposes large number of
ratios needs to be calculated. Therefore, the ratios that are calculated can be
classified in to various groups. (Kennedy A and Dugdale D (1999).

Figure 1: Ratios

3.1 Liquidity Ratio

These ratios calculate the ability of the enterprise to pay day to day payments when
fall due. The liquidity ratios are current ratio and quick ratio.

I. Current Ratio – This measure the short-term liquidity position and shows the
ability to settle its current liabilities.

𝐂𝐮𝐫𝐞𝐧𝐭 𝐚𝐬𝐬𝐞𝐭𝐬
Current Ratio = 𝐜𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲

Current Ratio of United Motors

3,496,209,000
Current ratio = 1,001,371,000

= 3.5: 1

According to the current ratio of the company the UM is having a healthy solvency
position. UM is more capable to pay their day to day payments as their current asset
is more than two times of their current liabilities. So it is recommended for them to
minimize the short term borrowings because it is very high amount during the period.

II. Quick Ratio - It shows how to settle current liabilities by using the assets
which can be converted into cash without financial loss.

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 𝐜𝐮𝐫𝐫𝐞𝐧𝐭 𝐚𝐬𝐬𝐞𝐭𝐬−𝐢𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲
Quick Ratio = 𝐜𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲

Quick ratio of UM

3,496,209,000−1,535,959000
Quick Ratio = 1,001,371,000

= 1.9: 1

The ideal rate of quick ratio is 1:1. According to the quick ratios of the company, that
is UM can meet their short-term obligations with its most liquid assets more
efficiently. To have a better liquidity position they have to consider on minimizing
their short-term debts or to increase the liquid assets. Generally, UM liquidity position
is better because current and quick ratios are favorable for them.

3.2 Efficiency Ratio

This ratio explains to what extent assets of business (how efficiently) are utilized to
earn income. Efficiency ratios are

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 Table 2: Efficiency Ratios

I. Stock Turnover Ratio

United motors

5669775000 2,717,528,000+1,535,959000
Stock turnover ratio = 2126742500 Average stock = 2

= 2.6 times = 2126743500

According to the result of the stock turnover ratio, whereas UM does 2.6 times. So in
united motors more funds is tied up with inventory. Having more inventories in the
business will cause additional expenses like storage, security etc. So UM have to
incur more money to have inventories in the business. It is recommended for them to
have sufficient amount of inventory by reducing the additional expenses and to have
a higher value of stock turnover ratio.

II. Total assets Ratio

United motors

8,774,242,000
Total assets ratio = 7,186,756,000

= 0.2

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 I have taken the revenue of the company as sales.

According to this ratio United Motors uses its total assets more efficiently to produce
sales, because UM’s ratio is higher.

III. Average Collection Period

United Motors

442,477,000
Average collection period = 8,774,242,000 * 365

= 18 days

Since credit sales in not given clearly, I have taken the total sales of the
company. Debtors receivable amount are obtained from UM- note 23

United Motors take 18 days respectively to collect the receivables. UM is more

efficient in credit collection. It is recommended for to minimize the collection period to
have more efficient credit collection.

3.3 Profitability Ratio

These ratios assess the ability of the enterprise to earn profit compared to sales,
assets or capital (investment). It shows how well the company is performing.

Profitability ratios are

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 Table 3: Profitability Ratios

I. Net profit ratio

United Motors

2,030,896,000
Net profit ratio = 8,774,242,000 × 100

= 1.2%

Revenue has been taken as sales in the company.

According to net profit ratio of the company United Motors net profit is very high. The
sale of UM the net profit after tax (total comprehensive income) is very low for the
amount of sales they are making. The reason for the net profit change is that UM is
incurring a higher amount as expenses. It is recommended for UM to minimize their
expenses and to have a better profit margin percentage.

II. Return on Assets (ROA)

United Motors

2,030,896,000
ROA = 7,186,756,000 × 100

= 2.6%

According ROA United Motors is having a higher ratio. UM net profit is a very lower
amount. That is the reason for a greater change of the percentage of the company. It
is recommended for them to increase their net profit by minimizing the expenses. UM
profitability ratio is favorable. That is they are more able to earn profit in relation to
sales and total assets. Overall UM performance is much better.

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3.4 Leverage Ratio
It examines the capital structure of the company. It indicates the shareholders and
lenders the degree of risk attached to the company. Leverage ratios are

I. Leverage ratio
II. Debt to equity ratio
III. Times interest earned ratio

I. Debt to Equity Ratio

It indicates the company’s obligations to creditors in relation to funds invested
by the owner.

𝐭𝐨𝐭𝐚𝐥 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲
Debt to equity ratio = 𝐭𝐨𝐭𝐚𝐥 𝐞𝐪𝐮𝐢𝐭𝐲

United Motors

1,136,445,000
Debt to equity ratio = 6,050,311,000

= 0.1 times

The company ratio is not up to the favorable value that is closer to 1.1. Since this
ratio is considered by creditors, higher ratio is considered more risky to them and
also it is not favorable to companies as well, because a higher ratio means their
liabilities are more than their equity. According to that United Motors is performing
well.

Times Interest Earned Ratio

It examines whether earning is sufficient to cover the interest cost on long term
debts. This shows the ability of paying interest.

𝒆𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙

Interest earned ratio = 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕

United Motors

Earnings before interest and tax = profit before tax + interest expense

= 2,443,045,000 + 18,700,000

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 = 2,461,745,000

2,461,745,000
Interest earned ratio = 18,700,000

= 131.6

Interest earned ratios of the company is more than the favorable rate which is 1:1.
But United Motors ratio is very high. That means the earnings of UM is sufficient to
cover the interest cost on long term debts and their interest expense is very lower.

Financial information’s and the Stakeholders

Stakeholders are the parties who are interested towards the organization. Interest
towards the organizations may differ from stakeholder to stakeholder. The major
reason for the stakeholders to be interested towards the financial information is that,
to know about the financial position and the performance of the organizations.
Stakeholders who are interested towards the financial information are,

Stakeholders

Internal stakeholders’ External stakeholders

• Management • Suppliers/ creditors

• Shareholders • Government
• Employees

Figure 4: Classification of stakeholders

•

Management

A management team of a company needs information to make decisions. It can be

long term or a short-term decision. The liquidity, efficiency and profitability ratios are
considered by the management to make decisions.

United Motors the management can make decisions on new investments, dividend
payment, and increasing productivity etc. by analyzing the above ratios. According
to the performance of the company the decisions vary. So the management can

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make the decision of minimizing the borrowings in the future to have a healthy
liquidity position and to have more efficient credit collection, the management has to
make decisions on minimizing the credit collection period. In UM the management
has to consider about minimizing their inventories to reduce the additional stock

holding cost and to have a better performance.

Government

Government will be interested towards the performance of the organizations. That is

whether the organization will pay the tax and are they making enough profit to pay
the tax.

The organizations are paying a higher amount of income tax to the government. If
some problem arises in tax payment the government can make the decision to close
down the business.

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Suppliers/creditors

Suppliers will be interested towards the financial information because they wanted to
analyze whether the company is able to pay their credits on time. Liquidity ratio and
efficiency ratios are the main ratios which helps the creditors to make decisions
because those ratios explain about the ability of the organization to pay their debts.

UM liquidity ratio is more than the favorable value. So, the creditors will be attracted
toward the organizations and they will decide to supply more to the organization
because the company is able to pay their liability efficiently. If the organization could
evaluate the ratios and the effects of them to their stakeholders will help them to
achieve their targets more efficiently.

CSR Project

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4.0. Difference of financial statements comparing Limited Companies with Sole
Proprietorships & Partnerships

Characteristics of a Limited Liability Company

Restricted felony responsibility: because of the fact the selection indicates, an LLC
offers restrained legal responsibility to its contributors. Even though individuals,
managers and personnel stay answerable for their very own torts, or civil wrongs, an
LLC member is protected from criminal responsibility for torts committed via
exclusive individuals, managers or personnel. This selection allows members the
liberty to lease employees and behavior excessive-legal duty commercial
organization that could otherwise position the participants' non-public assets at
danger in a lawsuit.

Simplicity in Documentation and Operation: whilst a separate crook lifestyle,

constrained prison responsibility and bendy tax treatment are all critical LLC
functions, the ones entities also are characterized thru simplicity in phrases of
documentation and operation. Maximum states do no longer require an annual
shareholders' meeting and the attendant schooling and submitting of minutes of that

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assembly. LLC people, in evaluation to shareholders in a commercial enterprise,
also are usually no longer required to hire a board of administrators to run the
business enterprise. Recordkeeping is also an awful lot of lots less burdensome than
with agencies.

Income Statement

The objective of preparing income statement is to calculate the profit or loss of an

accounting period. The income statement consists of trading account and profit and
loss account. Trading account is prepared to calculate the gross profit. Gross profit is
defined as the excess of sales over cost of sales. The second part of the income
statement (profit and loss account) is prepared to calculate the Net profit.

Balance Sheet

Balance sheet shows the financial position of the business on a given date. Financial
position is based on the assets of the business; therefore the balance sheet displays
the total assets and the real owners of those assets on a given date.

Financial Statements of United Motors (UM)

UM’s annual reports of 2012/13 consists of comprehensive income statement,

statement of financial position, statement of changes in equity, and cash flow
statement. In the organizations, financial statements are prepared by following the
Sri Lanka Accounting Standard. That is according to SLAS a complete financial
statement should include statement of director’s responsibility, auditor’s certificate,
income statement. Balance sheet, change in equity statement, cash flow statement,
notes to the financial statement and accounting policies if it should be a valid
statement. In both the organization’s annual report all these statements are found.

In United Motors Statement of Changes in Equity there are many types of reserves
like revaluation reserve, development reserve, property plant and equipment
replacement reserve, and non-controlling interest which are not present in the
Statement of Changes in Equity.

In UM’s annual report they have presented the financial statements for the group and
company separately but financial statement they have presented the information
about the company and the group in the same statement in two columns. The format

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and the presentation of other financial statements are similar in the company. All the
financial statements are understandable, relevant, reliable and comparable which
shows the completeness of the financial statement according to SLAS.

5.0. The Budgeting processes

Budgeting is a critical manages system in nearly all agencies (Armstrong et
al.,1996; Ekholm and Wallin, 2000; merchant and Van der Stede, 2003 cited in
Hansen and Van der Stede)”. In a business organization all of the activity is
coordinated collectively by using using the use of getting ready plans for the future.

The ones plans are known as Budgets.

• set up the project and dreams

• figuring out the limiting element example earnings
• installing vicinity, the price variety restricted with the aid of the usage of
restricted detail
• Set unique budgets according with dreams
• mixture all the budgets to shape a maintain close price range
• receive the hold close price range
• Display the real results with the budgeted plan.

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The budgeting technique is simple to understand and easy to put into effect. But
however, budgeting has been the vicinity of criticism (desire and Fraser (1999);
Ekholm and Wallin (2000)). Regular with desire and Fraser (1999a), on this
information age traditional budgeting has now not been capable of meet the needs of

the competitive environment.

Annual budgeting manner results in betterment of the long-time plans set via an
corporation. Managers sometimes make hasty preference which can bog down the
growth of plans set. Budgeting approach encourages managers to anticipate the
issues within the future. In line with Kennedy and Dugdale budgeting fashions have
to be made, one for planning and forecasting and the opportunity for motivational
cause. Making plans a price range gadget takes hundreds of time and becomes a
steeply-priced affair (Mike B, Andy N and Herman H (2002)). This has been one of
the most common criticisms approximately the budgeting.

One of the uses of budgeting is Motivation. A price variety is a tool used for
influencing managerial behavior and motivating the managers to perform the goals of
the enterprise. It acts as a motivational device with the beneficial aid of imparting a
mission to the managers. Colin Drury believes that price range enables managers to
coordinate the sports activities of the organization and gather organizational dreams.
Budgeting allows employer to run easily and efficaciously. This is because of the

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right traces of communique to be able to permit managers and other body of workers
understand what element they need to carry out or carry out (Colin Drury (2009);
Hansen s and Van der Stede w (2004)). A study shows that budgeting encourages
‘gaming’ state of affairs among superiors and the subordinates at some degree
within the goal placing (Mike B, Andy N and Herman H (2002)).

Budgeting allows a supervisor to control and control the sports activities of the
company. on the identical time because the actual effects are compared with
deliberate effects there is a chance that some of the fees don not take a look at the
particular plan which makes critical for the supervisor to provide an interest. This
device is known as manage by way of the use of exception.

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6.0. Working Capital Cycle
Working capital is a financial concept describing the distinction among present day-
day property and contemporary liabilities of a commercial enterprise business
enterprise. If modern liabilities are more than modern belongings, an enterprise has
a deficit of working capital, because of this that it could not repay its present-day
liabilities the usage of its modern belongings. For this reason, healthy industrial
corporations have to have a surplus of running capital.

Elements of working capital

Common examples of current assets and current liabilities are shown within the
parent below.

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Formula

The formula to calculate working capital is rather straightforward.

Working Capital = Current Assets - Current Liabilities

Working capital cycle

The working capital cycle is a period of time that is essential to convert modern-day
assets and contemporary liabilities into coins. The decrease range is usually
favorable because of decrease costs tied to the fee of capital. The components are
expressed as follows:

As we can see, the cycle time may be reduced thru manner of both developing the
quantity of days of payables top notch or with the aid of reducing the wide kind of
days of inventory high-quality and days of earnings great. Each way has its very
private drawbacks. It’s important to reduce the common inventory degree to lessen
the amount of days of stock high-quality that would cause manufacturing issues and
harm income. To decrease the form of days of earnings superb, an agency wants to
perform an extra hard credit score insurance, but this will also harm income.

In the long run, to boom the variety days of sales exquisite, a corporation need to
growth the not unusual money owed payable balance which will negatively have an
impact on a corporation’s liquidity.

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7.0. Company’s Sources of finance
Businesses need finance to operate its business activities; it can be short term or
long term. The ways in which they collect funds may differ according to the situation.
It is necessary to select the best source of finance.

Figure 5: Sources of finance

Internal sources of financing

These are the ways of generating funds within the organization. In need of finance in
a business first the internal sources will be considered.

Personal savings: This mainly applies to sole traders and partnerships. Owners may
use some of their own money as capital to invest in the business. Personal saving is
a method of investment which has no cost of obtaining the finance, even though
there is no any cost of obtaining it there are opportunity costs we have to consider
before investing it in the business. This is a higher risk option because incase if the
business fails all the losses will have to be incurred by the investor.

Sale of assets: The business can finance new activities or pay-off debts by selling its
assets such as property, fixtures & fittings, machinery, vehicles etc. It is often used
as a short-term source of finance (e.g. selling a vehicle to pay debts), but it can be
used as a long-term source of finance as well.

Retained profit: Retained profits are the profits that are kept by the organization
rather than distributing it as dividends to shareholders. Retained profit is an easy
access source of finance to a business because it is already kept a side to use in an

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emergency situation. This source do not have repayment obligation which is risk
free.

External sources of finance

These are funds that come from outside the business.

Figure 6: External sources of finance

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rotation and can be obtained only in the bank where they have current account. The
next problem with the overdraft is that the interest rate applied is nearly always
variable, making it difficult to accurately calculate the borrowing costs.

When we consider about all the sources of finance it has both advantages and as
well as disadvantages. It is necessary for a business to analyze more and select the
best source of finance according to their financial need. When utilizing these sources
of finance business has to incur some costs like, cost on documentation, advertising,
legal fee, stamp charges etc. in addition a borrower had to meet capital,
interest/dividend repayment.

In UM they are paying dividend for their shareholders costing 88,764,000 in the year
2012/13. And the interest payment for their borrowings is costing 630,798,000, which
is a very high amount than the dividend payment. It is recommended for them to
minimize their borrowings in order to minimize the cost of finance. They’re having a
bank OD with an interest payment of 2,958,000. They have made dividend payment
of 605,404,000 to their shareholders. Accordingly, UM is incurring a higher amount
of cost on dividend payment. Even though they are incurring a high amount it is not
affecting the business as their profitability is increasing every year.

UM collect funds by issuing ordinary shares, but in the year 2012/13 they have not
issued any further shares (according to the investor’s information). According to their
statement of changes in equity they have reserved Development reserve of
785,400,000 to fund future development projects of the company and General
reserve of 466,250,000 to fund future needs of the business which have not been
specified. Since they have not reserved from this year’s earnings it has not affected
the retained earnings for the year.

According to the note No.16 they have disposed only motor vehicle to generate
funds during the year. This profit on disposal has increased their income which has
increased their profit for the year.

UM have not obtained any long-term borrowings during the year. According to note
no 25 they have taken a bank overdraft of 90,869,000 to finance business activities
during the year which is a higher amount than the last year. This has increased the

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liabilities for the external parties. And the interest on bank OD has increased their
financial cost decreasing the profit.

According to the sources of finance of UM they have not obtained much external
sources. But they have more amounts of reserves within the business which is
strength to them, where they are not much liable to external parties. They have only
bank overdraft liability to be paid to the external party.

United Motors is having a good management in finding funds for their business. It is
bringing more advantages to the business. It may be the reason for having a better
liquidity position. This will attract new investors. It is recommended for UM to
continue with their existing management of sources of finance, since it brings more
advantages to them.

8.0. Conclusion
This report has been prepared to identify how a business organization can manage
its financial resources more efficiently. In task one; it is clearly giving an
understanding about the financial performance and position of UM by analyzing their
annual reports. It is concluded that UM is a way ahead their financial position and the
performance. In task two of the report it will give a clear picture about the necessity
of financial planning and the methods of investment appraisals.

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Reference

• UM Engineering PLC. Annual report 2012/13 [online] Available at

http://cse.lk/cmt/upload_report_file/694_1370574257.pdf [Accessed 25th June

2019]

• HM Treasury, ‘The Green Book’, Appraisal and Evaluation in Central

Government, HMSO, 2003.

• Rex Zeeman, kymberlee S., 2002. Principles of Managerial Finance. 3rd ed.

Australia: Pearson Education Australia.

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