Financial Ratios with examples:

i) Average Daily Stockholding = Stock held/Sales Cost * 365 =

- 2003: 1,850/8,740 * 365 = 77 days
- 2004: 3,166/12,564 * 365 = 92 days
This ratio addresses how long does the stock remain in the warehouse before it’s actually
sold. In 2003, the company’s stock remained an average of 77 days in the warehouse before
it was sold. In 2004, the company has moved it stock slower than in 2003. The average days
the stock remained in the warehouse before being sold was 92 days. Generally, the average
must be as low as possible and at the same time keeping sufficient stock available when
there’s high demand. County Enterprises has done rather poorly in 2004 than in 2003 with
respect to stock. It has held more stock in 2004 than in 2003. The reasons behind that are that
perhaps County Enterprises was trying to sell more in 2004, but couldn’t. Or perhaps some
stocks were forced to be left in the warehouse because of some sales promotion. Some of the
stock might have become obsolete over time, an indication of bad stockholding policy.

ii) Current Ratio: Current assets/current liabilities =

- 2003: 3,450/2,778 = 1.24:1
- 2004: 5,210/4,548 = 1.15:1
County Enterprises has had a drop in its current ratio from 1.24:1 in 2003 to 1.15:1 in 2004.
This ratio actually represents the amount of current asset versus £1 of current liabilities. It’s
quite favorable if the ratio is more than 1:1 like 2:1 or even more. However, this is not
always possible. If the ratio is only 1:1, this means that the company might not have enough
sufficient liquid cash to handle short-term commitments. The current rate for County
Enterprises has dropped to 1.15:1, which means that they have performed poorly in this
regard in 2004. The current ratio for County Enterprises is worse in 2004 than in 2003, and
as stated earlier, a clear sign that the company might not be able to provide liquid cash or
cash for its short-term commitments. A more satisfactory ratio would be 2:1, £2 assets per £1
liabilities. However, it’s not always possible. In 2004, the company might barely meet its
short-term commitment, if not fall short and default on them.

iii) Gross Profit Margin: Gross profit/Sales * 100% =

- 2003: 6,860/15,600 * 100 = 44 %
- 2004: 11,596/24,160 * 100 = 48 %
The purpose of this ratio is to provide the gross profit that was made by the company against
the total sales of the company. For example, in 2003, County Enterprises had a 44% gross
profit margin. This means that for every single pound in sales, the company has made a
profit of £0.44 in gross profit. This parentage also provides us with the sales income that was
generated after paying all expenses necessary for making the product available to the
customers. Here, County Enterprises has actually done better in 2004 than in 2003 by having
its Gross Profit increase by 4%. The gross profit of any company is its total profit less the
cost of its sales. The gross profit indicates the company’s overall profit, that doesn’t include
other overheads (salaries cost of raw materials, taxes, etc.) The gross profit margin
establishes a relation between the gross profit of the company and its sales.

iv) Net Profit Margin: Net profit before taxes and interest/Sales * 100% =
- 2003: 1,564/15,600 * 100 = 10%
- 2004: 3,024/24,160 * 100 = 12.5%
The purpose of this margin is to show what remains of the company’s sales after all the
necessary expenses of running the business have been paid off. Here, the company has had
its net profit margin increase from 10% in 2003 to 12.5% in 2004, indicating that the
company is having better sales in 2004 than in 2003. It should be understood that the net
profit figure must be as high as possible. Many investors consider this figure when
considering investing in a company. So, the higher the figure, the better. As for the net profit,
it compares the net profit of a company against its total sales. Net profit margin gives the net
profit, which is the gross profit less all expenses incurred by the company. The net profit as
well as the gross profit has increased in 2004 than in 2003.

v) Quick Asset Ratio = Liquid Assets / Current Liabilities (one year)

- 2003: 3,450 – 1,850/2,778 = 0.58:1
- 2004: 5,210 – 3,166/4,548 = 0.45:1
This ratio is concerned mainly with short-term debt and the a ability to any liabilities in the
short run. The liquid assets are actually the current assets less the company’s stock divided
by the company’s current liabilities. If the number is low, this means that the company might
not be able to fulfill its short-term obligations. The performance of the company has declined
from 0.58 to 0.45 in 2004. The company in 2004 is less able to meet its liquid requirements
in the short-term than in the previous year.

vi) Return on Capital Employed = net profit before interest and tax/total asset – current
liabilities * 100%=
- 2003: 1,564/8,744 * 100% = 17.89 %
- 2004: 3,024/11,118 * 100% = 27.20 %
This ratio addresses the profitability that is made for the suppliers (shareholders and credit
suppliers) of long-term capital.
Of course, the profit that was made for those suppliers is the net profit because the interest
and taxes haven’t been deducted yet. The profitability in 2004 was 10% higher than that in
2003 indicating a better employment of capital.
vii) Return on Equity = Net profit after tax and interest/share reserve + capital * 100% =
- 2003: 1,248/8,744 * 100% = 14.3%
- 2004: 2,374/10,518 * 100% = 22.6%
The main concern of shareholders is the Return of Equity ratio. It shows what profits are
available to shareholders as a total percentage of their stake in this business after all the
charges have been deducted (tax and interest). County Enterprises has done better in 2004
this regard than in 2003, with nearly an 8% increase in 2004.

The importance of budgetary control:

budgetary control is a priority in any business to implement the set plans as successful
planning is the indicator for the business success since it sets the goals to be achieved and
determines the methods of achieving them. Budgetary control helps in determining the
financial and human resources needed to attain the predetermined objectives, coordinating
between different managements and individuals to avid chaos, exercising control over the
implementation of goals internally and externally and expecting potential problems and
obstacles. A company has to formulate policies, goals, plans and conduct market researches
in order to set the budget based on the size of the company and the type of business whether
the company provides services or products. For example, a person wants to open a
supermarket in an industrial area, so he should decide the product to be sold, the suitable
location and the costs of establishment or rent.
Plans of each management in the company should be realistic and they are divided to:
strategic plans which are set by the company regardless of the policy of each management,
tactical plans which focus on implementing the strategic plans and operational plans which
are formulated by managers and they are daily plans to perform different tasks. For example,
a clothing company wants to display its products for sale, so it studies the target location,
determines the type of clothes, the warehouse and the best method of advertising.
Consequently, the managers in this company can predict the suitable type of clothes in the
short run or the long run, the desired colors and can carry out a market study concerning the
economy of the country where the company is opened in addition to the prices to decide how
wages and rent will be paid.
The budget allows managers to determine expenditure to compare expected figures with
actual ones, so either the actual expenses are higher than the budget or the actual expenses
are lower than the budget, and then the manager should cite the reasons to effectively control
the budget and the business. Finally, companies should set accurate standards concerning
goals, policies and plans to control their budgets as budgetary control is an important
indicator for the business success or failure.
Methods used by managers to control the budgets allocated to departments or businesses
under their control:
Managers have to control expected and actual expenses to meet the budget set by the top
management. To control the budget, some steps should be followed; on top of which is
formulating the budget plan and estimating expenses to balance between the set budget and
actual expenditure as managers cannot properly exercise budgetary control if the actual
expenditure is more than the set budget, and vice versa. The poor budgetary control forces
managers to determine where the additional expenses are spent, so they have to revise the
budget allocated for a specific period of time, for example, four weeks, including all its
elements, actual expenses and the difference between them and the budget presented.
Moreover, daily plans should be flexible to be adapted to any change occurring and should
depend on forecasting to set the budget (weekly, monthly or yearly). The budget set should
be appropriate for the market conditions as prices differ every now and then in a year; for
example, in the field of ticketing the demand is increasing in summer more than any other
time period in the year. Managers should fully consider inflexible budgets as they cannot be
changed and many managers can make mistakes which can incur great losses. After the
preparation of the budget, there will be a movement to the process of budget control. There
are various methods of budgets control. The first of these methods is to have a balance
review that is to be implemented every four weeks to explain the reasons of variances in case
that there is a great level of differentiations. The second step refers to the procedures of
variance analysis. This procedure can be defined as vital to good organization. Generally,
going under financial plan is a constructive variance, and over financial plan is an off-putting
variance. Nevertheless, the real test of administration should be whether the consequence
was excellent for business or not. The positive variances are excellent news since they mean
that the expenditures are less than budgeted ones. The negative variance means that the
expenditures are more than the financial plan. In this instance, the $6,000 positive variance in
advertising in February means $6,000 less than intended to be spent. The negative variance
for advertising in March and April show that more was spent than was planned. Evaluating
these variances needs concentration. Positive variances aren’t everlastingly good news. For
instance, the positive variance of $6,000 in advertising has the meaning that money wasn’t
spent, but it also means that advertising did not take place. Every variance should arouse
questions. Why did one venture cost more or less? Were purposes met? Is a positive variance
an outlay saving or a malfunction of implemented activities? Is a negative variance a change
in tactics, an organizational failure, or an impractical budget? A variance table can offer
management with important data. Without this information, some of these significant
questions might go unasked. As for the data revealed from budgeting and budget control,
they can be summed up as follows:
1. Determine the areas in the organization that needs more attention.
2. Decide the wasteful areas that needs more control and better management.
3. Use the final accounts in the process of budget preparation.
Determine the needs of each department and the needs of each employee financially to have
a perfect performance.

The production of accurate final accounts depends on effective budgetary control:

The process of daily registering accounts in accounting books and the actual use of the assets
or liabilities of a company are regarded as key financial data. Registering all expenses and
revenues in the statement of financial position at the end of the financial year is important to
determine whether revenues have covered expenses and whether the revenues have been
higher or lower than the expenses. Therefore, expenses should be estimated at the beginning
of the financial year such as administrative expenses; for example, when recording all the
expenses which have been spent and all liabilities of one company during one financial year,
the figures related to the profit, loss and liabilities of the company will be accurate,
particularly if the recording process depends on a precise computerized system.
Budgetary control relies on the ability of managers to control the activities that result in
generating revenues or spending expenses in one company.
Budgetary control depends on the ability of managers to control the activities that result in
gaining revenues or spending expenses in institutions, but there are some expenses that
managers cannot control, and consequently they cannot become responsible for them.
Sometimes, the expenses which are controlled by one manager cannot be determined because
they may be generated due to decisions made by previous managements. Budgetary control
also relies on the time span of the budget of each department; the time span of strategic
planning done by top managements is approximately 10 years, the time span of tactical
planning done by middle-level managements is one year ahead and the time span of
operational planning done by lower-level managements is approximately a year. Sometimes,
the bases upon which the budget is set change during the year, so a policy should be
formulated to revise the budget every now and then. The information obtained by
managements on the difference between expected budget figures and actual expenses helps
them to take corrective measures, so some steps should be followed such as determining the
standards of performance evaluation, analyzing the reasons of the difference between
expected budget and actual performance, and adopting corrective measures to correct
deviations.

What is Remuneration?
Remuneration is any type of compensation or payment that an individual or employee
receives as payment for their services or the work that they do for an organization
or company. It includes whatever base salary an employee receives, along with other forms
of payment that accrue during the course of their work, which includes expense account
funds, bonuses, and stock options.
The Amounts and Types of Remuneration
The amount of remuneration an individual receives – and what form it takes – depends on
several factors. First, it’s important to note that remuneration values and types will differ
depending on an employee’s value to the company. Taking into consideration things like the
individual’s employment status (full time vs. part time) and whether they are in an executive-
level position or are an entry-level member of a company make a significant difference in
calculating the final amount.
Also, remuneration can vary depending on how an individual is typically paid, meaning,
whether they are a salaried worker, if they get paid based on commission, and if they
regularly receive tips as a part of the work they do.
It’s also important to note that a lot of companies may try to attract or hire desirable
employees off of another company by offering them better remuneration, meaning, higher
pay, more benefits, and better perks. This business tactic is known as a “golden hello.”
 
Minimum Wage
Minimum wage is one type of remuneration. It is the lowest amount that can legally be
offered for a specific position or to do a certain job. It is maintained by the federal
government, and, while minimum wage can vary from state to state or region to region, the
lowest amount offered can’t fall below the minimum wage set by the federal government.
Historically, the minimum wage tends to rise with inflation, though this isn’t always the case.
 
Deferred Compensation
Another type of remuneration is known as deferred compensation. It means that an employee
has part of their earnings withheld in order to receive them at a future date. The best example
of this is a retirement fund. When an employee signs up for a retirement fund, a portion of
their pay is taken and stored in order to allow them to have funds to rely on once they retire.